-----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, A/lVLYLnFIYK051v/XNjXqh4sXG4zxptQrqjYWJD6zorOclNaXmHErewNH1Ie4in CFwyxsutipW5ufaX4R+3kA== 0000950135-03-002384.txt : 20030415 0000950135-03-002384.hdr.sgml : 20030415 20030415152103 ACCESSION NUMBER: 0000950135-03-002384 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030415 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: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14771 FILM NUMBER: 03650470 BUSINESS ADDRESS: STREET 1: 10 M COMMERCE WAY CITY: WOBURN STATE: MA ZIP: 01801 BUSINESS PHONE: 7819944800 MAIL ADDRESS: STREET 1: 10 M COMMERCE WAY CITY: WOBURN STATE: MA ZIP: 01801 FORMER COMPANY: FORMER CONFORMED NAME: BOYLE LEASING TECHNOLOGIES INC DATE OF NAME CHANGE: 19980605 10-K 1 b45683mfe10vk.txt MICROFINANCIAL INCORPORATED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO.
--------------------- MICROFINANCIAL INCORPORATED (Exact name of Registrant as Specified in its Charter) MASSACHUSETTS 04-2962824 (State or other jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10M COMMERCE WAY, WOBURN, MA 01801 (Address of Principal Executive Offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 994-4800 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Shares, $0.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price of such stock as of June 28 2002, was approximately $63,960,000. As of March 31, 2003, 13,141,800 shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE DESCRIPTION NUMBER - ----------- ------ PART I Item 1. Business.................................................... 2 Item 2. Properties.................................................. 6 Item 3. Legal Proceedings........................................... 6 Item 4. Submission of Matters to a Vote of Security Holders......... 9 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 10 Item 6. Selected Financial Data..................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 13 Item 7a. Quantitative and Qualitative Disclosures about Market Risk........................................................ 19 Item 8. Financial Statements and Supplementary Data, Including Selected Quarterly Financial Data (Unaudited)............... 20 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 20 PART III Item 10. Directors and Executive Officers of the Registrant.......... 20 Item 11. Executive Compensation...................................... 22 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 27 Item 13. Certain Relationships and Related Transactions.............. 29 Item 14. Controls and Procedures..................................... 30 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 31 SIGNATURES................................................................ 34 CERTIFICATIONS............................................................ 35
1 PART I ITEM 1. BUSINESS GENERAL MicroFinancial Incorporated ("MicroFinancial" or the "Company") was formed as a Massachusetts corporation on January 27, 1987. 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 $400 to $15,000, with an average amount financed of approximately $1,500 and an average lease term of 44 months. Leasecomm Corporation started originating leases in January 1986. The Company has used proprietary software in developing a sophisticated, risk-adjusted pricing model and in automating its credit approval and collection systems, including a fully-automated, Internet-based application, credit scoring and approval process. The Company provides financing to lessees which may have few other sources of credit. The Company primarily leases and rents low-priced commercial equipment 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 1,000 independent sales organizations and other dealer-based origination networks ("Dealers"). 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"). POS authorization systems require the use of a POS terminal capable of reading a cardholder's account information from the card's magnetic strip and combining this information with the amount of the sale entered via a POS terminal keypad, or POS software used on a personal computer to process a sale. 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. As of September 30, 2002, the Company's credit facility failed to renew. As a result, in October 2002, the Company made the decision to suspend new contract originations until a source of funding is obtained. The Company is currently working with a capital advisory firm in an effort to obtain a new line of credit in order to resume funding activity. The Company remains hopeful that a new funding facility can be in place in a reasonable period of time. LEASING, SERVICING AND FINANCING PROGRAMS 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 primarily leases and rents low-priced commercial equipment to small merchants. The majority of the Company's leases are currently for POS authorization systems; however, the Company also leases a wide variety of other equipment including advertising and display equipment, coffee machines, paging systems, water coolers and restaurant equipment. In addition, the Company also acquires service contracts and contracts in certain other financing markets. The Company opportunistically seeks to enter various other financing markets. The Company's residential financings include acquiring service contracts from Dealers that provide security monitoring services, primarily. The Company originates and services leases, contracts and loans in all 50 states of the United States and its territories. As of December 31, 2001 and 2002, leases in California, Florida, Texas, Massachusetts and New York accounted for approximately 42% of the Company's portfolio. Only California accounted for more than 10% of the total portfolio as of December 31, 2001 and 2002 at approximately 14%. None of the remaining states accounted for more than 4% of such total. 2 TERMS OF EQUIPMENT LEASES Substantially all equipment leases originated or acquired by the Company are non-cancelable. 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 the 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 performs all processing, billing and collection functions under its leases. 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. Initial terms of the leases in the Company's portfolio generally range from 12 to 48 months, with an average initial term of 44 months as of December 31, 2002. The terms and conditions of all of the Company's leases are substantially similar. In most cases, the contracts require lessees to: (i) maintain, service and operate the equipment in accordance with the manufacturer's and government-mandated procedures; (ii) insure the equipment against property and casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make all scheduled contract payments regardless of the performance of the equipment. The Company's standard lease forms provide that in the event of a default by the lessee, the Company can require payment of liquidated damages and can seize and remove the equipment for subsequent sale, refinancing or other disposal at its discretion. Any additions, modifications or upgrades to the equipment, regardless of the source of payment, are automatically incorporated into, and deemed a part of, the equipment financed. The Company seeks to protect itself from credit exposure relating to poor-quality Dealers by entering into limited 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. RESIDUAL INTERESTS IN UNDERLYING EQUIPMENT The Company typically owns a residual interest in the equipment covered by a lease. 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 either sell the equipment, or place it into its used equipment rental or leasing program. SERVICE CONTRACTS 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. DEALERS The Company provides financing to obligors under microticket leases, contracts and loans through its Dealers. The Company had over 1,000 different Dealers originating 50,106 Company leases, contracts and loans in 2002. One dealer accounted for approximately 10.6%, 4.5%, and .22% of all originations during the years ended December 31, 2000, 2001, and 2002, respectively. Another dealer accounted for approximately 4.89%, 7.38%, and 10.98% of all originations during the years ended December 31, 2000, 2001, and 2002, respectively. No other dealer accounted for more than 10% of the Company's origination volume during the years ended December 31, 2000, 2001, or 2002. 3 The Company does not sign exclusive agreements with its Dealers. Dealers interact with merchants directly and typically market not only POS authorization systems, but also financing through the Company and ancillary POS processing services. USE OF TECHNOLOGY 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 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 Internet and obtain almost instantaneous approval automatically over the Internet through the Company's computer system, all without any contact with any employee of the Company. The Company also offers Instalease(R), a program that allows a Dealer to submit applications by telephone, telecopy or e-mail to a Company representative, receive approval, and complete a sale from a lessee's location. By assisting the 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. The Company has used its proprietary software to develop a multidimensional credit-scoring model which generates pricing of its leases, contracts and loans commensurate with the risk assumed. 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 uses credit scoring in most, but not all, of its extension of credit. UNDERWRITING 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 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 database and recognized commercial credit reporting agencies such as Dun & Bradstreet, Experian, 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 Company is thus able to analyze both the quality and amount of credit history available with respect to both obligors and Dealers and to assess the credit risk. The Company uses this information to underwrite a broad range of credit risks and provide financing in situations when its competitors may be unwilling to provide such financing. The credit-scoring model is complex and automatically adjusts for different transactions. In situations where the amount financed is over $6,000, the Company may go beyond its own data base and recognized commercial credit reporting agencies to obtain information from less readily available sources such as banks. In certain instances, the Company will require the lessee to provide verification of employment and salary. The second aspect of the credit decision involves an assessment of the originating Dealer. Dealers undergo both an initial screening process and ongoing evaluation, including an examination of Dealer portfolio credit quality and 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 poorly 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. 4 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. 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 often will 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 has also completed the acquisition of six large POS authorization system lease and rental portfolios: two in 1996, one in 1998, one in 1999, one in 2000 and the acquisition of the rental and lease portfolio of Resource Leasing in 2001. The acquisition, completed in September of 1999, consisted of 2,148 leases with fundings of $3.2 million. The acquisition, completed in April of 2000, consisted of 7,085 rental contracts and 1,996 lease contracts, together totaling fundings of $5.5 million. On January 3, 2001, the Company acquired the rental and lease portfolio of Resource Leasing Corporation ("Resource") along with certain other assets. The acquisition consisted of 7,862 rental contracts and 326 lease contracts. 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 the Company's securitization programs (the "Securitizations"), preparing investor reports, paying taxes and insurance and performing collection and liquidation functions. 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 monitors delinquent accounts using its automated collection process. The Company uses several computerized processes in its customer service and collection efforts, including the generation of daily priority call lists and scrolling for daily delinquent account servicing, generation and mailing of delinquency letters, and routing of incoming customer service calls to appropriate employees with instant computerized access to account details. The Company's collection efforts include one or more of the following: sending collection letters, making collection calls, reporting delinquent accounts to credit reporting agencies, and litigating delinquent accounts when necessary and obtaining and enforcing judgments. The Company also has started to use a collectability scoring model to determine if the benefits from further collection efforts will out weigh the costs associated with those efforts. 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. EMPLOYEES As of December 31, 2002, the Company had 203 full-time employees, of whom 7 were engaged in credit activities and Dealer service, 136 were engaged in servicing and collection activities, 1 was engaged in marketing activities, and 59 were engaged in general administrative activities. Management believes that its 5 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. AVAILABILITY OF INFORMATION The Company will provide without charge to each of its stockholders upon the written request of such person, a copy of the Company's Annual Report on Form 10K for its fiscal year ended December 31, 2002, including the financial statements and the financial statement schedules, required to be filed with the Securities and Exchange Commission. Requests for such document should be directed to Richard F. Latour, Chief Executive Officer, at 10M Commerce Way, Woburn, Massachusetts 01801. ITEM 2. PROPERTIES The Company's corporate headquarters and operations center are located in leased space of 44,659 square feet of office space at 10M Commerce Way, Woburn Massachusetts 01801. The lease for this space expires on December 14, 2003. The Company also leases 5,133 square feet of office space for its West Coast office in Newark, California, under a lease that expires on May 1, 2005. The Company also leases 21,656 square feet of office space in Waltham, Massachusetts, under a lease that expires on July 31, 2004. On January 3, 2001, the Company acquired certain assets and assumed certain liabilities of Resource Leasing Corporation. As a result of this transaction, the Company occupied 15,399 square feet of office space in Herndon, Virginia. The Company is no longer utilizing the facilities in Newark, California and Herndon, Virginia. Also, the Company is in the process of moving its headquarters from Waltham, Massachusetts to its facility in Woburn, Massachusetts. ITEM 3. LEGAL PROCEEDINGS Management believes, after consultation with counsel, that the allegations against the Company included in the lawsuits described below are subject to substantial legal defenses, and the Company is vigorously defending each of the allegations. The Company also is subject to claims and suits arising in the ordinary course of business. At this time, it is not possible to estimate the ultimate loss or gain, if any, related to these lawsuits, nor if any such loss will have a material adverse effect on the Company's results of operations or financial position. A. The Company filed an action in the United States District Court for the District of Massachusetts against Sentinel Insurance Company, Ltd., ("Sentinel"), Premier Holidays International, Inc., ("Premier") and Daniel DelPiano ("DelPiano") arising from Premier's October, 1999, default on its repayment obligations to the Company under a Twelve Million Dollar ($12,000,000) loan. Judgment has been entered in this case against Sentinel, which had issued a business performance insurance policy guaranteeing repayment of the loan, in the amount of Fourteen Million Dollars ($14,000,000). This judgment has not been satisfied. Sentinel is currently undergoing liquidation proceedings, and a claim in this amount has been filed with the bankruptcy court. Premier has asserted a counterclaim against the Company for Seven Hundred Sixty Nine Million Three Hundred Fifty Thousand dollars ($769,350,000) in actual and consequential damages, and for Five Hundred Million Dollars ($500,000,000) in punitive damages, plus interest, cost and attorney's fees. The counterclaim is based upon an alleged representation by the Company that it would lend Premier an additional Forty-Five Million Dollars ($45,000,000), when all documents evidencing the Premier loan refer only to the Twelve Million ($12,000,000) amount actually loaned and not repaid. The Company denies any liability on the counterclaim, which the Company is vigorously contesting. The Company's motion for summary judgment seeking dismissal of the counterclaim and the award of full damages on the Company's claims was denied by Court Order, without a written decision. The Company's motion for the appointment of a special master was also denied without a written decision. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse effect. 6 B. On January 29, 2002, Leasecomm was served with an Amended Complaint ("Complaint") in an action entitled People v. Roma Computer Solutions, Inc., et al., Ventura County Superior Court Case No. CIV207490. The Complaint asserts two claims, one for violation of the California Business Professions Code Section 17500 (false advertising), and the other for violation of the California Business and Professions Code Section 17200 (unfair or unlawful acts or practices). The claims arise from the marketing and selling activities of other defendants, including Roma Computer Solutions, Inc., and/or Maro Securities, Inc. The Complaint seeks to have Leasecomm held liable for the acts of other defendants, alleging that Leasecomm directly participated in those acts and received proceeds and the assignment of lease contracts as a result of those acts. The Complaint requests injunctive relief, rescission, restitution, and a civil penalty. The Company has filed an Answer denying the claims. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse affect. C. On May 8, 2000, Plaintiff Efraim Bason brought an action in the Supreme Court of the State of New York, County of Nassau, seeking compensatory damages in the amount of $450,000 and punitive damages under various legal theories for Leasecomm's refusal to promptly release him from an equipment lease to which he claims his name was forged (the "Bason Complaint"). The Bason Complaint alleged that Leasecomm's failure to promptly release him from the lease, and subsequent negative reports to credit agencies, ruined his credit and prevented him from securing certain financing that he allegedly needed to purchase merchandise which he claims he could have then re-sold at a $450,000 profit. Leasecomm has subsequently settled this matter with Court approval. D. On January 29, 2002, Leasecomm was served with an Amended Complaint ("Complaint") in an action entitled Rae Lynn Copitka v. Leasecomm Corp., et al., Travis County (Texas) District Court Case No. GN-102292. The Complaint asserts that the original action, filed mid-2001 by a single plaintiff should proceed as a class action. In the original action, Ms. Copitka sought to rescind her finance lease with Leasecomm and to recover economic damages arising from prior payments under the lease. Ms. Copitka alleges that her proposed class includes all persons in Texas who have executed Leasecomm finance leases for "virtual terminal" type credit card software during the years 1998, 1999, 2000, and 2001. On November 25, 2002 Leasecomm and E-Commerce Exchange agreed to settle the case with Ms. Copitka and a class of residents of Texas who leased Quickcommerce or QuickcommercePro software licenses from Leasecomm. The Travis County District Court entered its order approving the class settlement and entered its final judgement in the case on January 24, 2003. Leasecomm has satisfied its obligations under the Settlement, and the time to appeal has expired. E. On April 3, 2000, a purported class action suit was filed in Superior Court of the State of California, County of San Mateo against Leasecomm and MicroFinancial as well as a number of other defendants with whom Leasecomm and MicroFinancial are alleged to have done business, directly or indirectly. The complaint seeks certification of a subclass of those class members who entered into any lease agreement contracts with Leasecomm for the purposes of financing the goods or services allegedly purchased from other defendant entities. The class action complaint alleges multiple causes of action, including: fraud and deceit; negligent misrepresentation; unfair competition; false advertising; unjust enrichment; fraud in the inducement and the inception of contract; lack of consideration for contact; and breach of the contractual covenant of good faith and fair dealing. The Court granted final approval of the class action Settlement on December 2, 2002. Leasecomm has satisfied its obligations under the Settlement, and the time to appeal has expired. The Court retains jurisdiction to oversee any issues that may arise regarding administration of the settlement. F. In October, 2002, the Company was served with a Complaint in an action in the United States District Court for the Southern District of New York filed by approximately 170 present and former lessees asserting individual claims. The Complaint contains claims for violation of RICO (18 U.S.C. sec. 1964), fraud, unfair and deceptive acts and practices, unlawful franchise offerings, and intentional infliction of mental anguish. The claims purportedly arise from Leasecomm's dealer relationships with Themeware, E-Commerce Exchange, Cardservice International, Inc., and Online Exchange for the leasing of websites and virtual terminals. The Complaint asserts that the Company is responsible for the conduct of its dealers in trade shows, 7 infomercials and web page advertisements, seminars, direct mail, telemarketing, all which are alleged to constitute unfair and deceptive acts and practices. Further, the Complaint asserts that Leasecomm's lease contracts as well as its collection practices and late fees are unconscionable. The Complaint seeks restitution, compensatory and treble damages, and injunctive relief. The Company filed a Motion to Dismiss the Complaint on January 31, 2003, and expects that the Motion will be argued sometime after May 6, 2003. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse effect. G. On March 31, 2002, plaintiffs Robert Hayden and Renono Wesley filed a Complaint against Leasecomm Corporation alleging a violation of California Business & Professions Code Section 17200. The Complaint was filed on behalf of Hayden and Wesley individually, on behalf of a class of people similarly situated, and on behalf of the general public. The case is venued in San Francisco Superior Court. Specifically, plaintiffs allege that Leasecomm's practice of filing suits against lessees in Massachusetts courts constitutes an unfair business practice under California law. On March 12, 2003, the San Francisco County Superior Court granted Leasecomm's Motion to dismiss this action. H. On August 22, 2002 plaintiff Aaron Cobb filed a Complaint against Leasecomm Corporation and MicroFinancial, Inc. and another Entity known as Galaxy Mall, Inc. alleging breach of contract; Fraud, Suppression and Deceit; Unjust Enrichment; Conspiracy; Conversion; Theft by Deception; and violation of Alabama Usury Laws. The Complaint was filed on behalf of Aaron Cobb individually, and on behalf of a class of persons and entities similarly situated in the State of Alabama. More specifically, the Plaintiff purports to represent a class of persons and small business in the State of Alabama who allegedly were induced to purchase services and/or goods from any of the Defendants named in the Complaint. The case is venued in Bullock County, Alabama. On March 31, 2003 the trial court entered an Order denying the Company's Motion to Dismiss. This Order is currently being reviewed and in all likelihood will be appealed to the Alabama Supreme Court. The appeal must be filed within 45 days of the entry of the Order. Should the appeal not be filed or should the Company otherwise be unsuccessful with its appeal the discovery in this case would commence with the first efforts being directed toward the Class Certification issues. The Company continues to deny any wrongdoing and plans to vigorously defend this claim. Because of the uncertainties inherent in litigation, the company cannot predict whether the outcome will have a material adverse affect. I. In March, 2003, an action was filed by a shareholder against the Company in United States District Court asserting a single count of common law fraud and constructive fraud. The complaint alleges that the shareholder was defrauded by untrue statements made to him by management, upon which he relied in the purchase of Company stock for himself and for others. The complaint seeks damages in an unspecified amount. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse effect. J. In March, 2003, a purported class action was filed in Superior Court in Massachusetts against Leasecomm and one of its dealers. The class sought to be certified is a nationwide class (excluding certain residents of the State of Texas) who signed identical or substantially similar lease agreements with Leasecomm covering the same product. The complaint asserts claims for declaratory relief, rescission, civil conspiracy, usury, breach of fiduciary duty, and violation of Massachusetts General Laws Chapter 93A, Section 11 ("Chapter 93A"). The claims concern the validity, enforceability, and alleged unconscionability of agreements provided through the dealer, including a Leasecomm lease, to acquire on line credit card processing services. The complaint seeks rescission of the lease agreements with Leasecomm, restitution, multiple damages and attorneys fees under Chapter 93A, and injunctive relief. Because of the uncertainties inherent in litigation we cannot predict whether the outcome will have a material adverse effect. Leasecomm has been served with Civil Investigative Demands by the Offices of the Attorney General for the states of Kansas, Illinois, Florida, and Texas, and for the Commonwealth of Massachusetts. Those Offices of the Attorney General, in conjunction with the Northwest Region Office of the Federal Trade Commission, the Offices of the Attorney General for North Carolina and North Dakota, and the Ventura County, California, District Attorney's Office, have informed Leasecomm that they are seeking to coordinate their investigations (collectively, the "Government Investigators"). At this time, the principal focus of the 8 investigations appears to be software license leases (principally virtual terminals) and leases from certain vendor/dealers whose activities included business opportunity seminars. Leasecomm has further been informed that the investigations cover certain lease provisions, including the forum selection clause and language concerning the non-cancellability of the lease. In addition, the investigations include, among other things, whether Leasecomm's lease termination, or rollover, provisions, are legally sufficient; whether a Leasecomm lease is an enforceable lease; whether there were potential problems with its leases of which Leasecomm had knowledge; whether the leases are enforceable in accordance with their terms; whether three day right of rescission notices were required and, if required, whether proper notices were given; whether any lease prices were unconscionable; whether the lease of a software license is the lease of a service, not a good; whether any lease of satellites or computers are leases to consumers which must comply with certain consumer statutes; whether electronic fund transfer payments pursuant to a lease violate Reg. E; whether any Leasecomm billing and collection practices or charges are unreasonable, or constitute unfair or deceptive trade practices; whether Leasecomm's course of dealings with its vendors/dealers makes Leasecomm liable for any of the activities of its vendors/dealers. In April, 2002, Leasecomm and the Government Investigators entered into provisional relief and tolling agreements which provide for Leasecomm to take certain interim actions, temporarily stop the running of the statute of limitations as of January 29, 2002, and require advance notice by Leasecomm of its withdrawal from the provisional relief agreement and advance notice by each of the Government Investigators of its intention to commence legal action. The tolling agreement has been extended several times and is set to expire in May, 2003. In February, 2003, Leasecomm received a Civil Investigative Demand from the Office of the Attorney General, State of Washington, to which a response is currently due in April, 2003. The Civil Investigative Demand concerns an investigation of monitoring agreements between Priority One, Inc. and various State of Washington consumers, as to which Leasecomm appears to be the assignee of the right to receive monthly payments. Since the investigations are in process, and no legal action has been commenced against Leasecomm, there can be no assurance as to the eventual outcome. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the security holders of the Company during the fourth quarter of its fiscal year ended December 31, 2002. 9 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's common stock, par value $0.01 per share (the "Common Stock"), is listed on the New York Stock Exchange under the symbol "MFI."
2001 2002 ------------------------------------- ------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH BY QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER - ---------- ------- ------- ------- ------- ------- ------- ------- ------- Stock Price High................. 14.00 17.00 16.75 14.00 10.50 10.93 9.30 4.44 Low.................. 10.50 11.00 12.40 9.48 6.40 7.24 4.01 .99
(b) Holders At March 14, 2003, there were approximately 825 stockholders of record of the Common Stock. (c) Dividends The Company paid the following quarterly cash dividends on the Common Stock.
