-----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, UNCrf9OQKDXkcJ+kC9sHsLeNGwpUcRE6Z2uloeYjzM8GcRdrHX5cvz8zP9zHupsr fwc+FbTkSuIsEBj+gplmKQ== 0000950135-99-000080.txt : 19990112 0000950135-99-000080.hdr.sgml : 19990112 ACCESSION NUMBER: 0000950135-99-000080 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 15 FILED AS OF DATE: 19990111 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: 99503938 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 JANUARY 11, 1999. REGISTRATION NO. 333-56339 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 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 02151 (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 2800 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 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED MAXIMUM TITLE OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) AMOUNT OF REGISTRATION FEE(2) - ------------------------------------------------------------------------------------------------------------------------------ Common Stock, par value $.01 per share...................... $73,600,000 $21,712
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Estimated in accordance with Rule 457(o) 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. $20,355 was previously paid in connection with prior filings of this Registration Statement on Form S-1. 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 JANUARY 11, 1999 PROSPECTUS dated , 1999 4,000,000 SHARES [MICROFINANCIAL LOGO] 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 $14.00 and $16.00 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. The Common Stock will be listed on The New York Stock Exchange ("NYSE"), subject to official notice of issuance, 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.
- ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ PROCEEDS TO PRICE TO UNDERWRITING PROCEEDS TO SELLING PUBLIC DISCOUNT(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 Discount and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. The shares of Common Stock are offered by the Underwriters subject to prior sale when, as and if delivered to and accepted by the Underwriters and subject to their right to reject orders in whole or in part. It is expected that delivery of the certificates for such shares of Common Stock will be made at the offices of Piper Jaffray Inc. in Minneapolis, Minnesota on or about , 1999. PIPER JAFFRAY INC. CIBC OPPENHEIMER 3 [GRAPHIC -- PICTURE OF PEOPLE BICYCLING ON BRIDGE OVER COMPUTER TERMINALS WITH THE COMPANY'S WEBSITE ADDRESS (WWW.LEASECOMM.COM) PRINTED ON THE BRIDGE, AND THE FOLLOWING TEXT: TECHNOLOGY With our new secure web site, LeasecommDirect(TM), dealers have the opportunity to send in new applications, receive approvals and access a remarkable amount of in-depth information -- instantly, without human involvement. LeasecommDirect(TM) -- one more example of our constant commitment to information technology and management.] 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." 4 - -------------------------------------------------------------------------------- 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 "1999 Stock Split") of the Common Stock to be effective as of the date on which this Offering is consummated. 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 September 30, 1998, the Company's gross investment in leases and loans (as defined herein) totaled $273.1 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 nine months ended September 30, 1998 totaled $55.8 million and $9.5 million, increases of 11.2% and 52.6%, respectively, over the nine months ended September 30, 1997. The Company has completed six private securitizations since 1992, pursuant to which $70.2 million of securitized receivables remained on the Company's balance sheet as of November 30, 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. An example of the Company's strategic use of technology is LeasecommDirect(TM), the Company's Internet-based application processing, credit approval and Dealer information tool, use of which has increased from approximately 3.5% of total applications processed in the first quarter of 1998 to approximately 33.7% of total applications processed in the fourth quarter of 1998. 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 7,265,016 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(1) Total Offering..................................... 4,000,000 shares Common Stock to be outstanding after the Offering......................................... 13,332,766 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) 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." (2) 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 120,380 shares of Common Stock reserved for issuance upon exercise of stock options at exercise prices of $0.6375 and $1.95, outstanding as of December 31, 1998, 6,682 shares 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 of Common Stock held in the Company's treasury as of December 31, 1998. 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 September 30, 1998 and for the nine months ended September 30, 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 September 30, 1998 and for the nine months ended September 30, 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 nine months ended September 30, 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 $15.00 per share (the mid-point of the range of estimated initial offering prices) and the application of the net proceeds therefrom as described in "Use of Proceeds" occurred on September 30, 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.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 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 $33,900 $35,285 Income on service contracts(1)..................... -- -- -- 6 501 87 1,557 Rental income...................................... 1,329 2,058 3,688 8,250 10,809 8,104 11,153 Fee income(2)...................................... 2,576 3,840 5,446 8,675 11,236 8,104 7,837 ------- ------- ------- ------- ------- ------- ------- Total revenues................................... 14,745 21,847 36,145 55,585 68,180 50,195 55,832 ------- ------- ------- ------- ------- ------- ------- EXPENSES Selling, general and administrative................ 2,689 4,975 8,485 14,073 17,252 12,558 14,284 Provision for credit losses........................ 5,753 8,179 13,388 19,822(3) 21,713(3) 15,601 12,568 Depreciation and amortization...................... 602 827 1,503 2,981 3,787 2,701 3,867 Interest........................................... 3,598 5,009 8,560 10,163 11,890 8,891 9,198 ------- ------- ------- ------- ------- ------- ------- Total expenses................................... 12,642 18,990 31,936 47,039 54,642 39,751 39,917 ------- ------- ------- ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES............. 2,103 2,857 4,209 8,546 13,538 10,444 15,915 NET INCOME........................................... 1,325(4) 1,643 2,524 5,080 7,652 6,199 9,460 ======= ======= ======= ======= ======= ======= ======= NET INCOME PER COMMON SHARE Basic(5)........................................... $ 0.27 $ 0.33 $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96 Diluted(6)......................................... 0.15 0.19 0.27 0.52 0.76 0.62 0.94 DIVIDENDS PER COMMON SHARE........................... -- -- 0.06 0.10 0.12 0.09 0.10
DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 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 $273,148 $273,148 Unearned income............................... (19,952) (33,807) (60,265) (76,951) (73,060) (73,742) (73,742) Allowance for credit losses................... (4,778) (7,992) (15,952) (23,826) (26,319) (24,423) (24,423) Investment in service contracts(1)............ -- -- -- -- 2,145 7,412 7,412 Total assets.............................. 50,810 83,484 126,479 170,192 179,701 208,767 208,767 Notes payable................................. 37,747 57,594 94,900 116,202 116,830 132,104 105,704(8) Subordinated notes payable.................... 5,394 13,436 13,170 27,006 26,382 25,288 5,488(8) Total liabilities......................... 45,041 77,652 118,568 158,013 160,935 181,472 135,272 Total stockholders' equity................ 5,687 5,750 7,911 12,179 18,766 27,295 73,495
- -------------------------------------------------------------------------------- 5 7 - --------------------------------------------------------------------------------
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, -------------------------------------------------------- ------------------- 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 $ 90,637 $107,164 Total service contracts acquired(10)................... -- -- 3,635 2,431 2,972 1,660 6,298 Dealer fundings(11).............. $ 26,213 $ 52,745 $ 76,502 $ 73,659 $ 77,590 $ 56,767 $ 76,710 Average yield on leases and loans(12)...................... 30.0% 29.9% 30.7% 32.4% 33.9% 33.3% 35.4% Cash flows from (used in): Operating activities............. $ 17,660 $ 26,288 $ 41,959 $ 60,104 $ 77,393 $ 53,054 $ 69,641 Investing activities............. (26,182) (51,528) (76,353) (86,682) (80,127) (58,533) (78,222) Financing activities............. 9,502 27,803 36,155 33,711 (1,789) 1,498 12,786 -------- -------- -------- -------- -------- -------- -------- Total.......................... 980 2,563 1,761 7,133 (4,523) (3,981) 4,205 Selected Ratios: Return on average assets(13)..... 2.96% 2.45% 2.40% 3.42% 4.37% 4.74% 6.49% Return on average stockholders' equity(13)..................... 29.82 28.73 36.95 50.57 49.46 55.46 54.77 Operating margin(14)............. 53.28 50.51 48.68 51.04 51.70 51.89 51.02 Credit Quality Statistics: Net charge-offs.................. $ 4,033 $ 4,961 $ 5,428 $ 11,948(15) $ 19,220(15) $ 17,082 $ 14,464 Net charge-offs as a percentage of average gross investment(13)(16)............. 6.46% 5.37% 3.56% 5.46%(15) 7.57%(15) 8.58% 7.13% Provision for credit losses as a percentage of average gross investment(13)(17)............. 9.21 8.85 8.78 9.07 8.55 7.83 6.20 Allowance for credit losses as a percentage of gross investment(18)................. 6.87 6.93 8.41 9.62 10.11 8.78 8.71
- --------------- (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 4,994,296, 5,003,880, 7,352,189, 9,682,851, 9,793,140, 9,791,212 and 9,849,602 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively. (6) Net income per common share (diluted) is calculated based on weighted average common shares outstanding on a diluted basis of 9,120,355, 8,713,065, 9,448,206, 9,770,613, 9,925,329, 10,005,028 and 10,031,974 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine months ended September 30, 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 $19.8 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Subordinated Debt and (ii) the use of $26.4 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Credit Facilities. (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) Represents the aggregate of the implied interest rate on each lease and loan originated during the period weighted by the amount funded at origination for each such lease and loan. (13) Quarterly amounts are annualized. (14) Represents income before provision for income taxes and provision for credit losses as a percentage of total revenues. (15) Charge-offs in 1996 and 1997 were higher due to write-offs related to satellite television equipment lease receivables and 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." (16) Represents net charge-offs as a percentage of average gross investment in leases and loans and investment in service contracts. (17) Represents provision for credit losses as a percentage of average gross investment in leases and loans and investment in service contracts. (18) 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 58% of new lease originations during the first nine months 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 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. The Company's receivables (including the entire lease receivable with the exception of service contracts, as to which only the amount of the invoices billed but not collected is included) which were contractually past due by 31 days or more at October 2, 1998 represented 25.1% of the sum of the Company's receivables due in installments plus investment in service contracts plus 8 10 loans receivable at September 30, 1998. See "Business -- Exposure to Credit Losses." Under the Company's charge-off policy, cumulative net charge-offs from the Company's inception to September 30, 1998 have totaled 7.45% 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." 9 11 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 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, as of September 30, 1998, approximately 41% of the Company's portfolio was 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. 10 12 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, 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 11 13 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 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 41.0% 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 13,332,766 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, all of the remaining 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 Piper Jaffray 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 12 14 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, 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 $9.47. 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 "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 $46.2 million (assuming an initial public offering price of $15.00 per share, the mid-point of the range of estimated initial public offering prices), after deducting the estimated underwriting discount 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)................... $10.3 Repayment of senior subordinated debt(2).................... 9.5 Repayment of Credit Facilities (2)(3)....................... 26.4 ----- Total(4).................................................... $46.2 =====
- --------------- (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 April 1, 1999 to December 1, 2003 and bear interest at rates ranging from 8.0% to 12.0% per annum at December 31, 1998. The Company has borrowed $1.4 million principal amount of the Junior Subordinated Notes since December 31, 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 December 31, 1998, the Company had (a) $4.5 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, (b) $4.6 million outstanding under its subordinated note with Rothschild Inc., all of which bears interest at a fixed rate of 12.25% per annum and matures on October 1, 2001 and (c) $5.0 million outstanding under its subordinated note with Aegon Insurance Group, all of which bears interest at a fixed rate of 12.6% per annum and matures on October 15, 2003. 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 December 31, 1998, the Company had $39.3 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, $5.9 million in revolving credit and term loans outstanding under its facility led by BankBoston, N.A. Of these amounts, $3.7 million is a term loan which bears interest at a fixed rate of 7.75% per annum and matures on August 2, 1999; and $41.5 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 $35.6 million principal amount and no later than the second anniversary of the Commitment Termination Date as to $5.9 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 1999 Stock Split:
1996 1997 1998 ---- ---- ---- (AMOUNT PER SHARE) First Quarter............................................ $0.020 $0.025 $0.030 Second Quarter........................................... 0.025 0.030 0.035 Third Quarter............................................ 0.025 0.030 0.035 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 September 30, 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 $15.00 per share, the mid-point of the range of estimated initial public offering prices) 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 SEPTEMBER 30, 1998 ------------------------ ACTUAL AS ADJUSTED(1) (DOLLARS IN THOUSANDS) ------ -------------- Debt: Notes payable............................................. $132,104 $105,704 Subordinated notes payable................................ 25,288 5,488 -------- -------- Total debt............................................. 157,392 111,192 -------- -------- Redeemable convertible preferred stock(2)................... -- -- Stockholders' equity: Common Stock $0.01 par value per share, 25,000,000 shares authorized; 9,886,516 shares issued and outstanding; and 13,306,116 shares issued and outstanding, after giving effect to the Offering(2)(3).................... 99 133 Additional paid-in capital................................ 1,764 47,930 Retained earnings......................................... 25,838 25,838 Treasury stock............................................ (138) (138) Notes receivable from officers and employees.............. (268) (268) -------- -------- Total stockholders' equity............................. 27,295 73,495 -------- -------- Total capitalization.............................. $184,687 $184,687 ======== ========
- --------------- (1) As adjusted reflects (i) the use of approximately $19.8 million of the net proceeds of the Offering to repay amounts outstanding under the Company's subordinated indebtedness and (ii) the use of $26.4 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Credit Facilities. (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 September 30, 1998. (3) Shares issued and outstanding do not include an aggregate of 147,030 shares of Common Stock reserved for issuance upon exercise of stock options at exercise prices of $0.6375 and $1.95, outstanding as of September 30, 1998, 26,650 of which were exercised between October 1, 1998 and December 31, 1998 and 6,682 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 September 30, 1998. 16 18 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 9,886,516 million shares of Common Stock outstanding as of September 30, 1998 (not including treasury stock). The net tangible book value of the Company as of September 30, 1998 was approximately $27.3 million, or $2.76 per share of Common Stock. After giving effect to the sale of the Common Stock by the Company at an assumed initial public offering price of $15.00 per share (the mid-point of the range of estimated initial public offering prices) and after deduction of the underwriting discount 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 September 30, 1998, would have been approximately $73.5 million or $5.53 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.77 per share to existing stockholders and an immediate dilution of $9.47 per share to new investors purchasing the Common Stock in the Offering. The following table illustrates the pro forma per share dilution, as of September 30, 1998: Initial public offering price per share..................... $15.00 Net tangible book value per share at September 30, 1998..... 2.76 Increase per share attributable to new investors............ 2.77 Pro forma net tangible book value per share after the Offering.................................................. 5.53 Net tangible book value dilution per share to new investors................................................. 9.47
The following table sets forth, as of September 30, 1998 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)........... 9,886,516 74.4% $ 1,905,949 3.6% $ 0.19 New investors(1)................... 3,400,000 25.6 51,000,000 96.4 15.00 ---------- ----- ----------- ----- ------ Total.................... 13,286,516 100.0% $52,905,949 100.0% $ 3.98 ========== ===== =========== ===== ======
- --------------- (1) Sales by the Selling Stockholders will reduce the number of shares of Common Stock held by existing stockholders to 9,286,516, 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 (i) exclude an aggregate of 26,650 shares of Common Stock issued after September 30, 1998 pursuant to the exercise of stock options granted under the Company's 1987 Stock Option Plan for an aggregate consideration of $51,968; and (ii) assume no conversion of the Company's outstanding Series C Preferred Stock, $1.00 par value (the "Series C Preferred Stock") into 19,600 shares of Common 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 September 30, 1998, and for the nine months ended September 30, 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 PricewaterhouseCoopers LLP, independent accountants. The Company's selected consolidated financial and operating data as of September 30, 1998 and for the nine months ended September 30, 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 nine months ended September 30, 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 $15.00 per share (the mid-point of the range of estimated initial public offering prices) and the application of the net proceeds therefrom as described in "Use of Proceeds" occurred on September 30, 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.
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------- ----------------- 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 $33,900 $35,285 Income on service contracts(1)...................... -- -- -- 6 501 87 1,557 Rental income....................................... 1,329 2,058 3,688 8,250 10,809 8,104 11,153 Fee income(2)....................................... 2,576 3,840 5,446 8,675 11,236 8,104 7,837 ------- ------- ------- ------- ------- ------- ------- Total revenues.................................... 14,745 21,847 36,145 55,585 68,180 50,195 55,832 ------- ------- ------- ------- ------- ------- ------- EXPENSES Selling, general and administrative................. 2,689 4,975 8,485 14,073 17,252 12,558 14,284 Provision for credit losses......................... 5,753 8,179 13,388 19,822(3) 21,713(3) 15,601 12,568 Depreciation and amortization....................... 602 827 1,503 2,981 3,787 2,701 3,867 Interest............................................ 3,598 5,009 8,560 10,163 11,890 8,891 9,198 ------- ------- ------- ------- ------- ------- ------- Total expenses.................................... 12,642 18,990 31,936 47,039 54,642 39,751 39,917 ------- ------- ------- ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES.............. 2,103 2,857 4,209 8,546 13,538 10,444 15,915 NET INCOME............................................ 1,325(4) 1,643 2,524 5,080 7,652 6,199 9,460 ======= ======= ======= ======= ======= ======= ======= NET INCOME PER COMMON SHARE Basic(5)............................................ $ 0.27 $ 0.33 $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96 Diluted(6).......................................... 0.15 0.19 0.27 0.52 0.76 0.62 0.94 DIVIDENDS PER COMMON SHARE............................ -- -- 0.06 0.10 0.12 0.09 0.10
DECEMBER 31, SEPTEMBER 30, ---------------------------------------------------- ------------------- 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 $273,148 $273,148 Unearned income................................ (19,952) (33,807) (60,265) (76,951) (73,060) (73,742) (73,742) Allowance for credit losses.................... (4,778) (7,992) (15,952) (23,826) (26,319) (24,423) (24,423) Investment in service contracts(1)............. -- -- -- -- 2,145 7,412 7,412 Total assets............................... 50,810 83,484 126,479 170,192 179,701 208,767 208,767 Notes payable.................................. 37,747 57,594 94,900 116,202 116,830 132,104 105,704(8) Subordinated notes payable..................... 5,394 13,436 13,170 27,006 26,382 25,288 5,488(8) Total liabilities.......................... 45,041 77,652 118,568 158,013 160,935 181,472 135,272 Total stockholders' equity................. 5,687 5,750 7,911 12,179 18,766 27,295 73,495
18 20
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------------------------------- ------------------- 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 $ 90,637 $107,164 Total service contracts acquired(10).... -- -- 3,635 2,431 2,972 1,660 6,298 Dealer fundings(11)..................... $ 26,213 $ 52,745 $ 76,502 $ 73,659 $ 77,590 $ 56,767 $ 76,710 Average yield on leases and loans(12)... 30.0% 29.9% 30.7% 32.4% 33.9% 33.3% 35.4% Cash flows from (used in): Operating activities.................... $ 17,660 $ 26,288 $ 41,959 $ 60,104 $ 77,393 $ 53,054 $ 69,641 Investing activities.................... (26,182) (51,528) (76,353) (86,682) (80,127) (58,533) (78,222) Financing activities.................... 9,502 27,803 36,155 33,711 (1,789) 1,498 12,786 -------- -------- -------- -------- -------- -------- -------- Total................................. 980 2,563 1,761 7,133 (4,523) (3,981) 4,205 Selected Ratios: Return on average assets(13)............ 2.96% 2.45% 2.40% 3.42% 4.37% 4.74% 6.49% Return on average stockholders' equity(13)... 29.82 28.73 36.95 50.57 49.46 55.46 54.77 Operating margin(14).................... 53.28 50.51 48.68 51.04 51.70 51.89 51.02 Credit Quality Statistics: Net charge-offs......................... $ 4,033 $ 4,961 $ 5,428 $ 11,948(15) $ 19,220(15) $ 17,082 $ 14,464 Net charge-offs as a percentage of average gross investment(13)(16).............. 6.46% 5.37% 3.56% 5.46%(15) 7.57%(15) 8.58% 7.13% Provision for credit losses as a percentage of average gross investment(13)(17)... 9.21 8.85 8.78 9.07 8.55 7.83 6.20 Allowance for credit losses as a percentage of gross investment(18)............... 6.87 6.93 8.41 9.62 10.11 8.78 8.71
- --------------- (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 4,994,296, 5,003,880, 7,352,189, 9,682,851, 9,793,140, 9,791,212 and 9,849,602 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and 1998, respectively. (6) Net income per common share (diluted) is calculated based on weighted average common shares outstanding on a diluted basis of 9,120,355, 8,713,065, 9,448,206, 9,770,613, 9,925,329, 10,005,028 and 10,031,974 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine months ended September 30, 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 $19.8 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Subordinated Debt and (ii) the use of $26.4 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Credit Facilities. (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) Represents the aggregate of the implied interest rate on each lease and loan originated during the period weighted by the amount funded at origination for each such lease and loan. (13) Quarterly amounts are annualized. (14) Represents income before provision for income taxes and provision for credit losses as a percentage of total revenues. (15) Charge-offs in 1996 and 1997 were higher due to write-offs related to satellite television equipment lease receivables and 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." (16) Represents net charge-offs as a percentage of average gross investment in leases and loans and investment in service contracts. (17) Represents provision for credit losses as a percentage of average gross investment in leases and loans and investment in service contracts. (18) 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 nine months ended September 30, 1998 and the year ended December 31, 1997, the Company had fundings to Dealers upon origination of leases, contracts and loans ("Dealer Fundings") of $76.7 million and $77.6 million, respectively, and revenues of $55.8 million and $68.2 million, respectively. 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 September 30, 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 Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30, 1997 Total revenues for the nine months ended September 30, 1998 were $55.8 million, an increase of $5.6 million, or 11.2%, from the nine months ended September 30, 1997, due primarily to increases of $1.4 million, or 4.1%, in income on financing leases and loans and $4.5 million, or 55.2%, in rental and service contract income over such amounts in the previous year's period. The increase in income on financing leases and loans was due to the continued growth in the Company's lease and loan portfolio. The increase in rental and service 21 23 contract income was due to an increase in the number of lessees that have continued renting the equipment beyond the original lease term and the increase in the number of service contracts in the Company's portfolio. Selling, general and administrative expenses increased $1.7 million, or 13.7%, for the nine-month period ended September 30, 1998 as compared to the same period in 1997. Such increase was primarily attributable to an increase in personnel resulting in a 19.9% increase in employee-related expenses, as the number of employees needed to maintain and manage the Company's increased portfolio and the general expansion of the Company's operations increased. 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 $3.0 million from the nine months ended September 30, 1997 to $12.6 million for the nine months ended September 30, 1998, primarily due to an increase in recoveries. This decrease was the result of the Company's estimate of future losses. See "Business -- Exposure to Credit Losses." Depreciation and amortization expense increased by $1.2 million, or 43.2%, due to the increased number of rental contracts and the amortization of the investment associated with service contracts. Interest expense increased by $307,000, or 3.5%, from $8.9 million for the nine months ended September 30, 1997 to $9.2 million for the nine months ended September 30, 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 $3.3 million, or 52.6%, from $6.2 million for the nine months ended September 30, 1997 to $9.5 million for the nine months ended September 30, 1998. Dealer Fundings were $76.7 million during the nine months ended September 30, 1998, an increase of $19.9 million, or 35.1%, compared to the nine months ended September 30, 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 $254.1 million at September 30, 1997 to $273.1 million at September 30, 1998, representing a 7.5% increase. Cash collections increased by $17.4 million to $102 million during the first nine months of 1998, or 20.6%, from the first nine months 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 $300,000, or 0.4%, from $74.0 million at September 30, 1997 to $73.7 million at September 30, 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 financing 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 22 24 attributable to a 20% increase in the number of employees needed to maintain and manage the Company's 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 $77.6 million for the fiscal year ended December 31, 1997, an increase of $3.9 million, or 5.3%, compared to $73.7 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 $4.7 million in 1996. Excluding this factor, the Company had an increase in Dealer Fundings of $7.8 million, or 11.3%, 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 financing 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 $73.7 million in 1996, a decrease of $2.8 million, or 3.7%, 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 September 30, 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 $97.1 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 date, cash flow from its portfolio and other fees have been sufficient to repay amounts borrowed under the Credit Facilities and Subordinated Debt. 24 26 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 September 30, 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 45% 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 29.8% of the Company's fixed rate indebtedness outstanding at September 30, 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 September 30, 1998, the Company had entered into LIBOR loans with interest rates ranging from 7.54% to 8.19%. 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 substantially Year 2000 compliant. 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 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. 25 27 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 September 30, 1998, the Company's gross investment in leases and loans totaled $273.1 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 nine months of 1998 totaled $55.8 million and $9.5 million, increases of 11.2% and 52.6%, respectively, over the first nine months 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. An example of the Company's strategic use of technology is LeasecommDirect(TM), the Company's Internet-based application processing, credit approval and Dealer information tool, use of which has increased from approximately 3.5% of total applications processed in the first quarter of 1998 to approximately 33.7% of total applications processed in the fourth quarter of 1998. 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 26 28 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. 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 (including a fully automated Internet-based applications processing system), 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 27 29 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 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 885,000 new employer firms in 1997, a 5.1% increase over 1996. 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, 1997, the number of POS payment terminals worldwide had increased 25.4% from 13.4 million at December 31, 1996 to 16.8 million, of which approximately 44% were located in the U.S. 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. 28 30 The Company has enjoyed a long history of portfolio growth, fueled by origination growth in both traditional and developing markets that the Company serves. 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 following table outlines historical Dealer Fundings defined as the amount paid to Dealers upon origination for each type of underlying equipment or service financed:
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ------------------ 1995 1996 1997 1997 1998 (DOLLARS IN THOUSANDS) ---- ---- ---- ---- ---- COMMERCIAL POS authorization systems(a)........... $54,658 $55,938 $55,391 $42,418 $44,478 Service contracts...................... 0 28 283 103 518 Other commercial....................... 9,235 10,437 17,656 11,589 22,627 ------- ------- ------- ------- ------- Total commercial.................... $63,893 $66,403 $73,330 $54,110 $67,623 RESIDENTIAL Service contracts...................... $ 3,635 $ 2,403 $ 2,689 $ 1,557 $ 5,780 Other residential...................... 8,974 4,853 1,571 1,100 3,307 ------- ------- ------- ------- ------- Total residential................... $12,609 $ 7,256 $ 4,260 $ 2,657 $ 9,087 Total amount funded................. $76,502 $73,659 $77,590 $56,767 $76,710
- --------------- (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 and various other types of residential finance products. The Company's residential portfolio in past years primarily included 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 September 30, 1998, leases in California, Florida, Texas and New York accounted for approximately 41% 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 as of September 30, 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 29 31 or upgrades to the equipment, regardless of the source of payment, are automatically incorporated into and deemed a part of the equipment financed. 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 September 30, 1998 had an aggregate residual value of approximately $17.6 million, representing 7.1% of the Company's total lease receivables at September 30, 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 (approximately 10,800 in September 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 LeasecommDirect(TM), an Internet-based application processing, credit approval and Dealer information tool. Using LeasecommDirect(TM), a Dealer can input an application directly to the Company via the 30 32 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. Use of this system by Dealers has increased from approximately 3.5% of total applications processed in the first quarter of 1998 to approximately 33.8% of total applications processed in the fourth quarter of 1998. 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 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 LeasecommDirect(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. 31 33 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. 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 three large POS authorization system lease and rental portfolios, two in 1996 and one in 1998, all 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 second acquisition was for approximately 8,200 leases in December 1996 with fundings of $7.9 million. The Company acquired 4,841 rental contracts in July 1998 with fundings of $2.8 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 32 34 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 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 33 35 of Dealer error or misrepresentation, the Company will charge-back the Dealer for both the lessee's delinquent amounts and attorney and court fees. The following table sets forth certain information as of December 29, 1995, December 31, 1996 and 1997 and as of October 2, 1998, with respect to delinquent leases, contracts and loans. These dates represent the dates on the Company's regular schedule for calculating delinquencies which are nearest to the final day of the corresponding fiscal year and quarter. The percentages in the table below represent the aggregate on such date 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 cumulative amount billed at such date from the date of origination on all leases, contracts and loans in the Company's portfolio. 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.
