-----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, WwATyfiwDed/pGOIxLnwvtHc/Juyox35594i2XEn9yXgEUFYs8MOuNc29OM8Mo4b XnyLGOmtNNxjp8wSmleRTA== 0000950123-99-008923.txt : 20000211 0000950123-99-008923.hdr.sgml : 20000211 ACCESSION NUMBER: 0000950123-99-008923 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19990929 GROUP MEMBERS: LIGHTHOUSE ACQUISITION CORP GROUP MEMBERS: TEXTRON FINANCIAL CORP SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: LITCHFIELD FINANCIAL CORP /MA CENTRAL INDEX KEY: 0000882515 STANDARD INDUSTRIAL CLASSIFICATION: MORTGAGE BANKERS & LOAN CORRESPONDENTS [6162] IRS NUMBER: 043023928 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-43236 FILM NUMBER: 99719547 BUSINESS ADDRESS: STREET 1: 430 MAIN STREET CITY: WILLIAMSTOWN STATE: MA ZIP: 01267 BUSINESS PHONE: 4134581000 MAIL ADDRESS: STREET 1: 430 MAIN STREET CITY: WILLIAMSTOWN STATE: MA ZIP: 01267 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: TEXTRON FINANCIAL CORP CENTRAL INDEX KEY: 0000709255 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 056008768 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 40 WESTMINSTER ST CITY: PROVIDENCE STATE: RI ZIP: 02901 BUSINESS PHONE: 4016214200 MAIL ADDRESS: STREET 1: 40 WESTMINSTER ST CITY: PROVIDENCE STATE: RI ZIP: 02901 SC 14D1 1 SCHEDULE 14D-1 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ SCHEDULE 14D-1 TENDER OFFER STATEMENT PURSUANT TO SECTION 14(d)(1) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------------ LITCHFIELD FINANCIAL CORPORATION (NAME OF SUBJECT COMPANY) LIGHTHOUSE ACQUISITION CORP. TEXTRON FINANCIAL CORPORATION (BIDDERS) COMMON STOCK, PAR VALUE $0.01 PER SHARE (TITLE OF CLASS OF SECURITIES) 536619 10 9 (CUSIP NUMBERS OF CLASS OF SECURITIES) ELIZABETH C. PERKINS, ESQ. SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY TEXTRON FINANCIAL CORPORATION 40 WESTMINSTER STREET PROVIDENCE, RI 02903 TELEPHONE: (401) 621-4244 (NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF BIDDER) COPY TO: MARIO A. PONCE, ESQ. SIMPSON THACHER & BARTLETT 425 LEXINGTON AVENUE NEW YORK, NEW YORK 10017 TELEPHONE: (212) 455-2000 CALCULATION OF FILING FEE
- ------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------- TRANSACTION VALUATION(1) AMOUNT OF FILING FEE(2) - ------------------------------------------------------------------------------------------------- $183,000,000 $36,600 - ------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------
(1) Based on the offer to purchase all of the outstanding shares of Common Stock of the Subject Company at $24.50 cash per share, 6,984,601 shares of Common Stock issued and outstanding and 913,720 outstanding options as of September 22, 1999, at prices ranging from $1.44 to $23.25. (2) 1/50 of 1% of Transaction Valuation. [ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: Filing Party: Form or Registration No.: Date Filed:
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 This Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") relates to the offer by Lighthouse Acquisition Corp., a Massachusetts corporation ("Purchaser") and a wholly owned subsidiary of Textron Financial Corporation, a Delaware corporation ("TFC"), to purchase for cash all of the outstanding shares of Common Stock, par value $0.01 per share (the "Shares"), of Litchfield Financial Corporation, a Massachusetts corporation (the "Company"), at a purchase price of $24.50 per Share net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated as of September 29, 1999 (the "Offer to Purchase"), a copy of which is attached hereto as Exhibit (a)(1), and in the related Letter of Transmittal (which, together with the Offer to Purchase, as amended from time to time, constitute the "Offer"), a copy of which is attached hereto as Exhibit (a)(2). ITEM 1. SECURITY AND SUBJECT COMPANY. (a) The name of the subject company is Litchfield Financial Corporation. The information set forth in Section 7 ("Certain Information Concerning the Company") of the Offer to Purchase is incorporated herein by reference. (b) The exact title of the class of equity securities being sought in the Offer is Common Stock, par value $0.01 per share, of the Company. The information set forth in the Introduction of the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section 6 ("Price Range of Shares; Dividends") of the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. (a)-(d) and (g) This Statement is filed by Purchaser and TFC. The information set forth in Section 8 ("Certain Information Concerning the Purchaser, TFC and Textron") of the Offer to Purchase and in Schedule I thereto is incorporated herein by reference. (e) and (f) During the last five years, none of Purchaser, TFC or, to the best knowledge of Purchaser, TFC or Textron, any of the persons listed in Schedule I to the Offer to Purchase (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY. (a) and (b) The information set forth in Section 8 ("Certain Information Concerning the Purchaser, TFC and Textron"), Section 10 ("Background of the Offer; Contacts with the Company") and Section 11 ("The Merger Agreement") of the Offer to Purchase is incorporated herein by reference. ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) and (b) The information set forth in Section 9 ("Source and Amount of Funds") of the Offer to Purchase is incorporated herein by reference. (c) Not applicable. ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER. (a)-(e) The information set forth in the Introduction, Section 10 ("Background of the Offer; Contacts with the Company"), Section 11 ("The Merger Agreement"), Section 12 ("Purpose of the Offer; The Merger; Plans for the Company") and Section 14 ("Effect of the Offer on the Market for the Shares, Nasdaq Listing and Exchange Act Registration") of the Offer to Purchase is incorporated herein by reference. (f)-(g) The information set forth in Section 14 ("Effect of the Offer on the Market for the Shares, Nasdaq Listing and Exchange Act Registration") of the Offer to Purchase is incorporated herein by reference. 2 3 Except as contemplated by the Merger Agreement (as defined in the Offer to Purchase), neither TFC nor Purchaser has any plans or proposals which relate to or would result in (x) the acquisition by any person of additional securities of the Company or the disposition of securities of the Company, or (y) changes to the Company's charter, bylaws or instruments corresponding thereto or other action which may impede the acquisition of control of the Company by any person. ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) and (b) The information set forth in the Introduction and Section 8 ("Certain Information Concerning the Purchaser, TFC and Textron") of and Schedule I to the Offer to Purchase is incorporated herein by reference. ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES The information set forth in the Introduction, Section 8 ("Certain Information Concerning the Purchaser, TFC and Textron"), Section 10 ("Background of the Offer; Contacts with the Company"), Section 11 ("The Merger Agreement") and Section 12 ("Purpose of the Offer; The Merger; Plans for the Company") of the Offer to Purchase is incorporated herein by reference. ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth in the Introduction and Section 17 ("Fees and Expenses") of the Offer to Purchase is incorporated herein by reference. ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS. The information set forth in Section 8 ("Certain Information Concerning the Purchaser, TFC and Textron") and Annex I of the Offer to Purchase is incorporated herein by reference. ITEM 10. ADDITIONAL INFORMATION. (a) The information set forth in Section 11 ("The Merger Agreement") is incorporated herein by reference. (b) and (c) The information set forth in Section 16 ("Certain Legal Matters and Regulatory Approvals") of the Offer to Purchase is incorporated herein by reference. (d) The information set forth in Section 14 ("Effect of the Offer on the Market for the Shares, Nasdaq Listing and Exchange Act Registration") and Section 16 ("Certain Legal Matters and Regulatory Approvals") of the Offer to Purchase is incorporated herein by reference. (e) None. (f) The information set forth in the Offer to Purchase and the Letter of Transmittal is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Offer to Purchase dated September 29, 1999. (a)(2) Letter of Transmittal. (a)(3) Notice of Guaranteed Delivery. (a)(4) Letter from the Dealer Manager to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees. (a)(5) Letter to clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Nominees. 3 4 (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Summary Advertisement as published on September 29, 1999. (a)(8) Press Release issued by TFC and the Company on September 23, 1999. (b) Not applicable. (c) Agreement and Plan of Merger, dated as of September 22, 1999, by and among Textron Financial Corporation, Lighthouse Acquisition Corp. and Litchfield Financial Corporation. (d) Not applicable. (e) Not applicable. (f) Not applicable. 4 5 SIGNATURE After due inquiry and to the best of our knowledge and belief, we hereby certify that the information set forth in this Statement is true, complete and correct. LIGHTHOUSE ACQUISITION CORP. By: /s/ ELIZABETH C. PERKINS ------------------------------------ Name: Elizabeth C. Perkins Title: Secretary TEXTRON FINANCIAL CORPORATION By: /s/ ELIZABETH C. PERKINS ------------------------------------ Name: Elizabeth C. Perkins Title: Secretary Date: September 29, 1999 5 6 EXHIBIT INDEX
EXHIBIT PAGE NO. DESCRIPTION NO. - ------- ----------- ---- (a)(1) Offer to Purchase dated September 29, 1999. (a)(2) Letter of Transmittal. (a)(3) Notice of Guaranteed Delivery. (a)(4) Letter from the Dealer Manager to Brokers, Dealers, Commercial Banks, Trust Companies and Nominees. (a)(5) Letter to clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Nominees. (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Summary Advertisement as published on September 29, 1999. (a)(8) Press Release issued by TFC and the Company on September 23, 1999. (b) Not applicable. (c) Agreement and Plan of Merger, dated as of September 22, 1999, by and among Textron Inc., Lighthouse Acquisition Corp. and Litchfield Financial Corporation. (d) Not applicable. (e) Not applicable. (f) Not applicable.
6 EX-99.A.1 2 OFFER TO PURCHASE 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF LITCHFIELD FINANCIAL CORPORATION AT $24.50 NET PER SHARE BY LIGHTHOUSE ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF TEXTRON FINANCIAL CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, OCTOBER 27, 1999, UNLESS THE OFFER IS EXTENDED. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PURSUANT TO THE OFFER PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE (THE "SHARES"), OF LITCHFIELD FINANCIAL CORPORATION (THE "COMPANY"), WHICH CONSTITUTES MORE THAN 66 2/3% OF THE SHARES (DETERMINED ON A FULLY-DILUTED BASIS) (II) THE EXPIRATION OR TERMINATION OF ANY APPLICABLE WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED. THE OFFER IS ALSO SUBJECT TO OTHER TERMS AND CONDITIONS. SEE THE INTRODUCTION AND SECTIONS 1, 11 AND 15. ------------------------ THE BOARD OF DIRECTORS OF THE COMPANY HAS APPROVED THE MERGER AGREEMENT (AS DEFINED BELOW) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER (EACH AS DEFINED BELOW), AND DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS, AND RECOMMENDS THAT STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES TO THE PURCHASER PURSUANT TO THE OFFER. ------------------------ IMPORTANT Any stockholder desiring to tender all or any portion of such stockholder's Shares should either (1) complete and sign the Letter of Transmittal (or a facsimile thereof) in accordance with the instructions in the Letter of Transmittal, mail or deliver the Letter of Transmittal (or such facsimile) and any other required documents to the Depositary (as defined herein), and either deliver the certificates representing the tendered Shares and any other required documents to the Depositary or tender such Shares pursuant to the procedure for book-entry transfer set forth in Section 3 or (2) request such stockholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such stockholder. Stockholders having Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if they desire to tender Shares so registered. A stockholder who desires to tender Shares and whose certificates representing such Shares are not immediately available, or who cannot deliver the certificates for Shares and all other required documents to reach the Depository on or prior to the Expiration Date (as defined herein), or who cannot comply with the procedure for book-entry transfer on a timely basis, may tender such Shares by following the procedures for guaranteed delivery set forth in Section 3. Questions and requests for assistance may be directed to Donaldson, Lufkin & Jenrette Securities Corporation (the "Dealer Manager") or to D.F. King & Co., Inc. (the "Information Agent") at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may also be obtained from the Information Agent or the Dealer Manager, or from brokers, dealers, commercial banks or trust companies. THE DEALER MANAGER FOR THE OFFER IS: DONALDSON, LUFKIN & JENRETTE September 29, 1999 2 TABLE OF CONTENTS
PAGE ---- INTRODUCTION............................................................ 1 THE OFFER............................................................... 2 1. Terms of the Offer; Expiration Date......................... 2 2. Acceptance for Payment and Payment for Shares............... 3 3. Procedure for Tendering Shares.............................. 4 4. Withdrawal Rights........................................... 7 5. Certain Federal Income Tax Consequences..................... 8 6. Price Range of Shares; Dividends............................ 8 7. Certain Information Concerning the Company.................. 9 8. Certain Information Concerning the Purchaser, TFC and 15 Textron..................................................... 9. Source and Amount of Funds.................................. 17 10. Background of the Offer; Contacts with the Company.......... 17 11. The Merger Agreement........................................ 20 12. Purpose of the Offer; the Merger; Plans for the Company..... 30 13. Dividends and Distributions................................. 31 14. Effect of the Offer on the Market for the Shares, Nasdaq 32 Listing and Exchange Act Registration....................... 15. Certain Conditions of the Offer............................. 32 16. Certain Legal Matters and Regulatory Approvals.............. 34 17. Fees and Expenses........................................... 36 18. Miscellaneous............................................... 38 SCHEDULE I -- DIRECTORS AND EXECUTIVE OFFICERS.......................... I-1 ANNEX I -- CONSOLIDATED FINANCIAL STATEMENTS OF TFC AND SUPPLEMENTARY DATA.................................................................. A-1
