-----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, QKPznFZbQQ6xjwVvgqk/xe1eInBeFnK/C+N2bpt56AcN6UD6l1T9NTCPced6+d+A RcW12t90ClqhfYqK1Qar2A== 0000950135-99-000442.txt : 19990205 0000950135-99-000442.hdr.sgml : 19990205 ACCESSION NUMBER: 0000950135-99-000442 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990204 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: 99520968 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 FEBRUARY 4, 1999. REGISTRATION NO. 333-56339 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 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. [ ] ------------------------ 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 FEBRUARY 4, 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 8 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 $67.4 million of securitized receivables remained on the Company's balance sheet as of December 31, 1998. The Company capitalizes on its unique understanding of its lessees, underwriting higher risk credits with a multi-dimensional credit scoring model that generates risk-adjusted pricing. Additionally, the Company maintains a disciplined and persistent approach to collections which enables the Company to collect delinquent amounts that it believes its competitors often would not pursue due to the perceived high costs of collecting relatively small monthly payments against equipment with low resale value. In each of these areas, the Company has focused on the application of technology to execute its operating strategy by designing proprietary software and systems to operate its business and achieve economies of scale. - -------------------------------------------------------------------------------- 3 5 - -------------------------------------------------------------------------------- STRATEGY The Company's strategy is to significantly expand its business through internal growth, diversification of product offerings and selective acquisitions of lease portfolios and leasing companies, while maintaining or improving current levels of profitability. The Company has successfully utilized technology to (i) manage the high volume of information associated with originating and servicing its leases, (ii) develop a multi-dimensional credit scoring model for assessing credit risk and pricing its leases and (iii) implement a systematic and efficient collections policy which enables the Company to collect delinquent amounts owed on its leases even several years after the original delinquency. The Company believes its efficiency in these areas will provide it a competitive advantage by allowing it to provide better service to Dealers, facilitating product sales by such Dealers. Furthermore, the Company believes that its system has excess capacity which it believes will decrease the Company's servicing costs per lease, contract and loan as volumes increase. 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 8 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).................. $ 43,209 $ 85,627 $134,546 $143,200 $129,064 $ 95,597 $112,158 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 10.14 8.78 8.94
- --------------- (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 $5.1 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 - -------------------------------------------------------------------------------- RECENT RESULTS The Company recently announced its financial and operating results for the three months ended December 31, 1998 and fiscal year 1998. The Company generated $20.7 million in total revenues for the fourth quarter of 1998, compared to $18.0 million in the fourth quarter of 1997. For the year ended December 31, 1998, the Company generated $76.5 million in total revenues, compared to $68.2 million for the year ended December 31, 1997. The Company earned net income of $2.5 million, or $0.25 per diluted share, for the fourth quarter of 1998, compared to $1.5 million, or $0.15 per diluted share, for the fourth quarter of 1997 and net income of $11.9 million, or $1.19 per diluted share for the year ended December 31, 1998 compared to $7.7 million, or $0.76 per diluted share for the year ended December 31, 1997. The Company's provision for credit losses for the fourth quarter of 1998 and the year ended December 31, 1998 were $6.5 million and $19.1 million, respectively, compared to $6.1 million and $21.7 million for the fourth quarter of 1997 and the year ended December 31, 1997, respectively. Net charge-offs for the fourth quarter of 1998 and the year ended December 31, 1998 were $6.1 million and $20.5 million, respectively, compared to $2.1 million and $19.2 million for the fourth quarter of 1997 and the year ended December 31, 1998, respectively. Dealer fundings were $28.5 million and $105.2 million for the fourth quarter of 1998 and the year ended December 31, 1998, respectively, compared to $20.8 million and $77.6 million for the fourth quarter of 1997 and the year ended December 31, 1997, respectively. The Company's total leases and loans originated were $41.7 million and $153.8 million for the fourth quarter of 1998 and the year ended December 31, 1998, respectively, compared to $33.5 million and $129.1 million for the fourth quarter of 1997 and the year ended December 31, 1997, respectively. The Company acquired service contracts totaling $2.0 million and $8.3 million for the fourth quarter of 1998 and the year ended December 31, 1998, respectively, compared to $1.3 million and $3.0 million for the fourth quarter of 1997 and the year ended December 31, 1997. - -------------------------------------------------------------------------------- 7 9 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 8 10 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 9 11 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." 10 12 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. 11 13 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 12 14 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 13 15 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. 14 16 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 $1.3 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." 15 17 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 0.035
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." 16 18 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. 17 19 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. 18 20 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(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
19 21
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).... $ 43,209 $ 85,627 $134,546 $143,200 $129,064 $ 95,597 $112,158 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 10.14 8.78 8.94
- --------------- (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 $5.1 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. 20 22 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. 21 23 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 22 24 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. The income attributable to these acquired leases and rental contracts represented approximately $2.2 million, or 4.7%, of total income on leases and loans and rental income for 1996 and approximately $4.4 million, or 7.8%, of total income on leases and loans and rental income for 1997. 23 25 Selling, general and administrative expenses increased $3.2 million, or 22.6%, for the year ended December 31, 1997 as compared to the year ended December 31, 1996. Such increase was primarily attributable to a 20% increase in the number of employees needed to maintain and manage the Company's 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, $5.1 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 $5.1 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. The income attributable to these acquired leases and rental contracts represented approximately $2.2 million, or 4.7%, of total income on leases and loans and rental income for 1996. Fee income increased as a result of the continued growth in the overall portfolio serviced by the Company. 24 26 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. 25 27 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. 26 28 BUSINESS GENERAL The Company, which operates primarily through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized commercial finance company that leases and rents "microticket" equipment and provides other financing services in amounts generally ranging from $900 to $2,500, with an average amount financed of approximately $1,400 and an average lease term of 45 months. The Company pioneered the use of proprietary software in developing a sophisticated, risk-adjusted pricing model and automating its credit approval and collection systems, including a fully-automated Internet-based application, credit scoring and approval process. This has enabled the Company to better service its dealer network, to develop economies of scale in originating and servicing over 200,000 leases, contracts and loans and to operate on a nationwide basis in a historically fragmented market. The majority of the Company's leases are currently for POS authorization systems. The Company continues to develop other product lines, including leasing other commercial products and acquiring payment streams from service contracts. The Company targets owner-operated or other small commercial enterprises, with little business credit history and limited or poor personal credit history at the owner level. The Company provides a convenient source of financing to these lessees who may have few other sources of credit. The Company primarily leases and rents low-priced commercial equipment with limited residual value which is used by these lessees in their daily operations. The Company does not market its services directly to lessees, but sources leasing transactions through a nationwide network of over 1,100 Dealers. The Company's ability to approve applications quickly for a wide range of credit profiles facilitates Dealer sales, thereby enhancing the Company's relationships with its Dealers. The Company commenced operations in 1986 and has been profitable every year since 1987. At 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 27 29 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 28 30 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. 29 31 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 30 32 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 31 33 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. 32 34 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 33 35 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 34 36 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. 35 37 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% 10.19% 8.94%
- --------------- (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) $5.1 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. 36 38 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. 37 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position with the Company of each of the directors and executive officers of the Company:
NAME AGE POSITION ---- --- -------- Peter R. Bleyleben(1)........................... 45 President, Chief Executive Officer and Director Brian E. Boyle(1)(2)............................ 50 Director Torrence C. Harder(1)(2)........................ 55 Director Jeffrey P. Parker(2)............................ 55 Director Alan J. Zakon(1)(2)............................. 63 Director Richard F. Latour............................... 45 Executive Vice President, Chief Operating Officer, Chief Financial Officer, Treasurer, Clerk 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. 38 40 JEFFREY P. 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 J. 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, Clerk 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- 39 41 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. 40 42 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, Clerk 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). 41 43 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. 42 44 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. 43 45 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 44 46 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. 45 47 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. 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. 46 48 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 9,913,166 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 17.00% Brian E. Boyle(3)................................... 2,240,000 22.60% Torrence C. Harder(4)............................... 2,083,452 21.02% Jeffrey P. Parker(5)................................ 340,840 3.44% Alan J. Zakon....................................... 40,000 * Richard F. Latour................................... 342,222 3.45% 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 68.68%
- --------------- * Less than 1%. (1) Unless otherwise indicated in the footnotes, each of the stockholders named in this table has sole voting and investment power with respect to the shares of Common Stock shown as beneficially owned by such stockholder, except to the extent that authority is shared by spouses under applicable law. (2) Includes 19,600 shares of Common Stock owned by Dr. Bleyleben's mother for which Dr. Bleyleben disclaims beneficial ownership. (3) Includes 716,800 shares of Common Stock owned by Dr. Boyle's former spouse over which Dr. Boyle retains voting control, for which Dr. Boyle disclaims beneficial ownership. (4) Includes 100,000 shares of Common Stock held in trust for Mr. Harder's daughter, Lauren E. Harder, over which Mr. Harder retains sole voting and investment power as the sole trustee and for which Mr. Harder disclaims beneficial ownership; 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 and for which Mr. Harder disclaims beneficial ownership; 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., for which Mr. Harder disclaims beneficial ownership. (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. 47 49 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 16.80% 129,550 1,535,810 11.52% Torrence C. Harder(3).................... 1,673,834 16.88 130,250 1,543,584 11.58 Brian E. Boyle(4)........................ 1,523,200 15.37 118,500 1,404,700 10.54 Rosemary Boyle(5)........................ 716,800 7.23 80,050 636,750 4.78 Entrepreneurial Ventures, Inc............ 375,572 3.79 29,200 346,372 2.60 Spindle Limited Partnership.............. 368,688 3.72 30,000 338,688 2.54 Richard F. Latour(6)..................... 342,222 3.45 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 * Stephen 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 for which Mr. Harder disclaims beneficial ownership; 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 and for which Mr. Harder disclaims beneficial ownership. 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., for which Mr. Harder disclaims beneficial ownership, 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, Clerk 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) Stephen Obana has served as Vice President, Marketing--West Coast of Leasecomm since January 1995. 48 50 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 $55 million revolving credit and term loan facility, of which $39.3 million in revolving credit and term loans was outstanding as of December 31, 1998 (the "Fleet Facility"). The second facility, led by BankBoston, N.A., is a $55 million revolving credit and term loan facility, of which $23.4 million in revolving credit and term loans was outstanding as of December 31, 1998 (the "BankBoston Facility"). The Borrower and the lenders under these facilities have entered into an intercreditor agreement which governs the relationship among the lenders under each facility as secured creditors of the Company. The terms of the two facilities are substantially similar. Both are two-year facilities, with the Borrower retaining the option to renew for one year. All balances under the revolving lines of credit will be automatically converted to term loans ("Conversion Term Loans") on September 30, 2000 in the case of the BankBoston Facility and July 31, 2000 in the case of the Fleet Facility (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 three-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 contracts, the lesser of such specified percentage or 100% of the adjusted cost basis of the equipment underlying such contract. 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, $3.7 million remains outstanding as of December 31, 1998 as a term loan which is due and payable on August 2, 1999 and which bears interest at 7.75% per annum. Outstanding borrowings with respect to the revolving lines of credit bear interest at LIBOR plus 1.75% 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 0.50%. Amounts outstanding under the Fleet Facility also may bear interest at the federal funds rate plus 1.75%. 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, except for prepayments made from the net proceeds of this Offering so long as Consolidated Tangible Capital Funds (as hereinafter defined) and Consolidated Tangible Net Worth (as hereinafter defined) are in excess of the 49 51 respective amounts thereof immediately prior to consummation of this Offering; (vi) make capital expenditures in any year in excess of 20% of Consolidated Tangible Net Worth (as hereinafter defined) as of the end of the immediately preceding fiscal year; and (vii) enter into certain transactions with affiliates. Further, the Company may not incur additional indebtedness, other than (i) indebtedness under each Credit Facility; (ii) purchase money indebtedness; (iii) unsecured indebtedness; (iv) certain existing indebtedness, including Subordinated Debt; and (v) indebtedness under lender hedge agreements. In addition, under the Fleet Facility, at any such time as the Company shall not be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, 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 60%, 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. Under the BankBoston Facility, both Peter R. Bleyleben and Richard F. Latour must remain officers of the Company unless replacements acceptable to BankBoston N.A. are named. Additionally, under the BankBoston Facility, not more than one-third of the Company's directors may be replaced during the same year without the consent of BankBoston N.A. 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 of not more than 6.5:1.0; (ii) to maintain at all times a Consolidated Tangible Net Worth of not less than the sum of (a) 85% of Tangible Net Worth as of December 31, 1997 in the case of the Fleet Facility and $23,500,000 in the case of the BankBoston Facility, plus (b) 50% of the aggregate amount of Consolidated Net Income of the Company and its subsidiaries for each of the fiscal quarters ending after March 31, 1998 in the case of the Fleet Facility and September 30, 1998 in the case of the BankBoston Facility, in each case 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 7% 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 payments of interest on all indebtedness (including payments on capitalized lease obligations in the nature of interest). 50 52 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 $53.4 million in excess of the sum of the amount required under the Fleet Facility and $50.0 million in excess of the amount required under the BankBoston Facility. As of such date, the Company's allowance for bad debt was 9.3% of the Company's Gross Lease Installments as of such date. On a pro forma basis, assuming that the Offering and the repayment of indebtedness occurred on April 1, 1997, the Company's Fixed Charge Ratio would have been 3.68:1.0. 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 51 53 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. 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. 52 54 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 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. 53 55 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 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 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. 54 56 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 87 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. 55 57 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 56 58 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. 57 59 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. 58 60 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. 59 61 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. 60 62 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. 61 63 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 62 64 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. 63 65 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 66 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 67 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 68 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 69 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 70 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 71 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 72 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 73 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 74 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....................... 419,597 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 75 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 76 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 77 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 78 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 79 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 80 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 81 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 82 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 83 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 84 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 85 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 86 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 87 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............................................................ 8 Use of Proceeds......................................................... 15 Dividend Policy......................................................... 16 Capitalization.......................................................... 17 Dilution................................................................ 18 Selected Consolidated Financial and Operating Data...................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 21 Business................................................................ 27 Management.............................................................. 38 Certain Transactions.................................................... 46 Principal Stockholders.................................................. 47 Selling Stockholders.................................................... 48 Description of Certain Indebtedness..................................... 49 Description of Capital Stock............................................ 55 Shares Eligible for Future Sale......................................... 58 Certain United States Tax Consequences to Non-United States Holders........................................................ 59 Underwriting............................................................ 61 Legal Matters........................................................... 62 Experts................................................................. 62 Available Information................................................... 62 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 88 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 89 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 90 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 91
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 92 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- *1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Organization, as amended(2). 3.2 Bylaws(2). *4.1 Specimen of Common Stock Certificate. 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(2). 10.13 Employment Agreement between the Company and Peter R. Bleyleben(2). 10.14 Employment Agreement between the Company and Richard F. Latour(2). 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(2). 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(2). 10.20 Specimen 1997-A Note(2). 10.21 Specimen 1996-A Note(2). 10.22 Specimen 1998-A Note(2).
II-5 93 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(2). 10.26 Amendment to Lease #1, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated(2). 10.27 Employment Agreement between the Company and J. Gregory Hines(2). 10.28 Employment Agreement between the Company and John Plumlee(2). 10.29 Employment Agreement between the Company and Carol Salvo(2). *10.30 Fourth Amendment to Amended and Restated Loan Agreement, dated July 31, 1998, among Leasecomm Corporation, the lenders parties thereto and Fleet Bank, National Association, as agent. *10.31 Fifth Amendment to Amended and Restated Loan Agreement, dated January 27, 1999, among Leasecomm Corporation, the lenders parties thereto and Fleet Bank, National Association, as agent for such lenders. *10.32 Second Amended and Restated Revolving Credit Agreement, dated January 27, 1999, among Leasecomm Corporation, the lenders parties thereto and BankBoston, N.A., as agent. 11.1 Statement regarding computation of per share earnings(2). 21.1 Subsidiaries of Registrant(2). *23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Edwards & Angell, LLP (see Exhibit 5.1). 24.1 Powers of Attorney(2). 27 Financial Data Schedule(2). - --------------- * 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 II-6 94 indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (i) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (ii) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement for the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 95 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has duly caused this Amendment No. 3 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 4th day of February, 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. 3 to the Registration Statement on Form S-1 has been signed below by the following persons in the capacities indicated as of the 4th day of February, 1999.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ PETER R. BLEYLEBEN President, Chief Executive February 4, 1999 - --------------------------------------------------- Officer and Director Peter R. Bleyleben /s/ RICHARD F. LATOUR Executive Vice President, Chief February 4, 1999 - --------------------------------------------------- Operating Officer and Chief Richard F. Latour Financial Officer * Director February 4, 1999 - --------------------------------------------------- Brian E. Boyle * Director February 4, 1999 - --------------------------------------------------- Torrence C. Harder * Director February 4, 1999 - --------------------------------------------------- Jeffrey Parker * Director February 4, 1999 - --------------------------------------------------- Alan Zakon *BY: /s/ PETER R. BLEYLEBEN --------------------------------------------- Peter R. Bleyleben Attorney-in-Fact
II-8 96 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- *1.1 Form of Underwriting Agreement. 3.1 Restated Articles of Organization, as amended(2). 3.2 Bylaws(2). *4.1 Specimen of Common Stock Certificate. 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(2). 10.13 Employment Agreement between the Company and Peter R. Bleyleben(2). 10.14 Employment Agreement between the Company and Richard F. Latour(2). 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(2). 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(2). 10.20 Specimen 1997-A Note(2). 10.21 Specimen 1996-A Note(2). 10.22 Specimen 1998-A Note(2).
97 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(2). 10.26 Amendment to Lease #1, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated(2). 10.27 Employment Agreement between the Company and J. Gregory Hines(2). 10.28 Employment Agreement between the Company and John Plumlee(2). 10.29 Employment Agreement between the Company and Carol Salvo(2). *10.30 Fourth Amendment to Amended and Restated Loan Agreement, dated July 31, 1998, among Leasecomm Corporation, the lenders parties thereto and Fleet Bank, National Association, as agent. *10.31 Fifth Amendment to Amended and Restated Loan Agreement, dated January 27, 1999, among Leasecomm Corporation, the lenders parties thereto and Fleet Bank, National Association, as agent for such lenders. *10.32 Second Amended and Restated Revolving Credit Agreement, dated January 27, 1999, among Leasecomm Corporation, the lenders parties thereto and BankBoston, N.A., as agent. 11.1 Statement regarding computation of per share earnings(2). 21.1 Subsidiaries of Registrant(2). *23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Edwards & Angell, LLP (see Exhibit 5.1). 24.1 Powers of Attorney(2). 27 Financial Data Schedule(2). - --------------- * Filed herewith. (1) To be filed by amendment. (2) Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 4,000,000 SHARES(1) MICROFINANCIAL INCORPORATED COMMON STOCK FORM OF UNDERWRITING AGREEMENT ------------------------------ February __, 1999 PIPER JAFFRAY INC. CIBC OPPENHEIMER CORP. As Representatives of the several Underwriters named in Schedule II hereto c/o Piper Jaffray Inc. Piper Jaffray Tower 222 South Ninth Street Minneapolis, Minnesota 55402 Ladies and Gentlemen: MicroFinancial Incorporated, a Massachusetts corporation (the "Company"), and the stockholders of the Company listed in Schedule I hereto (the "Selling Stockholders") severally propose to sell to the several Underwriters named in Schedule II hereto (the "Underwriters") an aggregate of 4,000,000 shares (the "Firm Shares") of Common Stock, $.01 par value per share (the "Common Stock"), of the Company. The Firm Shares consist of 3,400,000 authorized but unissued shares of Common Stock to be issued and sold by the Company and 600,000 outstanding shares of Common Stock to be sold by the Selling Stockholders. The Selling Stockholders have also granted to the several Underwriters an option to purchase up to 600,000 additional shares of Common Stock, respectively, on the terms and for the purposes set forth in Section 3 hereof (the "Option Shares"). The Firm Shares and any Option Shares purchased pursuant to this Purchase Agreement are herein collectively called the "Securities." The Company and the Selling Stockholders hereby confirm their agreement with respect to the sale of the Securities to the several Underwriters, for whom you are acting as Representatives (the "Representatives"). 1. REGISTRATION STATEMENT AND PROSPECTUS. A registration statement on Form S-1 (Registration No. 333-56339) with respect to the Securities, including a preliminary form of prospectus, has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations ("Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission; one or more amendments to such registration statement have also been so prepared and have been, or will be, so filed; and, if the Company has elected to - ---------- (1)Plus an option to purchase up to 600,000 additional shares from the Selling Stockholders to cover over-allotments. 2 rely upon Rule 462(b) of the Rules and Regulations to increase the size of the offering registered under the Act, the Company will prepare and file with the Commission a registration statement with respect to such increase pursuant to Rule 462(b). Copies of such registration statement(s) and amendments and each related preliminary prospectus have been delivered to you. If the Company has elected not to rely upon Rule 430A of the Rules and Regulations, the Company has prepared and will promptly file an amendment to the registration statement and an amended prospectus (including a term sheet meeting the requirements of Rule 434 of the Rules and Regulations). If the Company has elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and file a prospectus (or a term sheet meeting the requirements of Rule 434) pursuant to Rule 424(b) that discloses the information previously omitted from the prospectus in reliance upon Rule 430A. Such registration statement as amended at the time it is or was declared effective by the Commission, and, in the event of any amendment thereto after the effective date and prior to the First Closing Date (as hereinafter defined), such registration statement as so amended (but only from and after the effectiveness of such amendment), including a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and Regulations increasing the size of the offering registered under the Act and information (if any) deemed to be part of the registration statement at the time of effectiveness pursuant to Rules 430A(b) and 434(d) of the Rules and Regulations, is hereinafter called the "Registration Statement." The prospectus included in the Registration Statement at the time it is or was declared effective by the Commission is hereinafter called the "Prospectus," except that if any prospectus (including any term sheet meeting the requirements of Rule 434 of the Rules and Regulations provided by the Company for use with a prospectus subject to completion within the meaning of Rule 434 in order to meet the requirements of Section 10(a) of the Rules and Regulations) filed by the Company with the Commission pursuant to Rule 424(b) (and Rule 434, if applicable) of the Rules and Regulations or any other such prospectus provided to the Underwriters by the Company for use in connection with the offering of the Securities (whether or not required to be filed by the Company with the Commission pursuant to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file at the time the Registration Statement is or was declared effective by the Commission, the term "Prospectus" shall refer to such differing prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) from and after the time such prospectus is filed with the Commission or transmitted to the Commission for filing pursuant to such Rule 424(b) (and Rule 434, if applicable) or from and after the time it is first provided to the Underwriters by the Company for such use. The term "Preliminary Prospectus" as used herein means any preliminary prospectus included in the Registration Statement prior to the time it becomes or became effective under the Act and any prospectus subject to completion as described in Rule 430A or 434 of the Rules and Regulations. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDERS. (a) The Company represents and warrants to, and agrees with, the several Underwriters as follows: (i) No order preventing or suspending the use of any Preliminary Prospectus has been issued by the Commission and each Preliminary Prospectus, at the time of filing thereof, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; except that the foregoing shall not apply to statements in or omissions from any Preliminary Prospectus in reliance upon, and in conformity with, written information -2- 3 furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof. (ii) As of the time the Registration Statement (or any post-effective amendment thereto, including a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and Regulations increasing the size of the offering registered under the Act) is or was declared effective by the Commission, upon the filing or first delivery to the Underwriters of the Prospectus (or any supplement to the Prospectus (including any term sheet meeting the requirements of Rule 434 of the Rules and Regulations)) and at the First Closing Date and Second Closing Date (as hereinafter defined), (A) the Registration Statement and Prospectus (in each case, as so amended and/or supplemented) conformed or will conform in all material respects to the requirements of the Act and the Rules and Regulations, (B) the Registration Statement (as so amended) did not or will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (C) the Prospectus (as so supplemented) did not or will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances in which they are or were made, not misleading; except that the foregoing shall not apply to statements in or omissions from any such document in reliance upon, and in conformity with, written information furnished to the Company by you, or by any Underwriter through you, specifically for inclusion in the Registration Statement. If the Registration Statement has been declared effective by the Commission, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceeding for that purpose has been initiated or, to the Company's knowledge, threatened by the Commission. (iii) The financial statements of the Company, together with the notes thereto, set forth in the Registration Statement and Prospectus comply as to form with the requirements of the Act and fairly present the financial condition of the Company as of the dates indicated and the results of operations and changes in cash flows for the periods therein specified in conformity with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise stated therein); and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein. The selected financial data set forth under the caption "Selected Consolidated Financial and Operating Data" in the Prospectus and Registration Statement fairly present, on the basis stated in the Prospectus and the Registration Statement, the information included therein. No other financial statements or schedules are required to be included in the Registration Statement or Prospectus. PricewaterhouseCoopers LLP, which has expressed its opinion with respect to the financial statements and schedules filed as a part of the Registration Statement and included in the Registration Statement and Prospectus, are independent public accountants as required by the Act and the Rules and Regulations. (iv) Each of the Company and its subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries has full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as currently being carried on and as described in the Registration Statement and Prospectus, and is duly qualified to do business as a foreign corporation in -3- 4 good standing in each jurisdiction in which it owns or leases real property or in which the conduct of its business makes such qualification necessary and in which the failure to so qualify would have a material adverse effect upon the business, condition (financial or otherwise) or properties of the Company and its subsidiaries, taken as a whole. (v) Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock; and there has not been any change in the capital stock (other than a change in the number of outstanding shares of Common Stock due to the issuance of shares upon the exercise of outstanding options or warrants), or any material change in the short-term or long-term debt, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock, of the Company or any of its subsidiaries, or any material adverse change, or any development which would reasonably be expected to cause a material adverse change in the business, condition (financial or otherwise), key personnel or properties of the Company and its subsidiaries, taken as a whole. (vi) Except as set forth in the Prospectus, there is not pending or, to the knowledge of the Company, threatened, any action, suit or proceeding to which the Company or any of its subsidiaries is a party before or by any court or governmental agency, authority or body, or any arbitrator, which would be reasonably expected to (i) have a material adverse effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) result in any material adverse change in the business, condition (financial or otherwise), key personnel or properties of the Company and its subsidiaries, taken as a whole. (vii) There are no contracts or documents of the Company or any of its subsidiaries that are required to be described in or filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations that have not been so described or filed; and the statements in the Prospectus under the headings "Certain United States Tax Consequences to Non-United States Holders", "Business--Legal Proceedings" and "Risk Factors--Government Regulation" fairly summarize the matters therein described. (viii) This Agreement has been duly authorized, executed and delivered by the Company. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated will not conflict with, result in a breach or violation of any of the terms and provisions of or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or constitute a default under, any statute, any agreement or instrument to which the Company or any of its subsidiaries is a party, which conflict or breach of agreement would be reasonably expected to have a material adverse effect on the business, condition (financial or otherwise) , key personnel or properties of the Company or its subsidiaries, taken as a whole or by which any of them are bound or to which any of its property is subject, the Company's or any of its subsidiaries' charter or by-laws, or any order, rule, regulation or decree of any court or governmental agency or body having jurisdiction over the Company or any of its subsidiaries or any of their properties; no consent, approval, authorization or order of, or filing with, any court or governmental agency or body is required for the execution, delivery and performance of -4- 5 this Agreement or for the consummation of the transactions contemplated hereby, including the issuance or sale of the Securities by the Company, except such as have been obtained under the Act and such as may be required under state securities or blue sky laws; and the Company has full power and authority to enter into this Agreement and to authorize, issue and sell the Securities as contemplated by this Agreement. (ix) All of the issued and outstanding shares of capital stock of the Company, including the outstanding shares of Common Stock, are duly authorized and validly issued, fully paid and nonassessable, have been issued in compliance with all Federal and state securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities, and the holders thereof are not subject to personal liability by reason of being such holders; the Securities which may be sold hereunder by the Company have been duly and validly authorized and, when issued, delivered and paid for in accordance with the terms hereof, will have been validly issued and will be fully paid and nonassessable, and the holders thereof will not be subject to personal liability by reason of being such holders; and the capital stock of the Company, including the Common Stock, conforms to the description thereof in the Registration Statement and Prospectus. The Certificates for the Securities are in valid and sufficient form. Except as otherwise stated in the Registration Statement and Prospectus, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's charter, by-laws or any agreement or other instrument to which the Company is a party or by which the Company is bound. Neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated by this Agreement gives rise to any rights for or relating to the registration of any shares of Common Stock or other securities of the Company. All of the issued and outstanding shares of capital stock of each of the Company's subsidiaries have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise described in the Registration Statement and Prospectus and except for any directors' qualifying shares, the Company owns of record and beneficially, free and clear of any security interests, claims, liens, proxies, equities or other encumbrances, all of the issued and outstanding shares of such stock. Except as described in the Registration Statement and the Prospectus, there are no options, warrants, agreements, contracts or other rights in existence to purchase or acquire from the Company or any subsidiary of the Company or rights to convert any obligations into or exchange any Securities for, any shares of the capital stock of or ownership interests in the Company or any subsidiary of the Company. The Company has an authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. (x) The Company and each of its subsidiaries holds, and is operating in compliance in all material respects with, all franchises, grants, authorizations, licenses, permits, easements, consents, certificates and orders of any governmental or self-regulatory body required for the conduct of its business and all such franchises, grants, authorizations, licenses, permits, easements, consents, certifications and orders are valid and in full force and effect; and the Company and each of its subsidiaries is in compliance in all material respects with all applicable Federal, state, local and foreign laws, regulations, orders and decrees. (xi) The Company and its subsidiaries have good and marketable title to all property described in the Registration Statement and Prospectus as being -5- 6 owned by them, in each case free and clear of all liens, claims, security interests or other encumbrances except such as are described in the Registration Statement and the Prospectus; the property held under lease by the Company and its subsidiaries is held by them under valid, subsisting and enforceable leases with only such exceptions with respect to any particular lease as do not interfere in any material respect with the conduct of the business of the Company or its subsidiaries; the Company and each of its subsidiaries owns or possesses all patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets and rights necessary for the conduct of the business of the Company and its subsidiaries as currently carried on and as described in the Registration Statement and Prospectus; except as stated in the Registration Statement and Prospectus, no name which the Company or any of its subsidiaries uses and no other aspect of the business of the Company or any of its subsidiaries will involve or give rise to any infringement of, or license or similar fees for, any patents, patent applications, trademarks, service marks, tradenames, trademark registrations, service mark registrations, copyrights, licenses, inventions, trade secrets or other similar rights of others material to the business or financial condition of the Company and neither the Company nor any of its subsidiaries has received any notice alleging any such infringement or fee. (xii) Neither the Company nor any of its subsidiaries is in violation of its respective charter or by-laws. Except for such breaches or defaults which would not have a material adverse effect on the business, condition (financial or otherwise), key personnel or properties of the Company and its subsidiaries, taken as a whole, neither the Company nor any of its subsidiaries is in breach of or otherwise in default in the performance of any material obligation, agreement or condition contained in any bond, debenture, note, indenture, loan agreement or any other material contract, lease or other instrument to which it is subject or by which any of them may be bound, or to which any of the material property or assets of the Company or any of its subsidiaries is subject. (xiii) There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance by the Company or sale by the Company of the Securities. (xiv) The Company and its subsidiaries have filed all Federal, state, local and foreign income and franchise tax returns required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a material adverse effect on the business, condition (financial or otherwise), key personnel or properties of the Company and its subsidiaries, taken as a whole) and are not in default in the payment of any taxes which were payable pursuant to said returns or any assessments with respect thereto, other than any which the Company or any of its subsidiaries is contesting in good faith or as would not have a material adverse effect on the business, condition (financial or otherwise), key personnel or properties of the Company and its subsidiaries, taken as a whole). (xv) The Company has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act to be distributed by the Company. -6- 7 (xvi) The Securities have been approved for listing and admitted and authorized for trading on the New York Stock Exchange, subject to official notice of issuance and evidence of satisfactory distribution and, on the date the Registration Statement became or becomes effective, the Company's Registration Statement on Form 8-A or other applicable form under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), became or will become effective. (xvii) Other than the subsidiaries of the Company listed in Exhibit 21.1 to the Registration Statement and a 50% interest in [ ], LLC (which is not a "significant subsidiary" as such term is defined in Rule 1-02 of Regulation S-X), the Company owns no capital stock or other equity or ownership or proprietary interest in any corporation, partnership, association, trust or other entity. (xviii) The Company and its subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xix) Except for the underwriting discount contemplated by the Prospectus and payable to the Underwriters, the Company has not incurred any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (xx) The Company is not and, after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Registration Statement and Prospectus, will not be an "investment company" as defined in the Investment Company Act of 1940, as amended. (xxi) Except as described in the Registration Statement, no holders of Securities of the Company have rights to the registration of such Securities under the Registration Statement. (xxii) The Company and each of its subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the business in which they are engaged; all policies of insurance and fidelity or surety bonds insuring the Company or any of its subsidiaries or their respective businesses, assets, employees, officers and directors are in full force and effect; the Company and its subsidiaries are in compliance with the terms of such policies and instruments in all material respects; and there are no claims by the Company or any of its subsidiaries under any such policy or instrument as to which any insurance company is denying liability or defending under a reservation of rights clause; neither the Company nor any such subsidiary has been refused any insurance coverage sought or applied for, and neither the Company nor any such subsidiary has any -7- 8 reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a material adverse effect on the business, condition (financial or otherwise), key personnel or properties of the Company and its subsidiaries, taken as a whole, except as set forth in or contemplated in the Prospectus. (xxiii) No subsidiary of the Company is currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such subsidiary's capital stock, from repaying to the Company any loans or advances to such subsidiary from the Company or from transferring any of such subsidiary's property or assets to the Company or any other subsidiary of the Company, except as described in or contemplated by the Prospectus. (xxiv) The Company has not taken, directly or indirectly, any action designed to or which has constituted or which might reasonably be expected to cause or result, under the Exchange Act or otherwise, in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (xxv) Each of the Company and its subsidiaries has fulfilled its obligations, if any, under the minimum funding standards of Section 302 of the United States Employee Retirement Income Security Act of 1974 ("ERISA") and the regulations and published interpretations thereunder with respect to each "plan" (as defined in Section 3(3) of ERISA and such regulations and published interpretations) in which employees of the Company and its subsidiaries are eligible to participate and each such plan is in compliance in all material respects with the presently applicable provisions of ERISA and such regulations and published interpretations. The Company and its subsidiaries have not incurred any unpaid liability to the Pension Benefit Guaranty Corporation (other than for the payment of premiums in the ordinary course) or to any such plan under Title IV of ERISA. (xxvi) In the ordinary course of its business, the Company periodically reviews the effect of environmental laws on the business, operations and properties of the Company and its subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with environmental laws, or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of such review, the Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a material adverse effect on the business, condition (financial or otherwise), key personnel or properties of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus. (xxvii) The Company and its subsidiaries have implemented a comprehensive, detailed program to analyze and address the risk that their computer hardware and software may be unable to recognize and properly execute date-sensitive functions involving certain dates prior to and any dates after December 31, 1999 (the "Year 2000 Problem") and has determined that their computer hardware and software are and will be able to process all date information prior to and after December 31, 1999 -8- 9 without any errors, aborts, delays or other interruptions in operations associated with the Year 2000 Problem; and the Company believes, after due inquiry, that each supplier, vendor, customer or financial service organization used or serviced by the Company and its subsidiaries has remedied or will remedy on a timely basis the Year 2000 Problem, except to the extent that a failure to remedy by any such supplier, vendor, customer or financial service organization would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. The Company is in compliance with the Commission's staff legal bulletin No. 5 dated January 12, 1998 related to Year 2000 compliance. (b) Each Selling Stockholder represents and warrants to, and agrees with, the several Underwriters as follows: (i) Such Selling Stockholder is the record and beneficial owner of, and has, and on the First Closing Date and/or the Second Closing Date, as the case may be, will have, valid and marketable title to the Securities to be sold by such Selling Stockholder, free and clear of all security interests, claims, liens, restrictions on transferability, legends, proxies, equities or other encumbrances; and upon delivery of and payment for such Securities hereunder, the several Underwriters will acquire valid and marketable title thereto, free and clear of any security interests, claims, liens, restrictions on transferability, legends, proxies, equities or other encumbrances. Such Selling Stockholder is selling the Securities to be sold by such Selling Stockholder for such Selling Stockholder's own account and is not selling such Securities, directly or indirectly, for the benefit of the Company, and no part of the proceeds of such sale received by such Selling Stockholder will inure, either directly or indirectly, to the benefit of the Company other than as described in the Registration Statement and Prospectus. (ii) Such Selling Stockholder has duly authorized, executed and delivered a Letter of Transmittal and Custody Agreement ("Custody Agreement"), which Custody Agreement is a valid and binding obligation of such Selling Stockholder, to the Company as Custodian (the "Custodian"); pursuant to the Custody Agreement the Selling Stockholder has placed in custody with the Custodian, for delivery under this Agreement, the certificates representing the Securities to be sold by such Selling Stockholder; such certificates represent validly issued, outstanding, fully paid and nonassessable shares of Common Stock; and such certificates were duly and properly endorsed in blank for transfer, or were accompanied by all documents duly and properly executed that are necessary to validate the transfer of title thereto, to the Underwriters, free of any legend, restriction on transferability, proxy, lien or claim, whatsoever. (iii) Such Selling Stockholder has the power and authority to enter into this Agreement and to sell, transfer and deliver the Securities to be sold by such Selling Stockholder; and such Selling Stockholder has duly authorized, executed and delivered to Peter Bleyleben and Richard Latour, as attorneys-in-fact (the "Attorneys-in-Fact"), an irrevocable power of attorney (a "Power of Attorney") authorizing and directing the Attorneys-in-Fact, or either of them, to effect the sale and delivery of the Securities being sold by such Selling Stockholder, to enter into this Agreement and to take all such other action as may be necessary hereunder. -9- 10 (iv) This Agreement, the Custody Agreement and the Power of Attorney have each been duly authorized, executed and delivered by or on behalf of such Selling Stockholder. The Custody Agreement constitutes a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnity thereunder may be limited by Federal or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or laws affecting the rights of creditors generally and subject to general principles of equity. The execution and delivery of this Agreement, the Custody Agreement and the Power of Attorney and the performance of the terms hereof and thereof and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any agreement or instrument to which such Selling Stockholder is a party or by which such Selling Stockholder is bound, or any law, regulation, order or decree applicable to such Selling Stockholder; no consent, approval, authorization or order of, or filing with, any court or governmental agency or body is required for the execution, delivery and performance of this Agreement, the Custody Agreement and the Power of Attorney or for the consummation of the transactions contemplated hereby and thereby, including the sale of the Securities being sold by such Selling Stockholder, except such as may be required under the Act or state securities laws or blue sky laws. (v) Such Selling Stockholder has not distributed and will not distribute any prospectus or other offering material in connection with the offering and sale of the Securities other than any Preliminary Prospectus or the Prospectus or other materials permitted by the Act to be distributed by such Selling Stockholder. (vi) Such Selling Stockholder has reviewed the Registration Statement and the Prospectus and to the best knowledge of such Selling Stockholder neither the Registration Statement nor the Prospectus contains any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading regarding such Selling Stockholder, the other Selling Stockholders, the Company or otherwise. (vii) To the best knowledge of such Selling Stockholder, the representations and warranties of the Company contained in paragraph (a) of this Section 2 are true and correct. (c) Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby; any certificate signed by or on behalf of any Selling Stockholder as such and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. 3. PURCHASE, SALE AND DELIVERY OF SECURITIES. (a) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to issue and sell 3,400,000 Firm Shares, and each Selling Stockholder agrees, severally and not jointly, to sell the number of Firm Shares set forth opposite the name of such Selling Stockholder in Schedule I hereto, to the several Underwriters, and each Underwriter agrees, severally and not -10- 11 jointly, to purchase from the Company and the Selling Stockholders the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto. The purchase price for each Firm Share shall be $ per share. The obligation of each Underwriter to each of the Company and the Selling Stockholders shall be to purchase from each of the Company and the Selling Stockholders that number of Firm Shares (to be adjusted by the Representatives to avoid fractional shares) which represents the same proportion of the number of Firm Shares to be sold by each of the Company and the Selling Stockholders pursuant to this Agreement as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule II hereto represents to the total number of Firm Shares to be purchased by all Underwriters pursuant to this Agreement. In making this Agreement, each Underwriter is contracting severally and not jointly; except as provided in paragraph (c) of this Section 3 and in Section 8 hereof, the agreement of each Underwriter is to purchase only the respective number of Firm Shares specified in Schedule II. The Firm Shares will be delivered by the Company and the Custodian to you for the accounts of the several Underwriters against payment of the purchase price therefor by certified or official bank check or other next day funds payable to the order of the Company and the Custodian, as appropriate, at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable, at 9:00 a.m. Central time on the third (or if the Securities are priced, as contemplated by Rule 15c6-1(c) under the Exchange Act, after 4:30 p.m. Eastern time, the fourth) full business day following the date hereof, or at such other time and date as you and the Company determine pursuant to Rule 15c6-1(a) under the Exchange Act, such time and date of delivery being herein referred to as the "First Closing Date." If the Representatives so elect, delivery of the Firm Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. Certificates representing the Firm Shares, in definitive form and in such denominations and registered in such names as you may request upon at least two business days' prior notice to the Company and the Custodian, will be made available for checking and packaging not later than 10:30 a.m., Central time, on the business day next preceding the First Closing Date at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable. (b) On the basis of the representations, warranties and agreements herein contained, but subject to the terms and conditions herein set forth, the Selling Stockholders, with respect to the number of Option Shares set forth opposite the name of such Selling Stockholder in Schedule I hereto, hereby grant to the several Underwriters an option to purchase all or any portion of the Option Shares at the same purchase price as the Firm Shares, for use solely in covering any over-allotments made by the Underwriters in the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time (but not more than once) within 30 days after the effective date of this Agreement upon notice (confirmed in writing) by the Representatives to the Company and to the Attorneys-in-Fact setting forth the aggregate number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the certificates for the Option Shares are to be registered and the date and time, as determined by you, when the Option Shares are to be delivered, such time and date being herein referred to as the "Second Closing" and "Second Closing Date", respectively; provided, however, that the Second Closing Date shall not be earlier than the First Closing Date nor earlier than the second business day after the date on which the option shall have been exercised. If the option is exercised, the obligation of each Underwriter shall be to purchase from the Selling Stockholders granting an option to purchase the Option Shares, on a -11- 12 pro rata basis up to 600,000 Option Shares, that number of Option Shares (to be adjusted by the Representatives to avoid fractional shares) which represents the same proportion that the number of Option Shares granted by each such Selling Stockholder bears to the total number of Option Shares granted by all such Selling Stockholders. The number of Option Shares to be purchased by each Underwriter shall be the same percentage of the total number of Option Shares to be purchased by the several Underwriters as the number of Firm Shares to be purchased by such Underwriter is of the total number of Firm Shares to be purchased by the several Underwriters, as adjusted by the Representatives in such manner as the Representatives deem advisable to avoid fractional shares. No Option Shares shall be sold and delivered unless the Firm Shares previously have been, or simultaneously are, sold and delivered. The Option Shares will be delivered by the Custodian and the Company, as appropriate, to you for the accounts of the several Underwriters against payment of the purchase price therefor by certified or official bank check or other next day funds payable to the order of the Custodian or the Company, as appropriate, at the offices of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable at 9:00 a.m., Central time, on the Second Closing Date. If the Representatives so elect, delivery of the Option Shares may be made by credit through full fast transfer to the accounts at The Depository Trust Company designated by the Representatives. Certificates representing the Option Shares in definitive form and in such denominations and registered in such names as you have set forth in your notice of option exercise, will be made available for checking and packaging not later than 10:30 a.m., Central time, on the business day next preceding the Second Closing Date at the office of Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such other location as may be mutually acceptable. (c) It is understood that you, individually and not as Representatives of the several Underwriters, may (but shall not be obligated to) make payment to the Company or the Selling Stockholders, on behalf of any Underwriter for the Securities to be purchased by such Underwriter. Any such payment by you shall not relieve any such Underwriter of any of its obligations hereunder. Nothing herein contained shall constitute any of the Underwriters an unincorporated association or partner with the Company or any Selling Stockholder. 4. COVENANTS. (a) The Company covenants and agrees with the several Underwriters as follows: (i) If the Registration Statement has not already been declared effective by the Commission, the Company will use its best efforts to cause the Registration Statement and any post-effective amendments thereto to become effective as promptly as possible; the Company will notify you promptly of the time when the Registration Statement or any post-effective amendment to the Registration Statement has become effective or any supplement to the Prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) has been filed and of any request by the Commission for any amendment or supplement to the Registration Statement or Prospectus or additional information; if the Company has elected to rely on Rule 430A of the Rules and Regulations, the Company will prepare and file a Prospectus (or term sheet within the meaning of Rule 434 of the Rules and Regulations) containing the information omitted therefrom pursuant to Rule 430A of the Rules and Regulations -12- 13 with the Commission within the time period required by, and otherwise in accordance with the provisions of, Rules 424(b), 430A and 434, if applicable, of the Rules and Regulations; if the Company has elected to rely upon Rule 462(b) of the Rules and Regulations to increase the size of the offering registered under the Act, the Company will prepare and file a registration statement with respect to such increase with the Commission within the time period required by, and otherwise in accordance with the provisions of, Rule 462(b); the Company will prepare and file with the Commission, promptly upon your request, any amendments or supplements to the Registration Statement or Prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) that, in your opinion, may be necessary or advisable in connection with the distribution of the Securities by the Underwriters; and the Company will not file any amendment or supplement to the Registration Statement or Prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) to which you shall reasonably object by notice to the Company after having been furnished a copy a reasonable time prior to the filing. (ii) The Company will advise you, promptly after it shall receive notice or obtain knowledge thereof, of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose; and the Company will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such a stop order should be issued. (iii) Within the time during which a prospectus (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) relating to the Securities is required to be delivered under the Act, the Company will comply as far as it is able with all requirements imposed upon it by the Act, as now and hereafter amended, and by the Rules and Regulations, as from time to time in force, so far as necessary to permit the continuance of sales of or dealings in the Securities as contemplated by the provisions hereof and the Prospectus. If during such period any event occurs as a result of which the Prospectus would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances then existing, not misleading, or if during such period it is necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act, the Company will promptly notify you and will amend the Registration Statement or supplement the Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance. (iv) The Company will use its best efforts to qualify the Securities for sale under the securities laws of such jurisdictions as you reasonably designate and to continue such qualifications in effect so long as required for the distribution of the Securities, except that the Company shall not be required in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process in any state. (v) The Company will furnish to the Underwriters copies of the Registration Statement (three of which will be signed and will include all exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and supplements (including any term sheet within the meaning of Rule 434 of the Rules and Regulations) to such -13- 14 documents, in each case as soon as available and in such quantities as you may from time to time reasonably request. (vi) During a period of five years commencing with the date hereof, the Company will furnish to the Representatives, and to each Underwriter who may so request in writing, copies of all periodic and special reports furnished to the stockholders of the Company and all information, documents and reports filed with the Commission, the National Association of Securities Dealers, Inc., NASDAQ or any securities exchange. (vii) The Company will make generally available to its security holders as soon as practicable, but in any event not later than 15 months after the end of the Company's current fiscal quarter, an earnings statement (which need not be audited) covering a 12-month period beginning after the effective date of the Registration Statement that shall satisfy the provisions of Section 11(a) of the Act and Rule 158 of the Rules and Regulations. (viii) The Company, whether or not the transactions contemplated hereunder are consummated or this Agreement is prevented from becoming effective under the provisions of Section 9(a) hereof or is terminated, will pay or cause to be paid (A) all expenses (including transfer taxes allocated to the respective transferees) incurred in connection with the delivery to the Underwriters of the Securities, (B) all expenses and fees (including, without limitation, fees and expenses of the Company's accountants and counsel but, except as otherwise provided below, not including fees of the Underwriters' counsel) in connection with the preparation, printing, filing, delivery, and shipping of the Registration Statement (including the financial statements therein and all amendments, schedules, and exhibits thereto), the Securities, each Preliminary Prospectus, the Prospectus, and any amendment thereof or supplement thereto, and the printing, delivery, and shipping of this Agreement and other underwriting documents, including Blue Sky Memoranda, (C) all filing fees and the reasonable fees and disbursements of the Underwriters' counsel incurred in connection with the qualification of the Securities for offering and sale by the Underwriters or by dealers under the securities or blue sky laws of the states and other jurisdictions which you shall designate in accordance with Section 4(d) hereof, (D) the fees and expenses of any transfer agent or registrar, (E) the filing fees incident to any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of the Securities, (F) listing fees, if any, and (G) all other costs and expenses incident to the performance of its obligations hereunder that are not otherwise specifically provided for herein. If the sale of the Securities provided for herein is not consummated by reason of action by the Company pursuant to Section 9(a) hereof which prevents this Agreement from becoming effective, or by reason of any failure, refusal or inability on the part of the Company or the Selling Stockholders to perform any agreement on its or their part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company or the Selling Stockholders is not fulfilled, the Company will reimburse the several Underwriters for all reasonable out-of-pocket disbursements (including reasonable fees and disbursements of counsel) incurred by the Underwriters in connection with their investigation, preparing to market and marketing the Securities or in contemplation of performing their obligations hereunder. The Company shall not in any event be liable to any of the Underwriters for loss of anticipated profits from the transactions covered by this Agreement. -14- 15 (ix) The Company will apply the net proceeds from the sale of the Securities to be sold by it hereunder for the purposes set forth in the Prospectus and will file such reports with the Commission with respect to the sale of the Securities and the application of the proceeds therefrom as may be required in accordance with Rule 463 of the Rules and Regulations. (x) [Except for granting options under the Company's option plans and the issuance of shares of Common Stock upon the exercise of options issued under the Company's option plans, the] Company will not, without your prior written consent, offer for sale, sell, contract to sell, grant any option for the sale of or otherwise issue or dispose of any Common Stock or any securities convertible into or exchangeable for, or any options or rights to purchase or acquire, Common Stock, except to the Underwriters pursuant to this Agreement for a period of 180 days after the commencement of the public offering of the Securities by the Underwriters. (xi) The Company either has caused to be delivered to you or will cause to be delivered to you prior to the effective date of the Registration Statement a letter in the form of Exhibit A hereto from each of the Company's directors and officers stating that such person agrees that he or she will not, without your prior written consent, offer for sale, sell, contract to sell or otherwise dispose of any shares of Common Stock or rights to purchase Common Stock, except to the Underwriters pursuant to this Agreement, for a period of 180 days after commencement of the public offering of the Securities by the Underwriters. (xii) The Company has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in, or which has constituted, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, and has not effected any sales of Common Stock which are required to be disclosed in response to Item 701 of Regulation S-K under the Act which have not been so disclosed in the Registration Statement. (xiii) Except for the underwriting discount contemplated by the Prospectus and payable to the Underwriters, the Company will not incur any liability for any finder's or broker's fee or agent's commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. (b) Each Selling Stockholder covenants and agrees with the several Underwriters as follows: (i) Except as otherwise agreed to by the Company and the Selling Stockholder, such Selling Stockholder will pay all taxes, if any, on the transfer and sale, respectively, of the Securities being sold by such Selling Stockholder, the fees of such Selling Stockholder's counsel and such Selling Stockholder's proportionate share (based upon the number of Securities being offered by such Selling Stockholder pursuant to the Registration Statement) of all costs and expenses (except for legal and accounting expenses and fees of the registrar and transfer agent) incurred by the Company pursuant to the provisions of Section 4(a)(viii) of this Agreement; provided, however, that each -15- 16 Selling Stockholder severally agrees to reimburse the Company for any reimbursement made by the Company to the Underwriters pursuant to Section 4(a)(viii) hereof to the extent such reimbursement resulted from the failure or refusal on the part of such Selling Stockholder to comply under the terms or fulfill any of the conditions of this Agreement. (ii) If this Agreement shall be terminated by the Underwriters because of any failure, refusal or inability on the part of such Selling Stockholder to perform any agreement on such Selling Stockholder's part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by such Selling Stockholder is not fulfilled, such Selling Stockholder agrees to reimburse the several Underwriters for all out-of-pocket disbursements (including reasonable fees and disbursements of counsel for the Underwriters) incurred by the Underwriters in connection with their investigation, preparing to market and marketing the Securities or in contemplation of performing their obligations hereunder. The Selling Stockholder shall not in any event be liable to any of the Underwriters for loss of anticipated profits from the transactions covered by this Agreement. (iii) The Securities to be sold by such Selling Stockholder, represented by the certificates on deposit with the Custodian pursuant to the Custody Agreement of such Selling Stockholder, are subject to the interest of the several Underwriters and the other Selling Stockholders; the arrangements made for such custody are, except as specifically provided in the Custody Agreement, irrevocable; and the obligations of such Selling Stockholder hereunder shall not be terminated, except as provided in this Agreement or in the Custody Agreement, by any act of such Selling Stockholder, by operation of law, whether by the liquidation, dissolution or merger of such Selling Stockholder, by the death of such Selling Stockholder, or by the occurrence of any other event. If any Selling Stockholder should liquidate, dissolve or be a party to a merger or if any other such event should occur before the delivery of the Securities hereunder, certificates for the Securities deposited with the Custodian shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such liquidation, dissolution, merger or other event had not occurred, whether or not the Custodian shall have received notice thereof. (iv) Such Selling Stockholder will not, without your prior written consent, offer for sale, sell, contract to sell, grant any option for the sale of or otherwise dispose of any Common Stock or any securities convertible into or exchangeable for, or any options or rights to purchase or acquire, Common Stock, except to the Underwriters pursuant to this Agreement, for a period of 180 days after the commencement of the public offering of the Securities by the Underwriters. (v) Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities, and has not effected any sales of Common Stock which, if effected by the Company, would be required to be disclosed in response to Item 701 of Regulation S-K. (vi) Such Selling Stockholder shall immediately notify you if any event occurs, or of any change in information relating to such Selling Stockholder or the Company or any new information relating to the Company or relating to any matter -16- 17 stated in the Prospectus or any supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), which results in the Prospectus (as supplemented) including an untrue statement of a material fact or omitting to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the several Underwriters hereunder are subject to the accuracy, as of the date hereof and at each of the First Closing Date and the Second Closing Date (as if made at such Closing Date), of and compliance with all representations, warranties and agreements of the Company and the Selling Stockholders contained herein, to the performance by the Company and the Selling Stockholders of their respective obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., Central time, on the date of this Agreement, or such later time and date as you, as Representatives of the several Underwriters, shall approve and all filings required by Rules 424, 430A and 434 of the Rules and Regulations shall have been timely made; no stop order suspending the effectiveness of the Registration Statement or any amendment thereof shall have been issued; no proceedings for the issuance of such an order shall have been initiated or threatened; and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of the Commission. (b) No Underwriter shall have advised the Company that the Registration Statement or the Prospectus, or any amendment thereof or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), contains an untrue statement of fact which, in your opinion, is material, or omits to state a fact which, in your opinion, is material and is required to be stated therein or necessary to make the statements therein not misleading. (c) Except as contemplated in the Prospectus, subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries shall have incurred any material liabilities or obligations, direct or contingent, or entered into any material transactions, or declared or paid any dividends or made any distribution of any kind with respect to its capital stock; and there shall not have been any change in the capital stock (other than a change in the number of outstanding shares of Common Stock due to the issuance of shares upon the exercise of outstanding options or warrants), or any material change in the short-term or long-term debt of the Company, or any issuance of options, warrants, convertible securities or other rights to purchase the capital stock of the Company or any of its subsidiaries, or any material adverse change or any development involving a prospective material adverse change (whether or not arising in the ordinary course of business), in the general affairs, condition (financial or otherwise), business, key personnel, property, prospects, net worth or results of operations of the Company and its subsidiaries, taken as a whole, that, in your judgment, makes it impractical or inadvisable to offer or deliver the Securities on the terms and in the manner contemplated in the Prospectus. (d) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, the opinion of Edwards & Angell, LLP, counsel for the Company, dated such Closing Date and addressed to you, to the effect that: -17- 18 (i) Each of the Company and its subsidiaries is duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. Each of the Company and its subsidiaries has full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as currently being carried on and as described in the Registration Statement and Prospectus. (ii) The Company's authorized capital stock is as set forth in the Prospectus under the heading "Description of Capital Stock." The description of the Company's capital stock, as set forth in the Prospectus under the heading "Description of Capital Stock," to the extent such description constitutes matters of law, summaries of legal matters or legal conclusions, has been reviewed by us and is correct in all material respects. All of the issued and outstanding shares of the capital stock of the Company (including the securities being sold hereunder by the Selling Stockholders) have been duly authorized and validly issued and are fully paid and nonassessable, and the holders thereof are not subject to personal liability by reason of being such holders. The Securities to be issued and sold by the Company hereunder have been duly authorized and, when issued, delivered and paid for in accordance with the terms of this Agreement, will have been validly issued and will be fully paid and nonassessable. The form of certificate for the Securities has been duly approved and adopted by the Company and complies with the provisions of Massachusetts law. Except as otherwise stated in the Registration Statement and Prospectus, to the knowledge of such counsel, there are no preemptive rights or other rights to subscribe for or to purchase, or any restriction upon the voting or transfer of, any shares of Common Stock pursuant to the Company's charter, by-laws or any agreement or other instrument known to such counsel to which the Company is a party or by which the Company is bound. The Securities being sold hereunder by the Company and the Selling Stockholders are duly authorized for listing, subject to official notice of issuance and evidence of satisfactory distribution, on the New York Stock Exchange. To the knowledge of such counsel, except with respect to the Securities being sold hereunder, neither the filing of the Registration Statement nor the offering or sale of the Securities as contemplated by this Agreement gives rise to any rights for or relating to the registration of any other shares of Common Stock or other securities of the Company. (iii) All of the issued and outstanding shares of capital stock of each of the Company's subsidiaries have been duly authorized and issued and are fully paid and nonassessable, and, to the knowledge of such counsel, except as otherwise described in the Registration Statement and Prospectus and except for directors' qualifying shares, the Company owns of record and beneficially, free and clear of any security interests, claims, liens, proxies, equities or other encumbrances, all of the issued and outstanding shares of such stock. To the knowledge of such counsel, except as described in the Registration Statement and Prospectus, there are no options, warrants, agreements, contracts or other rights in existence to purchase or acquire from the Company or any subsidiary of the Company or rights to convert any obligations into or exchange any Securities for, any shares of the capital stock or ownership interests of the Company or any subsidiary of the Company. (iv) The Registration Statement has become effective under the Act; any required filing of the Prospectus, and any supplements thereto, pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b) -18- 19 and, to the knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceeding for that purpose has been instituted or, to the knowledge of such counsel, threatened by the Commission. (v) The descriptions in the Registration Statement and Prospectus of contracts and other documents, insofar as such descriptions purport to summarize certain provisions thereof, provide a fair summary of such provisions; and the statements in the Prospectus under the headings "Certain United States Tax Consequences to Non-United States Holders" and "Business--Legal Proceedings" and, in the case of the laws of the Commonwealth of Massachusetts, "Risk Factors--Government Regulation" fairly summarize the matters therein described, to the extent such statements constitute matters of law, summaries of legal matters or legal conclusions, have been reviewed by us and are correct in all material respects and such counsel does not know of any statutes or legal or governmental proceedings required to be described in the Prospectus that are not described as required by the Act and the rules thereunder, or of any contracts or documents of a character required to be described in the Registration Statement or Prospectus or included as exhibits to the Registration Statement that are not described or included as required by the Act and the rules thereunder. (vi) The Company has the corporate power and authority to enter into this Agreement, and this Agreement has been duly authorized, executed and delivered by the Company; the execution, delivery and performance of this Agreement and the consummation by the Company as of the applicable Closing Date of the transactions herein contemplated will not conflict with, result in a breach or violation of any of the terms and provisions of, or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or constitute a default under, any Massachusetts or U.S. Federal statute, rule or regulation, any agreement or instrument (in each case governed by the laws of the Commonwealth of Massachusetts) known to such counsel to which the Company or any of its subsidiaries is a party or by which any of them are bound or to which any of their property is subject, the Company's or any of its subsidiaries' charter or by-laws, or any