AS OF AS OF DECEMBER 29, DECEMBER 31, AS OF ------------ ------------------- OCTOBER 2, 1995 1996 1997 1998 ---- ---- ---- ------------- Cumulative amount billed (in thousands)........ $122,065 $189,798 $260,958 $301,244 31-60 days past due............................ 1.0% 1.6% 1.6% 1.4% 61-90 days past due............................ 0.8 1.2 1.1 1.1 Over 90 days past due.......................... 5.7 6.6 7.0 8.0 -------- -------- -------- -------- Total past due............................ 7.5% 9.4% 9.7% 10.5%
The following table sets forth, as of December 31, 1997 and October 2, 1998 (the dates on the Company's regular reporting schedule for calculating delinquencies which are nearest to the final day of the corresponding fiscal year and quarter), contractual delinquencies (including the entire lease receivable with the exception of service contracts, as to which only the amount of the invoices billed but not collected is included) in each category as a percentage of the sum of receivables due in installments plus investment in service contracts plus loans receivable on the Company's most recent balance sheet.
AS OF AS OF DECEMBER 31, OCTOBER 2, 1997 1998 ------------ ------------- Receivables due in installments plus investment in service contracts plus loans receivable (in thousands)(1)......... $243,591 $262,987 31-60 days past due......................................... 3.2% 3.4% 61-90 days past due......................................... 2.4 2.5 Over 90 days past due....................................... 19.9 19.2 -------- -------- Total past due......................................... 25.5% 25.1%
(1) As reported on the Company's balance sheet at December 31, 1997 and September 30, 1998, respectively. 34 36 The following table sets forth the Company's allowance for credit losses as of December 31, 1994, 1995, 1996 and 1997 and as of September 30, 1998 and the related provisions, charge-offs and recoveries for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1998 (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 Provision for credit losses................................. 12,568 Charge-offs................................................. 20,644 Recoveries.................................................. 6,180 ------- Charge-offs, net of recoveries.............................. 14,464 ------- Balance at September 30, 1998............................... $24,423
The following table sets forth (i) for the indicated period the Company's charge-offs and provision for credit losses as percentages of the sum of average gross investment in leases and loans plus investment in service contracts and (ii) at the end of the given period, the Company's allowance for credit losses as a percentage of gross investment in leases and loans plus investment in service contracts:
NINE MONTHS YEAR ENDED DECEMBER 31, ENDED -------------------------------- SEPTEMBER 30, 1995 1996 1997 1998(1) ---- ---- ---- ------------- Average gross investment in leases and loans and investment in service contracts (in thousands)(2)............. $152,492 $218,666 $254,004 $270,468 Net charge-offs........................... 3.56% 5.46% 7.57% 7.13% Provision for credit losses............... 8.78% 9.07% 8.55% 6.20% Allowance for credit losses............... 8.41% 9.62% 10.11% 8.71%
- --------------- (1) Quarterly amounts are annualized. (2) 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. 35 37 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 September 30, 1998 were 7.45% 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, 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 02151. The Company's telephone number is (781) 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 September 30, 1998, the aggregate monthly rent under these leases was approximately $76,964. The Company recently signed a lease for 44,659 square feet of office space in Woburn, Massachusetts which commenced on December 15, 1998 and expires on December 14, 2003. The monthly rent under this lease is $57,099. EMPLOYEES As of September 30, 1998, the Company had 230 full-time employees, of which 45 were engaged in credit activities and Dealer service, 116 were engaged in servicing and collection activities, 10 were engaged in marketing activities, and 59 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. 36 38 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)........................ 55 Director Jeffrey Parker(2)............................... 55 Director Alan Zakon(1)(2)................................ 63 Director Richard F. Latour............................... 45 Executive Vice President, Chief Operating Officer, Chief Financial Officer, Treasurer and Secretary J. Gregory Hines................................ 38 Vice President, Funding John Plumlee.................................... 47 Vice President, MIS Carol A. Salvo.................................. 32 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. 37 39 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, Chief Financial Officer, Treasurer and Secretary 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. The directors of the Company have been 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 1999 annual meeting of the stockholders of the Company, the term of office of the second class to expire at the 2000 annual meeting of the stockholders of the Company and the term of office of the third class to expire at the 2001 annual meeting of the stockholders of the Company, with each director to hold office until his or her successor shall have been duly elected and qualified or until his or her earlier removal or resignation. At each annual meeting of stockholders of the Company, commencing with the 1999 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of the stockholders of the Company after their election. In accordance with the foregoing, Peter Bleyleben's term as a director of the Company expires at the 2001 annual meeting of the stockholders of the Company, Brian Boyle and Alan Zakon's respective terms as directors of the Company expire at the 2000 annual meeting of the stockholders of the Company and Torrence Harder and Jeffrey Parker's respective terms as directors of the Company expire at the 1999 annual meeting of the stockholders of the Company. 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- 38 40 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 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 September 30, 1998, Dr. Boyle, Mr. Harder, Mr. Parker and Dr. Zakon had 2,978.12, 3,474.48, 2,978.12 and 3,474.48 Stock Units in their respective accounts. The Board of Directors has voted to terminate the Stock Unit Plan effective upon the closing of the Offering. Each Non-Employee Director will receive a cash payment in an amount equal to the number of Stock Units in their respective accounts multiplied by the price to public on the cover of this Prospectus. 39 41 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, 1998, 1997 and 1996 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION NAME AND -------------------- ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION ------------------ ---- ------ -------- ------------ Peter R. Bleyleben............................... 1998 $250,888 $364,000 $65,245(3) President, Chief Executive 1997 218,798 276,730 71,072 Officer and Director 1996 187,837 214,073 73,674 Richard F. Latour................................ 1998 198,446 244,568 45,690(4) Executive Vice President, 1997 169,495 153,755(5) 49,680 Chief Operating Officer, 1996 134,535 43,000 44,381 Chief Financial Officer, Treasurer and Secretary J. Gregory Hines................................. 1998 106,951 42,095 4,281(6) Vice President, Funding 1997 87,348 26,950 3,206 1996 79,853 10,320 2,256 John Plumlee..................................... 1998 141,351 44,533 21,191(7) Vice President, MIS 1997 124,624 29,769 20,687 1996 108,657 14,346 18,603 Carol Salvo...................................... 1998 84,677 34,734 4,022(8) Vice President, Legal 1997 66,368 15,781 2,170 1996 47,190 3,817 1,502
- --------------- (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. (3) Amounts for Dr. Bleyleben include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1998 ($4,000), 1997 ($4,470) and 1996 ($4,500); (b) split dollar life insurance premiums paid by the Company in 1998 ($54,156), 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 1998 ($7,089), 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 each such loan, in 1997 ($595) and 1996 ($5,113). (4) Amounts for Mr. Latour include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1998 ($4,000), 1997 ($4,500) and 1996 ($4,435); (b) split dollar life insurance premiums paid by the Company in 1998 ($34,917), 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 1998 ($3,028), 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 such loan, in 1998 ($3,745), 1997 ($3,093) and 1996 ($2,419). (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. Hines include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1998 ($2,738), 1997 ($2,273) and 1996 ($1,963); (b) term life insurance premiums paid by the Company in 1998 ($84), 1997 ($84) and 1996 ($76); (c) executive disability insurance policy premiums paid by the Company in 1998 ($602), 1997 ($434) and 1996 ($217); 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 such loan, in 1998 ($857) and 1997 ($415). (7) Amounts for Mr. Plumlee include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1998 ($3,870), 1997 ($3,722) and 1996 ($2,991); (b) split dollar life insurance premiums paid by the Company in 1998 ($15,000), 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 1998 ($1,016), 1997 ($1,016) and 1996 ($508); 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 such loan, in 1998 ($1,305) and 1997 ($836). (8) Amounts for Ms. Salvo include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1998 ($2,597), 1997 ($1,686) and 1996 ($1,447); (b) term life insurance premiums paid by the Company in 1998 ($84), 1997 ($69) and 1996 ($55); (c) executive disability insurance policy premiums paid by the Company in 1998 ($485); 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 such loan, in 1998 ($857) and 1997 ($415). 40 42 STOCK OPTION PLANS 1998 Equity Incentive Plan The Company has adopted the 1998 Equity Incentive Plan (the "1998 Plan") effective July 9, 1998 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 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 fair 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. "Change in 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 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 1998 Plan 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. 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. 41 43 1987 Stock Option Plan The Company adopted the 1987 Stock Option Plan (the "1987 Stock Option Plan" and together with the 1998 Plan, the "Stock Option Plans") effective July 1, 1987 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 1987 Stock Option Plan provides that options may be granted thereunder up to July 1, 1997. The Company reserved 1,220,000 shares of Common Stock for issuance pursuant to options granted under the 1987 Stock Option Plan. Options for 508,000 shares of Common Stock were granted under the 1987 Stock Option Plan, 371,166 of which have been exercised. The 1987 Stock Option Plan is administered by the Board of Directors of the Company. 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) effected the grant of options under the 1987 Stock Option Plan, determined the form of options to be granted in each case, and has the right to 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 provided 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 could only be granted to employees of the Company. Non- qualified stock options could 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, determined the persons to be granted options, the number of shares subject to each option, whether the options would 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 had the right to appoint from its disinterested directors a committee of three or more persons who had the right to exercise the powers of the Board of Directors in granting options under the 1987 Stock Option Plan. A 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 is at least equal to the fair market value per share of the outstanding Common Stock of the Company at the time the option was granted as determined by the Board of Directors in its discretion. The aggregate fair market value (determined as of the time the option was granted) of the Common Stock for which an individual could have been granted incentive stock options in any calendar year was 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, owned (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"), is 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 is 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 was granted. An incentive stock option granted to a Restricted Individual is not exercisable after the expiration of five years from the date such option was granted. A non-qualified stock option is exercisable for such consideration, in such manner and at such time or times as set forth in an option agreement containing such provisions as the Board of Directors determined in granting such an option, and is exercisable for a period of ten years and one day from the date such option was granted, but in no event after such period. 42 44 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. There were no stock options awarded in 1998 under the 1987 Stock Option Plan. The following table indicates the aggregate option exercises in 1998 by the Named Executive Officers and fiscal year-end option values: AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 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.......... 0 $ 0 0 0 $ 0 $ 0 Richard F. Latour........... 40,262 354,244 0 38,778 0 395,835 J. Gregory Hines............ 13,420 116,842 0 14,920 0 153,719 John Plumlee................ 11,940 96,982 0 12,000 0 120,552 Carol Salvo................. 11,940 96,982 0 12,000 0 120,552
- --------------- (1) The amounts in these columns are calculated using the difference between the fair market value of the Company's Common Stock at exercise or at the end of the Company's 1998 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 has entered into Employment Agreements with Dr. Bleyleben and Mr. Latour for a three-year period commencing June 12, 1998, 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, 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 43 45 plans. Dr. Bleyleben's and Mr. Latour's current base salaries, respectively, are $260,000 and $210,000. The bonus for the current fiscal year will be determined by the Board of Directors. If, in connection with a payment under their Employment Agreement, either 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, "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 outside of the metropolitan Boston, Massachusetts area; 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 in Control (as defined above). Each employment agreement has an initial term of one year following a Change in 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 in Control. If the employment 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. Mr. Latour has agreed to repay all outstanding indebtedness to the Company upon the closing of the Offering with the proceeds of shares of Common Stock sold by him. During the fiscal year ended December 31, 1997, the largest aggregate amount outstanding under this loan was $86,297, with $85,168 remaining outstanding at September 30, 1998. The Parker Family Limited Partnership, controlled by Jeffrey Parker, a director of the Company, loaned the Company an aggregate of $2.4 million in the form of Junior Subordinated Notes, $2.2 million of which was outstanding as of December 31, 1998, as follows: $200,000 on September 1, 1994 at an interest rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing September 1, 1999; $200,000 on May 1, 1995 at an interest rate per annum equal to 12% or a bank prime rate plus 4% maturing May 1, 2000; $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, 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 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. 44 46 Peter R. Bleyleben, the President and Chief Executive Officer and a Director of the Company, loaned the Company an aggregate of $125,000 in the form of Junior Subordinated Notes as follows: $100,000 on December 1, 1996 at 12% interest per annum maturing December 1, 2001; and $25,000 on June 1, 1998 at 10.5% interest per annum maturing June 1, 2003. Mr. Bleyleben also loaned the Company an aggregate of $200,000 in the form of demand notes as follows: $100,000 on October 17, 1997 at an interest rate per annum equal to a bank prime rate minus 1%; and $100,000 on December 1, 1998 at an interest rate per annum equal to a bank prime rate minus 1%. Alan J. Zakon, a director of the Company, loaned the Company an aggregate of $200,000 in the form of Junior Subordinated Notes as follows: $100,000 on February 1, 1995 at 12% interest per annum maturing February 1, 2000; and $100,000 on March 18, 1998 at 10.5% interest per annum through his IRA 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; $20,000 on June 4, 1997 at an interest rate per annum equal to 11.5% maturing May 1, 2002; and $25,000 on June 1, 1998 at an interest rate per annum equal to 10% maturing June 1, 2003. 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 December 31, 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 9,886,516 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 17.04% Brian E. Boyle(3)................................... 2,240,000 22.66% Torrence C. Harder(4)............................... 2,083,452 21.07% Jeffrey Parker(5)................................... 340,840 3.45% Alan Zakon.......................................... 40,000 * Richard F. Latour................................... 342,222 3.46% J. Gregory Hines.................................... 25,080 * John Plumlee........................................ 34,000 * Carol Salvo......................................... 18,000 * All directors and executive officers as a group (9 persons).......................................... 6,808,554 68.87%
- --------------- * 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. 45 47 (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 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. 46 48 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 16.84% 129,550 1,535,810 11.52% Torrence C. Harder(3).................... 1,673,834 16.93 130,250 1,543,584 11.58 Brian E. Boyle(4)........................ 1,523,200 15.41 118,500 1,404,700 10.54 Rosemary Boyle(5)........................ 716,800 7.25 80,050 636,750 4.78 Entrepreneurial Ventures, Inc............ 375,572 3.80 29,200 346,372 2.60 Spindle Limited Partnership.............. 368,688 3.73 30,000 338,688 2.54 Richard F. Latour(6)..................... 342,222 3.46 35,450 306,772 2.30 Rock Creek Partnership................... 241,660 2.44 18,125 223,535 1.68 Arthur J. Epstein........................ 227,680 2.30 15,000 212,680 1.60 Maureen Curran(7)........................ 78,000 * 8,200 69,800 * John Plumlee(8).......................... 34,000 * 3,725 30,275 * Steven Obana(9).......................... 18,000 * 1,950 16,050 *
- --------------- * 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. (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, Chief Financial Officer, Treasurer and Secretary of the Company since 1995. (7) Includes 4,454 shares of Common Stock issuable under options granted to Ms. Curran pursuant to the 1987 Stock Option Plan. (8) John Plumlee has served as Vice President, MIS, of the Company since 1990. (9) Steven Obana has served as Vice President, Marketing--West Coast of Leasecomm since January 1995. 47 49 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 $67.4 million in revolving credit and term loans was outstanding as of September 30, 1998 (the "Fleet Facility"). The second facility, led by BankBoston, N.A., is a $35 million revolving credit and term loan facility, of which $29.7 million in revolving credit and term loans was outstanding as of September 30, 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 Fleet Facility, $6.5 million was borrowed as a term loan, 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%. 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 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, 48 50 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 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. 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 September 30, 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 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 September 30, 1998, on a pro forma basis after giving effect to the consummation of the Offering and the anticipated use of $10.3 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 $26.4 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 1.85:1.0; and (ii) Consolidated Tangible Net Worth would have been $73.5 million, which was $55.6 million in excess of the sum of (a) $5.5 million or (b) $17.9 million (which amount constitutes $5.5 million plus 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 9.3% of the 49 51 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 3.68:1.0. Set forth below is a summary of the material terms of the Company's notes payable under these facilities as of December 31, 1998.