i 3 To the Stockholders of LITCHFIELD FINANCIAL CORPORATION INTRODUCTION Lighthouse Acquisition Corp. (the "Purchaser"), a Massachusetts corporation and a wholly owned subsidiary of Textron Financial Corporation, a Delaware corporation ("TFC"), hereby offers to purchase all of the outstanding shares of common stock, par value $.01 per share (the "Shares") of Litchfield Financial Corporation, a Massachusetts corporation (the "Company") at a purchase price of $24.50 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with this Offer to Purchase, as amended from time to time, constitute the "Offer"). TFC is a wholly owned subsidiary of Textron Inc., a Delaware corporation ("Textron"). Tendering stockholders will not be obligated to pay brokerage fees or commissions or, subject to Instruction 6 of the Letter of Transmittal, stock transfer taxes on the transfer and sale of Shares pursuant to the Offer. The Purchaser will pay all fees and expenses of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), which is acting as Dealer Manager for the Offer (in such capacity, the "Dealer Manager"), EquiServe Limited Partnership which is acting as the Depositary (in such capacity, the "Depositary"), and D.F. King & Co., Inc., which is acting as the Information Agent (in such capacity, the "Information Agent"), incurred in connection with the Offer. See Section 17. THE BOARD OF DIRECTORS OF THE COMPANY (THE "BOARD OF DIRECTORS") HAS APPROVED THE MERGER AGREEMENT (AS DEFINED BELOW) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER (AS DEFINED BELOW), AND DETERMINED THAT THE TERMS OF THE OFFER AND THE MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS THAT STOCKHOLDERS OF THE COMPANY ACCEPT THE OFFER AND TENDER THEIR SHARES TO THE PURCHASER PURSUANT TO THE OFFER. The Board of Directors has received the oral and written opinions, each dated September 22, 1999, of CIBC World Markets Corp., financial advisor to the Company (the "Financial Advisor"), to the effect that, as of such dates and based upon and subject to certain matters stated therein, from a financial point of view the $24.50 per Share cash consideration to be received in the Offer and the Merger by holders of Shares (other than Textron, TFC, the Purchaser or any direct or indirectly wholly-owned subsidiary of Textron, TFC or the Purchaser) is fair to such holders. A copy of the written opinion of the Financial Advisor is attached to the Company's Solicitation/Recommendation Statement on Schedule 14D-9, which is being distributed to the stockholders of the Company, and stockholders are urged to read the opinion carefully in its entirety for the assumptions made, matters considered and limitations on the review undertaken by the Financial Advisor. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PURSUANT TO THE OFFER PRIOR TO THE EXPIRATION DATE (AS DEFINED IN SECTION 1) SUCH NUMBER OF SHARES WHICH CONSTITUTES MORE THAN 66 2/3% OF THE SHARES (DETERMINED ON A FULLY DILUTED BASIS) (THE "MINIMUM CONDITION") AND (II) THE EXPIRATION OR TERMINATION OF ANY APPLICABLE WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED (THE "HSR ACT") (THE "HSR ACT CONDITION"). SEE SECTIONS 1, 11 AND 15. IF THE PURCHASER PURCHASES AT LEAST THAT NUMBER OF SHARES NEEDED TO SATISFY THE MINIMUM CONDITION, IT WILL BE ABLE TO EFFECT THE MERGER WITHOUT THE AFFIRMATIVE VOTE OF ANY OTHER STOCKHOLDER OF THE COMPANY. SEE SECTION 12. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of September 22, 1999 (the "Merger Agreement"), by and among TFC, the Purchaser and the Company. The Merger Agreement provides, among other things, for the making of the Offer by the Purchaser, and further provides that, following the completion of the Offer, upon the terms and subject to the conditions of the Merger Agreement, and in accordance with the Massachusetts Business Corporation Law (the "MBCL"), the Purchaser will be 1 4 merged with and into the Company (the "Merger"). Following the Merger, the Company will continue as the surviving corporation (the "Surviving Corporation") and become a wholly owned subsidiary of TFC, and the separate corporate existence of the Purchaser will cease. See Section 11. At the effective time of the Merger (the "Effective Time"), each Share issued and outstanding immediately prior to the Effective Time (other than (i) Shares owned by the Company and Shares owned by TFC, the Purchaser or any other direct or indirectly wholly-owned subsidiary of TFC or the Purchaser, which shall be cancelled, and (ii) Shares, if any (collectively, "Dissenting Shares"), held by stockholders who have properly exercised appraisal rights under Section 89 of the MBCL) will, by virtue of the Merger and without any action on the part of the holders of the Shares, be cancelled, extinguished and converted into and become a right to receive $24.50 in cash (the "Merger Consideration"), payable to the holder thereof, without interest, upon surrender of the certificate formerly representing such Share, less any required withholding taxes. The Merger Agreement is more fully described in Section 11. Certain federal income tax consequences of the sale of the Shares pursuant to the Offer and the exchange of Shares for the Merger Consideration pursuant to the Merger are described in Section 5. The Company has represented to TFC and the Purchaser that as of the close of business on September 22, 1999, there were 6,984,601 Shares issued and outstanding and 913,720 Shares reserved for issuance upon exercise of outstanding options. Based upon the foregoing, the Purchaser believes that approximately 5,265,548 shares constitutes 66 2/3% of the outstanding Shares on a fully-diluted basis. THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. THE OFFER 1. TERMS OF THE OFFER; EXPIRATION DATE. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of such extension or amendment), the Purchaser will accept for payment and pay for all Shares validly tendered on or prior to the Expiration Date and not properly withdrawn as permitted by Section 4. The term "Expiration Date" means 12:00 Midnight, New York City time, on Wednesday, October 27, 1999, unless and until the Purchaser, in its sole discretion (but subject to the terms and conditions of the Merger Agreement), shall have extended the period during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Purchaser, shall expire. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, SATISFACTION OF THE MINIMUM CONDITION AND THE HSR ACT CONDITION AND CERTAIN OTHER CONDITIONS. SEE SECTION 15, WHICH SETS FORTH IN FULL THE CONDITIONS TO THE OFFER. SUBJECT TO THE PROVISIONS OF THE MERGER AGREEMENT AND THE APPLICABLE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"), THE PURCHASER RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO WAIVE ANY OR ALL CONDITIONS TO THE OFFER (OTHER THAN THE MINIMUM CONDITION) AND TO MODIFY THE TERMS OF THE OFFER. SUBJECT TO THE PROVISIONS OF THE MERGER AGREEMENT, INCLUDING THE PROVISIONS OF THE MERGER AGREEMENT DESCRIBED IN THE NEXT TWO PARAGRAPHS, AND THE APPLICABLE RULES AND REGULATIONS OF THE COMMISSION, IF BY THE EXPIRATION DATE ANY OR ALL OF SUCH CONDITIONS TO THE OFFER HAVE NOT BEEN SATISFIED, THE PURCHASER RESERVES THE RIGHT (BUT SHALL NOT BE OBLIGATED) TO (I) TERMINATE THE OFFER AND RETURN ALL TENDERED SHARES TO TENDERING STOCKHOLDERS, (II) WAIVE SUCH UNSATISFIED CONDITIONS AND PURCHASE ALL SHARES VALIDLY TENDERED OR (III) EXTEND THE OFFER AND, SUBJECT TO THE TERMS OF THE OFFER (INCLUDING THE RIGHTS OF STOCKHOLDERS TO WITHDRAW THEIR SHARES), RETAIN THE SHARES WHICH HAVE BEEN TENDERED, UNTIL THE TERMINATION OF THE OFFER, AS EXTENDED. Subject to the applicable rules and regulations of the Commission and the provisions of the Merger Agreement, the Purchaser expressly reserves the right, in its sole discretion, at any time and from time to time, and regardless of whether or not any of the events set forth in Section 15 shall have