YEAR ENDED YEAR ENDED DECEMBER 31, 2001 DECEMBER 31, 2002 ----------------- ----------------- First Quarter....................................... $0.045 $0.050 Second Quarter...................................... $0.050 $0.050 Third Quarter....................................... $0.050 $0.050 Fourth Quarter...................................... $0.050 --
During the fourth quarter of 2002, the Board of Directors suspended the future payment of dividends to comply with the Company's banking agreements. Provisions in certain of the Company's credit facilities and agreements governing its 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. (d) Recent Sales of Unregistered Securities Not applicable (e) Use of Proceeds from Registered Securities Not applicable 10 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected consolidated financial and operating data for the Company and its subsidiaries for the periods and at the dates indicated. The selected financial data were derived from the financial statements and accounting records of the Company. The data presented below should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
YEARS ENDED DECEMBER 31, -------------------------------------------------- 1998 1999 2000 2001 2002 ------- ------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Income Statement Data: Revenues Income on financing leases and loans.... $47,341 $55,545 $ 69,847 $ 70,932 $ 53,012 Income on service contracts............. 2,565 6,349 8,687 8,665 9,734 Rental income........................... 16,118 21,582 27,638 37,664 37,154 Other income(1)......................... 18,248 24,802 33,305 36,830 26,922 ------- ------- -------- -------- -------- Total revenues.................. 84,272 108,278 139,477 154,091 126,822 ------- ------- -------- -------- -------- Expenses: Selling, general and administrative..... 27,434 33,827 38,371 44,899 45,535 Provision for credit losses............. 19,075 37,836(2) 38,912 54,092 88,948(3) Depreciation and amortization........... 5,076 7,597 10,227 14,378 18,385 Interest................................ 12,553 10,781 15,858 14,301 10,787 ------- ------- -------- -------- -------- Total expenses.................. 64,138 90,041 103,368 127,670 163,655 ------- ------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes........................ $20,134 $18,237 $ 36,109 $ 26,421 $(36,833) ======= ======= ======== ======== ======== Net income (loss)......................... $11,924 $10,728 $ 20,860 $ 16,317 $(22,098) ======= ======= ======== ======== ======== Net income (loss) per common share Basic(4)................................ $ 1.21 $ 0.84 $ 1.64 $ 1.28 $ (1.72) Diluted(5).............................. 1.19 0.83 1.63 1.26 (1.72) Dividends per common share................ 0.14 0.16 0.18 0.20 0.15
DECEMBER 31, ------------------------------------------------------- 1998 1999 2000 2001 2002 -------- --------- --------- --------- -------- (DOLLARS IN THOUSANDS) Balance Sheet Data: Gross investment in leases and loans(6)........................... $280,875 $ 362,721 $ 452,885 $ 438,723 $367,173 Unearned income...................... (74,520) (100,815) (132,687) (104,538) (67,574) Allowance for credit losses.......... (24,850) (41,719) (40,924) (45,026) (69,294) Investment in service contracts...... 8,920 14,250 12,553 14,126 14,463 Total assets............... 210,254 265,856 342,602 361,728 295,085 Notes payable........................ 130,421 144,871 201,991 203,053 168,927 Subordinated notes payable........... 24,421 9,238 4,785 3,262 3,262 Total liabilities.......... 180,771 187,018 246,579 251,172 208,482 Total stockholders' equity................... 29,483 78,838 96,023 110,556 86,603
11
DECEMBER 31, ---------------------------------------------------------- 1998 1999 2000 2001 2002 --------- --------- --------- --------- -------- (DOLLARS IN THOUSANDS, EXCEPT STATISTICAL DATA) Other Data: Operating Data: Total leases and loans originated(7)................. $ 153,819 $ 223,446 $ 236,763 $ 155,308 $111,829 Total service contracts acquired(8)................... 8,080 9,105 4,138 6,658 6,773 Total rental contracts originated.................... 4,306 220 5,686 12,379 677 Dealer fundings(9)............... 105,200 137,300 145,400 111,100 74,000 Average yield on leases and loans(10)..................... 35.2% 36.8% 38.0% 38.1% 36.9% Cash Flows From (used in): Operating activities............. $ 95,973 $ 114,723 $ 116,360 $ 122,280 $120,628 Investing activities............. (108,111) (147,587) (157,947) (116,860) (80,141) Financing activities............. 10,529 33,123 43,081 (10,104) (35,139) --------- --------- --------- --------- -------- Total.................... (1,609) 259 1,494 (4,684) 5,348 Selected Ratios: Return on average assets......... 6.12% 4.51% 6.86% 4.63% (6.73)% Return on average stockholders' equity........................ 49.43 19.81 23.86 15.80 (22.42) Operating margin(11)............. 46.53 51.79 53.79 52.25 41.09 Credit Quality Statistics: Net charge-offs.................. $ 20,544 $ 20,967 $ 37,888(2) $ 51,408(2) $ 65,081(3) Net charge-offs as a percentage of average gross investment(12)................ 7.47% 6.29% 9.00% 11.20% 15.60% Provision for credit losses as a percentage of average gross investment(13)................ 6.93 11.35 9.24 11.78 21.32 Allowance for credit losses as a percentage of gross investment(14)................ 8.58 11.07 8.79 9.94 18.16
- --------------- (1) Includes loss and damage waiver fees, service fees, interest income, and equipment sales revenue. (2) The provision for 1999 includes a special provision of $12.7 million for a loan made to one company, collateralized by approximately 3,500 microticket consumer contracts, and guaranteed by, among other security, an insurance performance bond. MicroFinancial is currently involved in litigation with the Company and the insurance company. Charge-offs against the special reserve were $6.4 and $7.1 million for the years ended December 31, 2000 and 2001, respectively. (3) The provision for 2002 includes an additional provision of $35.0 million to reserve against certain dealer receivables as well as delinquent portfolio assets. In the past, dealer receivables had been offset, in some instances, against the funding of new contracts. Since the Company has suspended the funding of new deals, Management feels that the collection of these receivables will be more difficult. Although the Company will continue to pursue collections on these accounts, management believes that the cost associated with the legal enforcement would outweigh the benefits realized. (4) Net income per common share (basic) is calculated based on weighted-average common shares outstanding of 9,859,127, 12,795,809, 12,728,441, 12,789,605, and 12,821,946 for the years ended December 31, 1998, 1999, 2000, 2001, and 2002, respectively. (5) Net income per common share (diluted) is calculated based on weighted-average common shares outstanding on a diluted basis of 10,031,975, 12,904,231, 12,807,814, 12,945,243, and 12,862,834 for the years ended December 31, 1998, 1999, 2000, 2001, and 2002 respectively. (6) Consists of receivables due in installments, estimated residual value, and loans receivable. 12 (7) Represents the amount paid to Dealers upon funding of leases and loans, plus the associated unearned income. (8) Represents the amount paid to Dealers upon the acquisition of service contracts, including both noncancelable service contracts and month-to-month service contracts. (9) Represents the amount paid to Dealers upon funding of leases, contracts and loans. (10) 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. (11) Represents income before provision for income taxes and provision for credit losses as a percentage of total revenues. (12) Represents net charge-offs as a percentage of average gross investment in leases and loans and investment in service contracts. (13) Represents provision for credit losses as a percentage of average gross investment in leases and loans and investment in service contracts. (14) Represents allowance for credit losses as a percentage of gross investment in leases and loans and investment in service contracts. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion includes forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). When used in this discussion, 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; the risks of defaults on the Company's leases; adverse consequences associated with the Company's collection policy; risks associated with economic downturns; the effect on the Company's portfolio of higher interest rates; intense competition; increased governmental regulation of the rates and methods used by the Company in financing and collecting its leases and loans; risks associated with acquiring other portfolios and companies; dependence on key personnel; and other factors, many of which are beyond the Company's control. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein 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 herein will in fact transpire. OVERVIEW The Company is a specialized commercial finance company that provides "microticket" equipment leasing and other financing services in amounts generally ranging from $400 to $15,000, with an average amount financed of approximately $1,500. The Company primarily leases POS authorization systems and other small business equipment to small commercial enterprises. For the years ended December 31, 2001 and 2002, the Company had fundings to Dealers upon origination of leases, contracts and loans ("Dealer Fundings") of $111.1 million and $74.0 million, respectively, and revenues of $154.0 million and $126.4 million, respectively. The Company derives the majority of its revenues from leases originated and held by the Company, payments on service contracts, rental payments, and fee income. The Company funds the majority of leases, contracts and loans through its revolving-credit and term loan facilities (the "Credit Facilities") and on- balance sheet securitizations, and to a lesser extent, its subordinated debt program ("Subordinated Debt") and internally generated funds. As of September 30, 2002, the credit facility failed to renew and the Company 13 has been paying down the balance on the basis of a 36 month amortization plus interest. At December 31, 2002, the Company was in default of certain of its debt covenants in its credit facility and securitization agreements. The covenants that were in default with respect to the credit facility, require that the Company maintain a fixed charge ratio in an amount not less than 130% of consolidated earnings, a consolidated tangible net worth minimum of $77.5 million plus 50% of net income quarterly beginning with September 30, 2000 and compliance with the borrowing base. The covenants that were in default with respect to the securitization agreements, require that the Company maintain a fixed charge ratio in an amount not less than 125% of consolidated earnings and a consolidated tangible net worth greater than $90 million plus 50% of net income for each fiscal quarter after June 30, 2001. On April 14, 2003, the Company entered into a long-term agreement with its lenders. This long-term agreement waives the defaults described above, and in consideration for this waiver, requires the outstanding balance of the loan to be repaid over a term of 22 months beginning in April 2003 at an interest rate of prime plus 2.0%. The Company received a waiver, which was set to expire on April 15, 2003, for the covenant violations in connection with the securitization agreement. Subsequently, the Company received a permanent waiver of the covenant defaults and the securitization agreement was amended so that going forward, the covenants are the same as those contained in the long-term agreement entered into on April 14, 2003, for the senior credit facility. In October 2002, the Company made the decision to suspend new contract originations until a source of funding is obtained. The Company is currently in the process of pursuing alternative financing sources. The Company has been advised by the New York Stock Exchange (NYSE) that it is currently not in compliance with the NYSE's continued listing standards. Specifically, the Company does not meet the following requirements based on a consecutive thirty (30) day trading period; average market capitalization of not less than $15 million and a share price of not less than $1.00. In accordance with the continued listing criteria set forth by the NYSE, the Company has presented a plan which management believes has the potential to bring the Company back into compliance with the listing standards within the required timeframes. The NYSE is currently reviewing the plan that was submitted on April 1, 2003. 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 noncancelable. 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 noncancelable 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 44 months as of December 31, 2002. Substantially all service and rental contracts are month-to-month contracts with expected terms of 7 years for service contracts, 15 months for lessees that continue to rent their equipment beyond the original term, and 22 months for other types of rental contracts. CRITICAL ACCOUNTING POLICIES In response to the SEC's release No. 33-8040, "Cautionary Advice regarding Disclosure About Critical Accounting Policies," Management identified the most critical accounting principles upon which our financial status depends. The Company determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments. We identified our most critical accounting 14 policies to be those related to revenue recognition and maintaining the allowance for credit losses. These accounting policies are discussed below as well as within the notes to the consolidated financial statements. 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 either recorded at estimated residual value and depreciated using the straight-line method over a period of 12 months or at the acquisition cost and depreciated using the straight line method over a period of 36 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, rental 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, rental contract or loan, if any, and reflects management's judgment of additional loss potential considering current 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, rental 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, rental contracts and loans are charged against the allowance for credit losses and are put on non-accrual when they are deemed to be uncollectable. Generally, the Company deems leases, service contracts, rental contracts and loans to be uncollectable when one of the following occurs: (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 without contact with the lessee. 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 YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Total revenues for the year ended December 31, 2002 were $126.8 million, a decrease of $27.3 million, or 17.7%, from the year ended December 31, 2001, due primarily to decreases of $17.9 million, or 25.3%, in 15 income on financing leases and loans and $9.8 million, or 32.2%, in service fee and other income; offset by an increase of $559,000, or 1.2% in rental and service contract income over such amounts in the previous year's period. The decrease in income on financing leases and loans was due to the decreased number of leases originated primarily resulting from the Company's decision during the third quarter of 2002 to suspend the funding of new contracts. The decrease in fee income and other income is the result of decreased fees from the lessees related to the collection and legal process employed by the Company. The increase in rental and service contract income is a result of the increased number of lessees that have continued to rent their equipment beyond their original lease term, the acquisition of the rental portfolio of Resource Leasing Corporation, and increased originations in rental and service contracts. Selling, general and administrative expenses increased by $636,000 or 1.4%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001. Marketing programs increased by $1.4 million or 117.2%, due to increased dealer payments made on a portfolio of leases acquired in 2002. Legal services increased by $2.2 million or 198.2%, primarily due to costs incurred for the different class actions and investigations and in conjunction with the workout on the Company's credit facility and securitization covenant defaults. Compensation expenses decreased by $2.1 million or 11.3% primarily due to staff reductions. The Company's provision for credit losses increased by $34.9 million, or 64.4%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001, while net charge-offs increased 26.6% to $65.1 million. This provision was based on the Company's historical policy, based on experience, of providing a provision for credit losses based upon the dealer fundings and revenue recognized in any period and reflects management's judgement of loss potential considering current economic conditions and the nature of the underlying receivables. The Company took an additional provision of $35 million during the third quarter of 2002 to reserve against certain dealer receivables as well as delinquent portfolio assets. In the past, dealer receivables had been offset, in some instances, against the funding of new contracts. Since the Company has suspended the funding of new deals, the Company feels that the collection of these receivables will be more difficult. Although the Company will continue to pursue collections on these accounts, management believes that the cost associated with the legal enforcement would outweigh the benefits realized. Depreciation and amortization increased by $4.0 million, or 27.9%, due to the increased number of rental contracts and amortization of the Company's investment in service contracts. Interest expense decreased by $3.5 million, or 24.6%, for the year ended December 31, 2002 as compared to the year ended December 31, 2001. This decrease resulted primarily from the Company's declining cost of funds as well as a decreased level of borrowings. Dealer Fundings were $74.0 million during the year ended December 31, 2002, a decrease of $37.1 million, or 33.4%, compared to the year ended December 31, 2001. This decrease is a result of the Company's decision during the third quarter of 2002 to suspend new contract originations until a new line of credit is obtained. Receivables due in installments, estimated residual values, loans receivable, investment in service contracts, and investment in rental equipment also decreased from $470.6 million for the year ended December 31, 2001 to $396.5 million for the year ended December 31, 2002, representing a decrease of $74.1 million, or 15.7%. Net cash provided by operating activities decreased by $1.7 million to $120.6 million during the year ended December 31, 2002, or 1.4%, from the year ended December 31, 2001 because of the decrease in the size of the Company's overall portfolio. Unearned income decreased by $37.0 million, or 35.4%, from $104.5 million at December 31, 2001 to $67.6 million at December 31, 2002. This decrease was primarily due to the 33.4% decrease in dealer fundings during 2002. YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Total revenues for the year ended December 31, 2001 were $154.1 million, an increase of $14.6 million, or 10.5%, from the year ended December 31, 2000, due primarily to increases of $1.1 million, or 1.6%, in income on financing leases and loans; $10.0 million, or 27.5%, in rental and service contract income, and $3.2 million, or 11.8%, in service fee and other income over such amounts in the previous year's period. The increase in income on financing leases and loans was due to the increased number of leases originated. The 16 increase in rental and service contract income is a result of the increased number of lessees that have continued to rent their equipment beyond their original lease term, the acquisition of the rental portfolio of Resource Leasing Corporation, and increased originations in rental and service contracts. The increase in fee income and other income is the result of increased fees from the lessees related to the collection and legal process employed by the Company, and the addition of a new line of business of selling equipment out of existing inventory. Selling, general and administrative expenses increased by $6.5 million or 17%, for the year ended December 31, 2001 as compared to the year ended December 31, 2000. Compensation and personnel-related expenses increased by $3.4 million, due to an increase in overall compensation levels and an increase in the number of employees needed to maintain the Company's portfolio, including the addition of the personnel employed by Resource Leasing Corporation. 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 because of the requirements of maintaining the Company's microticket portfolio and the Company's focus on collections. Also, cost of goods sold increased by $3.6 million, or 100%, due to the Company's acquisition of the assets of Resource Leasing Corporation, and the addition of a new line of business of selling equipment. The Company's provision for credit losses increased by $15.2 million, or 39.0%, for the year ended December 31, 2001 as compared to the year ended December 31, 2000. This increase is a result of the Company's historical policy, based on experience, of providing a provision for credit losses based upon the dealer fundings and revenue recognized in any period and reflects management's judgement of loss potential considering current economic conditions and the nature of the underlying receivables. Depreciation and amortization increased by $4.2 million, or 40.6%, due to the increased number of rental contracts, including the addition of the Resource Leasing portfolio of rental contracts, and amortization of the Company's investment in service contracts. Interest expense decreased by $1.6 million, or 9.8%, for the year ended December 31, 2001 as compared to the year ended December 31, 2000. This decrease resulted primarily from the Company's declining cost of funds, offset by an increased level of borrowings. Dealer Fundings were $111.1 million during the year ended December 31, 2001, a decrease of $34.3 million, or 23.6%, compared to the year ended December 31, 2000. This decrease is a result of the Company's decision during the second quarter of 2000 to increase pricing and tighten its credit approval standards. The new credit policies were put into place in August of 2000. This is an ongoing effort, and is expected to continue going forward. Receivables due in installments, estimated residual values, loans receivable, investment in service contracts, and investment in rental equipment also decreased from $477.4 million for the year ended December 31, 2000 to $470.6 million for the year ended December 31, 2001, representing an decrease of $6.8 million, or 1.4%. Net cash provided by operating activities increased by $5.9 million to $122.3 million during the year ended December 31, 2001, or 5.1%, from the year ended December 31, 2000 because of the increase in the size of the Company's overall portfolio as well as the Company's continued emphasis on collections. Unearned income decreased by $28.2 million, or 21.2%, from $132.7 million at December 31, 2000 to $104.5 million at December 31, 2001. This decrease was primarily due to the 23.6% decrease in dealer fundings during 2001. The terrorist attacks of September 11, 2001 caused a significant loss of life and property. Fortunately, the Company has not experienced any significant losses as a direct result of the September 11 events. There can be no assurance that any potential impact associated with the September 11 events would not have a material adverse effect on the Company's business, financial condition, or results of operations. 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 17 its operations primarily through borrowings under its credit facilities, its on-balance sheet securitizations, the issuance of subordinated debt and an initial public offering completed in February of 1999. 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. On August 22, 2000, the Company entered into a new $192 million credit facility with seven banks, expiring on September 30, 2002. As of September 30, 2002 the credit facility failed to renew and the Company has been paying down the balance on the basis of a 36 month amortization plus interest. Based on the terms of the agreement, interest rates increased from Prime minus 0.25% to Prime plus 0.50% for prime based loans and from LIBOR plus 1.75% to LIBOR plus 2.50% for LIBOR based loans. In addition, based on the covenant defaults described below, the outstanding borrowings on all loans bear an additional 2.00% default interest. On January 3, 2003, the Company entered into a Forbearance and Modification Agreement from the senior credit facility which expired on February 7, 2003. Based on the terms of the Forbearance and Modification Agreement, interest rates increased again on the prime based loans to prime plus 1.00%. At December 31, 2002, the Company had approximately $126.6 million outstanding under the facility. The Company also may use 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. To date, cash flows from its portfolio and other fees have been sufficient to repay amounts borrowed under the credit facilities and subordinated debt, however, in October 2002, the Company made the decision to suspend new contract originations until a source of funding is obtained. At December 31, 2002, the Company was in default of certain of its debt covenants in its credit facility and securitization agreements. The covenants that were in default with respect to the credit facility, require that the Company maintain a fixed charge ratio in an amount not less than 130% of consolidated earnings, a consolidated tangible net worth minimum of $77.5 million plus 50% of net income quarterly beginning with September 30, 2000, and compliance with the borrowing base. On April 14, 2003, the Company entered into a long-term agreement with its lenders. This long-term agreement waives the defaults described above, and in consideration for this waiver, requires the outstanding balance of the loan to be repaid over a term of 22 months beginning in April 2003 at an interest rate of prime plus 2.0%. Based on the amortization schedule in the new agreement, the Company is obligated to repay a minimum of $54 million, plus applicable interest, over the next twelve months. The covenants that were in default with respect to the securitization agreements, require that the Company maintain a fixed charge ratio in an amount not less than 125% of consolidated earnings and a consolidated tangible net worth greater than $90 million plus 50% of net income for each fiscal quarter after June 30, 2001. The Company received a waiver, which was set to expire on April 15, 2003, for the covenant violations in connection with the securitization agreement. Subsequently, the Company received a permanent waiver of the covenant defaults and the securitization agreement was amended so that going forward, the covenants are the same as those contained in the long-term agreement entered into on April 14, 2003, for the senior credit facility. The Company believes that cash flows from its operations will be sufficient to fund the Company's operations for the foreseeable future, given the satisfactory resolution of the Company's discussions with the lenders involved in the senior credit facility and the securitized notes. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The Company has entered into various agreements, such as the long-term debt agreements, capital lease agreements and operating lease agreements that require future payments be made. Long-term debt agree- 18 ments include all debt outstanding under the credit facility, securitizations, subordinated notes, demand notes and other notes payable. At December 31, 2002 the repayment schedules for outstanding long-term debt, minimum lease payments under noncancelable operating leases and future minimum lease payments under capital leases were as follows:
FOR THE YEAR ENDED LONG-TERM OPERATING CAPITAL DECEMBER 31, DEBT LEASES LEASES TOTAL - ------------------ --------- --------- ------- -------- 2003.......................................... $ 83,677 $1,776 $272 $ 85,725 2004.......................................... 51,397 867 180 52,444 2005.......................................... 34,515 227 55 34,797 2006.......................................... 2,600 -- -- 2,600 Thereafter.................................... -- -- -- -- -------- ------ ---- -------- Total....................................... $172,189 $2,870 $507 $175,566 ======== ====== ==== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See Note B of the notes to the consolidated financial statements included herein for a discussion of the impact of recently issued accounting pronouncements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK GENERAL RISKS MicroFinancial incurred net losses of $22.1 million for the year ended December 31, 2002. The net losses incurred by the Company during the third and fourth quarters caused the Company to be in default of certain debt covenants in its credit facility and securitization agreements. In addition, as of September 30, 2002, the Company's credit facility failed to renew and consequently, the Company was forced to suspend new origination activity as of October 11, 2002. On April 14, 2003, the Company entered into a long-term agreement with its lenders. This long-term agreement waives the covenant defaults as of December 31, 2002, and in consideration for this waiver, requires the outstanding balance of the loan to be repaid over a term of 22 months beginning in April 2003 at an interest rate of prime plus 2.0%. The Company received a waiver, which was set to expire on April 15, 2003, for the covenant violations in connection with the securitization agreement. Subsequently, the Company received a permanent waiver of the covenant defaults and the securitization agreement was amended so that going forward, the covenants are the same as those contained in the long-term agreement entered into on April 14, 2003, for the senior credit facility. To date, the Company has fulfilled all of its debt obligations, as agreed to by the bank group, in a timely manner. In an effort to improve its financial position, MicroFinancial has taken certain steps including the engagement of a financial and strategic advisory firm, Triax Capital Advisors, LLC. Management and its advisors are actively considering various financing, restructuring and strategic alternatives as well as continuing to work closely with the Company's lenders to obtain long-term agreements. In addition, Management has taken steps to reduce overhead, including a reduction in headcount from 380 to 203. The failure or inability of MicroFinancial to successfully carry out these plans could ultimately have a material adverse effect on the Company's financial position and its ability to meet its obligations when due. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. MARKET-RATE-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT The following discussion about the Company's risk management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. This analysis presents the hypothetical loss in earnings, cash flows, and fair value of the financial instruments held by the Company at December 31, 2002 that are sensitive to changes in interest rates. The Company has used interest-rate swaps to manage the primary market exposures associated with underlying 19 liabilities and anticipated transactions. The Company used these instruments to reduce risk by creating offsetting market exposures. The instruments held by the Company are not held for trading purposes. In the normal course of operations, the Company also faces risks that are either nonfinancial or nonquantifiable. Such risks principally include country risk, credit risk, and legal risk, and are not represented in the analysis that follows. INTEREST RATE RISK MANAGEMENT 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 facility. 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. 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 December 31, 2002, the Company's outstanding fixed-rate indebtedness outstanding under the Company's securitizations and subordinated debt represented 26.5% of the Company's total outstanding indebtedness. In July 1997, the Company entered into an interest rate swap arrangement with one of its banks. This arrangement expired in July 2000. The Company's credit facility bears interest at rates, which fluctuate with changes in the prime rate or the 90-day LIBOR. The Company's interest expense on its credit facility and the fair value of its fixed rate debt is sensitive to changes in market interest rates. The effect of a 10% adverse change in market interest rates, sustained for one year, on the Company's interest expense and the fair value of its fixed rate debt would be $801,000 and $428,000, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, INCLUDING SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) MicroFinancial Incorporated's Financial Statements, together with the related Independent Auditors' Report, appear at pages F-1 through F-31 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
NAME AND AGE OF DIRECTORS AND EXECUTIVE OFFICERS TITLE - ------------------------- ----- Peter R. Bleyleben, 50........ Chairman of the Board and Director Brian E. Boyle, 55............ Director, Member of Audit and Compensation Committees Torrence C. Harder, 59........ Director, Chairman of Compensation Committee and Member of Audit Committee Richard F. Latour, 49......... Director, President, Chief Executive Officer, Treasurer, Secretary and Clerk Alan J. Zakon, 67............. Director, Chairman of Audit Committee and Member of Compensation Committee
20
NAME AND AGE OF DIRECTORS AND EXECUTIVE OFFICERS TITLE - ------------------------- ----- James R. Jackson, Jr., 41..... Vice President and Chief Financial Officer John Plumlee, 51.............. Vice President, MIS Carol Salvo, 36............... Vice President, Legal Mark Belinsky, 41............. Vice President, Marketing and Sales