order or decree known to such counsel and binding on the Company or any of its subsidiaries of any Massachusetts or U.S. Federal court or Massachusetts or U.S. Federal governmental agency having jurisdiction over the Company or any of its subsidiaries or any of their respective properties; and no consent, approval, authorization or order of, or filing with, any Massachusetts or U.S. Federal court or Massachusetts or U.S. Federal governmental agency is required to be obtained by the Company as of the applicable Closing Date under applicable Massachusetts or U.S. Federal law for the execution, performance and delivery of this Agreement or for the consummation of the transactions contemplated hereby, including the issuance or sale of the Securities by the Company, except such as have been obtained under the Act and such as may be required under the blue sky or securities laws of any State in the United States or by the securities laws of any jurisdiction outside the United States, as to which such counsel renders no opinion. (vii) The Company is not, and, immediately after giving effect to the offering and sale of the Securities and the application of the proceeds thereof as described in the Registration Statement and the Prospectus, will not be, an "investment company" as defined in the Investment Company Act of 1940, as amended. -19- 20 (viii) The Registration Statement and the Prospectus, and any amendment thereof or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations but excluding the financial statements and the other financial information contained therein, as to which we express no opinion), comply as to form in all material respects with the applicable requirements of the Act and the Rules and Regulations; and on the basis of conferences with representatives of the Underwriters, officers and other representatives of the Company and its subsidiaries, the Selling Stockholders and officers and other representatives of the Selling Stockholders and representatives of the independent certified public accountants of the Company and its subsidiaries, at which conferences the contents of the foregoing were discussed, examination of documents referred to in the Registration Statement and Prospectus and such other procedures as such counsel deemed appropriate, and although such counsel does not assume any responsibility for, or express any opinion as to the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus or any amendment thereof or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations (except and only to the extent as set forth in such counsel's opinions rendered pursuant to the first sentence of clause (ii) above and pursuant to clause (v) above), on the basis of the foregoing, nothing has come to the attention of such counsel that would lead such counsel to believe that the Registration Statement or any amendment thereof, at the time the Registration Statement became effective and as of such Closing Date (including any Registration Statement filed under Rule 462(b) of the Rules and Regulations), contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading or (b) that the Prospectus (as of its date and as of such Closing Date), as amended or supplemented, includes any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; it being understood that such counsel need express no opinion as to the financial statements and schedules or other financial data included in or omitted from any of the documents mentioned in this clause. In rendering such opinion such counsel may rely (i) as to matters of law other than Massachusetts and Federal law, to the extent they deem appropriate and specified in such opinion, upon the opinion or opinions of local counsel whom they believe to be reliable and who are satisfactory to counsel for the Underwrites and (ii) as to matters of fact, to the extent such counsel deems reasonable, upon certificates of officers of the Company and its subsidiaries and certificates of public officials provided that the extent of such reliance is specified in such opinion. (e) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, the opinion of Edwards & Angell, LLP counsel for the Selling Stockholders, dated such Closing Date and addressed to you, to the effect that: (i) The delivery on behalf on each Selling Stockholder by the Attorney-in-Fact to the Underwriters of certificates for the Securities being sold as of the applicable Closing Date pursuant to this Agreement by such Selling Stockholder against payment therefor as provided in this Agreement will (assuming the Underwriters have purchased such Securities in good faith and without notice of any adverse claim, and assuming that there are no events or circumstances peculiar to any individual Underwriter which might result in any adverse claim), to the knowledge of such counsel, -20- 21 pass good title to such Securities, free and clear of all liens, security interests, claims and other encumbrances. (ii) Each of the Selling Stockholders has the power and authority to enter into the Custody Agreement, the Power of Attorney and this Agreement and to perform and discharge such Selling Stockholder's obligations thereunder and hereunder; and this Agreement, the Custody Agreements and the Powers of Attorney have been duly authorized, executed and delivered by (or by the Attorneys-in-Fact, or either of them, on behalf of) the Selling Stockholders and the Custody Agreement is a valid and binding agreement of the Selling Stockholders, enforceable in accordance with its respective terms (except as rights to indemnity hereunder or thereunder may be limited by Federal or state securities laws and except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally and subject to general principles of equity). (iii) To our knowledge the execution and delivery of this Agreement, the Custody Agreement and the Power of Attorney by each Selling Stockholder and the performance by such Selling Stockholder of the terms hereof and thereof and the consummation by such Selling Stockholder as of the applicable Closing Date of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, any Massachusetts or U.S. Federal statute, or regulation, or any agreement or instrument (in each case governed by the laws of the Commonwealth of Massachusetts) known to such counsel to which such Selling Stockholder is a party or by which such Selling Stockholder is bound, or any order or decree known to such counsel and binding on such Selling Stockholder of any Massachusetts or U.S. Federal court or Massachusetts or U.S. Federal government agency having jurisdiction over such Selling Stockholder or any of its respective properties; and to our knowledge no consent, approval, authorization or order of, or filing with, any Massachusetts or U.S. Federal court or Massachusetts or U.S. Federal governmental agency is required to be obtained by such Selling Stockholder as of the applicable Closing Date under applicable Massachusetts or U.S. Federal law for the execution, performance and delivery of this Agreement, the Custody Agreement and the Power of Attorney or for the consummation by such Selling Stockholder of the transactions contemplated hereby and thereby, including the sale of the Securities being sold by such Selling Stockholder, except such as may be required under the Act or the blue sky or securities laws of any State in the United States or by the securities laws of any jurisdiction outside the United States, as to which such counsel renders no opinion. In rendering such opinion such counsel may rely (i) as to matters of law other than Massachusetts and Federal law, upon the opinion or opinions of local counsel provided that the extent of such reliance is specified in such opinion and that such counsel shall state that such opinion or opinions of local counsel are satisfactory to them and that they believe they and you are justified in relying thereon and (ii) as to matters of fact, to the extent such counsel deems reasonable upon certificates of officers of the Selling Stockholders provided that the extent of such reliance is specified in such opinion. (f) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, such opinion or opinions from Cravath, Swaine & Moore, counsel for the several Underwriters, dated such Closing Date and addressed to you, with respect to the formation of the Company, the validity of the Securities, the Registration -21- 22 Statement, the Prospectus and other related matters as you reasonably may request, and such counsel shall have received such papers and information as they request to enable them to pass upon such matters. (g) On each Closing Date you, as Representatives of the several Underwriters, shall have received a letter of PricewaterhouseCoopers LLP, dated such Closing Date and addressed to you, confirming that they are independent public accountants within the meaning of the Act and are in compliance with the applicable requirements relating to the qualifications of accountants under Rule 2-01 of Regulation S-X of the Commission, and stating, as of the date of such letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of such letter), the conclusions and findings of said firm with respect to the financial information and other matters covered by its letter delivered to you concurrently with the execution of this Agreement, and the effect of the letter so to be delivered on such Closing Date shall be to confirm the conclusions and findings set forth in such prior letter. (h) On each Closing Date, there shall have been furnished to you, as Representatives of the Underwriters, a certificate, dated such Closing Date and addressed to you, signed by the chief executive officer and by the chief financial officer of the Company, to the effect that: (i) The representations and warranties of the Company in this Agreement are true and correct, in all material respects, as if made at and as of such Closing Date, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date; (ii) No stop order or other order suspending the effectiveness of the Registration Statement or any amendment thereof or the qualification of the Securities for offering or sale has been issued, and no proceeding for that purpose has been instituted or, to their knowledge, is contemplated by the Commission or any state or regulatory body; and (iii) Since the date of the most recent financial statements of the Company included in the Prospectus (exclusive or any supplement thereto), there has been no material adverse change in the business, condition (financial or otherwise) or properties of the Company and its subsidiaries taken as a whole, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated by the Prospectus (exclusive of any supplement thereto). (i) On each Closing Date, there shall have been furnished to you, as Representatives of the several Underwriters, a certificate or certificates, dated such Closing Date and addressed to you, signed by each of the Selling Stockholders or either of such Selling Stockholder's Attorneys-in-Fact to the effect that the representations and warranties of such Selling Stockholder contained in this Agreement are true and correct as if made at and as of such Closing Date, and that such Selling Stockholder has complied with all the agreements and satisfied all the conditions on such Selling Stockholder's part to be performed or satisfied at or prior to such Closing Date. -22- 23 (j) The Securities shall have been listed and admitted and authorized for trading on the New York Stock Exchange, and satisfactory evidence of such actions shall have been provided to the Representatives. (k) The Company shall have furnished to you and counsel for the Underwriters such additional documents, certificates and evidence as you or they may have reasonably requested. All such opinions, certificates, letters and other documents will be in compliance with the provisions hereof only if they are satisfactory in form and substance to you and counsel for the Underwriters. The Company will furnish you with such conformed copies of such opinions, certificates, letters and other documents as you shall reasonably request. 6. INDEMNIFICATION AND CONTRIBUTION. (a) The Company and each Selling Stockholder, jointly and severally, agree to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, to which such Underwriter may become subject, under the Act or otherwise (including in settlement of any litigation if such settlement is effected with the written consent of the Company and/or such Selling Stockholders, as the case may be), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including the information deemed to be a part of the Registration Statement at the time of effectiveness pursuant to Rules 430A and 434(d) of the Rules and Regulations, if applicable, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each Underwriter for any legal or other expenses reasonably incurred by it in connection with investigating or defending against such loss, claim, damage, liability or action; provided, however, that neither the Company nor any Selling Stockholder shall be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you, or by any Underwriter through you, specifically for use in the preparation thereof; and further provided, however, that in no event shall any Selling Stockholder be liable under the provisions of this Section 6 for any amount in excess of the aggregate amount of proceeds such Selling Stockholder received from the sale of the Securities pursuant to this Agreement. In addition to their other obligations under this Section 6(a), the Company and each Selling Stockholder, jointly and severally, agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in this Section 6(a), they will reimburse each Underwriter on a monthly basis for all reasonable legal fees or other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's and/or the Selling Stockholder's obligation to reimburse the Underwriters for such expenses and the possibility that -23- 24 such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any such interim reimbursement payment is so held to have been improper, the Underwriter that received such payment shall promptly return it to the party or parties that made such payment, together with interest, compounded daily, determined on the basis of the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by ____________________ (the "Prime Rate"). Any such interim reimbursement payments which are not made to an Underwriter within 30 days of a request for reimbursement shall bear interest at the Prime Rate from the date of such request. This indemnity agreement shall be in addition to any liabilities which the Company or the Selling Stockholders may otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company and each Selling Stockholder against any losses, claims, damages or liabilities to which the Company and the Selling Stockholders may become subject, under the Act or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto (including any term sheet within the meaning of Rule 434 of the Rules and Regulations), or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by you, or by such Underwriter through you, specifically for use in the preparation thereof, and will reimburse the Company and the Selling Stockholders for any legal or other expenses reasonably incurred by the Company or any such Selling Stockholder in connection with investigating or defending against any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve the indemnifying party from any liability that it may have to any indemnified party. In case any such action shall be brought against any indemnified party, and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in, and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of the indemnifying party's election so to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under such subsection for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that if, in the sole judgment of the Representatives, it is advisable for the Underwriters to be represented as a group by separate counsel, the Representatives shall have the right to employ a single counsel to represent the Representatives and all Underwriters who may be subject to liability arising from any claim in respect of which indemnity may be sought by the Underwriters under subsection (a) of this Section 6, in which event the reasonable fees and expenses of such separate counsel shall be -24- 25 borne by the indemnifying party or parties and reimbursed to the Underwriters as incurred (in accordance with the provisions of the second paragraph in subsection (a) above). An indemnifying party shall not be obligated under any settlement agreement relating to any action under this Section 6 to which it has not agreed in writing. (d) If the indemnification provided for in this Section 6 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Stockholders on the one hand and the Underwriters on the other in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Stockholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and Selling Stockholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Stockholders or the Underwriters and the parties' relevant intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this subsection (d) were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the first sentence of this subsection (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending against any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this subsection (d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) The obligations of the Company and the Selling Stockholders under this Section 6 shall be in addition to any liability which the Company and the Selling Stockholders may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 6 shall be in addition to any liability that the respective Underwriters may otherwise have and shall extend, upon the same terms and conditions, to each -25- 26 director of the Company (including any person who, with his consent, is named in the Registration Statement as about to become a director of the Company), to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company or any Selling Stockholder within the meaning of the Act. 7. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, and agreements of the Company herein or in certificates delivered pursuant hereto, and the agreements of the several Underwriters, the Company and the Selling Stockholders contained in Section 6 hereof, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof, or the Company or any of its officers, directors, or controlling persons, or any Selling Stockholders or any controlling person thereof, and shall survive delivery of, and payment for, the Securities to and by the Underwriters hereunder. 8. SUBSTITUTION OF UNDERWRITERS. (a) If any Underwriter or Underwriters shall fail to take up and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder, upon tender of such Firm Shares in accordance with the terms hereof, and the amount of Firm Shares not purchased does not aggregate more than 10% of the total amount of Firm Shares set forth in Schedule II hereto, the remaining Underwriters shall be obligated to take up and pay for (in proportion to their respective underwriting obligations hereunder as set forth in Schedule II hereto except as may otherwise be determined by you) the Firm Shares that the withdrawing or defaulting Underwriters agreed but failed to purchase. (b) If any Underwriter or Underwriters shall fail to take up and pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to be purchased hereunder, upon tender of such Firm Shares in accordance with the terms hereof, and the amount of Firm Shares not purchased aggregates more than 10% of the total amount of Firm Shares set forth in Schedule II hereto, and arrangements satisfactory to you for the purchase of such Firm Shares by other persons are not made within 36 hours thereafter, this Agreement shall terminate. In the event of any such termination neither the Company nor any Selling Stockholder shall be under any liability to any Underwriter (except to the extent provided in Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the amount of Firm Shares agreed by such Underwriter to be purchased hereunder) be under any liability to the Company or the Selling Stockholders (except to the extent provided in Section 6 hereof). If Firm Shares to which a default relates are to be purchased by the non-defaulting Underwriters or by any other party or parties, the Representatives or the Company shall have the right to postpone the First Closing Date for not more than seven business days in order that the necessary changes in the Registration Statement, Prospectus and any other documents, as well as any other arrangements, may be effected. As used herein, the term "Underwriter" includes any person substituted for an Underwriter under this Section 8. 9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at 10:00 a.m., Central time, on the first full business day following the effective date of the Registration Statement, or at such -26- 27 earlier time after the effective time of the Registration Statement as you in your discretion shall first release the Securities for sale to the public; provided, that if the Registration Statement is effective at the time this Agreement is executed, this Agreement shall become effective at such time as you in your discretion shall first release the Securities for sale to the public. For the purpose of this Section, the Securities shall be deemed to have been released for sale to the public upon release by you of the publication of a newspaper advertisement relating thereto or upon release by you of telexes offering the Securities for sale to securities dealers, whichever shall first occur. By giving notice as hereinafter specified before the time this Agreement becomes effective, you, as Representatives of the several Underwriters, or the Company may prevent this Agreement from becoming effective without liability of any party to any other party, except that the provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at all times be effective. (b) You, as Representatives of the several Underwriters, shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the First Closing Date, and the option referred to in Section 3(b), if exercised, may be canceled at any time prior to the Second Closing Date, if (i) the Company shall have failed, refused or been unable, at or prior to such Closing Date, to perform any agreement on its part to be performed hereunder, (ii) any other condition of the Underwriters' obligations hereunder is not fulfilled, (iii) trading on the New York Stock Exchange or the American Stock Exchange shall have been wholly suspended, (iv) minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York Stock Exchange or the American Stock Exchange, by such Exchange or by order of the Commission or any other governmental authority having jurisdiction, (v) a banking moratorium shall have been declared by Federal, New York or Massachusetts authorities, or (vi) there has occurred any material adverse change in the financial markets in the United States or an outbreak of major hostilities (or an escalation thereof) in which the United States is involved, a declaration of war by Congress, any other substantial national or international calamity or any other event or occurrence of a similar character shall have occurred since the execution of this Agreement that, in your judgment, makes it impractical or inadvisable to proceed with the completion of the sale of and payment for the Securities. Any such termination shall be without liability of any party to any other party except that the provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at all times be effective. (c) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section, the Company and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified promptly by you by telephone or telegram, confirmed by letter. If the Company elects to prevent this Agreement from becoming effective, you and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified by the Company by telephone or telegram, confirmed by letter. 10. DEFAULT BY ONE OR MORE OF THE SELLING STOCKHOLDERS OR THE COMPANY. If one or more of the Selling Stockholders shall fail at the First Closing Date to sell and deliver the number of Securities which such Selling Stockholder or Selling Stockholders are obligated to sell hereunder, and the remaining Selling Stockholders do not exercise the right hereby granted to increase, pro rata or otherwise, the number of Securities to be sold by them hereunder to the total number of Securities to be sold by all Selling Stockholders as set forth in Schedule I, then the Underwriters may at your option, by notice from you to the Company and the non-defaulting Selling Stockholders, either (a) terminate this Agreement without any liability on the part of any -27- 28 non-defaulting party or (b) elect to purchase the Securities which the Company and the non-defaulting Selling Stockholders have agreed to sell hereunder. In the event of a default by any Selling Stockholder as referred to in this Section, either you or the Company or, by joint action only, the non-defaulting Selling Stockholders shall have the right to postpone the First Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. If the Company shall fail at the First Closing Date to sell and deliver the number of Securities which it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party. No action taken pursuant to this Section shall relieve the Company or any Selling Stockholders so defaulting from liability, if any, in respect of such default. 11. INFORMATION FURNISHED BY UNDERWRITERS. The statements set forth in the last paragraph of the cover page and under the caption "Underwriting" in any Preliminary Prospectus and in the Prospectus constitute the written information furnished by or on behalf of the Underwriters referred to in Section 2 and Section 6 hereof. 12. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing or by telegraph and, if to the Underwriters, shall be mailed, telegraphed or delivered to the Representatives c/o Piper Jaffray Inc., Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402, except that notices given to an Underwriter pursuant to Section 6 hereof shall be sent to such Underwriter at the address stated in the Underwriters' Questionnaire furnished by such Underwriter in connection with this offering; if to the Company, shall be mailed, telegraphed or delivered to it at 950 Winter Street, Suite 41000, Waltham, MA 02154 Attention: Richard F. Latour; if to any of the Selling Stockholders, at the address of the Attorneys-in-Fact as set forth in the Powers of Attorney, or in each case to such other address as the person to be notified may have requested in writing. All notices given by telegram shall be promptly confirmed by letter. Any party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose. 13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns and the controlling persons, officers and directors referred to in Section 6. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Securities from any of the several Underwriters. 14. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Minnesota. [Signature Page Follows] -28- 29 Please sign and return to the Company the enclosed duplicates of this letter whereupon this letter will become a binding agreement between the Company, the Selling Stockholders and the several Underwriters in accordance with its terms. Very truly yours, MICROFINANCIAL INCORPORATED By....................................... President and Chief Executive Officer SELLING STOCKHOLDERS By....................................... Attorney-in-Fact Confirmed as of the date first above mentioned, on behalf of themselves and the other several Underwriters named in Schedule II hereto. PIPER JAFFRAY INC. By............................. Managing Director CIBC OPPENHEIMER CORP. By............................. Managing Director -29- 30 SCHEDULE I Selling Stockholders Number of Maximum Number of Firm Shares Option Shares Name to be Sold Subject to Option - ---- ---------- ----------------- Peter R. Bleyleben 129,550 129,550 Torrence C. Harder 114,650 114,650 Trust for Ashley Jane Harder 7,800 7,800 Trust for Lauren E. Harder 7,800 7,800 Brian C. Boyle 118,500 118,500 Rosemary Boyle 80,050 80,050 Entrepreneurial Ventures, Inc. 29,200 29,200 Spindle Limited Partnership 30,000 30,000 Richard F. Latour 35,450 35,450 Rock Creek Partnership 18,125 18,125 Arthur J. Epstein 15,000 15,000 Maureen Curran 8,200 8,200 John Plumlee 3,725 3,725 Steven Obana 1,950 1,950 ------- ------- Total. . . . . . . . . 600,000 600,000 ======= ======= -30- 31 SCHEDULE II Underwriter Number of Firm Shares (1) - ----------- ------------------------- Piper Jaffray Inc. CIBC Oppenheimer Corp. -------- Total. . . . . . . . . . . . . . . . . . . . . . 4,000,000 ========= ----------------- (1) The Underwriters may purchase up to an additional 600,000 Option Shares, to the extent the option described in Section 3(b) of the Agreement is exercised, in the proportions and in the manner described in the Agreement. -31- 32 EXHIBIT A [Letterhead of officer, director or major stockholder of MicroFinancial Incorporated] MicroFinancial Incorporated --------------------------- Public Offering of Common Stock ------------------------------- , 19 Piper Jaffray Inc. CIBC Oppenheimer Corp. As Representatives of the several Underwriters, c/o Piper Jaffray Inc. Piper Jaffray Tower 222 South Ninth Street Minneapolis, MN 55402 Ladies and Gentlemen: This letter is being delivered to you in connection with the proposed Underwriting Agreement (the "Underwriting Agreement"), between MicroFinancial Incorporated, a Massachusetts corporation (the "Company"), and each of you as representatives of a group of Underwriters named therein, relating to the underwritten public offering of Common Stock, $0.01 par value (the "Common Stock"), of the Company. In order to induce you and the other Underwriters to enter into the Underwriting Agreement, the undersigned will not, without the prior written consent of Piper Jaffray Inc., offer, sell, contract to sell, pledge or otherwise dispose of, or file (or participate in the filing of) a registration statement with the Securities and Exchange Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Securities and Exchange Commission promulgated thereunder with respect to, any shares of capital stock of the Company or any securities convertible into exercisable or exchangeable for such capital stock, or publicly announce an intention to effect any such transaction, for a period of 180 days after the date of this Agreement, other than shares of Common Stock disposed of as bona fide gifts approved by Piper Jaffray Inc. -32- 33 If for any reason the Underwriting Agreement shall be terminated prior to the Closing Dated (as defined in the Underwriting Agreement), the agreement set forth above shall likewise be terminated. Yours very truly, [Signature of officer, director or major stockholder] [Name and address of officer, director or major stockholder] -33- EX-4.1 3 SPECIMEN STOCK CERTIFICATE 1 Exhibit 4.1 TEMPORARY CERTIFICATE - EXCHANGEABLE FOR DEFINITIVE ENGRAVED CERTIFICATE WHEN READY FOR DELIVERY [Vignette showing a woman, keyboard, abacus and computer disc] MicroFinancial Incorporated INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFICATE IS TRANSFERABLE COMMON STOCK CUSIP 595072 10 9 IN BOSTON, MA OR NEW YORK, NY SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT is the owner of FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF ========================= MicroFinancial Incorporated ========================== (hereinafter called the "Company") transferable upon the books of the Company by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be subject to all provisions of the Articles of Organization and By-Laws of the Company as from time to time amended (copies of which are on file with the Company) to all of which the holder, by acceptance hereof, assents. This certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. IN WITNESS WHEREOF, the Company has caused this certificate to be signed by the facsimile signatures of its duly authorized officers and its facsimile corporate seal to be hereunto affixed. Dated: /s/ /s/ EXECUTIVE VICE PRESIDENT, MICROFINANCIAL PRESIDENT AND CHIEF CHIEF OPERATING OFFICER, INCORPORATED EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER, TREASURER AND SECRETARY INCORPORATED 1987 MASSACHUSETTS * COUNTERSIGNED AND REGISTERED: STATE STREET BANK AND TRUST COMPANY TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 2 MicroFinancial Incorporated THE COMPANY HAS MORE THAN ONE CLASS OF STOCK AUTHORIZED TO BE ISSUED. THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO THE HOLDER OF THIS CERTIFICATE UPON WRITTEN REQUEST A COPY OF THE FULL TEXT OF THE PREFERENCES, POWERS, QUALIFICATIONS AND RIGHTS OF THE SHARES OF EACH CLASS OF STOCK (AND ANY SERIES THEREOF) AUTHORIZED TO BE ISSUED BY THE COMPANY. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM -as tenants in common UNIF GIFT MIN ACT- ______ Custodian _______ TEN ENT -as tenants by the entireties (Cust) (Minor) JT TEN -as joint tenants with right of survivorship and not as tenants under Uniform Gifts to Minors in common Act_____________ (State)
Additional abbreviations may also be used though not in the above list. For Value Received, _________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ ______________________________________ ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ _________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said shares on the books of the within named Corporation with full power of substitution in the premises. Dated _______________ _____________________________________________________________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: _____________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. EX-10.30 4 4TH AMENDMENT TO AMENDED & RESTATED LOAN AGREEMENT 1 Exhibit 10.30 FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT AMONG LEASECOMM CORPORATION, AS BORROWER, THE LENDERS NAMED THEREIN AND FLEET BANK, NATIONAL ASSOCIATION, AS AGENT JULY 31, 1998 2 FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT FOURTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment") made as of the 31st day of July, 1998 by and among LEASECOMM CORPORATION, a Massachusetts corporation (the "Borrower"), FLEET BANK, NATIONAL ASSOCIATION, a national banking association, in its individual corporate capacity, SANWA BUSINESS CREDIT CORPORATION, a Delaware corporation, FIRST UNION NATIONAL BANK (as successor to CORESTATES BANK, N.A.), a national banking association, PNC BANK, NATIONAL ASSOCIATION, a national banking association, and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (individually, a "Lender" and, collectively, the "Lenders"), and FLEET BANK, NATIONAL ASSOCIATION, as agent for the Lenders (the "Agent"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement. WITNESSETH: WHEREAS, the Borrower, the Lenders and the Agent are parties to a Loan Agreement dated as of July 29, 1993, as amended and restated as of July 28, 1995, as further amended by the First Amendment to Amended and Restated Loan Agreement made as of October 30, 1995, the Second Amendment to Amended and Restated Loan Agreement made as of August 6, 1996, and the Third Amendment to Loan Agreement and Consent made as of the August 11, 1998 (the "Loan Agreement") pursuant to which, INTER ALIA, the Lenders agreed to make available to the Borrower a revolving credit and term loan facility; WHEREAS, the Guarantor is proposing to register, offer to sell and sell its shares of Common Stock, par value $.01 per share (the "Common Stock"), under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Form S-1 Registration Statement under the Securities Act of 1933 (the offer and sale of such shares pursuant to such Registration Statement being hereinafter referred to as the "IPO"); and WHEREAS, as in connection with the IPO, the Borrower has requested the Lenders to agree to amend the Loan Agreement in certain respects, as hereinafter provided, and the Lenders are willing to agree to such changes, subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: 1. AMENDMENTS. The Loan Agreement is hereby amended as follows: (a) The definition of "PRINCIPAL OFFICE" in Section 1.1 of the Loan Agreement is hereby amended and restated in its entirety as follows: 3 "'PRINCIPAL OFFICE' - the principal office of the Agent, which office is currently located at 1185 Avenue of the Americas, New York, New York 10036." (b) The definition "IPO" is hereby added to Section 1.1 to read in its entirety as follows: "'IPO' - the initial public offering and sale of the shares of Common Stock, par value $.01 per share, of the Guarantor pursuant to an effective Form S-1 Registration Statement under the Securities Act of 1933, as amended. (c) Section 7.4 is hereby amended and restated to read in its entirety as follows: "SECTION 7.4 MERGERS, ACQUISITIONS. Merge or consolidate with any Person (whether or not the Borrower is the surviving entity) or acquire all or substantially all of the assets or any of the capital stock of any Person or sell all or any substantial part of its assets or create any Subsidiaries, whether wholly- or partially-owned; provided that a Loan Party (the "Acquiring Entity") may, upon prior written notice to the Agent and the Lenders, acquire any third Person, whether by merger, consolidation or acquisition of assets, subject to satisfaction of each of the following conditions: (i) if such transaction shall constitute a merger or consolidation, the Acquiring Entity shall be the surviving entity, (ii) the purchase price and other consideration for such transaction or related series of transactions (which shall include any assumption of indebtedness or issuance of capital stock (valued at the fair market value thereof)) shall not in the aggregate exceed the lesser of $10,000,000 or an amount equal to 15% of the Consolidated Tangible Capital Funds (measured as of the most recently available financial statements of the Guarantor) or, if the purchase price and other consideration shall exceed such amount, the Majority Lenders shall have given their prior written consent thereto, provided such consent shall be deemed to have been given if: (x) the Borrower shall have submitted directly to each of the Lenders and the Agent a written request for consent which request shall be delivered in hard copy by commercial messenger or courier service or by certified mail, return receipt requested, (y) such request shall have been accompanied by all appropriate supporting documentation, including, without limitation, pro forma financial statements and a certificate from the chief financial officer of the Guarantor setting forth a pro forma recalculation of the financial covenants in Section 6.9 evidencing compliance with such covenants as at and through the end of the period covered by 2 4 the most recent financial statements delivered to the Agent and the Lenders pursuant to the Loan Agreement, and other financial and other information necessary to enable to the Lenders to provide an informed consent with respect to such acquisition and (z) neither the Agent nor the Majority Lenders shall have objected to such transaction, either by telephone, facsimile or in writing, within ten (10) Business Days of actual receipt by each of the Lenders and the Agent of the items described in preceding parts (x) and (y), (iii) the business or assets acquired shall be in the same line of business as the Borrower and the portfolio of leases, if any, constituting such assets acquired shall satisfy the credit and risk acceptance policies and criteria of the Borrower then generally applicable to the Borrower's own leases and (iv) no Default or Event of Default shall exist either before or after giving effect to such transaction." (d) Section 7.6 is hereby deleted in its entirety. (e) Section 7.7 is hereby amended to delete the following from where it appears therein: "any shares of stock or". (f) Section 7.8 is hereby amended to add the following immediately prior to the end of the sentence: "and the Guarantor may prepay any Subordinated Debt provided (x) such prepayment is made from the net proceeds of the initial public offering of its Common Stock and (y) Consolidated Tangible Capital Funds and Consolidated Tangible Net Worth shall be in excess of the respective amounts thereof immediately prior to the IPO." (g) Subsection (B) of Section 7.9 is hereby amended and restated to read in its entirety as follows: "(B) any other Investments, provided that the same are permitted pursuant to Section 7.4."; and the paragraph immediately succeeding subsection (B) is hereby deleted in its entirety. (h) Section 8.9 is hereby amended and restated to read in its entirety as follows: "SECTION 8.9 OWNERSHIP OF STOCK AND CONTROL OF BORROWER. (a) The Guarantor shall at any time own, beneficially and of record, less than 100% in the aggregate of all of the issued and outstanding shares of capital stock of the Borrower, (b) 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 Principals shall own and/or Control more than 50% of the issued and outstanding shares of capital stock of the Guarantor on a fully diluted basis (assuming the exercise of all outstanding stock options) of the Guarantor having ordinary voting 3 5 rights for the election of directors or (c) the Principals shall own in the aggregate less than 45%, or own and/or Control 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 Guarantor having ordinary voting rights for the election of directors; PROVIDED that subpart (c) shall not apply if and for so long as the Common Stock of the Guarantor shall be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended." (i) Section 11.9 is hereby amended to substitute the following for the address for the Agent or, in its capacity as Lender, the Bank: Fleet Bank, National Association 1185 Avenue of the Americas New York, New York 10036 Attention: Leasing & Finance Companies Telecopier: (212) 819-6212 2. CONDITIONS PRECEDENT. Prior to or simultaneously with the entry by the Borrower into this Amendment and as a condition precedent to the effectiveness of this Amendment: (a) DOCUMENTS. The Agent shall have received with sufficient original counterparts for each Lender (i) this Amendment duly executed by the Borrower and each Lender and (ii) the Confirmation of Guaranty annexed to this Amendment duly executed by the Guarantor and. (b) IPO. The IPO shall have occurred and the Agent shall have received evidence satisfactory to it to such effect. (c) CORPORATE ACTION. The Borrower shall have taken all corporate action required to be taken to authorize the execution, delivery and performance of this Amendment, the agreements, documents and instruments referred to herein and the transactions contemplated hereby and thereby. (d) CORPORATE DOCUMENTS AND CERTIFICATES. The Borrower and the Guarantor shall have delivered to the Agent, with sufficient original counterparts for each Lender, an officer's certificate, in form and substance satisfactory to the Agent, confirming the following: (i) None of its organizational documents have been amended since the date(s) as of which copies of said organizational documents were certified to the Agent pursuant to the Third Amendment to Loan Agreement and Consent made as of August 11, 1997; (ii) Specimen signature(s) of the person(s) authorized to execute this Amendment; 4 6 (iii) The execution, delivery and performance of this Amendment has been authorized by resolutions of the Board of Directors of the Borrower and the Guarantor, copies of which shall be attached to such officer's certificate; and (iv) Each of the Borrower and the Guarantor remains in good standing in its respective jurisdiction of incorporation and in each jurisdiction in which it is qualified to do business. (e) BANK OF BOSTON FACILITY. The Bank of Boston Facility shall have been amended to reflect the amendments set forth herein (or shall be amended subject only to effectiveness of the amendments set forth herein) to the extent the provisions being amended pursuant to this Amendment are contained therein, and the Agent shall have received evidence satisfactory to it to such effect. (f) PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto, including, without limitation, the Certificate of Incorporation Amendments, shall be reasonably satisfactory in form and substance to the Agent, and the Agent and each Lender, upon request by such Lender, shall have received all information and such counterpart originals or certified or other of such documents as the Agent may reasonably request prior to the date hereof. (g) COMPLIANCE. (i) The Borrower and the Guarantor shall have complied and shall then be in compliance with all of the terms, covenants and conditions of the Loan Agreement as amended by this Amendment; and (ii) The representations and warranties contained in Article 3 of the Loan Agreement shall be true and correct on the date hereof; and (iii) No Default or Event of Default shall have occurred, and the Agent and each Lender shall have received a Compliance Certificate dated the date hereof certifying, INTER ALIA, that the conditions set forth in this Section 2 are satisfied on such date. (h) LEGAL MATTERS. All legal matters incident to the effectiveness of this Amendment shall be satisfactory to counsel to the Agent. 