occurred, to (i) extend the period of time during which the Offer is open and thereby delay acceptance for payment of, and the payment 2 5 for, any Shares, by giving oral or written notice of such extension to the Depositary or (ii) amend the Offer in any respect by giving oral or written notice of such amendment to the Depositary. During any such extension, all Shares previously tendered and not properly withdrawn will remain subject to the Offer, subject to the right of a tendering stockholder to withdraw such stockholder's Shares. Under the terms of the Merger Agreement, the Purchaser has agreed with the Company that it will not, without the prior written consent of the Company, (i) decrease the price per Share payable in the Offer to below $24.50, (ii) change the form of consideration to be paid in the Offer, (iii) reduce the maximum number of Shares to be purchased in the Offer or the Minimum Condition, (iv) impose conditions to the Offer in addition to the Offer conditions set forth in Annex A to the Merger Agreement (the "Offer Conditions") or modify the Offer conditions in a manner adverse to the holders of Shares or (v) amend any other term of the Offer in a manner adverse to the holders of the Shares (provided that a waiver by Purchaser of any condition other than the Minimum Condition shall not be deemed to be adverse to the holders of the Shares). Notwithstanding the foregoing, the Purchaser may, without the consent of the Company, extend the Offer for up to five business days beyond the Expiration Date if there shall not have been tendered sufficient Shares so that the Merger could be effected without a meeting of the Company's stockholders in accordance with Section 82 of the MBCL. The Purchaser shall have no obligation to pay interest on the purchase price of tendered Shares. The rights reserved by the Purchaser in this Section 1 are in addition to the Purchaser's rights to terminate the Offer pursuant to Section 15. If the Purchaser makes a material change in the terms of the Offer or if it waives a material condition of the Offer, the Purchaser will disseminate additional tender offer material and extend the Offer to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The minimum period during which an offer must remain open following material changes in the terms of the Offer, other than a change in price or a change in the percentage of securities sought, will depend upon the facts and circumstances, including the materiality, of the changes. With respect to a change in price or, subject to certain limitations, a change in the percentage of securities sought, a minimum ten business day period from the day of such change is generally required to allow for adequate dissemination to stockholders. For purposes of the Offer, a "business day" means any day other than a Saturday, Sunday, or a federal holiday and consists of the time period from 12:01 A.M. through 12:00 Midnight, New York City time. The Company has provided the Purchaser with the Company's stockholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase and the related Letter of Transmittal and other relevant materials will be mailed by the Purchaser to record holders of Shares and furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), the Purchaser will accept for payment Shares that have been validly tendered and not properly withdrawn on or prior to the Expiration Date as soon as practicable after the Expiration Date. In addition, subject to applicable rules of the Commission, the Purchaser expressly reserves the right to delay acceptance for payment of or payment for Shares pending receipt of any other regulatory approvals specified in Section 16. Any such delays will be effected in compliance with Rule 14e-1(c) under the Exchange Act (relating to a bidder's obligation to pay for or return tendered securities promptly after the termination or withdrawal of such bidder's offer). For information with respect to approvals required to be obtained prior to the consummation of the Offer, including the HSR Act, see Section 16. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates representing the Shares (the "Share 3 6 Certificates"), or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such Shares into the Depositary's account at The Depositary Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in Section 3, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined below) in connection with a book-entry transfer, and (iii) any other documents required by the Letter of Transmittal. The term "Agent's Message" means a message transmitted by the Book-Entry Transfer Facility to and received by the Depositary and forming a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has received an express acknowledgment from the participant in the Book-Entry Transfer Facility tendering the Shares that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that the Purchaser may enforce such agreement against such participant. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not properly withdrawn as, if and when the Purchaser gives oral or written notice to the Depositary of the Purchaser's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payments from the Purchaser and transmitting such payments to stockholders whose Shares have been accepted for payment. Under no circumstances will interest on the purchase price for Shares be paid by the Purchaser, regardless of any extension of the Offer or any delay in making such payment. If, for any reason whatsoever, acceptance for payment of or payment for any Shares tendered pursuant to the Offer is delayed or the Purchaser is unable to accept for payment or pay for Shares tendered pursuant to the Offer then, without prejudice to the Purchaser's rights set forth herein, the Depositary may nevertheless, on behalf of the Purchaser and subject to Rule 14e-1(c) under the Exchange Act, retain tendered Shares and such Shares may not be withdrawn except to the extent that the tendering stockholder is entitled to and duly exercises withdrawal rights as described in Section 4. If any tendered Shares are not accepted for payment for any reason or if Share Certificates are submitted for more Shares than are tendered, Share Certificates evidencing unpurchased or untendered Shares will be returned without expense to the tendering stockholder (or, in the case of Shares tendered by book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility pursuant to the procedures set forth in Section 3, such Shares will be credited to an account maintained at such Book-Entry Transfer Facility), as promptly as practicable following the expiration, termination or withdrawal of the Offer. If, prior to the Expiration Date, Purchaser increases the consideration to be paid per Share pursuant to the Offer, Purchaser will pay the increased consideration for all Shares purchased pursuant to the Offer, whether or not such Shares were tendered prior to the increase in consideration. The Purchaser reserves the right to transfer or assign to any direct or indirect wholly owned subsidiary or subsidiaries of TFC, the right to purchase all of the Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve the Purchaser of its obligations under the Offer and will in no way prejudice the rights of tendering stockholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. 