PRINCIPAL AMOUNT BANK OUTSTANDING FIXED/FLOATING RATE ---- ---------------- -------------- ---- (dollars in millions) Fleet Bank, N.A............................................. $15.0 Floating 7.4068%(a) Fleet Bank, N.A............................................. 20.0 Floating 7.3939(a) Fleet Bank, N.A............................................. 3.7 Fixed 7.75 BankBoston, N.A............................................. 10.0 Floating 7.1938(a) BankBoston, N.A............................................. 7.5 Floating 7.4103(a) Fleet Bank, N.A./BankBoston................................. 6.5 Floating Prime ----- $62.7 =====
- --------------- (a) Based on LIBOR as of December 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. LIBOR loans not renewed at maturity automatically convert to prime rate loans. 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 universe to include banks, insurance companies, and individual investors. The table below sets forth selected information as of December 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.................................. $ 4.5 12.0% August 1, 1994 July 15, 2001(a) Rothschild Inc........................ 4.6 12.25 October 17, 1996 October 1, 2001(b) Aegon Insurance Group................. 5.0 12.6 October 15, 1996 October 15, 2003(c) ----- 14.1 Others(d)............................. 10.3 ----- $24.4 =====
- --------------- (a) Repayment schedule requires annual principal payments of $1.5 million, commencing July 15, 1997, until the note matures. (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. The Company made a principal payment of $125,000 under the Rothschild Inc. subordinated note on January 1, 1999. (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 8.0% to 12.0% at December 31, 1998, with maturities ranging from April 1, 1999 to December 1, 2003. 50 52 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. 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 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 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 or (b) the sum of stockholders' equity as of January 1, 1994 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 51 53 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 September 30, 1998, on a pro forma basis after giving effect to the consummation of the Offering and the anticipated use of $10.3 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 $26.4 million of the net proceeds to repay indebtedness outstanding under the Credit Facilities, (i) the Company's consolidated net worth would have been $73.5 million, which was $50.6 million in excess of the greater of (a) $9.0 million and (b) the sum of stockholders' equity as of January 1, 1994 plus an amount equal to 65% of consolidated net income for the period from January 1, 1994 to September 30, 1998 (assuming that the Offering and the repayment of indebtedness occurred on January 1, 1994); (ii) consolidated senior debt would have been 129% of Adjusted Consolidated Net Worth; (iii) consolidated Subordinated Debt other than Junior Subordinated Notes would have been 6.8% 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 1.61:1.0. As of September 30, 1998, the Company's allowance for bad debts reserve was 101% of Delinquent Billed Lease Receivables. On a pro forma basis, assuming that the Offering and the repayment of indebtedness occurred on October 1, 1997, the ratio of Net Income Available for Interest Charges to interest charges would have been 3.68:1.0. SECURITIZATION PROGRAM The Company has completed six private Securitizations since its inception for an aggregate amount of $141.9 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. 52 54 The table below sets forth selected information as of December 31, 1998 with respect to the Company's six 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 $ 5.3 6.69 May 16, 2000 1997-A............................. 44.8 23.4 6.42 January 16, 2003 1998-A............................. 40.8 38.7 6.03 May 17, 2004 ------ ----- $141.9 $67.4 ====== =====
- --------------- (a) Monthly equivalent. (b) Repaid. Each of the Indentures pursuant to which each of the Series 1996-A, 1997-A and 1998-A Lease-Backed Term Notes were issued (the "1996-A Indenture", the "1997-A Indenture" and the "1998-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 Reported Companies (as hereinafter defined) or become deceased or unable to work for six months or more; (vii) either (a) any person or group of persons (within the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than Peter von Bleyleben, Brian Boyle and Torrence Harder (the "Key Shareholders") shall own, beneficially or of record, or control by contract or otherwise, more than 50% of the issued and outstanding shares of capital stock, on a fully diluted basis, of the Company having ordinary voting rights for the election of directors, (b) the Key Shareholders shall own, beneficially or of record, in the aggregate less than 45%, or own, beneficially or of record, or control, by contract or otherwise, in the aggregate less than 60% of the issued and outstanding shares of capital stock, on a fully diluted basis, of the Company having ordinary voting rights for the election of directors; provided, that this clause (b) shall not apply if and for so long as the Company shall be subject to the reporting requirements of the Exchange Act, or (c) the Company shall own, beneficially or of record, or control, by contract or otherwise, in the aggregate less than 100% of the issued and outstanding shares of capital stock of Leasecomm; (viii) the issuer or the trust estate is required to register as an "investment company" under the Investment Company Act of 1940, as amended; (ix) an event of default occurs under the Indenture or certain events of bankruptcy or insolvency occur with respect to the Company as servicer; (x) any Reported Company shall be in default under the Fleet Facility or the BankBoston Facility; or (xi) the Available Cash Requirement (as hereinafter defined) is not met. 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. 53 55 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) "Available Cash Requirement" means that, as of each calculation date and as reflected on each monthly report of the Company, the sum of (a) unrestricted cash and (b) amounts available for borrowing by the Reported Companies under their credit facilities is not less than $14,000,000; (iii) "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); (iv) "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; (v) "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; (vi) "Maximum Default Rate" equals 7%; (vii) "Maximum Delinquency Rate" equals 14.5%; (viii) "Minimum Net Worth Amount" means an amount equal to $24,950,000, provided, however, that if the Company becomes subject to the reporting requirements of the Exchange Act, such amount shall be reset to ninety percent (90%) of the Tangible Net Worth (as hereinafter defined) of the Reported Companies as of the close of the month in which such event occurs; (ix) "Net Worth Requirement" means that the Tangible Net Worth of the Company, Leasecomm and their affiliates (the "Reported Companies"), determined as of the close of each fiscal quarter, is equal to at least the Minimum Net Worth Amount plus 60% of the aggregate amount of consolidated net income of the Reported Companies for each of the fiscal quarters ending after the last determination of the Minimum Net Worth Amount, but without deducting therefrom any amount of consolidated net losses for any of such fiscal quarters; provided however that all such amounts shall be calculated in accordance with generally accepted accounting principles as in effect on December 31, 1997; and (x) "Tangible Net Worth" means as of the applicable date of determination, the sum, with respect to the Reported Companies 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 good will, (y) treasury stock and (z) 25% of debt issuance costs. 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 Organization, 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 December 31, 1998, 9,913,166 shares of Common Stock were outstanding and held of record by 86 persons. Upon completion of the Offering and the conversion of the Company's outstanding redeemable convertible preferred stock, 13,332,766 shares of Common Stock will be outstanding, excluding 120,380 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 December 31, 1998. 54 56 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 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. The Company's Restated Articles of Organization provide for a classified board in compliance with such statute and the Board of 55 57 Directors of the Company has established a classified board consisting of three classes as nearly equal in size as possible. 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 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 13,332,766 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 under "Underwriting" 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 2,120,380 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 and 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 Non-U.S. Holder is allowable as a credit against the holder's U.S. federal income tax, which may entitle the Non-U.S. 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 Non-U.S. 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 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 , 1999, each of the Underwriters named below, for whom Piper Jaffray Inc. and CIBC Oppenheimer Corp. are acting as representatives (the "Representatives"), has severally agreed to purchase, and the Company and the Selling Stockholders have agreed to sell to each of the Underwriters, the number of shares of Common Stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Piper Jaffray Inc........................................... CIBC Oppenheimer Corp....................................... --------- 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 have advised the Company and the Selling Stockholders that they propose to offer the shares directly to the public at the Price to Public set forth on the cover page of this Prospectus and to selected dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other brokers and dealers. After the Offering, the initial public offering price and other selling terms may be changed by the Underwriters. The Selling Stockholders have granted to the Underwriters an option, exercisable within the 30-day period after the date of this Prospectus, under which the Underwriters may purchase up to an additional 600,000 shares of Common Stock from the Company at the Price to Public less the Underwriting Discount set forth on the cover page of this Prospectus. The Underwriters may exercise the option solely for the purpose of covering over-allotments, if any, made in connection with the distribution of the Common Stock offered hereby. To the extent such option is exercised, each Underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as it was obligated to purchase under the Underwriting Agreement. At the request of the Company, the Underwriters have reserved up to 200,000 shares of Common Stock to be issued by the Company and offered hereby for sale, at the Price to Public, to directors, officers, employees, business associates and other individuals and entities related to 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 such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the Offering without notice. The Underwriters reserve the right to reject any order for the purchase of shares in whole or in part. In connection with the Offering, the Company, the Selling Stockholders and the executive officers and directors of the Company have agreed that they will not sell any shares of Common Stock other than the shares to be sold in the Offering without the prior consent of Piper Jaffray Inc., acting on behalf of the Underwriters, for a period of 180 days after the date of this Prospectus. 60 62 The Company and the Selling Stockholders have agreed to indemnify the Underwriters against certain liabilities, including civil liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make in respect thereof. Prior to this Offering, there has been no public market for the Common Stock. Consequently, the initial public offering price for the Common Stock will be determined by negotiations between the Company, the Selling Stockholders and the Underwriters. Among the factors to be considered in determining the initial public offering price will be the Company's record of operations, the Company's current financial position and future prospects, the experience of its management, the economics of the equipment leasing industry in general, the general condition of the securities markets and the price-earnings ratios, market prices of securities and certain financial and operating information of companies engaged in activities similar to those of the Company. The estimated public offering price range set forth on the cover page of this Prospectus is subject to change as a result of market conditions and other factors. See "Risk Factors -- No Prior Market for Common Stock; Possible Volatility of Stock Price." In order to facilitate the Offering, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of the Common Stock. Specifically, the Underwriters may over-allot or otherwise create a short position in the Common Stock for their own account by selling more shares of Common Stock than have been sold to them by the Company and the Selling Stockholders. The Underwriters may elect to cover any such short position by purchasing shares of Common Stock in the open market or by exercising the over-allotment option granted to the Underwriters. In connection therewith, the Representatives may stabilize or maintain the price of the Common Stock by imposing penalty bids on certain Underwriters, under which selling commissions allowed to Underwriters or dealers participating in the Offering are retained if shares of Common Stock previously distributed in the Offering are repurchased in connection with stabilization transactions or otherwise. The effect of these transactions may be to stabilize or maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market. The imposition of a penalty bid may also affect the price of the Common Stock to the extent that it discourages resales thereof. No representations are made as to the magnitude or effect of any such stabilization or other transactions. Such transactions may be effected on the New York Stock Exchange or otherwise and, if commenced, may be discontinued at any time. 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. 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 61 63 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 September 30, 1998 (unaudited).................. F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997, and for the nine months ended September 30, 1997 (unaudited) and September 30, 1998 (unaudited).......................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997, and the nine months ended September 30, 1998 (unaudited)............... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997, and for the nine months ended September 30, 1997 (unaudited) and September 30, 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, ------------------- SEPTEMBER 30, 1996 1997 1998 -------- -------- ------------- (UNAUDITED) ASSETS Assets: Net investment in financing leases and loans: Receivables due in installments........................ $232,693 $238,979 $246,846 Estimated residual value............................... 14,702 16,784 17,573 Initial direct costs................................... 2,692 2,777 3,883 Loans receivable....................................... 238 2,467 8,729 Less: Advance lease payments and deposits.................. (186) (334) (804) Unearned income...................................... (76,951) (73,060) (73,742) Allowance for credit losses.......................... (23,826) (26,319) (24,423) -------- -------- -------- Net investment in financing leases and loans.............. 149,362 161,294 178,062 Investment in service contracts........................... -- 2,145 7,412 Cash and cash equivalents................................. 13,775 9,252 13,457 Property and equipment, net............................... 5,143 4,265 7,340 Other assets.............................................. 1,912 2,745 2,496 -------- -------- -------- Total assets...................................... $170,192 $179,701 $208,767 ======== ======== ======== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Notes payable............................................... $116,202 $116,830 $132,104 Subordinated notes payable.................................. 27,006 26,382 25,288 Capitalized lease obligations............................... 1,523 1,071 943 Accounts payable............................................ 561 89 35 Dividends payable........................................... 242 294 346 Other liabilities........................................... 5,801 5,300 6,040 Income taxes payable........................................ 606 -- -- Deferred income taxes....................................... 6,072 10,969 16,716 -------- -------- -------- Total liabilities................................. 158,013 160,935 181,472 -------- -------- -------- Commitments and contingencies (Note J)...................... -- -- -- Redeemable convertible preferred stock (liquidation preference $12, at December 31, 1996 and 1997, and September 30, 1998)....................................... -- -- -- Stockholders' equity: Common stock.............................................. 97 98 99 Additional paid-in capital................................ 1,442 1,604 1,764 Retained earnings......................................... 10,841 17,366 25,838 Treasury stock, at cost................................... (100) (138) (138) Notes receivable from officers and employees.............. (101) (164) (268) -------- -------- -------- Total stockholders' equity........................ 12,179 18,766 27,295 -------- -------- -------- Total liabilities and stockholders' equity........ $170,192 $179,701 $208,767 ======== ======== ========
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 NINE FOR THE YEARS ENDED MONTHS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ------------------ 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- (UNAUDITED) Revenues: Income on financing leases and loans... $27,011 $38,654 $45,634 $33,900 $35,285 Income on service contracts............ -- 6 501 87 1,557 Rental income.......................... 3,688 8,250 10,809 8,104 11,153 Loss and damage waiver fees............ 2,648 4,188 5,448 3,983 4,067 Service fees........................... 2,798 4,487 5,788 4,121 3,770 ------- ------- ------- ------- ------- Total revenues................. 36,145 55,585 68,180 50,195 55,832 ------- ------- ------- ------- ------- Expenses: Selling, general and administrative.... 8,485 14,073 17,252 12,558 14,284 Provision for credit losses............ 13,388 19,822 21,713 15,601 12,568 Depreciation and amortization.......... 1,503 2,981 3,787 2,701 3,867 Interest............................... 8,560 10,163 11,890 8,891 9,198 ------- ------- ------- ------- ------- Total expenses................. 31,936 47,039 54,642 39,751 39,917 Income before provision for income taxes.................................. 4,209 8,546 13,538 10,444 15,915 Provision for income taxes............... 1,685 3,466 5,886 4,245 6,455 ------- ------- ------- ------- ------- Net income............................... $ 2,524 $ 5,080 $ 7,652 $ 6,199 $ 9,460 ======= ======= ======= ======= ======= Net income per common share -- basic..... $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96 ======= ======= ======= ======= ======= Net income per common share -- diluted... $ 0.27 $ 0.52 $ 0.76 $ 0.62 $ 0.94 ======= ======= ======= ======= ======= Dividends per common share............... $ 0.06 $ 0.10 $ 0.12 $ 0.09 $ 0.10 ======= ======= ======= ======= =======
F-4 68 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1995, 1996 and 1997, and the nine months ended September 30, 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............... 87,516 1 160 161 Common stock dividends............ (988) (988) Notes receivable from officers and employees....................... (104) (104) Net income........................ -- 9,460 9,460 --------- --- ------ ------- ----- ----- ------- Balance at September 30, 1998 (unaudited)..................... 9,886,516 $99 $1,764 $25,838 $(138) $(268) $27,295 ========= === ====== ======= ===== ===== =======
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 NINE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------------- ---------------------- 1995 1996 1997 1997 1998 -------- ---------- --------- ---------- --------- (UNAUDITED) Cash flows from operating activities: Cash received from customers.............................. $60,632 $ 87,130 $118,444 $ 84,604 $ 102,020 Cash paid to suppliers and employees...................... (10,710) (16,708) (29,113) (22,305) (24,435) Interest paid............................................. (8,248) (10,724) (12,334) (9,516) (9,004) Interest received......................................... 285 406 396 271 1,060 ------- --------- -------- ---------- --------- Net cash provided by operating activities........... 41,959 60,104 77,393 53,054 69,641 ------- --------- -------- ---------- --------- Cash flows from investing activities: Investment in leased equipment............................ (70,498) (81,303) (71,943) (53,147) (62,218) Investment in direct costs................................ (1,992) (2,186) (2,354) (1,666) (2,959) Investment in service contracts........................... (3,635) (2,431) (2,972) (1,660) (6,298) Investment in loans....................................... -- -- (2,538) (1,904) (7,657) Purchase of property and equipment........................ (274) (628) (288) (216) (381) Increase in notes receivable from officers and employees............................................... -- -- (150) (150) (144) Decrease in notes receivable from officers and employees............................................... 46 104 87 79 40 Investment in notes receivable............................ -- (349) (160) -- -- Repayment of notes receivable............................. -- 111 191 131 1,395 ------- --------- -------- ---------- --------- Net cash used in investing activities............... (76,353) (86,682) (80,127) (58,533) (78,222) ------- --------- -------- ---------- --------- Cash flows from financing activities: Proceeds from secured debt................................ 87,881 181,006 56,639 47,254 70,485 Repayment of secured debt................................. (17,023) (29,946) (56,194) (44,370) (55,162) Proceeds from refinancing of secured debt................. -- -- 203,580 115,000 185,000 Prepayment of secured debt................................ (33,390) (129,049) (203,580) (115,000) (185,000) Proceeds from short-term demand notes payable............. 548 123 497 110 180 Repayment of short-term demand notes payable.............. (710) (833) (315) (116) (227) Proceeds from issuance of subordinated debt............... 187 15,410 2,123 2,373 1,200 Repayment of subordinated debt............................ (619) (1,740) (2,891) (2,616) (2,374) Proceeds from exercise of common stock options............ 90 4 162 152 160 Repayment of capital leases............................... (159) (393) (697) (511) (540) Purchase of treasury stock................................ -- -- (38) -- -- Payment of dividends...................................... (650) (871) (1,075) (778) (936) ------- --------- -------- ---------- --------- Net cash provided by (used in) financing activities........................................ 36,155 33,711 (1,789) 1,498 12,786 ------- --------- -------- ---------- --------- Net increase (decrease) in cash and cash equivalents........ 1,761 7,133 (4,523) (3,981) 4,205 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 $ 9,794 $ 13,457 ======= ========= ======== ========== ========= Reconciliation of net income to net cash provided by operating activities: Net income................................................ $ 2,524 $ 5,080 $ 7,652 $ 6,199 $ 9,460 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 1,503 2,981 3,787 2,701 3,867 Provision for credit losses............................. 13,388 19,822 21,713 15,601 12,568 Recovery of equipment cost and residual value, net of revenue recognized.................................... 20,972 29,378 41,334 28,564 37,532 Increase (decrease) in current taxes.................... 985 (379) (1,266) (601) -- Increase in deferred income taxes....................... 701 1,892 4,897 2,601 6,407 Change in assets and liabilities: Decrease (increase) in other assets..................... 317 (603) (173) (1,133) (414) (Decrease) increase in accounts payable................. (11) 711 65 13 (55) Increase (decrease) in accrued liabilities.............. 1,580 1,222 (616) (891) 276 ------- --------- -------- ---------- --------- Net cash provided by operating activities........... $41,959 $ 60,104 $ 77,393 $ 53,054 $ 69,641 ======= ========= ======== ========== ========= Cash paid for income taxes.................................. $ 34 $ 1,954 $ 2,254 $ 2,282 $ 90 ======= ========= ======== ========== ========= Supplemental disclosure of noncash activities: Property acquired under capital leases.................... $ 849 $ 985 $ 246 $ 302 $ 412 Accrual of common stock dividends......................... $ 194 $ 242 $ 294 $ 559 $ 691 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 September 30, 1998, and for the nine months ended September 30, 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 effected in 1997 and a 2-to-1 stock split to be effective in 1999, each 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 NINE MONTHS FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30, ------------------------------------ ----------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Net income........................... $ 2,524 $ 5,080 $ 7,652 $ 6,199 $ 9,460 Shares used in computation: Weighted average common shares outstanding used in computation of net income per common share.................. 7,352,189 9,682,851 9,793,140 9,791,212 9,849,602 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 48,562 112,589 194,216 162,772 ---------- ---------- ---------- ---------- ---------- Shares used in computation of net income per common share -- assuming dilution........................... 9,448,206 9,770,613 9,925,329 10,005,028 10,031,974 ========== ========== ========== ========== ========== Net income per common share.......... $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96 ========== ========== ========== ========== ========== Net income per common share -- assuming dilution.................. $ 0.27 $ 0.52 $ 0.76 $ 0.62 $ 0.94 ========== ========== ========== ========== ==========
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"). F-10 74 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that an 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 September 30, 1998 have totaled 7.45% 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 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 as of September 30, 1998 and the related provisions, charge-offs and recoveries for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1998 (unaudited) (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 Provision for credit losses................................. 12,568 Charge-offs................................................. 20,644 Recoveries.................................................. 6,180 ------- Charge-offs, net of recoveries.............................. 14,464 ------- Balance at September 30, 1998 (unaudited)................... $24,423 =======
F-12 76 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) 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 as of September 30, 1998 (unaudited) 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 and for the nine months ended September 30, 1998 (unaudited) (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............................................ 4,992 Lease Terminations.......................................... 4,203 Balance of Estimated Residual Value at September 30, 1998 (unaudited)............................................... $17,573
- --------------- * 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. D. PROPERTY AND EQUIPMENT: At December 31, 1996 and 1997, property and equipment consisted of the following:
NINE MONTHS DECEMBER 31, ENDED ---------------- SEPTEMBER 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Rental equipment................................... $4,845 $5,588 $9,706 Computer equipment................................. 2,628 2,998 3,083 Office equipment................................... 571 634 628 Leasehold improvements............................. 224 224 219 ------ ------ ------ 8,268 9,444 13,636 Less accumulated depreciation and amortization..... 3,125 5,179 6,296 ------ ------ ------ Total.............................................. $5,143 $4,265 $7,340 ====== ====== ======
Depreciation and amortization expense totaled $1,503,000, $2,981,000, $3,787,000 and $3,867,000 for the years ended December 31, 1995, 1996 and 1997 and for the nine months ended September 30, 1998, respectively. F-13 77 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) At December 31, 1996 and 1997 and at September 30, 1998, computer equipment includes $2,092,287, $2,339,000 and $2,141,000, respectively, under capital leases. Accumulated amortization related to capital leases amounted to $611,000, $1,306,000 and $1,226,000 at December 31, 1996 and 1997 and at September 30, 1998, respectively. At December 31, 1997 and September 30, 1998, accumulated depreciation related to rental equipment amounted to $3,060,000 and $4,040,937, respectively. 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 September 30, 1998 and December 31, 1997 and 1996 were 8.25%, 8.5% and 8.25%, respectively. The 90-day LIBOR at September 30, 1998 and December 31, 1997 and 1996 was 5.31%, 5.91% and 5.78%, respectively. At September 30, 1998, the Company had borrowings outstanding under the agreement with the following terms (unaudited):
TYPE RATE AMOUNT ---- ------ ----------- (UNAUDITED) Prime................................................. 8.2500% $11,910 LIBOR................................................. 7.5375% 29,000 LIBOR................................................. 7.5375% 20,000 Fixed................................................. 8.3000% 1,449 Fixed................................................. 7.7500% 5,100 ------- Total $67,459 =======
At December 31, 1997, the Company had borrowings outstanding under the agreement with the following terms:
TYPE RATE AMOUNT ---- ------ ------- Prime................................................... 8.5000% $ 6,634 LIBOR................................................... 7.7250% 12,000 Fixed................................................... 8.3000% 5,798 Fixed/99 7.7500% 9,273 ------- Total $33,705 =======
At December 31, 1996, the Company had borrowings outstanding under the agreement with the following terms:
TYPE RATE AMOUNT ---- ------ ------- Prime................................................... 8.2500% $ 6,966 LIBOR................................................... 8.0976% 5,000 LIBOR................................................... 8.0000% 25,000 Fixed................................................... 8.0000% 5 Fixed................................................... 8.3000% 12,030 Fixed................................................... 7.7500% 15,054 ------- Total $64,055 =======
F-14 78 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) 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 September 30, 1998, the Company had borrowings outstanding under the agreement with the following terms (unaudited):
TYPE RATE AMOUNT ---- ------ ----------- (UNAUDITED) LIBOR................................................. 7.5375% $21,500 LIBOR................................................. 8.1875% 6,000 Prime................................................. 8.5000% 2,155 ------- Total $29,655 =======
At December 31, 1997, the Company had borrowings outstanding under the agreement with the following terms:
TYPE RATE AMOUNT ---- ------ ------- Variable................................................ 8.5000% $ 2,816 LIBOR................................................... 7.5688% 17,500 LIBOR................................................... 8.4375% 5,000 LIBOR................................................... 7.6273% 3,000 Fixed................................................... 8.3000% 68 Fixed................................................... 7.7500% 797 ------- Total $29,181 =======
At December 31, 1996, the Company had borrowings outstanding under the agreement with the following terms:
TYPE RATE AMOUNT ---- ------ ------- Prime................................................... 8.2500% $ 3,123 LIBOR................................................... 8.9770% 5,000 LIBOR................................................... 8.0313% 10,000 Fixed................................................... 8.3000% 605 Fixed................................................... 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 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 F-15 79 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) 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 (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 F-16 80 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) 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. 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 F-17 81 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) 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 1,200,000 and 10,000,000 authorized shares of common stock with a par value of $.01 per share of which 9,683,340 and 9,799,000 shares (giving effect to the two stock splits referred to below) 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 to be effective with the Company's initial public offering. This will result in the issuance of 5,007,813 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-18 82 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......... 381,660 $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 $1.95 251,000 4.9 $ 1.87 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-19 83 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-20 84 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-21 85 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. N. SUBSEQUENT EVENTS (UNAUDITED): Series 1998-A Notes In November 1998, BLT III issued its 6.03% Lease-Backed Notes, Series 1998-A (the "1998-A Notes") in aggregate principal amount of $40,768,557. The 1998-A Notes mature on May 17, 2004. Lease The Company recently signed a lease for 44,659 square feet of office space in Woburn, Massachusetts which lease commenced on December 15, 1998 and expires on December 14, 2003. The monthly rent under this lease is $57,099. 1998 Plan The Company has adopted the 1998 Equity Incentive Plan (the "1998 Plan") effective July 9, 1998. The 1998 Plan permits the Compensation Committee of the Company's Board of Directors to make various long-term incentive awards, generally equity-based, to eligible persons. The Company intends to reserve 2,000,000 shares of the Company's common stock for issuance pursuant to the 1998 Plan. F-22 86 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 ---- Summary............................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 14 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 17 Selected Consolidated Financial and Operating Data...................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 26 Management............................ 37 Certain Transactions.................. 44 Principal Stockholders................ 45 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................. 61 Index to Consolidated Financial Statements.......................... F-1
UNTIL , 1999 (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 LOGO] COMMON STOCK ------------------------ PROSPECTUS ------------------------ PIPER JAFFRAY INC. CIBC OPPENHEIMER , 1999 87 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........................................ $ 21,712 NYSE fees................................................... 128,255 NASD filing fee............................................. 7,860 Transfer Agent fees and expenses............................ 10,000 Printing expenses........................................... 215,000 Legal fees and expenses..................................... 371,241 Accounting fees and expenses................................ 314,000 Directors and Officers insurance premiums................... 134,000 Miscellaneous............................................... 27,932 ---------- Total....................................................... $1,230,000 ==========
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. II-1 88 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 December 31, 1998. COMMON STOCK
NO. OF SHARES OF AGGREGATE EXEMPTION PURCHASER ISSUANCE DATE COMMON STOCK CONSIDERATION CLAIMED* --------- ------------- ---------------- ------------- --------- 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 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 Richard F. Latour........................ June, 1998 2,762 1,760.78 Rule 701 J. Gregory Hines......................... September, 1998 1,480 943.50 Rule 701 Richard F. Latour........................ September, 1998 3,222 2,054.03 Rule 701 John Plumlee............................. September, 1998 3,008 5,865.60 Rule 701 Carol Salvo.............................. September, 1998 3,008 5,865.60 Rule 701 Richard F. Latour........................ December, 1998 12,622 24,612.90 Rule 701 J. Gregory Hines......................... December, 1998 4,454 8,685.30 Rule 701 Stephen Obana............................ December, 1998 4,454 8,685.30 Rule 701 John Plumlee............................. December, 1998 1,446 2,819.70 Rule 701 Carol Salvo.............................. December, 1998 1,446 2,819.70 Rule 701 Stephen Constantino...................... December, 1998 2,228 4,344.60 Rule 701
- --------------- * Shares issued pursuant to exercises of options under the Company's 1987 Stock Option Plan. II-2 89 SUBORDINATED DEBT
ISSUE AGGREGATE EXEMPTION PURCHASER DATE PRINCIPAL AMOUNT CLAIMED** --------- ----- ---------------- --------- 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) 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) - --------------------------------------------------------------------------------------------------------- ** 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 90
ISSUE AGGREGATE EXEMPTION PURCHASER DATE PRINCIPAL AMOUNT CLAIMED** --------- ----- ---------------- --------- 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) - --------------------------------------------------------------------------------------------------------- ** 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-4 91 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement(1). 3.1 Restated Articles of Organization, as amended(2). 3.2 Bylaws(2). 4.1 Specimen of Common Stock Certificate(1). 5.1 Opinion of Edwards & Angell, LLP(2). 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. *10.13 Employment Agreement between the Company and Peter R. Bleyleben. *10.14 Employment Agreement between the Company and Richard F. Latour. 10.15 Standard Terms and Condition of Indenture dated as of November 1, 1994 governing the BLT Finance Corp. III 6.03% Lease-Backed Notes, Series 1998-A (the "1998-A Notes"), the BLT Finance Corp. 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")(2). *10.16 Second Amended and Restated Specific Terms and Conditions of Indenture dated as of October 1, 1998, governing the 1996-A Notes, the 1997-A Notes and the 1998-A Notes. 10.17 Supplement to Indenture dated May 1, 1996 governing the 1996-A Notes(2). 10.18 Supplement to Indenture dated August 1, 1997 governing the 1997-A Notes(2). *10.19 Supplement to Indenture dated as of October 1, 1998 governing the 1998-A Notes. 10.20 Specimen 1997-A Note(2). 10.21 Specimen 1996-A Note(2). *10.22 Specimen 1998-A Note.
II-5 92
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.23 Standard Terms and Conditions of Servicing governing the 1996-A Notes, the 1997-A Notes and the 1998-A Notes (2). 10.24 Specific Terms and Conditions of Servicing governing the 1996-A Notes, the 1997-A Notes and the 1998-A Notes (2). *10.25 Commercial Lease, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated. *10.26 Amendment to Lease #1, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated. *10.27 Employment Agreement between the Company and J. Gregory Hines. *10.28 Employment Agreement between the Company and John Plumlee. *10.29 Employment Agreement between the Company and Carol Salvo. *11.1 Statement regarding computation of per share earnings. 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.