BACKGROUNDS OF DIRECTORS AND EXECUTIVE OFFICERS Peter R. Bleyleben serves as Chairman of the Board of Directors of the Corporation. He served as President, Chief Executive Officer and Director of the Corporation or its predecessor since June 1987 until January 2002, and Chief Executive Officer until October 2002. He is also a director of UpToDate in Medicine, Inc. Before joining the Corporation, 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. Dr. Bleyleben's term as a Director expires in 2004. Brian E. Boyle, the Chief Executive Officer of the Corporation from 1985 to 1987 and Chairman of the MicroFinancial Board from 1985 to 1995, has served as a Director of the Corporation or its predecessor since 1985 and has been a member of the Audit Committee and the Compensation Committee since 1997. He is currently the Vice Chairman and a Director of Boston Communications Group, Inc. ("Communications"), a Boston-based provider of call processing to the global wireless industry. He has also served as Chairman of GoldK, Inc. since 1999 and was the Chief Executive Officer of GoldK, Inc. from 1999 until November 2002. 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. From 1995 to 1999 he was a Director of Saville Systems, a global telecommunications billing software company, with its United States headquarters in Burlington, Massachusetts, and served as a member of its Compensation Committee from 1995 to October 1999. Dr. Boyle is also a director 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. Mr. Boyle's term as a Director expires in 2003. Torrence C. Harder has served as a Director of the Corporation since 1986, served as Chairman of the Compensation Committee since 1997 and has been a member of the Audit Committee since 1997. He has been the President and Director of Harder Management Corporation, Inc., a registered investment advisory firm, since its establishment in 1971. He has also been the President and Director of Entrepreneurial Ventures, Inc., a private equity investment firm, since its founding in 1986. Mr. Harder is a Director of RentGrow, Inc., Trade Credit Corporation and UpToDate in Medicine, Inc., a privately held company. Mr. Harder earned an M.B.A. from the Wharton School of the University of Pennsylvania, and a B.A. with honors from Cornell University. Mr. Harder's term as a Director expires in 2005. Richard F. Latour has served as President, Chief Executive Officer, Chief Financial Officer, Treasurer, Clerk and Secretary of the Company since October 2002 and as President, Chief Operating Officer, Chief Financial Officer, Treasurer, Clerk and Secretary, as well as a director of the Corporation, since February 2002. From 1995 to January 2002, he served as Executive Vice President, Chief Operating Officer, Chief Financial Officer, Treasurer, Clerk and Secretary. From 1986 to 1995 Mr. Latour served as Vice President of Finance and Chief Financial Officer. Prior to joining the Company, Mr. Latour was Vice President of Finance for eleven years with Trak Incorporated, an international manufacturer and distributor of consumer goods, where he was responsible for all financial and operational functions. Mr. Latour earned a B.S. in accounting from Bentley College in Waltham, Massachusetts. Mr. Latour's term as a Director expires in 2004. 21 Alan J. Zakon has served as a Director of the Corporation since 1988 and has served as Chairman of the Audit Committee since 1997. Since 1995, he has been the Vice Chairman and a Director, and since November 1997, Chairman of the Executive Committee, of Scientific Games Corporation, a New York-based global gaming and simulcasting company. Dr. Zakon 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 and a Director of InfraRedx, a privately held medical research and development company. Dr. Zakon holds a B.A. from Harvard University, an M.S. in Industrial Management from the Sloan School at the Massachusetts Institute of Technology and a Ph.D. in Economics and Finance from the University of California at Los Angeles. Mr. Zakon's term as a Director expires in 2003. James R. Jackson Jr. has served as Vice President and Chief Financial Officer of the Company since April 2002. Prior to joining the Company, from 1999 to 2001, Mr. Jackson was Vice President of Finance for Deutsche Financial Services Technology Leasing Group. From 1992 to 1999, Mr. Jackson held positions as Manager of Pricing and Structured Finance and Manager of Business Planning with AT&T Capital Corporation. 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 A. Salvo has served as Vice President, Legal of the Company since 1996. From 1995 to 1996, Ms. Salvo served as Director of Legal Collection Services of the Company. From 1992 to 1995, Ms. Salvo served as Litigation Supervisor of the Company. Prior to joining the Company, Ms. Salvo was a junior accountant with InfoPlus Inc. Mark S. Belinsky has served as Vice President, Sales and Marketing of the Company since June 2001. Prior to joining the Company, from June 1999 to April 2001 Mr. Belinsky was the Vice President of Marketing and Business Development for Iwant.com, an Internet-based Application Service Provider, which owns a patent for Online advertising technology, used by the Internet's top websites. Prior to that, he served as President, Club Development for TransNational Group, an affinity marketing company. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Section 16(a) of the Securities Exchange Act of 1934 (as amended, the "Exchange Act") requires the Corporation's directors, officers and persons who beneficially own more than ten percent (10%) of the Common Shares (each, a "Reporting Person") to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Copies of all filed reports are required to be furnished to the Corporation pursuant to Section 16(a) of the Exchange Act. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to the Corporation pursuant to Rule 16a-3(e) of the Exchange Act during fiscal year ending December 31, 2002 and on written representations from Reporting Persons, the Corporation believes that each Reporting Person complied with all applicable filing requirements during its fiscal year ended December 31, 2002, with the exception of Dr. Boyle, who inadvertently failed to report the sales of 39,000 shares from June to September 2002. These transactions were subsequently reported by the Reporting Person. ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table sets forth the compensation of (i) Messrs. Bleyleben and Latour, both of whom served as the Chief Executive Officer of the Corporation during 2002, (ii) the four most highly compensated executive officers, other than Messrs. Bleyleben and Latour who were serving as executive officers of the Corporation as of December 31, 2002 (collectively, the "Named Executive Officers"), in each case for the years ended December 31, 2002, 2001 and 2000. Determination of the most highly compensated executive officers is based upon compensation for the Corporation's fiscal year ended December 31, 2002 and does not 22 necessarily reflect the most highly compensated executive officers for the Corporation's fiscal years ended December 31, 2001 and 2000. SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION ---------------------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION - --------------------------- ---- -------- -------- ------------ PETER R. BLEYLEBEN.......................... 2002 $239,038 $ 0 $12,227(3) Chairman and Director 2001 $277,116 $469,997 $97,636 2000 $270,000 $436,873 $72,004 RICHARD F. LATOUR........................... 2002 $232,077 $236,560 $ 6,291(4) President, Chief Executive Officer, Treasurer, Clerk, Secretary and Director 2001 $230,000 $306,643 $54,856 2000 $220,000 $278,042 $53,515 JAMES R. JACKSON, JR........................ 2002 $104,769 $ 0 $ 3,143(5) Vice President and Chief Financial Officer JOHN PLUMLEE................................ 2002 $169,029 $ 70,351 $ 5,229(6) Vice President, MIS 2001 $165,000 $ 73,753 $19,456 2000 $155,769 $ 63,819 $20,888 CAROL SALVO................................. 2002 $138,183 $ 73,698 $ 4,359(7) Vice President, Legal 2001 $135,000 $ 73,753 $ 4,098 2000 $115,269 $ 63,819 $ 4,701 MARK BELINSKY............................... 2002 $175,000 $ 10,040 $ 6,317(8) Vice President, Marketing and Sales 2001 $ 88,173 $ 30,000 $ 0
- --------------- (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 Corporation 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 Corporation under the Corporation's 401(k) retirement/profit sharing plan in 2002 ($4,411), 2001 ($3,200) and 2000 ($3,199); (b) split dollar life insurance premiums paid by the Corporation in 2001 ($90,382) and 2000 ($65,259) (this policy was terminated in 2002 and the Corporation was repaid the cash value under the policy) and (c) executive disability insurance policy premiums paid by the Corporation in 2002 ($7,816), 2001 ($4,054) and 2000 ($3,546). (4) Amounts for Mr. Latour include: (a) contributions by the Corporation under the Corporation's 401(k) retirement/profit sharing plan in 2002 ($3,200), 2001 ($3,200) and 2000 ($3,323); (b) split dollar life insurance premiums paid by the Corporation in 2001 ($50,782) and 2000 ($49,318) (this policy was terminated in 2002 and the Corporation was repaid the cash value under the policy) and (c) executive disability insurance policy premiums paid by the Corporation in 2002 ($3,091), 2001 ($874) and 2000 ($874). (5) Mr. Jackson joined the Company in 2002. Amounts for Mr. Jackson include contributions by the Corporation under the Corporation's 401(k) retirement/profit sharing plan in 2002 ($3,143). (6) Amounts for Mr. Plumlee include: (a) contributions by the Corporation under the Corporation's 401(k) retirement/profit sharing plan in 2002 ($4,213), 2001 ($3,440), and 2000 ($4,111); (b) split dollar life insurance premiums paid by the Corporation in 2001 ($15,000), and 2000 ($15,084) (this policy was 23 terminated in 2002 and the Corporation was repaid the cash value under the policy) and (c) executive disability insurance policy premiums paid by the Corporation in 2002 ($1,016), 2001 ($1,016) and 2000 ($1,016). (7) Amounts for Ms. Salvo include: (a) contributions by the Corporation under the Corporation's 401(k) retirement/profit sharing plan in 2002 ($3,673), 2001 ($3,440) and 2000 ($3,090); (b) executive disability insurance policy premiums paid by the Corporation in 2002 ($686), 2001 ($658) and 2000 ($630); and (c) the benefit to the executive of interest-free loans from the Corporation based on the applicable federal rate in effect on the date of issuance of each such loan, in 2000 ($981). This loan was repaid to the Corporation as of December 31, 2002. (8) Mr. Belinsky joined the Corporation in 2001. Amounts for Mr. Belinsky include: (a) contributions by the Corporation under the Corporation's 401(k) retirement/profit sharing plan in 2002 ($5,072); and (b) executive disability insurance policy premiums paid by the Corporation in 2002 ($1,255). 1998 EQUITY INCENTIVE PLAN The following table indicates the aggregate options granted in 2002 to the Named Executive Officers: OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS --------------------------------------------------------------------------------------- PERCENT OF NUMBER OF TOTAL POTENTIAL VALUE AT ASSUMED SECURITIES OPTIONS/SARS RATES OF STOCK APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(3) OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------- NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($) - ---- ------------- -------------- ----------- ---------- ------------ ------------ Peter R. Bleyleben... 50,000 5.15% $1.585 11/25/12 $ 129,089 $ 205,554 Richard F. Latour.... 100,000 10.31% $ 6.70 02/28/12 $1,091,360 $1,737,810 200,000 20.62% $1.585 11/25/12 $ 516,360 $ 822,216 James R. Jackson, Jr................. 150,000 15.46% $1.585 11/25/12 $ 387,270 $ 616,665 John Plumlee......... 40,000 4.12% $ 6.70 02/28/12 $ 436,544 $ 695,123 50,000 5.15% $1.585 11/25/12 $ 129,089 $ 205,554 Carol Salvo.......... 40,000 4.12% $ 6.70 02/28/12 $ 436,544 $ 695,124 50,000 5.15% $1.585 11/25/12 $ 129,089 $ 205,554 Mark Belinsky........ 40,000 4.12% $ 6.70 02/28/12 $ 436,544 $ 695,124
- --------------- (1) Stock options were granted under the Plan. No stock appreciation rights were awarded with these grants. All options granted other than those that expire on November 25, 2012 first become exercisable, in five equal annual installments, beginning one year from the grant date, and have a ten-year term. The options that expire on November 25, 2012 vested 20% on the date of grant and 5% every three months in arrears, and have a ten-year term. If a change of control of MicroFinancial were to occur, the options would become immediately exercisable in full. All options outstanding to Messrs. Jackson, Plumlee and Belinsky and Ms. Salvo were cancelled in February 2003, and replaced by a smaller number of shares of restricted stock which vested 20% upon grant, and vests 5% on the first day of each quarter after the grant date, with accelerated vesting if the price of the Corporation's common stock exceeds certain thresholds during the vesting period. The number of shares of restricted stock for each Names Executive Officer is included in "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters." (2) The percentages in the table for the stock options granted in 2002 are based on a total of 970,000 stock options granted in 2002 to MicroFinancial employees, all of which were granted on the same material terms described in footnote (1) above. 24 (3) The dollar amounts under these columns represent the potential realizable value of each grant assuming that the market value of the Common Stock appreciates from the date of grant to the expiration of the option at annualized rates of 5% and 10%. These assumed rates of appreciation have been specified by the SEC for illustrative purposes only and are not intended to forecast future financial performance or possible future appreciation in the price of the Common Stock. The actual amount the executive officer may realize will depend on the extent to which the stock price exceeds the exercise price of the options on the date the option is exercised. The following table indicates the fiscal year-end option values for options held by the Named Executive Officers at December 31, 2002. No options were exercised in 2002. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN- OPTIONS/SAR'S AT FISCAL THE-MONEY OPTIONS/SAR'S YEAR-END(#) AT FISCAL YEAR-END($)(1)(2) --------------------------- --------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ----------- ------------- ----------- ------------- Peter R. Bleyleben............................ 110,000 140,000 $0 $0 Richard F. Latour............................. 188,000 452,000 $0 $0 James R. Jackson, Jr.......................... 30,000 120,000 $0 $0 John Plumlee.................................. 74,000 186,000 $0 $0 Carol Salvo................................... 74,000 186,000 $0 $0 Mark Belinsky................................. 6,000 64,000 $0 $0
- --------------- (1) The exercise price of all unexercised options exceeded the fair market value of the Common Stock on December 31, 2002. (2) The value of unexercised in-the-money stock options at December 31, 2002 is presented to comply with regulations of the Securities and Exchange Commission. The actual amount realized upon exercise of stock options (if any) will depend upon the excess of the fair market value of the Common Stock over the exercise price at the time the stock option is exercised. There is no assurance that the values of unexercised stock options reflected in this table will be realized. PROFIT SHARING PLAN AND DISCRETIONARY BOARD OF DIRECTOR BONUS PROGRAMS The Corporation pays annual bonuses and makes profit sharing payments as determined by the Compensation Committee of the MicroFinancial Board. Each year the Compensation Committee indicates to the executive officers the percentage of the following year's pre-tax profits on which profit sharing plan payments will be based. Upon the conclusion of the audit of the prior year's financial results, the Compensation Committee determines the total percentage of pre-tax profits eligible for profit-sharing plan payments, and awards payments to all Named Executive Officers, as well as ten other employees. To enhance long-term retention of these executives, only one-third of the amount awarded is paid at that point in time. The remaining two-thirds may be paid out over the next two years in the discretion of the Compensation Committee and are subject to separate annual approvals of the Compensation Committee. In March 2003, the Board of Directors voted to issue promissory notes to these executives to cover the deferred portion of the profit-sharing plan payments. EMPLOYMENT AGREEMENTS The Corporation 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 Corporation 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 25 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 Corporation's bonus and/or profit sharing plans. Dr. Bleyleben's and Mr. Latour's current base salaries, respectively, are $130,000 and $250,000. The bonus for the current fiscal year will be determined by the MicroFinancial Board. 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 Corporation 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 Corporation to require a successor to assume all obligations under the Employment Agreement. The Corporation has also entered into separate employment agreements with Messrs. Jackson and Plumlee and Ms. Salvo, as well as six other employees, which are designed to provide an incentive to each executive to remain with the Corporation pending and following a Change in Control (as defined below). 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 (such date and each annual anniversary thereof, the "Renewal Date"). 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 MicroFinancial Board other than for cause, death or disability, or is terminated by the executive for specified good reason, the Corporation shall pay to the executive, the aggregate of the following amounts: (i) one times annual base salary in the case of Mr. Jackson and one and one-half times the annual base salary in the case of Mr. Plumlee and Ms. Salvo; (ii) any other compensation or bonus previously deferred by the executive, together with any accrued interest or earnings thereon; and (iii) any accrued vacation pay. Pursuant to each employment agreement, if the Executive's employment is terminated during the Change of Control employment period, the Company shall pay the amounts referenced above to the Executive in a lump sum in cash within 30 days after the date of termination. If the Executive's employment is terminated prior to the first day of the Change of Control employment period, the Company is obligated to pay the amounts referenced above, however, payments of the Executive's annual base salary would be payable over twelve months, in the case of Mr. Jackson and eighteen months in the case of Mr. Plumlee and Ms. Salvo with payment to be made at the same time that the Company pays other peer executives of the Company. "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 Securities Exchange Act of 1934, as amended (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 Corporation entitled to vote generally in the election of directors; (ii) individuals who, as of the date of the original employment agreements constitute the MicroFinancial Board, cease for any reason to constitute at least a majority of the MicroFinancial Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code, except with respect to any director who was approved by a vote of at least a majority of the directors then comprising the MicroFinancial Board; (iii) approval by the shareholders of the Corporation or, in the instance of proceedings for the Corporation pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of Common Stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors 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 or, in the instance of 26 proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Corporation of a complete liquidation or dissolution of the Corporation or the sale or other disposition of all or substantially all of the assets of the Corporation. DIRECTOR COMPENSATION The MicroFinancial Board is comprised of five Directors, two of whom, Peter Bleyleben and Richard F. Latour, are salaried employees of the Corporation who receive no additional compensation for services rendered as Directors. The members of the MicroFinancial Board who were not employees of the Corporation ("Non-Employee Directors") received stock options to purchase 50,000 shares of Common Stock in 1999 and stock options to purchase 50,000 shares of Common Stock in 2000 for their service on the MicroFinancial Board. In 2001, the Non-Employee Directors each received stock options to purchase 25,000 shares of Common Stock. In February 2002, the options granted in 2001 were voluntarily cancelled, and each of the Directors received new options to purchase 45,000 shares of Common Stock. In November 2002, the Non-Employee Directors each received stock options to purchase 50,000 shares of Common Stock. Directors also are reimbursed for out-of-state travel expenses incurred in connection with attendance at meetings of the MicroFinancial Board and committees thereof. In addition, the Corporation pays for health care insurance for each Non-Employee Director. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF DECEMBER 31, 2002
NUMBER OF SECURITIES TO NUMBER OF SECURITIES REMAINING BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE AVAILABLE FOR FUTURE ISSUANCE UNDER OF OUTSTANDING OPTIONS PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS (EXCLUDING PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS SECURITIES REFLECTED IN THE FIRST COLUMN) - ------------- ----------------------- ---------------------------- ----------------------------------------- Equity compensation plans approved by security holders................ 2,995,000 $7.849 1,125,380 Equity compensation plans not approved by security holders....... 0 $ 0 0
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information as of February 28, 2003 with respect to the beneficial ownership of Common Stock of each person known by the Corporation to be the beneficial owner of more than 5% of the 13,141,800 shares of Common Stock outstanding as of such date (not including treasury stock), each director and executive officer of the Corporation and all directors and executive officers of the Corporation 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 OUTSTANDING NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK - ------------------------------------ --------------------- ---------------------- Peter R. Bleyleben(2).......................... 1,532,910 11.5% 66 Norfolk Road Chestnut Hill, Massachusetts 02464 Torrence C. Harder(4).......................... 1,683,229 12.7% 675 Sudbury Road Concord, Massachusetts 01742 Brian E. Boyle(3).............................. 1,446,900 10.9% 11 Whispering Lane Weston, Massachusetts 02493
27
NUMBER OF SHARES PERCENTAGE OUTSTANDING NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK - ------------------------------------ --------------------- ---------------------- Wasatch Advisors, Inc.......................... 1,543,355 11.7% 150 Social Hall Avenue Salt Lake City, Utah 84111 Key Colony Fund, L.P.(5)....................... 689,300 5.2% 10825 Financial Centre Parkway Suite 100 Little Rock, Arkansas 72211 Royce & Associates, LLC........................ 701,700 5.3% 1414 Avenue of the Americas New York, New York 10019 Alan J. Zakon(6)............................... 131,500 * 32 Cardinal Lane Ocean Reef Club Key Largo, Florida 33037 Richard F. Latour(7)........................... 601,550 4.7% 11 Stillbrook Lane Mansfield, Massachusetts 02048 James R. Jackson, Jr.(8)....................... 85,558 * 6 Hickory Ridge Road Plaistow, New Hampshire 03865 John Plumlee(9)................................ 49,916 * 243 Pearl Street Manchester, New Hampshire 03104 Carol Salvo(10)................................ 64,916 * 3 Woodridge Road Medfield, Massachusetts 02052 Mark Belinsky(11).............................. 12,721 * 237 Strasser Avenue Westwood, Massachusetts 02090 All directors and executive officers as a group (11 persons)................................. 5,659,200 43.1%
- --------------- * 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 152,500 shares of Common Stock issuable upon the exercise of options issued to Dr. Bleyleben which vest on or before May 1, 2003. (3) Includes 91,500 shares of Common Stock issuable upon the exercise of options issued to Dr. Boyle which vest on or before May 1, 2003 and 10,700 shares of Common Stock held in the Brian E. Boyle Charitable Foundation, for which Dr. Boyle disclaims beneficial ownership. (4) Includes 91,500 shares of Common Stock issuable upon the exercise of options issued to Mr. Harder which vest on or before May 1, 2003; 92,200 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; 92,200 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; and 276,045 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. 28 (5) Alex R. Lieblong, Key Colony Fund, L.P., Key Colony Management LLC, Alex R. Lieblong IRA and Paul Spann filed a Schedule 13G with the Securities and Exchange Commission reporting that they held as a group 689,300 shares of Common Stock. In the Schedule 13G, Alex R. Lieblong reported that he had sole and shared voting and investment power over an aggregate of 689,300 shares held directly by him as well as the shares held by the Fund and the IRA; Key Colony Fund, L.P. reported that it had sole and shared voting and investment power over 668,900 shares held directly by it; Key Colony Management LLC reported that it had sole voting and investment power over the shares held by the Fund; Alex R. Lieblong IRA reported that it had sole voting and investment power over 4,100 shares held directly by it; and Paul Spann reported that he had sole voting and investment power over 16,900 shares held directly by him. All members of the group reported a business address as set forth in the table above. (6) Includes 91,500 shares of Common Stock issuable upon the exercise of options granted to Mr. Zakon which vest on or before May 1, 2003. (7) Includes 336,000 shares of Common Stock issuable upon the exercise of options granted to Mr. Latour which vest on or before May 1, 2003. (8) Consists of 85,558 shares of restricted stock over which Mr. Jackson has sole voting power. The stock may not be transferred by the executive until the shares are vested, and are forfeited if the executive leaves the employ of the Corporation other than for reason of death or disability. The restricted stock vested 20% upon grant, and vests 5% on the first day of each quarter after the grant date, with accelerated vesting if the price of the Corporation's Common Stock exceeds certain thresholds during the vesting period. (9) Consists of 49,916 shares of restricted stock over which Mr. Plumlee has sole voting power. The stock may not be transferred by the executive until the shares are vested, and are forfeited if the executive leaves the employ of the Corporation other than for reason of death or disability. The restricted stock vested 20% upon grant, and vests 5% on the first day of each quarter after the grant date, with accelerated vesting if the price of the Corporation's Common Stock exceeds certain thresholds during the vesting period. (10) Includes 49,916 shares of restricted stock over which Ms. Salvo has sole voting power. The stock may not be transferred by the executive until the shares are vested, and are forfeited if the executive leaves the employ of the Corporation other than for reason of death or disability. The restricted stock vested 20% upon grant, and vests 5% on the first day of each quarter after the grant date, with accelerated vesting if the price of the Corporation's Common Stock exceeds certain thresholds during the vesting period. Also includes 15,000 shares of Common Stock held jointly by Ms. Salvo and her husband over which Ms. Salvo shares voting and investment power with her husband. (11) Consists of 12,721 shares of restricted stock over which Mr. Belinsky has sole voting power. The stock may not be transferred by the executive until the shares are vested, and are forfeited if the executive leaves the employ of the Corporation other than for reason of death or disability. The restricted stock vested 20% upon grant, and vests 5% on the first day of each quarter after the grant date, with accelerated vesting if the price of the Corporation's Common Stock exceeds certain thresholds during the vesting period. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Dr. Bleyleben, the Chairman and a Director of the Corporation, loaned the Corporation $100,000 in the form of a term note on November 6, 2002, which matures on November 6, 2004 and bears interest at a rate of 7.5% per annum. Additionally, per the terms of the note, in the event of a payment default on the note, the interest rate will increase by 2 percentage points, for as long as the default goes uncured. On May 1, 2001 he also loaned $200,000 in the form of a subordinated note. This note matures on May 1, 2006 (with a one-year optional extension by the Corporation) and bears interest at a rate of 12% per annum. Mr. Boyle, a Director of the Corporation, loaned the Corporation $100,000 in the form of a term note on November 26, 2002, which matures on November 26, 2004 and bears interest at a rate of 7.5% per annum. 29 Additionally, per the terms of the note, in the event of a payment default on the note, the interest rate will increase by 2 percentage points, for as long as the default goes uncured. On May 1, 2001 he also loaned $200,000 in the form of a subordinated note. This note matures on May 1, 2006 (with a one-year optional extension by the Corporation) and bears interest at a rate of 12% per annum. Mr. Harder, a Director of the Corporation, loaned the Corporation $50,000 in the form of a term note on November 13, 2002 which matures on November 13, 2004 and bears interest at a rate of 7.5% per annum. Additionally, per the terms of the note, in the event of a payment default on the note, the interest rate will increase by 2 percentage points, for as long as the default goes uncured. On May 1, 2001 he also loaned $100,000 in the form of a subordinated note. This note matures on May 1, 2006 (with a one-year optional extension by the Corporation) and bears interest at a rate of 12% per annum. Mr. Latour President, Chief Executive Officer, Treasurer, Clerk, Secretary and Director of the Corporation loaned the Corporation $75,000 in the form of a subordinated note on May 1, 2001. The note matures on May 1, 2003 and bears interest at prime plus 3% per annum. On March 29, 1999, Ms. Ingrid Bleyleben, Dr. Bleyleben's mother, loaned the Corporation $200,000 in the form of a demand note at an interest rate per annum equal to a bank prime rate minus 1%. This note was repaid in full on May 16, 2002. On March 30, 1999, Fritz Froelich, Dr. Bleyleben's father-in-law, loaned the Corporation $85,000 in the form of a demand note at an interest rate per annum equal to a bank prime rate minus 1%. This note was repaid in full on February 20, 2002. On December 1, 1998, Mr. Froelich also loaned the Corporation $35,000 in the form of a subordinated note. This note matures on December 1, 2003 and bears interest at 8% per annum. All of the foregoing transactions are on terms at least as favorable as those that would have been obtained through arms-length negotiations. ITEM 14. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES Within 90 days before filing this report, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Our disclosure controls and procedures are the controls and other procedures that we designed to ensure that we record, process, summarize and report in a timely manner the information we must disclose in reports that we file with or submit to the SEC. Richard F. Latour, our President and Chief Executive Officer, and James R. Jackson, our Vice President and Chief Financial Officer, reviewed and participated in this evaluation. Based on this evaluation, Messrs. Richard F. Latour and James R. Jackson concluded that, as of the date of their evaluation, our disclosure controls were effective. INTERNAL CONTROLS During the fourth quarter, a system access control deficiency was identified. It was determined that this deficiency potentially provided the opportunity for certain employees to gain direct access to certain data tables stored in the Company's database. Management took immediate steps to eliminate this issue and utilized non-system controls, which have long been in place, to test that the information contained in the database had not been corrupted. No discrepancies were encountered. 30 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements MicroFinancial Incorporated's Financial Statements, together with the related Independent Auditors' Report, appear at pages F-1 through F-31 of this Form 10-K (2) None (3) Exhibits Index
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Articles of Organization, as amended(1) 3.2 Bylaws(1) 10.1 Standard Terms and Condition of Indenture, dated as of March 21, 2000 governing the MFI Finance Corp. I 7.375% Lease-Backed Notes, Series 2000-1 (the "2000-1 Notes") and the MFI Finance Corp. I 6.939% Lease-Backed Notes, Series 2000-2 (the "2000-2 Notes")(6) 10.2 Supplement to Indenture, dated March 21, 2000, governing the 2000-1 Notes(6) 10.3 Specimen 2000-1 Note(6) 10.4 Standard Terms and Conditions of Servicing governing the 2000-1 Notes(6) 10.5 Office Lease Agreement by and between WXI/AJP Real Estate Limited Partnership and Leasecomm Corporation dated, May 3, 2000, for facilities in Newark, California(7) 10.6 Fourth Amended and Restated Revolving Credit Agreement, dated August 22, 2000, among Leasecomm Corporation, the lenders parties thereto, and Fleet National Bank as agent(8) 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(1) 10.9** 1987 Stock Option Plan(1) 10.10** Forms of Grant under 1987 Stock Option Plan(1) 10.12** 1998 Equity Incentive Plan(3) 10.13*+ Employment Agreement between the Company and Peter R. Bleyleben 10.14*+ Employment Agreement between the Company and Richard F. Latour 10.15 Amended and Restated Standard Terms and Condition of Indenture dated as of September 2001 governing the MFI Finance Corp. I, 5.5800% Lease-Backed Notes, Series 2000-3 (the "2001-3 Notes")(9) 10.16 Supplement to Indenture dated September 2001 governing the 2001-3 Notes(9) 10.17 Specimen 2001-3 Note(9) 10.18 Standard Terms and Conditions of Servicing governing the 2001-3 Notes(9) 10.19 Standard Terms and Condition of Indenture dated as of September 2001 governing the MFI Finance Corp. II, LLC, 8.0000% Lease-Backed Notes, Series 2001-1 (the "2001-1 Notes")(9) 10.20 Supplement to Indenture dated September 2001 governing the 2001-1 Notes(9) 10.21 Specimen 2001-1 Note(9) 10.22 Standard Terms and Conditions of Servicing governing the 2001-1 Notes(9) 10.25 Commercial Lease, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated(3) 10.26 Amendment to Lease #1, dated November 3, 1998, between Cummings Properties Management, Inc. and MicroFinancial Incorporated(3) 10.30 Supplement to Indenture, dated December 1, 2000, governing the 2000-2 Notes(9) 10.31 Specimen, 2000-2 Notes(9)