3. PROCEDURE FOR TENDERING SHARES Valid Tenders. Except as set forth below, in order for Shares to be validly tendered pursuant to the Offer, either (a) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, together with any required signature guarantees, or an Agent's Message in connection with a book-entry delivery of Shares, and any other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase on or prior to the Expiration Date and either (i) Share Certificates evidencing tendered Shares must be received by the Depositary at such address or (ii) such Shares must be tendered pursuant to the procedure for book-entry transfer described below and a Book-Entry Confirmation must be received by the Depositary, in each case on 4 7 or prior to the Expiration Date or (b) the guaranteed delivery procedures described below must be complied with by tendering stockholders. Book-Entry Transfer. The Depositary will make a request to establish accounts with respect to the Shares at the Book-Entry Transfer Facility for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the system of the Book-Entry Transfer Facility may make book-entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at such Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures for such transfer. However, although delivery of Shares may be effected through book-entry transfer at the Book-Entry Transfer Facility, the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, together with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other documents required by the Letter of Transmittal, must in any case be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase on or prior to the Expiration Date, or the tendering stockholder must comply with the guaranteed delivery procedures described below. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH THE BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE OF BOOK-ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Signature Guarantees. Signatures on Letters of Transmittal must be guaranteed by a firm which is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program (each of the foregoing being referred to as an "Eligible Institution"), except in cases where Shares are tendered (i) by a registered holder of Shares who has not completed either the box labeled "Special Payment Instructions" or the box labeled "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. See Instructions 1 and 5 of the Letter of Transmittal. If the Share Certificates are registered in the name of a person other than the signer of the Letter of Transmittal, or if payment is to be made, or Share Certificates not accepted for payment or not tendered are to be returned, to a person other than the registered holder, the Share Certificates must be endorsed or accompanied by appropriate stock powers, in either case, signed exactly as the name of the registered holder appears on such certificates, with the signatures on such certificates or stock powers guaranteed as aforesaid. See Instructions 1 and 5 of the Letter of Transmittal. If Share Certificates are forwarded separately to the Depositary, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) must accompany each such delivery. Guaranteed Delivery. If a stockholder desires to tender Shares pursuant to the Offer and such stockholder's Share Certificates are not immediately available, or such stockholder cannot deliver the Share Certificates and all other required documents to reach the Depositary on or prior to the Expiration Date, or such stockholder cannot complete the procedure for delivery by book-entry transfer on a timely basis, such Shares may nevertheless be tendered, provided that all of the following conditions are satisfied: (i) such tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Purchaser, is received by the Depositary as provided below on or prior to the Expiration Date; and (iii) the Share Certificates (or a Book-Entry Confirmation), representing all tendered Shares in proper form for transfer, together with the Letter of Transmittal (or a facsimile thereof) 5 8 properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message) and any other documents required by the Letter of Transmittal are received by the Depositary within three trading days after the date of execution of such Notice of Guaranteed Delivery. A trading day is any day on which the Nasdaq National Market is open for business. The Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, telex, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution and a representation that the stockholder owns the Shares tendered within the meaning of, and that the tender of the Shares effected thereby complies with, Rule 14e-4 under the Exchange Act, each in the form set forth in such Notice of Guaranteed Delivery. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of Share Certificates for, or of Book-Entry Confirmation with respect to, such Shares, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), together with any required signature guarantees (or, in the case of a book-entry transfer, an Agent's Message), and any other documents required by the Letter of Transmittal. Accordingly, payment might not be made to all tendering stockholders at the same time and will depend upon when Share Certificates or Book-Entry Confirmations with respect to such Shares are received into the Depositary's account at a Book-Entry Transfer Facility. Appointment as Proxy. By executing the Letter of Transmittal, a tendering stockholder irrevocably appoints designees of the Purchaser and each of them as such stockholder's attorneys-in-fact and proxies, with full power of substitution, in the manner set forth in the Letter of Transmittal, to the full extent of such stockholder's rights with respect to the Shares tendered by such stockholder and accepted for payment by the Purchaser (and with respect to any and all other Shares or other securities issued or issuable in respect of such Shares on or after the date hereof). All such powers of attorney and proxies shall be considered irrevocable and coupled with an interest in the tendered Shares. Such appointment will be effective when, and only to the extent that, the Purchaser accepts such Shares for payment. Upon such acceptance for payment, all prior powers of attorney and proxies given by such stockholder with respect to such Shares (and such other Shares, and other securities) will be revoked without further action, and no subsequent powers of attorney and proxies may be given nor any subsequent written consents executed (and, if given or executed, will not be deemed effective). The designees of the Purchaser will, with respect to the Shares (and such other Shares and other securities) for which such appointment is effective, be empowered to exercise all voting and other rights of such stockholder as they in their sole discretion may deem proper at any annual or special meeting of the Company's stockholders or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise. The Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon the Purchaser's payment for such Shares, the Purchaser must be able to exercise full voting rights with respect to such Shares and other securities, including voting at any meeting of stockholders. Determination of Validity. All questions as to the validity, form, eligibility (including time of receipt) and acceptance for payment of any tender of Shares will be determined by the Purchaser in its sole discretion, which determination shall be final and binding. The Purchaser reserves the absolute right to reject any and all tenders determined by it not to be in proper form or the acceptance for payment of which may in the opinion of its counsel be unlawful. The Purchaser also reserves the absolute right to waive any of the conditions of the Offer (subject to the provisions of the Merger Agreement) or any defect or irregularity in any tender of Shares of any particular stockholder whether or not similar defects or irregularities are waived in the case of other stockholders. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of the Purchaser, TFC, any of their affiliates or assigns, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. The Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding. 6 9 Backup Federal Income Tax Withholding and Substitute Form W-9. Under the "backup withholding" provisions of federal income tax law, the Depositary may be required to withhold 31% of the amount of any payments of cash pursuant to the Offer. In order to avoid backup withholding, each stockholder surrendering Shares in the Offer must, unless an exemption applies, provide the payor of such cash with such stockholder's correct taxpayer identification number ("TIN") on a substitute Form W-9 and certify, under penalties of perjury, that such TIN is correct and that such stockholder is not subject to backup withholding. If a stockholder does not provide its correct TIN or fails to provide the certifications described above, the Internal Revenue Service ("IRS") may impose a penalty on such stockholder and payment of cash to such stockholder pursuant to the Offer may be subject to backup withholding of 31%. All stockholders surrendering Shares pursuant to the Offer should complete and sign the substitute Form W-9 included in the Letter of Transmittal to provide the information and certification necessary to avoid backup withholding (unless an applicable exemption exists and is proved in a manner satisfactory to the Depositary). Certain stockholders (including, among others, all corporations and certain foreign individuals and entities) are not subject to backup withholding. Noncorporate foreign stockholders should complete and sign a Form W-8, Certificate of Foreign Status, a copy of which may be obtained from the Depositary, in order to avoid backup withholding. See Instruction 9 of the Letter of Transmittal. Other Requirements. The Purchaser's acceptance for payment of Shares tendered pursuant to any of the procedures described above will constitute a binding agreement between the tendering stockholder and the Purchaser upon the terms and subject to the conditions of the Offer, including the tendering stockholder's representation and warranty that the stockholder is the holder of the Shares within the meaning of, and that the tender of the Shares complies with, Rule 14e-4 under the Exchange Act. 4. WITHDRAWAL RIGHTS. Tenders of Shares made pursuant to the Offer are irrevocable, except that Shares tendered pursuant to the Offer may be withdrawn at any time on or prior to the Expiration Date and, unless theretofore accepted for payment by the Purchaser pursuant to the Offer, may also be withdrawn at any time after November 27, 1999. If the Purchaser extends the Offer, is delayed in its acceptance for payment of Shares or is unable to purchase Shares validly tendered pursuant to the Offer for any reason, then, without prejudice to the Purchaser's rights under the Offer, the Depositary may nevertheless, on behalf of the Purchaser, retain tendered Shares and such Shares may not be withdrawn except to the extent that tendering stockholders are entitled to withdrawal rights as described in this Section 4. Any such delay in acceptance for payment will be accompanied by an extension of the Offer to the extent required by law. For a withdrawal to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If Share Certificates to be withdrawn have been delivered or otherwise identified to the Depositary, then prior to the physical release of such certificates, the serial numbers shown on such certificates must be submitted to the Depositary and the signatures on the notice of withdrawal must be guaranteed by an Eligible Institution unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in Section 3, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares, in which case a notice of withdrawal will be effective if delivered to the Depositary by any method of delivery described in the first sentence of this paragraph. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by the Purchaser, in its sole discretion, whose determination will be final and binding. None of the Purchaser, TFC, any of their affiliates or assigns, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. 7 10 Withdrawals of Shares may not be rescinded. Any Shares properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in Section 3. 5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The summary of tax consequences set forth below is for general information only and is based on the law as currently in effect. The tax treatment of each stockholder will depend in part upon such stockholder's particular situation. Special tax consequences not described herein may be applicable to particular classes of taxpayers, such as financial institutions, broker-dealers, insurance companies, foreign corporations, foreign partnerships, foreign trusts, foreign estates, persons who are not citizens or residents of the United States, tax-exempt entities, stockholders who acquired their Shares through the exercise of an employee stock option or otherwise as compensation, and persons who received payments in respect of options to acquire Shares. All stockholders should consult with their own tax advisors as to the particular tax consequences of the Offer and the Merger to them, including the applicability and effect of the alternative minimum tax and any state, local or foreign income and other tax laws and changes in such tax laws. The receipt of cash pursuant to the Offer or the Merger will be a taxable transaction for Federal income tax purposes under the Internal Revenue Code of 1986, as amended, and may also be a taxable transaction under applicable state, local, foreign income or other tax laws. Generally, for Federal income tax purposes, a stockholder will recognize gain or loss in an amount equal to the difference between the cash received by the stockholder pursuant to the Offer or the Merger and the stockholder's adjusted tax basis in the Shares tendered by the stockholder and purchased pursuant to the Offer or the Merger. Gain or loss will be calculated separately for each block of Shares tendered and purchased pursuant to the Offer or converted in the Merger, as the case may be. For Federal income tax purposes, such gain or loss will be a capital gain or loss if the Shares are a capital asset in the hands of the stockholder, and a long-term capital gain or loss if the stockholder's holding period is more than one year as of the date the Purchaser accepts such Shares for payment pursuant to the Offer or the effective date of the Merger, as the case may be. There are limitations on the deductibility of capital losses. Capital gains of individuals derived in respect of capital assets held for more than one year are eligible for reduced rates of taxation which may vary depending upon the holding period of such capital assets. Individuals should consult their own tax advisors with respect to the tax consequences of this transaction. 6. PRICE RANGE OF SHARES; DIVIDENDS. The Shares are listed on the Nasdaq National Market under the symbol "LTCH". The following table sets forth, for the calendar quarters indicated, the high and low sales prices per Share on the Nasdaq National Market as reported in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 Annual Report") with respect to the fiscal years 8 11 covered by such Annual Report and the amount of cash dividends paid or declared per Share for each quarter based on publicly available sources. All share prices have been adjusted for a 5% stock dividend in 1996.