- --------------- * Filed herewith. (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-6 93 (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-7 94 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has duly caused this Amendment No. 2 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 11th day of January, 1999. 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. 2 to the Registration Statement on Form S-1 has been signed below by the following persons in the capacities indicated as of the 11th day of January, 1999.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ PETER R. BLEYLEBEN President, Chief Executive January 11, 1999 - --------------------------------------------------- Officer and Director Peter R. Bleyleben /s/ RICHARD F. LATOUR Executive Vice President, Chief January 11, 1999 - --------------------------------------------------- Operating Officer and Chief Richard F. Latour Financial Officer * Director January 11, 1999 - --------------------------------------------------- Brian E. Boyle * Director January 11, 1999 - --------------------------------------------------- Torrence C. Harder * Director January 11, 1999 - --------------------------------------------------- Jeffrey Parker * Director January 11, 1999 - --------------------------------------------------- Alan Zakon *BY: /s/ PETER R. BLEYLEBEN --------------------------------------------- Peter R. Bleyleben Attorney-in-Fact
II-8 95 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement(1). 3.1 Restated Articles of Organization, as amended(2). 3.2 Bylaws(2). 4.1 Specimen of Common Stock Certificate(1). 5.1 Opinion of Edwards & Angell, LLP(2). 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. *10.13 Employment Agreement between the Company and Peter R. Bleyleben. *10.14 Employment Agreement between the Company and Richard F. Latour. 10.15 Standard Terms and Condition of Indenture dated as of November 1, 1994 governing the BLT Finance Corp. III 6.03% Lease-Backed Notes, Series 1998-A (the "1998-A Notes"), the BLT Finance Corp. 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")(2). *10.16 Second Amended and Restated Specific Terms and Conditions of Indenture dated as of October 1, 1998, governing the 1996-A Notes, the 1997-A Notes and the 1998-A Notes. 10.17 Supplement to Indenture dated May 1, 1996 governing the 1996-A Notes(2). 10.18 Supplement to Indenture dated August 1, 1997 governing the 1997-A Notes(2). *10.19 Supplement to Indenture dated as of October 1, 1998 governing the 1998-A Notes. 10.20 Specimen 1997-A Note(2). 10.21 Specimen 1996-A Note(2). *10.22 Specimen 1998-A Note.
96
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.23 Standard Terms and Conditions of Servicing governing the 1996-A Notes, the 1997-A Notes and the 1998-A Notes(2). 10.24 Specific Terms and Conditions of Servicing governing the 1996-A Notes, the 1997-A Notes and the 1998-A Notes(2). *10.25 Commercial Lease, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated. *10.26 Amendment to Lease #1, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated. *10.27 Employment Agreement between the Company and J. Gregory Hines. *10.28 Employment Agreement between the Company and John Plumlee. *10.29 Employment Agreement between the Company and Carol Salvo. *11.1 Statement regarding computation of per share earnings. 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.
- --------------- * Filed herewith. (1) To be filed by amendment. (2) Previously filed. EX-10.12 2 1998 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.12 MICROFINANCIAL INCORPORATED 1998 EQUITY INCENTIVE PLAN 2 MICROFINANCIAL INCORPORATED 1998 EQUITY INCENTIVE PLAN 1. PURPOSE The purpose of the MicroFinancial Incorporated 1998 Equity Incentive Plan (the "1998 Plan") is 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 MicroFinancial Incorporated (the "Company"). By affording eligible persons the opportunity to acquire proprietary interests in the Company and by providing them incentives to put forth maximum efforts for the success of the Company's business, the 1998 Plan is intended to serve the best interests of the Company and its stockholders. 2. DEFINITIONS "Affiliate" shall mean (i) any entity that, directly or indirectly, is controlled by the Company, and (ii) any entity in which the Company has a significant equity interest, in either case as determined by the Committee. "Award" shall mean any Option, Stock Appreciation Right, Restricted Stock Award, Performance Award or other Stock-Based Award. "Award Agreement" shall mean any written agreement, contract, or other instrument or document evidencing any Award, which may, but need not, be executed or acknowledged by a Participant. "Board" shall mean the Board of Directors of the Company. "Breach of Conduct" shall mean activities which constitute a serious breach of conduct as determined by the Committee in its sole discretion, including, but not limited to: (i) the disclosure or misuse of confidential information or trade secrets; (ii) activities in violation of the policies of the Company or any Affiliate, including without limitation, the Company's insider trading policy; (iii) the violation or breach of any material provision in any applicable employment contract or agreement; (iv) engaging in conduct relating to the Participant's employment for which either criminal or civil penalties may be sought; (v) engaging in activities which adversely affect or which are contrary or harmful to the interests of the Company or Affiliate, or (vi) engaging in competition with the Company or any Affiliate during employment or within one (1) year following termination of employment with the Company or Affiliate. The determination of Breach of Conduct shall be determined by the Committee in good faith and in its sole discretion. 3 "Change in Control" shall mean: (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended [the "Exchange Act"]) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (ii) the cessation for any reason of individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (iii) the 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, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (iv) the approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Committee" shall mean the Compensation Committee of the Board or such other committee consisting of not less than two Board members designated by the Board to administer the 1998 Plan. -2- 4 "Common Shares" shall mean shares of the Class A common stock, $.01 par value, of the Company, or such other securities of the Company as may be designated by the Committee from time to time. "Company" shall mean MicroFinancial Incorporated, a Massachusetts corporation. "Effective Date" means July 9, 1998. "Employee" shall mean an employee of the Company or of any Affiliate, a director of the Company, or any non-employee who provides services to the Company or any Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Fair Market Value" of the Common Shares shall mean the average of the high and low prices of the Common Shares as reported by the New York Stock Exchange, or the Fair Market Value of any other property or other item being valued as determined by the Committee in its sole discretion. "Freestanding Right" shall mean a Stock Appreciation Right awarded by the Committee pursuant to Paragraph 7 of the 1998 Plan other than in connection with an Option. "Incentive Stock Option" shall mean the right to purchase Common Shares from the Company that is granted under Section 6 of the Plan and that is intended to meet the requirements of Section 422 of the Code or any successor provision thereto. "Insider" shall mean, at any time, an individual who is an officer, director, or 10% stockholder of the Company within the meaning of Exchange Act Rule 16a-1(f) as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "Non-Qualified Stock Option" shall mean a right to purchase Common Shares from the Company that is granted under Section 6 of the Plan and that is not intended to be an Incentive Stock Option. "Option" shall mean an Incentive Stock Option or a Non-Qualified Stock Option. "Other Stock-Based Award" shall mean any right granted under Section 10 of the Plan. "Participant" shall mean any Employee selected by the Committee to receive an Award under the Plan. "Performance Award" shall mean any right granted under Section 9 of the Plan. -3- 5 "Person" shall mean any individual, corporation, partnership, association, joint-stock company, trust, unincorporated organization, government or political subdivision thereof or other equity. "Plan" shall mean this MicroFinancial Incorporated 1998 Equity Incentive Plan. "QDRO" shall mean a domestic relations order meeting such requirements as the Committee shall determine, in its sole discretion. "Restricted Period" shall mean the period during which Restricted Stock and Restricted Units may be forfeited to the Company. "Restricted Stock" shall mean Common Shares granted under Paragraph 8 of the 1998 Plan. "Restricted Stock Unit" shall mean any unit granted under Paragraph 8 of the 1998 Plan. "Rule 16b-3" shall mean Rule 16b-3 as promulgated and interpreted by the SEC under the Exchange Act, or any successor rule or regulation thereto as in effect from time to time. "SEC" shall mean the Securities and Exchange Commission. "Stock Appreciation Right" shall mean any Tandem Right or Freestanding Right granted under Paragraph 7 of the 1998 Plan. "Tandem Right" shall mean a Stock Appreciation Right awarded by the Committee in connection with an Option pursuant to Paragraph 7 of the 1998 Plan. "Total Disability" shall mean a determination by the Committee that the Employee is unable to perform the duties required of him or her by the Company as a result of any physical or mental condition. 3. SCOPE AND DURATION Awards under the 1998 Plan may be granted in the form of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Shares, Restricted Units, Performance Awards or Other Stock-Based Awards. The maximum aggregate number of Common Shares as to which Awards may be granted from time to time under the 1998 Plan is 1,000,000 shares, subject to adjustment as provided in Paragraph 14. The Common Shares available may be in whole or in part, as the Board shall from time to time determine, authorized but unissued shares or issued shares re-acquired by the Company. Unless otherwise provided by the Committee, Common Shares covered by expired, terminated or forfeited Awards, Awards which are settled for cash or consideration other than the delivery of Common Shares, or Common Shares which are used to exercise any Award or to satisfy the withholding tax -4- 6 liabilities of any Award will be available for subsequent awards under the 1998 Plan. No Incentive Stock Option shall be granted more than 10 years after the Effective Date. 4. ADMINISTRATION The 1998 Plan shall be administered by the Committee. The Committee shall have plenary authority in its discretion, subject to and not inconsistent with the express provisions of the 1998 Plan, to grant Awards, to determine the terms and conditions applicable to Awards, to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of Common Shares to be covered by each grant; to determine the terms and provisions of the Award Agreements entered into in connection with Awards under the 1998 Plan; to interpret the 1998 Plan; to prescribe, amend and rescind rules and regulations relating to the 1998 Plan; and to make all other determinations provided for in the 1998 Plan, or deemed necessary or advisable for the administration of the 1998 Plan. To the extent permissible by law, the Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the 1998 Plan. 5. ELIGIBILITY; FACTORS TO BE CONSIDERED IN GRANTING AWARDS Subject to the discretion of the Committee, Awards may be granted to any Employee of the Company and its Affiliates, a director of the Company, or a non-employee who provides service to the Company or its Affiliates, except that a non-employee shall not be granted an Incentive Stock Option. In determining the Employees to whom Awards shall be granted and the number of Common Shares or units to be covered by each Award, the Committee shall take into account the nature of the Employee's duties, the present and potential contributions to the success of the Company, and such other factors as it shall deem relevant in connection with accomplishing the purposes of the 1998 Plan. No award of Incentive Stock Options shall result in the aggregate Fair Market Value of Common Shares with respect to which Incentive Stock Options are exercisable for the first time by any Employee during any calendar year (determined at the time the Incentive Stock Option is granted) exceeding $100,000. 6. STOCK OPTIONS (a) Exercise Price The purchase price of the Common Shares covered by each Option shall be determined by the Committee, but in the case of an Incentive Stock Option shall not be less than 100% of the Fair Market Value (110% in the case of a stockholder owning more than 10% of the combined voting power of all classes of Company stock) of the Common Shares on the date the Option is -5- 7 granted, or if there are no sales on such date, on the next preceding day on which there were sales. (b) Terms of Options The term of each Incentive Stock Option granted under the 1998 Plan shall not be more than 10 years (5 years in the case of a stockholder of the Company owning more than 10% of the combined voting power of all classes of Company stock) from the date of grant, as the Committee shall determine, subject to earlier termination as provided in PARAGRAPHS 11 and 12. The term of each Non-Qualified Stock Option granted under the 1998 Plan shall be such period of time as the Committee shall determine, subject to earlier termination as provided in PARAGRAPHS 11 and 12. (c) Exercise of Options (i) Subject to the provisions provided herein, an Option granted under the 1998 Plan shall become vested as determined by the Committee. The Committee may, in its discretion, determine as a condition of any Option, that all or a stated percentage of the Option shall become exercisable, in installments or otherwise, only after the completion of a specified service requirement, or the satisfaction or occurrence of other conditions. The Committee may also, in its discretion, accelerate the exercisability of any Option at any time and provide in any Award Agreement that the Option shall become immediately exercisable as to all Common Shares remaining subject to the Option upon a Change in Control. (ii) Subject to applicable regulatory restrictions, an Option may be exercised at any time or from time to time (further subject, in the case of an Incentive Stock Option, to such restrictions as may be imposed by the Code), as to any or all full shares as to which the Option has become exercisable. Notwithstanding the foregoing provision, no Option may be exercised without the prior consent of the Committee by an Insider until the expiration of six months from the date of the grant of the Option. (iii) Except as provided in Paragraphs 11, 12 and 13, no Option may be exercised at any time unless the holder thereof is then an Employee of the Company or one of its Affiliates. (iv) The Committee, in its sole discretion, may elect, in lieu of delivering all or a portion of the Common Shares as to which an Option has been exercised, if the Fair Market Value of the Common Shares exceeds the exercise price of the Option, (i) to pay the Employee in cash or in Common Shares, or a combination of cash and Common Shares, an amount equal to the excess of (A) the Fair Market Value on the exercise date of the Common Shares as to which such Option has been exercised, or if there were no sales on such date, on the next preceding day on which there were sales over (B) the Option price, or (ii) in the case of a Non-Qualified Stock Option, to defer payment and to credit the amount of such excess on the Company's books for the account of the Option and either (a) to treat the amount in such account as if it had been invested in the manner from time to time determined by the Committee, with dividends or other income -6- 8 therein being deemed to have been so reinvested or (b) for the Company's convenience, to contribute the amount credited to such account to a trust, which may be revocable by the Company, for investment in the manner from time to time determined by the Committee and set forth in the instrument creating such trust. The Committee's election pursuant to this subparagraph (c)(iv) shall be made by giving written notice of such election to the Employee (or other person exercising the Option). Common Shares paid pursuant to this subparagraph (c)(iv) will be valued at the Fair Market Value on the exercise date, or if there were no sales on such date, on the next preceding day on which there were sales. (d) Payment The purchase price of the Common Shares as to which an Option is exercised shall be paid in full at the time of exercise. Payment may be made (i) in cash, which may be paid by check, or other instrument acceptable to the Company, (ii) with the consent of the Committee or the Chief Executive Officer, in Common Shares, valued at the Fair Market Value on the date prior to exercise, or if there were no sales on such date, on the next preceding day on which there were sales, (iii) with the consent of the Committee and subject to such terms and conditions as it may determine, by surrender of outstanding Awards under the 1998 Plan, (iv) with the consent of the Committee, the delivery of a promissory note containing such terms as deemed acceptable to the Committee, or (v) any combination of the above. In addition, any amount necessary to satisfy applicable federal, state or local tax requirements shall be paid promptly upon notification of the amount due. The Committee may permit such amount to be paid in Common Shares previously owned by the Employee, or a portion of the Common Shares that otherwise would be distributed to such Employee upon exercise of the Option, or a combination of cash and such Common Shares. (e) Change in Control In the event of a Change in Control while any Option remains outstanding, all Options shall become immediately exercisable and fully vested. In lieu of delivering all or any portion of the Common Shares as to which an Option has been exercised within sixty (60) days of a Change in Control, the Committee may elect to pay each holder of an Option, not later than the effective date of any such transaction, an amount in cash equal to the excess of the Fair Market Value of the Common Shares the Option holder would have received upon exercise of the Option over the aggregate exercise price. 7. STOCK APPRECIATION RIGHTS (a) Awards The Committee may award Stock Appreciation Rights to Employees of the Company or any of its Affiliates. Stock Appreciation Rights may be either Tandem Rights or Freestanding Rights. Tandem Rights may be awarded either at the time the Option is granted or at any time prior to the exercise of the Option. -7- 9 (b) Terms and Conditions (i) Each Tandem Right shall be subject to the same terms and conditions as the related Option and shall be exercisable only to the extent the Option is exercisable. (ii) The price per share specified in a Freestanding Right shall be determined by the Committee, but in no event shall be less than the Fair Market Value of the Common Shares as of the date of grant. The term of each Freestanding Right shall be such period of time as the Committee shall determine. Subject to the provisions of the 1998 Plan, each Freestanding Right shall become vested as determined by the Committee. Prior to becoming 100% vested, each Freestanding Right shall become exercisable, in installments or otherwise, as the Committee shall determine. The Committee may also, in its discretion, accelerate the exercisability of any Freestanding Right at any time, including a Change in Control. (c) Exercise (i) Upon exercise of a Stock Appreciation Right, (subject, in the case of a Tandem Right, to the surrender of the related Option or any unexercised portion thereof which the Employee determines to surrender for this purpose) the Employee shall be entitled to receive, subject to the provisions of the 1998 Plan and such rules and regulations as from time to time may be established by the Committee, a payment having an aggregate value equal to (A) the excess of (i) the Fair Market Value on the exercise date of one Common Share over (ii) the Option price per share, in the case of a Tandem Right, or the price per share specified in the terms of a Freestanding Right, times (B) the number of Common Shares with respect to which the Stock Appreciation Right shall have been exercised. (ii) Upon exercise of a Tandem Right, the number of Common Shares subject to exercise under the related Option shall automatically be reduced by the number of Common Shares represented by the Option or portion thereof surrendered. (iii) A Tandem Right related to an Incentive Stock Option may only be exercised if the Fair Market Value of a Common Share on the exercise date exceeds the Option price. (d) Payments (i) The payment described in subparagraph (c)(i) above shall be made in the form of cash, Common Shares, or a combination thereof, as elected by the Employee, provided that the Committee shall have sole discretion to consent to or disapprove the election of an officer or director to receive all or part of a payment in cash. (ii) If upon exercise of a Stock Appreciation Right the Employee is to receive a portion of the payment in Common Shares, the number of shares received shall be determined by dividing such portion by the Fair Market Value of a share on the exercise date. The number of -8- 10 Common Shares received may not exceed the number of Common Shares covered by any Option or portion thereof surrendered. Cash will be paid in lieu of any fractional share. (iii) Whether payments to Employees upon exercise of Tandem Rights or Freestanding Rights are made in cash, Common Shares or a combination thereof, the Committee shall have sole discretion as to timing of the payments, whether in one lump sum or in annual installments or otherwise deferred, which deferred payments may in the Committee's sole discretion (i) bear amounts equivalent to interest or cash dividends, (ii) be treated as invested in the manner from time to time determined by the Committee, with dividends or other income thereon being deemed to have been so reinvested, or (iii) for the convenience of the Company, contributed to a trust, which may be revocable by the Company or subject to the claims of its creditors, for investment in the manner from time to time determined by the Committee and set forth in the instrument creating such trust, all as the Committee shall determine. (iv) No payment will be required from the Employee upon exercise of a Stock Appreciation Right, except that any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld or paid promptly upon notification of the amount due and prior to or concurrently with delivery of cash or a certificate representing shares. The Committee may permit such amount to be paid in (i) Common Shares previously owned by the Employee, (ii) a portion of the Common Shares that otherwise would be distributed to such Employee upon exercise of the right, or (iii) a combination of cash and Common Shares. 8. RESTRICTED SHARES OR RESTRICTED UNITS (a) Awards Restricted Stock or Restricted Stock Units may be awarded by the Committee in its sole discretion. At the time an award of Restricted Shares or Restricted Units is made, the Committee shall (i) establish a Restricted Period applicable to such award, (ii) prescribe conditions for the incremental lapse of restrictions during the Restricted Period, or for the lapse or termination of restrictions upon the satisfaction or occurrence of other conditions in addition to or other than the expiration of the Restricted Period, including a Change in Control, and (iii) determine all other terms and conditions of such award, including voting and dividend or dividend equivalent rights. (b) Restrictions on Transfer Upon the grant of Restricted Shares, a stock certificate representing the number of Common Shares equal to the number of Restricted Shares granted to an Employee shall be registered in the Employee's name but shall be held in custody by the Company for the Employee's account. The Employee shall not be entitled to delivery of the certificate or to sell, transfer, assign, pledge or otherwise encumber the Restricted Shares until the expiration of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee. Upon the forfeiture of any Restricted Shares, such forfeited Restricted Shares shall be transferred to the Company without further action by the Employee. -9- 11 (c) Delivery of Shares Upon the expiration or termination of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee or at such earlier time as provided for in Paragraph 12, a stock certificate for the number of Common Shares with respect to which the restrictions have lapsed, or one Common Share for each Restricted Unit with respect to which the restrictions have lapsed, shall be delivered, free of all such restrictions, except any that may be imposed by law, to the Employee or the Employee's beneficiary or estate, as the case may be. Fractional Shares will be paid in cash. (d) Payment No payment will be required from the Employee upon the issuance or delivery of any Common Shares, except that any amount necessary to satisfy applicable federal, state or local tax requirements shall be withheld or paid promptly upon notification of the amount due and prior to or concurrently with the issuance or delivery of a certificate representing such shares. The Committee may permit such amount to be paid in (i) Common Shares previously owned by the Employee, (ii) a portion of the Common Shares that otherwise would be distributed to such Employee upon the lapse of the restrictions applicable to the Restricted Shares or Restricted Units, or (iii) a combination of cash and Common Shares. 9. PERFORMANCE AWARDS (a) Grant Performance Awards may be granted to any Employee by the Committee in its sole discretion. A Performance Award shall consist of a right that is (i) denominated in cash or Common Shares, (ii) valued, as determined by the Committee, in accordance with the achievement of such performance goals during such performance periods as the Committee shall establish, and (iii) payable at such time and in such form as the Committee shall determine. (b) Terms and Conditions Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall (i) determine the performance goals to be achieved during any performance period, (ii) the length of any performance period, (iii) the amount of any Performance Award, (iv) the amount and kind of any payment or transfer to be made pursuant to any Performance Award, and (v) all other terms and conditions of any Performance Award, including the consequences of death, Disability, termination of employment and Change in Control. (c) Payment of Performance Awards -10- 12 Performance Awards may be paid in a lump sum or in installments following the close of the performance period or, in accordance with procedures established by the Committee, on a current or deferred basis. 10. OTHER STOCK-BASED AWARDS The Committee shall have authority to grant to eligible Employees an "Other Stock-Based Award", which shall consist of any right that is an Award of Common Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Common Shares (including, without limitation, securities convertible into Common Shares), as deemed by the Committee to be consistent with the purposes of the Plan, other than an Award described in Paragraphs 6 through 9 above. 11. TERMINATION OF EMPLOYMENT Unless otherwise determined by the Committee, and subject to such restrictions as may be imposed by the Code in the case of any Incentive Stock Options, in the event that the employment of an Employee to whom an Option or Stock Appreciation Right has been granted under the 1998 Plan shall be terminated (except as set forth in Paragraph 12), such Option or Stock Appreciation Right may, subject to the provisions of the 1998 Plan, be exercised, to the extent that the Employee was entitled to do so at the termination of his employment, at any time within three months after such termination, but in no case later than the date on which the Option or Stock Appreciation Right terminates; PROVIDED, HOWEVER, that any Option or Stock Appreciation Right held by an Employee whose employment is terminated for a Breach of Conduct shall terminate immediately. Unless otherwise determined by the Committee, if an Employee to whom Restricted Shares or Restricted Units have been granted ceases to be an Employee prior to the end of the Restricted Period and the satisfaction of any other conditions prescribed by the Committee for any reason other than death or Total Disability, the Employee shall immediately forfeit all Restricted Shares and Restricted Units. 12. DEATH OR TOTAL DISABILITY OF EMPLOYEE Unless otherwise determined by the Committee, if an Employee to whom an Award has been granted under the 1998 Plan shall die or suffer a Disability while employed by the Company, such Option or Stock Appreciation Right may be exercised, to the extent it was exercisable at the date of termination, at any time within one year after the date of the Employee's death or Total Disability, but in no case later than the date on which the Option or Stock Appreciation Right otherwise terminates. -11- 13 13. NON-TRANSFERABILITY OF AWARDS Awards granted under the 1998 Plan shall not be transferable other than by will or the laws of descent and distribution, or pursuant to a qualified domestic relations order as defined by Section 414(p) of the Code except to the extent provided in any Award Agreement and permitted under applicable law. 14. ADJUSTMENT UPON CHANGES IN CAPITALIZATION, ETC. (i) The existence of outstanding Options or other Awards shall not affect in any way the right or ability of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Shares or the rights hereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business or substantially all of the outstanding stock of the Company, or any other corporate act or proceeding, whether of a similar character or otherwise. (ii) If the Company shall effect a subdivision, consolidation or reclassification of the Common Shares or other capital readjustment or recapitalization, the payment of a stock dividend, or other increase or reduction in the number of the Common Shares outstanding, without receiving compensation therefor in money, services or property, then the number, class, and per share price of Common Shares shall be appropriately adjusted in such a manner as to entitle Employees to receive, for the same aggregate cash consideration, if applicable, the same total number and class of shares as he would have received as a result of the event requiring the adjustment. (iii) Except as hereinbefore expressly provided, the issue by the Company of shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Common Shares then subject to outstanding options. 15. BREACH OF CONDUCT In the event of a Breach of Conduct by a Participant or former Participant within two years of termination of employment, the Committee may, in its sole discretion, (i) cancel any Award, whether vested or not, in whole or in part, as of the date specified by the Committee, which shall thereafter be communicated in writing to such Participant or former Participant, and/or (ii) upon written notice to such Participant or former Participant, demand that any or all stock certificates for Common Shares or Restricted Shares acquired under this Plan, or any profit realized in connection with the sale or transfer of such Common Shares or Restricted Shares, or any proceeds received upon the exercise or settlement of a Stock Appreciation Right, -12- 14 Performance Award or other Stock-Based Award, be returned to the Company within five (5) days of receipt of such notice. If the Participant or former Participant shall have paid any consideration for the acquisition of Common Shares or Restricted Shares, or the settlement or any Award, the Company shall immediately thereafter return such consideration to the Participant or the former Participant, without interest. The Company shall be entitled to reimbursement of reasonable attorneys fees and expenses incurred in seeking to enforce its rights under this Section 15. 