3. REAFFIRMATION OF SECURITY INTEREST. The Borrower hereby reaffirms as of the date hereof each and every security interest and lien granted in favor of the Agent and the Lenders under the Loan Documents, and agrees and acknowledges that such security interests and liens shall continue from and after the date hereof, in each case after giving effect to the Loan Agreement as amended by this Amendment, and the obligations secured thereby and thereunder shall include Borrower's obligations under the Loan Agreement as amended by this Amendment. Each such 5 7 reaffirmed security interest and lien remains and shall continue to remain in full force and effect and is hereby in all respects ratified and confirmed. 4. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. (a) On and after the date hereof, each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents, shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended herein, the Loan Agreement shall remain in full force and effect in accordance with its terms. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICT OF LAWS. 6. FURTHER ASSURANCES. Each of the parties hereto hereby agrees to do such further acts and things and to execute, deliver and acknowledge such additional agreements, powers and instruments as any other party hereto may reasonably require to carry into effect the purposes of this Amendment. 7. COSTS AND EXPENSES. The Borrower hereby agrees to pay all reasonable costs and expenses of the Agent (including reasonable attorneys' fees and expenses) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment. 8. COUNTERPARTS; FACSIMILE SIGNATURES. This Amendment may be executed in any number of counterparts and by different parties on different counterparts, but all such counterparts shall together constitute but one agreement. Execution and delivery of this Amendment by facsimile transmission shall constitute execution and delivery of this Amendment for all purposes, with the same force and effect as execution and delivery of an originally manually signed copy hereof. 9. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment or be given any substantive effect. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURES TO FOLLOW] 6 8 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. BORROWER: LEASECOMM CORPORATION By: /s/ Peter Bleyleben ------------------------------- Name: Peter Bleyleben Title: President and CEO LENDERS: FLEET BANK, NATIONAL ASSOCIATION Address: Fleet Bank, N.A. 1185 Avenue of the Americas New York, New York 10036 Attention: Mr. Harris C. Mehos Vice President Telecopier: (212) 819-6212 By: /s/ Harris C. Mehos ------------------------------- Name: Harris C. Mehos Title: Vice President 7 9 SANWA BUSINESS CREDIT CORPORATION Address: Sanwa Business Credit Corporation One South Wacker Drive Chicago, Illinois 60606 Attention: Mr. Jeff Griffor Credit Manager Telecopier: (312) 853-1335 By: /s/ Jeffrey A. Griffor ------------------------------- Name: Jeffrey A. Griffor Title: Credit Manager FIRST UNION NATIONAL BANK (successor to CORESTATES BANK, N.A.) Address: 1339 Chestnut Street Mailstop: PA4827 Philadelphia, Pennsylvania 19101-7618 Attention: Ms. Theresa Smith Vice President Telecopier: (215) 786-7704 By: /s/ Theresa Smith ------------------------------- Name: Theresa Smith Title: Vice President 8 10 PNC BANK, NATIONAL ASSOCIATION Address: PNC Bank, National Association 1600 Market Street Philadelphia, Pennsylvania 19103 Attention: Mr. Philip Jackson Senior Vice President Telecopier: (215) 585-4769 By: /s/ Philip C. Jackson ------------------------------- Name: Philip C. Jackson Title: Senior Vice President STATE STREET BANK AND TRUST COMPANY Address: State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110-2804 Attention: F. Andrew Beise Vice President, Large Corporate Department Telecopier: (617) 664-4971 By: /s/ F. Andrew Beise ------------------------------- Name: F. Andrew Beise Title: Vice President 9 11 AGENT: FLEET BANK, NATIONAL ASSOCIATION, as Agent By: /s/ Harris C. Mehos -------------------------- Name: Harris C. Mehos Title: Vice President 10 12 CONFIRMATION OF GUARANTY The undersigned Guarantor of the Obligations under the Loan Documents hereby consents and agrees to the amendment on the date hereof, pursuant to the Fourth Amendment to Amended and Restated Loan Agreement (the "Fourth Amendment"), of the Amended and Restated Loan Agreement dated as of July 28, 1995, as amended by the First Amendment to Amended and Restated Loan Agreement made as of October 30, 1995, the Second Amendment to Amended and Restated Loan Agreement made as of August 6, 1996, and the Third Amendment to Loan Agreement and Consent made as of August 11, 1997, acknowledges receipt of a copy of the Fourth Amendment and agrees that its guaranty of the payment and performance of the Obligations pursuant to the Guaranty dated as of July 29, 1993 remains in full force and effect and shall continue to apply to the Obligations, after giving effect to the Fourth Amendment. The undersigned hereby reaffirms as of the date hereof each and every representation and warranty made pursuant to the Guaranty, and confirms that each and every such representation and warranty is true and correct on and as of the date hereof as if made on and as of such date. Dated: as of July 31, 1998 BOYLE LEASING TECHNOLOGIES, INC. By: /s/ Richard F. Latour ------------------------------------- Name: Richard F. Latour Title: Executive Vice President, COO/CFO 11 EX-10.31 5 5TH AMENDMENT TO AMENDED & RESTATED LOAN AGREEMENT 1 EXHIBIT 10.31 FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT AMONG LEASECOMM CORPORATION, AS BORROWER, THE LENDERS NAMED HEREIN AND FLEET BANK, NATIONAL ASSOCIATION, AS AGENT JANUARY 27, 1999 2 FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT FIFTH AMENDMENT TO AMENDED AND RESTATED LOAN AGREEMENT (this "Amendment") made as of the 27th day of January, 1999 by and among LEASECOMM CORPORATION, a Massachusetts corporation (the "Borrower"), FLEET BANK, N.A., a national banking association, in its individual corporate capacity, and FIRST UNION NATIONAL BANK (as successor to CORESTATES BANK, N.A.), a national banking association, (individually, a "Lender" and, collectively, the "Lenders"), and FLEET BANK, N.A., as agent for the Lenders (the "Agent"). Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed thereto in the Loan Agreement. W I T N E S S E T H: WHEREAS, the Borrower, the Lenders and the Agent are parties to a Loan Agreement dated as of July 29, 1993, as amended and restated as of July 28, 1995, as further amended by the First Amendment to Amended and Restated Loan Agreement made as of October 30, 1995, the Second Amendment to Amended and Restated Loan Agreement made as of August 6, 1996, the Third Amendment to Loan Agreement and Consent made as of the August 11, 1998, and the Fourth Amendment to Amended and Restated Loan Agreement made as of July 31, 1998 (the "Loan Agreement") pursuant to which, INTER ALIA, the Lenders agreed to make available to the Borrower a revolving credit and term loan facility; WHEREAS, PNC Bank, National Association, State Street Bank and Trust Company and Sanwa Business Credit Corporation have determined to withdraw as Lenders under the Loan Agreement; WHEREAS, the Borrower has requested that the Loan Agreement be amended as hereinafter set forth; WHEREAS, the Lenders are willing to amend the Loan Agreement on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein contained, the parties hereto agree as follows: 1. AMENDMENTS. The Loan Agreement is hereby amended as follows: (a) the definition of "BANK OF BOSTON FACILITY" set forth in Section 1.1 of the Loan Agreement is hereby amended by adding to the end thereof before the "." the words ", as such facility shall be amended from time to time." (b) The definition of "BORROWING BASE" set forth in Section 1.1 of the Loan Agreement is hereby amended by (i) deleting "50%" from part (iii) of the first sentence thereof and substituting in lieu thereof "75%" (ii) inserting the words "or (iii) with respect to Eligible Lease Receivables relating to Federal Funds Rate Loans, the Borrowing Rate applicable to each such Federal Funds Rate Loan as of such date" in the second sentence thereof before the words "and (b) determination" and (iii) inserting at the end of the first sentence thereof the words "(iv) in the case of Eligible Installment Finance Contracts, an amount equal to 75% of receivables then due and unpaid with respect to each Eligible Installment Finance Contract" 1 3 (c) The definition of "COMMITMENT" set forth in Section 1.1 of the Loan Agreement is hereby amended by deleting the names of the Lenders and the amounts set forth opposite the Lenders' names at the end of such definition and replacing such names and amounts with the following: "Fleet Bank, N.A. $30,000,000 First Union National Bank $25,000,000" (d) The definition "COMMITMENT TERMINATION DATE" set forth in Section 1.1 of the Loan Agreement is hereby amended to read in its entirety as follows: "COMMITMENT TERMINATION DATE" - July 31, 2000, unless extended pursuant to Section 2.14 hereof." (e) The definition "EQUIPMENT" set forth in Section 1.1 of the Loan Agreement is hereby amended by (i) inserting the words "microticket equipment leased to commercial end-users, restaurant equipment, other equipment costing less than $15,000" after the words "office equipment." (f) The definition "INTEREST PERIOD" set forth in Section 1.1 of the Loan Agreement is hereby amended by inserting the words "or Eligible Installment Finance Contracts" after the words ""Eligible Rental Contracts" (g) The definition "LEASE" set forth in Section 1.1 of the Loan Agreement is hereby amended by inserting the words "or installment sales contract" after the words "any lease agreement" (h) The following definitions shall be added to Section 1.1 of the Loan Agreement in their correct alphabetical position: 'CONTRACTOR' - a Person who is engaged in the business of selling and providing service related contracts. 'ELIGIBLE INSTALLMENT FINANCE CONTRACT' - an Installment Finance Contract: (a) Which is in full force and effect; (b) Which is assignable by the Contractor thereunder; (c) Which provides that the customer's obligations thereunder are absolute and unconditional, and not subject to defense, deduction, set-off or claim and as to which no defenses, set-offs, claims or counterclaims exist or have been asserted; (d) Which is not subject to any Lien other than that in favor of the Agent on behalf of the Lenders and in which the Agent has a duly perfected first priority security interest under the UCC; and (e) Under which no payment is more than 90 days past due. `INSTALLMENT FINANCE CONTRACT' - an agreement between a Contractor and a customer providing for the sales and/or the performance of services by the Contractor and the payment by the customer for such services over time. 2 4 `FEDERAL FUNDS RATE' - for any day, a fluctuating interest rate per annum equal to the weighted average of the rates on seven-day Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent. `FEDERAL FUNDS RATE LOAN' - a Loan the interest on which is determined on the basis of the Federal Funds Rate. (i) The second sentence of Section 2.1(a) of the Loan Agreement is hereby amended by (i)deleting the phrase "parts (i) through (iv)" and inserting in lieu thereof the phrase "parts (i) through (vi)" and (ii) inserting new sub-parts (v) and (vi) after sub-part (iv) as follows: "or (v) in the case of Loans based upon Eligible Rental Contracts, the aggregate outstanding principal amount of all such Loans exceed 20% of the Commitment;" (j) Section 2.1(b) of the Loan Agreement is hereby amended by adding the words ", Federal Funds Rate Loans" after the words "Prime Rate Loans" and before the words "and Libor Loans" in each of the first and third sentences thereof. (k) Clause (x) of Section 2.1(c) of the Loan Agreement is hereby amended by inserting the words "or Eligible Installment Finance Contracts" after the words "Eligible Leases" both times such phrase appears. (l) Clause (x) of part(ii) of Section 2.1(d) of the Loan Agreement is hereby amended by inserting the words "or Eligible Installment Finance Contracts" after the words "Eligible Leases" (m) Section 2.2 of the Loan Agreement is hereby amended by inserting the words "or a Federal Funds Rate Loan" after the words "conversion of a Prime Rate Loan" in the first sentence thereof and after the words "borrowing of a Prime Rate Loan" in the second sentence thereof. (n) Section 2.3(a) of the Loan Agreement is hereby amended by renumbering sub-parts "(vi)" and "(vii)" to be "(vii)" and "(viii)", respectively, and adding a new sub-part (vi) as follows: "(vi) a statement that such Eligible Installment Finance Contracts, subject to the acceptance by the Agent of the applicable obligor thereunder, satisfy the conditions to qualify as Eligible Installment Finance Contracts," (o) Section 2.3(b)(iii) of the Loan Agreement is hereby amended by (i) deleting "50%" and substituting in lieu thereof "75%" and (ii) adding a new subsection (v) thereof following sub-section (iv) thereof, which shall read in its entirety as follows: "(v) With respect to Loans based upon Eligible Installment Finance Contracts, the amount of each such Loan shall be an amount equal to 75% of the receivables then due and unpaid on such Eligible Installment Finance Contracts, discounted to present value (which calculation shall not take into account payments due and payable under such Eligible Installment Finance Contracts beyond 60 months after the commencement date 3 5 of such Eligible Installment Finance Contracts) by a percentage equal to the Borrowing Rate applicable to such Loan as of the applicable Borrowing Date." (p) Section 2.5(a) of the Loan Agreement is hereby amended by deleting ".25% per annum" and substituting in lieu thereof ".275% per annum." (q) Section 2.5(b) of the Loan Agreement is hereby amended to read in its entirety as follows: "(b) The Borrower shall pay to the Agent $70,000 per year, which fee shall be payable quarterly in advance on January ___, 1999 and on the First Business Day of each April, July, October and January thereafter, for so long as the Loan Agreement is in effect." (r) Section 2.6(a) of the Loan Agreement is hereby amended by (i) inserting at the beginning thereof before the words "The aggregate" the subheading "(i)", (ii) inserting after the words "Eligible Equipment" the words "and Eligible Installment Finance Sales Contracts" in subpart (i) thereof, and (iii) adding three new subparts (ii), (iii) and (iv) as follows: "(ii) If the percentage of the Borrowing Base attributable to Eligible Lease Receivables, Net Book Value and receivables due and unpaid on Eligible Installment Finance Contracts of any single obligor that is an end user under an Eligible Lease or Eligible Rental Contract or direct obligor under an Eligible Installment Finance Contract exceeds an amount equal to 5% of the Borrowing Base as of the date of any Borrowing Base Report, the Borrower shall immediately, but in any event not later than the next due date for the Borrowing Base Report required to be delivered to the Agent pursuant to Section 5.10 hereof, cause the Borrowing Base to be increased by granting to the Agent, as agent for the Lenders pursuant to the Security Agreement, a Lien pursuant to and as contemplated by Section 2.22 hereof and the Security Documents on additional Eligible Leases and Eligible Rental Contracts and Eligible Equipment and Eligible Installment Finance Contracts or other security acceptable to the Lenders, in their sole discretion, such that, after giving effect to the grant of such Lien, such percentage no longer exceeds an amount equal to 5% of the Borrowing Base. (iii) If the percentage of the Borrowing Base attributable to Eligible Lease Receivables and Net Book Value for which the Eligible Equipment is microticket equipment leased to consumer end-users exceeds 20% of the Borrowing Base as of the date of any Borrowing Base Report, the Borrower shall immediately, but in any event not later than the next due date for the Borrowing Base Report required to be delivered to the Agent pursuant to Section 5.10 hereof, cause the Borrowing Base to be increased by granting to the Agent, as agent for the Lenders pursuant to the Security Agreement, a Lien pursuant to and as contemplated by Section 2.22 hereof and the Security Documents on additional Eligible Leases and Eligible Rental Contracts and Eligible Equipment and Eligible Installment Finance Contracts or other security acceptable to the Lenders, in their sole discretion, such that, after giving effect to the grant of such Lien, such percentage no longer exceeds an amount equal to 20% of the Borrowing Base. (iv) If the percentage of the Borrowing Base attributable to Eligible Lease Receivables and Net Book Value regarding Eligible Equipment located in a single state exceeds 20% of the Borrowing Base as of the date of any Borrowing Base 4 6 Report, the Borrower shall immediately, but in any event not later than the next due date for the Borrowing Base Report required to be delivered to the Agent pursuant to Section 5.10 hereof, cause the Borrowing Base to be increased by granting the Agent, as agent for the Lenders pursuant to the Security Agreement, a Lien pursuant to and as contemplated by Section 2.22 hereof and the Security Documents on additional Eligible Leases and Eligible Rental Contracts and Eligible Equipment and Eligible Installment Finance Contracts or other security acceptable to the Lenders, in their sole discretion, such that, after giving effect to the grant of such Lien, such percentage no longer exceeds an amount equal to 20% of the Borrowing Base." (s) The last sentence of Section 2.6(b) of the Loan Agreement is hereby amended by inserting after the words "Eligible Rental Contracts" the words "and Eligible Installment Finance Contracts" (t) Section 2.7 of the Loan Agreement is hereby amended to read in its entirety as follows: "SECTION 2.7 CONVERSION OF LOANS. Subject to Sections 2.17 and 2.19 hereof, the Borrower shall have the option to convert any Prime Rate Loan, into a Federal Funds Rate Loan or Libor Loan, any Federal Funds Rate Loan into a Prime Rate Loan or Libor Loan, or any Libor Loan into any Prime Rate Loan or Federal Funds Rate Loan; provided, however, that in the case of any conversion of such Loan, (a) the Borrower shall give to the Agent notice of each such conversion as provided in Section 2.2; and (b) no Loan may be converted if, on the proposed date of conversion, an Event of Default or Default has occurred and is continuing." (u) Section 2.8 of the Loan Agreement is hereby amended to read in its entirety as follows: "SECTION 2.8 USE OF PROCEEDS OF LOANS. The proceeds of each Loan hereunder may be used by the Borrower solely to finance or refinance (i) Eligible Equipment covered by Eligible Leases and Eligible Rental Contracts or (ii) Eligible Installment Finance Contracts referred to in the Borrowing Computation relating to such Loan, and for no other purpose whatsoever." (v) Subsections (i) and (ii) of Section 2.9(a) of the Loan Agreement are hereby amended and restated in their entirety as follows: "(i) with respect to any Revolving Credit Loan, (x) during such periods that such Loan (or any portion thereof) is a Prime Rate Loan, the Prime Rate; (y) during such periods that such Loan (or any portion thereof) is a Libor Loan, Libor plus 1.75%; and (z) during such periods that such Loan (or any portion thereof) is a Federal Funds Rate Loan, the Federal Funds Rate plus 1.75%; and (ii) with respect to any Term Loan, (x) during such periods that such Loan (or any portion thereof) is a Prime Rate Loan, the Prime Rate plus .50%; and (y) during such periods that such Loan (or any portion thereof) is a Libor Loan, Libor plus 2.50%; PROVIDED, HOWEVER, that any Term Loans outstanding on August 6, 1996 that are Libor Loans shall bear interest at the rate established and in effect with respect thereto as of such date; and (z) during such periods that such Loan (or any portion thereof) is a Federal Funds Rate Loan, the Federal Funds Rate plus 1.75%" 5 7 (w) Section 2.9(d) of the Loan Agreement is hereby amended to read in its entirety as follows: "(d) Subject to Section 2.7 hereof, the Borrower shall be permitted to convert any Loan, or any portion thereof, in an amount equal to or exceeding $500,000." (x) Section 2.13(a) of the Loan Agreement is hereby amended by adding a new subpart (iii) after subpart (ii) as follows: "and (iii) each borrowing of a Federal Funds Rate Loan (other than a Conversion Term Loan) and each prepayment of a Federal Funds Rate Loan shall be in an amount at least equal to $500,000 or some greater integral multiple of $100,000." (y) Section 2.16(b) of the Loan Agreement is hereby amended by adding the words "or Federal Funds Rate Loan" after the words "Prime Rate Loans" therein. (z) Section 2.17 of the Loan Agreement is hereby amended by adding the words "or Federal Funds Rate Loan" after the words "Prime Rate Loans" therein. (aa) Section 2.18 of the Loan Agreement is hereby amended by adding the words "or Federal Funds Rate Loan" after the words "Prime Rate Loans" each time such phrase occurs therein. (ab) The fourth sentence of Section 2.21 of the Loan Agreement is hereby amended and restated in its entirety as follows: "Notwithstanding the foregoing, in the event the Agent shall have made an advance on behalf of a Lender without prior notice not to do so, the Borrower shall, on demand from the Agent, repay to the Agent that amount so made available with interest thereon, in respect of each day during the period commencing on and including the date such advance was made by the Agent until the date the Agent recovers such amount at a rate per annum equal to (i) with respect to any Revolving Credit Loan, (x) during such periods that such Loan (or any portion thereof) is a Prime Rate Loan, the Prime Rate; (y) during such periods that such Loan (or any portion thereof) is a Libor Loan, Libor plus 1.75%; and (z) during such periods that such Loan (or any portion thereof) is a Federal Funds Rate Loan, the Federal Funds Rate plus 1.75% or (ii) with respect to any Term Loan, (x) during such periods that such Loan (or any portion thereof) is a Prime Rate Loan, the Prime Rate plus .50%; and (y) during such periods that such Loan (or any portion thereof) is a Libor Loan, Libor plus 2.50%;" (ac) Section 2.22(a)(ii) of the Loan Agreement is hereby amended and restated in its entirety as follows: "(ii) subject to the provisions of the Security Agreement, the Borrower shall hold, as collateral custodian for the Agent, all originally executed Leases included in the Collateral." (ad) Section 2.22(a) of the Loan Agreement by adding a new subsection "(v)" at the end thereof as follows: "(v) if the Borrowing Base value attributable to Eligible Lease Receivables or Net Asset Value for any installment sale contract (x) is greater than $10,000, then the Borrower shall file appropriate UCC financing statements against the obligor of such installment 6 8 sale contract or (y) is greater than $35,000, then the Borrower shall name the Agent as assignee of such security interest." (ae) Section 4.2(f) of the Loan Agreement is hereby amended and restated in its entirety as follows: "(f) Reserved." (af) Section 6.9(a)(ii) of the Loan Agreement is hereby amended and restated in its entirety as follows: "(ii) a Consolidated Tangible Net Worth of not less than the sum of (i) 85% of the Consolidated Tangible Net Worth as of December 31, 1997, and (ii) 50% of the aggregate amount of Consolidated Net Income of the Guarantor and its Subsidiaries, including the Borrower, for each of the fiscal quarters ending on or after March 31, 1998 but without deducting therefrom any amount of Consolidated Net Deficit for any of such fiscal quarters;" (ag) Section 6.9(a)(iii) of the Loan Agreement is hereby amended and restated in its entirety as follows: "(iii) an allowance for bad debt of the Guarantor and its Subsidiaries, including the Borrower, of at least 7% of Gross Lease Installments;" (ah) Section 6.12 of the Loan Agreement is hereby amended to read in its entirety as follows: "SECTION 6.12 BORROWING BASE. Make such prepayments or pledge such additional security, from time to time, as required by Section 2.6 hereof." (ai) Section 7.4 of the Loan Agreement is hereby amended by (A) inserting after the words "surviving entity, (ii)" the words "the total consideration paid by the Borrower (x) in connection with any single such transaction shall not exceed $10,000,000 and (y) in connection with all such transactions during any fiscal year shall not exceed $20,000,000 in the aggregate, (iii)", (B) deleting "(iii)" and inserting in lieu thereof "(iv)" and (C) deleting "(iv)" and inserting in lieu thereof "(v)". (aj) Section 7.7(b) of the Loan Agreement is hereby amended by inserting after the words "Eligible Equipment" the words "or Eligible Installment Finance Contracts" (ak) Exhibit H to the Loan Agreement is hereby deleted in its entirety and Exhibit B attached hereto is hereby substituted in lieu thereof. 2. CONDITIONS PRECEDENT. Prior to or simultaneously with the entry by the Borrower into this Amendment and as a condition precedent to the effectiveness of this Amendment: (a) DOCUMENTS. The Agent shall have received with sufficient original counterparts for each Lender (i) this Amendment duly executed by the Borrower and each Lender, (ii) the Confirmation of Guaranty annexed to this Amendment duly executed by the Guarantor, (iii) an amendment to the Security Agreement in form and substance satisfactory to the Agent and (iv) such UCC financing statements and related documents as the Agent shall require in connection therewith. 7 9 (b) CORPORATE ACTION. The Borrower shall have taken all corporate action required to be taken to authorize the execution, delivery and performance of this Amendment, the agreements, documents and instruments referred to herein and the transactions contemplated hereby and thereby. (c) CORPORATE DOCUMENTS AND CERTIFICATES. The Borrower and the Guarantor shall have delivered to the Agent, with sufficient original counterparts for each Lender, an officer's certificate, in form and substance satisfactory to the Agent, confirming the following: (i) None of its organizational documents have been amended since the date(s) as of which copies of said organizational documents were certified to the Agent pursuant to the Fourth Amendment to Loan Agreement and Consent made as of July 31, 1998 except that the name of the Guarantor has been changed from Boyle Leasing Technologies, Inc. to Micro Financial, Inc.; (ii) Specimen signature(s) of the person(s) authorized to execute this Amendment; (iii) The execution, delivery and performance of this Amendment has been authorized by resolutions of the Board of Directors of the Borrower and the Guarantor, copies of which shall be attached to such officer's certificate; and (iv) Each of the Borrower and the Guarantor remains in good standing in its respective jurisdiction of incorporation and in each jurisdiction in which it is qualified to do business. (d) BANK OF BOSTON FACILITY. The Bank of Boston Facility shall have been amended to reflect the amendments set forth herein (or shall be amended subject only to effectiveness of the amendments set forth herein) to the extent the provisions being amended pursuant to this Amendment are contained therein, and the Agent shall have received evidence satisfactory to it to such effect. (e) PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the transactions contemplated by this Amendment and all documents incident thereto, including, without limitation, the Certificate of Incorporation Amendments, shall be reasonably satisfactory in form and substance to the Agent, and the Agent and each Lender, upon request by such Lender, shall have received all information and such counterpart originals or certified or other of such documents as the Agent may reasonably request prior to the date hereof. (f) COMPLIANCE. (i) The Borrower and the Guarantor shall have complied and shall then be in compliance with all of the terms, covenants and conditions of the Loan Agreement as amended by this Amendment; and (ii) The representations and warranties contained in Article 3 of the Loan Agreement shall be true and correct on the date hereof; and (iii) No Default or Event of Default shall have occurred, and the Agent and each Lender shall have received a Compliance Certificate dated the date hereof certifying, INTER ALIA, that the conditions set forth in this Section 2 are satisfied on such date. (g) LEGAL MATTERS. All legal matters incident to the effectiveness of this Amendment shall be satisfactory to counsel to the Agent. 8 10 (h) LETTERS OF WITHDRAWAL. (i) The Agent shall have received a letter of withdrawal duly executed and delivered by Sanwa Business Credit Corporation ("Sanwa"), evidencing Sanwa's agreement to withdraw as a Lender under the Loan Agreement; provided that Sanwa shall remain as a Lender under the Loan Agreement only with respect to existing Libor Loans and only until the end of the current Interest Period for each such Loan. (ii) The Agent shall have received a letter of withdrawal duly executed and delivered by State Street Bank and Trust Company ("State Street"), evidencing State Street's agreement to withdraw as a Lender under the Loan Agreement; provided that State Street shall remain as a Lender under the Loan Agreement only with respect to existing Libor Loans and only until the end of the current Interest Period for each such Loan. (iii) The Agent shall have received a letter of withdrawal duly executed and delivered by PNC Bank, National Association ("PNC"), evidencing PNC's agreement to withdraw as a Lender under the Loan Agreement; provided that PNC shall remain as a Lender under the Loan Agreement only with respect to existing Libor Loans and only until the end of the current Interest Period for each such Loan. 3. REAFFIRMATION OF SECURITY INTEREST. The Borrower hereby reaffirms as of the date hereof each and every security interest and lien granted in favor of the Agent and the Lenders under the Loan Documents, and agrees and acknowledges that such security interests and liens shall continue from and after the date hereof, in each case after giving effect to the Loan Agreement as amended by this Amendment, and the obligations secured thereby and thereunder shall include Borrower's obligations under the Loan Agreement as amended by this Amendment. Each such reaffirmed security interest and lien remains and shall continue to remain in full force and effect and is hereby in all respects ratified and confirmed. 4. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS. (a) On and after the date hereof, each reference in the Loan Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference in the other Loan Documents, shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended herein, the Loan Agreement shall remain in full force and effect in accordance with its terms. 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS PRINCIPLES OF CONFLICT OF LAWS. 6. FURTHER ASSURANCES. Each of the parties hereto hereby agrees to do such further acts and things and to execute, deliver and acknowledge such additional agreements, powers and instruments as any other party hereto may reasonably require to carry into effect the purposes of this Amendment. 7. COSTS AND EXPENSES. The Borrower hereby agrees to pay all reasonable costs and expenses of the Agent (including reasonable attorneys' fees and expenses) incurred in connection with the negotiation, preparation, execution and delivery of this Amendment. 9 11 8. COUNTERPARTS; FACSIMILE SIGNATURES. This Amendment may be executed in any number of counterparts and by different parties on different counterparts, but all such counterparts shall together constitute but one agreement. Execution and delivery of this Amendment by facsimile transmission shall constitute execution and delivery of this Amendment for all purposes, with the same force and effect as execution and delivery of an originally manually signed copy hereof. 9. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment or be given any substantive effect. [BALANCE OF PAGE INTENTIONALLY LEFT BLANK; SIGNATURES TO FOLLOW] 10 12 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written. BORROWER: LEASECOMM CORPORATION By: /s/ Peter R. Bleyleben ---------------------------------- Name: Peter R. Bleyleben Title: Authorized Signatory LENDERS: FLEET BANK, NATIONAL ASSOCIATION Address: Fleet Bank, N.A. 1185 Avenue of the Americas New York, New York 10036 Attention: Mr. Harris C. Mehos Vice President Telecopier: (212) 819-6212 By: /s/ James Fox ---------------------------------- Name: James Fox Title: Authorized Signatory 11 13 FIRST UNION NATIONAL BANK (successor to CORESTATES BANK, N.A.) Address: 1339 Chestnut Street Mailstop: PA4827 Philadelphia, Pennsylvania 19101-7618 Attention: Ms. Theresa Smith Vice President Telecopier: (215) 786-7704 By: /s/ S. Scott Gates ----------------------------------- Name: S. Scott Gates Title: Authorized Signatory AGENT: FLEET BANK, NATIONAL ASSOCIATION, as Agent By: /s/ James Fox ----------------------------------- Name: James fox Title: Authorized Signatory 12 14 CONFIRMATION OF GUARANTY The undersigned Guarantor of the Obligations under the Loan Documents hereby consents and agrees to the amendment on the date hereof, pursuant to the Fifth Amendment to Amended and Restated Loan Agreement (the "Fifth Amendment"), of the Amended and Restated Loan Agreement dated as of July 28, 1995, as amended by the First Amendment to Amended and Restated Loan Agreement made as of October 30, 1995, the Second Amendment to Amended and Restated Loan Agreement made as of August 6, 1996, the Third Amendment to Loan Agreement and Consent made as of August 11, 1997, and the Fourth Amendment to Amended and Restated Loan Agreement made as of July 31, 1998, acknowledges receipt of a copy of the Fifth Amendment and agrees that its guaranty of the payment and performance of the Obligations pursuant to the Guaranty dated as of July 29, 1993 remains in full force and effect and shall continue to apply to the Obligations, after giving effect to the Fifth Amendment. The undersigned hereby reaffirms as of the date hereof each and every representation and warranty made pursuant to the Guaranty, and confirms that each and every such representation and warranty is true and correct on and as of the date hereof as if made on and as of such date. Dated: as of January 27, 1999 MicroFinancial, Inc. (formerly known as Boyle Leasing Technologies, Inc.) By: /s/ Peter R. Bleyleben -------------------------------- Name: Peter R. Bleyleben Title: Authorized Signatory 13 EX-10.32 6 2ND AMENDED & RESTATED REVOLVING CREDIT AGREEMENT 1 EXHIBIT 10.32 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT AMONG THE LENDERS PARTY HERETO BANKBOSTON, N.A., AS AGENT AND LEASECOMM CORPORATION Dated: January 27, 1999 2 TABLE OF CONTENTS
DEFINITIONS.......................................................................................................1 1.1 Definitions.........................................................................................1 1.2 Rules of Interpretation............................................................................24 DESCRIPTION OF CREDIT............................................................................................25 2.1 Revolving Credit Loans.............................................................................25 2.2 Swing Line Advances................................................................................26 2.3 The Notes..........................................................................................27 2.4 Notice and Manner of Borrowing or Conversion of Loans..............................................28 2.5 Funding of Loans...................................................................................30 2.6 Interest Rates and Payments of Interest............................................................32 2.7 Fees...............................................................................................34 2.8 Payments and Prepayments of the Loans; Conversion Term Loan........................................35 2.9 Method of Payment and Allocation of Payments.......................................................36 2.10 Indemnity..........................................................................................38 2.11 Computation of Interest and Fees...................................................................38 2.12 Changed Circumstances; Illegality..................................................................39 2.13 Increased Costs....................................................................................40 2.14 Capital Requirements...............................................................................41 CONDITIONS OF LOANS..............................................................................................42 3.1 Conditions Precedent to Initial Loans..............................................................42 3.2 Conditions Precedent to all Loans..................................................................43 REPRESENTATIONS AND WARRANTIES...................................................................................44 4.1 Organization; Qualification; Business..............................................................44 4.2 Corporate Authority................................................................................44 4.3 Valid Obligations..................................................................................45 4.4 Consents or Approvals..............................................................................45 4.5 Title to Properties; Absence of Encumbrances.......................................................45 4.6 Financial Statements...............................................................................45 4.7 Changes............................................................................................46 4.8 Solvency...........................................................................................46 4.9 Defaults...........................................................................................47 4.10 Taxes..............................................................................................47 4.11 Litigation.........................................................................................47 4.12 Subsidiaries.......................................................................................47 4.13 Investment Company Act.............................................................................48 4.14 Compliance.........................................................................................48 4.15 ERISA..............................................................................................48 4.16 Environmental Matters..............................................................................49 4.17 Restrictions on the Borrower.......................................................................50
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4.18 Labor Relations....................................................................................50 4.19 Margin Rules.......................................................................................51 4.20 Disclosure.........................................................................................51 4.21 Year 2000 Compliance...............................................................................51 AFFIRMATIVE COVENANTS............................................................................................52 5.1 Financial Statements...............................................................................52 5.2 Conduct of Business................................................................................54 5.3 Maintenance and Insurance..........................................................................54 5.4 Taxes..............................................................................................55 5.5 Inspection.........................................................................................55 5.6 Maintenance of Books and Records...................................................................55 5.7 Use of Proceeds....................................................................................56 5.8 Further Assurances.................................................................................56 5.9 Notification Requirements...........................................................................56 5.10 ERISA Reports......................................................................................57 5.11 Environmental Compliance...........................................................................58 5.12 Year 2000 Compliance...............................................................................58 FINANCIAL COVENANTS..............................................................................................59 6.1 Debt to Worth Ratio................................................................................59 6.2 Consolidated Tangible Net Worth....................................................................59 6.3 Bad Debt Allowance.................................................................................59 6.4 Fixed Charge Ratio.................................................................................59 NEGATIVE COVENANTS...............................................................................................59 7.1 Indebtedness.......................................................................................60 7.2 Contingent Liabilities.............................................................................61 7.3 Encumbrances.......................................................................................61 7.4 Merger; Consolidation; Sale or Lease of Assets.....................................................62 7.5 Subsidiary Stock...................................................................................63 7.6 Restricted Payments................................................................................63 7.7 Payments on Subordinated Debt......................................................................64 7.8 Investments; Purchases of Assets...................................................................64 7.9 ERISA Compliance...................................................................................66 7.10 Transactions with Affiliates.......................................................................66 7.11 Fiscal Year........................................................................................66 7.12 Underwriting Procedures. ..........................................................................67 DEFAULTS 67 8.1 Events of Default..................................................................................67 8.2 Remedies...........................................................................................70 ASSIGNMENT; PARTICIPATION........................................................................................71 9.1 Assignment.........................................................................................71