HIGH LOW DIVIDENDS ---- ---- --------- Year Ended December 31, 1999: Third Quarter (through September 27, 1999)................ $24 1/8 $16 7/8 $ -- Second Quarter............................................ $19 1/4 $15 1/2 $ -- First Quarter............................................. $21 27/32 $14 1/2 $ --
Year Ended December 31, 1998: Fourth Quarter............................................ $19 5/8 $9 1/4 $0.07 Third Quarter............................................. $22 3/4 $15 $ -- Second Quarter............................................ $24 $18 1/4 $ -- First Quarter............................................. $24 $17 1/2 $ --
Year Ended December 31, 1997: Fourth Quarter............................................ $21 1/2 $16 1/2 $0.06 Third Quarter............................................. $21 3/4 $16 3/8 $ -- Second Quarter............................................ $17 $13 7/8 $ -- First Quarter............................................. $16 3/4 $14 $ --
On August 23, 1999, one month prior to announcement of the Offer, the closing sale price per Share of Company Common Stock reported on the Nasdaq National Market was $19. On September 22, 1999, the last full trading day prior to announcement of the Offer, the closing sale price per Share of Company Common Stock reported on the Nasdaq National Market was $17 3/4. Stockholders are urged to obtain a current market quotation for the Shares. Pursuant to the Merger Agreement, the Company, among other things, has agreed that it will not declare or pay dividends on, or make other distributions in respect of, the Shares. 7. CERTAIN INFORMATION CONCERNING THE COMPANY. The information concerning the Company in this Section 7 and elsewhere in this Offer to Purchase has been furnished by the Company or has been taken from or based upon the 1998 Annual Report and other publicly available documents and records on file with the Commission and other public sources. Although the Purchaser does not have any knowledge that would indicate that any information concerning the Company contained in such documents and records is untrue, neither TFC nor the Purchaser assumes any responsibility for the accuracy or completeness of the information contained therein, or for any failure by the Company to disclose events that may have occurred and may affect the significance or accuracy of any information concerning the Company, but which are unknown to TFC and the Purchaser. General. The Company was incorporated in Massachusetts on November 18, 1988. The Company's principal executive offices are located at 430 Main Street, Williamstown, Massachusetts 01267, and its telephone number is (413) 458-1000. As of September 22, 1999, the Company had approximately 140 employees. The Company is a diversified finance company that provides financing to creditworthy borrowers for assets not typically financed by banks. The Company provides such financing by purchasing consumer loans and by making loans to businesses secured by consumer receivables or other assets. The Company purchases consumer loans consisting primarily of loans to purchasers of rural and vacation properties and vacation ownership interests (popularly known as timeshare interests). The Company also provides financing, secured by receivables, to rural land dealers, timeshare resort developers and other finance companies and to dealers and developers for the acquisition and development of rural land and timeshare resorts. In addition, the Company purchases other loans, such as consumer home equity loans, mortgages and construction loans and tax lien certificates, and provides financing to other businesses secured by receivables or other assets. 9 12 Financial Information. Set forth below are certain selected consolidated financial data which were derived from the Company's 1998 Annual Report and quarterly report on Form 10-Q for the fiscal quarter ended June 30, 1999. More comprehensive financial information is included in the reports (including management's discussion and analysis of financial condition and results of operations) and other documents filed by the Company with the Commission, and the following financial data are qualified in their entirety by reference to such reports and other documents including the financial information and related notes contained therein. Such reports and other documents may be examined and copies thereof may be obtained from the offices of the Commission and Nasdaq in the manner set forth below. 10 13 LITCHFIELD FINANCIAL CORPORATION SUMMARY CONSOLIDATED FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30, ------------------------------------ ------------------------- 1998 1997 1996 1999 1998 ---------- ---------- ---------- ----------- ----------- STATEMENT OF INCOME DATA (1): Revenues: Interest and fees on loans....... $ 25,736 19,374 $ 14,789 $ 16,364 $ 11,288 Gain on sale of loans............ 10,691 8,564 7,331 6,879 5,679 Servicing and other income....... 2,379 1,753 1,576 1,104 959 ---------- ---------- ---------- ---------- ---------- Total revenues......... 38,806 29,691 23,696 24,347 17,926 ---------- ---------- ---------- ---------- ---------- Expenses: Interest expense............... 14,265 10,675 7,197 9,352 6,692 Salaries and employee benefits.................... 4,806 3,399 2,824 2,704 2,280 Other operating expenses....... 3,834 3,480 3,147 2,039 1,869 Provision for loan losses...... 1,532 1,400 1,954 1,000 810 ---------- ---------- ---------- ---------- ---------- Total expenses......... 24,437 18,954 15,122 15,095 11,651 ---------- ---------- ---------- ---------- ---------- Income before income taxes and distributions on preferred securities........... 14,369 10,737 8,574 9,252 6,275 Provision for income taxes....... 5,537 4,134 3,301 3,562 2,416 Distributions on preferred securities, net................ -- -- -- 205 -- ---------- ---------- ---------- ---------- ---------- Income before extraordinary item........................... 8,832 6,603 5,273 5,485 3,859 Extraordinary item (2)........... (77) (220) -- -- -- ---------- ---------- ---------- ---------- ---------- Net income.................. $ 8,755 $ 6,383 $ 5,273 $ 5,485 $ 3,859 ========== ========== ========== ========== ========== Basic per common share amounts: Income before extraordinary item........................... $ 1.41 $ 1.19 $ .97 $ .80 $ .68 Extraordinary item............. (.01) (.04) -- -- -- ---------- ---------- ---------- ---------- ---------- Net income per share........... $ 1.40 $ 1.15 $ 97 $ .80 $ .68 ========== ========== ========== ========== ========== Basic weighted average number of shares outstanding............. 6,273,638 5,572,465 5,441,636 6,897,411 5,706,887 Diluted per common share amounts: Income before extraordinary item........................ $ 1.34 $ 1.12 $ .93 $ .76 $ .64 ========== ========== ========== ========== ========== Extraordinary item............. (.01) (.04) -- -- -- ---------- ---------- ---------- ---------- ---------- Net income per share........... $ 1.33 $ 1.08 $ .93 $ .76 $ .64 ========== ========== ========== ========== ========== Diluted weighted average number of shares outstanding.......... 6,604,367 5,909,432 5,682,152 7,189,488 6,069,164 Cash dividends declared per Common share................... $ .07 $ .06 $ .05 $ -- $ -- OTHER STATEMENT OF INCOME DATA: Income before extraordinary item as a percentage of revenues.... 22.8% 22.2% 22.3% 22.5% 21.5% Ratio of EBITDA to interest expense (3).................... 2.13 2.17 2.38 2.10 2.13 Ratio of earnings to fixed charges (4).................... 2.01 2.01 2.19 2.02 1.94 Return on average assets (5)..... 3.7% 3.8% 4.0% 3.4% 3.6% Return on average equity (5)..... 13.2% 14.1% 13.3% 12.9% 13.8%