16. EFFECTIVE DATE The 1998 Plan shall be effective as of July 9, 1998, provided that the adoption of the 1998 Plan shall have been approved by the stockholders of the Company not later than 12 months after such date. The Committee may, in its discretion, grant Awards under the 1998 Plan, the grant, exercise or payment of which shall be expressly subject to the conditions that, to the extent required at the time of grant, exercise or payment, (i) if the Company deems it necessary or desirable, a Registration Statement under the Securities Act of 1933 with respect to such Common Shares shall be effective, and (ii) any requisite approval or consent of any governmental authority of any kind having jurisdiction over Awards granted under the 1998 Plan shall be obtained. 17. TERMINATION AND AMENDMENT The Board may suspend, terminate, modify or amend the 1998 Plan at any time without stockholder approval except as may be required by the Company's articles of incorporation, applicable laws, regulations and exchange requirements. If the 1998 Plan is terminated, the terms of the 1998 Plan shall, notwithstanding such termination, continue to apply to Awards granted prior to such termination. In addition, no suspension, termination, modification or amendment of the 1998 Plan may, without the consent of the Employee to whom an Award shall theretofore have been granted, adversely affect the rights of such Employee under such Award. 18. MISCELLANEOUS (a) Written Agreements Each Award hereunder shall be evidenced by an Award Agreement which shall contain such restrictions, terms and conditions as the Committee may require. (b) No Right to Employment Nothing in the 1998 Plan or in any Award granted pursuant to the 1998 Plan shall confer upon any Employee any right to continue in the employ of the Company or any of its subsidiaries or interfere in any way with the right of the Company or any such subsidiary to terminate such employment at any time. -13- 15 (c) Governing Law The validity, construction, and effect of the Plan and any rules and regulations relating to the Plan and any Award Agreement shall be determined in accordance with the laws of the Commonwealth of Massachusetts. (d) Severability If any provision of the Plan or any Award is or becomes or is deemed to be invalid, illegal, or unenforceable in any jurisdiction or as to any Employee or Award, or would disqualify the Plan or any Award under any law or regulations deemed applicable, or the compliance with which is deemed desirable, including any accounting rules or regulations, by the Committee, such provision shall be construed or deemed amended to conform to the applicable laws, rules or regulations, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, Employee or Award and the remainder of the Plan and any such Award shall remain in full force and effect. (e) Other Laws The Committee may refuse to issue or transfer any Common Shares or other consideration under an Award if, acting in its sole discretion, it determines that the issuance or transfer of such Common Shares or such other consideration might violate any applicable law or regulation or entitle the Company to recover the same under Section 16(b) of the Exchange Act, and any payment tendered to the Company by an Employee, other holder or beneficiary in connection with the exercise of such Award shall be promptly refunded to the relevant Employee, holder, or beneficiary. IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Plan as of the 9th day of July, 1998. MICROFINANCIAL INCORPORATED /s/ Peter R. Bleyleben Peter R. Bleyleben, President -14- EX-10.13 3 EMPLOYMENT AGREEMENT WITH PETER R. BLEYLEBEN 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 12, 1998 by and between Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Company") and Peter R. Bleyleben, (the "Executive") residing at 66 Norfolk Road, Chestnut Hill, MA 02167. WHEREAS Executive has served as President and Chief Executive Officer of the Company pursuant to an Employment Agreement dated September 26, 1997 (the "Original Employment Agreement"); and WHEREAS the Company desires to continue to employ Executive and to enter into this Agreement embodying the terms of such continued employment (the "Agreement"); and WHEREAS Executive desires to accept such continued employment and enter into this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Subject to the provisions of Section 7, Executive shall be employed by the Company pursuant to the terms and conditions of this Agreement for a period commencing on June 12, 1998 (the "Commencement Date") and ending June 12, 2001; PROVIDED that such period shall be automatically extended for one year on June 12, 2001 and June 12 of any succeeding year unless a minimum of six months prior notice is given by either party to the other. The period beginning on the Commencement Date and ending June 12, 2001, or upon the expiration of any renewal period, in either case in accordance with the foregoing provision, shall be referred to as the "Employment Term". 2 2. POSITION. (a) The Executive shall continue to serve as President and Chief Executive Officer of the Company and in the event of an internal corporate restructuring, shall serve in a position or positions of comparable authority and responsibility in any resulting entity. In such positions, Executive shall have such duties and authority as shall be determined from time to time by the Board of Directors of the Company (the "Board") or its designee which shall not be less than that assigned to him on the Commencement Date. (b) During the term of his employment hereunder, Executive will devote substantially all of his business time and best efforts to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such services either directly or indirectly, without the prior written consent of the Board. 3. BASE SALARY. The Company shall pay Executive an annual base salary (the "Base Salary") at the initial rate of $250,000 payable in arrears in substantially equal installments not less frequently than monthly in accordance with the Company's payroll practices during the Employment Term. The Company shall increase (but not decrease) the Base Salary on each January 1 which occurs during the Employment Term after June 12, 1998 by a percentage equal to the percentage increase in the Consumer Price Index for all Urban Consumers for the Northeast Region, class B metropolitan area, for the twelve (12) month period ending on each such January 1. In addition to any automatic increases hereunder, the Company, at any time, may in its sole discretion increase Executive's Base Salary. 4. INCENTIVE COMPENSATION. (a) With respect to each fiscal year during all of which Executive is employed with the Company, including the fiscal year beginning January 1, 1998, -2- 3 he shall also be eligible to participate in the Company's annual bonus program as such program may be modified by the Board of Directors. (b) With respect to each performance period during which Executive is employed by the Company, including the performance period beginning January 1, 1998, the Executive shall also be eligible to participate in the Company's profit-sharing plan as such plan may be modified by the Board of Directors. (c) Executive shall be eligible to participate in the 1987 Stock Option Plan, the 1998 Equity Incentive Plan, and any other equity plan adopted by the Company (collectively "Option Plans"), at a level consistent with his position and responsibilities. 5. EMPLOYEE BENEFITS. (a) Executive shall continue to be provided employee benefits (including fringe benefits and other perquisites, profit sharing plan participation and life, health, accident and disability insurance) (collectively "Employee Benefits") on terms no less favorable in the aggregate (except for any changes thereto required to comply with changes in applicable law) than those benefits which were provided to Executive by the Company immediately prior to the Commencement Date, except as otherwise required hereunder. (b) The Board of Directors shall determine the amount of the payments, if any, to be awarded to the Executive under the Company's annual bonus program and/or profit-sharing plan pursuant to their terms for the 1997 fiscal year and for which payments have not been made prior to the Commencement Date. (c) Executive shall be entitled to a minimum of five (5) weeks annual vacation, in accordance with the Company's current vacation policies, which vacation shall be -3- 4 increased on the second anniversary of the Commencement Date up to a maximum of six (6) weeks. 6. BUSINESS EXPENSES. Reasonable travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder shall be reimbursed by the Company in accordance with Company policies. 7. TERMINATION. This Agreement, and Executive's employment may be terminated by either party at any time. In the event of any such termination, Executive's rights and entitlements shall be determined in accordance with the following provisions. (a) FOR CAUSE BY THE COMPANY. The provisions of this Section 7(a) shall apply in the event that Executive's employment hereunder is terminated by the Company for "Cause". For purposes of this Agreement, "Cause" shall mean (i) Executive's willful and continued failure substantially to perform his duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness), (ii) the willful commission by Executive of acts that are dishonest and demonstrably injurious to the Company, or (iii) an act or acts on Executive's part constituting a felony under the laws of the United States or any state thereof. If Executive is terminated for Cause, he shall be entitled to receive his Base Salary through the date of termination, and any accrued but unpaid amounts earned under any bonus program or profit-sharing plan. All other benefits due Executive following Executive's termination of employment pursuant to this Section 7(a) shall be determined in accordance with the plans, policies and practices of the Company at the time of such termination. Any Notice of Termination (as defined in subsection (i) of this Section 7), communicating the termination of Executive's employment pursuant to this Section 7(a) shall include a copy of a resolution duly -4- 5 adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and reasonable opportunity for Executive, together with Executive's counsel, to be heard before the Board prior to such vote), finding that in the good faith opinion of the Board that any event constituting Cause for termination in accordance with this Section 7(a) has occurred and specifying the particulars thereof in detail. (b) DISABILITY. The provisions of this Section 7(b) shall apply in the event that Executive's employment terminates on account of "Disability". For purposes of this Agreement, "Disability" shall mean Executive's physical or mental incapacity, which results in his inability to perform his duties for a period of six (6) consecutive months. Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree, shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. In the event of the Disability of Executive, the Company may terminate the employment of Executive, by delivery of a Notice of Termination to the Executive which Notice shall be effective not less than thirty (30) days after the giving of such Notice. Upon termination of Executive's employment hereunder as a result of Disability, Executive shall receive his Base Salary for a period of twelve (12) months following such termination, and any and all accrued but unpaid amounts earned by Executive under the annual bonus program or profit-sharing plan as of the date of Disability. Any payments provided for in this Section 7(b) shall be offset (but not below zero) by any payment of disability benefits in lieu of Base Salary received by Executive under the Company's employee benefit plans as then in effect. In addition, all options -5- 6 or other awards issued under the Option Plans shall become fully vested and exercisable as of the date of Disability. (c) DEATH. Upon termination of Executive's employment hereunder as a result of Executive's death, Executive's estate shall receive his Base Salary at the rate in effect at the time of Executive's death for a period of twelve (12) months following his death, and any and all accrued but unpaid amounts earned by Executive under the Company's annual bonus program or profit-sharing plan as of the date of death. In addition, all options or awards under the Option Plans shall become fully vested and exercisable as of the date of death. Thereafter, the Company shall, except as provided in subsections 5(a) and 7(g), have no further obligation to compensate Executive under this Agreement. (d) WITHOUT CAUSE BY THE COMPANY. If Executive's employment is terminated by the Company (including a termination of this Agreement by the Company as provided in Section 1) without "Cause" (other than by reason of Disability or death), Executive shall receive, as promptly as practicable following such termination, but in any event not later than ten (10) business days following such termination, a lump sum payment in cash equal to the sum of: (i) if not theretofore paid, the Executive's Base Salary through the date of termination at the rate in effect on the date of termination or, if higher, at the highest rate in effect at any time within the 90-day period preceding the Commencement Date; and (ii) the product of (x) the annual bonus paid to the Executive for the last full fiscal year ending during the Employment Term and (y) the fraction obtained by dividing (a) the number of days between the Commencement Date and the last day of the last full fiscal year ending during the Employment Term and (b) 365; and (iii) in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Company. -6- 7 Executive shall in addition receive an amount equal to three (3) times the Executive's annual Base Salary at the rate in effect at the time Notice of Termination was given, or if higher, at the highest rate in effect at any time within the ninety (90) day period preceding the Commencement Date. Such amount shall be paid to Executive in two (2) equal payments, on the first and second anniversaries, respectively, of the Executive's date of termination. No option or other award granted to Executive under the Option Plans shall terminate prior to the expiration of the option term or award period without regard to a termination of employment. (e) FOR GOOD REASON BY EXECUTIVE. The provisions of this Section 7(e) shall apply in the event that the Executive terminates his employment with the Company for "Good Reason". For purposes of this Agreement, "Good Reason" means (without Executive's express prior written consent): (i) The assignment to Executive by the Company of duties inconsistent with Executive's positions, duties, responsibilities, titles or offices, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of Executive's employment for Cause, Disability, or as a result of Executive's death or by Executive other than for Good Reason; (ii) A reduction by the Company in Executive's Base Salary as in effect at the Commencement Date, as the same may be increased according to the terms of this Agreement; (iii) A relocation of the Company's principal executive offices to a location outside of the metropolitan Boston, Massachusetts area or the Company's requiring Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations at the -7- 8 Commencement Date, or any material reduction or adverse change in the emoluments or perquisites of office provided to the Executive at the Commencement Date; (iv) A failure by the Company to continue in effect fringe benefits and benefit or compensation plans (including any profit sharing, bonus, life insurance, health, accidental death or dismemberment or disability plan) with terms which in the aggregate are as favorable as those fringe benefits and plans to which Executive is entitled or in which Executive is participating, as the case may be, at the Commencement Date (or in the case of fringe benefits or plans granted or adopted, as the case may be, after the date hereof and providing a type of benefit not provided by the Company at the Commencement Date, at the respective dates of grant or adoption of such fringe benefits or plans); or (v) The failure by the Company to obtain the specific assumption of this Agreement by any successor or assign of the Company or any person acquiring a substantial portion of the assets of the Company, or, following any such assumption, assignment or acquisition by an entity other than an affiliate of the Company, the occurrence of any event Executive believes will impair his duties under this Agreement. If Executive terminates his employment for "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company without "Cause". (f) GROSS-UP PAYMENTS. In the event that Executive receives any payments under this Agreement, or other payments subject to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), which are considered "excess parachute payments" as defined in Section 280G of the Code, the Company shall make an additional gross-up payment to Executive in an amount which results in Executive being in the same after-tax position that he would have been in had no excise tax under Code Section 4999 been imposed. -8- 9 (g) WITHOUT GOOD REASON BY EXECUTIVE. If Executive voluntarily terminates his employment with the Company for any reason other than "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company for Cause. (h) CONTINUATION OF BENEFITS. Upon the termination of Executive's employment other than as a result of death or for Cause, in addition to any amounts due under Section 5(a) and (b) hereof and Sections (a) through (f) of this Section 7, the Company shall provide Executive with a continuation of those benefits denoted by an asterisk on Exhibit A hereto until the earlier of Executive's death or 65th birthday; provided, however, that in the event that Executive obtains other substantially comparable employment during such period, Executive shall notify the Company and the amount of any benefits to which Executive is entitled under this Section 7(h) shall be reduced (but not below zero) by any such benefits provided by Executive's new employer. (i) NOTICE OF TERMINATION. Any purported termination of employment by the Company or by Executive shall not be effective until communicated by written Notice of Termination to the other party hereto in accordance with Section 11(i) hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 8. NONCOMPETITION. (a) During the Employment Term, and for a two (2) year period following termination of Executive's employment hereunder, Executive shall not, directly or -9- 10 indirectly, (i) become under contract to or associated with, employed by, render services to or own an interest (other than as a shareholder owning not more than a 5% interest) in any microticket leasing business that is in competition with the Company in the United States, (ii) solicit any officer or employee of the Company or any of its affiliates to engage in any conduct prohibited hereby for Executive or to terminate any existing relationship with the Company or such affiliate or (iii) assist any other person to engage in any activity in any manner prohibited hereby to Executive. For purposes of this Section 8(a), in the event of a termination of employment prior to expiration of the Employment Term, determination of the duration of the Employment Term, shall be made without regard to the automatic renewal provisions of Section 1 hereof. (b) It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 8 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 9. CONFIDENTIALITY. Executive will not at any time (whether, during or after his employment with the Company) disclose or use for his own benefit or purposes or the benefit or -10- 11 purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company, PROVIDED that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Executive's breach of this covenant. Executive agrees that upon termination of his employment with the Company, for any reason, he will return to the Company immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that he may retain personal notes, notebooks and diaries. Executive further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. 10. SPECIFIC PERFORMANCE. Executive acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Sections 8 or 9 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. -11- 12 11. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. (b) ENTIRE AGREEMENT/AMENDMENTS. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and, subject to the exception noted below, supersedes any and all prior understandings, agreements, contracts and arrangements, whether written or oral, between the Company and Executive, including but not limited to the Original Employment Agreement and the Executive Performance Incentive Plan. The parties hereto agree that as of the Commencement Date, the Original Employment Agreement shall be null and void and of no further force or effect and any and all current and future obligations of either party thereunder are fully and forever discharged. Notwithstanding anything to the contrary contained herein, this Agreement shall in no way reduce or diminish any benefit to which Executive is otherwise entitled and which has already accrued, or been granted, to Executive, pursuant to the terms of a plan, program or arrangement of the Company, including without limitation, any outstanding award granted to Executive under the Company's Executive Performance Incentive Plan for which the performance period has not closed (or, if closed, payment has not been made) prior to the Commencement Date. The Executive hereby agrees to provide any consent, waiver or other documentation necessary to give effect to this paragraph (b). This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) NO WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or -12- 13 deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) SEVERABILITY. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. (e) ASSIGNMENT. This Agreement shall not be assignable by Executive and shall be assignable by the Company only to a direct or indirect wholly-owned subsidiary of the Company. (f) MITIGATION. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer after the termination of his employment hereunder or otherwise, except to the extent set forth in Section 7(h) of this Agreement. (g) ARBITRATION. Except where equitable relief is sought, any dispute, controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by arbitration in accordance with the rules of the American Arbitration Association by a single arbitrator. The Arbitrator shall be an individual familiar with the leasing and finance industry. The arbitrator's award shall be final and binding upon both parties, and judgment upon the award may be entered in any court of competent jurisdiction in any state of the United States -13- 14 or country or application may be made to such court for a judicial acceptance o the award and an enforcement as the law of such jurisdiction may require or allow. (h) SUCCESSORS; BINDING AGREEMENT. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets or the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. The term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. (ii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to -14- 15 Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive. (i) NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement, PROVIDED that all notices to the Company shall be directed to the attention of the Board with a copy to Managing Partner, Edwards & Angell, 101 Federal Street, Boston, MA 02110, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (j) LEGAL FEES AND EXPENSES. The Company shall reimburse Executive on a quarterly basis for all costs and expenses incurred by Executive to enforce or protect his rights under this Agreement (including fees and expenses incurred in connection with an arbitration) unless it shall ultimately be determined by a final judgment of an arbitrator or a court of competent jurisdiction that Executive was without any justification for commencing or continuing any such arbitration, action or proceeding, in which case Executive shall repay to the Company any amounts of reimbursement paid under this Section 11(j) and in the event of an arbitration, shall also pay one half (1/2) of the fees of the arbitrator. -15- 16 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. /s/ Peter R. Bleyleben ----------------------------------- Peter R. Bleyleben Boyle Leasing Technologies, Inc. /s/ Richard F. Latour ----------------------------------- Richard F. Latour Chief Financial Officer -16- EX-10.14 4 EMPLOYMENT AGREEMENT WITH RICHARD F. LATOUR 1 EXHIBIT 10.14 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 12, 1998 by and between Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Company") and Richard F. Latour, (the "Executive") residing at 29 Cherubs Way, Hampstead, NH 03841. WHEREAS Executive has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company pursuant to an Employment Agreement dated September 26, 1997 (the "Original Employment Agreement"); and WHEREAS the Company desires to continue to employ Executive and to enter into this Agreement embodying the terms of such continued employment (the "Agreement"); and WHEREAS Executive desires to accept such continued employment and enter into this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. TERM OF EMPLOYMENT. Subject to the provisions of Section 7, Executive shall be employed by the Company pursuant to the terms and conditions of this Agreement for a period commencing on June 12, 1998 (the "Commencement Date") and ending June 12, 2001; PROVIDED that such period shall be automatically extended for one year on June 12, 2001 and June 12 of any succeeding year unless a minimum of six months prior notice is given by either party to the other. The period beginning on the Commencement Date and ending June 12, 2001, or upon the expiration of any renewal period, in either case in accordance with the foregoing provision, shall be referred to as the "Employment Term". 2 2. POSITION. (a) The Executive shall continue to serve as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company and in the event of an internal corporate restructuring, shall serve in a position or positions of comparable authority and responsibility in any resulting entity. In such positions, Executive shall have such duties and authority as shall be determined from time to time by the Board of Directors of the Company (the "Board") or its designee which shall not be less than that assigned to him on the Commencement Date. (b) During the term of his employment hereunder, Executive will devote substantially all of his business time and best efforts to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such services either directly or indirectly, without the prior written consent of the Board. 3. BASE SALARY. The Company shall pay Executive an annual base salary (the "Base Salary") at the initial rate of $200,000 payable in arrears in substantially equal installments not less frequently than monthly in accordance with the Company's payroll practices during the Employment Term. The Company shall increase (but not decrease) the Base Salary on each January 1 which occurs during the Employment Term after June 12, 1998 by a percentage equal to the percentage increase in the Consumer Price Index for all Urban Consumers for the Northeast Region, class B metropolitan area, for the twelve (12) month period ending on each such January 1. In addition to any automatic increases hereunder, the Company, at any time, may in its sole discretion increase Executive's Base Salary. 4. INCENTIVE COMPENSATION. (a) With respect to each fiscal year during all of which Executive is employed with the Company, including the fiscal year beginning January 1, 1998, -2- 3 he shall also be eligible to participate in the Company's annual bonus program as such program may be modified by the Board of Directors. (b) With respect to each performance period during which Executive is employed by the Company, including the performance period beginning January 1, 1998, the Executive shall also be eligible to participate in the Company's profit-sharing plan as such plan may be modified by the Board of Directors. (c) Executive shall be eligible to participate in the 1987 Stock Option Plan, the 1998 Equity Incentive Plan, and any other equity plan adopted by the Company (collectively "Option Plans"), at a level consistent with his position and responsibilities. 5. EMPLOYEE BENEFITS. (a) Executive shall continue to be provided employee benefits (including fringe benefits and other perquisites, profit sharing plan participation and life, health, accident and disability insurance) (collectively "Employee Benefits") on terms no less favorable in the aggregate (except for any changes thereto required to comply with changes in applicable law) than those benefits which were provided to Executive by the Company immediately prior to the Commencement Date, except as otherwise required hereunder. (b) The Board of Directors shall determine the amount of the payments, if any, to be awarded to the Executive under the Company's annual bonus program and/or profit-sharing plan pursuant to their terms for the 1997 fiscal year and for which payments have not been made prior to the Commencement Date. (c) Executive shall be entitled to a minimum of five (5) weeks annual vacation, in accordance with the Company's current vacation policies, which vacation shall be increased on the second anniversary of the Commencement Date up to a maximum of six (6) weeks. -3- 4 6. BUSINESS EXPENSES. Reasonable travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder shall be reimbursed by the Company in accordance with Company policies. 7. TERMINATION. This Agreement, and Executive's employment may be terminated by either party at any time. In the event of any such termination, Executive's rights and entitlements shall be determined in accordance with the following provisions. (a) FOR CAUSE BY THE COMPANY. The provisions of this Section 7(a) shall apply in the event that Executive's employment hereunder is terminated by the Company for "Cause". For purposes of this Agreement, "Cause" shall mean (i) Executive's willful and continued failure substantially to perform his duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness), (ii) the willful commission by Executive of acts that are dishonest and demonstrably injurious to the Company, or (iii) an act or acts on Executive's part constituting a felony under the laws of the United States or any state thereof. If Executive is terminated for Cause, he shall be entitled to receive his Base Salary through the date of termination, and any accrued but unpaid amounts earned under any bonus program or profit-sharing plan. All other benefits due Executive following Executive's termination of employment pursuant to this Section 7(a) shall be determined in accordance with the plans, policies and practices of the Company at the time of such termination. Any Notice of Termination (as defined in subsection (i) of this Section 7), communicating the termination of Executive's employment pursuant to this Section 7(a) shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and reasonable opportunity for Executive, together with Executive's counsel, to be heard before -4- 5 the Board prior to such vote), finding that in the good faith opinion of the Board that any event constituting Cause for termination in accordance with this Section 7(a) has occurred and specifying the particulars thereof in detail. (b) DISABILITY. The provisions of this Section 7(b) shall apply in the event that Executive's employment terminates on account of "Disability". For purposes of this Agreement, "Disability" shall mean Executive's physical or mental incapacity, which results in his inability to perform his duties for a period of six (6) consecutive months. Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree, shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. In the event of the Disability of Executive, the Company may terminate the employment of Executive, by delivery of a Notice of Termination to the Executive which Notice shall be effective not less than thirty (30) days after the giving of such Notice. Upon termination of Executive's employment hereunder as a result of Disability, Executive shall receive his Base Salary for a period of twelve (12) months following such termination, and any and all accrued but unpaid amounts earned by Executive under the annual bonus program or profit-sharing plan as of the date of Disability. Any payments provided for in this Section 7(b) shall be offset (but not below zero) by any payment of disability benefits in lieu of Base Salary received by Executive under the Company's employee benefit plans as then in effect. In addition, all options or other awards issued under the Option Plans shall become fully vested and exercisable as of the date of Disability. (c) DEATH. Upon termination of Executive's employment hereunder as a result of Executive's death, Executive's estate shall receive his Base Salary at the rate in effect at the -5- 6 time of Executive's death for a period of twelve (12) months following his death, and any and all accrued but unpaid amounts earned by Executive under the Company's annual bonus program or profit-sharing plan as of the date of death. In addition, all options or awards under the Option Plans shall become fully vested and exercisable as of the date of death. Thereafter, the Company shall, except as provided in subsections 5(a) and 7(g), have no further obligation to compensate Executive under this Agreement. (d) WITHOUT CAUSE BY THE COMPANY. If Executive's employment is terminated by the Company (including a termination of this Agreement by the Company as provided in Section 1) without "Cause" (other than by reason of Disability or death), Executive shall receive, as promptly as practicable following such termination, but in any event not later than ten (10) business days following such termination, a lump sum payment in cash equal to the sum of: (i) if not theretofore paid, the Executive's Base Salary through the date of termination at the rate in effect on the date of termination or, if higher, at the highest rate in effect at any time within the 90-day period preceding the Commencement Date; and (ii) the product of (x) the annual bonus paid to the Executive for the last full fiscal year ending during the Employment Term and (y) the fraction obtained by dividing (a) the number of days between the Commencement Date and the last day of the last full fiscal year ending during the Employment Term and (b) 365; and (iii) in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Company. Executive shall in addition receive an amount equal to three (3) times the Executive's annual Base Salary at the rate in effect at the time Notice of Termination was given, or if higher, at the highest rate in effect at any time within the ninety (90) day period preceding the -6- 7 Commencement Date. Such amount shall be paid to Executive in two (2) equal payments, on the first and second anniversaries, respectively, of the Executive's date of termination. No option or other award granted to Executive under the Option Plans shall terminate prior to the expiration of the option term or award period without regard to a termination of employment. (e) FOR GOOD REASON BY EXECUTIVE. The provisions of this Section 7(e) shall apply in the event that the Executive terminates his employment with the Company for "Good Reason". For purposes of this Agreement, "Good Reason" means (without Executive's express prior written consent): (i) The assignment to Executive by the Company of duties inconsistent with Executive's positions, duties, responsibilities, titles or offices, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of Executive's employment for Cause, Disability, or as a result of Executive's death or by Executive other than for Good Reason; (ii) A reduction by the Company in Executive's Base Salary as in effect at the Commencement Date, as the same may be increased according to the terms of this Agreement; (iii) A relocation of the Company's principal executive offices to a location outside of the metropolitan Boston, Massachusetts area or the Company's requiring Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations at the Commencement Date, or any material reduction or adverse change in the emoluments or perquisites of office provided to the Executive at the Commencement Date; (iv) A failure by the Company to continue in effect fringe benefits and benefit or compensation plans -7- 8 (including any profit sharing, bonus, life insurance, health, accidental death or dismemberment or disability plan) with terms which in the aggregate are as favorable as those fringe benefits and plans to which Executive is entitled or in which Executive is participating, as the case may be, at the Commencement Date (or in the case of fringe benefits or plans granted or adopted, as the case may be, after the date hereof and providing a type of benefit not provided by the Company at the Commencement Date, at the respective dates of grant or adoption of such fringe benefits or plans); or (v) The failure by the Company to obtain the specific assumption of this Agreement by any successor or assign of the Company or any person acquiring a substantial portion of the assets of the Company, or, following any such assumption, assignment or acquisition by an entity other than an affiliate of the Company, the occurrence of any event Executive believes will impair his duties under this Agreement. If Executive terminates his employment for "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company without "Cause". (f) GROSS-UP PAYMENTS. In the event that Executive receives any payments under this Agreement, or other payments subject to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), which are considered "excess parachute payments" as defined in Section 280G of the Code, the Company shall make an additional gross-up payment to Executive in an amount which results in Executive being in the same after-tax position that he would have been in had no excise tax under Code Section 4999 been imposed. (g) WITHOUT GOOD REASON BY EXECUTIVE. If Executive voluntarily terminates his employment with the Company for any reason other than "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company for Cause. -8- 9 (h) CONTINUATION OF BENEFITS. Upon the termination of Executive's employment other than as a result of death or for Cause, in addition to any amounts due under Section 5(a) and (b) hereof and Sections (a) through (f) of this Section 7, the Company shall provide Executive with a continuation of those benefits denoted by an asterisk on Exhibit A hereto until the earlier of Executive's death or 65th birthday; provided, however, that in the event that Executive obtains other substantially comparable employment during such period, Executive shall notify the Company and the amount of any benefits to which Executive is entitled under this Section 7(h) shall be reduced (but not below zero) by any such benefits provided by Executive's new employer. (i) NOTICE OF TERMINATION. Any purported termination of employment by the Company or by Executive shall not be effective until communicated by written Notice of Termination to the other party hereto in accordance with Section 11(i) hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 8. NONCOMPETITION. (a) During the Employment Term, and for a two (2) year period following termination of Executive's employment hereunder, Executive shall not, directly or indirectly, (i) become under contract to or associated with, employed by, render services to or own an interest (other than as a shareholder owning not more than a 5% interest) in any microticket leasing business that is in competition with the Company in the United States, (ii) solicit any officer or employee of the Company or any of its affiliates to engage in any conduct prohibited hereby for Executive or to terminate any existing relationship with the Company or -9- 10 such affiliate or (iii) assist any other person to engage in any activity in any manner prohibited hereby to Executive. For purposes of this Section 8(a), in the event of a termination of employment prior to expiration of the Employment Term, determination of the duration of the Employment Term, shall be made without regard to the automatic renewal provisions of Section 1 hereof. (b) It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 8 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 9. CONFIDENTIALITY. Executive will not at any time (whether, during or after his employment with the Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company, -10- 11 PROVIDED that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Executive's breach of this covenant. Executive agrees that upon termination of his employment with the Company, for any reason, he will return to the Company immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that he may retain personal notes, notebooks and diaries. Executive further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. 10. SPECIFIC PERFORMANCE. Executive acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Sections 8 or 9 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 11. MISCELLANEOUS. (a) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. (b) ENTIRE AGREEMENT/AMENDMENTS. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and, subject to the exception noted below, supersedes any and all prior understandings, agreements, contracts and arrangements, whether written or oral, between the Company and Executive, including but not -11- 12 limited to the Original Employment Agreement and the Executive Performance Incentive Plan. The parties hereto agree that as of the Commencement Date, the Original Employment Agreement shall be null and void and of no further force or effect and any and all current and future obligations of either party thereunder are fully and forever discharged. Notwithstanding anything to the contrary contained herein, this Agreement shall in no way reduce or diminish any benefit to which Executive is otherwise entitled and which has already accrued, or been granted, to Executive, pursuant to the terms of a plan, program or arrangement of the Company, including without limitation, any outstanding award granted to Executive under the Company's Executive Performance Incentive Plan for which the performance period has not closed (or, if closed, payment has not been made) prior to the Commencement Date. The Executive hereby agrees to provide any consent, waiver or other documentation necessary to give effect to this paragraph (b). This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) NO WAIVER. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) SEVERABILITY. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. -12- 13 (e) ASSIGNMENT. This Agreement shall not be assignable by Executive and shall be assignable by the Company only to a direct or indirect wholly-owned subsidiary of the Company. (f) MITIGATION. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer after the termination of his employment hereunder or otherwise, except to the extent set forth in Section 7(h) of this Agreement. (g) ARBITRATION. Except where equitable relief is sought, any dispute, controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by arbitration in accordance with the rules of the American Arbitration Association by a single arbitrator. The Arbitrator shall be an individual familiar with the leasing and finance industry. The arbitrator's award shall be final and binding upon both parties, and judgment upon the award may be entered in any court of competent jurisdiction in any state of the United States or country or application may be made to such court for a judicial acceptance o the award and an enforcement as the law of such jurisdiction may require or allow. (h) SUCCESSORS; BINDING AGREEMENT. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets or the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to -13- 14 the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. The term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. (ii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive. (i) NOTICE. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement, PROVIDED that all notices to the Company shall be directed to the attention of the Board with a copy to Managing Partner, Edwards & Angell, 101 Federal Street, Boston, MA -14- 15 02110, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (j) LEGAL FEES AND EXPENSES. The Company shall reimburse Executive on a quarterly basis for all costs and expenses incurred by Executive to enforce or protect his rights under this Agreement (including fees and expenses incurred in connection with an arbitration) unless it shall ultimately be determined by a final judgment of an arbitrator or a court of competent jurisdiction that Executive was without any justification for commencing or continuing any such arbitration, action or proceeding, in which case Executive shall repay to the Company any amounts of reimbursement paid under this Section 11(j) and in the event of an arbitration, shall also pay one half (1/2) of the fees of the arbitrator. -15- 16 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. /s/ Richard F. Latour --------------------------------------- Richard F. Latour Boyle Leasing Technologies, Inc. /s/ Peter R. Bleyleben --------------------------------------- Peter R. Bleyleben, President -16- EX-10.16 5 SECOND AMENDMENT AND RESTATED SPECIFIC TERMS 1 - -------------------------------------------------------------------------------- EXHIBIT 10.16 ---------- SECOND AMENDED AND RESTATED SPECIFIC TERMS & CONDITIONS OF INDENTURE among BLT FINANCE CORP. III, as Issuer, MICROFINANCIAL INCORPORATED, as Servicer, NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Indenture Trustee and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Back-up Servicer ---------- Dated as of November 1, 1994 and amended and restated as of October 1, 1998 - -------------------------------------------------------------------------------- 2 SECOND AMENDED AND RESTATED SPECIFIC TERMS AND CONDITIONS OF INDENTURE, dated as of November 1, 1994 and amended and restated as of October 1, 1998, by and among BLT Finance Corp. III, a Massachusetts corporation, as Issuer (the "Issuer"), MicroFinancial Incorporated (formerly known as Boyle Leasing Technologies, Inc.), a Massachusetts corporation, as Servicer (the "Servicer"), Norwest Bank Minnesota, National Association, a national banking association, as Indenture Trustee (in such capacity, the "Indenture Trustee") and Norwest Bank Minnesota, National Association, a national banking association, as Back-up Servicer (in such capacity, the "Back-up Servicer"). 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 from time to time of its Lease-Backed Notes, in Series, 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, the Servicer 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 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 ACH Account (including any Eligible Investments and other property in such accounts); (g) the Lease Contract Files; and (h) proceeds of the foregoing (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 3 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. Except as otherwise provided herein, each term used in the Indenture shall have the meaning assigned thereto in the Standard Indenture Terms; provided, that the definition of each term defined herein will govern over any conflicting definition contained in the Standard Indenture Terms, will replace such definition. With respect to the Notes, the following definitions shall apply: "ACH Account": None. "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). "Available Cash Requirement": shall mean that, as of each Calculation Date and as reflected on each Monthly Servicer's Report, the sum of (i) unrestricted cash and (ii) amounts available for borrowing by the Reported Companies under their credit facilities is not less than $14,000,000. "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. "BankBoston Loan Agreement": shall mean that certain 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, as amended by the 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. "Cash Collateral Account Factor": shall mean 1.0067. 2 4 "Change in Control": shall mean either (a) 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 or (b) either (i) any Person or group of Persons (within the meaning of Section 13(d) or 14(d)(2) of the Securities Exchange Act of 1934, as amended) other than the Key Shareholders shall own, beneficially or of record, or control by contract or otherwise, more than 50% of the issued and outstanding shares of capital stock of the Servicer on a fully diluted basis (assuming the exercise of all outstanding stock options) of the Servicer having ordinary voting rights for the election of directors, (ii) the Key Shareholders shall own, beneficially or of record, in the aggregate less than 45%, or own, beneficially or of record, or control, by contract or otherwise, in the aggregate less than 60% of the issued and outstanding shares of capital stock, on a fully diluted basis (assuming the exercise of all outstanding stock options) of the Servicer having ordinary voting rights for the election of directors; provided, that clause (ii) shall not apply if and for so long as the Servicer shall be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or (iii) the Servicer shall own, beneficially or of record, or control, by contract or otherwise, in the aggregate less than 100% of the issued and outstanding shares of capital stock of the Company. "Collateralization Percentage": shall mean 26%. "Company": shall mean Leasecomm Corporation. "Corporate Trust Office": shall mean the trust office listed in Section 1.03 below. "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 calender 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 calender month as such Warehouse Funding, the last day of the calender month prior to the month such Warehouse Funding occurs. "Defaulted Lease Purchase and Substitution Limit": shall mean 6.5%. "Delinquent Lease Purchase and Substitution Limit": shall mean 20%. "Enumerated States": None. "Fleet Loan Agreement": shall mean that certain Amended and Restated Loan Agreement between Leasecomm Corporation and NatWest Bank, N.A., dated July 28, 1995, as amended by the First Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and NatWest Bank, N.A., dated October 30, 1995, and the 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, and the Third Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and Fleet Bank, N.A., dated August 11, 1997. 3 5 "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 ACH Deposit": shall be $0.00. "Insurance Agreement": Shall mean each Insurance Agreement by and among MBIA, the Issuer, the Company, the Back-up Servicer, the Note Administrator and the Indenture Trustee, executed in connection with the Issuance of a Series of Notes. "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. "Key Shareholders": shall mean Peter von Bleyleben, Brian Boyle and Torrence Harder. "Lease Receivables": The term "Lease Receivables" shall include Servicing Charges. "Maximum Default Rate": shall mean 7%. "Maximum Delinquency Rate": shall mean 14.5%. "Minimum Net Worth Amount" means an amount equal to $24,950,000, provided however, that if the Servicer becomes subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, such amount shall be reset to ninety percent (90%) of the Tangible Net Worth of the Reported Companies as of the close of the month in which such event occurs. "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' Tangible Net Worth, determined as of the close of each fiscal quarter, is equal to at least the Minimum Net Worth Amount plus 60% of the aggregate amount of consolidated net income of the Reported Companies for each of the fiscal quarters ending after the last determination of the Minimum Net Worth Amount, but without deducting therefrom any amount of consolidated net losses for any of such fiscal quarters; provided however that all such amounts shall be calculated in accordance 4 6 with generally accepted accounting principles as in effect on December 31, 1997. "Overdue Payment": shall include Servicing Charges. "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. "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. "Specific Indenture Terms": The Specific Terms and Conditions of Indenture, dated as of November 1, 1994 and amended and restated as of October 1, 1998, among the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee, as amended from time to time. "Tangible Net Worth" means as of the applicable date of determination, the sum, with respect to the Reported Companies 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 good will, (y) treasury stock and (z) 25% of debt issuance costs. "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. "Trigger Event": The occurrence of any one of the following events unless, in the case of subclauses (e) through (k) below, waived by MBIA or, if an MBIA Default has occurred and is continuing, by the Holders of Notes representing no less than 66 2/3% in Outstanding Principal Amount of the Notes, that such occurrence shall constitute a Trigger Event: (a) 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; 5 7 (b) in any Due Period, the Annualized Default Rate was equal to or greater than three times the Maximum Default Rate; (c) 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; (d) 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; (e) the Net Worth Requirement is not met and, after 30 days of the date on which it is reported, has not been cured or waived by MBIA or, if an MBIA Default has occurred and is continuing, by the Holders of Notes representing no less than 66 2/3% in Outstanding Principal Amount of the Notes; (f) the occurrence of any Change in Control; (g) an Event of Default occurs; (h) the Issuer or the Trust Estate becomes required to register as an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (i) a voluntary bankruptcy filing of the Servicer or an involuntary bankruptcy filing of the Servicer which is not discharged within sixty (60) days; (j) any Reported Company shall be in default under, or in violation of, any covenant or obligation under either the Fleet Loan Agreement or the BankBoston Loan Agreement (each, a "Loan Agreement"), as each such Loan Agreement may be amended from time to time (provided, that any such amendment will only amend this subclause (j) to the extent it has been approved for inclusion herein by MBIA or, if an MBIA Default has occurred and is continuing, by the Holders of Notes representing no less than 66 2/3% of the Outstanding Principal Amount of the Notes), such that the lender under such Loan Agreement would be authorized, pursuant to the terms of such agreement and upon the expiration of any cure period or grace period with respect to such violation or default, to demand immediate payment by such Reported Company of the debt outstanding thereunder, and such default or violation shall not have been cured, remedied or waived in writing by such lender and MBIA (or, if an MBIA Default has occurred and is continuing, by the Holders of Notes representing no less than 66 2/3% in Outstanding Principal Amount of the Notes) after ninety (90) days, counting from the initial date of the violation or default and not from the expiration of any applicable cure period or grace period; (k) the Available Cash Requirement is not met and, after 30 days of the date on which it is reported, has not been cured or waived by MBIA or, if an MBIA Default has occurred and is continuing, by the Holders of Notes representing no less than 66 2/3% in Outstanding Principal Amount of the Notes; or (l) the occurrence of any additional event set forth in any Supplement as a "Trigger Event". "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. "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 6 8 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 the 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. SECTION 1.02 INTERPRETIVE PROVISIONS References herein to statutes or regulations are to be construed as including all statutory or regulatory provisions consolidating, amending or replacing the statute or regulation referred to; references to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications to such instruments; and references to Persons include their respective permitted successors and assigns and Persons succeeding to their respective functions and capacities. SECTION 1.03 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 1.04 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 02451 Attention: President; (b) if to the Servicer, at 950 Winter Street, Waltham, Massachusetts 02451 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. 7 9 SECTION 1.05 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 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." (b) 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." (c) The provisions of Section 4.04(e)(iii) of the Standard Indenture Terms shall not be 8 10 applicable. (d) 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." (e) 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." (f) 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. 9 11 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/ Eileen R. O'Connor ---------------------------------------- Name: Eileen R. O'Connor Title: Corporate Trust Officer NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Back-up Servicer By: /s/ Eileen R. O'Connor ---------------------------------------- Name: Eileen R. O'Connor Title: Corporate Trust Officer BLT FINANCE CORP. III., Issuer By: /s/ J.G. Hines ---------------------------------------- Name: J.G. Hines Title: Vice President MICROFINANCIAL INCORPORATED, Servicer By: /s/ J.G. Hines ---------------------------------------- Name: J.G. Hines Title: Vice President 10 12 Consented and Agreed to as of the date first above written: MBIA INSURANCE CORPORATION By: /s/ Nicholas Sourbis ---------------------------------------- Name: Nicholas Sourbis Title: Managing Director MARNIX ASSET FUNDING CORPORATION By: /s/ Kathleen Daese ---------------------------------------- Name: Kathleen Daese Title: Assistant Vice President PRINCIPAL LIFE INSURANCE COMPANY By: /s/ Jon C. Heiny ---------------------------------------- Name: Jon C. Heiny Title: Counsel By: /s/ James G. Fifield ---------------------------------------- Name: James G. Fifield Title: Counsel 11 EX-10.19 6 SUPPLEMENT TO INDENTURE DATED OCTOBER 1, 1998 1 EXHIBIT 10.19 SUPPLEMENT TO INDENTURE, TERM NOTES, SERIES 1998-A This INDENTURE SUPPLEMENT, dated as of October 1, 1998, is entered into by and among BLT Finance Corp. III, a Massachusetts corporation (the "Issuer"), MicroFinancial Incorporated (formerly known as 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 Second Amended and Restated Specific Terms and Conditions of Indenture, dated as of November 1, 1994 and amended and restated as of October 1, 1998, among the Issuer, the Servicer, the Indenture Trustee and the Back-up Servicer (the "Specific Indenture Terms") and one or more Supplements, 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 6.03% Lease Backed Term Notes, Series 1998-A (the "1998-A Term Notes") in an aggregate principal amount of $40,768,556.80, issuable as provided in the Indenture. Lease Contracts are being acquired from Leasecomm Corporation pursuant to the Specific Terms and Conditions of Lease Acquisition dated as of November 1, 1994 and as amended and restated as of October 1, 1998, which incorporate by reference the Standard Terms and Conditions of Lease Acquisition, dated as of November 1, 1994, and an Assignment and Assumption Agreement dated as of October 1, 1998. The Series Lease Schedule for the Series 1998-A Term Notes is attached hereto as Schedule A and the Targeted Balance Schedule with respect to the 1998-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 1998-A Term Notes, which series is hereby designated as Term Notes: SECTION 1. DEFINITIONS. "Accrual Date": shall mean November 4, 1998. "Cut-off Date": shall mean with respect to the definitions of "Initial Series IPB" and "Term Note Funding Amount," September 30, 1998. "Delivery Date": shall mean November 4, 1998. "Initial Cash Deposit": $313,736.63. "Initial Payment Date": shall mean November 16, 1998. "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 2 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 and as further supplemented and amended pursuant to Second Supplement and Amendment to Insurance Agreement dated as of October 1, 1998, 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 6.03%. "Note Insurance Policy": shall mean MBIA Policy Number 27849. "Private Placement Memorandum" or "Final Private Placement Memorandum": shall refer to the Private Placement Memorandum dated November 4, 1998. "Stated Maturity": shall mean May 17, 2004. "Term Note Funding Amount": shall not exceed $40,768,556.80. "Transaction Documents Date": shall mean October 1, 1998 with respect to the 1998-A Term Note Supplement, the Indenture and the Insurance Agreement; with respect to the Note Insurance Policy with respect to the 1998-A Term Notes, "Transaction Documents Date" shall mean November 4, 1998; for all other purposes "Transaction Documents Date" shall mean November 1, 1994. "Trustee Fee Rate": shall mean with respect to the 1998-A Term Notes, 0.03% per annum. SECTION 2. ADDITIONAL AND MODIFIED TERMS. (a) During the period that the 1998-A Term Notes remain outstanding, the Issuer agrees to provide any Holder of the 1998-A Term Notes or any prospective purchaser of the 1998-A Term Notes such information as may be required pursuant to Rule 144A(d)(4) of the Rules and Regulations under the Act to render the 1998-A Term Notes eligible for resale pursuant to Rule 144A. (b) Notice is hereby given that effective as of July 30, 1998, Boyle Leasing Technologies, Inc. changed its name to MicroFinancial Incorporated. (c) The address of the Issuer and the Servicer referred to in Section 13.03(a),(c) and (d) of the Standard Indenture Terms shall be as follows: (i) if to the Issuer, at 950 Winter Street, Suite 4200A, Waltham, Massachusetts 02451 Attention: President; (ii) if to the Servicer, 950 Winter Street, Suite 4100, Waltham, Massachusetts 02451 Attention: President -2- 3 SECTION 3. CASH COLLATERAL ACCOUNT RELEASE. Notwithstanding any other provision of the Indenture, the Trustee is hereby directed to release $5,216,658.69 from the Cash Collateral Account to the Issuer on the Delivery Date in consideration for the pledge of an equivalent amount (by Aggregate IPB) of additional Lease Assets on such date. SECTION 4. PAYMENT OF PRINCIPAL AND INTEREST. Notwithstanding any other provision of the Indenture, the principal and interest on the 1998-A Term Notes shall be payable 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. SECTION 5. COUNTERPARTS. This Indenture Supplement may be executed in one or more counterparts all of which together shall constitute one original document. 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/ Richard F. Latour ---------------------------------------- Name: Richard F. Latour Title: Vice President MICROFINANCIAL INCORPORATED, as Servicer By: /s/ Richard F. Latour ---------------------------------------- Name: Richard F. Latour Title: Executive Vice President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Back-up Servicer By: /s/ Eileen R. O'Connor ---------------------------------------- Name: Eileen R. O'Connor Title: Corporate Trust Officer -3- 4 NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Indenture Trustee By: /s/ Eileen R. O'Connor ---------------------------------------- Name: Eileen R. O'Connor Title: Corporate Trust Officer -4- 5 SCHEDULE A SERIES 1998-A LEASE SCHEDULE In the possession of the Trustee 6 SCHEDULE B TARGETED BALANCE SCHEDULE SERIES 1998-A 7 SCHEDULE B BLT FINANCE CORP. III $40,768,446.80 6.03% LEASE-BACKED TERM NOTES, SERIES 1998-A TARGETED AMORTIZATION SCHEDULE