31
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.33 Third Amended and Restated Revolving Credit Agreement, dated December 21, 1999, among Leasecomm Corporation, the lenders parties thereto, and BankBoston, N.A. as agent(5) 10.34 Fifth Amendment to Office Lease Agreement by and between MicroFinancial Incorporated and Leasecomm Corporation and Bay Colony Corporate Center LLC, dated June 29, 1999, for facilities in Waltham, Massachusetts(5) 10.40*+ Employment Agreement between the Company and John Plumlee 10.41*+ Employment Agreement between the Company and Carol Salvo 10.42*+ Employment Agreement between the Company and James R. Jackson, Jr. 10.43*+ Employment Agreement between the Company and Stephen Constantino 10.44* Employment Agreement between the Company and Steven LaCreta 21.1 Subsidiaries of Registrant 23.1* Consent of Deloitte & Touche LLP 99.1* Certification of Chief Executive Officer Regarding Annual Report on Form 10-K for the Year Ended December 31, 2002 99.2* Certification of Chief Financial Officer Regarding Annual Report on Form 10-K for the Year Ended December 31, 2002
- --------------- * Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 14(c) of this Report. (1) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on June 9, 1998. (2) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on August 3, 1998. (3) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Amendment No. 2 to Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on January 11, 1999. (4) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Amendment No. 3 to Registration Statement on Form S-1 (Registration Statement No. 333-56639) filed with the Securities and Exchange Commission on February 4, 1999. (5) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 30, 2000. (6) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on May 22, 2000. (7) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on August 14, 2000. (8) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2000. (9) Incorporated by reference to the Exhibit with the same exhibit number in the Registrant's Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission on November 14, 2001. (b) One report on Form 8-K was filed on October 11, 2002 disclosing other events, a second report on Form 8-K was filed on October 31, 2002 to discuss the third quarter results and a third report on 32 Form 8-K was filed on March 11, 2003, to announce the results for the year ended December 31, 2003. A fourth report on Form 8-K was filed on March 19, 2003 disclosing other events. (c) See (a)(3) above. (d) None. 33 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MICROFINANCIAL INCORPORATED By: /s/ RICHARD F. LATOUR ------------------------------------ President and Chief Executive Officer By: /s/ JAMES R. JACKSON JR. ------------------------------------ Vice President and Chief Financial Officer Date: April 15, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ PETER R. BLEYLEBEN Chairman of the Board of Directors April 15, 2003 --------------------------------------------- Peter R. Bleyleben /s/ RICHARD F. LATOUR President, Chief Executive Officer, April 15, 2003 --------------------------------------------- Treasurer, Clerk, Secretary and Richard F. Latour Director /s/ JAMES R. JACKSON JR. Vice President and Chief Financial April 15, 2003 --------------------------------------------- Officer James R. Jackson Jr. /s/ BRIAN E. BOYLE Director April 15, 2003 --------------------------------------------- Brian E. Boyle /s/ TORRENCE C. HARDER Director April 15, 2003 --------------------------------------------- Torrence C. Harder /s/ ALAN J. ZAKON Director April 15, 2003 --------------------------------------------- Alan J. Zakon
34 CERTIFICATION I, Richard F. Latour, certify that: 1. I have reviewed this annual report on Form 10-K of MicroFinancial Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ RICHARD F. LATOUR -------------------------------------- Richard F. Latour President and Chief Executive Officer Date: April 15, 2003 35 CERTIFICATION I, James R. Jackson Jr., certify that: 1. I have reviewed this annual report on Form 10-K of MicroFinancial Incorporated; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ JAMES R. JACKSON JR. -------------------------------------- James R. Jackson Jr. Vice President and Chief Financial Officer Date: April 15, 2003 36 MICROFINANCIAL INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2 Financial Statements: Consolidated Balance Sheets as of December 31, 2001 and 2002...................................................... F-3 Consolidated Statements of Operations for the Years Ended December 31, 2000, 2001, and 2002......................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2000, 2001, and 2002............. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 2001, and 2002......................... F-6 Notes to Consolidated Financial Statements.................. F-8
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of MicroFinancial Incorporated: We have audited the accompanying consolidated balance sheets of MicroFinancial Incorporated and subsidiaries (the "Company") as of December 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of MicroFinancial Incorporated and subsidiaries as of December 31, 2001 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts April 15, 2003 F-2 MICROFINANCIAL INCORPORATED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- 2001 2002 --------- -------- (IN THOUSANDS, EXCEPT SHARE DATA) ASSETS Net investment in leases and loans: Receivables due in installments........................... $ 399,361 $334,623 Estimated residual value.................................. 37,114 30,754 Initial direct costs...................................... 7,090 4,891 Loans receivable.......................................... 2,248 1,796 Less: Advance lease payments and deposits.................... (287) (96) Unearned income........................................ (104,538) (67,574) Allowance for credit losses............................ (45,026) (69,294) --------- -------- Net investment in leases and loans.......................... $ 295,962 $235,100 Investment in service contracts............................. 14,126 14,463 Cash and cash equivalents................................... 146 5,494 Restricted cash............................................. 20,499 18,516 Property and equipment, net................................. 16,034 9,026 Income taxes receivable..................................... -- 8,652 Other assets................................................ 14,961 3,834 --------- -------- Total assets...................................... $ 361,728 $295,085 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable............................................... $ 203,053 $168,927 Subordinated notes payable.................................. 3,262 3,262 Capitalized lease obligations............................... 833 471 Accounts payable............................................ 2,517 3,840 Dividends payable........................................... 642 -- Other liabilities........................................... 6,182 6,776 Income taxes payable........................................ 4,211 1,400 Deferred income taxes payable............................... 30,472 23,806 --------- -------- Total liabilities................................. 251,172 208,482 --------- -------- Commitments and contingencies (Note I)...................... -- -- Stockholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued at 12/31/01 and 12/31/02....... -- -- Common stock, $.01 par value; 25,000,000 shares authorized; 13,410,646 shares issued at 12/31/01 and 12/31/02............................................... 134 134 Additional paid-in capital................................ 47,723 47,723 Retained earnings......................................... 69,110 45,089 Treasury stock (588,700 shares of common stock at 12/31/01 and 12/31/02), at cost................................. (6,343) (6,343) Notes receivable from officers and employees.............. (68) -- --------- -------- Total stockholders' equity........................ 110,556 86,603 --------- -------- Total liabilities and stockholders' equity........ $ 361,728 $295,085 ========= ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2000 2001 2002 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) Revenues: Income on financing leases and loans...................... $ 69,847 $ 70,932 $ 53,012 Income on service contracts............................... 8,687 8,665 9,734 Rental income............................................. 27,638 37,664 37,154 Loss and damage waiver fees............................... 6,034 6,344 6,257 Service fees and other.................................... 27,271 30,486 20,665 -------- -------- -------- Total revenues.................................... 139,477 154,091 126,822 -------- -------- -------- Expenses: Selling, general and administrative....................... 38,371 44,899 45,535 Provision for credit losses............................... 38,912 54,092 88,948 Depreciation and amortization............................. 10,227 14,378 18,385 Interest.................................................. 15,858 14,301 10,787 -------- -------- -------- Total expenses.................................... 103,368 127,670 163,655 -------- -------- -------- Income (loss) before provision for income taxes............. 36,109 26,421 (36,833) Provision (benefit) for income taxes........................ 15,249 10,104 (14,735) -------- -------- -------- Net income (loss)........................................... $ 20,860 $ 16,317 $(22,098) ======== ======== ======== Net income (loss) per common share -- basic................. $ 1.64 $ 1.28 $ (1.72) ======== ======== ======== Net income (loss) per common share -- diluted............... $ 1.63 $ 1.26 $ (1.72) ======== ======== ======== Dividends per common share.................................. $ 0.175 $ 0.195 $ 0.150 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-4 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
NOTES COMMON STOCK ADDITIONAL TREASURY STOCK RECEIVABLE TOTAL ------------------- PAID-IN RETAINED ------------------ FROM STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT OFFICERS EQUITY ---------- ------ ---------- -------- -------- ------- ---------- ------------- (IN THOUSANDS, EXCEPT SHARE DATA) Balance at December 31, 1999..................... 13,347,726 $133 $47,920 $ 36,656 667,790 $(5,777) $ (94) $ 78,838 Exercise of stock options.................. 62,920 1 118 119 Common stock dividends..... (2,225) (2,225) Treasury stock repurchased.............. 164,100 (1,595) (1,595) Treasury stock retired..... (138) (162,190) 138 -- Notes receivable from officers and employees... 26 26 Net income................. 20,860 20,860 ---------- ---- ------- -------- -------- ------- ----- -------- Balance at December 31, 2000..................... 13,410,646 $134 $47,900 $ 55,291 669,700 $(7,234) $ (68) $ 96,023 Exercise of stock options, net of tax benefit....... (177) (96,000) 1,037 860 Common stock dividends..... (2,498) (2,498) Treasury stock repurchased.............. 15,000 (146) (146) Net income................. 16,317 16,317 ---------- ---- ------- -------- -------- ------- ----- -------- Balance at December 31, 2001..................... 13,410,646 $134 $47,723 $ 69,110 588,700 $(6,343) $ (68) $110,556 Common stock dividends..... (1,923) (1,923) Notes receivable from officers and employees... 68 68 Net loss................... (22,098) (22,098) ---------- ---- ------- -------- -------- ------- ----- -------- Balance at December 31, 2002..................... 13,410,646 $134 $47,723 $ 45,089 588,700 $(6,343) $ 0 $ 86,603 ========== ==== ======= ======== ======== ======= ===== ========
The accompanying notes are an integral part of the consolidated financial statements. F-5 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2000 2001 2002 --------- --------- --------- (IN THOUSANDS) Cash flows from operating activities: Cash received from customers............................ $ 174,501 $ 185,939 $ 175,859 Cash paid to suppliers and employees.................... (34,405) (44,060) (41,573) Cash paid for income taxes.............................. (9,726) (6,767) (3,829) Interest paid........................................... (15,649) (14,186) (10,222) Interest received....................................... 1,639 1,354 393 --------- --------- --------- Net cash provided by operating activities............ 116,360 122,280 120,628 --------- --------- --------- Cash flows from investing activities: Investment in lease contracts........................... (141,076) (92,118) (66,042) Investment in inventory................................. -- (4,198) (2,989) Investment in direct costs.............................. (7,812) (5,200) (4,150) Investment in service contracts......................... (4,138) (6,658) (6,773) Investment in Resource Leasing Corporation.............. (2,800) (6,900) -- Investment in fixed assets.............................. (2,354) (1,722) (255) Repayment of notes from officers........................ 25 -- 68 Investment in notes receivable.......................... (117) (70) -- Repayment of notes receivable........................... 325 6 -- --------- --------- --------- Net cash used in investing activities................ (157,947) (116,860) (80,141) --------- --------- --------- Cash flows from financing activities: Proceeds from secured debt.............................. 195,917 84,750 33,521 Repayment of secured debt............................... (123,075) (90,839) (66,672) Proceeds from refinancing of secured debt............... 473,118 515,897 490,000 Prepayment of secured debt.............................. (488,118) (509,555) (490,100) Proceeds from short-term demand notes payable........... 259 902 305 Repayment of short-term demand notes payable............ (983) (93) (1,181) Proceeds from issuance of subordinated debt............. -- 2,975 -- Repayment of subordinated debt.......................... (4,500) (4,500) -- (Increase) decrease in restricted cash.................. (5,401) (7,372) 1,983 Proceeds from exercise of common stock options.......... 119 810 -- Repayment of capital leases............................. (494) (505) (430) Purchase of treasury stock.............................. (1,595) (146) -- Payment of dividends.................................... (2,166) (2,428) (2,565) --------- --------- --------- Net cash provided by (used in) financing activities......................................... 43,081 (10,104) (35,139) --------- --------- --------- Net increase in cash and cash equivalents................. 1,494 (4,684) 5,348 Cash and cash equivalents, beginning of period............ 3,336 4,830 146 --------- --------- --------- Cash and cash equivalents, end of period.................. $ 4,830 $ 146 $ 5,494 ========= ========= =========
(Continued) The accompanying notes are an integral part of the consolidated financial statements. F-6 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, --------------------------------- 2000 2001 2002 --------- --------- --------- (IN THOUSANDS) Reconciliation of net income to net cash provided by operating activities: Net income (loss)......................................... $ 20,860 $ 16,317 $(22,098) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 10,227 14,378 18,385 Provision for credit losses............................ 38,912 54,092 88,948 Recovery of equipment cost and residual value, net of revenue recognized................................... 40,288 34,685 49,046 Increase (decrease) in income taxes payable............ (1,211) 1,878 (2,811) Increase in income taxes receivable.................... -- -- (8,652) Increase (decrease) in deferred income taxes........... 6,480 1,472 (6,666) Changes in assets and liabilities: Decrease (increase) in other assets.................. (934) (1,200) 3,124 Increase (decrease) in accounts payable.............. 1,267 (129) 1,323 Increase in accrued liabilities...................... 471 787 29 -------- -------- -------- Net cash provided by operating activities.............. $116,360 $122,280 $120,628 ======== ======== ======== Supplemental disclosure of noncash activities: Property acquired under capital leases.................... $ 109 $ 479 $ 68 ======== ======== ======== Accrual of common stock dividends......................... $ 573 $ 642 $ -- ======== ======== ========
(Concluded) The accompanying notes are an integral part of the consolidated financial statements. F-7 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (TABLES IN THOUSANDS, EXCEPT SHARE AND 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 primarily leases and rents "microticket" equipment and provides other financing services in amounts generally ranging from $400 to $15,000 with an average amount financed of approximately $1,500 and an average lease term of 44 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 funded its operations primarily through borrowings under its credit facilities, issuances of subordinated debt and on balance sheet securitizations. MicroFinancial incurred net losses of $22.1 million for the year ended December 31, 2002. The net losses incurred by the Company during the third and fourth quarters caused the Company to be in default of certain debt covenants in its credit facility and securitization agreements. In addition, as of September 30, 2002, the Company's credit facility failed to renew and consequently, the Company was forced to suspend new origination activity as of October 11, 2002. On April 14, 2003, the Company entered into a long-term agreement with its lenders. This long-term agreement waives the defaults described above, and in consideration for this waiver, requires the outstanding balance of the loan to be repaid over a term of 22 months beginning in April 2003 at an interest rate of prime plus 2.0%. The Company received a waiver, which was set to expire on April 15, 2003, for the covenant violations in connection with the securitization agreement. Subsequently, the Company received a permanent waiver of the covenant defaults and the securitization agreement was amended so that going forward, the covenants are the same as those contained in the long-term agreement entered into on April 14, 2003, for the senior credit facility. To date, the Company has fulfilled all of its debt obligations, as agreed to by the bank group, in a timely manner. In an effort to improve its financial position, MicroFinancial has taken certain steps including the engagement of a financial and strategic advisory firm, Triax Capital Advisors, LLC. Management and its advisors are actively considering various financing, restructuring and strategic alternatives as well as continuing to work closely with the Company's lenders to obtain long-term agreements. In addition, Management has taken steps to reduce overhead, including a reduction in headcount from 380 to 203. Leasecomm Corporation periodically finances its lease and service contracts, together with unguaranteed residuals, through securitizations using special purpose vehicles. MFI Finance Corporation I and MFI Finance Corporation II, LLC are special purpose companies. The assets of such special purpose vehicles and cash collateral or other accounts created in connection with the financings in which they participate are not available to pay creditors of Leasecomm Corporation, MicroFinancial Incorporated, or other affiliates. While Leasecomm Corporation generally does not sell its interests in leases, service contracts or loans to third parties after origination, the Company does, from time to time, contribute certain leases, service contracts, or loans to special-purpose entities for purposes of obtaining financing in connection with the related receivables. The contribution of such assets under the terms of such financings are intended to constitute "true sales" of such assets for bankruptcy purposes (meaning that such assets are legally isolated from Leasecomm Corporation). However, the special purpose entities to which such assets are contributed are not "qualifying special purpose entities" within the meaning Statement of Financial Accounting Standards ("SFAS") SFAS No. 140, and are required under generally accepted accounting principles to be consolidated in the financial statements of the Company. As a result, such assets and the related liability remain on the balance sheet and do not receive gain on sale treatment. F-8 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, 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 amounts of revenues and expenses during the reported period. A significant area requiring the use of management estimates is the Allowance for credit losses. 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. RESTRICTED CASH As part of its servicing obligation under the securitizations agreements, the Company collects cash receipts for financing contracts that have been pledged to special purpose entities, specifically MFI Finance Corporation I and MFI Finance Corporation II, LLC. These collections are segregated into separate accounts for the benefit of the entities to which the related contracts were pledged or sold and are remitted to such entities on a weekly basis. 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. Unamortized unearned lease income and initial direct costs are written off 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 occurs: (i) the obligor files for bankruptcy; (ii) the obligor dies, and the equipment is returned; or (iii) an account has become 360 days past due without contact with the lessee. 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 interest 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. F-9 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Loans are reported at their outstanding principal balances. 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 current 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. 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, which is seven years. Income on service contracts is recognized monthly 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 At the end of the lease term, the lease typically converts into a month-to-month rental contract. 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, restricted cash, net investment in leases and loans, accounts payable, and other liabilities, it is assumed that the carrying amount approximates fair value. DERIVATIVE FINANCIAL INSTRUMENTS On January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended by SFAS No. 138. SFAS No. 133, as amended, requires that all derivative instruments be measured at fair value and recognized in the consolidated balance sheet as either assets or liabilities. The Company has assessed the effects of SFAS No. 133 and has determined that the adoption of SFA No. 133 does not have a material impact on its results of operations or consolidated financial position. The Company did not hold any derivative instruments at either December 31, 2001 or 2002. DEBT ISSUE COSTS Debt issuance costs incurred in securing credit facility financing are capitalized and subsequently amortized over the term of the credit facility. F-10 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NEW ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations." SFAS No. 141 addresses financial accounting and reporting for business combinations and amends or supersedes a number of interpretations concerning business combinations. SFAS No. 141 requires companies to use the purchase method of accounting for all business combinations, whereas previous interpretations provided for the use of another method (pooling-of-interests method) if certain criteria were met. This statement also amends the recognition policies of intangible assets and goodwill and provides for additional disclosure requirements for business combinations. The Company has determined that the adoption of this Statement does not have a material impact on its results of operations or consolidated financial position. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". This statement supersedes APB Opinion No. 17, "Intangible Assets" ("APB No. 17") and addresses financial accounting and reporting for intangible assets, but not those acquired in a business combination at acquisition. SFAS No. 142 addresses financial accounting and reporting of goodwill and other intangible assets subsequent to their acquisition, assigning a definite or indefinite useful life to these assets. Goodwill and other intangible assets having an indefinite useful life will not be amortized, but rather tested at least annually for impairment. It also provides guidance on how to define, measure and record impairment losses on goodwill and other intangible assets and provides for additional disclosures regarding these assets in years subsequent to their acquisition. The Company has determined that the adoption of this Statement does not have a material impact on its results of operations or consolidated financial position. In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement Obligations." SFAS No. 143 provides new accounting standards for recording of liabilities related to legal obligations to retire tangible long-lived assets. The Statement requires an entity to recognize at fair value a liability associated with an asset retirement obligation in the period in which the liability is both incurred and in which the fair value is determinable. The provisions of this Statement are effective for the Company's fiscal year ended December 31, 2003, although earlier application is permitted. The Company has determined that the adoption of this Statement does not have a material impact on its results of operations or consolidated financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of a long-lived asset or group of assets. This pronouncement, which supersedes and amends several earlier interpretations, establishes a single comprehensive statement to provide impairment accounting guidance for tangible long-lived assets to be either held and continued to be used by the entity or disposed of by sale or by some other means. The Company has determined that the adoption of this Statement does not have a material impact on its results of operations or consolidated financial position. On January 1, 2002, the Company adopted the provisions of Statement of Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. The SOP was effective for financial statements issued for the fiscal year beginning after F-11 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) December 15, 2001. The Company has determined that the adoption of this SOP does not have a material impact on its results of operations or consolidated financial position. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64 and Technical Corrections." This Statement which rescinds and amends several statements, improves financial reporting for extinguishment of debt, modifies the accounting for certain leasing transactions, and makes various technical corrections to existing pronouncements. The Statement requires the gains and losses from the extinguishment of debt to be classified as extraordinary items only if they meet the criteria in APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Also, the Statement requires that the accounting treatment of certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. The Company has determined that the adoption of this Statement does not have a material impact on its results of operations or consolidated financial position. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." This statement requires an entity to recognize and measure initially at fair value a liability for a cost associated with an exit or disposal activity, when the liability is incurred. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002 although earlier adoption is permitted. The Company has determined that the adoption of this Statement does not have a material impact on its historical financial statements. In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain Financial Institutions." SFAS 147 addresses the financial accounting and reporting for the acquisition of all or part of a financial institution except for a transaction between two or more mutual enterprises. In addition, this statement removes acquisitions of financial institutions, other than transactions between two or more mutual enterprises, from the scope of FASB Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions," and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method." SFAS 147 clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill. The provisions of this Statement were effective on October 1, 2002. The Company has determined that the adoption of this Statement does not have a material impact on its results of operations or consolidated financial position. In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure, an amendment of FASB Statement No. 123." This statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has adopted the disclosure provisions under SFAS 148, but does not intend to adopt the fair value method. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities an interpretation of ARB No. 51." This interpretation clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements to certain entities in which equity investors do not have the characteristic of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The F-12 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Company has determined that the adoption of the provisions under FIN 46 does not have a material impact on its results of operations or consolidated financial position. RECLASSIFICATION OF PRIOR YEAR BALANCES Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current presentation. NET INCOME (LOSS) PER COMMON SHARE Basic net income per common share is computed based on the weighted-average number of common shares outstanding during the period. Dilutive net income per common share gives effect to all dilutive potential common shares outstanding during the period. 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. Options to purchase 830,000 and 440,609 shares of common stock were not included in the computation of diluted earnings per share for the years ended December 31, 2000 and 2001, respectively, because their effects were antidilutive. Stock options were excluded from the computation of dilutive earnings per share for the year ended December 31, 2002, because their inclusion would have had an antidilutive effect on earnings per share.
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2000 2001 2002 ----------- ----------- ----------- Net income (loss)............................. $ 20,860 $ 16,317 $ (22,098) ----------- ----------- ----------- Shares used in computation: Weighted-average common shares outstanding used in computation of net income per common share................ 12,728,441 12,789,605 12,821,946 Dilutive effect of common stock options................................ 79,373 155,638 -- ----------- ----------- ----------- Shares used in computation of net income per common share -- assuming dilution........... 12,807,814 12,945,243 12,821,946 =========== =========== =========== Net income (loss) per common share -- basic... $ 1.64 $ 1.28 $ (1.72) =========== =========== =========== Net income (loss) per common share -- diluted..................................... $ 1.63 $ 1.26 $ (1.72) =========== =========== ===========
STOCK-BASED EMPLOYEE COMPENSATION 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. The Company follows the disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires that compensation under a fair value method be determined using the Black-Scholes option-pricing model and disclosed in a pro forma effect on earnings and earnings per share. The Company accounts for stock-based employee compensation plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as either all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant or options granted that result in a variable compensation costs had an exercise price greater than the fair market value of the underlying common stock on December 31, 2002. The methodology used to calculate the fair value of stock-based employee compensation is described more fully in Note G. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value F-13 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
YEAR ENDED DECEMBER 31 ---------------------------- 2000 2001 2002 ------- ------- -------- Net income (loss), as reported......................... $20,860 $16,317 $(22,098) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects................... (932) (1,305) (1,475) ------- ------- -------- Pro forma net income (loss)............................ 19,928 15,012 (23,573) ======= ======= ======== Earnings (loss) per share: Basic -- as reported................................... $ 1.64 $ 1.28 $ (1.72) ======= ======= ======== Basic -- pro forma..................................... $ 1.57 $ 1.17 $ (1.84) ======= ======= ======== Diluted -- as reported................................. $ 1.63 $ 1.26 $ (1.72) ======= ======= ======== Diluted -- pro forma................................... $ 1.56 $ 1.16 $ (1.84) ======= ======= ========
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.