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9.2 Participations.....................................................................................73 THE AGENT........................................................................................................75 10.1 Appointment of Agent; Powers and Immunities.......................................................75 10.2 Actions by Agent..................................................................................77 10.3 Indemnification...................................................................................78 10.4 Reimbursement.....................................................................................78 10.5 Non-Reliance on Agent and Other Lenders...........................................................79 10.6 Resignation or Removal of Agent...................................................................79 MISCELLANEOUS....................................................................................................80 11.1 Notices...........................................................................................80 11.2 Expenses..........................................................................................81 11.3 Indemnification...................................................................................81 11.4 Survival of Covenants, Etc........................................................................82 11.5 Set-Off...........................................................................................82 11.6 No Waivers........................................................................................83 11.7 Amendments, Waivers, Etc..........................................................................83 11.8 Binding Effect of Agreement.......................................................................84 11.9 Captions; Counterparts............................................................................84 11.10 Entire Agreement, Etc.............................................................................85 11.11 Waiver of Jury Trial..............................................................................85 11.12 Governing Law.....................................................................................85 11.13 Severability......................................................................................86 11.14 Confidentiality...................................................................................86
EXHIBITS EXHIBIT A - Form of Revolving Credit Note EXHIBIT B - Form of Notice of Borrowing or Conversion EXHIBIT C - Disclosure EXHIBIT D - Form of Report of Chief Financial Officer EXHIBIT E - Assignment and Joinder Agreement EXHIBIT F-1 - Form of Dealer Agreement EXHIBIT F-2 - Form of Security Monitoring Agreement EXHIBIT G - Instrument of Adherence iii 5 SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT THIS SECOND AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT is made as of January 27, 1999 by and among LEASECOMM CORPORATION, a Massachusetts corporation having its chief executive office at 950 Winter Street, Waltham, Massachusetts 02154 (the "BORROWER"); BANKBOSTON, N.A., a national bank having its head office at 100 Federal Street, Boston, Massachusetts 02110 ("BKB"); the other financial institutions from time to time party hereto (together with BKB, the "LENDERS"); and BANKBOSTON, N.A., as agent for the Lenders (in such capacity, the "AGENT"). WHEREAS, the Borrower and BKB are parties to an Amended and Restated Revolving Credit Agreement dated as of August 6, 1996, as amended (the "EXISTING AGREEMENT"). WHEREAS, certain financial institutions wish to become parties to the Existing Agreement, as amended and restated hereby. WHEREAS, the parties hereto wish to amend the Existing Agreement and to restate the Existing Agreement as so amended. NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree that the Existing Agreement is hereby amended and restated in its entirety to read as follows: SECTION 1 DEFINITIONS 1.1 DEFINITIONS. All capitalized terms used in this Agreement or in the Notes or in any certificate, report or other document made or delivered pursuant to this Agreement (unless otherwise defined therein) shall have the meanings assigned to them below: ADJUSTED COST. The Original Cost less any dealer reserve, hold backs and discounts to the Borrower, sales taxes, insurance, shipping, delivery, handling and other similar charges applicable to any Equipment or Security Monitoring Agreement. AFFECTED LOANS. See Section 2.12(a). AFFILIATE. With reference to any Person, (including an individual, a corporation, a partnership, a trust and a governmental agency or instrumentality), (i) any director, officer or employee of that Person, (ii) any other person controlling, controlled by or under direct or indirect common control of that person, (iii) any other Person directly or indirectly holding 5% 1 6 or more of any class of the capital stock or other equity interests (including options, warrants, convertible securities and similar rights) of that Person and (iv) any other Person 5% or more of any class of whose capital stock or other equity interests (including options, warrants, convertible securities and similar rights) is held directly or indirectly by that Person. For purposes of Sections 4.15, 5.10 and 7.9 hereof, "Affiliate" shall mean, within the meaning of Section 414(b), (c), (m) or (o) of the Code (i) any member of a controlled group of corporations which includes the Borrower, (ii) any trade or business, whether or not incorporated, under common control with the Borrower, (iii) any member of an affiliated service group which includes the Borrower, and (iv) any member of a group treated as a single employer by regulation. AGENT. See Preamble. AGREEMENT. This Second Amended and Restated Revolving Credit Agreement, including the Exhibits and Schedules hereto, as the same may be supplemented or amended from time to time. ASSIGNEE. See Section 9.1. BASE RATE. The greater of (i) the rate of interest announced from time to time by the Agent at its head office as its Base Rate, and (ii) the Federal Funds Effective Rate plus 1/2 of 1% per annum (rounded upwards, if necessary, to the next 1/8 Of 1%). BASE RATE LOAN. Any Loan bearing interest determined with reference to the Base Rate. BORROWER. See Preamble. BORROWER'S ACCOUNTANTS. Coopers & Lybrand or such other independent certified public accountants as are selected by the Borrower and reasonably acceptable to the Agent. BORROWING BASE. As at the date of any determination thereof, an amount equal to the sum of: (a) in the case of Eligible Leases which are Finance Leases (other than Eligible Security Monitoring Agreements) or in the case of Eligible Installment Sales Contracts, the lesser of (x) 100% of the Adjusted Cost of the Eligible Equipment subject to such Eligible Leases or Eligible Installment Sales Contracts, or (y) 75% of the aggregate amount of all Eligible Lease Receivables relating to all such Eligible Leases or Eligible Installment Sales Contracts, discounted to present value by a percentage equal to the Discount Rate (which calculation shall not take into account rental payments due or payable under such Eligible Leases or Eligible Installment Sales Contracts beyond 60 months after the commencement date of such Eligible Leases or Eligible Installment Sales Contracts); PLUS (b) in the case of Eligible Leases which are Operating Leases (other than Rental Contracts or Eligible Security Monitoring Agreements), the lesser of (x) 75% of the aggregate Net Book Value of the Eligible Equipment subject to such Operating Leases or (y) 75% of the 2 7 aggregate amount of all Eligible Lease Receivables relating to all such Eligible Leases, discounted to present value by a percentage equal to the Discount Rate (which calculation shall not take into account rental payments due or payable under such Eligible Leases beyond 60 months after the commencement date of such Eligible Leases); PLUS (c) in the case of Eligible Rental Contracts (other than Eligible Security Monitoring Agreements), an amount equal to 75% of the aggregate Net Book Value of all Eligible Equipment subject to such Eligible Rental Contracts, PROVIDED that the portion of the Borrowing Base determined pursuant to this subparagraph (c) shall not exceed the lesser of (i) $14,000,000 and (ii) 20% of the Total Commitment; PLUS (d) in the case of Eligible Security Monitoring Agreements, an amount equal to 75% of the Adjusted Cost of the security system and/or monitoring services subject to such Agreement, PROVIDED that solely for purposes of the foregoing calculation the Adjusted Cost shall not, unless otherwise approved by the Agent, exceed 35 times the so-called "recurring monthly revenues" from any such Agreement; PLUS (e) in the case of Eligible Installment Finance Contracts, an amount equal to 75% of the aggregate amount of all Eligible Lease Receivables relating to all such Eligible Installment Finance Contracts, discounted to present value by a percentage equal to the Discount Rate (which calculation shall not take into account payments due or payable under such Eligible Installment Finance Contracts beyond 48 months after the commencement date of such Eligible Installment Finance Contracts); MINUS (f) Borrowing Base Reserves, if any, at the date of determination of the Borrowing Base; PROVIDED, HOWEVER, that notwithstanding the foregoing, there shall be excluded from the Borrowing Base (x) any Lease or Eligible Installment Finance Contract to the extent that the Receivables due pursuant to such Lease or Eligible Installment Finance Contract, when added to the Receivables due pursuant to all other Leases and Eligible Installment Finance Contracts with lessees and account debtors in the same state would exceed 20% of Gross Lease Installments, and (y) any Lease or Eligible Installment Finance Contract to the extent that the Receivables due pursuant to such Lease or Eligible Installment Finance Contract, when added to all other Receivables due from the same account debtor, would exceed the lesser of (i) $3,500,000, or (ii) five percent (5%) of the Commitments at such time. For purposes hereof, determination of the calculation shall be made on a lease by lease and contract by contract basis but the Borrowing Base shall include the aggregate of all such calculations. BORROWING BASE MATURITY DATE. September 30, 2000. BORROWING BASE REPORT. A report of a Borrowing Computation in form satisfactory to the Agent and signed by any Responsible Officer. 3 8 BORROWING BASE RESERVES. At the time of any determination of the Borrowing Base, such reserves as the Agent may from time to time determine to establish, in the exercise of its reasonable credit judgment based upon its review of the financial information delivered pursuant to Section 5.1, the results of inspection and reviews of books and records as contemplated by Section 5.5 and other information concerning the business, operations and prospects of the Borrower. BORROWING COMPUTATION. See Section 2.4(c). BUSINESS DAY. (i) For all purposes other than as covered by clause (ii) below, any day other than a Saturday, Sunday or legal holiday on which banks in Boston, Massachusetts are open for the conduct of a substantial part of their commercial banking business; and (ii) with respect to all notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, any day that is a Business Day described in clause (i) and that is also a day for trading by and between banks in U.S. Dollar deposits in the interbank Eurodollar market. CAPITAL EXPENDITURES. For any period, the aggregate amount of all payments made by any Person directly or indirectly for the purpose of acquiring, constructing or maintaining fixed assets, real property or equipment which, in accordance with GAAP, would be added as a debit to the fixed asset account of such Person, including, without limitation, Capitalized Lease Obligations, but excluding therefrom the purchase of Equipment as inventory for the purpose of being leased under an Operating Lease. CAPITALIZED LEASE OBLIGATIONS. As to any Person, the obligations of such Person to pay rent or other amounts under lease of (or other agreement conveying the right to use) real and/or personal property which obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP and, for purposes of this Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, consistently applied. CLOSING DATE. The first date on which the conditions set forth in Sections 3.1 and 3.2 have been satisfied and any Loans are to be made hereunder. CODE. The Internal Revenue Code of 1986 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. COLLATERAL. All of the property, rights and interests of the Borrower and its Subsidiaries that are or are intended to be subject to the security interests and liens created by the Security Documents. COMMITMENT. With respect to any Lender, the maximum dollar amount which such Lender has agreed to loan to the Borrower upon the terms and subject to the conditions of this Agreement, initially as set forth on SCHEDULE 1 attached hereto, as such Lender's Commitment 4 9 may be modified from time to time as provided in this Agreement, including termination or reduction of such Commitment in accordance with Sections 2.1 and 8.2 hereof. SCHEDULE 1 shall be amended from time to time to reflect any changes in the Commitments of the Lenders. COMMITMENT FEE. See Section 2.7(a). CONSOLIDATED EARNINGS. The sum of Consolidated Net Income plus, on a consolidated basis for the Parent and its Subsidiaries, including the Borrower, (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. CONSOLIDATED INDEBTEDNESS. The consolidated Indebtedness (excluding Subordinated Debt but including Non-Recourse Indebtedness) of the Parent and its Subsidiaries, including the Borrower, determined in accordance with GAAP. CONSOLIDATED NET INCOME (DEFICIT). The consolidated net income (or deficit) of the Parent and its Subsidiaries, including the Borrower, determined in accordance with GAAP; PROVIDED, HOWEVER, that Consolidated Net Income shall not include amounts added to such net income (or deficit) in respect of the write-up of any asset. CONSOLIDATED TANGIBLE CAPITAL FUNDS. The sum, with respect to the Parent and its Subsidiaries, including the Borrower, on a consolidated basis, of (a) the 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. CONSOLIDATED TANGIBLE NET WORTH. The sum, with respect to the Parent and its Subsidiaries, including the Borrower, 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 Issue Costs. CONSUMER FINANCE LEASE. A Finance Lease between the Borrower, as lessor, and a lessee who is an individual and who takes under the Lease primarily for personal, family or household purposes. CONVERSION TERM LOAN. See Section 2.8(a). CONVERSION TERM LOAN MATURITY DATE. If the Revolving Credit Loans are converted into the Conversion Term Loan, as provided in Section 2.8(a), the date which is the third anniversary of the Borrowing Base Maturity Date. DEALER. A Person who (i) is domiciled in the United States of America, (ii) is not the subject of and has not taken any action described in subsections (f) and (g) of Section 8.1 and (iii) is engaged in the business of selling, servicing and installing security/alarm monitoring and related equipment in the United States of America. 5 10 DEALER AGREEMENT. An agreement between the Borrower and a Dealer, substantially in the form of EXHIBIT F-1 hereto, setting forth the rights and obligations of each with respect to a Security Monitoring Agreement or other agreement that has been assigned by such Dealer to the Borrower and which has not been modified, amended, restated or otherwise rewritten in any material respect more than two times. DEBT ISSUE COSTS. Those amounts characterized as "debt issue costs" in accordance with GAAP on the Initial Financial Statements or the most recent financial statements delivered pursuant to Section 5.1(a) or (b) hereof. DEFAULT. An Event of Default or event or condition that, but for the requirement that time elapse or notice be given, or both, would constitute an Event of Default. DERIVATIVE EXPOSURE. The aggregate potential exposure of a Lender under all outstanding Eligible Interest Rate Contracts, as determined by such Lender in its reasonable discretion. Such Lender shall determine its potential exposure under each Eligible Interest Rate Contract and notify the Agent and the Borrower of such determination at the time the Borrower enters into such Eligible Interest Rate Contract and such determination shall not be changed so long as such Eligible Interest Rate Contract remains in effect. DISCOUNT RATE. The Base Rate, which rate shall change contemporaneously with any change in the Base Rate. DRAWDOWN DATE. The Business Day on which any Loan is made or is to be made. ELIGIBLE EQUIPMENT. Equipment: (a) To which the Borrower has good and marketable title; (b) Which is not subject to any Encumbrance other than that in favor of the Agent for the benefit of the Lenders and in which (other than with respect to security systems subject to a Security Monitoring Agreement) the Agent has a duly perfected first priority security interest under the UCC or other similar law if (x) required under the Security Documents, or (y) required by the Agent by written notice to the Borrower in the case of any Equipment with an Original Cost of more than $35,000; (c) Which is to be used primarily for personal, family or household purposes or in the ordinary course of business by the Borrower's lessees; (d) Which is subject to an Eligible Lease or Eligible Rental Contract; and (e) Which is insured by either the Borrower in accordance with current practice or the lessee thereof in accordance with industry standards. 6 11 ELIGIBLE INSTALLMENT SALES CONTRACT. Any installment sales contract, purchase money security agreement or other similar chattel paper (including any and all schedules, supplements and amendments thereto and modifications thereof) entered into by the Borrower or its predecessor in interest as seller and a third party as buyer in connection with a sale of Equipment. ELIGIBLE INSTALLMENT FINANCE CONTRACT. An Installment Finance Contract: (a) which is in full force and effect; (b) the creditor under which is the Borrower; (c) to which the Borrower has good and marketable title, and which is assignable by the Borrower; (d) which is non-cancelable and provides that the third party obligor's obligations thereunder are absolute and unconditional, and not subject to defense, deduction, setoff or claim and as to which no defenses, setoffs, claims or counterclaims exist or have been asserted; (e) which is not subject to any Encumbrance other than that in favor of the Agent for the benefit of the Lenders and in which the Agent has a duly perfected first priority security interest under the UCC; (f) the third party obligor under which (i) is domiciled in the United States of America, (ii) is not the subject of and has not taken any action described in subsections (f) and (g) of Section 8.1 and (iii) is not otherwise been determined by the Agent to be unacceptable; (g) which is in a form approved by the Agent; (h) under which no payment is more than 90 days past due; (i) under which no default has occurred other than to the extent permissible under clause (h) immediately above; and (j) which has not been modified, amended, restated or otherwise rewritten more than two times. ELIGIBLE INTEREST RATE CONTRACTS. Interest rate swap agreements, interest rate collar agreements, options on any of the foregoing and any other agreements or arrangements designed to provide protection against fluctuations in interest rates, in each case purchased by the Borrower from a Lender with respect to Loans and approved by the Agent. 7 12 ELIGIBLE LEASE. A Lease: (a) Which is in full force and effect; (b) The lessor under which is the Borrower; (c) Which is assignable by the lessor thereunder; (d) Which is non-cancelable and provides that the lessee's obligations thereunder are absolute and unconditional, and not subject to defense, deduction, set-off or claim and as to which no defenses, set-offs, claims or counterclaims exist or have been asserted; (e) Which is not subject to any Encumbrance other than that in favor of the Agent for the benefit of the Lenders and in which the Agent has a duly perfected first priority security interest under the UCC; (f) Which is a Finance Lease or Operating Lease; (g) The lessee under which (i) is domiciled in the United States of America, (ii) is not the subject of and has not taken any action described in subsections (f) and (g) of Section 8.1 and (iii) has not otherwise been determined by the Agent to be unacceptable; (h) Which is in a form approved by the Agent; (i) Under which no payment is more than 90 days past due; (j) Under which no default has occurred other than to the extent permissible under clause (i) immediately above; (k) Which covers Eligible Equipment; (l) Which, if an Operating Lease, has a present value of all Fixed Rentals thereunder as of the date such Operating Lease is to be included in the Borrowing Base of at least 70% of the Original Cost of the Equipment leased thereunder; or which is an Eligible Security Monitoring Agreement; and (m) which has not been modified, amended, restated or otherwise rewritten with respect to terms of payment or in any other material respect more than two times. ELIGIBLE LEASE RECEIVABLES. As at the date of determination thereof, Receivables then due and unpaid with respect to an Eligible Lease, an Eligible Installment Sales Contract or an Eligible Installment Finance Contract. 8 13 ELIGIBLE RENTAL CONTRACT. A Rental Contract: (a) Which is in full force and effect; (b) The lessor under which is the Borrower; (c) Which is assignable by the lessor thereunder; (d) Which provides that the lessee's obligations thereunder are absolute and unconditional, and not subject to defense, deduction, set-off or claim and as to which no defenses, set-offs, claims or counterclaims exist or have been asserted; (e) Which is not subject to any Encumbrance other than that in favor of the Agent for the benefit of the Lenders and in which the Agent has a duly perfected first priority security interest under the UCC; (f) The lessee under which (i) is domiciled in the United States of America, (ii) is not the subject of and has not taken any action described in subsections (f) and (g) of Section 8.1 and (iii) has not otherwise been determined by the Agent to be unacceptable; (g) Which is in a form approved by the Agent; (h) Under which no payment is more than 90 days past due; (i) Under which no default has occurred other than to the extent permissible under clause (h) immediately above; (j) Which covers Eligible Equipment; and (k) Which has not been modified, amended, restated or otherwise rewritten with respect to terms of payment or in any other material respect more than two times. ELIGIBLE SECURITY MONITORING AGREEMENT. A Security Monitoring Agreement: (a) Which is in full force and effect; (b) Which is assignable by the Dealer thereunder; (c) Which provides that the customer's obligations thereunder (solely as to any equipment covered thereby) are absolute and unconditional, and not subject to defense, deduction, set-off or claim and as to which no defenses, set-offs, claims or counterclaims exist or have been asserted; 9 14 (d) Which is not subject to any Encumbrance other than that in favor of the Agent on behalf of the Lenders and in which the Agent has a duly perfected first priority security interest under the UCC; (e) Under which no payment is more than 90 days past due; (f) Under which no default has occurred other than to the extent permissible under clause (e) immediately above; (g) Which is the subject of a Dealer Agreement which is in full force and effect, under which no default shall have occurred by either party thereto and which is not subject to any Encumbrance other than in favor of the Agent on behalf of the Lenders and in which the Agent has a duly perfected first priority security interest under the UCC; and (h) With respect to which the monitoring services are being provided by the Dealer under the applicable Dealer Agreement or by a Servicer which is acceptable to the Agent, which acceptance shall not be unreasonably withheld. ENCUMBRANCES. See Section 7.3. ENVIRONMENTAL LAWS. Any and all applicable federal, state and local environmental, health or safety statutes, laws, regulations, rules and ordinances (whether now existing or hereafter enacted or promulgated), of all governmental agencies, bureaus or departments to the extent the foregoing may now or hereafter have jurisdiction over the Borrower or any of its Subsidiaries and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations, relating to injury to, or the protection of, real or personal property or human health or the environment, including, without limitation, all requirements pertaining to reporting, licensing, permitting, investigation, remediation and removal of emissions, discharges, releases or threatened releases of Hazardous Materials into the environment or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of such Hazardous Materials. EQUIPMENT. Tangible equipment having an Original Cost not exceeding $75,000 and reasonably acceptable to the Agent, whether now or hereafter owned and leased to third party users by the Borrower; PROVIDED, HOWEVER, that in no event shall Equipment include (i) stand-alone software, (ii) fixtures (other than electronic signs or security systems subject to a Security Monitoring Agreement), or (iii) any equipment (other than electronic signs subject to a Security Monitoring Agreement) custom designed for any Person. ERISA. The Employee Retirement Income Security Act of 1974 and the rules and regulations thereunder, collectively, as the same may from time to time be supplemented or amended and remain in effect. 10 15 EURODOLLAR LOAN. Any Loan bearing interest at a rate determined with reference to the Eurodollar Rate. EURODOLLAR RATE. With respect to any Eurodollar Loan for any Interest Period, the rate of interest determined by the Agent to be the prevailing rate per annum at which deposits in U.S. Dollars are offered to the Agent by first-class banks in the interbank Eurodollar market in which it regularly participates on or about 12:00 noon (Boston time) two Business Days before the first day of such Interest Period in an amount approximately equal to the principal amount of the Eurodollar Loan to which such Interest Period is to apply for a period of time approximately equal to such Interest Period. EURODOLLAR RESERVE PERCENTAGE. For any Interest Period, the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves), expressed as a decimal, established by the Board of Governors of the Federal Reserve System and any other banking authority, domestic or foreign, to which any Lender is subject with respect to "Eurocurrency Liabilities" (as defined in regulations issued from time to time by such Board of Governors). The Eurodollar Reserve Percentage shall be adjusted automatically on and as of the effective date of any change in any such reserve percentage. EVENT OF DEFAULT. Any event described in Section 8.1. EXISTING AGREEMENT. See Preamble. FEDERAL FUNDS EFFECTIVE RATE. For any day, a fluctuating interest rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by the Agent. FINANCE LEASE. A Lease characterized as a "finance lease" in accordance with GAAP. FIXED CHARGE RATIO. The ratio of Consolidated Earnings for any fiscal quarter to Fixed Charges payable during such quarter. FIXED CHARGES. On a consolidated basis for the Parent and its Subsidiaries, including the Borrower, all payments of interest on all Indebtedness (including all payments on capitalized lease obligations in the nature of interest). FIXED RENTALS. The periodic rental payments under a Lease, the amounts of which are fixed and do not vary from time to time based on usage, cash flow or any other factor. FLEET FACILITY. That certain revolving credit facility established pursuant to that certain Loan Agreement dated as of July 29, 1993, as amended and restated as of July 28, 1995 and as 11 16 subsequently amended as of the date hereof, by and among the Borrower, Fleet Bank, N.A. (successor by merger to NatWest Bank, N.A.) and the other banks named therein, as the same may be further amended, supplemented and in effect from time to time. GAAP. Generally accepted accounting principles, consistently applied. GROSS LEASE INSTALLMENTS. The aggregate Receivables due to the Borrower from all leases of equipment. GUARANTEES. As applied to the Parent and its Subsidiaries, all guarantees, endorsements or other contingent or surety obligations with respect to obligations of others whether or not reflected on the consolidated balance sheet of the Borrower and their Subsidiaries, including any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, by agreement to keep-well or otherwise), through the purchase of goods, supplies or services, or by way of stock purchase, capital contribution, advance or loan, or to enter into a contract for any of the foregoing, for the purpose of payment of obligations of any other Person. HAZARDOUS MATERIAL. Any substance (i) the presence of which requires or may hereafter require notification, investigation or remediation under any Environmental Law; (ii) which is or becomes defined as a "hazardous waste", "hazardous material" or "hazardous substance" or "pollutant" or "contaminant" under any present or future Environmental Law or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 ET SEQ.) and any applicable local statutes and the regulations promulgated thereunder; (iii) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and which is or becomes regulated pursuant to any Environmental Law by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, any state of the United States, or any political subdivision thereof to the extent any of the foregoing has or had jurisdiction over the Borrower; or (iv) without limitation, which contains gasoline, diesel fuel or other petroleum products, asbestos or polychlorinated biphenyls ("PCB's"). INDEBTEDNESS. As applied to any Person, all (i) liabilities or obligations, direct and contingent, which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person at the date as of which Indebtedness is to be determined, including, without limitation, lease obligations required to be shown as a liability on the balance sheet of the lessee in accordance with generally accepted accounting principles; (ii) liabilities or obligations of others for which such Person is directly or indirectly liable, by way of guaranty (whether by direct guaranty, suretyship, discount, endorsement, take-or-pay agreement, agreement to purchase or advance or keep in funds or other agreement having the effect of a guaranty) or otherwise; (iii) liabilities or obligations secured by liens on any assets of such person, whether or not such liabilities or obligations shall have been assumed by it; and (iv) non-cancelable liabilities under all Operating Leases. INITIAL FINANCIAL STATEMENTS. See Section 4.6. 12 17 INSTALLMENT FINANCE CONTRACT. Any agreement (including any and all schedules, supplements and amendments thereto and modifications thereof) entered into by the Borrower or its predecessor in interest as a service provider and a third party as buyer in connection with the rendering of services to such third party. INTERCREDITOR AGREEMENT. The Second Amended and Restated Intercreditor Agreement dated as of the Closing Date between the Agent and Fleet Bank. N.A. (successor by merger to NatWest Bank N.A.), as agent. INTEREST EXPENSE. For any period, the consolidated interest expense (including imputed interest on capitalized lease obligations) and amortized debt discount on Indebtedness of the Parent and its Subsidiaries for such period. INTEREST PERIOD. With respect to (a) each Eurodollar Loan, the period commencing on the date of the making or continuation of or conversion to such Eurodollar Loan and ending one (1), two (2), three (3), six (6) or twelve (12) months thereafter, as the Borrower may elect in the applicable Notice of Borrowing or Conversion, and (b) each Money Market Loan, the period commencing on the date of the making such Money Market Loan and ending not more than seven (7) days thereafter, as the Borrower may elect (subject to availability) in the applicable Notice of Borrowing or Conversion; PROVIDED that: (i) any Interest Period (other than an Interest Period determined pursuant to clause (iii) below) that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day, except that with respect to any Interest Period for a Eurodollar Loan, if such Business Day falls in the next calendar month, such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period for a Eurodollar Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall, subject to clause (iii) below, end on the last Business Day of a calendar month; (iii) any Interest Period that would otherwise end after the Borrowing Base Maturity Date shall end on the Borrowing Base Maturity Date; and (iv) notwithstanding clause (iii) above, no Interest Period for a Eurodollar Loan shall have a duration of less than one month, and if any Interest Period applicable to a Eurodollar Loan would be for a shorter period, such Interest Period shall not be available hereunder. INVESTMENT. As applied to the Borrower and its Subsidiaries, the purchase or acquisition of any share of capital stock, partnership interest, evidence of indebtedness or other equity security of any other Person (including any Subsidiary), any loan, advance or extension of credit (excluding Accounts Receivable arising in the ordinary course of business) to, or contribution to the capital of, any other Person (including any Subsidiary), any real estate held for sale or 13 18 investment, any securities or commodities futures contracts held, any other investment in any other Person (including any other Borrower or any Subsidiary), and the making of any commitment or acquisition of any option to make an Investment. LEASE. Any lease agreement, installment sales contract or other agreement (including any and all schedules, supplements and amendments thereon and modifications thereof) entered into by the Borrower as lessor or seller with respect to Equipment. LENDER. BKB, the other financial institutions listed on Schedule 1 attached hereto and each other Person that may after the date hereof become a party to this Agreement as a "Lender" hereunder. LOAN DOCUMENTS. This Agreement, the Notes, the Security Documents, the Parent Guarantee and the Intercreditor Agreement, together with any agreements, instruments or documents executed and delivered pursuant to or in connection with any of the foregoing. LOANS. The Loans made or to be made by the Lenders to the Borrower pursuant to Section II of this Agreement, including Revolving Credit Loans, Swing Line Advances and the Conversion Term Loan. MAJORITY LENDERS. As of any date, the holders of sixty percent (60%) of the Total Commitment. MONEY MARKET LOAN. Subject to availability, any Swing Line Advance bearing interest at a rate determined with reference to the Money Market Rate. MONEY MARKET RATE. With respect to any Swing Line Advance, subject to availability, the interest rate per annum determined by BKB in its sole and absolute discretion plus 2.00%. NET BOOK VALUE. At a particular date, as to any Eligible Equipment, the Original Cost of such Eligible Equipment less aggregate depreciation thereon calculated from the date of acquisition thereof in accordance with the Borrower's standard accounting and depreciation practices using the straight line method over the estimated life of such Eligible Equipment, with salvage value determined by the Borrower in accordance with such practices. NON-RECOURSE INDEBTEDNESS. Indebtedness of the Borrower or the Parent, as the case may be, for which the remedy for nonpayment or non-performance of any obligation or any default in respect thereof is strictly and absolutely limited to any collateral securing such Indebtedness and in respect of which neither the Borrower nor the Parent is subject to any personal liability. NOTE RECORD. Any internal record, including a computer record, maintained by any Lender with respect to any Loan. NOTES. The Revolving Credit Notes. 14 19 NOTICE OF BORROWING OR CONVERSION. The notice, substantially in the form of Exhibit B hereto, to be given by the Borrower to the Agent to request a Loan or to convert an outstanding Loan of one Type into a Loan of another Type, in accordance with Section 2.4. OBLIGATIONS. Any and all obligations of the Borrower to the Agent and the Lenders of every kind and description pursuant to or in connection with the Loan Documents (including, without limitation, in connection with Revolving Credit Loans and the Conversion Term Loan) and Eligible Interest Rate Contracts, direct or indirect, absolute or contingent, primary or secondary, due or to become due, now existing or hereafter arising, regardless of how they arise or by what agreement or instrument, if any, and including obligations to perform acts and refrain from taking action as well as obligations to pay money. OPERATING LEASE. A Lease characterized as an "operating lease" in accordance with GAAP. ORIGINAL COST. The Borrower's purchase price for (i) any Equipment as invoiced by the supplier thereof or (ii) for any Security Monitoring Agreement or for the security system and/or monitoring services subject thereto. PARENT. MicroFinancial Incorporated (f/k/a Boyle Leasing Technologies, Inc.), a Massachusetts corporation, and the sole stockholder of the Borrower. PARENT GUARANTEE. The amended and restated unlimited guarantee made by the Parent in favor of the Agent for the benefit of the Lenders, dated the Closing Date and guaranteeing all Obligations. PARTICIPANT. See Section 9.2. PBGC. The Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA. PENSION PLAN. Any Plan which is an "employee pension benefit plan" (as defined in ERISA). PERMITTED ACQUISITIONS. See Section 7.8. PERMITTED ENCUMBRANCES. See Section 7.3. PERSON. Any individual, corporation, partnership, trust, unincorporated association, business or other legal entity, any government or governmental agency or political subdivision thereof, a court, and any other legal entity, whether acting in an individual, fiduciary or other capacity. PLAN. Any "employee pension benefit plan" or "employee welfare benefit plan" (each as defined in ERISA) maintained by Borrower or Subsidiary. 15 20 PROHIBITED TRANSACTION. Any "prohibited transaction" as defined in ERISA and the Code. QUALIFIED INVESTMENTS. As applied to the Borrower and its Subsidiaries, investments in (i) notes, bonds or other obligations of the United States of America or any agency thereof that as to principal and interest constitute direct obligations of or are guaranteed by the United States of America; (ii) certificates of deposit, demand deposit accounts or other deposit instruments or accounts maintained in the ordinary course of business with banks or trust companies organized under the laws of the United States or any state thereof that have capital and surplus of at least $100,000,000, (iii) commercial paper that is rated not less than prime-one or A-1 or their equivalents by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or their successors, (iv) any repurchase agreement secured by any one or more of the foregoing, and (v) advances to employees for business related expenses to be incurred in the ordinary course of business and consistent with past practices in an amount not to exceed $500,000 in the aggregate outstanding at any one time, PROVIDED that no advances to any single employee shall exceed $100,000 in the aggregate. RECEIVABLES. Any of the Borrower's accounts, accounts receivable, notes, bills, drafts, acceptances, instruments, documents, chattel paper and other debts, obligations and liabilities in whatever form owing to the Borrower from any Person for goods sold or leased or for services rendered by the Borrower or its predecessor in interest, or however otherwise established or created, all guaranties and security therefor, any right, title and interest of the Borrower in the goods or services which gave rise thereto, including rights to reclamation and stoppage in transit and any rights of an unpaid seller of goods or services; whether any of the foregoing be now existing or hereafter arising, now or hereafter received by or owing or belonging to the Borrower. RENTAL CONTRACT. An Operating Lease which is month-to-month and which is cancelable. RESPONSIBLE OFFICER. The chief financial officer of the Borrower, the vice president of funding operations of the Borrower and any other officer of the Borrower designated by the chief financial officer to sign Borrowing Base Reports and Notices of Borrowing or Conversion. RESTRICTED PAYMENT. Any dividend, distribution, loan, advance, guaranty, extension of credit or other payment, whether in cash or property to or for the benefit of any Person who holds an equity interest in the Borrower or any of its Subsidiaries, whether or not such interest is evidenced by a security, and any purchase, redemption, retirement or other acquisition for value of any capital stock of the Borrower or any of its Subsidiaries, whether now or hereafter outstanding, or of any options, warrants or similar rights to purchase such capital stock or any security convertible into or exchangeable for such capital stock. REVOLVING CREDIT ASSIGNMENT OF LEASES. A second amended and restated assignment of leases, dated the Closing Date, by the Borrower in favor of the Agent for the benefit of the Lenders, as amended, supplemented and in effect from time to time, and any supplement thereto in the form of Exhibit A to the Revolving Credit Assignment of Leases as executed and delivered by the Borrower and the Agent from time to time. 16 21 REVOLVING CREDIT LOAN. See Section 2.1(a) hereof. REVOLVING CREDIT NOTES. See Section 2.3(a). SECURITY AGREEMENT. A second amended and restated security agreement, dated the Closing Date, between the Borrower and the Agent, as amended, supplemented and in effect from time to time, and any supplement thereto in the form of Exhibit A to the Security Agreement as executed and delivered by the Borrower and the Agent from time to time. SECURITY DOCUMENTS. The Revolving Credit Assignment of Leases, the Security Agreement and any additional documents evidencing or perfecting the Agent's lien on the Collateral. SECURITY MONITORING AGREEMENT. An agreement between a Dealer and a customer, substantially in the form of EXHIBIT F-2 hereto, which provides for (i) the selling, servicing and installation by the Dealer of central station security/alarm monitoring equipment and related monitoring services or (ii) only monitoring services with respect to such equipment. SERVICER. A Person engaged in the business of providing monitoring services for central alarm systems. SUBORDINATED DEBT. Indebtedness of the Parent or any of its Subsidiaries, including the Borrower, which is expressly subordinated and made junior to the payment and performance in full of the Obligations and the Guaranteed Obligations (as defined in the Parent Guaranty) on terms and conditions satisfactory to the Agent and the Majority Lenders. SUBSIDIARY. Any corporation, association, joint stock company, business trust or other similar organization of which 50% or more of the ordinary voting power for the election of a majority of the members of the board of directors or other governing body of such entity is held or controlled by the Parent, the Borrower or a Subsidiary of the Parent or Borrower; or any other such organization the management of which is directly or indirectly controlled by the Parent, the Borrower or a Subsidiary of the Parent or Borrower through the exercise of voting power or otherwise; or any joint venture, whether incorporated or not, in which the Parent or Borrower has a 50% ownership interest. SWING LINE ADVANCES. See Section 2.2. TOTAL COMMITMENT. The sum of the Commitments of the Lenders as in effect from time to time, which as of the Closing Date shall be $55,000,000 and which may be increased from time to time to an amount not to exceed $70,000,000 in accordance with the provisions of Section 9.3 hereof, and which may be any lesser amount, including zero, resulting from a termination or reduction of such amount in accordance with Sections 2.1 and 8.2 hereof. 