Beginning Principal Ending Month Number Payment Date Note Balance Payment Note Balance - ------------ ------------ ------------ ------- ------------ 1 16-Nov-98 40,768,556.80 1,029,329.98 39,739,226.81 2 16-Dec-98 39,739,226.81 1,036,529.55 38,702,697.27 3 16-Jan-99 38,702,697.27 1,044,366.10 37,658,331.16 4 16-Feb-99 37,658,331.16 1,138,100.84 36,520,230.32 5 16-Mar-99 36,520,230.32 1,237,650.12 35,282,580.20 6 16-Apr-99 35,282,580.20 1,048,660.60 34,233,919.60 7 16-May-99 34,233,919.60 1,035,951.94 33,197,967.65 8 16-Jun-99 33,197,967.65 1,039,246.41 32,158,721.25 9 16-Jul-99 32,158,721.25 1,042,341.06 31,116,380.19 10 16-Aug-99 31,116,380.19 1,047,219.11 30,069,161.08 11 16-Sep-99 30,069,161.08 1,058,013.36 29,011,147.71 12 16-Oct-99 29,011,147.71 967,355.42 28,043,792.30 13 16-Nov-99 28,043,792.30 1,176,276.78 26,867,515.51 14 16-Dec-99 26,867,515.51 1,082,423.16 25,785,092.35 15 16-Jan-2000 25,785,092.35 1,087,030.27 24,698,062.08 16 16-Feb-2000 24,698,062.08 752,782.34 23,945,279.74 17 16-Mar-2000 23,945,279.74 726,277.76 23,219,001.98 18 16-Apr-2000 23,219,001.98 784,582.48 22,434,419.51 19 16-May-2000 22,434,419.51 833,515.94 21,600,903.57 20 16-Jun-2000 21,600,903.57 877,572.93 20,723,330.64 21 16-Jul-2000 20,723,330.64 899,538.80 19,823,791.83 22 16-Aug-2000 19,823,791.83 937,897.59 18,885,894.24 23 16-Sep-2000 18,885,894.24 992,740.13 17,893,154.11 24 16-Oct-2000 17,893,154.11 2,141,434.37 15,751,719.74 25 16-Nov-2000 15,751,719.74 983,783.81 14,767,935.92 26 16-Dec-2000 14,767,935.92 1,490,808.91 13,277,127.01 27 16-Jan-2001 13,277,127.01 1,406,080.24 11,871,046.77 28 16-Feb-2001 11,871,046.77 1,317,184.19 10,553,862.58 29 16-Mar-2001 10,553,862.58 1,215,204.63 9,338,657.96 30 16-Apr-2001 9,338,657.96 1,304,443.48 8,034,214.48 31 16-May-2001 8,034,214.48 1,338,585.45 6,695,629.03 32 16-June-2001 6,695,629.03 1,209,614.24 5,486,014.78 33 16-Jul-2001 5,486,014.78 1,091,385.90 4,394,628.88 34 16-Aug-2001 4,394,628.88 972,555.19 3,422,073.69 35 16-Sep-2001 3,422,073.69 931,721.06 2,490,352.63 36 16-Oct-2001 2,490,352.63 888,681.17 1,601,671.46 37 16-Nov-2001 1,601,671.46 810,598.47 791,072.99 38 16-Dec-2001 791,072.99 733,786.12 57,286.87 39 16-Jan-2002 57,286.87 57,286.87 0.00
EX-10.22 7 SPECIMEN 1998-A NOTE 1 EXHIBIT 10.22 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. __ $ __________ CUSIP NO. ________________ BLT FINANCE CORP. III 6.03% LEASE-BACKED NOTE, SERIES 1998-A DELIVERY DATE: ___________ STATED MATURITY: May 17, 2004 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 principal sum of __________ DOLLARS ($_______) in monthly installments beginning on November 16, 1998, 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 November 16, 1998, 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 6.03% 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 2 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 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 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 6.03% Lease-Backed Notes, Series 1998-A Due May 17, 2004 (herein called the "Notes") issued and to be issued under the Second Amended and Restated Specific Terms and Conditions of Indenture dated as of November 1, 1994 and amended and restated as of October 1, 1998, and the Standard Terms and Conditions of Indenture dated November 1, 1994, appended thereto and incorporated therein (herein called the "Indenture"), among the Issuer, MicroFinancial Incorporated (formerly known as 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 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 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 2 3 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 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 3 4 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. STATEMENT OF INSURANCE OBLIGATIONS: $___________ POLICY NUMBER:_______ BLT Finance Corp. III Lease-Backed Notes, Series 1998-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 1998-A Term Notes, 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 1998-A Term Notes only such amount as is outstanding at the Stated Maturity applicable to such 1998-A Term Notes. 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 1998-A Term Notes 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 4 5 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 1998-A Term Notes 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 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 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 1998-A Term Notes 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 and Conditions of Indenture, dated as of November 1, 1994 and the Second Amended and Restated Specific Terms and Conditions of Indenture, dated as of November 1, 1994, and as amended and restated as of October 1, 1998, among BLT Finance Corp. III, as Issuer, Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee, and MicroFinancial Incorporated (formerly known as Boyle Leasing Technologies, Inc.), as Servicer, without regard to any amendment or supplement thereto (other than the Supplement to the Indenture for the 1996-A Term Notes, dated as of May 5 6 1, 1996, the Supplement to the Indenture for the 1997-A Term Notes, dated as of August 1, 1997 and the Supplement to the Indenture for the 1998-A Term Notes, dated as of October 1, 1998), 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 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 1998-A Term Notes 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 applicable to the 1998-A Term Notes, any shortfall in amounts available in the Collection Account to pay the Principal Distribution Amount for the 1998-A Term Notes 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) 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 (as defined in the Agreement) who, on the applicable Payment Date, is entitled under the terms of the applicable 1998-A Term Notes to payment thereunder. "Preference Amount" means any amount previously distributed to an Owner on the 1998-A Term 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 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. 6 7 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. 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 1998-A Term Notes. MBIA Insurance Corporation ******** 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. ******** 7 8 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 9 CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-mentioned Indenture. Dated: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: ----------------------------------------- Authorized Signatory EX-10.25 8 COMMERCIAL LEASE, DATED NOVEMBER 3, 1998 1 EXHIBIT 10.25 CUMMINGS PROPERTIES MANAGEMENT, INC. STANDARD FORM COMMERCIAL LEASE - 598331 - DJC - F In consideration of the covenants herein contained, Cummings Properties Management, Inc., hereinafter call LESSOR, does hereby lease to MicroFinancial Incorporated (a MA corp.), 950 Winter Street, Waltham, MA 02154 hereinafter called LESSEE, the following described premises, hereinafter called the leased premises: approximately 44,984 square feet at 10-M Commerce Way, Woburn, MA 01801 TO HAVE AND HOLD the leased premises for a term of five (5) years commencing at noon on December 15, 1998 and ending at noon on December 14, 2003 unless sooner terminated as herein provided. LESSOR and LESSEE now covenant and agree that the following terms and conditions shall govern this lease during the term hereof and for such further time as LESSEE shall hold the leased premises. 1. RENT. LESSEE shall pay to LESSOR base rent at the rate of six hundred eighty seven thousand seven hundred nineteen (687,719.00) U.S. dollars per year, drawn on a U.S. bank, payable in advance in monthly installments of $57,309.91 on the first day in each calendar month in advance, the first monthly payment to be made upon LESSEE's execution of this lease, including payment in advance of appropriate fractions of a monthly payment for any portion of a month at the commencement or end of said lease term. All payments shall be made to LESSOR or agent at 200 West Cummings Park, Woburn, Massachusetts 01801, or at such other place as LESSOR shall from time to time in writing designate. If the "Cost of Living" has increased or decreased as shown by the Consumer Price Index (Boston, Massachusetts, all items, all urban consumers), U.S. Bureau of Labor Statistics, the amount of base rent due during each calendar year of this lease and any extensions thereof shall be annually adjusted in proportion to any increase or decrease in the Index. All such adjustments shall take place with the rent due on January 1 of each year during the lease term except that the first such adjustment will take place with the rent due January 1, 2001. The base month from which to determine the amount of each increase or decrease in the Index shall be January 1999, which figure shall be compared with the figure for November 1999, and each November thereafter to determine the percentage increase or decrease (if any) in the base rent to be paid during the following calendar year. In the event that the Consumer Price Index as presently computed is discontinued as a measure of "Cost of Living" changes, any adjustment shall then be made on the basis of a comparable index then in general use. 2. SECURITY DEPOSIT. LESSEE shall pay to LESSOR a security deposit in the amount of sixty thousand (60,000) U.S. dollars upon the execution of this lease by LESSEE, which shall be held as security for LESSEE's performance as herein provided and refunded to LESSEE with interest at the simple interest rate of 4% per annum at the end of this lease, subject to LESSEE's satisfactory compliance with the conditions hereof. LESSEE may not apply the security deposit to payment of the last month's rent. In the event of any default or breach of this lease by LESSEE, LESSOR may immediately apply the security deposit to offset any outstanding invoice or other payment due to LESSOR, with the balance applied to outstanding rent. If all or any portion of the security deposit is applied to cure a default which has not been cured within 7 days 2 notice from LESSOR, or breach during the term of the lease, LESSEE shall be responsible for restoring said deposit forthwith, and failure to do so shall be considered a substantial default under the lease. LESSEE's failure to remit the full security deposit or any portion thereof when due shall also constitute a substantial lease default. Until such time as LESSEE pays the security deposit and first month's rent, LESSOR may declare this lease null and void for failure of consideration. 3. USE OF PREMISES. LESSEE shall use the leased premises only for the purpose of executive and administrative offices and equipment storage. 4. ADDITIONAL RENT. LESSEE shall pay to LESSOR as additional rent a proportionate share of 36.74% (based on square footage leased by LESSEE as compared with the total leaseable square footage of the building of which the leased premises are a part) of any increase in the real estate taxes levied against the land and building of which the leased premises are a part (hereinafter called the building ), whether such increase is caused by an increase in tax rate, or the assessment on the property, or a change in the method of determining real estate taxes. LESSEE shall make payment within thirty (30) days of written notice from LESSOR that such increased taxes are payable, and any additional rent shall be prorated should the lease terminate before the end of any tax year. The base from which to determine the amount of any increase in taxes shall be the rate and the assessment in effect as of July 1, 1998. See Paragraph K of the Rider to Lease. 5. UTILITIES. LESSOR shall provide equipment per LESSOR's building standard specifications to heat and cool the leased premises 12 months a year. LESSEE shall pay all charges for utilities used on the leased premises, including electricity, gas, oil, water and sewer. LESSEE shall pay the utility provider or LESSOR, as applicable, for all such utility charges as determined by separate meters serving the leased premises and/or as a proportionate share of the utility charges for the building if not separately metered. No plumbing, construction or electrical work of any type shall be done without LESSOR's prior written approval and LESSEE obtaining the appropriate municipal permit. 6. COMPLIANCE WITH LAWS. LESSEE and LESSOR acknowledge that no trade, occupation, activity or work shall be conducted in the leased premises or use made thereof which may be unlawful, improper, noisy, offensive, or contrary to any applicable statute, regulation, ordinance or bylaw. LESSEE shall keep all employees working in the leased premises covered by Worker's Compensation Insurance and shall obtain any licenses and permits necessary for full compliance with any applicable statute, regulation, ordinance or bylaw. 7. FIRE, CASUALTY, EMINENT DOMAIN. Should a substantial portion of the leased premises, or of the property of which they are a part, be substantially damaged by fire or other casualty, or be taken by eminent domain, LESSOR may elect to terminate this lease with 90 days written notice to LESSEE, and LESSEE has 90 days to vacate. When such fire, casualty, or taking renders the leased premises substantially unsuitable for their intended use, a just and proportionate abatement of rent shall be made, and LESSEE may elect to terminate this lease if: (a) LESSOR fails to give written notice within thirty (30) days of intention to restore the leased -2- 3 premises, or (b) LESSOR fails to restore the leased premises to a condition substantially suitable for their intended use within ninety (90) days of said fire, casualty or taking. LESSOR reserves all rights for damages or injury to the leased premises for any taking by eminent domain, except for damage to LESSEE's property or equipment. 8. FIRE INSURANCE. LESSEE shall not permit any use of the leased premises which will adversely affect or make voidable any insurance on the property of which the leased premises are a part, or on the contents of said property, or which shall be contrary to any law or regulation from time to time established by the Insurance Services Office (or successor), local Fire Department, LESSOR's insurer, or any similar body. LESSEE shall on demand reimburse LESSOR, and all other tenants, all extra insurance premiums caused by LESSEE's use of the leased premises. LESSEE shall not vacate the leased premises or permit same to be unoccupied other than during LESSEE's customary non-business days or hours, unless LESSEE continues to pay rent and otherwise comply with its obligations of the lease. 9. MAINTENANCE OF PREMISES. LESSOR will be responsible for all structural maintenance of the leased premises and for the normal daytime maintenance of all space heating and cooling equipment, sprinklers, doors, locks, plumbing, and electrical wiring, but specifically excluding damage caused by the careless, malicious, willful, or negligent acts of LESSEE or others, chemical, water or corrosion damage from any source except Lessor's negligence, and maintenance of any non "building standard" leasehold improvements. LESSEE agrees to maintain at its expense all other aspects of the leased premises in the same condition as they are at the commencement of the term or as they may be put in during the term of this lease, normal wear and tear and damage by fire or other casualty only excepted, and whenever necessary, to replace light bulbs, plate glass and other glass therein, acknowledging that the leased premises are now in good order and the light bulbs and glass whole. LESSEE will properly control or vent all solvents, degreasers, smoke, odors, etc. and shall not cause the area surrounding the leased premises to be in anything other than a neat and clean condition, depositing all waste in appropriate receptacles. LESSEE shall be solely responsible for any damage to plumbing equipment, sanitary lines, or any other portion of the building which results from the discharge or use of any acid or corrosive substance by LESSEE. LESSEE shall not permit the leased premises to be overloaded, damaged, stripped or defaced, nor suffer any waste, and will not keep animals within the leased premises. If the leased premises include any wooden mezzanine type space, the floor capacity of such space is suitable only for office use, light storage or assembly work. Unless heat is provided at LESSOR's expense, LESSEE shall maintain sufficient heat to prevent freezing of pipes or other damage. Any increase in air conditioning equipment or electrical capacity or any installation or maintenance of equipment which is necessitated by some specific aspect of LESSEE's use of the leased premises shall be LESSEE's sole responsibility, at LESSEE's expense and subject to LESSOR's prior written consent. All maintenance provided by LESSOR shall be during LESSOR's normal business hours, within a reasonable time after notice by LESSEE. 10. ALTERATIONS. LESSEE shall not make structural alterations or additions of any kind to the leased premises, but may make nonstructural alterations provided LESSOR consents thereto in writing. All such allowed alterations shall be at LESSEE's expense and shall conform -3- 4 with LESSOR's construction specifications. If LESSOR or LESSOR's agent provides any services or maintenance for LESSEE in connection with such alterations or otherwise under this lease, any just invoice will be promptly paid. LESSEE shall not permit any mechanics' liens, or similar liens, to remain upon the leased premises in connection with work of any character performed or claimed to have been performed at the direction of LESSEE and shall cause any such lien to be released or removed forthwith without cost to LESSOR. Any alterations or additions shall become part of the leased premises and the property of LESSOR. Any alterations completed by LESSOR or LESSEE shall be LESSOR's "building standard" unless noted otherwise. LESSOR shall have the right at any time to change the arrangement of parking areas, stairs, walkways or other common areas of the building, provided such changes do not materially interfere with LESSEE's use of the leased premises. 11. ASSIGNMENT OR SUBLEASING. LESSEE shall not assign this lease or sublet or allow any other firm or individual to occupy the whole or any part of the leased premises without LESSOR's prior written consent. Notwithstanding such assignment or subleasing, LESSEE and GUARANTOR shall remain liable to LESSOR for the payment of all rent and for the full performance of the covenants and conditions of this lease. LESSEE shall pay LESSOR promptly for reasonable legal and administrative expenses incurred by LESSOR in connection with any consent requested hereunder by LESSEE. 12. SUBORDINATION. This lease shall be subject and subordinate to any and all mortgages and other instruments in the nature of a mortgage, now or at any time hereafter, and LESSEE shall, when requested, promptly execute and deliver such written instruments as shall be necessary to show the subordination of this lease to said mortgages or other such instruments in the nature of a mortgage. 13. LESSOR'S ACCESS. LESSOR or agents of LESSOR may at any reasonable time upon reasonable notice except in the case of an emergency enter to view the leased premises, to make repairs and alterations as LESSOR should elect to do for the leased premises, the common areas or any other portions of the building, to make repairs which LESSEE is required but has failed to do, and to show the leased premises to others. LESSOR may only show the leased premises to prospective lessees within the last 12 months of the lease term. 14. SNOW REMOVAL. The plowing of snow from all roadways and unobstructed parking areas shall be at the sole expense of LESSOR. The control of snow and ice on all walkways, steps and loading areas serving the leased premises and all other areas not readily accessible to plows shall be the sole responsibility of LESSOR. Notwithstanding the foregoing, however, LESSEE shall hold LESSOR and OWNER harmless from any and all claims by LESSEE's agents, representatives, employees, callers or invitees for damage or personal injury resulting in any way from snow or ice on any area serving the leased premises, except for claims arising out of LESSOR's negligence. 15. ACCESS AND PARKING. LESSEE shall have the right without additional charge to use parking facilities provided for the leased premises in common with others entitled to the use thereof. Said parking areas plus any stairs, corridors, walkways, elevators or other common -4- 5 areas (hereinafter collectively called the common areas) shall in all cases be considered a part of the leased premises when they are used by LESSEE or LESSEE's employees, agents, callers or invitees. LESSEE will not obstruct in any manner any portion of the building or the walkways or approaches to the building, and will conform to all rules and regulations now or hereafter made by LESSOR for parking, and for the care, use, or alteration of the building, its facilities and approaches. LESSEE further warrants that LESSEE will not permit any employee or visitor to violate this or any other covenant or obligation of LESSEE. No unattended parking will be permitted between 7:00 PM and 7:00 AM without LESSOR's prior written approval, and from December 1 through March 31 annually, such parking shall be permitted only in those areas specifically designated for assigned overnight parking. Unregistered or disabled vehicles, or storage trailers of any type, may not be parked at any time. LESSOR may tow, at LESSEE's sole risk and expense, any misparked vehicle belonging to LESSEE or LESSEE's agents, employees, invitees or callers, at any time. LESSOR shall not be responsible for providing any security services for the leased premises. 16. LIABILITY. LESSEE shall be solely responsible as between LESSOR and LESSEE for deaths or personal injuries to all persons whomsoever occurring in or on the leased premises (including any common areas that are considered part of the leased premises hereunder) from whatever cause arising, and damage to property to whomsoever belonging arising out of the use, control, condition or occupation of the leased premises by LESSEE; and LESSEE agrees to indemnify and save harmless LESSOR and OWNER from any and all liability, including but not limited to costs, expenses, damages, causes of action, claims, judgments and attorney's fees caused by or in any way growing out of any matters aforesaid, except for death, personal injuries or property damage directly resulting from the sole negligence of LESSOR, except for personal injuries to LESSOR's employees that are covered by LESSOR's worker's compensation insurance and that do not arise out of LESSEE's negligence in any way. 17. INSURANCE. LESSEE will secure and carry at its own expense a commercial general liability policy insuring LESSEE, LESSOR and OWNER against any claims based on bodily injury (including death) or property damage arising out of the condition of the leased premises (including any common areas that are considered part of the leased premises hereunder) or their use by LESSEE, such policy to insure LESSEE, LESSOR and OWNER against any claim up to One Million (1,000,000) Dollars in the case of any one accident involving bodily injury (including death), and up to One Million (1,000,000) Dollars against any claim for damage to property. LESSOR and OWNER shall be included in each such policy as additional insureds using ISO Form CG 20 26 11 85 or some other form approved by LESSOR. LESSEE will file with LESSOR prior to occupancy certificates and any applicable riders or endorsements showing that such insurance is in force, and thereafter will file renewal certificates prior to the expiration of any such policies. All such insurance certificates shall provide that such policies shall not be cancelled without at least ten (10) days prior written notice to each insured. In the event LESSEE shall fail to provide or maintain such insurance at any time during the term of this lease, then LESSOR may elect to contract for such insurance at LESSEE's expense. 18. SIGNS. LESSOR authorizes, and LESSEE at LESSEE's expense agrees to erect promptly upon commencement of this lease, signage for the leased premises in accordance with -5- 6 LESSOR's building standards for style, size, location, etc. LESSEE shall obtain the prior written consent of LESSOR before erecting any sign on the leased premises, which consent shall include approval as to size, wording, design and location. LESSOR may remove and dispose of any sign not approved, erected or displayed in conformance with this lease. 19. BROKERAGE. LESSEE warrants and represents to LESSOR that LESSEE has dealt with no broker or third person with respect to this lease except for Brian Hines of Fallon, Hines & O'Connor, Inc., and LESSEE agrees to indemnify LESSOR against any brokerage claims arising by virtue of this lease. LESSOR warrants and represents to LESSEE that LESSOR has employed no exclusive broker or agent in connection with the letting of the leased premises. 20. DEFAULT AND ACCELERATION OF RENT. In the event that: (a) any assignment for the benefit of creditors, trust mortgage, receivership or other insolvency proceeding shall be made or instituted with respect to LESSEE or LESSEE's property; (b) LESSEE shall default in the observance or performance of any of LESSEE's covenants, agreements, or obligations hereunder, other than substantial monetary payments as provided below, and such default shall not be corrected within ten (10) days after written notice thereof; or (c) LESSEE vacates the leased premises without continuing to pay rent, then LESSOR shall have the right thereafter, while such default continues and without demand or further notice, to re-enter and take possession of the leased premises, to declare the term of this lease ended, and to remove LESSEE's effects, without being guilty of any manner of trespass, and without prejudice to any remedies which might be otherwise used for arrears of rent or other default or breach of the lease. If LESSEE shall default in the payment of the security deposit, rent, taxes, substantial invoice from LESSOR or LESSOR's agent for goods and/or services or other sum herein specified, and such default shall continue for ten (10) days after written notice thereof, and, because both parties agree that nonpayment of said sums when due is a substantial breach of the lease, and, because the payment of rent in monthly installments is for the sole benefit and convenience of LESSEE, then in addition to the foregoing remedies the entire balance of rent which is due hereunder shall become immediately due and payable as liquidated damages. LESSOR, without being under any obligation to do so and without thereby waiving any default, may remedy same for the account and at the expense of LESSEE. If LESSOR pays or incurs any obligations for the payment of money in connection therewith, such sums paid or obligations incurred plus interest and costs, shall be paid to LESSOR by LESSEE as additional rent. Any sums received by LESSOR from or on behalf of LESSEE at any time shall be applied first to any unamortized improvements completed for LESSEE's occupancy, then to offset any outstanding invoice or other payment due to LESSOR, with the balance applied to outstanding rent. LESSEE agrees to pay reasonable attorney's fees and/or administrative costs incurred by LESSOR in enforcing any or all obligations of LESSEE under this lease at any time. LESSEE shall pay LESSOR interest at the rate of eighteen (18) percent per annum on any payment from LESSEE to LESSOR which is past due. 21. NOTICE. Any notice from LESSOR to LESSEE relating to the leased premises or to the occupancy thereof shall be deemed duly served when left at the leased premises addressed to LESSEE, or served by constable, and sent to the leased premises by certified mail, return receipt requested, postage prepaid, addressed to LESSEE, Attention: Chief Executive Officer. Any -6- 7 notice from LESSEE to LESSOR relating to the leased premises or to the occupancy thereof shall be deemed duly served when served by constable, or delivered to LESSOR by certified mail, return receipt requested, postage prepaid, addressed to LESSOR at 200 West Cummings Park, Woburn, MA 01801 or at LESSOR's last designated address. No oral notice or representation shall have any force or effect. Time is of the essence in the service of any notice. 22. OCCUPANCY. In the event that LESSEE takes possession of said leased premises prior to the start of the lease term, LESSEE will perform and observe all of LESSEE's covenants from the date upon which LESSEE takes possession except the obligation for the payment of extra rent for any period of less than one month. LESSEE shall not remove LESSEE's goods or property from the leased premises other than in the ordinary and usual course of business without continuing to pay rent or, without having first paid and satisfied LESSOR for all rent which may become due during the entire term of this lease. In the event that LESSEE continues to occupy or control all or any part of the leased premises after the agreed termination of this lease without the written permission of LESSOR, then LESSEE shall be liable to LESSOR for any and all loss, damages or expenses incurred by LESSOR, and all other terms of this lease shall continue to apply except that rent shall be due in full monthly installments at a rate of one hundred fifty (150) percent of that which would otherwise be due under this lease, it being understood between the parties that such extended occupancy is as a tenant at sufferance and is solely for the benefit and convenience of LESSEE and as such has greater rental value. LESSEE's control or occupancy of all or any part of the leased premises beyond noon on the last day of any monthly rental period shall constitute LESSEE's occupancy for an entire additional month, and increased rent as provided in this section shall be due and payable immediately in advance. LESSOR's acceptance of any payments from LESSEE during such extended occupancy shall not alter LESSEE's status as a tenant at sufferance. 23. FIRE PREVENTION. LESSEE agrees to use every reasonable precaution against fire and agrees to provide and maintain approved, labeled fire extinguishers, and complete any other modifications within the leased premises as required or recommended by the Insurance Services Office (or successor organization), OSHA, the local Fire Department, or any similar body. 24. OUTSIDE AREA. Any goods, equipment, or things of any type or description held or stored in any common area without LESSOR's prior written consent shall be deemed abandoned and may be removed by LESSOR at LESSEE's expense without notice. LESSEE shall maintain a building standard size dumpster in a location approved by LESSOR, which dumpster shall be provided and serviced at LESSEE's expense by whichever disposal firm may from time to time be designated by LESSOR. Alternatively, if a shared dumpster or compactor is provided by LESSOR, LESSEE shall pay its proportionate share of any costs associated therewith. 25. ENVIRONMENT. LESSEE will so conduct and operate the leased premises as not to interfere in any way with the use and enjoyment of other portions of the same or neighboring buildings by others by reason of odors, smoke, exhaust, smells, noise, pets, accumulation of garbage or trash, vermin or other pests, or otherwise, and will as its expense employ a professional pest control service if necessary. LESSEE agrees to maintain efficient and effective devices for preventing damage to heating equipment from solvents, degreasers, cutting oils, -7- 8 propellants, etc. which may be present at the leased premises. No hazardous materials or wastes shall be stored, disposed of, or allowed to remain at the leased premises at any time, and LESSEE shall be solely responsible for any and all corrosion or other damage associated with the use, storage and/or disposal of same by LESSEE. 26. RESPONSIBILITY. Subject to Section 16 and 17 above neither LESSOR nor OWNER shall be held liable to anyone for loss or damage caused in any way by the use, leakage, seepage or escape of water from any source, or for the cessation of any service rendered customarily to said premises or buildings, or agreed to by the terms of this lease, due to any accident, the making of repairs, alterations or improvements, labor difficulties, weather conditions, mechanical breakdowns, trouble or scarcity in obtaining fuel, electricity, service or supplies form the sources from which they are usually obtained for said building, or any cause beyond LESSOR's immediate control. 