2000 2001 2002 ------- ------- ------- Risk-free interest rate................................... 6.50% 5.03% 3.63% Expected dividend yield................................... 1.37% 2.50% 0.80% Expected life............................................. 7 years 7 years 7 years Volatility................................................ 55.00% 51.00% 68.00%
The weighted-average fair value at the date of grant for options granted during 2000, 2001, and 2002 approximated $5.45, $5.34, $2.03 per option, respectively. C. NET INVESTMENT IN LEASES AND LOANS At December 31, 2002, future minimum payments on the Company's lease receivables are as follows:
FOR THE YEAR ENDED DECEMBER 31, - ------------------ 2003........................................................ $233,820 2004........................................................ 60,645 2005........................................................ 32,258 2006........................................................ 7,426 2007........................................................ 474 -------- Total....................................................... $334,623 ========
At December 31, 2002, the weighted-average remaining life of leases in the Company's lease portfolio is approximately 26 months and the implicit rate of interest is approximately 34.4%. The Company's business is characterized by a high incidence of delinquencies that 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 loss experience, current economic F-14 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) conditions and other relevant factors. The Company provides an allowance for credit losses for leases which are considered impaired. The Company takes charge-offs against its receivables when such receivables are 360 days past due and no contact has been made with the lessee for 12 months. Cumulative net charge-offs after recoveries from the Company's inception to December 31, 2002 have totaled 12.60% of total cumulative receivables plus total billed fees over such period. The following table sets forth the Company's allowance for credit losses as of December 31, 2000, 2001, and 2002 and the related provisions, charge-offs and recoveries for the years ended December 31, 2000, 2001, and 2002. Balance at December 31, 1999................................ $41,719 Provision for leases and loans credit losses................ 36,029 Provision for other asset credit losses..................... 2,883 Total provisions for credit losses................ 38,912 Charge-offs (including $1,064 in other asset charge-offs)... 57,145 Recoveries.................................................. 19,257 ------ Charge-offs, net of recoveries.................... 37,888 ------- Balance of allowance for credit losses at December 31, 2000...................................................... $40,924 ------- Balance of other asset reserve at December 31, 2000......... $ 1,819 ------- Provision for leases and loans credit losses................ 54,092 Total provisions for credit losses................ 54,092 Charge-offs (including $1,418 in other asset charge-offs)... 68,882 Recoveries.................................................. 17,474 ------ Charge-offs, net of recoveries.................... 51,408 ------- Balance of allowance for credit losses at December 31, 2001...................................................... $45,026 ------- Balance of other asset reserve at December 31, 2001......... $ 401 ------- Provision for leases and loans credit losses................ 88,948 Total provisions for credit losses................ 88,948 Charge-offs (including $401 in other asset charge-offs)..... 76,844 Recoveries.................................................. 11,763 ------ Charge-offs, net of recoveries.................... 65,081 ------- Balance of allowance for credit losses at December 31, 2002...................................................... $69,294 ======= Balance of other asset reserve at December 31, 2002......... $ -- =======
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, 2000, 2001, and 2002 and changes in the Company's estimated residual F-15 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) value as a result of new originations, and lease terminations for the years ended December 31, 2000, 2001, and 2002. Balance of Estimated Residual Value at December 31, 2000.... $ 35,368 New Originations............................................ 15,052 Lease Terminations.......................................... (13,306) Balance of Estimated Residual Value at December 31, 2001.... $ 37,114 New Originations............................................ 10,254 Lease Terminations.......................................... (16,614) Balance of Estimated Residual Value at December 31, 2002.... $ 30,754
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 or (iii) that has been charged off by the Company. D. PROPERTY AND EQUIPMENT At December 31, 2001 and 2002, property and equipment consisted of the following:
DECEMBER 31, ----------------- 2001 2002 ------- ------- Rental Equipment and Inventory.............................. $19,196 $15,751 Computer Equipment.......................................... 7,251 7,072 Office Equipment............................................ 1,525 1,278 Leasehold improvements...................................... 381 154 ------- ------- 28,353 24,255 Less accumulated depreciation and amortization.............. 12,319 15,229 ------- ------- Total....................................................... $16,034 $ 9,026 ======= =======
Depreciation and amortization expense totaled $10,227,000, $14,378,000, and $18,385,000 for the years ended December 31, 2000, 2001, and 2002, respectively. At December 31, 2001 and 2002, computer equipment includes $1,793,000 and $1,650,000 respectively, under capital leases. Accumulated amortization related to capital leases amounted to $988,000 and $1,186,000 in 2001 and 2002, respectively. E. NOTES PAYABLE AND SUBORDINATED DEBT NOTES PAYABLE On December 21, 1999, the Company entered into a revolving line of credit and term loan facility with a group of financial institutions whereby it may borrow a maximum of $150,000,000 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 the prevailing rate per annum as offered in the interbank Eurodollar market (Eurodollar) plus 1.75% for Eurodollar Loans. If the Eurodollar loans are not renewed upon their maturity they automatically convert into prime rate loans. On August 22, 2000, the revolving line of credit and term loan facility was amended and restated whereby the Company may now borrow a maximum of $192,000,000 based upon qualified lease receivables, loans, rentals and service contracts. Outstanding borrowings with F-16 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respect to the revolving line of credit bear interest based either at Prime minus 0.25% for Prime Rate Loans or the prevailing rate per annum as offered in the London Interbank Offered Rate (LIBOR) plus 1.75% for LIBOR Loans or the seven-day Money Market rate plus 2.00% for Swing Line Advances. If the LIBOR loans are not renewed upon their maturity they automatically convert into prime rate loans. The Swing Line Advances have a seven-day maturity, and upon their maturity they automatically convert into prime rate loans. In addition, the Company's aggregate outstanding principal amount of Swing Line Advances shall not exceed $10 million. The prime rates at December 31, 2000, 2001, and 2002 were 9.50%, 4.75%, and 4.25% respectively. The 90-day LIBOR rates at December 31, 2001 and 2002 were 1.938% and 1.40% respectively. The 7-day Money Market Rates at December 31, 2001 was 1.88%. At December 31, 2001 and 2002, the Company had borrowings outstanding under this agreement with the following terms:
2001 2002 ----------------- ----------------- TYPE RATE AMOUNT RATE AMOUNT - ---- ------ -------- ------ -------- Prime.......................................... 4.5000% $ 4,640 4.7500% $ 31,556 LIBOR.......................................... 3.8750% 100,000 4.1875% 50,000 LIBOR.......................................... 4.1875% 45,000 -------- -------- Total Outstanding......................... $104,640 $126,556 ======== ========
Outstanding borrowings are collateralized by leases, loans, rentals, and service contracts pledged specifically to the financial institutions. As of September 30, 2002 the revolving credit line failed to renew and the Company has been paying down the balance on the basis of a 36 month amortization plus interest. Based on the terms of the agreement, interest rates increased from Prime minus 0.25% to Prime plus 0.50% for prime based loans and from LIBOR plus 1.75% to LIBOR plus 2.50% for LIBOR based loans. In addition, based on the covenant defaults described below, the outstanding borrowings on all loans bear an additional 2.00% default interest. On January 3, 2003, the Company entered into a Forbearance and Modification Agreement for the senior credit facility which expired on February 7, 2003. Based on the terms of the Forbearance and Modification Agreement, interest rates increased again on the prime based loans to prime plus 1.00%. At December 31, 2002, the Company was in default of certain of its debt covenants in its senior credit facility. The covenants that were in default with respect to the senior credit facility require that the Company maintain a fixed charge ratio in an amount not less than 130% of consolidated earnings, a consolidated tangible net worth minimum of $77.5 million plus 50% of net income quarterly beginning with September 30, 2000 and compliance with the borrowing base. On April 14, 2003, the Company entered into a long-term agreement with its lenders. This long-term agreement waives the defaults described above, and in consideration for this waiver, requires the outstanding balance of the loan to be repaid over a term of 22 months beginning in April 2003 at an interest rate of prime plus 2.0%. Based on the amortization schedule in the new agreement, the Company is obligated to repay a minimum of $54 million, plus applicable interest, over the next twelve months. BLT III had three series of notes, the 1996-A Notes, the 1997-A Notes and the 1998-A Notes. In May 1996, BLT III issued the 1996-A Notes in aggregate principal amount of $23,406,563. In August 1997, BLT III issued the 1997-A Notes in aggregate principal amount of $44,763,000 and in November 1998, BLT III issued the 1998-A Notes in aggregate principal amount of $40,769,000. All outstanding amounts under the 1996-A Notes were repaid in October 1999. All outstanding amounts under the 1997-A Notes were repaid in September 2000. All outstanding amounts under the 1998-A notes were repaid in September 2001. MFI I has three series of notes, the 2000-1 Notes, the 2000-2 Notes, and the 2001-3 Notes. In March 2000, MFI I issued the 2000-1 Notes in aggregate principal amount of $50,056,686. In December 2000, MFI I issued the 2000-2 Notes in aggregate principal amount of $50,561,633. In September 2001, MFI I issued the 2001-3 F-17 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes in aggregate principal amount of $39,397,354. Outstanding borrowings are collateralized by a specific pool of lease receivables. In September 2001, MFI II, LLC was formed and issued one series of notes, the 2001-1 Notes in aggregate principal amount of $10,000,000. Outstanding borrowings are collateralized by a specific pool of lease receivables as well as the excess cash flow from the MFI I collateral. These notes are subordinated to the three series of notes issued by MFI I. At December 31, 2002, the Company was in default on two of its debt covenants in its securitization agreements. The convenants that were in default with respect to the securitization agreements require that the Company maintain a fixed charge ratio in an amount not less than 125% of consolidated earnings and a consolidated tangible net worth greater than $90 million plus 50% of net income for each fiscal quarter after June 30, 2001. Additionally per the terms of the securitization agreement, any default with respect to the senior credit facility is considered a default under the terms of the agreement. The Company received a waiver, which was set to expire on April 15, 2003, for the covenant violations in connection with the securitization agreement. Subsequently, the Company received a permanent waiver of the covenant defaults and the securitization agreement was amended so that going forward, the covenants are the same as those contained in the long-term agreement entered into on April 14, 2003, for the senior credit facility. At December 31, 2002, MFI I and MFI II, LLC had borrowings outstanding under the series of notes with the following terms:
NOTE SERIES EXPIRATION RATE AMOUNT - ----------- ---------- ---- ------- MFI I 2000-1 Notes............................................. 9/16/2005 7.38% $ 3,464 2000-2 Notes............................................. 6/16/2006 6.94% 17,983 2001-3 Notes............................................. 2/18/2008 5.58% 17,019 MFI II LLC 2001-1 Notes............................................. 2/18/2008 8.00% 3,625 ------- Total Outstanding................................... $42,091 =======
At December 31, 2001, MFI I and MFI II, LLC had borrowings outstanding under the series of notes with the following terms:
NOTE SERIES EXPIRATION RATE AMOUNT - ----------- ---------- ---- ------- MFI I 2000-1 Notes............................................. 9/16/2005 7.38% $19,855 2000-2 Notes............................................. 6/16/2006 6.94% 34,518 2001-3 Notes............................................. 2/18/2008 5.58% 34,160 MFI II LLC 2001-1 Notes............................................. 2/18/2008 8.00% 8,725 ------- Total Outstanding................................... $97,258 =======
At December 31, 2001 and 2002, the Company also had other notes payable which totaled $1,155,000 and $280,000 respectively. Of these notes, at December 2001 and 2002, $339,000 and $30,000 respectively, are notes that are due on demand and bear interest at a rate of prime less 1.00%. As of December 31, 2002, $250,000 are two-year term notes that carry an interest of 7.5%. As of December 31, 2001, the Company had $816,000 of notes which were borrowed against the cash surrender value of the life insurance policies held on key officers. These notes were all repaid as of December 31, 2002. Other notes payable included amounts due F-18 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) to stockholders and directors of the Company at December 31, 2001 and 2002 of $309,000 and $250,000. Interest paid to stockholders under such notes was not material for the years ended December 31, 2001 and 2002. SUBORDINATED NOTES PAYABLE At December 31, 2001 and 2002, the Company also had subordinated debt outstanding amounting to $3,262,000. This debt is subordinated in the rights to the Company's assets to notes payable to the primary lenders as described above. Outstanding borrowings bear interest ranging from 8% to 12.5% for fixed rate financing and prime plus 3% to 4% for variable rate financing. These notes have maturity dates ranging from May 2003 to November 2007. The Company had 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 $6,743,108, net of a discount of $756,892 which was amortized over the life of the note. This senior note required annual payments of $1,500,000 commencing on July 15, 1997 until the note matured 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 required 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 matured in October 1, 2001. In April 1999, this note was amended to require monthly payments of $250,000 for the period May 1, 1999 until the note matured on September 1, 2000. The third senior subordinated note was issued in October 1996 at 12.60% to a financial institution with an aggregate principal amount of $5,000,000. This senior note requires quarterly payments of $250,000 commencing on March 15, 1999 until the note matures in October 2003. The most restrictive covenants of the senior subordinated note agreements have minimum net worth and interest coverage ratio requirements and restrictions on payment of dividends. At December 31, 2000, the Company was in default on one of its debt covenants in its senior subordinated notes. The covenant that was in default requires that the Company maintain an allowance for credit losses in an amount not less than 100% of the Delinquent Billed Lease Receivables. The covenant default was waived as of December 31, 2000. In consideration of the waiver, the Company repaid one of the notes in full on March 2, 2001. At December 31, 2001 and 2002, subordinated notes payable included $727,000 due to stockholders, officers and directors. Interest paid to stockholders, officers and directors under such notes, at rates ranging between 8% and 12%, amounted to $8,500, $53,700, and $84,000 for the years ended December 31, 2000, 2001, and 2002, respectively. REPAYMENT SCHEDULE At December 31, 2002, the repayment schedule for outstanding notes and subordinated notes is as follows:
FOR THE YEAR ENDED DECEMBER 31, ------------------ 2003........................................................ $ 83,677 2004........................................................ 51,397 2005........................................................ 34,515 2006........................................................ 2,600 Thereafter.................................................. -- -------- Total.................................................. $172,189 ========
F-19 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 2001 and 2002, the aggregate carrying value of the Company's fixed rate borrowings was approximately $101,336,000, and $45,603,000 respectively, with an estimated fair value of approximately $102,049,000, and $45,562,000 respectively. F. REDEEMABLE PREFERRED STOCK: At December 2001 and 2002, the Company had authorized 5,000,000 shares of preferred stock ("preferred stock") with a par value of $0.01 of which zero shares were issued and outstanding. G. STOCKHOLDERS' EQUITY: COMMON STOCK The Company had 25,000,000 authorized shares of common stock with a par value of $.01 per share of which 13,410,646 shares were issued and outstanding at December 31, 2001 and 2002. TREASURY STOCK The Company had 588,700 shares of common stock in treasury at December 31, 2001 and 2002. STOCK OPTIONS In 1987, the Company adopted its 1987 Stock Option Plan (the "Plan") which provided 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 June 16, 1997 stock split. Pursuant to this amendment, the aggregate number of shares issued could not exceed 1,220,000 and the exercise price of any outstanding options issued pursuant to the Plan would be reduced by a factor of ten and the number of outstanding options issued pursuant to the Plan would be increased by a factor of ten. The Company adopted the 1998 Equity Incentive Plan (the "1998 Plan") on 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 reserved 4,120,380 shares of its common stock for issuance pursuant to the 1998 Plan. 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-20 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following summarizes the stock option activity:
WEIGHTED- AVERAGE SHARES PRICE PER SHARE EXERCISE PRICE --------- ------------------- -------------- Outstanding at December 31, 1999................. 936,920 $0.6375 to $13.544 $11.357 Exercised........................................ (62,920) $0.6375 to $1.95 $ 1.889 Canceled......................................... (10,000) $12.313 $12.313 Granted.......................................... 730,000 $9.781 $ 9.781 --------- Outstanding at December 31, 2000................. 1,594,000 $1.95 to $13.544 $11.003 Exercised........................................ (96,000) $1.95 to $13.125 $ 8.439 Canceled......................................... (112,000) $9.78125 to $13.125 $11.214 Granted.......................................... 650,000 $9.48 to $13.10 $11.708 --------- Outstanding at December 31, 2001................. 2,036,000 $9.48 to $13.544 $11.337 --------- Canceled......................................... (391,000) $6.70 to $13.544 $11.184 Granted.......................................... 1,350,000 $1.585 to $6.70 $ 3.555 --------- Outstanding at December 31, 2002................. 2,995,000 $1.585 to $13.544 $ 7.849 =========
The options vest over five years and are exercisable only after they become vested. At December 31, 2000, 2001 and 2002, 200,000, 414,000 and 876,000, respectively, of the outstanding options were fully vested. At December 31, 2001 and 2002, 2,036,000 and 2,995,000 shares, respectively, of common stock were reserved for common stock option exercises. Information relating to stock options at December 31, 2002, summarized by exercise price, is as follows:
OUTSTANDING EXERCISABLE - ------------------------------------------------- ------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE PRICE SHARES LIFE (YEARS) EXERCISE PRICE SHARES - -------------------- --------- ------------ -------------- ------- $ 12.3125 581,391 6.15 $12.3125 345,635 $ 13.5440 40,609 6.15 $13.5440 24,365 $ 12.0625 10,000 6.58 $12.0625 6,000 $ 9.7813 608,000 7.15 $ 9.7813 242,000 $ 13.1000 260,000 8.14 $13.1000 52,000 $ 9.4800 200,000 8.87 $ 9.4800 40,000 $ 6.7000 465,000 9.17 $ 6.7000 -- $ 1.5850 830,000 9.91 $ 1.5850 166,000 --------- ------- $1.585 to $13.544 2,995,000 8.22 $ 9.5303 876,000 ========= =======
F-21 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) H. INCOME TAXES: The provision (benefit) for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 2000 2001 2002 -------- -------- --------- Current: Federal............................................. $ 7,109 $ 7,633 $ (7,198) State............................................... 1,659 1,000 (872) ------- ------- -------- 8,768 8,633 (8,070) ------- ------- -------- Deferred: Federal............................................. 5,532 1,256 (4,685) State............................................... 949 215 (1,980) ------- ------- -------- 6,481 1,471 (6,665) ------- ------- -------- Total....................................... $15,249 $10,104 $(14,735) ======= ======= ========
At December 31, 2001 and 2002, the components of the net deferred tax liability were as follows:
2001 2002 -------- --------- Deferred tax assets: Allowance for credit losses................................. $ 19,181 $ 17,353 Lease receivable and unearned income........................ 7,159 59,582 State NOL and other state attributes........................ 0 1,249 -------- --------- Total deferred tax asset............................... $ 26,340 $ 78,184 ======== ========= Deferred tax liabilities: Residual value.............................................. $ (8,677) $ (8,428) Initial direct cost......................................... (4,470) (4,013) State refunds............................................... 0 (432) Depreciation and amortization............................... (43,665) (89,117) -------- --------- Total deferred tax liability........................... $(56,812) $(101,990) ======== ========= Net deferred tax liability............................. $(30,472) $ (23,806) ======== =========
A valuation allowance against the deferred tax assets is not considered necessary, because it is more likely than not that the deferred tax assets will be fully realized. At December 31, 2002, the Company had state loss carryforwards of $8,800,000 which may be used to offset future income. These loss carryforwards are available for use against future state income until they expire between the years 2007 and 2022. F-22 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, ------------------------ 2000 2001 2002 ----- ----- ------ Federal statutory rate...................................... 35.00% 35.00% (35.00)% State income taxes, net of federal benefit.................. 5.60% 4.60% (5.38)% Nondeductible expenses and other............................ 1.60% (1.40)% 0.38% ----- ----- ------ Effective income tax rate................................... 42.20% 38.20% (40.00)% ===== ===== ======
I. COMMITMENTS AND CONTINGENCIES: OPERATING AND CAPITAL LEASES The Company's lease for its facility in Waltham, Massachusetts, expires in 2004. 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 2005. The Company's lease for its facilities in Woburn, Massachusetts, expires in 2003. The Company has vacated the facilities in Newark, California and Herndon, Virginia and is in the process of negotiating early termination of the outstanding leases. The Company also has entered into various operating lease agreements ranging from three to four years for additional office equipment. At December 31, 2002, the future minimum lease payments under noncancelable operating leases with remaining terms in excess of one year are as follows:
FOR THE YEARS ENDED DECEMBER 31, - ------------------- 2003........................................................ $1,776 2004........................................................ 867 2005........................................................ 227 2006........................................................ -- ------ Total.................................................. $2,870 ======
Rental expense under operating leases totaled $1,557,000, $1,998,000, and $2,321,000 for the years ended December 31, 2000, 2001, and 2002, respectively. Rental expense for the year ended 2002 includes $316,000 for the net present value for the remaining lease payments on office space that is currently not being utilized. F-23 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, 2002, future minimum lease payments under capital leases were as follows:
FOR THE YEARS ENDED DECEMBER 31, - ------------------- 2003........................................................ $272 2004........................................................ 180 2005........................................................ 55 2006........................................................ -- ---- Total minimum lease payments................................ 507 Less amounts representing interest.......................... (36) ---- Total.................................................. $471 ====
LEGAL MATTERS Management believes, after consultation with counsel, that the allegations against the Company included in the lawsuits described below are subject to substantial legal defenses, and the Company is vigorously defending each of the allegations. The Company also is subject to claims and suits arising in the ordinary course of business. At this time, it is not possible to estimate the ultimate loss or gain, if any, related to these lawsuits, nor if any such loss will have a material adverse effect on the Company's results of operations or financial position. A. The Company filed an action in the United States District Court for the District of Massachusetts against Sentinel Insurance Company, Ltd., ("Sentinel"), Premier Holidays International, Inc., ("Premier") and Daniel DelPiano ("DelPiano") arising from Premier's October, 1999, default on its repayment obligations to the Company under a Twelve Million Dollar ($12,000,000) loan. Judgment has been entered in this case against Sentinel, which had issued a business performance insurance policy guaranteeing repayment of the loan, in the amount of Fourteen Million Dollars ($14,000,000). This judgment has not been satisfied. Sentinel is currently undergoing liquidation proceedings, and a claim in this amount has been filed with the bankruptcy court. Premier has asserted a counterclaim against the Company for Seven Hundred Sixty Nine Million Three Hundred Fifty Thousand dollars ($769,350,000) in actual and consequential damages, and for Five Hundred Million Dollars ($500,000,000) in punitive damages, plus interest, cost and attorney's fees. The counterclaim is based upon an alleged representation by the Company that it would lend Premier an additional Forty-Five Million Dollars ($45,000,000), when all documents evidencing the Premier loan refer only to the Twelve Million ($12,000,000) amount actually loaned and not repaid. The Company denies any liability on the counterclaim, which the Company is vigorously contesting. The Company's motion for summary judgment seeking dismissal of the counterclaim and the award of full damages on the Company's claims was denied by Court Order, without a written decision. The Company's motion for the appointment of a special master was also denied without a written decision. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse effect. B. On January 29, 2002, Leasecomm was served with an Amended Complaint ("Complaint") in an action entitled People v. Roma Computer Solutions, Inc., et al., Ventura County Superior Court Case No. CIV207490. The Complaint asserts two claims, one for violation of the California Business Professions Code Section 17500 (false advertising), and the other for violation of the California Business and Professions Code Section 17200 (unfair or unlawful acts or practices). The claims arise from the marketing and selling activities of other defendants, including Roma Computer Solutions, Inc., and/or Maro Securities, Inc. The Complaint seeks to have Leasecomm held liable for the acts of other defendants, alleging that Leasecomm F-24 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) directly participated in those acts and received proceeds and the assignment of lease contracts as a result of those acts. The Complaint requests injunctive relief, rescission, restitution, and a civil penalty. The Company has filed an Answer denying the claims. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse affect. C. On May 8, 2000, Plaintiff Efraim Bason brought an action in the Supreme Court of the State of New York, County of Nassau, seeking compensatory damages in the amount of $450,000 and punitive damages under various legal theories for Leasecomm's refusal to promptly release him from an equipment lease to which he claims his name was forged (the "Bason Complaint"). The Bason Complaint alleged that Leasecomm's failure to promptly release him from the lease, and subsequent negative reports to credit agencies, ruined his credit and prevented him from securing certain financing that he allegedly needed to purchase merchandise which he claims he could have then re-sold at a $450,000 profit. Leasecomm has subsequently settled this matter with Court approval. D. On January 29, 2002, Leasecomm was served with an Amended Complaint ("Complaint") in an action entitled Rae Lynn Copitka v. Leasecomm Corp., et al., Travis County (Texas) District Court Case No. GN-102292. The Complaint asserts that the original action, filed mid-2001 by a single plaintiff should proceed as a class action. In the original action, Ms. Copitka sought to rescind her finance lease with Leasecomm and to recover economic damages arising from prior payments under the lease. Ms. Copitka alleges that her proposed class includes all persons in Texas who have executed Leasecomm finance leases for "virtual terminal" type credit card software during the years 1998, 1999, 2000, and 2001. On November 25, 2002 Leasecomm and E-Commerce Exchange agreed to settle the case with Ms. Copitka and a class of residents of Texas who leased Quickcommerce or QuickcommercePro software licenses from Leasecomm. The Travis County District Court entered its order approving the class settlement and entered its final judgement in the case on January 24, 2003. Leasecomm has satisfied its obligations under the Settlement, and the time to appeal has expired. E. On April 3, 2000, a purported class action suit was filed in Superior Court of the State of California, County of San Mateo against Leasecomm and MicroFinancial as well as a number of other defendants with whom Leasecomm and MicroFinancial are alleged to have done business, directly or indirectly. The complaint seeks certification of a subclass of those class members who entered into any lease agreement contracts with Leasecomm for the purposes of financing the goods or services allegedly purchased from other defendant entities. The class action complaint alleges multiple causes of action, including: fraud and deceit; negligent misrepresentation; unfair competition; false advertising; unjust enrichment; fraud in the inducement and the inception of contract; lack of consideration for contact; and breach of the contractual covenant of good faith and fair dealing. The Court granted final approval of the class action Settlement on December 2, 2002. Leasecomm has satisfied its obligations under the Settlement, and the time to appeal has expired. The Court retains jurisdiction to oversee any issues that may arise regarding administration of the settlement. F. In October, 2002, the Company was served with a Complaint in an action in the United States District Court for the Southern District of New York filed by approximately 170 present and former lessees asserting individual claims. The Complaint contains claims for violation of RICO (18 U.S.C. sec. 1964), fraud, unfair and deceptive acts and practices, unlawful franchise offerings, and intentional infliction of mental anguish. The claims purportedly arise from Leasecomm's dealer relationships with Themeware, E-Commerce Exchange, Cardservice International, Inc., and Online Exchange for the leasing of websites and virtual terminals. The Complaint asserts that the Company is responsible for the conduct of its dealers in trade shows, infomercials and web page advertisements, seminars, direct mail, telemarketing, all which are alleged to constitute unfair and deceptive acts and practices. Further, the Complaint asserts that Leasecomm's lease contracts as well as its collection practices and late fees are unconscionable. The Complaint seeks restitution, compensatory and treble damages, and injunctive relief. The Company filed a Motion to Dismiss the F-25 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Complaint on January 31, 2003, and expects that the Motion will be argued sometime after May 6, 2003. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse effect. G. On March 31, 2002, plaintiffs Robert Hayden and Renono Wesley filed a Complaint against Leasecomm Corporation alleging a violation of California Business & Professions Code Section 17200. The Complaint was filed on behalf of Hayden and Wesley individually, on behalf of a class of people similarly situated, and on behalf of the general public. The case is venued in San Francisco Superior Court. Specifically, plaintiffs allege that Leasecomm's practice of filing suits against lessees in Massachusetts courts constitutes an unfair business practice under California law. On March 12, 2003, the San Francisco County Superior Court granted Leasecomm's Motion to dismiss this action. H. On August 22, 2002 plaintiff Aaron Cobb filed a Complaint against Leasecomm Corporation and MicroFinancial, Inc. and another Entity known as Galaxy Mall, Inc. alleging breach of contract; Fraud, Suppression and Deceit; Unjust Enrichment; Conspiracy; Conversion; Theft by Deception; and violation of Alabama Usury Laws. The Complaint was filed on behalf of Aaron Cobb individually, and on behalf of a class of persons and entities similarly situated in the State of Alabama. More specifically, the Plaintiff purports to represent a class of persons and small business in the State of Alabama who allegedly were induced to purchase services and/or goods from any of the Defendants named in the Complaint. The case is venued in Bullock County, Alabama. On March 31, 2003 the trial court entered an Order denying the Company's Motion to Dismiss. This Order is currently being reviewed and in all likelihood will be appealed to the Alabama Supreme Court. The appeal must be filed within 45 days of the entry of the Order. Should the appeal not be filed or should the Company otherwise be unsuccessful with its appeal the discovery in this case would commence with the first efforts being directed toward the Class Certification issues. The Company continues to deny any wrongdoing and plans to vigorously defend this claim. Because of the uncertainties inherent in litigation, the company cannot predict whether the outcome will have a material adverse affect. I. In March, 2003, an action was filed by a shareholder against the Company in United States District Court asserting a single count of common law fraud and constructive fraud. The complaint alleges that the shareholder was defrauded by untrue statements made to him by management, upon which he relied in the purchase of Company stock for himself and for others. The complaint seeks damages in an unspecified amount. Because of the uncertainties inherent in litigation, we cannot predict whether the outcome will have a material adverse effect. J. In March, 2003, a purported class action was filed in Superior Court in Massachusetts against Leasecomm and one of its dealers. The class sought to be certified is a nationwide class (excluding certain residents of the State of Texas) who signed identical or substantially similar lease agreements with Leasecomm covering the same product. The complaint asserts claims for declaratory relief, rescission, civil conspiracy, usury, breach of fiduciary duty, and violation of Massachusetts General Laws Chapter 93A, Section 11 ("Chapter 93A"). The claims concern the validity, enforceability, and alleged unconscionability of agreements provided through the dealer, including a Leasecomm lease, to acquire on line credit card processing services. The complaint seeks rescission of the lease agreements with Leasecomm, restitution, multiple damages and attorneys fees under Chapter 93A, and injunctive relief. Because of the uncertainties inherent in litigation we cannot predict whether the outcome will have a material adverse effect. Leasecomm has been served with Civil Investigative Demands by the Offices of the Attorney General for the states of Kansas, Illinois, Florida, and Texas, and for the Commonwealth of Massachusetts. Those Offices of the Attorney General, in conjunction with the Northwest Region Office of the Federal Trade Commission, the Offices of the Attorney General for North Carolina and North Dakota, and the Ventura County, California, District Attorney's Office, have informed Leasecomm that they are seeking to coordinate their investigations (collectively, the "Government Investigators"). At this time, the principal focus of the investigations appears to be software license leases (principally virtual terminals) and leases from certain F-26 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) vendor/dealers whose activities included business opportunity seminars. Leasecomm has further been informed that the investigations cover certain lease provisions, including the forum selection clause and language concerning the non-cancellability of the lease. In addition, the investigations include, among other things, whether Leasecomm's lease termination, or rollover, provisions, are legally sufficient; whether a Leasecomm lease is an enforceable lease; whether there were potential problems with its leases of which Leasecomm had knowledge; whether the leases are enforceable in accordance with their terms; whether three day right of rescission notices were required and, if required, whether proper notices were given; whether any lease prices were unconscionable; whether the lease of a software license is the lease of a service, not a good; whether any lease of satellites or computers are leases to consumers which must comply with certain consumer statutes; whether electronic fund transfer payments pursuant to a lease violate Reg. E; whether any Leasecomm billing and collection practices or charges are unreasonable, or constitute unfair or deceptive trade practices; whether Leasecomm's course of dealings with its vendors/dealers makes Leasecomm liable for any of the activities of its vendors/dealers. In April, 2002, Leasecomm and the Government Investigators entered into provisional relief and tolling agreements which provide for Leasecomm to take certain interim actions, temporarily stop the running of the statute of limitations as of January 29, 2002, and require advance notice by Leasecomm of its withdrawal from the provisional relief agreement and advance notice by each of the Government Investigators of its intention to commence legal action. The tolling agreement has been extended several times and is set to expire in May, 2003. In February, 2003, Leasecomm received a Civil Investigative Demand from the Office of the Attorney General, State of Washington, to which a response is currently due in April, 2003. The Civil Investigative Demand concerns an investigation of monitoring agreements between Priority One, Inc. and various State of Washington consumers, as to which Leasecomm appears to be the assignee of the right to receive monthly payments. Since the investigations are in process, and no legal action has been commenced against Leasecomm, there can be no assurance as to the eventual outcome. INDEMNITIES In the normal course of its business, the Company has entered into agreements that include indemnities in favor of third parties, such as engagement letters with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements and service agreements. The foregoing agreements generally do not contain any limits on the Company's liability and therefore, it is not possible to estimate the Company's potential liability under these indemnities. The Company has entered into agreements relating to the acquisition of assets, each of which contains indemnities in favor of third parties that are customary to such commercial transactions. It is not possible to estimate the Company's potential liability for these indemnities due to the nature of these indemnities. In certain cases, the Company has recourse against third parties with respect to the foresaid indemnities and the Company also maintains insurance policies that may provide coverage against certain of these claims. J. 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 contributions to the defined contribution plan were $142,700, $89,100, and $135,300 for the years ended December 31, 2000, 2001, and 2002, respectively. A Director of the Company is an Officer of the company that is the Plan custodian and record keeper. F-27 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) K. 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, credit policies are in place for approving leases and loans, and lease pools are monitored by management. In addition, the cash and cash equivalents are maintained with several high-quality financial institutions. One dealer accounted for approximately 10.6%, 4.5%, and .22% of all originations during the years ended December 31, 2000, 2001, and 2002, respectively. Another dealer accounted for approximately 4.89%, 7.38%, and 10.98% of all originations during the years ended December 31, 2000, 2001, and 2002, respectively. No other dealer accounted for more than 10% of the Company's origination volume during the years ended December 31, 2000, 2001, or 2002. The Company originates and services leases, contracts and loans in all 50 states of the United States and its territories. As of December 31, 2001 and 2002, leases in California, Florida, Texas, Massachusetts and New York accounted for approximately 42% of the Company's portfolio. Only California accounted for more than 10% of the total portfolio as of December 31, 2001 and 2002 at approximately 14%. None of the remaining states accounted for more than 4% of such total. L. RELATED-PARTY TRANSACTIONS: The Company had notes receivable from officers and employees of $68,000 at December 31, 2001. During 1997 and 1998, the Company issued notes to certain officers and employees in connection with the exercise of common stock options amounting to $150,000 and $144,000 respectively, in exchange for recourse loans with fixed maturity dates prior to the expiration date of the original grant. These notes are non-interest bearing unless the principal amount thereof is not paid in full when due, at which time interest will accrue at a rate per annum equal to the prime rate plus 4.0%. All principal amounts outstanding under these notes is due in full on the earlier of the end of employment or the expiration date. As of December 31, 2002, the notes were paid in full. No new notes were issued during 2001 or 2002. Other notes payable includes amounts due to stockholders of the Company at December 31, 2001 and 2002 of $309,000 and $250,000. Interest paid to stockholders under such notes was not material for the years ended December 31, 2001 and 2002. At December 31, 2001 and 2002, subordinated notes payable included $727,000 due to stockholders, officers and directors. Interest paid to stockholders, officers and directors under such notes, at rates ranging between 8% and 12%, amounted to $8,500, $53,700, and $84,000 for the years ended December 31, 2000, 2001, and 2002, respectively. F-28 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) M. SELECTED QUARTERLY DATA (UNAUDITED): The following is a summary of the unaudited quarterly results of operations of the Company for 2001 and 2002.