17 22 TOTAL OUTSTANDINGS. At any time, the aggregate outstanding principal balance of the Revolving Credit Loans at the time. TYPE. A Base Rate Loan, a Eurodollar Loan or a Money Market Loan. UCC. The Uniform Commercial Code as enacted in any state of the United States or in the District of Columbia or the United States Virgin Islands insofar as any such statute, as in effect from time to time, may be relevant to the creation, perfection, continuation and enforcement of Encumbrances on Collateral. YEAR 2000 COMPLIANT. With respect to any Person, all software, embedded microchips and other processing capabilities and equipment utilized by and material to the business operations or financial condition of such Person that are able to interpret and manipulate data involving all calendar dates correctly and without causing any abnormal ending scenario, including, without limitation, in the case of dates or time periods occurring or ending after December 31, 1999, the ability to function at least as effectively as in the case of time periods occurring or ending prior to January 1, 2000. 1.2 RULES OF INTERPRETATION. (1) All terms of an accounting character used herein but not defined herein shall have the meanings assigned thereto by GAAP applied on a consistent basis. All calculations for the purposes of Section VI hereof shall be made in accordance with GAAP. (2) A reference to any document or agreement shall include such document or agreement as amended, modified or supplemented and in effect from time to time in accordance with its terms and the terms of this Agreement. (3) The singular includes the plural and the plural includes the singular. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. (4) A reference to any Person includes its permitted successors and permitted assigns. (5) The words "include", "includes" and "including" are not limiting. (6) The words "herein", "hereof", "hereunder" and words of like import shall refer to this Agreement as a whole and not to any particular section or subdivision of this Agreement. (7) All terms not specifically defined herein or by GAAP, which terms are defined in the Uniform Commercial Code as in effect in the Commonwealth of Massachusetts, have the meanings assigned to them in such Uniform Commercial Code. 18 23 SECTION 2. DESCRIPTION OF CREDIT 2.1 REVOLVING CREDIT LOANS. (1) Upon the terms and subject to the conditions set forth in this Agreement, and in reliance upon the representations, warranties and covenants of the Borrower herein, each of the Lenders agrees, severally and not jointly, to make revolving credit loans (the "REVOLVING CREDIT LOANS") to the Borrower at the Borrower's request from time to time from and after the Closing Date and prior to the Borrowing Base Maturity Date, PROVIDED that the Total Outstandings (after giving effect to all requested Revolving Credit Loans and Swing Line Advances) shall not at any time exceed the lesser of (i) the Borrowing Base and (ii) the Total Commitment, and PROVIDED, FURTHER that the sum of the aggregate principal amount of outstanding Revolving Credit Loans made by each Lender shall not at any time (after giving effect to all requested Revolving Credit Loans and Swing Line Advances) exceed such Lender's Commitment, and PROVIDED, FURTHER, that the sum of the aggregate principal amount of outstanding Revolving Credit Loans based on Eligible Leases having original terms of more than 60 months shall not at any time (after giving effect to all requested Revolving Credit Loans) exceed 10% of the aggregate principal amount of all outstanding Revolving Credit Loans. Subject to the terms and conditions of this Agreement, the Borrower may borrow, repay and prepay amounts, up to the limits imposed by this Section 2.1, from time to time between the Closing Date and the Borrowing Base Maturity Date upon request given to the Agent pursuant to Section 2.4. Each request for a Revolving Credit Loan hereunder shall constitute a representation and warranty by the Borrower that the conditions set forth in Section 3.1, in the case of the initial Revolving Credit Loans to be made on the Closing Date, and Section 3.2 in the case of all other Revolving Credit Loans, have been satisfied as of the date of such request. (2) No Eurodollar Loan shall be requested or made for less than $500,000 in principal amount and in integral multiples of $100,000 in excess of such minimum amount. No more than 8 Eurodollar Loans may be outstanding at any time. (3) Upon the terms and subject to the conditions of this Agreement, the Borrower may convert all or any part (in integral multiples of $500,000) of any outstanding Loan into a Loan of another Type on any Business Day (which, in the case of a conversion of an outstanding Eurodollar Loan shall be the last day of the Interest Period applicable to such Eurodollar Loan), PROVIDED, HOWEVER that only Swing Line Advances may be made as or converted into Money Market Loans. The Borrower shall give the Agent prior notice of each such conversion (which notice shall be effective upon receipt) in accordance with Section 2.4. (4) All Commitments shall automatically terminate at 2:30 p.m. Boston time on the Borrowing Base Maturity Date. Subject to the provisions of Section 2.8 regarding mandatory payments, the Borrower shall have the right at any time and from time to time upon five (5) Business Days' prior written notice to the Agent to reduce by $5,000,000, and in integral multiples of $1,000,000 if in excess thereof, the Total Commitment or to terminate entirely the 19 24 Lenders' Commitments to make Revolving Credit Loans hereunder, whereupon the Commitments of the Lenders shall be reduced pro rata in accordance with their respective Commitments by the aggregate amount specified in such notice or shall, as the case may be, be terminated entirely. No such reduction or termination of any Commitment may be reinstated. 2.2 SWING LINE ADVANCES. (1) Upon the terms and subject to the conditions set forth in this Agreement, and in reliance upon the representations, warranties and covenants of the Borrower herein, BKB may, in its sole discretion, make short term advances ("SWING LINE ADVANCES") to the Borrower from time to time from and after the Closing Date and prior to the Borrowing Base Maturity Date, provided that the Total Outstandings (after giving effect to all requested Revolving Credit Loans and Swing Line Advances) shall not at any time exceed the lesser of (i) the Borrowing Base and (ii) the Total Commitment, PROVIDED, FURTHER that the aggregate outstanding principal amount of Swing Line Advances shall not exceed $5,000,000, and PROVIDED, FURTHER that the aggregate principal amount of Revolving Credit Loans and Swing Line Advances made by BKB shall not at any time exceed BKB's Commitment. Each Swing Line Advance shall be due and payable on such Business Day (not more than seven (7) days after the making thereof) as the Borrower shall specify in the Notice of Borrowing or Conversion requesting such Swing Line Advance. Each request for a Swing Line Advance hereunder shall constitute a representation and warranty by the Borrowers that the conditions set forth in Section 3.1, in the case of any Swing Line Advance to be made on the Closing Date, and Section 3.2 in the case of all other Swing Line Advances, have been satisfied as of the date of such request. (2) Each Swing Line Advance shall be either a Base Rate Loan or, subject to availability, a Money Market Loan; no Swing Line Advance shall be a Eurodollar Loan. No Swing Line Advance shall be requested or made for less than $100,000 in principal amount. (3) Subject to the limitations set forth above, Swing Line Advances of one Type may be converted into a Loan of another Type in accordance with Section 2.4. No Revolving Credit Loan may be converted into a Swing Line Advance. 2.3 THE NOTES. The Revolving Credit Loans shall be evidenced by separate promissory notes for each Lender, each such note to be in substantially the form of EXHIBIT A hereto, dated as of the Closing Date and completed with appropriate insertions (each such note being referred to herein as a "REVOLVING CREDIT NOTE" and collectively as the "REVOLVING CREDIT NOTES"). One Revolving Credit Note shall be payable to the order of each Lender in a principal amount equal to such Lender's highest possible Commitment. The Borrower irrevocably authorizes each of the Lenders to make or cause to be made, at or about the time of the Drawdown Date of any Revolving Credit Loan or at the time of receipt of any payment of principal on the Revolving Credit Notes, an appropriate notation on its Note Record reflecting the making of such Revolving Credit Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Revolving Credit Loans set forth on the Note Records shall be PRIMA FACIE evidence of the principal amount thereof owing and unpaid to such Lenders, but the failure to record, or any error in so recording, any such amount on any Lender's Note Record 20 25 shall not limit or otherwise affect the obligations of the Borrower hereunder or under any Revolving Credit Note to make payments of principal of or interest on any Revolving Credit Note when due. 2.4 NOTICE AND MANNER OF BORROWING OR CONVERSION OF LOANS. (1) Whenever the Borrower desires to obtain or continue a Loan hereunder or convert an outstanding Loan of one Type into a Loan of another Type, the Borrower shall give the Agent a written Notice of Borrowing or Conversion (or a telephonic notice promptly confirmed by a written Notice of Borrowing or Conversion), which Notice shall be irrevocable and which must be received no later than 2:00 p.m. Boston time (i) one Business Day before the day on which the requested Loan is to be made or continued as or converted to a Base Rate Loan, (ii) three Business Days before the day on which the requested Loan is to be made or continued as or converted to a Eurodollar Loan, and (iii) the same Business Day on which a requested Swing Line Advance is to be made. Such Notice shall specify (A) the effective date and amount of each such Loan or portion thereof requested to be made, continued or converted, subject to the limitations set forth in this Agreement, (B) the interest rate option requested to be applicable thereto, (C) the duration of the applicable Interest Period, if any (subject to the provisions of the definition of the term "Interest Period") and (D) in the case of a requested Swing Line Advance, the maturity date thereof (which maturity date shall be a Business Day no later than seven (7) days after the date such Swing Line Advance is requested to be made). If such Notice fails to specify the interest rate option to be applicable to the requested Loan, then the Borrower shall be deemed to have requested a Base Rate Loan. If such written confirmation of any telephonic notification differs in any material respect from the action taken by the Agent, the records of the Agent shall control absent manifest error, and shall be accompanied by a Borrowing Base Report. If the Agent receives a Notice of Borrowing or Conversion after the time specified in subsection (a) above, such Notice shall not be effective. (2) Subject to the provisions of the definition of the term "Interest Period" herein, the duration of each Interest Period for a Eurodollar Loan shall be as specified in the applicable Notice of Borrowing or Conversion. If no Interest Period is specified in a Notice of Borrowing or Conversion with respect to a requested Eurodollar Loan or Money Market Loan, then the Borrower shall be deemed to have selected an Interest Period of one month's duration for a requested Eurodollar Loan or one day's duration for a Money Market Loan. If the Agent does not receive an effective Notice of Borrowing or Conversion with respect to an outstanding Eurodollar Loan, or if, when such Notice must be given prior to the end of the Interest Period applicable to such outstanding Loan, the Borrower shall have failed to satisfy any of the conditions hereof, the Borrower shall be deemed to have elected to convert such outstanding Eurodollar Loan in whole into a Base Rate Loan on the last day of the then current Interest Period with respect thereto. (3) Each Notice of Borrowing or Conversion requesting borrowing of a Revolving Credit Loan shall be accompanied by a Borrowing Base Report containing a computation by the Borrower in form satisfactory to the Agent (hereinafter referred to as a "BORROWING COMPUTATION") certified by a Responsible Officer, setting forth (i) a complete description of the Equipment to be acquired or financed with respect to which such Revolving 21 26 Credit Loan has been requested, (ii) the Original Cost and Adjusted Cost of such Equipment, (iii) a complete description of the Leases covering such Equipment, (iv) the name of the lessees under such Leases, (v) a statement that such Equipment and Leases, subject to the acceptance by the Agent of such Equipment or the applicable lessee, satisfy the conditions to qualify as Eligible Equipment Leases or Eligible Rental Contracts, respectively, and (vi) such other information with respect to such Equipment and Leases as is requested by the Agent in the Borrowing Computation or otherwise. Within two Business Days after receipt of such information in the form indicated above, the Agent shall notify the Borrower if any of such Equipment or lessees are unacceptable to the Agent. In the event the Agent does not so notify the Borrower, the Agent shall be deemed to have accepted such Equipment and lessees. The acceptance or deemed acceptance of any lessee under any Lease at any one time by the Agent shall not operate as an acceptance of such lessee at any future time. 2.5 FUNDING OF LOANS. (1) PRO RATA FUNDING. Revolving Credit Loans shall be made by the Lenders PRO RATA in accordance with their respective Commitments, PROVIDED, HOWEVER that the failure of any Lender to make any Loan shall not relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). .. (2) NOTICE. The Agent shall promptly notify the Lenders of each Notice of Borrowing or Conversion received pursuant to Section 2.4 (other than a Notice requesting a Swing Line Advance) and of each Lender's portion of the requested Loan. Not later than 1:00 p.m. (Boston time) on the proposed Drawdown Date of such Loan, each Lender will make available to the Agent, at its head office, in immediately available funds, the amount of such Lender's PRO RATA share of the amount of such requested Loan. Upon receipt by the Agent of such amount, and upon receipt of the documents required by Section 3 and the satisfaction of the other conditions set forth therein (to the extent applicable) the Agent may first pay to BKB on behalf of the Borrower, out of such funds, an amount equal to the aggregate principal balance of any outstanding Swing Line Advances, and then shall make available to the Borrower the balance of such Loan. The failure or refusal of any Lender to make available to the Agent at the aforesaid time and place on any Drawdown Date the amount of its PRO RATA share of any requested Loans shall not relieve any other Lender from its several obligation hereunder to make available to the Agent the amount of such other Lender's PRO RATA share of any requested Loans. (3) ADVANCE BY AGENT. The Agent may, unless notified to the contrary by any Lender prior to a Drawdown Date, assume that each Lender has made available to the Agent on such Drawdown Date the amount of such Lender's PRO RATA share of the Loans to be made on such Drawdown Date, and the Agent may (but it shall not be required to), in reliance upon such assumption, make available to the Borrower a corresponding amount. If any Lender makes available to the Agent such amount on a date after such Drawdown Date, such Lender shall pay to the Agent on demand an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by the Agent for federal funds acquired by the Agent during each day included in such period, TIMES (ii) the 22 27 amount of such Lender's PRO RATA share of any such Loans TIMES (iii) a fraction, the numerator of which is the number of days that elapse from and including such Drawdown Date to the date on which the amount of such Lender's pro rata share of such Loans shall become immediately available to the Agent, and the denominator of which is 365. A statement of the Agent submitted to such Lender with respect to any amounts owing under this paragraph shall be PRIMA FACIE evidence of the amount due and owing to the Agent by such Lender. If the amount of such Lender's PRO RATA share of such Loans is not made available to the Agent by such Lender within three (3) Business Days following such Drawdown Date, the Agent shall be entitled to recover such amount from the Borrower on demand, with interest thereon at the rate per annum applicable to the Revolving Credit Loans made on such Drawdown Date. (4) SWING LINE ADVANCES. Upon the satisfaction of the conditions set forth in Section 3, to the extent applicable, BKB will make available to the Borrower the amount of any Swing Line Advance that BKB determines, in its sole discretion, to make. If any Swing Line Advance is not repaid when due, upon written demand by BKB given to the Agent and each other Lender, each other Lender shall purchase from BKB, and BKB shall sell and assign to each such Lender, such other Lender's PRO RATA share (based on its Commitment) of such unpaid Swing Line Advance as of the date of such advance, by making available to the Agent, at its head office, in immediately available funds, an amount equal to the PRO RATA portion of outstanding principal amount of such Swing Line Advance to be purchased by such other Lender. The Borrowers hereby agree to each such sale and assignment. Each such Lender agrees to make such purchase of its share of the unpaid Swing Line Advance on (i) the Business Day on which such demand is made by BKB, PROVIDED that notice of such demand is given not later than 12:00 noon (Boston time) on such Business Day, or (ii) the first Business Day next succeeding such demand if notice of such demand is given after such time. Upon any such assignment, BKB represents and warrants to each such other Lender that BKB is the legal and beneficial owner of the interest in such Swing Line Advance being assigned by it, but makes no other representation or warranty and assumes no responsibility with respect to such Swing Line Advance. If any such other Lender makes available to the Agent such amount on a date after the date such interest is to be assigned to it, such Lender shall pay to BKB on demand an amount equal to the product of (i) the average, computed for the period referred to in clause (iii) below, of the weighted average interest rate paid by BKB for federal funds acquired by BKB during each day included in such period, TIMES (ii) the amount to have been paid by such Lender on such purchase date, TIMES (iii) a fraction, the numerator of which is the number of days that elapse from and including the date scheduled for such purchase to the date on which the amount of such Lender's Commitment Percentage of such unpaid Swing Line Advance shall become immediately available to the Agent, and the denominator of which is 365. A statement of the Agent submitted to such Lender with respect to any amounts owing under this paragraph shall be PRIMA FACIE evidence of the amount due and owing to BKB by such Lender, absent manifest error. When such Lender shall pay such amount to the Agent for the account of BKB, such amount so paid in respect of principal shall constitute a Revolving Credit Loan which is a Base Rate Loan made by such Lender on such date for purposes of this Agreement. 23 28 2.6 INTEREST RATES AND PAYMENTS OF INTEREST. (1) BASE RATE LOANS. Each Revolving Credit Loan which is a Base Rate Loan shall bear interest on the outstanding principal amount thereof at a rate per annum equal to the Base Rate, which rate shall change contemporaneously with any change in the Base Rate. Such interest shall be payable monthly in arrears on the first Business Day of each month, commencing January 4, 1999, and when such Loan is due (whether at maturity, by reason of acceleration or otherwise). (2) EURODOLLAR LOANS. Each Revolving Credit Loan which is a Eurodollar Loan shall bear interest on the outstanding principal amount thereof, for each Interest Period applicable thereto, at a rate per annum equal to the Eurodollar Rate plus 1.75%. Such interest shall be payable for such Interest Period on the last day thereof and, if such Interest Period is longer than three months, at intervals of three months after the first day thereof. (3) MONEY MARKET LOANS. Each Revolving Credit Loan which is a Money Market Loan shall bear interest on the outstanding principal amount thereof at the Money Market Rate. Interest on each Money Market Loan shall be payable at the end of the Interest Period applicable thereto. (4) CONVERSION TERM LOAN. Any Conversion Term Loan shall bear interest on the outstanding principal amount thereof at the following rates: (x) to the extent such Loan is a Base Rate Loan, at a rate per annum equal to the Base Rate, plus .50% and (y) to the extent such Loan is a Eurodollar Loan, at a rate per annum equal to the Eurodollar Rate, plus 2.50%. (5) DEFAULT INTEREST. If a material Event of Default shall occur, then at the option of the Agent the unpaid balance of Loans shall bear interest, to the extent permitted by law, compounded daily at an interest rate equal to 2% per annum above the interest rate applicable to each such Loan in effect on the day such Event of Default occurs, until such Event of Default is cured or waived. (6) ADDITIONAL INTEREST. So long as any Lender shall be required under regulations of the Board of Governors of the Federal Reserve System (or any other banking authority, domestic or foreign, to which such Lender is subject) to maintain reserves with respect to liabilities or assets consisting of or including "Eurocurrency Liabilities" (as defined in regulations issued from time to time by such Board of Governors), the Borrower shall pay to the Agent for the account of each such Lender additional interest on the unpaid principal amount of each Eurodollar Loan made by such Lender from the date of such Loan until such principal amount is paid in full, at an interest rate per annum equal at all times to the remainder (rounded upwards, if necessary, to the next higher 1/8 of 1%) obtained by subtracting (i) the Eurodollar Rate for the Interest Period for such Eurodollar Loan from (ii) the rate obtained by dividing such Eurodollar Rate by a percentage equal to 100% minus the Eurodollar Reserve Percentage of such Lender for such Interest Period. Such additional interest shall be determined by such Lender and notified to the Borrower through the Agent, and shall be payable on each date on which interest is payable on such Eurodollar Loan. 24 29 2.7 FEES. (1) The Borrower shall pay to the Agent for the benefit of the Lenders a commitment fee (the "COMMITMENT FEE"), computed on a daily basis and payable quarterly in arrears on the first Business Day of each quarter, equal to 0.275% per annum of the excess of (i) the Total Commitment at the time over (ii) the Total Outstandings from time to time, PROVIDED, HOWEVER that for purposes of the foregoing, Total Outstandings shall not include outstanding Swing Line Advances. (2) On the Closing Date the Borrower shall pay to the Agent for the pro rata benefit of the Lenders an administrative and transactional fee of $25,000. (3) Without limiting any of the Lenders' other rights hereunder or by law, if any Loan or any portion thereof or any interest thereon is not paid within fifteen (15) days after its due date, the Borrower shall pay to the Agent for the benefit of the Lenders on demand a late payment charge equal to 5% of the amount of the total payment due. (4) The Borrower shall pay to the Lenders such other standard charges imposed by the Lenders on the Borrower as are customarily imposed by the Lenders in the ordinary course of business on borrowers generally (e.g., charges for returned checks, cashier's checks, wire transfers, letters of credit, foreign exchange transactions, and other operational services). (5) The Borrower shall pay to the Agent, solely for the account of the Agent, such other fees as the Borrower and the Agent shall agree. (6) The Borrower authorizes the Agent and the Lenders to charge to their Note Records or to any deposit account which the Borrower may maintain with any of them the interest, fees, charges, taxes and expenses provided for in this Agreement, the other Loan Documents or any other document executed or delivered in connection herewith or therewith. 2.8 PAYMENTS AND PREPAYMENTS OF THE LOANS; CONVERSION TERM LOAN. (1) On the Borrowing Base Maturity Date, if the Lenders shall not have offered to extend such date and if no Default shall have occurred and be continuing, then at the option of the Borrower the unpaid principal balance of the Revolving Credit Loans shall be converted into a term loan (the "CONVERSION TERM LOAN") which shall be payable in thirty six (36) equal consecutive monthly installments on the first day of each calendar month, commencing with the first day of the month following the Borrowing Base Maturity Date, with the unpaid principal balance of the Conversion Term Loan, together with all unpaid interest thereon and all fees and other amounts due with respect thereto, due and payable in full on the Conversion Term Loan Maturity Date. If the Lenders shall have offered to extend the Borrowing Base Maturity Date but the Borrower shall not have agreed to such extension or if any Default shall have occurred and be continuing on such date, then notwithstanding the existence of any 25 30 Eurodollar or Money Market Loan and notwithstanding any other provision of the Loan Documents, the Borrower shall pay in full on such date the unpaid principal balance of the Revolving Credit Loans, together with all unpaid interest thereon and all fees and other amounts due with respect thereto. (2) Eurodollar Loans may be paid, without premium or penalty, on the last day of any Interest Period applicable thereto, upon three Business Days' notice. Money Market Loans may be paid, without premium or penalty, on the last day of any Interest Period applicable thereto, and Base Rate Loans may be prepaid at any time, without premium or penalty, upon one Business Day's notice. Upon the written request of the Borrower in conjunction with any such prepayment of a Revolving Credit Loan, the Agent shall, simultaneously with receipt of such prepayment, release the Eligible Equipment, Eligible Leases and Eligible Rental Contracts to which such prepaid Loan relates from the Agent's Encumbrance on such items of Collateral granted to the Agent pursuant to the Security Documents, PROVIDED that (i) no Default shall have occurred and be continuing, (ii) the Agent shall have received from the Borrower a Borrowing Base Report demonstrating that upon such release the Borrower shall be in compliance with the terms of Section 2.1 hereof, and (iii) the Agent shall have received a certification from a Responsible Officer certifying that no Default has occurred and is continuing, that the Borrower has complied with the provisions of Section 7.4 hereof and Section 2(b)(ii) of the Security Agreement and that upon such release and after giving effect thereto the Borrower shall be in compliance with Section 2.1 hereof and no Default shall have occurred and be continuing. (3) If at any time the Total Outstandings exceed the lesser of (i) the Borrowing Base and (ii) the Total Commitment, then the Borrower shall immediately pay the amount of any such excess to the Agent for application to the Loans. 2.9 METHOD OF PAYMENT AND ALLOCATION OF PAYMENTS. (1) All payments by the Borrower hereunder and under any of the other Loan Documents shall be made without set-off or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Borrower is compelled by law to make such deduction or withholding. If any such obligation is imposed upon the Borrower with respect to any amount payable by it hereunder or under any of the other Loan Documents, the Borrower will pay to each Lender such additional amount in Dollars as shall be necessary to enable such Lender to receive the same net amount which such Lender would have received on such due date had no such obligation been imposed upon the Borrower. The Borrower will deliver promptly to each Lender certificates or other valid vouchers or other evidence of payment reasonably satisfactory to the Agent for all taxes or other charges deducted from or paid with respect to payments made by the Borrower hereunder or under such other Loan Document. The Lenders may, and the Borrower hereby authorizes the Lenders to, debit the amount of any payment not made by such time to the demand deposit accounts of the Borrower with the Lenders or to their Note Records. 26 31 (2) All payments of principal of and interest in respect of Revolving Credit Loans, the Conversion Term Loan and the Commitment Fee shall be made to the Agent, for the benefit of the Lenders, PRO RATA in accordance with their respective Commitments, and payments of any other amounts due hereunder shall be made to the Agent to be allocated among the Agent and the Lenders as their respective interests appear. All such payments shall be made at the Agent's head office or at such other location that the Agent may from time to time designate, in each case in immediately available funds. (3) If the Commitments shall have been terminated or the Obligations shall have been declared immediately due and payable pursuant to Section 8.2, all funds received from or on behalf of the Borrower (including as proceeds of Collateral) by any Lender in respect of Obligations (except funds received by any Lender as a result of a purchase of a participant interest pursuant to Section 2.9(d) below) shall be remitted to the Agent, and all such funds, together with all other funds received by the Agent from or on behalf of the Borrower (including proceeds of Collateral) in respect of Obligations, shall be applied by the Agent in the following manner and order: (i) first, to reimburse the Agent and the Lenders, in that order, for any amounts payable pursuant to Sections 11.2 and 11.3 hereof; (ii) second, to the payment of the Commitment Fee and any other fees payable hereunder; (iii) third, to the payment of interest due on the Revolving Credit Loans and the Conversion Term Loan; (iv) fourth, to the payment of the outstanding principal balance of any Swing Line Advances; (v) fifth, to the payment of the outstanding principal balance of the Revolving Credit Loans and the Conversion Term Loan; (vi) sixth, to the payment of any other Obligations payable by the Borrower; and (vii) any remaining funds shall be paid to whoever shall be entitled thereto or as a court of competent jurisdiction shall direct. (4) Each of the Lenders and the Agent hereby agrees that if it should receive any amount (whether by voluntary payment, by realization upon security, by the exercise of the right of set-off or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Loan Documents, or otherwise) in respect of principal of, or interest on, the Revolving Credit Loans or the Conversion Term Loan or any fees which are to be shared PRO RATA among the Lenders, which, as compared to the amounts theretofore received by the other Lenders with respect to such principal, interest or fees, is in excess of such Lender's PRO RATA share of such principal, interest or fees, such Lender shall share such excess, less the costs and expenses (including, reasonable attorneys' fees and disbursements) incurred by such Lender in connection with such realization, exercise, claim or action, PRO RATA with all other Lenders in proportion to their respective Commitments, and such sharing shall be deemed a purchase (without recourse) by such sharing party of participant interests in the Loans or such fees, as the case may be, owed to the recipients of such shared payments to the extent of such shared payments; provided, however, that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 2.10 INDEMNITY. If the Borrower for any reason (including, without limitation, pursuant to Sections 2.8(b), 2.12 and 8.2 hereof) makes any payment of principal with respect to any Eurodollar Loan or Money Market Loan on any day other than the last day of an Interest 27 32 Period applicable to such Loan, or fails to borrow or continue or convert to a Eurodollar Loan or Money Market Loan, as the case may be, after giving a Notice of Borrowing or Conversion thereof pursuant to Section 2.4, or fails to prepay a Eurodollar Loan after having given notice thereof, the Borrower shall pay to the Agent for the benefit of the Lenders any amount required to compensate the Lenders for any additional losses, costs or expenses which they may reasonably incur as a result of such payment or failure, including, without limitation, any loss (including loss of anticipated profits), costs or expense incurred by reason of the liquidation or re-employment of deposits or other funds required by the Lenders to fund or maintain such Loan. The Borrower shall pay such amount upon presentation by the Agent of a statement setting forth the amount and the Agent's (or the affected Lenders') calculation thereof pursuant hereto, which statement shall be deemed true and correct absent manifest error. 2.11 COMPUTATION OF INTEREST AND FEES. Interest and all fees payable hereunder shall be computed daily on the basis of a year of 360 days and paid for the actual number of days for which due. If the due date for any payment of principal is extended by operation of law, interest shall be payable for such extended time. If any payment required by this Agreement becomes due on a day that is not a Business Day such payment may be made on the next succeeding Business Day (subject to clause (i) of the definition of the term "Interest Rate Period"), and such extension shall be included in computing interest in connection with such payment. 2.12 CHANGED CIRCUMSTANCES; ILLEGALITY. (1) Notwithstanding any other provision of this Agreement, in the event that: (1) on any date on which the Eurodollar Rate would otherwise be set the Agent shall have determined in good faith (which determination shall be final and conclusive) that adequate and fair means do not exist for ascertaining the Eurodollar Rate, or (2) at any time the Agent or any Lender shall have determined in good faith (which determination shall be final and conclusive and, if made by any Lender, shall have been communicated to the Agent in writing) that: (A) the making or continuation of or conversion of any Loan to a Eurodollar Loan has been made impracticable or unlawful by (1) the occurrence of a contingency that materially and adversely affects the interbank Eurodollar market or (2) compliance by the Agent or such Lender in good faith with any applicable law or governmental regulation, guideline or order or interpretation or change thereof by any governmental authority charged with the interpretation or administration thereof or with any request or directive of any such governmental authority (whether or not having the force of law); or (B) the Eurodollar Rate shall no longer represent the effective cost to the Agent or such Lender for U.S. dollar deposits in the interbank market for deposits in which it regularly participates; 28 33 then, and in any such event, the Agent shall forthwith so notify the Borrower thereof. Until the Agent notifies the Borrower that the circumstances giving rise to such notice no longer apply, the obligation of the Lenders to allow selection by the Borrower of the Type of Loan affected by the contingencies described in this Section (herein called "AFFECTED LOANS") shall be suspended. If, at the time the Agent so notifies the Borrower, the Borrower has previously given the Agent a Notice of Borrowing or Conversion with respect to one or more Affected Loans but such Loans have not yet gone into effect, such notification shall be deemed to be a request for Base Rate Loans. (2) In the event of a determination of illegality pursuant to subsection (a)(ii)(A) above, the Borrower shall, with respect to the outstanding Affected Loans, prepay the same, together with interest thereon and any amounts required to be paid pursuant to Section 2.10, on such date as shall be specified in such notice (which shall not be earlier than the date such notice is given) and may, subject to the conditions of this Agreement, borrow a Loan of another Type in accordance with Section 2.1 hereof by giving a Notice of Borrowing or Conversion pursuant to Section 2.4 hereof. 2.13 INCREASED COSTS. In case any change in law, regulation, treaty or official directive or the interpretation or application thereof by any court or by any governmental authority charged with the administration thereof or the compliance with any guideline or request of any central bank or other governmental authority (whether or not having the force of law): (1) subjects any Lender to any tax with respect to payments of principal or interest or any other amounts payable hereunder by the Borrower or otherwise with respect to the transactions contemplated hereby (except for taxes on the overall net income of such Lender imposed by the United States of America or any political subdivision thereof), or (2) imposes, modifies or deems applicable any deposit insurance, reserve, special deposit or similar requirement against assets held by, or deposits in or for the account of, or loans by, any Lender (other than such requirements as are already included in the determination of the Eurodollar Rate), or (iii) imposes upon any Lender any other condition with respect to its obligations or performance under this Agreement, and the result of any of the foregoing is to increase the cost to the Lender, reduce the income receivable by such Lender or impose any expense upon such Lender with respect to any Loans or its obligations under this Agreement, such Lender shall notify the Borrower and the Agent thereof. The Borrower agrees to pay to such Lender the amount of such increase in cost, reduction in income or additional expense as and when such cost, reduction or expense is incurred or determined, upon presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender's calculation thereof and the assumptions upon which such calculation was based, which statement shall be deemed true and correct absent manifest error. 29 34 2.14 CAPITAL REQUIREMENTS. If after the date hereof any Lender reasonably determines that (i) the adoption of or change in any law, rule, regulation or guideline regarding capital requirements for banks or bank holding companies, or any change in the interpretation or application thereof by any governmental authority charged with the administration thereof, or (ii) compliance by such Lender or its parent bank holding company with any guideline, request or directive of any such entity regarding capital adequacy (whether or not having the force of law), has the effect of reducing the return on such Lender's or such holding company's capital as a consequence of such Lender's commitment to make Loans hereunder to a level below that which such Lender or such holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such holding company's then existing policies with respect to capital adequacy and assuming the full utilization of such entity's capital) by any amount deemed by such Lender to be material, then such Lender shall notify the Borrower thereof. The Borrower agrees to pay to such Lender the amount of such reduction of capital as and when such reduction is determined, payable within 30 days after presentation by such Lender of a statement in the amount and setting forth in reasonable detail such Lender's calculation thereof and the assumptions upon which such calculation was based (which statement shall be deemed true and correct absent manifest error) unless within such 30 day period the Borrower shall have prepaid in full all obligations to such Lender, in which event no amount shall be payable to such Lender under this Section. In determining such amount, such Lender may use any reasonable averaging and attribution methods. SECTION 3. CONDITIONS OF LOANS 3.1 CONDITIONS PRECEDENT TO INITIAL LOANS. The obligation of the Lenders to make any additional Revolving Credit Loans is subject to the satisfaction, on or prior to the Closing Date, of the condition that the Agent shall have received the following agreements, documents, certificates and opinions in form and substance satisfactory to the Agent and duly executed and delivered by the parties thereto: (1) This Agreement; (2) The Revolving Credit Notes; (3) The Security Documents; (4) The Parent Guarantee; (5) The Intercreditor Agreement; (6) UCC-1 Financing Statements and UCC-3 Financing Statement Amendments; 30 35 (7) Borrowing Base Report as of a date within five (5) Business Days of the Closing Date; (8) Notice of Borrowing or Conversion as of the Closing Date; (9) A certificate of the Clerk or an Assistant Clerk of the Borrower with respect to resolutions of the Board of Directors authorizing the execution and delivery of the Loan Documents and identifying the officer(s) authorized to execute, deliver and take all other actions required under this Agreement, and providing specimen signatures of such officers, and certifying that neither the Articles of Organization nor the Bylaws of the Borrower has been amended since the date the same were delivered to BKB pursuant to the Existing Credit Agreement; (10) A certificate of the Secretary of State of the Borrower's jurisdiction of incorporation as to legal existence and good standing of the Borrower in such state; (11) An opinion addressed to the Lenders from Edwards & Angell, counsel to the Borrower; and (12) Such other documents, instruments, opinions and certificates and completion of such other matters, as the Agent may reasonably deem necessary or appropriate. 3.2 CONDITIONS PRECEDENT TO ALL LOANS. The obligation of the Lenders to make any Loan, including the initial Loans, or continue or convert Loans of one Type to Loans of another Type is further subject to the following conditions: (1) timely receipt by the Agent of the Notice of Borrowing or Conversion and a Borrowing Base Report with respect to any Loan; (2) the representations and warranties contained in Section IV shall be true and accurate in all material respects on and as of the date of such Notice of Borrowing or Conversion and on the effective date of the making, continuation or conversion of each Loan as though made at and as of each such date (except to the extent that such representations and warranties expressly relate to an earlier date); (3) no Default shall have occurred and be continuing, or would result from the making of such requested Loan; (4) the resolutions referred to in Section 3.1 shall remain in full force and effect; and (5) no change shall have occurred in any law or regulation or interpretation thereof that, in the opinion of counsel for any Lender, would make it illegal or against the policy of any governmental agency or authority for such Lender to make Loans hereunder. 31 36 The making, continuation or conversion of each Loan shall be deemed to be a representation and warranty by the Borrower on the date of the making, continuation or conversion of such Loan as to the accuracy of the facts referred to in subsection (b) of this Section 3.2 and of the satisfaction of all of the conditions set forth in this Section 3.2. SECTION 4 REPRESENTATIONS AND WARRANTIES In order to induce the Agent and the Lenders to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants to the Agent and the Lenders that except as set forth on EXHIBIT C attached hereto: 4.1 ORGANIZATION; QUALIFICATION; BUSINESS. (1) Each of the Borrower and its Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, (ii) has all requisite corporate power to own its property and conduct its business as now conducted and as presently contemplated and (iii) is duly qualified and in good standing as a foreign corporation and is duly authorized to do business in each jurisdiction (all of which are listed on EXHIBIT C attached hereto) where the nature of its properties or business requires such qualification, except where the failure to be so qualified would not have a material adverse effect on the business, financial condition, assets or properties of the Borrower or of the Borrower and its Subsidiaries taken as a whole. (2) Since the date of the Initial Financial Statements, the Borrower has continued to engage in substantially the same business as that in which it was then engaged and is engaged in no unrelated business. 