27. SURRENDER. LESSEE shall at the termination of this lease remove all of LESSEE's goods and effects from the leased premises. LESSEE shall deliver to LESSOR the leased premises and all keys and locks thereto, all fixtures and equipment connected therewith, and all alterations, additions and improvements made to or upon the leased premises, whether completed by LESSEE, LESSOR or others, including but not limited to any offices, partitions, window blinds, floor coverings (including computer floors), plumbing and plumbing fixtures, air conditioning equipment and ductwork of any type, exhaust fans or heaters, burglar alarms, telephone wiring, air or gas distribution piping, compressors, overhead cranes, hoists, trolleys or conveyors, counters, shelving or signs attached to walls or floors, all electrical work, including but not limited to lighting fixtures of any type, wiring, conduit, EMT, transformers, distribution panels, bus ducts, raceways, outlets and disconnects, and furnishings or equipment except raised computer floor, uninterrupted power supply and related equipment which have been bolted, welded, nailed, screwed, glued or otherwise attached to any wall, floor, ceiling, roof, pavement or ground, or which have been directly wired to any portion of the electrical system or which have been plumbed to the water supply, drainage or venting systems serving the leased premises. LESSEE shall deliver the leased premises sanitized from any chemicals or other contaminants, and broom clean and in the same condition as they were at the commencement of this lease or any prior lease between the parties for the leased premises, or as they were modified during said term with LESSOR's written consent, reasonable wear and tear and damage by fire or other casualty only excepted. In the event of LESSEE's failure to remove any of LESSEE's property from the leased premises upon termination of the lease, LESSOR is hereby authorized, without liability to LESSEE for loss or damage thereto, and at the sole risk of LESSEE, to remove and store any such property at LESSEE's expense, or to retain same under LESSOR's control, or to sell at public or private sale (without notice), any or all of the property not so removed and to apply the net proceeds of such sale to the payment of any sum due hereunder, or to destroy such abandoned property. In no case shall the leased premises be deemed surrendered to LESSOR until the termination date provided herein or such other date as may be specified in a written agreement between the parties, notwithstanding the delivery of any keys to LESSOR. 28. GENERAL. (a) The invalidity or unenforceability of any provision of this lease shall not affect or render invalid or unenforceable any other provision hereof. (b) The obligations of -8- 9 this lease shall run with the land, and this lease shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that LESSOR and OWNER shall be liable only for obligations occurring while lessor, owner, or master lessee of the premises. (c) Any action or proceeding arising out of the subject matter of this lease shall be brought by LESSEE within one year after the cause of action has occurred and only in a court of the Commonwealth of Massachusetts. (d) If LESSOR is acting under or as agent for any trust or corporation, the obligations of LESSOR shall be binding upon the trust or corporation, but not upon any trustee, officer, director, shareholder, or beneficiary of the trust or corporation individually. (e) If LESSOR is not the owner (OWNER) of the leased premises, LESSOR represents that said OWNER has agreed to be bound by the terms of this lease unless LESSEE is in default hereof. (f) This lease is made and delivered in the Commonwealth of Massachusetts, and shall be interpreted, construed, and enforced in accordance with the laws thereof. (g) This lease was the result of negotiations between parties of equal bargaining strength, and when executed by both parties shall constitute the entire agreement between the parties, superseding all prior oral and written agreements, representations, statements and negotiations relating in any way to the subject matter herein. This lease may not be extended or amended except by written agreement signed by both parties or as otherwise provided herein, and no other subsequent oral or written representation shall have any effect hereon. (h) Notwithstanding any other statements herein, LESSOR makes no warranty, express or implied, concerning the suitability of the leased premises for LESSEE's intended use. (i) LESSEE agrees that if LESSOR does not deliver possession of the leased premises as herein provided for any reason, LESSOR shall not be liable for any damages to LESSEE for such failure, but LESSOR agrees to use reasonable efforts to deliver possession to LESSEE at the earliest possible date. A proportionate abatement of rent, excluding the cost of any amortized improvements to the leased premises, for such time as LESSEE may be deprived of possession of the leased premises, except where a delay in delivery is caused in any way by LESSEE, shall be LESSEE's sole remedy. (j) Neither the submission of this lease form, nor the prospective acceptance of the security deposit and/or rent shall constitute a reservation of or option for the leased premises, or an offer to lease, it being expressly understood and agreed that this lease shall not bind either party in any manner whatsoever until it has been executed by both parties. (k) LESSEE shall not be entitled to exercise any option contained herein if LESSEE is at that time in default of any terms or conditions hereof. (l) Except as otherwise provided herein, LESSOR, OWNER and LESSEE shall not be liable for any special, incidental, indirect or consequential damages, including but not limited to lost profits or loss of business, arising out of or in any manner connected with performance or nonperformance under this lease, even if any party has knowledge of the possibility of such damages. (m) The headings in this lease are for convenience only and shall not be considered part of the terms hereof. (n) No endorsement by LESSEE on any check shall bind LESSOR in any way. (o) LESSOR and LESSEE hereby waive any and all rights to a jury trial in any proceeding in any way arising out of this lease. 29. Removed. 30. WAIVERS, ETC. No consent or waiver, express or implied, by LESSOR, to or of any breach of any covenant, condition or duty of LESSEE shall be construed as a consent or waiver to or of any other breach of the same or any other covenant, condition or duty. If LESSEE is -9- 10 several persons, several corporations or a partnership, LESSEE's obligations are joint or partnership and also several. Unless repugnant to the context, "LESSOR" and "LESSEE" mean the person or persons, natural or corporate, named above as LESSOR and as LESSEE respectively, and their respective heirs, executors, administrators, successors and assigns. 31. Removed. 32. ADDITIONAL PROVISIONS. (Continued on attached rider(s) if necessary.) - See Attached Rider - IN WITNESS WHEREOF, LESSOR and LESSEE have hereunto set their hands and common seals and intend to be legally bound hereby this 3rd day of November, 1998. LESSOR: CUMMINGS PROPERTIES LESSEE: MICROFINANCIAL INCORPORATED MANAGEMENT, INC. By: /s/ Douglas Stephens By: /s/ Richard F. Latour ------------------------------- ------------------------ Douglas Stephens, Richard F. Latour, Executive Vice President Executive Vice President, Chief Operating Officer and Chief Financial Officer -10- 11 [Floor Plan of Leased Premises] -11- 12 CUMMINGS PROPERTIES MANAGEMENT, INC. STANDARD FORM RIDER TO LEASE The following additional provisions are incorporated into and made a part of the attached lease: A. Upon full execution of the lease, LESSOR shall credit LESSEE's previously forfeited deposit of $13,408.69 toward the security deposit. B. LESSOR, at LESSOR's cost, shall modify the leased premises according to a mutually agreed upon plan and specifications attached hereto within 45 days after full execution of the lease, plan and specifications, and full payment of the security deposit and December 1998 rent. Said modifications shall include installation of 2 x 4 Armstrong "second look" ceiling tiles, parabolic lighting, LESSOR's upgraded level loop carpet, "Aladdin Marquis" and vinyl composition tile where specified. If for any reason other than delay requested or caused by LESSEE (which shall include without limitation any additions and/or changes requested by LESSEE to the scope of LESSOR's work and any interference by LESSEE or LESSEE's contractor with LESSOR's work) LESSOR does not substantially complete, except for punch list items, the leased premises within said 45-day period, LESSEE shall then be entitled to a proportionate abatement of rent (if said 45-day period ends on or after December 1, 1998) on a per diem basis for any unfinished area (only) until LESSOR substantially completes its work in that area. C. *The leased premises consists of approximately 44,369 square feet of ground level space and approximately 615 square feet of mezzanine level light storage space. D. *Provided LESSEE is not then in default of this lease or in arrears of any rent or invoice payment, LESSEE shall have the right to extend this lease, including all terms, conditions, escalations, etc., for one additional period of five (5) years ("the extended lease term") by serving LESSOR with written notice of its desire to so extend the lease. The time for serving such written notice shall be not more than 12 months or less than 6 months prior to the expiration of the initial lease term. Time is of the essence. E. Notwithstanding the provisions of Section 1, annual base rent during the extended lease term shall be recalculated at 95% of LESSOR's published annual rent rate as of the commencement of the extended lease term for similar space. The base month from which to determine the amount of each "Cost of Living" adjustment during the extended lease term shall be changed to January 2003, the "comparison" month shall be changed to November 2003 and the first adjustment during the extended lease term shall take place with the rent due on January 1, 2004. Section 1 shall continue to apply in all other respects during the extended lease term. F. The base from which to determine the amount of any increase in taxes during the extended lease term shall be the rate and assessment in effect as of July 1, 2003. -12- 13 G. *The parties acknowledge and agree that, as of the execution of this lease, the leased premises have not been demised. Accordingly, upon completion of the modifications provided for herein, LESSOR shall carefully measure the entire leased premises, and if the size including common area does not equal the total number of square feet set forth in the initial paragraph of this lease, LESSOR shall notify LESSEE in writing of the actual revised square footage and the corresponding increase or decrease in rent, based on the same rate per square foot used in this lease. H. *Whenever LESSOR's or LESSEE's consent, agreement or approval is required under this lease, said consent, agreement or approval shall not be unreasonably withheld or delayed. I. LESSEE acknowledges that a Notice of Activity and Use Limitation concerning this property limiting residential uses, outdoor play areas and underground excavation is on record at the Middlesex South Registry of Deeds, Book 26901, Page 293. J. *During the initial term of this lease, LESSEE shall have the one-time right of first lease of approximately 18,462 square feet of additional space at 10-I Commerce Way, Woburn, Massachusetts, at LESSOR's then current published rental rate for said space as it becomes available for lease directly from LESSOR, subject to the right of the current lessee (if any) to extend or otherwise renegotiate its lease. LESSEE shall have five (5) days from receipt of notice from LESSOR of said availability to execute LESSOR's then current standard form lease or amendment to lease for said additional space. If LESSOR fails to notify LESSEE of the availability of said space and leases said space to others, and if LESSEE notifies LESSOR of its desire to lease said space and immediately executes LESSOR's then current standard form lease for said space, LESSOR shall then have 60 days to relocate the other party. If LESSOR fails to relocate the other party within 60 days and execute the new lease or amendment to lease with LESSEE, then LESSEE may elect, by serving LESSOR written notice within 30 days after expiration of the relocation period, either (1) to cancel this lease without penalty or (2) to occupy a similar amount of additional space on a no-charge basis until such time as LESSOR delivers possession of 10-I Commerce Way. This election of remedies shall be LESSEE's exclusive remedy for any failure by LESSOR to deliver possession of 10-I Commerce Way or any breach by LESSOR of the provisions of this paragraph. Time is of the essence. K. If the real estate taxes on the land, the building or the property are abated at any time for any year with respect to which LESSEE has paid a share of such real estate taxes, LESSOR upon receipt of the abatement shall refund to LESSEE, LESSEE's proportionate share of the net proceeds of such abatement (the amount of such abatement less all costs incurred by LESSOR to obtain the same), but in no event more than the amount paid by LESSEE for such real estate taxes for the year for which such abatement was granted. Notwithstanding anything to the contrary in Section 4 of the lease, LESSOR shall pay and shall itself bear all real estate taxes attributable to any -13- 14 improvements made to the land, building or the property after the date hereof, and such real estate taxes attributable to any improvements shall not be included in real estate taxes for the purposes of calculations under said Section 4. L. LESSEE may use up to a total of 175 unassigned parking spaces in common with others at any one time in the parking lot serving the building for LESSEE's employees, agents, contractors, visitors and other business invitees. LESSEE agrees that its employees, agents and contractors, other than mobility impaired individuals, shall use only the parking area located on the north side of the building. The parking area located on the south side of the building may be used only by LESSEE's visitors, other business invitees and all mobility impaired individuals. M. Notwithstanding language to the contrary in Section 9 above, LESSOR, at LESSOR's expense, shall repair or replace any building components damaged by any roof leak not caused directly or indirectly by LESSEE or its agents. N. *LESSEE's agreement to subordinate this lease to any and all mortgages and/or other instruments in the nature of a mortgage, now or at any time in the future, is conditional upon the mortgagee's agreement that LESSEE's possession will not be disturbed so long as LESSEE is not in default in the payment of rent or other covenants or obligations hereof. O. *LESSEE may install and maintain at LESSEE's sole expense an illuminated exterior sign on the south face of the building in a location to be designated by LESSOR and in compliance with any and all ordinances, bylaws, and state and local building codes. In addition, prior to commencement of installation, LESSEE shall obtain all necessary permits and LESSOR's written consent as to size, graphics, construction, etc. P. LESSOR authorizes LESSEE, at LESSEE's sole expense, to use one double-faced panel of the lighted cluster sign in the landscaped area on Commerce Way as shown as Panel A on the attached plan. LESSEE shall supply and install the sign panels at LESSEE's sole expense, with LESSOR's prior written approval as to content, materials, colors and graphics. LESSEE shall also be responsible for a proportionate share of the charge for any repairs to said sign and for obtaining any necessary permits, licenses and government approvals in connection with the sign (other than the initial building permit). LESSEE shall also pay for LESSEE's ongoing use of said sign and for LESSEE's share of cleaning charges for said sign. LESSOR may elect to terminate LESSEE's use of said sign for any reason or no reason at all by serving LESSEE with 15 days prior written notice to that effect at any time during the term of this lease. LESSOR shall have the right to relocate LESSEE's sign panels within the same cluster sign at any time during the term of this lease. Q. *With respect to any condition existing prior to the commencement of LESSEE's occupancy under this lease, LESSOR shall hold LESSEE harmless from any and all suits, judgments, or liabilities, for any "release," as defined in Section 101(22) of the -14- 15 Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), of any "hazardous substance" as defined in Section 101(14) of CERCLA, or any petroleum (including crude oil or any fraction thereof) as a result of any activity on the property of which the leased premises are a part occurring prior to LESSEE's occupancy and not caused by LESSEE. R. LESSOR hereby authorizes LESSEE, at LESSEE's sole cost and expense, to install one backup generator in a location to be designated by LESSOR. S. The HVAC equipment used within the leased premises consists of four (4) 25-ton Carrier units model #SOEQ028610DC and eight (8) 300,000 BTU Reznor in line duct furnaces with sealed combustion. LESSOR: CUMMINGS PROPERTIES LESSEE: MICROFINANCIAL, INC. MANAGEMENT, INC. By: /s/ Douglas Stephens By: /s/ Richard F. Latour ------------------------------- ------------------------ Douglas Stephens, Richard F. Latour, Executive Vice President Executive Vice President, Chief Operating Officer and Chief Financial Officer Date: November 3, 1998 -15- EX-10.26 9 AMENDMENT TO LEASE #1, DATED NOVEMBER 3, 1998 1 EXHIBIT 10.26 CUMMINGS PROPERTIES MANAGEMENT, INC. STANDARD FORM AMENDMENT TO LEASE #1 In connection with a lease currently in effect between the parties at 10-M Commerce Way, Woburn, Massachusetts, commencing on December 15, 1998 and terminating December 14, 2003, and in consideration of the mutual benefits to be derived herefrom, Cummings Properties Management, Inc., LESSOR, and MicroFinancial, Inc., LESSEE, hereby agree to amend said lease as follows: 1. Paragraph G of the Rider to Lease is hereby deleted. 2. LESSOR and LESSEE agree that, as a result of LESSEE's remeasuring the leased premises, the size of the leased premises is hereby reduced by 325 square feet to a new total of 44,659 square feet. This change affects the size of the ground level (only), and not the mezzanine level space, as set forth in Paragraph C of the Rider to Lease. All other terms, conditions and covenants of the present lease shall continue to apply except that adjusted base rent shall be decreased by $2,526.50 annually, from a total of $687,719.00 to a new annual total of $685,192.50 or $57,099.37 per month. Annual base rent for purposes of computing any future escalations thereon shall be $685,192.50. This amendment shall be effective December 15, 1998 and shall continue through the balance of the lease and any extensions thereof unless further modified by written amendment(s). In Witness Whereof, LESSOR and LESSEE have hereunto set their hands and common seals this 3rd day of November, 1998. LESSOR: CUMMINGS PROPERTIES LESSEE: MICROFINANCIAL, INC. MANAGEMENT, INC. By: /s/ Douglas Stephens By: /s/ Richard F. Latour ------------------------------ ------------------------ Douglas Stephens, Richard F. Latour, Executive Vice President Executive Vice President, Chief Operating Officer and Chief Financial Officer EX-10.27 10 EMPLOYMENT AGREEMENT WITH J.GREGORY HINES 1 Exhibit 10.27 EMPLOYMENT AGREEMENT AGREEMENT by and between Boyle Leasing Technologies, Inc., a Massachusetts corporation, and its subsidiaries (the "Company"), and Gregory Hines (the "Executive"), dated as of the 26th day of September, 1997 (this "Agreement"). The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Section 2) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of such date. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; 2 (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) 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, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Employment Period"); provided, however, that the Employment Period shall be automatically extended upon its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, -2- 3 to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Special Bonus. In addition to Annual Base Salary and Annual Bonus payable as hereinabove provided, if the Executive remains employed with the Company and its affiliated companies to the first anniversary of the Effective Date, the Company shall pay to the Executive a special bonus (the "Special Bonus") in recognition of the Executive's services during the crucial one-year transition period following the Change of Control in cash in the amount of $575,000. The Special Bonus shall be paid no later than 30 days following the first anniversary of the Effective Date. (iv) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, -3- 4 practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (vi) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. -4- 5 (ix) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; -5- 6 (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: -6- 7 (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the Special Bonus, due to the Executive pursuant to Section 4(b)(iii) of this Agreement, to the extent not theretofore paid and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) of this Section 6(a)(i) shall be hereinafter referred to as the "Severance Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal -7- 8 Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for (i) the Severance Amount and the timely payment or provision of Other Benefits if the Executive fulfills the criteria set forth in Section 4(b)(iii); and (ii) the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). 7. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. -8- 9 8. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. -9- 10 (b) Subject to the provisions of Section 9(c) of this Agreement, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand L.L.P. (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) of this Agreement and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and -10- 11 (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, -11- 12 without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Gregory Hines c/o Boyle Leasing Technologies, Inc. 950 Winter Street Waltham, MA 02154 If to the Company: -12- 13 Boyle Leasing Technologies, Inc. 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, Executive Vice President, Chief Financial Officer, Chief Operating Officer With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Gregory Hines ----------------------------------- Gregory Hines -13- 14 Boyle Leasing Technologies, Inc. By: /s/ Peter Bleyleben -------------------------------- Its: President ---------------------------- -14- EX-10.28 11 EMPLOYMENT AGREEMENT WITH JOHN PLUMLEE 1 Exhibit 10.28 EMPLOYMENT AGREEMENT AGREEMENT by and between Boyle Leasing Technologies, Inc., a Massachusetts corporation, and its subsidiaries (the "Company"), and John Plumlee (the "Executive"), dated as of the 26th day of September, 1997 (this "Agreement"). The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Section 2) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of such date. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; 2 (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) 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, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Employment Period"); provided, however, that the Employment Period shall be automatically extended upon its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, -2- 3 to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Special Bonus. In addition to Annual Base Salary and Annual Bonus payable as hereinabove provided, if the Executive remains employed with the Company and its affiliated companies to the first anniversary of the Effective Date, the Company shall pay to the Executive a special bonus (the "Special Bonus") in recognition of the Executive's services during the crucial one-year transition period following the Change of Control in cash in the amount of $600,000. The Special Bonus shall be paid no later than 30 days following the first anniversary of the Effective Date. (iv) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, -3- 4 practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (vi) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. -4- 5 (ix) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; -5- 6 (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: -6- 7 (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the Special Bonus, due to the Executive pursuant to Section 4(b)(iii) of this Agreement, to the extent not theretofore paid and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) of this Section 6(a)(i) shall be hereinafter referred to as the "Severance Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal -7- 8 Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for (i) the Severance Amount and the timely payment or provision of Other Benefits if the Executive fulfills the criteria set forth in Section 4(b)(iii); and (ii) the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). 7. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. -8- 9 8. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. -9- 10 (b) Subject to the provisions of Section 9(c) of this Agreement, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand L.L.P. (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) of this Agreement and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and -10- 11 (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, -11- 12 without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: John Plumlee c/o Boyle Leasing Technologies, Inc. 950 Winter Street Waltham, MA 02154 If to the Company: -12- 13 Boyle Leasing Technologies, Inc. 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, Executive Vice President, Chief Financial Officer, Chief Operating Officer With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ John Plumlee ----------------------------------- John Plumlee -13- 14 Boyle Leasing Technologies, Inc. By: /s/ Peter Bleyleben -------------------------------- Its: President ---------------------------- -14- EX-10.29 12 EMPLOYMENT AGREEMENT WITH CAROL SALVO 1 Exhibit 10.29 EMPLOYMENT AGREEMENT AGREEMENT by and between Boyle Leasing Technologies, Inc., a Massachusetts corporation, and its subsidiaries (the "Company"), and Carol Salvo (the "Executive"), dated as of the 26th day of September, 1997 (this "Agreement"). The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined in Section 2) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of such date. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; 2 (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) 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, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Employment Period"); provided, however, that the Employment Period shall be automatically extended upon its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment. (a) Position and Duties. (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, -2- 3 to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Special Bonus. In addition to Annual Base Salary and Annual Bonus payable as hereinabove provided, if the Executive remains employed with the Company and its affiliated companies to the first anniversary of the Effective Date, the Company shall pay to the Executive a special bonus (the "Special Bonus") in recognition of the Executive's services during the crucial one-year transition period following the Change of Control in cash in the amount of $585,000. The Special Bonus shall be paid no later than 30 days following the first anniversary of the Effective Date. (iv) Incentive, Savings and Retirement Plans. During the Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, -3- 4 practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Welfare Benefit Plans. During the Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (vi) Expenses. During the Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Fringe Benefits. During the Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Office and Support Staff. During the Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. -4- 5 (ix) Vacation. During the Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; -5- 6 (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination. (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: -6- 7 (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the Special Bonus, due to the Executive pursuant to Section 4(b)(iii) of this Agreement, to the extent not theretofore paid and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) of this Section 6(a)(i) shall be hereinafter referred to as the "Severance Amount"); and (ii) for the remainder of the Employment Period, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Employment Period and to have retired on the last day of such period; and (iii) to the extent not theretofore paid or provided the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal -7- 8 Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for (i) the Severance Amount and the timely payment or provision of Other Benefits if the Executive fulfills the criteria set forth in Section 4(b)(iii); and (ii) the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). 7. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b) and 6(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. -8- 9 8. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 9. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. -9- 10 (b) Subject to the provisions of Section 9(c) of this Agreement, all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Coopers & Lybrand L.L.P. (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) of this Agreement and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and -10- 11 (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, -11- 12 without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 11. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Carol Salvo c/o Boyle Leasing Technologies, Inc. 950 Winter Street Waltham, MA 02154 If to the Company: -12- 13 Boyle Leasing Technologies, Inc. 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, Executive Vice President, Chief Financial Officer, Chief Operating Officer With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Moreover, if prior to the Effective Date, the Executive's employment with the Company terminates, then the Executive shall have no further rights under this Agreement. IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. /s/ Carol Salvo ----------------------------------- Carol Salvo -13- 14 Boyle Leasing Technologies, Inc. By: /s/ Peter Bleyleben -------------------------------- Its: President ---------------------------- -14- EX-11.1 13 STATEMENT REGARDING COMPUTATION OF PER SHARE 1 EXHIBIT 11.1 Statement Regarding Computation of Per Share Earnings
For the nine months For the year ended December 31, ended September 30, --------------------------------------- ------------------------ 1995 1996 1997 1997 1998 ---------- ---------- ----------- ---------- ---------- (unaudited) Net Income (in thousands).................. $ 2,524 $ 5,080 $ 7,652 $ 6,199 $ 9,460 Shares used in computation: Weighted average common shares outstanding used in computation of net income per common share.......... 7,352,189 9,682,851 9,793,140 9,791,212 9,849,602 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 48,562 112,589 194,216 162,772 ---------- ---------- ----------- ----------- ----------- Shares used in computation of net income per common share -- assuming dilution.............................. 9,448,206 9,770,613 9,925,329 10,005,028 10,031,974 ========== ========== =========== =========== =========== Net income per common share................ $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96 ========== ========== =========== =========== =========== Net income per common share -- assuming dilution..................... $ 0.27 $ 0.52 $ 0.76 $ 0.62 $ 0.94 ========== ========== =========== =========== ===========
EX-23.1 14 CONSENT OF PRICEWATERHOUSECOOPERS L.L.P. 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 2 to the 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 and Operating Data" and "Selected Consolidated Financial and Operating Data." /s/ PricewaterhouseCoopers LLP Boston, Massachusetts January 11, 1999 EX-27 15 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER 30, 1998 UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 13,457 0 202,484 24,423 0 0 13,636 6,296 208,767 0 157,392 0 0 99 27,542 208,767 0 55,832 0 18,151 0 12,568 9,198 15,915 6,455 0 0 0 0 9,460 .96 .94 NET INVESTMENT IN FINANCING LEASES AND LOANS, EXCLUDING ALLOWANCE FOR CREDIT LOSSES.
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