2001 2002 ------------------------------------- --------------------------------------- FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- ------- ------- --------- ------- Revenues: Income on leases and loans..................... $18,731 $18,060 $18,105 $16,036 $15,235 $13,791 $ 12,819 $11,167 Income on service contracts rental and fees........... 20,611 20,491 21,204 20,853 20,050 19,170 17,730 16,860 ------- ------- ------- ------- ------- ------- --------- ------- Total revenues........ 39,342 38,551 39,309 36,889 35,285 32,961 30,549 28,027 ------- ------- ------- ------- ------- ------- --------- ------- Expenses: Selling general and administrative............ 11,903 10,658 10,900 11,438 12,574 11,409 10,306 11,246 Provision for credit losses.................... 10,266 11,819 15,064 16,943 10,964 10,824 44,672 22,488 Depreciation and amortization.............. 3,442 3,640 3,618 3,678 3,639 4,851 5,713 4,182 Interest.................... 4,370 3,493 3,444 2,994 2,747 2,618 2,458 2,964 ------- ------- ------- ------- ------- ------- --------- ------- Total expenses........ 29,981 29,610 33,026 35,053 29,924 29,702 63,149 40,880 ------- ------- ------- ------- ------- ------- --------- ------- Income (loss) before provision for income taxes..................... 9,361 8,941 6,283 1,836 5,361 3,259 (32,600) (12,853) ------- ------- ------- ------- ------- ------- --------- ------- Net Income (loss)........... $ 5,419 $ 5,179 $ 3,639 $ 2,080 $ 3,216 $ 1,955 ($ 19,558) ($7,711) ======= ======= ======= ======= ======= ======= ========= ======= Net Income (loss) per common share -- basic............ 0.43 0.41 0.28 0.16 0.25 0.15 (1.53) (0.60) Net Income (loss) per common share -- diluted.......... 0.42 0.40 0.28 0.16 0.25 0.15 (1.53) (0.60) Dividends per common share..................... 0.045 0.050 0.050 0.050 0.050 0.050 0.050 --
F-29 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) N. CONSOLIDATING BALANCE SHEET (UNAUDITED): The following outlines the leases and other assets that have been transferred to special purpose entities, MFI Finance Corp I and MFI Finance Corp II, LLC.
ELIMINATING CONSOLIDATED ELIMINATING MICROFINANCIAL LEASECOMM MFI FC I MFI FCII ENTRIES LEASECOMM MFI ENTRIES CONSOLIDATED --------- -------- -------- ----------- ------------ ------- ----------- -------------- ASSETS: Net investment in leases and loans: Receivables due in installments........ 291,684 42,362 577 334,623 334,623 Estimated residual value............... 30,754 30,754 30,754 Initial direct costs............... 4,081 810 4,891 4,891 Loans receivable...... 1,501 1,501 1,028 (733) 1,796 Less: Advance lease payments and deposits.......... (53) (42) (1) (96) (96) Unearned income:.... (57,363) (10,210) (1) (67,574) (67,574) Allowance for credit losses............ (62,751) (6,323) (220) (69,294) (69,294) ------- ------- ------ ------- ------- ------- -------- ------- Net investment in leases and loans:............ 207,853 26,597 355 -- 234,805 1,028 (733) 235,100 ------- ------- ------ ------- ------- ------- -------- ------- Investment in service contracts, net........ 14,463 14,463 14,463 Cash and cash equivalents........... 5,515 5,515 (21) 5,494 Restricted cash......... 17,697 819 18,516 18,516 Property and equipment, net................... 5,426 1,139 59 6,624 2,402 9,026 Investment in subsidiary............ 43,974 (43,974) -- 65,115 (65,115) -- Other assets............ 2,652 871 5 3,528 43,010 (42,704) 3,834 Income taxes receivable............ -- -- 8,652 8,652 ------- ------- ------ ------- ------- ------- -------- ------- Total assets:..... 279,883 46,304 1,238 (43,974) 283,451 120,186 (108,552) 295,085 ======= ======= ====== ======= ======= ======= ======== ======= LIABILITIES: Notes payable........... 126,621 38,466 3,625 168,712 280 (65) 168,927 Subordinated notes payable............... -- 3,262 3,262 Notes payable to parent................ 733 733 (733) -- Capitalized lease obligations........... -- 471 471 Accounts Payable........ 84,565 (33,690) (4,875) 46,000 544 (42,704) 3,840 Other liabilities....... 6,565 10 32 6,607 169 6,776 Income taxes payable.... (2,877) (2,877) 4,277 1,400 Deferred tax liability............. -- 23,806 23,806 ------- ------- ------ ------- ------- ------- -------- ------- Total Liabilities:.... 215,607 4,786 (1,218) -- 219,175 32,809 (43,502) 208,482 ------- ------- ------ ------- ------- ------- -------- ------- Stockholders' Equity: Common Stock:........... 1 1 134 (1) 134 Additional Paid-In-Capital....... 207 207 47,723 (207) 47,723 Retained Earnings....... 64,068 41,517 2,457 (43,974) 64,068 45,863 (64,842) 45,089 Treasury Stock.......... -- (6,343) (6,343) ------- ------- ------ ------- ------- ------- -------- ------- Total Stockholders' Equity:......... 64,276 41,517 2,457 (43,974) 64,276 87,377 (65,050) 86,603 ------- ------- ------ ------- ------- ------- -------- ------- Total Equity and Liabilities:.... 279,883 46,303 1,239 (43,974) 283,451 120,186 (108,552) 295,085 ======= ======= ====== ======= ======= ======= ======== =======
Leasecomm Corporation periodically finances its lease and service contracts, together with unguaranteed residuals, through securitizations using special purpose vehicles. MFI Finance Corporation I and MFI Finance Corporation II, LLC are special purpose companies. The assets of such special purpose vehicles and cash collateral or other accounts created in connection with the financings in which they participate are not available to pay creditors of Leasecomm Corporation, MicroFinancial Incorporated, or other affiliates. While Leasecomm Corporation generally does not sell its interests in leases, service contracts or loans to third parties after origination, the Company does, from time to time, contribute certain leases, service contracts, or loans to special-purpose entities for purposes of obtaining financing in connection with the related receivables. F-30 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The contribution of such assets under the terms of such financings are intended to constitute "true sales" of such assets for bankruptcy purposes (meaning that such assets are legally isolated from Leasecomm Corporation). However, the special purpose entities to which such assets are contributed are not "qualifying special purpose entities" within the meaning SFAS No. 140, and are required under generally accepted accounting principles to be consolidated in the financial statements of the Company. As a result, such assets and the related liability remain on the balance sheet and do not receive gain on sale treatment. O. SUBSEQUENT EVENTS On January 3, 2003 the Company entered into a Forbearance and Modification agreement with its lenders with respect to the credit facility. This agreement expired on February 7, 2003. The Company entered into a long-term agreement with its lenders on April 14, 2003. This long-term agreement waives the covenant defaults described more fully in Note E, and in consideration for this waiver, requires the outstanding balance of the loan to be repaid over a term of 22 months beginning in April 2003 at an interest rate of prime plus 2.0%. Based on the amortization schedule in the new agreement, the Company is obligated to repay a minimum of $54 million, plus applicable interest, over the next twelve months. On February 7, 2003, the Company offered non-director employees and executives who had been granted stock options in the past the opportunity to cancel any of the original option agreements in exchange for a grant of shares of restricted stock. All option awards subject to the offer were converted to restricted stock. In connection with this offer, on February 12, 2003, 1,325,000 options converted to 319,854 shares of common stock. As of March 31, 2003, 63,971 of these shares were fully vested. On February 18, 2003, the Company repaid $2.4 million in principal plus accrued interest for the MFI Finance I series 2000-1 notes utilizing the clean up call provision under its securitizations. The re-payment was made using cash previously classified as restricted. The Company is in the process of moving its headquarters from Waltham, Massachusetts to its facility in Woburn, Massachusetts. F-31 EX-10.13 3 b45683mfexv10w13.txt EMPLOYMENT AGREEMENT WITH PETER R. BLEYLEBEN EXHIBIT 10.13 [LETTERHEAD OF MICROFINANCIAL] January 30, 2003 Peter R. Bleyleben 66 Norfolk Road Chestnut Hill, MA 02467 Dear Mr. Bleyleben: You entered into an Employment Agreement, as may have been amended from time to time, (the "Employment Agreement") effective June 12, 1998 with MicroFinancial Incorporated, (f/k/a Boyle Leasing Technologies, Inc.), a Massachusetts corporation (the "Company"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Employment Agreement. This Letter Agreement (this "Letter") will summarize our understanding and agreement with respect to certain amendments to the Employment Agreement as follows: 1. Section 11(e) of the Employment Agreement is hereby amended in its entirety and replaced with the following: "(e) Assignment. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive other than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns." 2. Section ll(h) of the Employment Agreement is hereby amended in its entirety and replaced with the following; "(h) Successors: Binding Agreement. (i) The Company will require any successor (whether direct or indirect by Change of Control or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. The term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. As used in this Agreement, "Change of Control" shall mean: [LETTERHEAD OF MICROFINANCIAL] (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), including an acquisition pursuant to 11 U.S.C. Section. 1129 et passim, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. (ii) The Company agrees that within three (3) days of the entry of an order for relief with respect to the Company pursuant to the provisions of Chapter 7 or Chapter 11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy court having jurisdiction over its affairs for the assumption of this Agreement pursuant to the provisions of Section 365 of the United States Bankruptcy Code. (iii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, 2 devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive." 3. Except as expressly amended and clarified by this Letter, the Employment Agreement is hereby ratified and confirmed in all respects. 4. This Letter shall be subject to all applicable provisions of the Employment Agreement, including but not limited to, provisions relating to governing law, arbitration and notices. 5. This Letter may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. Counterparts of this Letter that are manually signed and delivered by facsimile transmission shall be deemed to constitute signed original counterparts hereof and shall bind the parties signing and delivering in such manner. 6. If the foregoing accurately summarizes our understanding and agreement, please execute this Letter and its counterpart in the space provided below. MICROFINANCIAL INCORPORATED By: /S/ Richard F. Latour ------------------------ Its President & CEO /S/ Peter R. Bleyleben - ---------------------- Peter R. Bleyleben 3 January 17, 2002 Peter R. Bleyleben MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 Dear Dr. Bleyleben: This letter will confirm our mutual understanding and agreement concerning the modification and amendment of certain terms of your Employment Agreement with MicroFinancial Incorporated, f/k/a Boyle Leasing Technologies, Inc. (the "Company") dated as of June 12, 1998 (the "Agreement"). Section 2(a) of the Agreement is hereby amended and restated in its entirety to read as follows: The Executive shall, as of January 17, 2002, serve as Chairman of the Board of Directors of the Company (the "Board") and Chief Executive Officer of the Company and in the event of an internal corporate restructuring, shall serve in a position or positions of comparable authority and responsibility in any resulting entity. In such positions, Executive shall have such duties and authority as shall be determined from time to time by the Board or its designee which shall not be less than that assigned to him on the Commencement Date. The Executive has voluntarily entered into this letter agreement. By signing this letter agreement in the space below, the Executive and the Company have amended the Agreement as set forth herein. All other terms and conditions of the Agreement shall remain in full force and effect. MicroFinancial Incorporated By: /s/ Richard F. Latour ----------------------- Its: President & CEO Agreed to and accepted: /s/ Peter R. Bleyleben - ------------------------- Peter R. Bleyleben EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 12, 1998 by and between Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Company") and Peter R. Bleyleben, (the "Executive") residing at 66 Norfolk Road, Chestnut Hill, MA 02167. WHEREAS Executive has served as President and Chief Executive Officer of the Company pursuant to an Employment Agreement dated September 26, 1997 (the "Original Employment Agreement"); and WHEREAS the Company desires to continue to employ Executive and to enter into this Agreement embodying the terms of such continued employment (the "Agreement"); and WHEREAS Executive desires to accept such continued employment and enter into this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Subject to the provisions of Section 7, Executive shall be employed by the Company pursuant to the terms and conditions of this Agreement for a period commencing on June 12, 1998 (the "Commencement Date") and ending June 12, 2001; provided that such period shall be automatically extended for one year on June 12, 2001 and June 12 of any succeeding year unless a minimum of six months prior notice is given by either party to the other. The period beginning on the Commencement Date and ending June 12, 2001, or upon the expiration of any renewal period, in either case in accordance with the foregoing provision, shall be referred to as the "Employment Term". 2. Position. (a) The Executive shall continue to serve as President and Chief Executive Officer of the Company and in the event of an internal corporate restructuring, shall serve in a position or positions of comparable authority and responsibility in any resulting entity. In such positions, Executive shall have such duties and authority as shall be determined from time to time by the Board of Directors of the Company (the "Board") or its designee which shall not be less than that assigned to him on the Commencement Date. (b) During the term of his employment hereunder, Executive will devote substantially all of his business time and best efforts to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such services either directly or indirectly, without the prior written consent of the Board. 3. Base Salary. The Company shall pay Executive an annual base salary (the "Base Salary") at the initial rate of $250,000 payable in arrears in substantially equal installments not less frequently than monthly in accordance with the Company's payroll practices during the Employment Term. The Company shall increase (but not decrease) the Base Salary on each January I which occurs during the Employment Term after June 12, 1998 by a percentage equal to the percentage increase in the Consumer Price Index for all Urban Consumers for the Northeast Region, class B metropolitan area, for the twelve (12) month period ending on each such January 1. In addition to any automatic increases hereunder, the Company, at any time, may in its sole discretion increase Executive's Base Salary. 4. Incentive Compensation. (a) With respect to each fiscal year during all of which Executive is employed with the Company, including the fiscal year beginning January 1, 1998, - 2 - he shall also be eligible to participate in the Company's annual bonus program as such program may be modified by the Board of Directors. (b) With respect to each performance period during which Executive is employed by the Company, including the performance period beginning January 1,1998, the Executive shall also be eligible to participate in the Company's profit-sharing plan as such plan may be modified by the Board of Directors. (c) Executive shall be eligible to participate in the 1987 Stock Option Plan, the 1998 Equity Incentive Plan, and any other equity plan adopted by the Company (collectively "Option Plans"), at a level consistent with his position and responsibilities. 5. Employee Benefits. (a) Executive shall continue to be provided employee benefits (including fringe benefits and other perquisites, profit sharing plan participation and life, health, accident and disability insurance) (collectively "Employee Benefits") on terms no less favorable in the aggregate (except for any changes thereto required to comply with changes in applicable law) than those benefits which were provided to Executive by the Company immediately prior to the Commencement Date, except as otherwise required hereunder. (b) The Board of Directors shall determine the amount of the payments, if any, to be awarded to the Executive under the Company's annual bonus program and/or. profit-sharing plan pursuant to their terms for the 1997 fiscal year and for which payments have not been made prior to the Commencement Date. (c) Executive shall be entitled to a minimum of five (5) weeks annual vacation, in accordance with the Company's current vacation policies, which vacation shall be increased on the second anniversary of the commencement Date up to a maximum of six (6) weeks. - 3 - 6. Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder shall be reimbursed by the Company in accordance with Company policies. 7. Termination. This Agreement, and Executive's employment may be terminated by either party at any time. In the event of any such termination, Executive's rights and entitlements shall be determined in accordance with the following provisions. (a) For Cause by the Company. The provisions of this Section 7(a) shall apply in the event that Executive's employment hereunder is terminated by the Company for "Cause". For purposes of this Agreement, "Cause" shall mean (i) Executive's willful and continued failure substantially to perform his duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness), (ii) the willful commission by Executive of acts that are dishonest and demonstrably injurious to the Company, or (iii) an act or acts on Executive's part constituting a felony under the laws of the United States or any state thereof. If Executive is terminated for Cause, he shall be entitled to receive his Base Salary through the date of termination, and any accrued but unpaid amounts earned under any bonus program or profit-sharing plan. All other benefits due Executive following Executive's termination of employment pursuant to this Section 7(a) shall be determined in accordance with the plans, policies and practices of the Company at the time of such termination. Any Notice of Termination (as defined in subsection (i) of this Section 7), communicating the termination of Executive's employment pursuant to this Section 7(a) shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and reasonable opportunity for Executive, together with Executive's counsel, to be heard before - 4 - the Board prior to such vote), finding that in the good faith opinion of the Board that any event constituting Cause for termination in accordance with this Section 7(a) has occurred and specifying the particulars thereof in detail. (b) Disability. The provisions of this Section 7(b) shall apply in the event that Executive's employment terminates on account of "Disability". For purposes of this Agreement, "Disability" shall mean Executive's physical or mental incapacity, which results in his inability to perform his duties for a period of six (6)consecutive months. Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree, shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. In the event of the Disability of Executive, the Company may terminate the employment of Executive, by delivery of a Notice of Termination to the Executive which Notice shall be effective not less than thirty (30) days after the giving of such Notice. Upon termination of Executive's employment hereunder as a result of Disability, Executive shall receive his Base Salary for a period of twelve (12) months following such termination, and any and all accrued but unpaid amounts earned by Executive under the annual bonus program or profit-sharing plan as of the date of Disability. Any payments provided for in this Section 7(b) shall be offset (but not below zero) by any payment of disability benefits in lieu of Base Salary received by Executive under the Company's employee benefit plans as then in effect. In addition, all options or other awards issued under the Option Plans shall become fully vested and exercisable as of the date of Disability. (c) Death. Upon termination of Executive's employment hereunder as a result of Executive's death, Executive's estate shall receive his Base Salary at the rate in effect at the - 5 - time of Executive's death for a period of twelve (12) months following his death, and any and all accrued but unpaid amounts earned by Executive under the Company's annual bonus program or profit-sharing plan as of the date of death. In addition, all options or awards under the Option Plans shall become fully vested and exercisable as of the date of death. Thereafter, the Company shall, except as provided in subsections 5(a) and 7(g), have no further obligation to compensate Executive under this Agreement. (d) Without Cause by the Company. If Executive's employment is terminated by the Company (including a termination of this Agreement by the Company as provided in Section 1) without "Cause" (other than by reason of Disability or death), Executive shall receive, as promptly as practicable following such termination, but in any event not later than ten (10) business days following such termination, a lump sum payment in cash equal to the sum of: (i) if not theretofore paid, the Executive's Base Salary through the date of termination at the rate in effect on the date of termination or, if higher, at the highest rate in effect at any time within the 90-day period preceding the Commencement Date; and (ii) the product of (x) the annual bonus paid to the Executive for the last full fiscal year ending during the Employment Term and (y) the fraction obtained by dividing (a) the number of days between the Commencement Date and the last day of the last full fiscal year ending during the Employment Term and (b) 365; and (iii) in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Company. Executive shall in addition receive an amount equal to three (3) times the Executive's annual Base Salary at the rate in effect at the time Notice of Termination was given, or if higher, at the highest rate in effect at any time within the ninety (90) day period preceding the - 6 - Commencement Date. Such amount shall be paid to Executive in two (2) equal payments, on the first and second anniversaries, respectively, of the Executive's date of termination. No option or other award granted to Executive under the Option Plans shall terminate prior to the expiration of the option term or award period without regard to a termination of employment. (e) For Good Reason By Executive. The provisions of this Section 7(e) shall apply in the event that the Executive terminates his employment with the Company for "Good Reason". For purposes of this Agreement, "Good Reason" means (without Executive's express prior written consent): (i) The assignment to Executive by the Company of duties inconsistent with Executive's positions, duties, responsibilities, titles or offices, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of Executive's employment for Cause, Disability, or as a result of Executive's death or by Executive other than for Good Reason: (ii) A reduction by the Company in Executive's Base Salary as in effect at the Commencement Date, as the same may be increased according to the terms of this Agreement; (iii) A relocation of the Company's principal executive offices to a location outside of the metropolitan Boston, Massachusetts area or the Company's requiring Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations at the Commencement Date, or any material reduction or adverse change in the emoluments or perquisites of office provided to the Executive at the Commencement Date; (iv) A failure by the Company to continue in effect fringe benefits and benefit or compensation plans - 7 - (including any profit sharing, bonus, life insurance, health, accidental death or dismemberment or disability plan) with terms which in the aggregate are as favorable as those fringe benefits and plans to which Executive is entitled or in which Executive is participating, as the case may be, at the Commencement Date (or in the case of fringe benefits or plans granted or adopted, as the case may be, after the date hereof and providing a type of benefit not provided by the Company at the Commencement Date, at the respective dates of grant or adoption of such fringe benefits or plans); (v) The failure by the Company to obtain the specific assumption of this Agreement by any successor or assign of the Company or any person acquiring a substantial portion of the assets of the Company, or, following any such assumption, assignment or acquisition by an entity other than an affiliate of the Company, the occurrence of any event Executive believes will impair his duties under this Agreement; or If Executive terminates his employment for "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company without "Cause". (f) Gross-up Payments. In the event that Executive receives any payments under this Agreement, or other payments subject to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), which are considered "excess parachute payments" as defined in Section 280G of the Code, the Company shall make an additional gross-up payment to Executive in an amount which results in Executive being in the same after-tax position that he would have been in had no excise tax under Code Section 4999 been imposed. (g) Without Good Reason by Executive. If Executive voluntarily terminates his employment with the Company for any reason other than "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company for Cause. - 8 - (h) Continuation of Benefits. Upon the termination of Executive's employment other than as a result of death or for Cause, in addition to any amounts due under Section 5(a) and (b) hereof and Sections (a) through (f) of this Section 7, the Company shall provide Executive with a continuation of those benefits denoted by an asterisk on Exhibit A hereto until the earlier of Executive's death or 65th birthday; provided, however, that in the event that Executive obtains other substantially comparable employment during such period, Executive shall notify the Company and the amount of any benefits to which Executive is entitled under this Section 7(h) shall be reduced (but not below zero) by any such benefits provided by Executive's new employer. (i) Notice of Termination. Any purported termination of employment by the Company or by Executive shall not be effective until communicated by written Notice of Termination to the other party hereto in accordance with Section II(i) hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed 10 provide a basis for termination of employment under the provision so indicated. 8. Noncompetition. (a) During the Employment Term, and for a two (2) year period, following termination of Executive's employment hereunder, Executive shall not, directly or indirectly, (i) become under contract to or associated with, employed by, render services to or own an interest (other than as a shareholder owning not more than a 5% interest) in my microticket leasing business that is in competition with the Company in the United States, (ii) solicit any officer or employee of the Company or any of its affiliates to engage in any conduct prohibited hereby for Executive or to terminate any existing relationship with the Company or - 9 - such affiliate or (iii) assist any other person to engage in any activity in any manner prohibited hereby to Executive. For purposes of this Section 8(a), in the event of a termination of employment prior to expiration of the Employment Term, determination of the duration of the Employment Term, shall be made without regard to the automatic renewal provisions of Section I hereof. (b) It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 8 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other restriction contained in this Agreement is an unenforceable restriction against Executive, the provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 9. Confidentiality. Executive will not at any time (whether, during or after his employment with the Company) disclose or use for his own benefit or purposes or the benefit or, purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company, - 10 - provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Executive's breach of this covenant. Executive agrees that upon termination of his employment with the Company, for any reason, he will return to the Company immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that he may retain personal notes, notebooks and diaries. Executive further agrees that he will not retain or use for his account at any time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. 10. Specific Performance. Executive acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Sections 8 or 9 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 11. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. (b) Entire Agreement/Amendments. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and, subject to the exception noted below, supersedes any and all prior understandings, agreements, contracts and arrangements, whether written or oral, between the Company and Executive, including but not - 11 - limited to the Original Employment Agreement and the Executive Performance Incentive Plan. The parties hereto agree that as of the Commencement Date, the Original Employment Agreement shall be null and void and of no further force or effect and any and all current and future obligations of either party thereunder are fully and forever discharged. Notwithstanding anything to the contrary contained herein, this Agreement shall in no way reduce or diminish any benefit to which Executive is otherwise entitled and which has already accrued, or been granted, to Executive, pursuant to the terms of a plan, program or arrangement of the Company, including without limitation, any outstanding award granted to Executive under the Company's Executive Performance Incentive Plan for which the performance period has not closed (or, if closed, payment has not been made) prior to the Commencement Date. The Executive hereby agrees to provide any consent, waiver or other documentation necessary to give effect to this paragraph (b). This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. - 12 - (e) Assignment. This Agreement shall not be assignable by Executive and shall be assignable by the Company only to a direct or indirect wholly-owned subsidiary of the Company. (f) Mitigation. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer after the termination of his employment hereunder or otherwise, except to the extent set forth in Section 7(h) of this Agreement. (g) Arbitration. Except where equitable relief is sought, any dispute, controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by arbitration in accordance with the rules of the American Arbitration Association by a single arbitrator. The Arbitrator shall be an individual familiar with the leasing and finance industry. The arbitrator's award shall be final and binding upon both parties, and judgment upon the award may be entered in any court of competent jurisdiction in any state of the United States or country or application may be made to such court for a judicial acceptance o the award and an enforcement as the law of such jurisdiction may require or allow. (h) Successors: Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets or the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to - 13 - the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Prior to a Change in Control, the term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. Following a Change in Control the term "Company" shall not mean any affiliate of the Company to which Executive may be transferred unless Executive shall have previously approved of such transfer in writing, in which case the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. (ii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive. (i) Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to Managing Partner, Edwards & Angell, 101 Federal Street, Boston, MA - 14 - 02110, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (j) Legal Fees and Expenses. The Company shall reimburse Executive on a quarterly basis for all costs and expenses incurred by Executive to enforce or protect his rights under this Agreement (including fees and expenses incurred in connection with an arbitration) unless it shall ultimately be determined by a final judgment of an arbitrator or a court of competent jurisdiction that Executive was without any justification for commencing or continuing any such arbitration, action or proceeding, in which case Executive shall repay to the Company any amounts of reimbursement paid under this Section 110) and in the event of an arbitration, shall also pay one half (1/2) of the fees of the arbitrator. - 15 - IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. /s/ Peter R. Bleyleben ------------------------------------------ Peter R. Bleyleben Boyle Leasing Technologies, Inc. /s/ Richard F. Latour ------------------------------------------ Richard F. Latour, Chief Financial Officer - 16 - EX-10.14 4 b45683mfexv10w14.txt EMPLOYMENT AGREEMENT WITH RICHARD F. LATOUR EXHIBIT 10.14 [LETTERHEAD OF MICROFINANCIAL] January 30, 2003 Richard F. Latour _________________ _________________ _________________ Dear MI. Latour: You entered into an Employment Agreement, as may have been amended from time to time, (the "Employment Agreement") effective June 12, 1998 with MicroFinancial Incorporated, (f/k/a Boyle Leasing Technologies, Inc.), a Massachusetts corporation (the "Company"). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed to them in the Employment Agreement. This Letter Agreement (this "Letter") will summarize our understanding and agreement with respect to certain amendments to the Employment Agreement as follows: 1. Section 11(e) of the Employment Agreement is hereby amended in its entirety and replaced with the following: "(e) Assignment. This Agreement is personal to Executive and without the prior written consent of the Company shall not be assignable by Executive other than by will or the laws of descent and distribution. This Agreement shall inure hire to the benefit of and be binding upon the Company and its successors and assigns." 2. Section ll (h) of the Employment Agreement is hereby amended in its entirety and replaced with the following: "(h) Successors: Binding Agreement (i) The Company will require any successor (whether direct or indirect by Change of Control or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise, The term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. As used in this Agreement, "Change of Control" shall mean: [LETTERHEAD OF MICROFINANCIAL] (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), including an acquisition pursuant to 11 U.S.C. Section 1129 et passim, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. (ii) The Company agrees that within three (3) days of the entry of an order for relief with respect to the Company pursuant to the provisions of Chapter 7 or Chapter 11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy Court having jurisdiction over its affairs for the assumption of this Agreement pursuant to the provisions of Section 365 of the United States Bankruptcy Code. (iii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, 2 devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive." 3. Except as expressly amended and clarified by this Letter, the Employment Agreement is hereby ratified and confirmed in all respects. 4. This Letter shall be subject to all applicable provisions of the Employment Agreement, including but not limited to, provisions relating to governing law, arbitration and notices. 5. This Letter may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. Counterparts of this Letter that are manually signed and delivered by facsimile transmission shall be deemed to constitute signed original counterparts hereof and shall bind the parties signing and delivering in such manner. 6. If the foregoing accurately summarizes our understanding and agreement, please execute this Letter and its counterpart in the space provided below. MICROFINANCIAL INCORPORATED By: /s/ Peter R. Bleyleben ----------------------------- Its CHAIRMAN /s/ Richard F. Latour - -------------------------- Richard F. Latour 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT dated as of June 12, 1998 by and between Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Company") and Richard F. Latour, (the "Executive") residing at 29 Cherubs Way, Hampstead, NH 03841. WHEREAS Executive has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company pursuant to an Employment Agreement dated September 26, 1997 (the "Original Employment Agreement"); and WHEREAS the Company desires to continue to employ Executive and to enter into this Agreement embodying the terms of such continued employment (the "Agreement"); and WHEREAS Executive desires to accept such continued employment and enter into this Agreement; NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein and for other good and valuable consideration, the parties agree as follows: 1. Term of Employment. Subject to the provisions of Section 7, Executive shall be employed by the Company pursuant to the terms and conditions of this Agreement for a period commencing on June 12, 1998 (the "Commencement Date") and ending June 12,2001; provided that such period shall be automatically extended for one year on June 12,2001 and June 12 of any succeeding year unless a minimum of six months prior notice is given by either party to the other. The period beginning on the Commencement Date and ending June 12,2001, or upon the expiration of any renewal period, in either case in accordance with the foregoing provision, shall be referred to as the "Employment Term". 2. Position. (a) The Executive shall continue to serve as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company and in the event of an internal corporate restructuring, shall serve in a position or positions of comparable authority and responsibility in any resulting entity. In such positions, Executive shall have such duties and authority as shall be determined from time to time by the Board of Directors of the Company (the "Board") or its designee which shall not be less than that assigned to him on the Commencement Date. (b) During the term of his employment hereunder, Executive will devote substantially all of his business time and best efforts to the performance of his duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such services either directly or indirectly, without the prior written consent of the Board. 3. Base Salary. The Company shall pay Executive an annual base salary (the "Base Salary") at the initial rate of $200,000 payable in arrears in substantially equal installments not less frequently than monthly in accordance with the Company's payroll practices during the Employment Term. The Company shall increase (but not decrease) the Base Salary on each January 1 which occurs during the Employment Term after June 12, 1998 by a percentage equal to the percentage increase in the Consumer Price Index for all Urban Consumers for the Northeast Region, class B metropolitan area, for the twelve (12) month period ending on each such January 1. In addition to any automatic increases hereunder, the Company, at any time, may in its sole discretion increase Executive's Base Salary. 