4.2 CORPORATE AUTHORITY. The execution, delivery and performance of the Loan Documents and the transactions contemplated hereby are within the corporate power and authority of the Borrower and have been authorized by all necessary corporate proceedings, and do not and will not (a) contravene any provision of the charter documents or by-laws of the Borrower or any law, rule or regulation applicable to the Borrower, (b) contravene any provision of, or constitute an event of default or event that, but for the requirement that time elapse or notice be given, or both, would constitute an event of default under, any other agreement, instrument, order or undertaking binding on the Borrower, or (c) result in or require the imposition of any Encumbrance on any of the properties, assets or rights of the Borrower, except in favor of the Agent and the Lenders. 4.3 VALID OBLIGATIONS. The Loan Documents and all of their respective terms and provisions are the legal, valid and binding obligations of the Borrower, enforceable in accordance with their respective terms except as limited by bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, and except as 32 37 the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceeding therefor may be brought. The Security Documents have effectively created in favor of the Agent and the Lenders legal, valid and enforceable security interests in the Collateral and such security interests are fully perfected first priority security interests. 4.4 CONSENTS OR APPROVALS. The execution, delivery and performance of the Loan Documents and the transactions contemplated herein do not require any approval or consent of, or filing or registration with, any governmental or other agency or authority, or any other Person, except under or as contemplated by the Security Documents. 4.5 TITLE TO PROPERTIES; ABSENCE OF ENCUMBRANCES. Each of the Borrower and its Subsidiaries has good and marketable title to all of the properties, assets and rights of every name and nature now purported to be owned by it, including, without limitation, such properties, assets and rights as are reflected in the Initial Financial Statements (except such properties, assets or rights as have been disposed of in the ordinary course of business since the date thereof), free from all Encumbrances except Permitted Encumbrances, and, except as so disclosed, free from all defects of title that might materially adversely affect such properties, assets or rights, taken as a whole. All real property owned or leased by the Borrower is described in EXHIBIT C hereto. 4.6 FINANCIAL STATEMENTS. The Borrower has furnished to the Lenders the Parent's consolidated and consolidating balance sheets as of December 31, 1997 and its consolidated and consolidating statements of income, changes in stockholders' equity and cash flow for the fiscal year then ended and related footnotes, audited and certified by the Borrower's Accountants. The Borrower has also furnished to the Lenders the Parent's unaudited consolidated balance sheet as of September 30, 1998 and consolidated statement of income for the nine months ended September 30, 1998 (the "INITIAL FINANCIAL STATEMENTS") in each case certified by the principal financial officer of the Borrower, subject to normal, recurring year-end adjustments that shall not in the aggregate be material in amount. All such financial statements were prepared in accordance with GAAP applied on a consistent basis throughout the periods specified and present fairly the financial position of the Parent and its Subsidiaries as of such dates and the results of the operations of the Parent and its Subsidiaries for such periods. At the date hereof, the Borrower has no Indebtedness or other material liabilities, debts or obligations, whether accrued, absolute, contingent or otherwise, and whether due or to become due, including, but not limited to, liabilities or obligations on account of taxes or other governmental charges, that are not set forth on the Initial Financial Statements or on EXHIBIT C hereto. 4.7 CHANGES. Since the date of the Initial Financial Statements, there have been no changes in the assets, liabilities, financial condition, business or prospects of the Parent or any of its Subsidiaries other than changes in the ordinary course of business, the effect of which has not, in the aggregate, been materially adverse to the Parent and its Subsidiaries taken as a whole. 4.8 SOLVENCY. The Borrower has and, after giving effect to the Loans, will have, assets (both tangible and intangible) having a fair saleable value in excess of the amount required to pay the probable liability on its then-existing debts (whether matured or unmatured, liquidated or unliquidated, fixed or contingent); the Borrower has and will have access to adequate capital 33 38 for the conduct of its business and the discharge of its debts incurred in connection therewith as such debts mature; the Borrower was not insolvent immediately prior to the making of the Loans and immediately after giving effect thereto, the Borrower will not be insolvent. 4.9 DEFAULTS. As of the date of this Agreement, no Default exists. 4.10 TAXES. The Borrower and each Subsidiary has filed all federal, state and other tax returns required to be filed, and all taxes, assessments and other governmental charges due from the Borrower and each Subsidiary have been fully paid, except for such taxes, assessments or charges that are being contested in good faith by appropriate proceedings and with respect to which (a) adequate reserves have been established and are being maintained in accordance with GAAP and (b) no lien has been filed to secure such taxes, assessments or charges. All such contests at the date hereof are described on EXHIBIT C hereto. The Borrower and its Subsidiaries have not executed any waiver that would have the effect of extending the applicable statute of limitations in respect of tax liabilities. The federal and state income tax returns of the Borrower and each Subsidiary have not been audited or otherwise examined by any federal or state taxing authority. The Borrower and each Subsidiary have established on their books reserves adequate for the payment of all federal, state and other tax liabilities. 4.11 LITIGATION. There is no litigation, arbitration, proceeding or investigation pending, or, to the knowledge of the Borrower's or any Subsidiary's officers, threatened, against the Borrower or any Subsidiary that, if adversely determined, may reasonably be expected to result in a material judgment not fully covered by insurance, may reasonably be expected to result in a forfeiture of all or any substantial part of the property of the Borrower or their Subsidiaries, or may reasonably be expected to have a material adverse effect on the assets, business or prospects of the Borrower and its Subsidiaries taken as a whole. 4.12 SUBSIDIARIES. As of the date of this Agreement, all the Subsidiaries of the Borrower are listed on EXHIBIT C hereto. The Borrower or a Subsidiary of the Borrower is the owner, free and clear of all liens and encumbrances, of all of the issued and outstanding stock of each Subsidiary. All shares of such stock have been validly issued and are fully paid and nonassessable, and no rights to subscribe to any additional shares have been granted, and no options, warrants or similar rights are outstanding. 4.13 INVESTMENT COMPANY ACT ACT. Neither the Borrower nor any of its Subsidiaries is subject to regulation under the Investment Company Act of 1940, as amended. 4.14 COMPLIANCE. The Borrower has all necessary permits, approvals, authorizations, consents, licenses, franchises, registrations and other rights and privileges (including patents, trademarks, trade names and copyrights) to allow it to own and operate its business without any violation of law or the rights of others except to the extent that any such violation would not have a material adverse effect on the business, financial condition or operation of the Borrower and its Subsidiaries taken as a whole; and the Borrower and each Subsidiary are duly authorized, qualified and licensed under and in compliance with all applicable laws, regulations, authorizations and orders of public authorities, including, without limitation, Environmental 34 39 Laws, except to the extent that any such failure to be so authorized, qualified, licensed or in compliance would not have a material adverse effect on the business, financial condition or operation of the Borrower and its Subsidiaries taken as a whole. The Borrower and each Subsidiary have performed all obligations required to be performed by it under, and is not in default under or in violation of, its Certificate of Incorporation or By-Laws, or any agreement, lease, mortgage, note, bond, indenture, license or other instrument or undertaking to which it is a party or by which any of it or any of its properties are bound, except for violations none of which, either individually or in the aggregate, would have any material adverse effect on the business, condition (financial or otherwise) or assets of the Borrower and its Subsidiaries taken as a whole. 4.15 ERISA. The Borrower and each of its Affiliates are in compliance in all material respects with ERISA and the provisions of the Code applicable to the Plans; neither the Borrower nor any of its Affiliates have engaged in a Prohibited Transaction which would subject the Borrower, any of its Affiliates or any Plan to a material tax or penalty imposed on a Prohibited Transaction; no Plan has incurred any "accumulated funding deficiency" (as defined in ERISA); except as set forth in the Initial Financial Statements, the aggregate fair market value of all assets of the Plans which are single-employer plans is at least equal to the aggregate present value of all accrued benefits under such Plans, both as determined in the most recent actuarial reports for such Plans using the actuarial assumptions used for funding purposes therein; neither the Borrower nor any of its Affiliates has incurred any liability to the Pension Benefit Guaranty Corporation over and above premiums required by law; and neither the Borrower nor any of its Affiliates has terminated any Plan in a manner which could result in the imposition of a lien on the property of the Borrower or any of its Affiliates. 4.16 ENVIRONMENTAL MATTERS. (1) The Borrower and each of its Subsidiaries have obtained all permits, licenses and other authorizations which are required under all Environmental Laws, except to the extent failure to have any such permit, license or authorization would not have a material adverse effect on the business, financial condition or operations of the Borrower or any of its Subsidiaries. The Borrower and each of its Subsidiaries are in compliance with the terms and conditions of all such permits, licenses and authorizations, and are also in compliance with all applicable orders, decrees, judgments and injunctions, issued, entered, promulgated or approved under any Environmental Law, except to the extent failure to comply would not have a material adverse effect on the business, financial condition or operations of the Borrower and its Subsidiaries. (2) No written notice, notification, demand, request for information, citation, summons or order has been issued, no complaint has been filed, no penalty has been assessed and no investigation or review is pending or, to the best of the Borrower's knowledge, threatened by any governmental or other entity with respect to any alleged failure by the Borrower or any of its Subsidiaries to have any permit, license or authorization required in connection with the conduct of its business or to comply with any Environmental Laws. 35 40 (3) To the best of the Borrower's knowledge no material oral or written notification of a release of a Hazardous Material has been filed by or on behalf of the Borrower or any of its Subsidiaries and no property now or previously owned, leased or used by the Borrower or any of its Subsidiaries is listed or proposed for listing on the National Priorities List under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or on any similar state list of sites requiring investigation or clean-up. (4) There are no liens or Encumbrances arising under or pursuant to any Environmental Laws on any of the real property or properties owned, leased or used by the Borrower or any of its Subsidiaries and no governmental actions have been taken or, to the best of the Borrower's knowledge, are in process which could subject any of such properties to such liens or Encumbrances or, as a result of which the Borrower or any of its Subsidiaries would be required to place any notice or restriction relating to the presence of Hazardous Materials at any property owned by it in any deed to such property. 4.17 RESTRICTIONS ON THE BORROWER. The Borrower is not party to or bound by any contract, agreement or instrument, nor subject to any charter or other corporate restriction which will, under current or foreseeable conditions, materially and adversely affect the business, property, assets, operations or conditions, financial or otherwise of the Borrower or any of its Subsidiaries. 4.18 LABOR RELATIONS. There is (i) no unfair labor practice complaint pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower, threatened, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower, threatened, except for such complaints, grievances and arbitration proceedings which, if adversely decided, would not have a material and adverse effect on the condition (financial or otherwise), properties, business or results of operations of the Borrower or any of its Subsidiaries, (ii) no strike, labor dispute, slowdown or stoppage pending against the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries, except for any such labor action as would not have a material and adverse effect on the condition (financial or otherwise), properties, business or results of operations of the Borrower or any of its Subsidiaries and (iii) to the best knowledge of the Borrower, no union representation question existing with respect to the employees of the Borrower or any of its Subsidiaries and, to the best knowledge of the Borrower, no union organizing activities are taking place, except for any such question or activities as would not have a material and adverse effect on the condition (financial or otherwise), properties, business or results of operations the Borrower or any of its Subsidiaries. 4.19 MARGIN RULES. The Borrower does not own or have any present intention of purchasing or carrying, and no portion of any Loan shall be used for purchasing or carrying, any "margin security" or "margin stock" as such terms are used in Regulations G, U or X of the Board of Governor's of the Federal Reserve System. 36 41 4.20 DISCLOSURE. No representation or warranty made by the Borrower in any Loan Document and no document or information furnished to the Lenders by or on behalf of or at the request of the Borrower in connection with any of the transactions contemplated by the Loan Documents contains any untrue statement of a material fact or omits to state any material fact necessary in order to make the statements contained therein not misleading in light of the circumstances in which they are made. 4.21 YEAR 2000 COMPLIANCE. (1) The Borrower and its Subsidiaries have (i) undertaken a detailed inventory, review and assessment of all areas within their business and operations that could be adversely affected by the failure of the Borrower or its Subsidiaries to be Year 2000 Compliant on a timely basis, (ii) developed a detailed plan and timetable for becoming Year 2000 Compliant on a timely basis, and (iii) are implementing that plan in accordance with that timetable in all material respects. (2) The Borrower and its Subsidiaries have developed a plan and timetable for making written inquiry of their key suppliers and vendors as to whether such persons will be Year 2000 Compliant in all material respects and are implementing that plan in accordance with that timetable in all material respects. For purposes hereof, "key suppliers and vendors" refers to those suppliers and vendors of the Borrower and its Subsidiaries whose business failure or significant disruption would, with reasonable probability, result in a material adverse change in the business, properties or financial condition of the Borrower and its Subsidiaries taken as a whole. SECTION 5 AFFIRMATIVE COVENANTS So long as the Lenders have any obligation to lend hereunder or any Loan or other Obligation remains outstanding, the Borrower covenants as follows: 5.1 FINANCIAL STATEMENTS. The Borrower shall furnish to the Lenders: (1) as soon as available to the Borrower, but in any event within 90 days after the end of each of fiscal year, the Parent's consolidated and consolidating balance sheets as of the end of, and related consolidated and consolidating statements of income and retained earnings and consolidated statement of cash flow for, such year, audited and certified by the Borrower's Accountants in the case of such consolidated statements, and certified by the chief financial officer of the Borrower in the case of such consolidating statements; and, concurrently with such financial statements, a copy of the Borrower's Accountants management report and a written statement by the Borrower's Accountants that, in the making of the audit necessary for their report and opinion upon such financial statements they have obtained no knowledge of any Default or, if in the opinion of such accountants any such Default exists, they shall disclose in such written statement the nature and status thereof; 37 42 (2) as soon as available to the Borrower, but in any event within 45 days after the end of each quarter, the Parent's consolidated balance sheet as of the end of, and related consolidated statements of income, retained earnings and cash flow for, the quarter then ended and portion of the year then ended, certified by a Responsible Officer of the Borrower, subject to normal, recurring year-end adjustments that shall not in the aggregate be material in amount; (3) as soon as available, but in any event within 15 days after the end of each month, a Borrowing Base Report, together with such other information regarding Eligible Lease Receivables as the Agent may require; (4) at least 30 days prior to the first day of each fiscal year, the Parent's and the Borrower's projections for such fiscal year, prepared on a monthly basis and including consolidated and consolidating balance sheets and statements of income, retained earnings and cash flows; (5) concurrently with the delivery of each financial statement pursuant to subsections (a) and (b) of this Section 5.1, a report in substantially the form of EXHIBIT D hereto signed on behalf of the Borrower by a Responsible Officer; (6) promptly after the receipt thereof by the Parent or the Borrower, copies of any reports (including any so-called management letters) submitted to the Parent or the Borrower by independent public accountants in connection with any annual or interim review of the accounts of the Parent or the Borrower made by such accountants; (7) promptly after the same are delivered to its stockholders or the Securities and Exchange Commission, copies of all proxy statements, financial statements and reports as the Parent or the Borrower shall send to its stockholders or as the Parent or the Borrower may file with the Securities and Exchange Commission or any governmental authority at any time having jurisdiction over the Parent or the Borrower or their Subsidiaries; (8) at least 30 days prior to the date any amendments or modifications are made to the agreements and other instruments evidencing Indebtedness for borrowed money of the Borrower (other than Obligations) which is not Subordinated Debt, notification setting forth in detail the proposed amendments or modifications; (9) promptly after the date on which the aggregate amount of Receivables due from any individual account debtor exceeds the lesser of (i) three percent (3%) of the of the Total Commitment at such time or (ii) $2,100,000, a detailed breakdown of the obligations due from such account debtor in form satisfactory to the Agent; and (10) from time to time, such other financial data and information about the Parent, the Borrower or their Subsidiaries (including, without limitation, a report in substantially the form of EXHIBIT D hereto) as the Agent or the Lenders may reasonably request. 38 43 5.2 CONDUCT OF BUSINESS. The Borrower and each of its Subsidiaries shall: (1) duly observe and comply in all material respects with all applicable laws, regulations, decrees, orders, judgments and valid requirements of any governmental authorities relative to its corporate existence, rights and franchises, to the conduct of its business and to its property and assets (including without limitation all Environmental Laws and ERISA), and shall maintain and keep in full force and effect and comply with all licenses and permits necessary in any material respect to the proper conduct of its business; (2) maintain its corporate existence and remain or engage substantially in the same business as that in which it is now engaged and in no unrelated business. 5.3 MAINTENANCE AND INSURANCE. The Borrower shall maintain its properties in good repair, working order and condition as required for the normal conduct of its business. The Borrower shall maintain, or cause its lessees to maintain, with responsible insurance companies such insurance on such of its properties, in such amounts and against such risks as are customarily maintained by similar businesses; PROVIDED, that the Borrower may continue to self-insure Equipment in the manner in which it is currently conducting its business until the Agent notifies the Borrower otherwise; and PROVIDED, FURTHER, that the Borrower shall (x) not materially change the manner in which it self-insures Equipment without the prior written consent of the Agent; (y) file with the Agent upon the request of the Agent a detailed list of the insurance then in effect, stating, as applicable, the names of the insurance companies, the amounts and rates of the insurance, dates of expiration thereof and the properties and risks covered thereby; and (z) within 45 days after notice in writing from the Agent, obtain such additional insurance as the Agent may reasonably request. 5.4 TAXES. The Borrower shall pay or cause to be paid all taxes, assessments or governmental charges on or against it or any of its Subsidiaries or its or their properties on or prior to the time when they become due; except for any tax, assessment or charge that is being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been established and are being maintained in accordance with GAAP if no Encumbrance shall have been filed to secure such tax, assessment or charge. 5.5 INSPECTION. The Borrower shall permit the Agent, any Lender and their designees, at any reasonable time and at reasonable intervals of time, and upon reasonable notice (or if a Default shall have occurred and is continuing, at any time and without prior notice), to (i) visit and inspect the properties of the Borrower and its Subsidiaries, (ii) examine and make copies of and take abstracts from the books and records of the Borrower and its Subsidiaries, and (iii) discuss the affairs, finances and accounts of the Borrower and its Subsidiaries with their appropriate officers and (following the occurrence and during the continuance of a Default hereunder) accountants, all at the reasonable expense of the Borrower. Without limiting the generality of the foregoing, the Borrower will permit periodic reviews (as determined by the Agent) of the books and records of the Borrower and its Subsidiaries to be carried out by the Agent's commercial finance examiners, provided that in the absence of a Default or unless requested or required by regulatory authorities or by official policy of any Lender, such reviews 39 44 shall not be conducted more than once per year; and the Agent may, in its sole discretion, in lieu of such reviews by its own commercial finance examiners accept reports of examinations of such books and records performed by commercial finance examiners acting on behalf of other lenders to the Borrower to minimize examination expense. The Borrower shall also permit the Agent to arrange for verification of Eligible Lease Receivables, under reasonable procedures, directly with any account debtors or by other methods. 5.6 MAINTENANCE OF BOOKS AND RECORDS. The Borrower and each of its Subsidiaries shall keep adequate books and records of account, in which true and complete entries will be made reflecting all of its business and financial transactions, and such entries will be made in accordance with GAAP consistently applied and applicable law. 5.7 USE OF PROCEEDS. (1) The Borrower will use the proceeds of Loans solely to finance or refinance Receivables arising from Eligible Leases and Eligible Rental Contracts, refinance existing Indebtedness of the Borrower, for the working capital needs of the Borrower, to finance Permitted Acquisitions and for ongoing general corporate purposes. (2) No portion of any Loan shall be used for the "purpose of purchasing or carrying" any "margin stock" or "margin security" as such terms are used in Regulations G, U and X of the Board of Governors of the Federal Reserve System, or otherwise in violation of such regulations. 5.8 FURTHER ASSURANCES. At any time and from time to time the Borrower shall, and shall cause each of its Subsidiaries to, execute and deliver such further instruments and take such further action as may reasonably be requested by the Agent to effect the purposes of the Loan Documents. 5.9 NOTIFICATION REQUIREMENTS. The Borrower shall furnish to the Agent: (1) immediately upon becoming aware of the existence of any condition or event that constitutes a Default, written notice thereof specifying the nature and duration thereof and the action being or proposed to be taken with respect thereto; (2) promptly upon becoming aware of any material litigation seeking damages in excess of $250,000 or of any investigative proceedings by a governmental agency or authority commenced or threatened against the Borrower or any of its Subsidiaries of which they have notice, the outcome of which would or might have a materially adverse effect on the assets, business or prospects of the Borrower alone or the Borrower and its Subsidiaries on a consolidated basis, written notice thereof and the action being or proposed to be taken with respect thereto; (3) promptly upon becoming aware of any investigative proceedings by a governmental agency or authority commenced or threatened against the Borrower or any of its 40 45 Subsidiaries regarding any potential violation of Environmental Laws or any spill, release, discharge or disposal of any Hazardous Material and promptly after receipt of any notice of the type referred to in Section 4.16, written notice thereof (together with a copy of any such notice) and the action being or proposed to be taken with respect thereto; and (4) promptly after any occurrence or after becoming aware of any condition affecting the Borrower or any Subsidiary which might constitute a material adverse change in or which might have a material adverse effect on the business, properties or condition (financial or otherwise) of the Borrower alone or the Borrower and its Subsidiaries, taken as a whole, written notice thereof. 5.10 ERISA REPORTS. With respect to any Plan, the Borrower shall, or shall cause its Affiliates to, furnish to the Agent promptly (i) written notice of the occurrence of a "reportable event" (as defined in Section 4043 of ERISA), excluding any such event notice of which has been waived by regulation, (ii) a copy of any request for a waiver of the funding standards or an extension of the amortization periods required under Section 412 of the Code and Section 302 of ERISA, (iii) a copy of any notice of intent to terminate any Pension Plan, (iv) notice that the Borrower or any Affiliate will or may incur any liability to or on account of a Plan under Section 4062, 4063, 4064, 4201 or 4204 of ERISA, and (v) a copy of the annual report of each Pension Plan (Form 5500 or comparable form) required to be filed with the Internal Revenue Service and/or the Department of Labor. Any notice to be provided to the Agent under this Section shall include a certificate of the chief financial officer of the Borrower setting forth details as to such occurrence and the action, if any, which the Borrower or the Affiliate is required or proposes to take, together with any notices required or proposed to be filed with or by the Borrower, any Affiliate, the PBGC, the Internal Revenue Service, the trustee or the plan administrator with respect thereto. Promptly after the adoption of any Pension Plan, the Borrower shall notify the Agent of such adoption. 5.11 ENVIRONMENTAL COMPLIANCE. (1) The Borrower and its Subsidiaries will comply in all material respects with all applicable Environmental Laws in all jurisdictions in which any of them operates now or in the future, and the Borrower and its Subsidiaries will comply in all material respects with all such Environmental Laws that may in the future be applicable to the Borrower's or any Subsidiary's business, properties and assets. (2) If the Borrower or any Subsidiary shall (i) receive notice that any material violation of any Environmental Law may have been committed or is about to be committed by the Borrower or any Subsidiary, (ii) receive notice that any administrative or judicial complaint or order has been filed or is about to be filed against the Borrower or any Subsidiary alleging a material violation of any Environmental Law requiring the Borrower or any Subsidiary to take any action in connection with the release of Hazardous Materials into the environment or (iii) receive any notice from a federal, state or local government agency or private party alleging that the Borrower or any Subsidiary may be liable or responsible for any material amount of costs associated with a response to or cleanup of a release of Hazardous Materials into the environment 41 46 or any damages caused thereby, the Borrower or such Subsidiary shall provide the Agent with a copy of such notice within five (5) days after the Borrower or such Subsidiary's receipt thereof. Within fifteen (15) days after the Borrower or any Subsidiary has learned of the enactment or promulgation of any Environmental Law which may result in any material adverse change in the condition, financial or otherwise, of the Borrower or any Subsidiary, the Borrower or such Subsidiary shall provide the Agent with notice thereof. 5.12 YEAR 2000 COMPLIANCE. The Borrower and its Subsidiaries shall be Year 2000 Compliant on or before April 30, 1999 and at all times thereafter, and shall so certify to the Agent in writing on or before May 31, 1999. SECTION 6 FINANCIAL COVENANTS So long as any Loan or other Obligation remains outstanding or the Lenders have any obligation to make any Loan hereunder, the Borrower covenants as follows: 6.1 DEBT TO WORTH RATIO. The ratio of Consolidated Indebtedness to Consolidated Tangible Capital Funds shall not exceed five (5) to one (1) at any time; PROVIDED, HOWEVER that in the event the Borrower shall amend Section 5.10 (a)(4)(i) of the Note Agreement dated as of July 1, 1994 with respect to the Parent's 12% Senior Subordinated Notes solely to increase the percentage set forth therein to 650% or greater, then the ratio in this Section 6.1 shall, effective as of the date of such amendment, but provided no Default or Event of Default shall have occurred and be continuing, increase to six and one-half (6.5) to one (1). 6.2 CONSOLIDATED TANGIBLE NET WORTH. The Borrower shall at all times maintain a Consolidated Tangible Net Worth of not less than the sum of (i) $23,500,000 and (ii) 50% of the aggregate amount of Consolidated Net Income of the Parent and its Subsidiaries, including the Borrower, for each of the fiscal quarters ending after September 30, 1998 but without deducting therefrom any amount of Consolidated Net Deficit for any of such fiscal quarters; 6.3 BAD DEBT ALLOWANCE. The Borrower shall at all times maintain an allowance for bad debt of the Parent and its Subsidiaries, including the Borrower, of at least 7% of Gross Lease Installments. 6.4 FIXED CHARGE RATIO. The Borrower shall have as of the end of each fiscal quarter a Fixed Charge Ratio of the Parent and its Subsidiaries, including the Borrower, of not less than 1.25 to 1.00. 42 47 SECTION 7 NEGATIVE COVENANTS So long as any Loan or other Obligation remains outstanding or the Lenders have any obligation to make any Loan hereunder, the Borrower covenants as follows: 7.1 INDEBTEDNESS. Neither the Borrower nor any of its Subsidiaries shall create, incur, assume, guarantee or be or remain liable with respect to any Indebtedness other than the following: (a) Obligations; (b) Indebtedness (other than pursuant to the Fleet Facility) existing as of the date of this Agreement and disclosed on EXHIBIT C hereto and renewals and refinancings thereof, but not any increase in the principal amounts thereof; (c) Indebtedness for taxes, assessments or governmental charges to the extent that payment therefor shall at the time not be required to be made in accordance with Section 5.4; (d) current liabilities on open account for the purchase price of services, materials and supplies incurred by the Borrower in the ordinary course of business (not as a result of borrowing), so long as all of such open account Indebtedness shall be promptly paid and discharged when due or in conformity with customary trade terms and practices, except for any such open account Indebtedness which is being contested in good faith by the Borrower, as to which adequate reserves required by GAAP have been established and are being maintained and as to which no Encumbrance has been placed on any property of the Borrower or any of its Subsidiaries; (e) Guarantees permitted under Section 7.2 hereof; (f) Subordinated Debt; (g) Indebtedness pursuant to the Fleet Facility not exceeding $70,000,000 in principal amount outstanding at any time; (h) Indebtedness of a Subsidiary of the Borrower secured by Leases, Equipment and Receivables relating to such Leases and Equipment, none of which constitutes any part of the Collateral; and (i) Indebtedness in connection with Permitted Acquisitions to the extent permitted by Section 7.8(f)(iii). 43 48 7.2 CONTINGENT LIABILITIES. Neither the Borrower nor any of its Subsidiaries shall create, incur, assume, guarantee or be or remain liable with respect to any Guarantees other than (i) Guarantees existing on the date of this Agreement and disclosed on EXHIBIT C hereto, and (ii) Guarantees resulting from the endorsement of negotiable instruments for deposit or collection in the ordinary course of business. 7.3 ENCUMBRANCES. Neither the Borrower nor any of its Subsidiaries shall create, incur, assume or suffer to exist any mortgage, pledge, security interest, lien or other charge or encumbrance, including the lien or retained security title of a conditional vendor upon or with respect to any of its property or assets ("ENCUMBRANCES"), or assign or otherwise convey any right to receive income, including the sale or discount of accounts receivable with or without recourse, except the following ("PERMITTED ENCUMBRANCES"): (1) Encumbrances in favor of the Agent or any of the Lenders to secure Obligations; (2) Encumbrances (other than Encumbrances arising under the Fleet Facility) existing as of the date of this Agreement and disclosed in EXHIBIT C hereto; (3) liens for taxes, fees, assessments and other governmental charges to the extent that payment of the same may be postponed or is not required in accordance with the provisions of Section 5.4; (4) landlords' and lessors' liens in respect of rent not in default or liens in respect of pledges or deposits under workmen's compensation, unemployment insurance, social security laws, or similar legislation (other than ERISA) or in connection with appeal and similar bonds incidental to litigation; mechanics', warehouseman's, laborers' and materialmen's and similar liens, if the obligations secured by such liens are not then delinquent; liens securing the performance of bids, tenders, contracts (other than for the payment of money); and liens securing statutory obligations or surety, indemnity, performance, or other similar bonds incidental to the conduct of the Borrower's or a Subsidiary's business in the ordinary course and that do not in the aggregate materially detract from the value of its property or materially impair the use thereof in the operation of its business; (5) judgment liens securing judgments that (i) are not fully covered by insurance, and (ii) shall not have been in existence for a period longer than 10 days after the creation thereof or, if a stay of execution shall have been obtained, for a period longer than 10 days after the expiration of such stay; (6) rights of lessors under capital leases; (7) easements, rights of way, restrictions and other similar charges or Encumbrances relating to real property and not interfering in a material way with the ordinary conduct of the Borrower' business; 44 49 (8) any Encumbrance on any Eligible Lease, Eligible Rental Contract and Eligible Equipment created by the sale, transfer, assignment or disposition of such Eligible Lease, Eligible Rental Contract or Eligible Equipment in compliance with Section 7.4(ii) hereof; (9) liens constituting a renewal, extension or replacement of any Permitted Encumbrance; (10) Encumbrances arising under the Fleet Facility, PROVIDED that no such Encumbrance attaches to any part of the Collateral; and (11) Encumbrances granted with respect to any Indebtedness permitted under Section 7.1(h), PROVIDED that no such Encumbrance attaches to any part of the Collateral. 7.4 MERGER; CONSOLIDATION; SALE OR LEASE OF ASSETS. Without the prior written consent of the Agent, neither the Borrower nor any of its Subsidiaries shall liquidate, merge or consolidate into or with any other person or entity, or sell, lease or otherwise dispose of any assets or properties, other than (i) the disposition of scrap, waste and obsolete or unusable items and Qualified Investments, in each case in the ordinary course of business; (ii) the sale, transfer, assignment or disposition of any Eligible Leases, Eligible Rental Contracts and Eligible Equipment, PROVIDED that the net proceeds thereof are sufficient to prepay and are applied simultaneously to prepay any related Revolving Credit Loan or Conversion Term Loan in accordance with Section 2.9 hereof; and (iii) Permitted Acquisitions. 7.5 SUBSIDIARY STOCK. The Borrower shall not permit any of its Subsidiaries to issue any additional shares of its capital stock or other equity securities, any options therefor or any securities convertible thereto other than to the Borrower. Neither the Borrower nor any of its Subsidiaries shall sell, transfer or otherwise dispose of any of the capital stock or other equity securities of a Subsidiary, except to the Borrower or any of its wholly-owned Subsidiaries. 7.6 RESTRICTED PAYMENTS. Neither the Borrower nor any of its Subsidiaries shall pay, make, declare or authorize any Restricted Payment other than: (1) compensation paid to employees, officers and directors in the ordinary course of business and consistent with prudent business practices; (2) dividends payable solely in common stock; (3) dividends paid by any Subsidiary to the Borrower; 45 50 (4) cash dividends paid by the Borrower to the Parent not to exceed, in the aggregate in any fiscal year, an amount equal to fifty percent (50%) of Consolidated Net Income for the immediately preceding fiscal year, PROVIDED that both at the time such cash dividend is declared or paid, and after giving effect to the payment thereof, no Default shall have occurred and be continuing. 7.7 PAYMENTS ON SUBORDINATED DEBT. The Borrower shall not make any payment or prepayment of principal of or interest on or any other payment in respect of Subordinated Debt, except (i) regularly scheduled payments of principal and interest thereon at the rates and times specified in the instruments evidencing the Subordinated Debt as delivered to the Agent along with the agreements pursuant to which such Indebtedness is subordinated to the Obligations (but not any amendments thereof without the consent of the Majority Lenders) and (ii) prepayments of principal of, and accrued and unpaid interest on, any Subordinated Debt, provided that the aggregate principal amount of all Subordinated Debt so prepaid by the Borrower during any fiscal year of the Borrower may not exceed $100,000; PROVIDED that in the case of both clause (i) and clause (ii), both immediately prior to making any such payment and after giving effect thereto there shall not have occurred and be continuing any Default. 7.8 INVESTMENTS; PURCHASES OF ASSETS. Neither the Borrower nor any of its Subsidiaries shall make or maintain any Investments or purchase or otherwise acquire any material amount of assets other than: (1) Investments existing on the date hereof in Subsidiaries; (2) Qualified Investments; (3) Capital Expenditures; (4) purchases of Equipment, Installment Finance Contracts, Leases, Security Monitoring Agreements and inventory in the ordinary course of business; (5) normal trade credit extended in the ordinary course of business and consistent with prudent business practice; (6) the purchase of all or substantially all of the assets or outstanding equity securities of any other Person and the merger or consolidation of any other Person with or into the Borrower or a Subsidiary of the Borrower, in each case if all of the following conditions are satisfied (a "PERMITTED ACQUISITION"): (1) if the proposed transaction involves a merger or consolidation, at the completion of such merger or consolidation the surviving party shall be the Borrower or a wholly-owned Subsidiary of the Borrower; (2) the total consideration (excluding assumed Indebtedness) paid by the Borrower (x) in connection with any single Permitted Acquisition shall not exceed 46 51 $10,000,000 and (y) in connection with all Permitted Acquisitions during any fiscal year shall not exceed $20,000,000 in the aggregate; (3) the total Indebtedness (other than Subordinated Debt) assumed or incurred by the Borrower in connection with all Permitted Acquisitions (including any Indebtedness to which any Permitted Acquisition is subject) during any fiscal year shall not exceed $30,000,000 in the aggregate unless the Majority Lenders otherwise approve; (4) the assets, business or Person acquired in any Permitted Acquisition must be in the same or a substantially similar line of business as that of the Borrower; (5) both immediately before and immediately after the consummation of any Permitted Acquisition no Default shall have occurred and be continuing; and (6) immediately after consummation of each Permitted Acquisition, the Borrowing Base shall exceed Total Outstandings by at least $7,000,000; and (7) Investments in outstanding equity securities of any other Person, PROVIDED that (i) the total consideration paid by the Borrower in connection with all such Investments during any fiscal year shall not exceed $5,000,000 in the aggregate, (ii) after giving effect to any such Investment, the Borrower and/or its Subsidiaries and Affiliates would not have a majority or controlling interest in such Person, and (iii) both immediately before and immediately after giving effect to any such Investment, no Default shall have occurred and be continuing. 7.9 ERISA COMPLIANCE. Neither the Borrower nor any of its Affiliates nor any Plan shall (i) engage in any Prohibited Transaction which would have a material adverse effect on the business, financial condition or operations of the Borrower and its Subsidiaries taken as a whole, (ii) incur any "accumulated funding deficiency" (as defined in Section 412(a) of the Code and Section 302 of ERISA) whether or not waived which would have a material adverse effect on the business, financial condition or operations of the Borrower and its Subsidiaries taken as a whole, (iii) fail to satisfy any additional funding requirements set forth in Section 412 of the Code and Section 302 of ERISA which ,would have a material adverse effect on the business, financial condition or operations of the Borrower and its Subsidiaries taken as a whole, or (iv) terminate any Pension Plan in a manner which could result in the imposition of a lien on any property of the Borrower or any of its Subsidiaries. Each Plan shall comply in all material respects with ERISA, except to the extent failure to comply in any instance would not have a material adverse effect on the business, financial condition or operations of the Borrower and its Subsidiaries taken as a whole. 7.10 TRANSACTIONS WITH AFFILIATES. The Borrower will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into any purchase, sale, lease or other transaction with any Affiliate except (i) transactions in the ordinary course of business on terms that are no less favorable to the Borrower than those which might be obtained at the time in a comparable arm's-length transaction with any Person who is not an Affiliate and (ii) employment contracts with senior management of the Borrower entered into in the ordinary course of business and 47 52 consistent with prudent business practices. Notwithstanding the foregoing, the Borrower will not, and will not permit any Subsidiary to, directly or indirectly, pay any management, consulting, overhead, indemnity, guarantee or other similar fee or charge to any Affiliate. 7.11 FISCAL YEAR. The Borrower and its Subsidiaries shall not change their fiscal years without the prior written consent of the Agent. 7.12 UNDERWRITING PROCEDURES. The Borrower shall not make any material change in its underwriting and credit approval procedures without the prior written consent of the Majority Lenders. SECTION 8 DEFAULTS 8.1 EVENTS OF DEFAULT. There shall be an Event of Default hereunder if any of the following events occurs: (1) the Borrower shall fail to pay any principal of any Loan, or any interest, fees or other amounts owing under any Loan Document or in respect of any Obligation when the same shall become due and payable, whether at maturity or at any accelerated date of maturity or at any other date fixed for payment; (2) the Borrower shall fail to perform or comply with any term, covenant or agreement applicable to it contained in Sections 5.1, 5.2(b), 5.5, 5.6, 5.7, 5.9, 5.11, 5.12, 6 and 7 of this Agreement; or (3) the Borrower shall fail to perform any term, covenant or agreement (other than as specified in subsections 8.1(a) or (b) hereof) contained in this Agreement or any other Loan Document and such default shall continue for 30 days; or (4) any representation or warranty of the Borrower made in this Agreement or any other Loan Document or in any certificate delivered hereunder or thereunder shall prove to have been false in any material respect upon the date when made deemed to have been made; or (5) the Borrower or any of its Subsidiaries shall fail to pay when due (after any applicable period of grace) any amount payable under any Indebtedness exceeding $100,000 in principal amount or under any agreement for the use of real or personal property requiring aggregate payments in excess of $100,000 in any twelve month period, or fail to observe or perform any term, covenant or agreement evidencing or securing such Indebtedness or relating to such agreement for the use of real or personal property; or (6) the Borrower, the Parent or any of its Subsidiaries shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, liquidator or similar official of itself or of all or a substantial part of its property, (ii) be generally 48 53 not paying its debts as such debts become due, (iii) make a general assignment for the benefit of its creditors, (iv) commence a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect), (v) take any action or commence any case or proceeding under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts, or any other law providing for the relief of debtors, (vi) fail to contest in a timely or appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the United States Bankruptcy Code or other law, (vii) take any action under the laws of its jurisdiction of incorporation or organization similar to any of the foregoing, or (viii) take any corporate action for the purpose of effecting any of the foregoing; or (7) a proceeding or case shall be commenced against the Borrower, the Parent or any of its Subsidiaries, without the application or consent of the Borrower, the Parent or such Subsidiary in any court or competent jurisdiction, seeking (i) the liquidation, reorganization, dissolution, winding up, or composition or readjustment of its debts, (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of it or of all or any substantial part of its assets, or (iii) similar relief in respect of it, under any law relating to bankruptcy, insolvency, reorganization, winding-up or composition or adjustment of debts or any other law providing for the relief of debtors, and such proceeding or case shall continue undismissed, or unstayed and in effect, for a period of 30 days; or an order for relief shall be entered in an involuntary case under the Federal Bankruptcy Code, against the Borrower, the Parent or such Subsidiary; or action under the laws of the jurisdiction of incorporation or organization of the Borrower, the Parent or any of its Subsidiaries similar to any of the foregoing shall be taken with respect to the Borrower, the Parent or such Subsidiary and shall continue unstayed and in effect for a period of 30 days; or (8) a judgment or order for the payment of money shall be entered against the Borrower or any of its Subsidiaries by any court, or a warrant of attachment or execution or similar process shall be issued or levied against property of the Borrower or such Subsidiary, that in the aggregate exceeds $500,000 in value, the payment of which is not fully covered by insurance in excess of any deductibles not exceeding $500,000 in the aggregate, and such judgment, order, warrant or process shall continue undischarged or unstayed for 30 days; or (9) the Borrower or any Affiliate shall fail to pay when due any material amount that they shall have become liable to pay to the PBGC or to a Plan under Title IV of ERISA, unless such liability is being contested in good faith by appropriate proceedings, the Borrower or the Affiliate, as the case may be, has established and is maintaining adequate reserves in accordance with GAAP and no lien shall have been filed to secure such liability; or the PBGC shall institute proceedings under Title IV of ERISA to terminate or to cause a trustee to be appointed to administer any such Plan or Plans; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any such Plan or Plans must be terminated; or (10) any of the Loan Documents shall be cancelled, terminated, revoked or rescinded otherwise then in accordance with the express terms thereof or with the express prior written agreement, consent or approval of the Lenders, or any action at law or in equity or other legal proceeding to cancel, revoke or rescind any Loan Document shall be commenced by or on 49 54 behalf of the Borrower, or any court or other governmental or regulatory authority or agency of competent jurisdiction shall make a determination that, or shall issue a judgment, order, decree or ruling to the effect that, any one or more of the Loan Documents is illegal, invalid or unenforceable in accordance with the terms thereof; or (11) the occurrence of any material change in the condition or affairs (financial or otherwise) of the Borrower or any of its Subsidiaries or of any endorser, guarantor or surety for any Obligation which causes the Lenders to deem themselves insecure; or (12) any failure of Peter R. von Bleyleben to be at all times the duly elected and acting chief executive officer of the Borrower or the imposition of any material restriction on his right to exercise the powers and authority of such office and to manage the business of the Borrower in a manner consistent with past practices, unless, in the event of his ceasing to act as such chief executive officer, a replacement reasonably acceptable to the Agent is appointed within 60 days of such cessation; or (13) any failure of Richard F. Latour to be at all times the duly elected and acting chief operating officer and chief financial officer of the Borrower or the imposition of any material restriction on his right to exercise the powers and authority of such office and to manage the financial affairs of the Borrower in a manner consistent with past practices, unless, in the event of his ceasing to act as such chief financial officer, a replacement reasonably acceptable to the Agent is appointed within 60 days of such cessation; or (14) more than one-third of the members of the Board of Directors of the Parent or of the Borrower at the beginning of any year fail to remain in office throughout such year, unless such former members of the Board of Directors are replaced with Persons reasonably acceptable to the Agent within 60 days. 8.2 REMEDIES. Upon the occurrence of an Event of Default described in subsections 8.1(f) and (g), immediately and automatically, and upon the occurrence of any other Event of Default, at any time thereafter while such Event of Default is continuing, at the option of the Agent or the Majority Lenders and upon the Agent's declaration: (1) the obligation of the Lenders to make any further Loans shall terminate; (2) the unpaid principal amount of the Loans together with accrued interest and all other Obligations shall become immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived; and (3) the Agent and the Lenders may exercise any and all rights they have under this Agreement, the other Loan Documents or at law or in equity, and proceed to protect and enforce their respective rights by any action at law or in equity or by any other appropriate proceeding. 50 55 No remedy conferred upon the Agent and the Lenders in the Loan Documents is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be an addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or by any other provision of law. Without limiting the generality of the foregoing or of any of the terms and provisions of any of the Security Documents, (i) if and when the Agent exercises remedies under the Security Documents with respect to the Collateral, the Agent may, in its sole discretion, determine which items and types of Collateral to dispose of and in what order and may dispose of Collateral in any order the Agent shall select in its sole discretion, and the Borrower consents to the foregoing and waives all rights of marshalling with respect to all Collateral. SECTION 9 ASSIGNMENT; PARTICIPATION; INCREASED COMMITMENT 9.1 ASSIGNMENT. (1) Each Lender shall have the right to assign at any time any portion of its Commitment hereunder and its interests in the risk relating to any Revolving Credit Loans or the Conversion Term Loan Participations in an amount equal to or greater than $5,000,000 to other Lenders or to banks or financial institutions approved by the Agent (such approval not to be unreasonably withheld or delayed) (each an "ASSIGNEE"), provided that any Lender which proposes to assign less than its Total Commitment must retain a Commitment of at least $5,000,000, and provided, further, that if no Default or Event of Default shall have occurred and be continuing, each such Assignee which is not a Lender, an Affiliate of a Lender or a Federal Reserve Bank shall be subject to prior approval by the Borrower (such approval not to be unreasonably withheld or delayed). Each such Assignee shall execute and deliver to the Agent and the Borrower a counterpart joinder in the form of EXHIBIT E hereto and shall pay to the Agent, solely for the account of the Agent, an assignment fee of $3,500. Upon the execution and delivery of such counterpart joinder, (a) such Assignee shall, on the date and to the extent provided in such counterpart joinder, become a "Lender" party to this Agreement and the other Loan Documents for all purposes of this Agreement and such other Loan Documents and shall have all rights and obligations of a "Lender" with a Commitment as set forth in such counterpart joinder, and the transferor Lender shall, on the date and to the extent provided in such counterpart joinder, be released from its obligations hereunder and under the other Loan Documents to a corresponding extent (and, in the case of an assignment covering all of the remaining portion of an assigning Lender's rights and obligations under this Agreement, such transferor shall cease to be a party hereto but shall continue to be entitled to the benefits of Section 11.3 and to any fees accrued for its account hereunder and not yet paid); (b) the assigning Lender, if it holds any Revolving Credit Notes, shall promptly surrender such Revolving Credit Notes to the Agent for cancellation and delivery to the Borrower, provided that if the assigning Lender has retained any Commitment, the Borrower shall execute and deliver to the Agent for delivery to such assigning Lender a new Revolving Credit Note in the amount of the assigning Lender's retained Commitment; (c) the Borrower shall issue to such Assignee a Revolving Credit Note in the amount of such Assignee's Commitment dated the Closing Date or such other date as 51 56 may be specified by such Assignee and otherwise completed in substantially the form of EXHIBIT A; (d) this Agreement shall be deemed appropriately amended to reflect (i) the status of such Assignee as a party hereto and (ii) the status and rights of the Lenders hereunder; and (e) the Borrower shall take such action as the Agent may reasonably request to perfect any security interests or mortgages in favor of the Lenders, including any Assignee which becomes a party to this Agreement. (2) If the Assignee, or any Participant pursuant to Section 9.2 hereof, is organized under the laws of a jurisdiction other than the United States or any state thereof, such Assignee shall execute and deliver to the Borrower, simultaneously with or prior to such Assignee's execution and delivery of the counterpart joinder described above in Section 9.1(a), and such Participant shall execute and deliver to the Lender granting the participation, a United States Internal Revenue Service Form 4224 or Form 1001 (or any successor form), appropriately completed, wherein such Assignee or Participant claims entitlement to complete exemption from United States Federal Withholding Tax on all interest payments hereunder and all fees payable pursuant to any of the Loan Documents. The Borrower shall not be required to pay any increased amount to any Assignee or other Lender on account of taxes to the extent such taxes would not have been payable if the Assignee or Participant had furnished one of the Forms referenced in this Section 9.1(b) unless the failure to furnish such a Form results from (i) a condition or event affecting the Borrower or an act or failure to act of the Borrower or (ii) the adoption of or change in any law, rule, regulation or guideline affecting such Assignee or Participant occurring (x) after the date on which any such Assignee executes and delivers the counterpart joinder, or (y) after the date such Assignee shall otherwise comply with the provisions of Section 9.1(a), or (z) after the date a Participant is granted its participation. 9.2 PARTICIPATIONS. Each Lender shall have the right to grant participations to one or more banks or other financial institutions (each a "PARTICIPANT") in all or any part of any Loans owing to such Lender and the Note held by such Lender. Each Lender shall retain the sole right to approve, without the consent of any Participant, any amendment, modification or waiver of any provision of the Loan Documents, PROVIDED that the documents evidencing any such participation may provide that, except with the consent of such Participant, such Lender will not consent to (a) the reduction in or forgiveness of the stated principal of or rate of interest on or commitment fee with respect to the portion of any Loan subject to such participation, (b) the extension or postponement of any stated date fixed for payment of principal or interest or commitment fee with respect to the portion of any Loan subject to such participation, (c) the waiver or reduction of any right to indemnification of such Lender hereunder, or (d) except as otherwise permitted hereunder, the release of any Collateral. Notwithstanding the foregoing, no participation shall operate to increase the Total Commitment hereunder or otherwise alter the substantive terms of this Agreement. In the event of any such sale by a Lender of participating interests to a Participant, such Lender's obligations under this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of such Note for all purposes under this Agreement and the Borrower and Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. 52 57 9.3 INCREASED TOTAL COMMITMENT. (1) The Borrower may, at any time prior to the Maturity Date by written notice to the Agent, provided no Default shall have occurred and be continuing, request an increase in the Total Commitment to such amount (in integral multiples of $5,000,000 up to a maximum of $70,000,000) as the Borrower shall request. The Agent shall promptly notify the existing Lenders of such requests and each existing Lender shall have the option, but not the obligation, to increase its Commitment by its PRO RATA share (based on the proportion of its Commitment to the Total Commitment) of the requested increase in the Total Commitment. To the extent that any existing Lender declines to exercise such option, the remaining existing Lenders shall have the additional options to increase their respective Commitments by their PRO RATA shares of the portion of the increase in the Total Commitment which such existing Lender has declined (each existing Lender who so increases its Commitment is herein referred to as an "INCREASING LENDER"). (2) To the extent that the entire requested increase in the Total Commitment is not provided by the Increasing Lenders pursuant to Section 9.3(a), any other bank or financial institution selected by the Agent with the approval of the Borrower (such approval not to be unreasonably withheld) may, prior to the Maturity Date, become a "Lender" party to this Agreement for all purposes of this Agreement and the other Loan Documents with respect to a specified additional Commitment hereunder (each such Lender being referred to herein as a "NEW LENDER"), PROVIDED that the sum of the aggregate Commitments of the existing Lenders (after giving effect to any increases in such Commitments pursuant to Section 9.3(a)) and the aggregate Commitments of the New Lenders do not exceed the lesser of (i) the increased amount of the Total Commitment as requested by the Borrower and (ii) $70,000,000. (3) Each Increasing Lender, each New Lender, the Agent and the Borrower shall execute and deliver to the Agent an instrument of adherence in the form of EXHIBIT G hereto (the "INSTRUMENT OF ADHERENCE"), which Instrument of Adherence shall specify the new Commitment of each Increasing Lender or New Lender, as the case may be, and pursuant to which each New Lender, if any, shall agree to be bound as a Lender by the terms and conditions hereof and the other Loan Documents. Upon the execution and delivery of such Instrument of Adherence, (a) each New Lender shall, on the effective date thereof, become a "Lender" party to this Agreement and the other Loan Documents and shall have all rights and obligations of a "Lender" with a Commitment as set forth in such Instrument of Adherence , (b) each Increasing Lender shall have a new Commitment as specified in such Instrument of Adherence, (c) the Total Commitment shall be increased accordingly, (d) each Lender shall be deemed to have consented to such increase in the Total Commitment, such increases in the Commitments of the Increasing Lenders and the addition of such new Lender or Lenders as parties to this Agreement and the other Loan Documents with such new Commitments, (e) this Agreement (including Schedule 1 hereto) shall be deemed appropriately amended to reflect such changes in Commitments and the status and rights of the Lenders hereunder, (f) the Agent shall notify the Lenders of such increases and shall furnish the Lenders and the Borrower with a new Schedule 1 hereto, (g) the Borrower shall receive any Notes surrendered pursuant to the Instrument of Adherence, and (h) the Borrower shall issue replacement Notes to the Increasing Lenders and new Notes to the New 53 58 Lenders, in each case in the amount of such Lender's Commitment, dated the Closing Date or such other date as may be specified by such Lender and otherwise completed in substantially the form of EXHIBIT A hereto. In addition, concurrent with the execution and delivery of such Instrument of Adherence and as a condition to the effectiveness thereof, the Borrower shall deliver to the Agent such evidence of corporate proceedings, opinions of counsel and other certificates, instruments and documents as the Agent shall reasonably request. SECTION 10 THE AGENT 10.1 APPOINTMENT OF AGENT; POWERS AND IMMUNITIES. (1) Each Lender hereby irrevocably appoints and authorizes the Agent to act as its agent hereunder and under the other Loan Documents and to execute such Loan Documents (other than this Agreement) and all other instruments relating thereto. Each Lender irrevocably authorizes the Agent to take such action on behalf of each of the Lenders and to exercise all such powers as are expressly delegated to the Agent hereunder and in the other Loan Documents and all related documents, together with such other powers as are reasonably incidental thereto. The obligations of the Agent hereunder are only those expressly set forth herein. The Agent shall not have any duties or responsibilities or any fiduciary relationship with any Lender except those expressly set forth in this Agreement. (2) Neither the Agent nor any of its directors, officers, employees or agents shall be responsible for any action taken or omitted to be taken by any of them hereunder or in connection herewith, except for their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, neither the Agent nor any of its Affiliates shall be responsible to the Lenders for or have any duty to ascertain, inquire into or verify: (i) any recitals, statements, representations or warranties made by the Borrower or any of its Subsidiaries or any other Person whether contained herein or otherwise; (ii) the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, the other Loan Documents or any other document referred to or provided for herein or therein; (iii) any failure by the Borrower or any of its Subsidiaries or any other Person to perform its obligations under any of the Loan Documents; (iv) the satisfaction of any conditions specified in Section III hereof, other than receipt of the documents, certificates and opinions specified in Section 3.1 hereof; (v) the existence, value, collectibility or adequacy of the Collateral or any part thereof or the validity, effectiveness, perfection or relative priority of the liens and security interests of the Lenders therein; or (vi) the filing, recording, refiling, continuing or re-recording of any financing statement or other document or instrument evidencing or relating to the security interests or liens of the Lenders in the Collateral. (3) The Agent may employ agents, attorneys and other experts, shall not be responsible to any Lender for the negligence or misconduct of any such agents, attorneys or experts selected by it with reasonable care and shall not be liable to any Lender for any action 54 59 taken, omitted to be taken or suffered in good faith by it in accordance with the advice of such agents, attorneys and other experts. BKB, in its separate capacity as a Lender shall have the same rights and powers under the Loan Documents as any other Lender and may exercise or refrain from exercising the same as though it were not the Agent, and BKB and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Borrower as if it were not the Agent. 10.2 ACTIONS BY AGENT. (1) The Agent shall be fully justified in failing or refusing to take any action under this Agreement as it reasonably deems appropriate unless it shall first have received such advice or concurrence of the Lenders and shall be indemnified to its reasonable satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any of the Loan Documents in accordance with a request of the Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders and all future holders of the Notes. (2) Whether or not an Event of Default shall have occurred, the Agent may from time to time exercise such rights of the Agent and the Lenders under the Loan Documents as it determines may be necessary or desirable to protect the Collateral and the interests of the Agent and the Lenders therein and under such Loan Documents. In addition, the Agent may, without the consent of the Lenders, release Collateral valued by the Agent, in its sole discretion, of not more than $1,000,000 in any fiscal year. (3) Neither the Agent nor any of its directors, officers, employees or agents shall incur any liability by acting in reliance on any notice, consent, certificate, statement or other writing (which may be a bank wire, telex, facsimile or similar writing) reasonably believed by any of them to be genuine or to be signed by the proper party or parties. (1) 10.3 INDEMNIFICATION. Without limiting the obligations of the Borrower hereunder or under any other Loan Document, the Lenders agree to indemnify the Agent ratably in accordance with their respective Commitments, for any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by or asserted against the Agent in any way relating to or arising out of this Agreement or any other Loan Document or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or the enforcement of any of the terms hereof or thereof or of any such other documents; PROVIDED, THAT no Lender shall be liable for any of the foregoing to the extent they result from the gross negligence or willful misconduct of the Agent. 10.4 REIMBURSEMENT. Without limiting the provisions of Section 10.3, the Lenders and the Agent hereby agree that the Agent shall not be obliged to make available to any Person any sum which the Agent is expecting to receive for the account of that Person until the Agent has determined that it has received that sum. The Agent may, however, disburse funds prior to 55 60 determining that the sums which the Agent expects to receive have been finally and unconditionally paid to the Agent if the Agent wishes to do so. If and to the extent that the Agent does disburse funds and it later becomes apparent that the Agent did not then receive a payment in an amount equal to the sum paid out, then any Person to whom the Agent made the funds available shall, on demand from the Agent refund to the Agent the sum paid to that Person. If the Agent in good faith reasonably concludes that the distribution of any amount received by it in such capacity hereunder or under the other Loan Documents might involve it in liability, it may refrain from making distribution until its right to make distribution shall have been adjudicated by a court of competent jurisdiction. If a court of competent jurisdiction shall adjudge that any amount received and distributed by the Agent is to be repaid, each Person to whom any such distribution shall have been made shall either repay to the Agent its proportionate share of the amount so adjudged to be repaid or shall pay over the same in such manner and to such Persons as shall be determined by such court. 10.5 NON-RELIANCE ON AGENT AND OTHER LENDERS. Each Lender represents that it has, independently and without reliance on the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of the financial condition and affairs of the Borrower and decision to enter into this Agreement and the other Loan Documents and agrees that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own appraisals and decision in taking or not taking action under this Agreement or any other Loan Document. The Agent shall not be required to keep informed as to the performance or observance by the Borrower of this Agreement, the other Loan Documents or any other document referred to or provided for herein or therein or by any other Person of any other agreement or to make inquiry of, or to inspect the properties or books of, any Person. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent hereunder, the Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning any Person which may come into the possession of the Agent or any of its affiliates. Each Lender shall have access to all documents relating to the Agent's performance of its duties hereunder at such Lender's request. Unless any Lender shall promptly object to any action taken by the Agent hereunder (other than actions to which the provisions of Section 11.7(b) are applicable and other than actions which constitute gross negligence or willful misconduct by the Agent), such Lender shall conclusively be presumed to have approved the same. 10.6 RESIGNATION OR REMOVAL OF AGENT. The Agent may resign at any time by giving 30 days prior written notice thereof to the Lenders and the Borrower. Upon any such resignation, the Lenders shall have the right to appoint a successor Agent which, provided that no Default or Event of Default has occurred and is continuing, shall be reasonably acceptable to the Borrower and shall be a financial institution having a combined capital and surplus in excess of $150,000,000. If no successor Agent shall have been so appointed by the Lenders and shall have accepted such appointment within 30 days after the retiring Agent's giving of notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent which, provided that no Default or Event of Default has occurred and is continuing, shall be reasonably acceptable to the Borrower and shall be a financial institution having a combined 56 61 capital and surplus in excess of $150,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. After any retiring Agent's resignation, the provisions of this Agreement shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Agent. SECTION 11 MISCELLANEOUS 11.1 NOTICES. Unless otherwise specified herein, all notices hereunder to any party hereto shall be in writing and shall be deemed to have been given when delivered by hand, or when sent by electronic facsimile transmission or by telex, answer back received, or on the first Business Day after delivery to any overnight delivery service, freight pre-paid, or three days after being sent by certified or registered mail, return receipt requested, postage pre-paid, and addressed to such party at its address indicated below: If to the Borrower, at Leasecomm Corporation 950 Winter Street Waltham, Massachusetts 02154 Attention: J. Gregory Hines, Vice President of Funding Operations with a copy to: Gerald P. Hendrick, Esq. Edwards & Angell 101 Federal Street Boston, MA 02110 Facsimile: (617) 439-4170 If to Agent or BKB, at 100 Federal Street Boston, Massachusetts 02110 Attention: Jeffrey G. Millman, Vice President, or Division Executive (New England Corporate Banking) Facsimile: (617) 434-8102 57 62 with a copy to: William A. Levine, Esq. Sullivan & Worcester LLP One Post Office Square Boston, MA 02109 Facsimile: (617) 338-2880 if to any other Lender, to its address set forth on Schedule 1 attached hereto; or at any other address specified by such party in writing. 11.2 EXPENSES. Whether or not the transactions contemplated herein shall be consummated, the Borrower hereby promises to reimburse the Agent and the Lenders for all reasonable out-of-pocket fees and disbursements (including all reasonable attorneys' fees and collateral evaluation costs) incurred or expended in connection with the preparation, filing or recording, or interpretation of this Agreement and the other Loan Documents, or any amendment, modification, approval, consent or waiver hereof or thereof, or with the enforcement of any Obligations or the satisfaction of any indebtedness of the Borrower hereunder or thereunder, or in connection with any litigation, proceeding or dispute in any way related to the credit hereunder. The Borrower will pay any taxes (including any interest and penalties in respect thereof) other than the Lenders' federal and state income taxes, payable on or with respect to the transactions contemplated by the Loan Documents (the Borrower hereby agreeing to indemnify the Agent and the Lenders with respect thereto). 11.3 INDEMNIFICATION. The Borrower agrees to indemnify and hold harmless the Agent and the Lenders, as well as their respective shareholders, directors, agents, officers, subsidiaries and affiliates, from and against all damages, losses, settlement payments, obligations, liabilities, claims, suits, penalties, assessments, citations, directives, demands, judgments, actions or causes of action, whether statutorily created or under the common law, and reasonable costs and expenses incurred, suffered, sustained or required to be paid by an indemnified party by reason of or resulting from the transactions contemplated hereby, except any of the foregoing which result from the gross negligence or willful misconduct of the indemnified party. In any investigation, proceeding or litigation, or the preparation therefor, the Lenders shall select their own counsel and, in addition to the foregoing indemnity, the Borrower agrees to pay promptly the reasonable fees and expenses of such counsel. In the event of the commencement of any such proceeding or litigation, the Borrower shall be entitled to participate in such proceeding or litigation with counsel of its choice at its own expense, provided that such counsel shall be reasonably satisfactory to the Agent. The covenants of this Section 11.3 shall survive payment or satisfaction of payment of all amounts owing with respect to the Notes or any other Loan Document. 11.4 SURVIVAL OF COVENANTS, ETC. Unless otherwise stated herein, all covenants, agreements, representations and warranties made herein, in the other Loan Documents or in any documents or other papers delivered by or on behalf of the Borrower pursuant hereto shall be 58 63 deemed to have been relied upon by the Agent and the Lenders, notwithstanding any investigation heretofore or hereafter made by any of them, and shall survive the making by the Lenders of the Loans as herein contemplated, and shall continue in full force and effect so long as any amount due under any Loan Document remains outstanding and unpaid or any Lender has any obligation to make any Loans hereunder. All statements contained in any certificate or other paper delivered by or on behalf of the Borrower pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrower hereunder. 11.5 SET-OFF. Regardless of the adequacy of any Collateral or other means of obtaining repayment of the Obligations, any deposits, balances or other sums credited by or due from the head office of any Lender or any of its branch offices to the Borrower may, at any time and from time to time after the occurrence of an Event of Default hereunder, without notice to the Borrower or compliance with any other condition precedent now or hereafter imposed by statute, rule of law, or otherwise (all of which are hereby expressly waived) be set off, appropriated, and applied by such Lender against any and all Obligations of the Borrower to such Lender or any of its affiliates in such manner as the head office of such Lender or any of its branch offices in its sole discretion may determine, and the Borrower hereby grants each such Lender a continuing security interest in such deposits, balances or other sums for the payment and performance of all such Obligations. 11.6 NO WAIVERS. No failure or delay by the Agent or any Lender in exercising any right, power or privilege hereunder or under the Notes or under any other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. No waiver shall extend to or affect any Obligation not expressly waived or impair any right consequent thereon. No course of dealing or omission on the part of the Agent or the Lenders in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon the Borrower shall entitle the Borrower to other or further notice or demand in similar or other circumstances. The rights and remedies herein and in the Notes and the other Loan Documents are cumulative and not exclusive of any rights or remedies otherwise provided by agreement or law. 11.7 AMENDMENTS, WAIVERS, ETC. (1) Neither this Agreement nor the Revolving Credit Notes nor any other Loan Documents nor any provision hereof or thereof may be amended, waived, discharged or terminated except by a written instrument signed by the Agent on behalf of the Lenders or, as the case may be, by the Lenders or the Majority Lenders, and, in the case of amendments, by the Borrower. (2) Except where this Agreement or any of the other Loan Documents authorizes or permits the Agent to act alone and except as otherwise expressly provided in this Section 11.7(b), any action to be taken (including the giving of notice) by the Lenders may be taken, and any consent or approval required or permitted by this Agreement or any other Loan 59 64 Document to be given by the Lenders may be given, and any term of this Agreement, any other Loan Document or any other instrument, document or agreement related to this Agreement or such other Loan Documents or mentioned therein may be amended, and the performance or observance by any of the Borrower or any other Person of any of the terms thereof and any Default or Event of Default (as defined in any of the above-referenced documents or instruments) may be waived (either generally or in a particular instance and either retroactively or prospectively), in each case only with the written consent of the Majority Lenders; PROVIDED, HOWEVER, that no such consent or amendment which affects the rights, duties or liabilities of the Agent shall be effective without the written consent of the Agent. Notwithstanding the foregoing, no amendment, waiver or consent shall do any of the following unless in writing and signed by ALL of the Lenders: (i) increase the Total Commitment (or subject the Lenders to any additional obligations) (ii) reduce the principal of or interest on any of the Revolving Credit Notes (including, without limitation, interest on overdue amounts) or any fees payable hereunder, (iii) postpone any date (including the Borrowing Base Maturity Date) fixed for any payment in respect of principal of or interest (including, without limitation, interest on overdue amounts) on the Revolving Credit Notes, or any fees payable hereunder, (iv) change the definition of "Majority Lenders" or the number of Lenders which shall be required for the Lenders or any of them to take any action under the Loan Documents; (v) change the definition of "Borrowing Base" set forth in Section 1.1, amend Section 2.1(a) or waive the limitations set forth in Section 2.1(a); (vi) amend this Section 11.7(b); (vii) change the Commitment of any Lender, except as permitted under Section IX hereof; (viii) except as permitted by Section 10.2(b) hereunder, release any Collateral; or (ix) amend Sections 2.6 or 2.7 hereof. 11.8 BINDING EFFECT OF AGREEMENT. This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders and their respective successors and assigns; PROVIDED that the Borrower may not assign or transfer its rights or obligations hereunder. 11.9 CAPTIONS; COUNTERPARTS. The captions in this Agreement are for convenience of reference only and shall not define or limit the provisions hereof. This Agreement and any amendment hereof may be executed in several counterparts and by each party on a separate counterpart, each of which when so executed and delivered shall be an original, but all of which together shall constitute one instrument. In proving this Agreement it shall not be necessary to produce or account for more than one such counterpart signed by the party against whom enforcement is sought. 11.10 ENTIRE AGREEMENT, ETC. The Loan Documents and any other documents executed in connection herewith or therewith express the entire understanding of the parties with respect to the transactions contemplated hereby. 11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER THE LENDERS HEREBY WAIVES ITS RIGHT TO A JURY TRIAL WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION WITH THIS AGREEMENT, THE NOTES OR ANY OF THE OTHER LOAN DOCUMENTS, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THEREUNDER OR THE PERFORMANCE OF SUCH RIGHTS AND OBLIGATIONS. EXCEPT AS PROHIBITED BY LAW, EACH OF THE 60 65 BORROWER AND THE LENDERS HEREBY WAIVES ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THE PRECEDING SENTENCE ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. THE BORROWER (a) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF THE LENDERS HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE LENDERS WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (b) ACKNOWLEDGES THAT THE LENDERS HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH EACH IS A PARTY BECAUSE OF, AMONG OTHER THINGS, THE BORROWER'S WAIVERS AND CERTIFICATIONS CONTAINED HEREIN. 11.12 GOVERNING LAW. THIS AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS ARE CONTRACTS UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH (EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER CONSENTS TO THE JURISDICTION OF ANY OF THE FEDERAL OR STATE COURTS LOCATED IN THE COMMONWEALTH OF MASSACHUSETTS IN CONNECTION WITH ANY SUIT TO ENFORCE THE RIGHTS OF THE LENDERS UNDER THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS. THE BORROWER IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION BROUGHT IN THE COURTS REFERRED TO IN THE PRECEDING SENTENCE AND IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH ACTION THAT SUCH ACTION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. 11.13 SEVERABILITY. The provisions of this Agreement are severable and if any one clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction, and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provision of this Agreement in any jurisdiction. 11.14 CONFIDENTIALITY. The Agent and the Lenders shall hold all confidential information delivered by the Borrower to the Agent or any Lender pursuant to this Agreement relating to the Borrower or its business in accordance with such entity's customary procedures for handling confidential information of this nature and in accordance with safe and sound business practices and in any event may make disclosure to such of its respective Affiliates, officers, directors, employees, agents and representatives as need to know such information in connection with the Loans. If the Agent or any Lender is otherwise a creditor of Borrower, the Agent or such Lender, as the case may be, may use the information in connection with its other credits. The Agent or any Lender may also make disclosure reasonably required by any bona fide Participant, potential Assignee or potential Participant (each, a "TRANSFEREE"), or as required or requested by any governmental authority or representative thereof, or pursuant to legal process, or to its accountants, lawyers and other advisors, and shall require any Transferee to agree, in a 61 66 writing to which the Borrower shall be the third party beneficiary, to hold all such information as confidential to the extent required by the first sentence of this Section 11.14. [Remainder of Page Intentionally Blank] 62 67 IN WITNESS WHEREOF, the undersigned have duly executed this Second Amended and Restated Revolving Credit Agreement under seal as of the date first set above. LEASECOMM CORPORATION By: /s/ Richard F. Latour ---------------------------------------- Title: Vice President BANKBOSTON, N.A., individually and as Agent By: /s/ Jeffrey G. Millman ---------------------------------------- Name : Jeffrey G. Millman Title: Vice President STATE STREET BANK AND TRUST COMPANY By: /s/ F. Andrew Beise ------------------------------------------- Name: F. Andrew Beise Title: Vice President 63 EX-23.1 7 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Amendment No. 3 to the Registration Statement on Form S-1 (File No. 333-56339) 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 February 4, 1999 -----END PRIVACY-ENHANCED MESSAGE-----