4. Incentive Compensation. (a) With respect to each fiscal year during all of which Executive is employed with the Company, including the fiscal year beginning January 1, 1998, he shall also be eligible to participate in the Company's annual bonus program as such program may be modified by the Board of Directors. - 2 - (b) With respect to each performance period during which Executive is employed by the Company, including the performance period beginning January 1, 1998, the Executive shall also be eligible to participate in the Company's profit-sharing plan as such plan may be modified by the Board of Directors. (c) Executive shall be eligible to participate in the 1987 Stock Option Plan, the 1998 Equity Incentive Plan, and my other equity plan adopted by the Company (collectively "Option Plans"), at a level consistent with his position and responsibilities. 5. Employee Benefits. (a) Executive shall continue to be provided employee benefits (including fringe benefits and other perquisites, profit sharing plan participation and life, health, accident and disability insurance) (collectively "Employee Benefits") on terms no less favorable in the aggregate (except for any changes thereto required to comply with changes in applicable law) than those benefits which were provided to Executive by the Company immediately prior to the Commencement Date, except as otherwise required hereunder. (b) The Board of Directors shall determine the amount of the payments, if any, to be awarded to the Executive under the Company's annual bonus program and/or profit-sharing plan pursuant to their terms for the 1997 fiscal year and for which payments have not been made prior to the Commencement Date. (c) Executive shall be entitled to a minimum of five (5) weeks annual vacation, in accordance with the Company's current vacation policies, which vacation shall be increased on the second anniversary of the Commencement Date up to a maximum of six (6) weeks. - 3 - 6. Business Expenses. Reasonable travel, entertainment and other business expenses incurred by Executive in the performance of his duties hereunder shall be reimbursed by the Company in accordance with Company policies. 7. Termination. This Agreement, and Executive's employment may be terminated by either party at any time. In the event of any such termination, Executive's rights and entitlements shall be determined in accordance with the following provisions. (a) For Cause by the Company. The provisions of this Section 7(a) shall apply in the event that Executive's employment hereunder is terminated by the Company for "Cause". For purposes of this Agreement, "Cause" shall mean (i) Executive's willful and continued failure substantially to perform his duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness), (ii) the willful commission by Executive of acts that are dishonest and demonstrably injurious to the Company, or (iii) an act or acts on Executive's part constituting a felony under the laws of the United States or any state thereof. If Executive is terminated for Cause, he shall be entitled to receive his Base Salary through the date of termination, and any accrued but unpaid mounts earned under any bonus program or profit-sharing plan. All other benefits due Executive following Executive's termination of employment pursuant to this Section 7(a) shall be determined in accordance with the plans, policies and practices of the Company at the time of such termination. Any Notice of Termination (as defined in subsection (i) of this Section 7), communicating the termination of Executive's employment pursuant to this Section 7(a) shall include a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the entire membership of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and reasonable opportunity for Executive, together with Executive's counsel, to be heard before - 4 - the Board prior to such vote), finding that in the good faith opinion of the Board that any event constituting Cause for termination in accordance with this Section 7(a) has occurred and specifying the particulars thereof in detail. (b) Disability. The provisions of this Section 7(b) shall apply in the event that Executive's employment terminates on account of "Disability". For purposes of this Agreement, "Disability" shall mean Executive's physical or mental incapacity, which results in his inability to perform his duties for a period of six (6) consecutive months. Any question as to the existence of the Disability of Executive as to which Executive and the Company cannot agree, shall be determined in writing by a qualified independent physician mutually acceptable to Executive and the Company. In the event of the Disability of Executive, the Company may terminate the employment of Executive, by delivery of a Notice of Termination to the Executive which Notice shall be effective not less than thirty (30) days after the giving of such Notice. Upon termination of Executive's employment hereunder as a result of Disability, Executive shall receive his Base Salary for a period of twelve (12) months following such termination, and any and all accrued but unpaid amounts earned by Executive under the annual bonus program or profit-sharing plan as of the date of Disability. Any payments provided for in this Section 7 (b) shall be offset put not below zero) by any payment of disability benefits in lieu of Base Salary received by Executive under the Company's employee benefit plans as then in effect. In addition, all options or other awards issued under the Option Plans shall become fully vested and exercisable as of the date of Disability. (c) Death. Upon termination of Executive's employment hereunder as a result of Executive's death, Executive's estate shall receive his Base Salary at the rate in effect at the - 5 - time of Executive's death for a period of twelve (12) months following his death, and any and all accrued but unpaid amounts earned by Executive under the Company's annual bonus program or profit-sharing plan as of the date of death. In addition, all options or awards under the Option Plans shall become fully vested and exercisable as of the date of death. Thereafter, the Company shall, except as provided in subsections 5(a) and 7(g), have no further obligation to compensate Executive under this Agreement. (d) Without Cause by the Company. If Executive's employment is terminated by the Company (including a termination of this Agreement by the Company as provided in Section 1) without "Cause" (other than by reason of Disability or death), Executive shall receive, as promptly as practicable following such termination, but in any event not later than ten (10) business days following such termination, a lump sum payment in cash equal to the sum of: (i) if not theretofore paid, the Executive's Base Salary through the date of termination at the rate in effect on the date of termination or, if higher, at the highest rate in effect at any time within the 90-day period preceding the Commencement Date; and (ii) the product of (X) the annual bonus paid to the Executive for the last full fiscal year ending during the Employment Term and (y) the fraction obtained by dividing (a) the number of days between the Commencement Date and the last day of the last full fiscal year ending during the Employment Term and (b) 365; and (iii) in the case of compensation previously deferred by the Executive, all amounts of such compensation previously deferred and not yet paid by the Company. Executive shall in addition receive an amount equal to three (3) times the Executive's annual Base Salary at the rate in effect at the time Notice of Termination was given, or if higher, at the highest rate in effect at any time within the ninety (90) day period preceding the - 6 - Commencement Date. Such amount shall be paid to Executive in two (2) equal payments, on the first and second anniversaries, respectively, of the Executive's date of termination. No option or other award granted to Executive under the Option Plans shall terminate prior to the expiration of the option term or award period without regard to a termination of employment. (e) For Good Reason By Executive. The provisions of this Section 7(e) shall apply in the event that the Executive terminates his employment with the Company for "Good Reason". For purposes of this Agreement, "Good Reason" means (without Executive's express prior written Consent): (i) The assignment to Executive by the Company of duties inconsistent with Executive's positions, duties, responsibilities, titles or offices, or any removal of Executive from or any failure to re-elect Executive to any of such positions, except in connection with the termination of Executive's employment for Cause, Disability, or as a result of Executive's death or by Executive other than for Good Reason; (ii) A reduction by the Company in Executive's Base Salary as in effect at the Commencement Date, as the same may be increased according to the terns of this Agreement; (iii) A relocation of the Company's principal executive offices to a location outside of the metropolitan Boston, Massachusetts area or the Company's requiring Executive to be based anywhere other than the Company's principal executive offices, except for required travel on the Company's business to an extent substantially consistent with Executive's business travel obligations at the Commencement Date, or any material reduction or adverse change in the emoluments or perquisites of office provided to the Executive at the Commencement Date; (iv) A failure by the Company to continue in effect fringe benefits and benefit or compensation plans - 7 - (including any profit sharing, bonus, life insurance, health, accidental death or dismemberment or disability plan) with terms which in the aggregate are as favorable as those fringe benefits and plans to which Executive is entitled or in which Executive is participating, as the case may be, at the Commencement Date (or in the case of fringe benefits or plans granted or adopted, as the case may be, after the date hereof and providing a type of benefit not provided by the Company at the Commencement Date, at the respective dates of grant or adoption of such fringe benefits or plans); (v) The failure by the Company to obtain the specific assumption of this Agreement by any successor or assign of the Company or any person acquiring a substantial portion of the assets of the Company, or, following any such assumption, assignment or acquisition by an entity other than an affiliate of the Company, the occurrence of any event Executive believes will impair his duties under this Agreement; or If Executive terminates his employment for "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company without "Cause". (f) Gross-up Payments. In the event that Executive receives any payments under this Agreement, or other payments subject to Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), which are considered "excess parachute payments" as defined in Section 280G of the Code, the Company shall make an additional gross-up payment to Executive in an amount which results in Executive being in the same after-tax position that he would have been in had no excise tax under Code Section 4999 been imposed. (g) Without Good Reason by Executive. If Executive voluntarily terminates his employment with the Company for any reason other than "Good Reason", Executive shall be entitled to the same payments he would have received if his employment had been terminated by the Company for Cause. - 8 - (h) Continuation of Benefits. Upon the termination of Executive's employment other than as a result of death or for Cause, in addition to any amounts due under Section 5(a) and (b) hereof and Sections (a) through (f) of this Section 7, the Company shall provide Executive with a continuation of those benefits denoted by an asterisk on Exhibit A hereto until the earlier of Executive's death or 65th birthday; provided, however, that in the event that Executive obtains other substantially comparable employment during such period, Executive shall notify the Company and the amount of any benefits to which Executive is entitled under this Section 7(h) shall be reduced (but not below zero) by any such benefits provided by Executive's new employer. (i) Notice of Termination. Any purported termination of employment by the Company or by Executive shall not be effective until communicated by written Notice of Termination to the other party hereto in accordance with Section 11(i) hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. 8. Noncompetition. (a) During the Employment Term, and for a two (2) year period following termination of Executive's employment hereunder, Executive shall not, directly or indirectly, (i) become under contract to or associated with, employed by, render services to or own an interest (other than as a shareholder owning not more than a 5% interest) in any microticket leasing business that is in competition with the Company in the United States, (ii) solicit any officer or employee of the Company or any of its affiliates to engage in my conduct prohibited hereby for Executive or to terminate any existing relationship with the Company or - 9 - such affiliate or (iii) assist any other person to engage in any activity in any manner prohibited hereby to Executive. For purposes of this Section 8(a), in the event of a termination of employment prior to expiration of the Employment Term, determination of the duration of the Employment Term, shall be made without regard to the automatic renewal provisions of Section 1 hereof. (b) It is expressly understood and agreed that although Executive and the Company consider the restrictions contained in this Section 8 to be reasonable, if a final judicial determination is made by a court of competent jurisdiction that the time or territory or any other Restriction contained in this Agreement is an unenforceable restriction against Executive, the Provisions of this Agreement shall not be rendered void but shall be deemed amended to apply as to such maximum time and territory and to such maximum extent as such court may judicially determine or indicate to be enforceable. Alternatively, if any court of competent jurisdiction finds that any restriction contained in this Agreement is unenforceable, and such restriction cannot be amended so as to make it enforceable, such finding shall not affect the enforceability of any of the other restrictions contained herein. 9. Confidentiality. Executive will not at any time (whether, during or after his employment with the Company) disclose or use for his own benefit or purposes or the benefit or purposes of any other person, firm, partnership, joint venture, association, corporation or other business organization, entity or enterprise other than the Company and any of its subsidiaries or affiliates, any trade secrets, information, data, or other confidential information relating to customers, development programs, costs, marketing, trading, investment, sales activities, promotion, credit and financial data, manufacturing processes, financing methods, plans, or the business and affairs of the Company generally, or of any subsidiary or affiliate of the Company, - 10 - provided that the foregoing shall not apply to information which is not unique to the Company or which is generally known to the industry or the public other than as a result of Executive's breach of this covenant. Executive agrees that upon termination of his employment with the Company, for any reason, he will return to the Company immediately all memoranda, books, papers, plans, information, letters and other data, and all copies thereof or therefrom, in any way relating to the business of the Company and its affiliates, except that he may retain personal notes, notebooks and diaries. Executive further agrees that he will not retain or use for his account at my time any trade names, trademark or other proprietary business designation used or owned in connection with the business of the Company or its affiliates. 10. Specific Performance. Executive acknowledges and agrees that the Company's remedies at law for a breach or threatened breach of any of the provisions of Sections 8 or 9 would be inadequate and, in recognition of this fact, Executive agrees that, in the event of such a breach or threatened breach, in addition to any remedies at law, the Company, without posting any bond, shall be entitled to obtain equitable relief in the form of specific performance, temporary restraining order, temporary or permanent injunction or any other equitable remedy which may then be available. 11. Miscellaneous. (a) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. (b) Entire Agreement/Amendments. This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and, subject to the exception noted below, supersedes any and all prior understandings, agreements, contracts and arrangements, whether written or oral, between the Company and Executive, including but not - 11 - limited to the Original Employment Agreement and the Executive Performance Incentive Plan. The parties hereto agree that as of the Commencement Date, the Original Employment Agreement shall be null and void and of no further force or effect and any and all current and future obligations of either party thereunder are fully and forever discharged. Notwithstanding anything to the contrary contained herein, this Agreement shall in no way reduce or diminish any benefit to which Executive is otherwise entitled and which has already accrued, or been granted, to Executive, pursuant to the terms of a plan, program or arrangement of the Company, including without limitation, any outstanding award granted to Executive under the Company's Executive Performance Incentive Plan for which the performance period has not closed (or, if closed, payment has not been made) prior to the Commencement Date. The Executive hereby agrees to provide any consent, waiver or other documentation necessary to give effect to this paragraph (b). This Agreement may not be altered, modified, or amended except by written instrument signed by the parties hereto. (c) No Waiver. The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver of such party's rights or deprive such party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. (d) Severability. In the event that any one or more of the provisions of this Agreement shall be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions of this Agreement shall not be affected thereby. - 12 - (e) Assignment. This Agreement shall not be assignable by Executive and shall be assignable by the Company only to a direct or indirect wholly-owned subsidiary of the Company. (f) Mitigation. The Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor shall the amount of any payment provided for under this Agreement be reduced by any compensation earned by Executive as the result of employment by another employer after the termination of his employment hereunder or otherwise, except to the extent set forth in Section 7(h) of this Agreement. (g) Arbitration. Except where equitable relief is sought, any dispute, controversy or claim arising out of or relating to this Agreement, or the breach hereof, shall be settled by arbitration in accordance with the rules of the American Arbitration Association by a single arbitrator. The Arbitrator shall be an individual familiar with the leasing and finance industry. The arbitrator's award shall be final and binding upon both parties, and judgment upon the award may be entered in any court of competent jurisdiction in any state of the United States or country or application may be made to such court a judicial acceptance o the award and an enforcement as the law of such jurisdiction may require or allow. (h) Successors: Binding Agreement. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets or the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Such assumption and agreement shall be obtained prior to - 13 - the effectiveness of any such succession. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. Prior to a Change in Control, the term "Company" shall also mean any affiliate of the Company to which Executive may be transferred and the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. Following a Change in Control the term "Company" shall not mean any affiliate of the Company to which Executive may be transferred unless Executive shall have previously approved of such transfer in writing, in which case the Company shall cause such successor employer to be considered the "Company" bound by the terms of this Agreement and this Agreement shall be amended to so provide. (ii) This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Executive should die while any amount would still be payable to Executive hereunder if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the devisee, legatee or other designee of Executive or, if there is no such designee, to the estate of Executive, (i) Notice. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the execution page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to Managing Partner, Edwards & Angell, 101 Federal Street, Boston, MA - 14 - 02110, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. (j) Legal Fees and Expenses. The Company shall reimburse Executive on a quarterly basis for all costs and expenses incurred by Executive to enforce or protect his rights under this Agreement (including fees and expenses incurred in connection with an arbitration) unless it shall ultimately be determined by a final judgment of an arbitrator or a court of competent jurisdiction that Executive was without any justification for commencing or continuing any such arbitration, action or proceeding, in which case Executive shall repay to the Company any amounts of reimbursement paid under this Section 11 (j) and in the event of an arbitration, shall also pay one half (1/2)of the fees of the arbitrator. - 15 - IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the day and year first above written. /s/ Richard F. Latour --------------------------------- Richard F. Latour Boyle Leasing Technologies, Inc. /s/ Peter R. Bleyleben, President --------------------------------- Peter R. Bleyleben, President - 16 - EX-10.40 5 b45683mfexv10w40.txt EMPLOYMENT AGREEMENT WITH JOHN PLUMLEE EXHIBIT 10.40 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT by and between MicroFinancial Incorporated, a Massachusetts corporation, and its subsidiaries (the "Company"), and John Plumlee (the "Executive"), dated as of November 21, 2002 (this "Agreement"). WHEREAS, Executive and the Company entered into an Employment Agreement dated as of September 26, 1997 (as amended from time to time, the "Original Agreement") to assure that the Company would have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control of the Company; WHEREAS, in order to encourage the Executive's continued attention and dedication to the Company, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to provide the Executive with additional severance arrangements whether or not a Change of Control of the Company occurs and to make other amendments to the Original Agreement, subject to the terms set forth herein; and WHEREAS, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement which shall amend and supersede in its entirety the Original Agreement (and any and all prior oral and written agreements and understandings with respect to the Original Agreement) as follows: NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on third anniversary of the date of such date; provided, however, that commencing on the first anniversary of the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), the Change of Control Period shall be automatically extended so as to terminate three (3) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), including an acquisition pursuant to 11 U.S.C. Section 1129 et passim, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Change of Control Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Change of Control Employment Period"); provided, however, that the Change of Control Employment Period shall be automatically extended upon - 2 - its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment during Change of Control Employment Period. (a) Position and Duties. (i) During the Change of Control Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Change of Control Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Change of Control Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. - 3 - (b) Compensation during Change of Control Employment Period. (i) Base Salary. During the Change of Control Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Change of Control Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Change of Control Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Change of Control Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Change of Control Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and - 4 - programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Change of Control Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Change of Control Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Change of Control Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Change of Control Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment (During the Change of Control Employment Period) (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death if during the Change of Control Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Change of Control Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 13(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be - 5 - total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Change of Control Employment Period for Cause. For purposes of this Agreement (other than Section 7) "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Change of Control Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 12(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific - 6 - termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination (During the Change of Control Employment Period). (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Change of Control Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary multiplied by 1.5, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 6(a)(i) shall be hereinafter referred to as the "Change of Control Severance Amount"); and (ii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive - 7 - becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Change of Control Employment Period and to have retired on the last day of such period; and (iii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Change of Control Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Change of Control Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Change of Control Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section - 8 - 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Change of Control Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than the payment of the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). 7. Terms of Employment; Obligation of the Company upon Termination of Employment (Prior to the Effective Date). (a) Terms of Employment; Obligation of the Company upon Termination of Employment. The Executive and the Company acknowledge that the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Except as specifically provided in Sections 7(b), (c) and (d) of this Agreement, the terms of Executive's employment and the continuing participation of Executive in any plan, program, policy or practice provided by the Company or any of its affiliated companies prior to the Effective Date or upon Executive's termination of employment prior to the Effective Date (either by Executive or the Company) shall be governed by the then existing plan, program, policy or practice of the Company or any of its affiliated companies. (b) Other Than for Cause, Death or Disability. If, at any time prior to the Effective Date, the Company shall terminate the Executive's employment other than for Cause (defined below), death or Disability, the Company shall pay to the Executive (1) the Executive's Annual Base Salary multiplied by 1.5 payable over 18 months at the same time that the Company pays other peer executives of the Company generally, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 7(a)(i) shall be hereinafter referred to as the "Severance Amount"); For purposes of Section 7, "Cause" shall mean shall mean (i) a material breach by the Executive of the Executive's duties, responsibilities held, exercised and assigned by the Company to the Executive (other than as a result of incapacity due to physical or mental illness) - 9 - which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability prior to the Effective Date, this Agreement shall terminate without further obligation to the Executive, other than the payment by the Company to Executive of an amount equal to (i) the Severance Amount minus (ii) the amount Executive would be entitled to receive as a disability benefit under the then existing plan, program, policy or practice of the Company or any of its affiliated companies (which shall be paid to the Executive in accordance with the then existing, plan, program, policy or practice of the Company or any of its affiliated companies). 8. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b), 6(c), 7(b) or 7(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable - 10 - judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 10(c) of this Agreement, all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche, LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. - 11 - In the event that the Company exhausts its remedies pursuant to Section 10(c) of this Agreement and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the - 12 - taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 12. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same - 13 - manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Bankruptcy Proceedings. The Company agrees that within three (3) days of the entry of an order for relief with respect to the Company pursuant to the provisions of Chapter 7 or Chapter 11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy court having jurisdiction over its affairs for the assumption of this Agreement pursuant to the provisions of Section 365 of the United States Bankruptcy Code. 14. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) This Agreement amends and supersedes in its entirety all prior agreements and understandings, whether oral or written, with respect to the provisions of the Original Agreement. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: John Plumlee c/o MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 If to the Company: MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, President and Chief Executive Officer - 14 - With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell, LLP 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (g) This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. Counterparts of this Agreement (or applicable signature pages hereof) that are manually signed and delivered by facsimile transmission shall be deemed to constitute signed original counterparts hereof and shall bind the parties signing and delivering in such manner. - 15 - IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ______________________________________________ John Plumlee MicroFinancial Incorporated By: __________________________________________ Its:______________________________________ EX-10.41 6 b45683mfexv10w41.txt EMPLOYMENT AGREEMENT WITH CAROL SALVO EXHIBIT 10.41 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT by and between MicroFinancial Incorporated, a Massachusetts corporation, and its subsidiaries (the "Company"), and Carol Salvo (the "Executive"), dated as of November 21, 2002 (this "Agreement"). WHEREAS, Executive and the Company entered into an Employment Agreement dated as of September 26, 1997 (as amended from time to time, the "Original Agreement") to assure that the Company would have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control of the Company; WHEREAS, in order to encourage the Executive's continued attention and dedication to the Company, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to provide the Executive with additional severance arrangements whether or not a Change of Control of the Company occurs and to make other amendments to the Original Agreement, subject to the terms set forth herein; and WHEREAS, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement which shall amend and supersede in its entirety the Original Agreement (and any and all prior oral and written agreements and understandings with respect to the Original Agreement) as follows: NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on third anniversary of the date of such date; provided, however, that commencing on the first anniversary of the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), the Change of Control Period shall be automatically extended so as to terminate three (3) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), including an acquisition pursuant to 11 U.S.C. Section 1129 et passim, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Change of Control Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Change of Control Employment Period"); provided, however, that the Change of Control Employment Period shall be automatically extended upon - 2 - its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment during Change of Control Employment Period. (a) Position and Duties. (i) During the Change of Control Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Change of Control Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Change of Control Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. - 3 - (b) Compensation during Change of Control Employment Period. (i) Base Salary. During the Change of Control Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Change of Control Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Change of Control Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Change of Control Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Change of Control Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and - 4 - programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Change of Control Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Change of Control Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Change of Control Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Change of Control Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment (During the Change of Control Employment Period) (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death if during the Change of Control Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Change of Control Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 13(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be - 5 - total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Change of Control Employment Period for Cause. For purposes of this Agreement (other than Section 7) "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Change of Control Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 12(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific - 6 - termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination (During the Change of Control Employment Period). (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Change of Control Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary multiplied by 1.5, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 6(a)(i) shall be hereinafter referred to as the "Change of Control Severance Amount"); and (ii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive - 7 - becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Change of Control Employment Period and to have retired on the last day of such period; and (iii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Change of Control Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Change of Control Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Change of Control Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section - 8 - 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Change of Control Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than the payment of the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). 7. Terms of Employment; Obligation of the Company upon Termination of Employment (Prior to the Effective Date). (a) Terms of Employment; Obligation of the Company upon Termination of Employment. The Executive and the Company acknowledge that the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Except as specifically provided in Sections 7(b), (c) and (d) of this Agreement, the terms of Executive's employment and the continuing participation of Executive in any plan, program, policy or practice provided by the Company or any of its affiliated companies prior to the Effective Date or upon Executive's termination of employment prior to the Effective Date (either by Executive or the Company) shall be governed by the then existing plan, program, policy or practice of the Company or any of its affiliated companies. (b) Other Than for Cause, Death or Disability. If, at any time prior to the Effective Date, the Company shall terminate the Executive's employment other than for Cause (defined below), death or Disability, the Company shall pay to the Executive (1) the Executive's Annual Base Salary multiplied by 1.5 payable over 18 months at the same time that the Company pays other peer executives of the Company generally, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 7(a)(i) shall be hereinafter referred to as the "Severance Amount"); For purposes of Section 7, "Cause" shall mean shall mean (i) a material breach by the Executive of the Executive's duties, responsibilities held, exercised and assigned by the Company to the Executive (other than as a result of incapacity due to physical or mental illness) - 9 - which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability prior to the Effective Date, this Agreement shall terminate without further obligation to the Executive, other than the payment by the Company to Executive of an amount equal to (i) the Severance Amount minus (ii) the amount Executive would be entitled to receive as a disability benefit under the then existing plan, program, policy or practice of the Company or any of its affiliated companies (which shall be paid to the Executive in accordance with the then existing, plan, program, policy or practice of the Company or any of its affiliated companies). 8. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b), 6(c), 7(b) or 7(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable - 10 - judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 10(c) of this Agreement, all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche, LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. - 11 - In the event that the Company exhausts its remedies pursuant to Section 10(c) of this Agreement and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the - 12 - taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 12. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same - 13 - manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Bankruptcy Proceedings. The Company agrees that within three (3) days of the entry of an order for relief with respect to the Company pursuant to the provisions of Chapter 7 or Chapter 11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy court having jurisdiction over its affairs for the assumption of this Agreement pursuant to the provisions of Section 365 of the United States Bankruptcy Code. 14. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) This Agreement amends and supersedes in its entirety all prior agreements and understandings, whether oral or written, with respect to the provisions of the Original Agreement. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Carol Salvo c/o MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 If to the Company: MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, President and Chief Executive Officer - 14 - With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell, LLP 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (g) This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. Counterparts of this Agreement (or applicable signature pages hereof) that are manually signed and delivered by facsimile transmission shall be deemed to constitute signed original counterparts hereof and shall bind the parties signing and delivering in such manner. - 15 - IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. _________________________________ Carol Salvo MicroFinancial Incorporated By:______________________________ Its:__________________________ EX-10.42 7 b45683mfexv10w42.txt EMPLOYMENT AGREEMENT WITH JAMES R. JACKSON, JR. EXHIBIT 10.42 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT by and between MicroFinancial Incorporated, a Massachusetts corporation, and its subsidiaries (the "Company"), and James Jackson (the "Executive"), dated as of November 21, 2002 (this "Agreement"). WHEREAS, in order to encourage the Executive's continued attention and dedication to the Company, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to provide the Executive with severance arrangements, whether prior to or during a Change of Control of the Company, subject to the terms set forth herein; and WHEREAS, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement which shall amend and supersede in its entirety any and all prior oral and written agreements and understandings between Company and Executive with respect to the subject matter of this Agreement as follows: NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on third anniversary of the date of such date; provided, however, that commencing on the first anniversary of the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), the Change of Control Period shall be automatically extended so as to terminate three (3) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), including an acquisition pursuant to 11 U.S.C. Section. 1129 et passim, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Change of Control Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Change of Control Employment Period"); provided, however, that the Change of Control Employment Period shall be automatically extended upon its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment during Change of Control Employment Period. (a) Position and Duties. (i) During the Change of Control Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, - 2 - duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Change of Control Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Change of Control Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation during Change of Control Employment Period. (i) Base Salary. During the Change of Control Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Change of Control Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Change of Control Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. - 3 - (iii) Incentive, Savings and Retirement Plans. During the Change of Control Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Change of Control Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Change of Control Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Change of Control Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Change of Control Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective - 4 - Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Change of Control Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment (During the Change of Control Employment Period) (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death if during the Change of Control Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Change of Control Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 13(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Change of Control Employment Period for Cause. For purposes of this Agreement (other than Section 7) "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Change of Control Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; - 5 - (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 12(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination (During the Change of Control Employment Period). (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Change of Control Employment Period, the Company shall terminate the Executive's - 6 - employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 6(a)(i) shall be hereinafter referred to as the "Change of Control Severance Amount"); and (ii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Change of Control Employment Period and to have retired on the last day of such period; and (iii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Change of Control Employment Period, this Agreement shall - 7 - terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Change of Control Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Change of Control Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Change of Control Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Change of Control Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than the payment of the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). - 8 - 7. Terms of Employment; Obligation of the Company upon Termination of Employment (Prior to the Effective Date). (a) Terms of Employment; Obligation of the Company upon Termination of Employment. The Executive and the Company acknowledge that the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Except as specifically provided in Sections 7(b), (c) and (d) of this Agreement, the terms of Executive's employment and the continuing participation of Executive in any plan, program, policy or practice provided by the Company or any of its affiliated companies prior to the Effective Date or upon Executive's termination of employment prior to the Effective Date (either by Executive or the Company) shall be governed by the then existing plan, program, policy or practice of the Company or any of its affiliated companies. (b) Other Than for Cause, Death or Disability. If, at any time prior to the Effective Date, the Company shall terminate the Executive's employment other than for Cause (defined below), death or Disability, the Company shall pay to the Executive (1) the Executive's Annual Base Salary payable over 12 months at the same time that the Company pays other peer executives of the Company generally, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 7(a)(i) shall be hereinafter referred to as the "Severance Amount"); For purposes of Section 7, "Cause" shall mean shall mean (i) a material breach by the Executive of the Executive's duties, responsibilities held, exercised and assigned by the Company to the Executive (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability prior to the Effective Date, this Agreement shall terminate without further obligation to the Executive, other than the payment by the Company to Executive of an amount equal to (i) the Severance Amount minus (ii) the amount Executive would be entitled to receive as a disability benefit under the then existing plan, program, policy or practice of the Company or any of its affiliated companies (which shall be paid to the Executive in accordance with the then existing, plan, program, policy or practice of the Company or any of its affiliated companies). 8. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b), 6(c), 7(b) or 7(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, - 9 - practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all - 10 - taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 10(c) of this Agreement, all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche, LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 10(c) of this Agreement and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, - 11 - accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. - 12 - 11. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 12. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Bankruptcy Proceedings. The Company agrees that within three (3) days of the entry of an order for relief with respect to the Company pursuant to the provisions of Chapter 7 or Chapter 11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy court having jurisdiction over its affairs for the assumption of this Agreement pursuant to the provisions of Section 365 of the United States Bankruptcy Code. 14. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. - 13 - (b) This Agreement amends and supersedes in its entirety all prior agreements and understandings, whether oral or written, with respect to the subject matter of this Agreement. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: James Jackson c/o MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 If to the Company: MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, President and Chief Executive Officer With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell, LLP 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (g) This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. Counterparts of - 14 - this Agreement (or applicable signature pages hereof) that are manually signed and delivered by facsimile transmission shall be deemed to constitute signed original counterparts hereof and shall bind the parties signing and delivering in such manner. - 15 - IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ___________________________________ James Jackson MicroFinancial Incorporated By: _______________________________ Its:___________________________ EX-10.43 8 b45683mfexv10w43.txt EMPLOYMENT AGREEMENT WITH STEPHEN CONSTANTINO EXHIBIT 10.43 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT by and between MicroFinancial Incorporated, a Massachusetts corporation, and its subsidiaries (the "Company"), and Stephen Constantino (the "Executive"), dated as of November 21, 2002 (this "Agreement"). WHEREAS, Executive and the Company entered into an Employment Agreement dated as of September 26, 1997 (as amended from time to time, the "Original Agreement") to assure that the Company would have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control of the Company; WHEREAS, in order to encourage the Executive's continued attention and dedication to the Company, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to provide the Executive with additional severance arrangements whether or not a Change of Control of the Company occurs and to make other amendments to the Original Agreement, subject to the terms set forth herein; and WHEREAS, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement which shall amend and supersede in its entirety the Original Agreement (and any and all prior oral and written agreements and understandings with respect to the Original Agreement) as follows: NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on third anniversary of the date of such date; provided, however, that commencing on the first anniversary of the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), the Change of Control Period shall be automatically extended so as to terminate three (3) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), including an acquisition pursuant to 11 U.S.C. Section 1129 et passim, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Change of Control Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Change of Control Employment Period"); provided, however, that the Change of Control Employment Period shall be automatically extended upon - 2 - its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment during Change of Control Employment Period. (a) Position and Duties. (i) During the Change of Control Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Change of Control Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Change of Control Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. - 3 - (b) Compensation during Change of Control Employment Period. (i) Base Salary. During the Change of Control Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Change of Control Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Change of Control Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Change of Control Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Change of Control Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and - 4 - programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Change of Control Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Change of Control Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Change of Control Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Change of Control Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment (During the Change of Control Employment Period) (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death if during the Change of Control Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Change of Control Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 13(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be - 5 - total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Change of Control Employment Period for Cause. For purposes of this Agreement (other than Section 7) "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Change of Control Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 12(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific - 6 - termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination (During the Change of Control Employment Period). (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Change of Control Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary multiplied by 1.5, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 6(a)(i) shall be hereinafter referred to as the "Change of Control Severance Amount"); and (ii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive - 7 - becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Change of Control Employment Period and to have retired on the last day of such period; and (iii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Change of Control Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Change of Control Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Change of Control Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section - 8 - 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Change of Control Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than the payment of the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). 7. Terms of Employment; Obligation of the Company upon Termination of Employment (Prior to the Effective Date). (a) Terms of Employment; Obligation of the Company upon Termination of Employment. The Executive and the Company acknowledge that the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Except as specifically provided in Sections 7(b), (c) and (d) of this Agreement, the terms of Executive's employment and the continuing participation of Executive in any plan, program, policy or practice provided by the Company or any of its affiliated companies prior to the Effective Date or upon Executive's termination of employment prior to the Effective Date (either by Executive or the Company) shall be governed by the then existing plan, program, policy or practice of the Company or any of its affiliated companies. (b) Other Than for Cause, Death or Disability. If, at any time prior to the Effective Date, the Company shall terminate the Executive's employment other than for Cause (defined below), death or Disability, the Company shall pay to the Executive (1) the Executive's Annual Base Salary multiplied by 1.5 payable over 18 months at the same time that the Company pays other peer executives of the Company generally, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 7(a)(i) shall be hereinafter referred to as the "Severance Amount"); For purposes of Section 7, "Cause" shall mean shall mean (i) a material breach by the Executive of the Executive's duties, responsibilities held, exercised and assigned by the Company to the Executive (other than as a result of incapacity due to physical or mental illness) - 9 - which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability prior to the Effective Date, this Agreement shall terminate without further obligation to the Executive, other than the payment by the Company to Executive of an amount equal to (i) the Severance Amount minus (ii) the amount Executive would be entitled to receive as a disability benefit under the then existing plan, program, policy or practice of the Company or any of its affiliated companies (which shall be paid to the Executive in accordance with the then existing, plan, program, policy or practice of the Company or any of its affiliated companies). 8. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b), 6(c), 7(b) or 7(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable - 10 - judgment by a court of competent jurisdiction declaring that such termination was for Cause or that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 10(c) of this Agreement, all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche, LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. - 11 - In the event that the Company exhausts its remedies pursuant to Section 10(c) of this Agreement and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the - 12 - taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 12. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same - 13 - manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Bankruptcy Proceedings. The Company agrees that within three (3) days of the entry of an order for relief with respect to the Company pursuant to the provisions of Chapter 7 or Chapter 11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy court having jurisdiction over its affairs for the assumption of this Agreement pursuant to the provisions of Section 365 of the United States Bankruptcy Code. 14. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) This Agreement amends and supersedes in its entirety all prior agreements and understandings, whether oral or written, with respect to the provisions of the Original Agreement. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Stephen Constantino c/o MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 If to the Company: MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, President and Chief Executive Officer - 14 - With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell, LLP 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (g) This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. Counterparts of this Agreement (or applicable signature pages hereof) that are manually signed and delivered by facsimile transmission shall be deemed to constitute signed original counterparts hereof and shall bind the parties signing and delivering in such manner. - 15 - IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ___________________________________ Stephen Constantino MicroFinancial Incorporated By:________________________________ Its:____________________________ EX-10.44 9 b45683mfexv10w44.txt EMPLOYMENT AGREEMENT WITH STEVEN LACRETA EXHIBIT 10.44 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT by and between MicroFinancial Incorporated, a Massachusetts corporation, and its subsidiaries (the "Company"), and Steven LaCreta (the "Executive"), dated as of November 21, 2002 (this "Agreement"). WHEREAS, Executive and the Company entered into an Employment Agreement dated as of September 26, 1997 (as amended from time to time, the "Original Agreement") to assure that the Company would have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control of the Company; WHEREAS, in order to encourage the Executive's continued attention and dedication to the Company, the Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to provide the Executive with additional severance arrangements whether or not a Change of Control of the Company occurs and to make other amendments to the Original Agreement, subject to the terms set forth herein; and WHEREAS, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement which shall amend and supersede in its entirety the Original Agreement (and any and all prior oral and written agreements and understandings with respect to the Original Agreement) as follows: NOW, THEREFORE, IT IS HEREBY, AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect the Change of Control or (ii) otherwise arose in connection with or anticipation of the Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on third anniversary of the date of such date; provided, however, that commencing on the first anniversary of the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), the Change of Control Period shall be automatically extended so as to terminate three (3) years from such Renewal Date, unless at least sixty (60) days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person"), including an acquisition pursuant to 11 U.S.C. Section 1129 et passim, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") or; (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board or are divested of possession by appointment of a trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or (c) Approval by the shareholders of the Company, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be; or (d) Approval by the shareholders, or, in the instance of proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the bankruptcy judge, of the Company of (i) a complete liquidation or dissolution of the Company or (ii) the sale or other disposition of all or substantially all of the assets of the Company. 3. Change of Control Employment Period. The Company hereby agrees to continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company, in accordance with the terms and provisions of this Agreement, for the period commencing on the Effective Date and ending (subject to the terms hereof) on the day following the first anniversary of such date (the "Change of Control Employment Period"); provided, however, that the Change of Control Employment Period shall be automatically extended upon - 2 - its expiration for successive periods of one (1) month each, in full accordance with the terms and provisions of this Agreement. 4. Terms of Employment during Change of Control Employment Period. (a) Position and Duties. (i) During the Change of Control Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 90-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office which is the headquarters of the Company and is less than 35 miles from such location. (ii) During the Change of Control Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Change of Control Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. - 3 - (b) Compensation during Change of Control Employment Period. (i) Base Salary. During the Change of Control Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid in equal installments on a monthly basis, at least equal to twelve times the highest monthly base salary paid or payable to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Change of Control Employment Period, the Annual Base Salary shall be reviewed at least annually and shall be increased at any time and from time to time as shall be substantially consistent with increases in base salary generally awarded in the ordinary course of business to other peer executives of the Company and its affiliated companies. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive may be awarded, for each fiscal year ending during the Change of Control Employment Period, an annual bonus (the "Annual Bonus") in cash as determined in the discretion of the Company's President and Chief Executive Officer consistent with the practices and procedures of the Company. Any such Annual Bonus shall be paid no later than the end of the fourth month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Change of Control Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 90-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Change of Control Employment Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and - 4 - programs in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Change of Control Employment Period, the Executive shall be entitled to receive prompt reimbursement for all reasonable employment expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Change of Control Employment Period, the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Change of Control Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Change of Control Employment Period, the Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment (During the Change of Control Employment Period) (a) Death or Disability. The Executive's employment shall terminate automatically upon the Executive's death if during the Change of Control Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Change of Control Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 13(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be - 5 - total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative (such agreement as to acceptability not to be withheld unreasonably). (b) Cause. The Company may terminate the Executive's employment during the Change of Control Employment Period for Cause. For purposes of this Agreement (other than Section 7) "Cause" shall mean (i) a material breach by the Executive of the Executive's obligations under Section 4(a) of this Agreement (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Good Reason. The Executive's employment may be terminated during the Change of Control Employment Period by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities or any other action by which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than that described in Section 4(a)(i)(B) of this Agreement; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 12(c) of this Agreement, provided that such successor has received at least ten days prior written notice from the Company or the Executive of the requirements of Section 12(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific - 6 - termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than 15 days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company hereunder or preclude the Executive or the Company from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligation of the Company upon Termination (During the Change of Control Employment Period). (a) Good Reason; Other Than for Cause, Death or Disability. If, during the Change of Control Employment Period, the Company shall terminate the Executive's employment other than for Cause, death or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: the sum of (1) the Executive's Annual Base Salary and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 6(a)(i) shall be hereinafter referred to as the "Change of Control Severance Amount"); and (ii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, or such longer period as any plan, program, practice or policy may provide, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(v) of this Agreement if the Executive's employment had not been terminated in accordance with the most favorable plans, practices, programs or policies of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive - 7 - becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility (such continuation of such benefits for the applicable period herein set forth shall be hereinafter referred to as "Welfare Benefit Continuation"). For purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Change of Control Employment Period and to have retired on the last day of such period; and (iii) for a minimum period that is the greater of the period commencing on the Date of Termination through (x) the next applicable Renewal Date following the Date of Termination or (y) the six month period following the Date of Termination, to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive and/or the Executive's family any other amounts or benefits required to be paid or provided or which the Executive and/or the Executive's family is eligible to receive pursuant to this Agreement and under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies as in effect and applicable generally to other peer executives and their families during the 90-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally thereafter with respect to other peer executives of the Company and its affiliated companies and their families (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by reason of the Executive's death during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for (i) payment of the Change of Control Severance Amount (which shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Death Benefits (as defined below)) and (ii) payment to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended (the "Code") of any cash amount to be received by the Executive or the Executive's family as a death benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of life insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Death Benefits"). (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability during the Change of Control Employment Period, this Agreement shall terminate without further obligation to the Executive, other than for (i) payment of Change of Control Severance Amount (which shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination) and the timely payment or provision of the Welfare Benefit Continuation and Other Benefits (excluding, in each case, Disability Benefits (as defined below)) and (ii) payment to the Executive in a lump sum in cash within 30 days of the Date of Termination of an amount equal to the present value (determined as provided in Section - 8 - 280G(d)(4) of the Code) of any cash amount to be received by the Executive as a disability benefit pursuant to the terms of any plan, policy or arrangement of the Company and its affiliated companies, but not including any proceeds of disability insurance covering the Executive to the extent paid for directly or on a contributory basis by the Executive (which shall be paid in any event as an Other Benefit) (the benefits included in this clause (ii) shall be hereinafter referred to as the "Disability Benefits"). (d) Cause; Other than for Good Reason. If the Executive's employment shall be terminated for Cause during the Change of Control Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive Annual Base Salary through the Date of Termination plus the amount of any compensation previously deferred by the Executive, in each case to the extent theretofore unpaid. If the Executive terminates employment during the Change of Control Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than the payment of the Executive's Annual Base Salary through the Date of Termination and any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay (in each case to be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination). 7. Terms of Employment; Obligation of the Company upon Termination of Employment (Prior to the Effective Date). (a) Terms of Employment; Obligation of the Company upon Termination of Employment. The Executive and the Company acknowledge that the employment of the Executive by the Company is "at will" and, prior to the Effective Date, may be terminated by either the Executive or the Company at any time. Except as specifically provided in Sections 7(b), (c) and (d) of this Agreement, the terms of Executive's employment and the continuing participation of Executive in any plan, program, policy or practice provided by the Company or any of its affiliated companies prior to the Effective Date or upon Executive's termination of employment prior to the Effective Date (either by Executive or the Company) shall be governed by the then existing plan, program, policy or practice of the Company or any of its affiliated companies. (b) Other Than for Cause, Death or Disability. If, at any time prior to the Effective Date, the Company shall terminate the Executive's employment other than for Cause (defined below), death or Disability, the Company shall pay to the Executive (1) the Executive's Annual Base Salary payable over 12 months at the same time that the Company pays other peer executives of the Company generally, and (2) any compensation or bonus previously deferred (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1) and (2) of this Section 7(a)(i) shall be hereinafter referred to as the "Severance Amount"); For purposes of Section 7, "Cause" shall mean shall mean (i) a material breach by the Executive of the Executive's duties, responsibilities held, exercised and assigned by the Company to the Executive (other than as a result of incapacity due to physical or mental illness) which is demonstrably willful and deliberate on the Executive's part, which is committed in bad - 9 - faith or without reasonable belief that such breach is in the best interests of the Company and which is not remedied in a reasonable period of time after receipt of written notice from the Company specifying such breach or (ii) the conviction of the Executive of a felony involving moral turpitude. (c) Disability. If the Executive's employment is terminated by reason of the Executive's Disability prior to the Effective Date, this Agreement shall terminate without further obligation to the Executive, other than the payment by the Company to Executive of an amount equal to (i) the Severance Amount minus (ii) the amount Executive would be entitled to receive as a disability benefit under the then existing plan, program, policy or practice of the Company or any of its affiliated companies (which shall be paid to the Executive in accordance with the then existing, plan, program, policy or practice of the Company or any of its affiliated companies). 8. Non-Exclusivity of Rights. Except as provided in Sections 6(a)(ii), 6(b), 6(c), 7(b) or 7(c) of this Agreement, nothing in this Agreement shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement; Resolution of Disputes. (a) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and, except as provided in Section 6(a)(ii) of this Agreement, such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay promptly as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Code. (b) If there shall be any dispute between the Company and the Executive (i) in the event of any termination of the Executive's employment by the Company, whether such termination was for Cause, or (ii) in the event of any termination of employment by the Executive, whether Good Reason existed, then, unless and until there is a final, nonappealable judgment by a court of competent jurisdiction declaring that such termination was for Cause or - 10 - that the determination by the Executive of the existence of Good Reason was not made in good faith, the Company shall pay all amounts, and provide all benefits, to the Executive and/or the Executive's family or other beneficiaries, as the case may be, that the Company would be required to pay or provide pursuant to Section 6(a) of this Agreement as though such termination were by the Company without Cause or by the Executive with Good Reason; provided, however, that the Company shall not be required to pay any disputed amounts pursuant to this paragraph except upon receipt of an undertaking by or on behalf of the Executive to repay all such amounts to which the Executive is ultimately adjudged by such court not to be entitled. 10. Certain Additional Payments by the Company. (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 10(c) of this Agreement, all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Deloitte & Touche, LLP (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 10(c) of this Agreement - 11 - and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is - 12 - limited solely to such contested amount Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(c) of this Agreement) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c) of this Agreement, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Confidential Information; Non-Compete. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. For a period of twelve months from and after the Date of Termination, the Executive shall not, directly or indirectly, be or become employed or associated with any microticket leasing business in the United States which is in competition with the Company. 12. Successors. (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such - 13 - succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Bankruptcy Proceedings. The Company agrees that within three (3) days of the entry of an order for relief with respect to the Company pursuant to the provisions of Chapter 7 or Chapter 11 of the United States Bankruptcy Code, it will seek approval of the bankruptcy court having jurisdiction over its affairs for the assumption of this Agreement pursuant to the provisions of Section 365 of the United States Bankruptcy Code. 14. Miscellaneous. (a) This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) This Agreement amends and supersedes in its entirety all prior agreements and understandings, whether oral or written, with respect to the provisions of the Original Agreement. (c) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Steven LaCreta c/o MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 If to the Company: MicroFinancial Incorporated 950 Winter Street Waltham, MA 02154 Attention: Richard F. Latour, President and Chief Executive Officer - 14 - With a copy to: Gerald P. Hendrick, Esq. Edwards & Angell, LLP 101 Federal Street Boston, MA 02110 or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) The Executive's or the Company's failure to insist upon strict compliance with any provision hereof or any other provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (g) This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument. Counterparts of this Agreement (or applicable signature pages hereof) that are manually signed and delivered by facsimile transmission shall be deemed to constitute signed original counterparts hereof and shall bind the parties signing and delivering in such manner. - 15 - IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ___________________________________ Steven LaCreta MicroFinancial Incorporated By:________________________________ Its:____________________________ EX-28.1 10 b45683mfexv28w1.txt CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos.333-75801, 333-77211 and 333-85324 of MicroFinancial Incorporated on Form S-8 of our report dated April 15, 2003, appearing in this Annual Report on Form 10-K of MicroFinancial Incorporated for the year ended December 31, 2002. /s/ Deloitte & Touche LLP Boston, Massachusetts April 15, 2003 EX-99.1 11 b45683mfexv99w1.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER Exhibit 99.1 MICROFINANCIAL, INCORPORATED CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002 Richard F. Latour, President and Chief Executive Officer of MicroFinancial, Incorporated, (the "Company"), hereby certifies that, to the best of his knowledge, based upon a review of the Annual Report on Form 10-K for the Year ended December 31, 2002 (the "Covered Report") and, excepts as corrected or supplemented in a subsequent covered report: - - the Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - - the information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company. In Witness Whereof, the undersigned has signed this Certification as of this April 15, 2003. /s/RICHARD F. LATOUR -------------------- President and Chief Executive Officer EX-99.2 12 b45683mfexv99w2.txt CERTIFICATION OF THE CHIEF FINANCIAL OFFICER Exhibit 99.2 MICROFINANCIAL, INCORPORATED CERTIFICATION OF CHIEF FINANCIAL OFFICER REGARDING ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002 James R. Jackson Jr., Vice President and Chief Financial Officer of MicroFinancial, Incorporated, (the "Company"), hereby certifies that, to the best of his knowledge, based upon a review of the Annual Report on Form 10-K for the Year ended December 31, 2002 (the "Covered Report") and, excepts as corrected or supplemented in a subsequent covered report: - - the Covered Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and - - the information contained in the Covered Report fairly presents, in all material respects, the financial condition and results of operations of the Company. In Witness Whereof, the undersigned has signed this Certification as of this April 15, 2003. /s/JAMES R. JACKSON JR. ----------------------- Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----