11 14 LITCHFIELD FINANCIAL CORPORATION SUMMARY CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31, ------------------------------ JUNE 30, 1998 1997 1996 1999 -------- -------- -------- -------- Total assets........................................ $293,882 $186,790 $152,689 $340,589 Loans held for sale (6)............................. 19,750 16,366 12,260 13,351 Other loans (6)..................................... 191,292 86,307 79,996 219,944 Retained interests in loan sales (6)................ 28,883 30,299 28,912 32,603 Secured debt........................................ 49,021 5,387 43,727 62,012 Unsecured debt...................................... 134,588 105,347 46,995 133,897 Stockholders' equity................................ 82,094 52,071 42,448 91,288
- --------------- (1) Certain amounts in the 1996 financial information have been restated to conform to the 1997 through 1999 presentation. (2) Reflects loss on early extinguishment of a portion of the 1992 Notes net of applicable tax benefit of $138,000, for 1997, and of the term note payable, net applicable tax benefit of $48,000, for 1998. (3) The ratio of EBITDA to interest expense is required to be calculated for the twelve month period immediately preceding each calculation date, pursuant to the terms of the indentures to which the Company is subject. EBITDA is defined as earnings before deduction of taxes, depreciation, amortization of debt costs, and interest expense (but after deduction for any extraordinary item). (4) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes and extraordinary items and fixed charges. Fixed charges consist of interest charges and the amortization of debt expense. (5) Calculations are based on income before extraordinary item. (6) Amount indicated is net of allowance for losses and recourse obligation on retained interests in loan sales. 12 15 The Shares are registered under the Exchange Act. Accordingly, the Company is subject to the informational filing requirements of the Exchange Act and in accordance therewith is obligated to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Information as of particular dates concerning the Company's directors and officers, their remuneration, options granted to them, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company is required to be disclosed in such proxy statements and distributed to the Company's stockholders and filed with the Commission. Such reports, proxy statements and other information should be available for inspection at the public reference facilities of the Commission located in Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be available for inspection and copying at prescribed rates at the regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York, New York 10048. Such reports, proxy statements and other information may also be obtained at the Web site that the Commission maintains at http://www.sec.gov. Copies of this material may also be obtained by mail, upon payment of the Commission's customary fees, from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. In addition, such material should also be available for inspection at the library of the Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006. Except as otherwise noted in this Offer to Purchase, all of the information with respect to the Company set forth in this Offer to Purchase has been derived from publicly available information. Certain Projections. To the knowledge of TFC and the Purchaser, the Company does not as a matter of course make public forecasts as to its future operating performance. However, in connection with TFC's and the Purchaser's business investigation of the Company and during the course of negotiations between TFC and the Purchaser, the Company and their respective advisors described in Section 10 of this Offer to Purchase, the Company provided TFC and the Purchaser with certain projections of future loan originations by the Company which TFC and the Purchaser believe are not publicly available. Neither TFC nor the Purchaser has verified the accuracy of such projections. Such projections covered the period through the fiscal year ending December 31, 2001 (the Company has not provided TFC or Purchaser with projections for periods following such date) and, contained the following information regarding the Company's future loan originations:
FISCAL YEAR ENDING DECEMBER 31, --------------------------------- 1999 2000 2001 --------- --------- --------- (IN THOUSANDS OF DOLLARS) (PROJECTED) Loan Originations..................................... $481,569 $700,000 $954,935
It is the understanding of TFC and the Purchaser that the projections were not prepared with a view to public disclosure or compliance with published guidelines of the Commission or the guidelines of the American Institute of Certified Public Accountants regarding projections or forecasts. The foregoing summary of the projections is included herein only because such information was provided to TFC and the Purchaser as described above. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE PROJECTIONS. THE COMPANY HAS ADVISED TFC AND THE PURCHASER THAT ITS INTERNAL FINANCIAL FORECASTS (UPON WHICH THE PROJECTIONS PROVIDED TO TFC AND THE PURCHASER WERE BASED) ARE, IN GENERAL, PREPARED SOLELY FOR INTERNAL USE AND CAPITAL BUDGETING PURPOSES AND OTHER MANAGEMENT DECISIONS, AND ARE SUBJECTIVE IN MANY RESPECTS AND THUS SUSCEPTIBLE TO INTERPRETATIONS AND PERIODIC REVISION BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS. THE PROJECTIONS ALSO REFLECT NUMEROUS ASSUMPTIONS (NOT ALL OF WHICH WERE PROVIDED TO TFC OR THE PURCHASER), ALL MADE BY MANAGEMENT OF THE COMPANY, WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL CONDITIONS AND 13 16 OTHER MATTERS, ALL OF WHICH ARE DIFFICULT TO PREDICT, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL AND NONE OF WHICH WAS SUBJECT TO APPROVAL BY EITHER TFC OR THE PURCHASER. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE ASSUMPTIONS MADE IN PREPARING THE PROJECTIONS WILL PROVE ACCURATE, AND ACTUAL RESULTS MAY BE MATERIALLY GREATER OR LESS THAN THOSE CONTAINED IN THE PROJECTIONS. THE INCLUSION OF THE FOREGOING SUMMARY OF THE PROJECTIONS IN THIS OFFER TO PURCHASE SHOULD NOT BE REGARDED AS AN INDICATION THAT ANY OF TFC, THE PURCHASER, THE COMPANY OR ANY OF THEIR RESPECTIVE REPRESENTATIVES CONSIDERED OR CONSIDER THE PROJECTIONS TO BE A RELIABLE PREDICTION OF FUTURE EVENTS, AND THE PROJECTIONS SHOULD NOT BE RELIED UPON AS SUCH. NONE OF TFC, THE PURCHASER, THE COMPANY OR ANY OF THEIR REPRESENTATIVES ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY, REASONABLENESS, ACCURACY OR COMPLETENESS OF THE PROJECTIONS. NONE OF TFC, THE PURCHASER, THE COMPANY OR ANY OF THEIR REPRESENTATIVES HAS MADE, OR MAKES, ANY REPRESENTATION TO ANY PERSON REGARDING THE INFORMATION CONTAINED IN THE PROJECTIONS AND NONE OF THEM INTENDS TO UPDATE OR OTHERWISE REVISE THE PROJECTIONS TO REFLECT CIRCUMSTANCES ARISING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING THE PROJECTIONS ARE SHOWN TO BE IN ERROR. 14 17 8. CERTAIN INFORMATION CONCERNING THE PURCHASER, TFC AND TEXTRON. The Purchaser. The Purchaser is a newly formed Massachusetts corporation organized at the direction of TFC in connection with the Offer and the Merger. The address of the Purchaser is the same as the address of TFC. TFC. TFC was incorporated on February 5, 1962, in the State of Delaware. TFC is a diversified commercial finance company with active operations in three segments: term loans and leases, revolving credit, and specialty finance. TFC's term lending and leasing activity is focused in general aviation aircraft, equipment and golf course facilities. Revolving credit products consist primarily of dealer inventory finance, factoring, and working capital loans. Specialty finance operations include broadcast media finance, franchise finance, resort receivables, and structured investment grade transactions. TFC's other financial services and products include transaction syndication, equipment appraisal and management, portfolio servicing and insurance brokerage. Since TFC's inception, all of its stock has been owned by Textron. TFC was organized to finance the distribution of Textron products, but the scope of the financial services offered by TFC has become progressively more diversified. As of June 30, 1999, 26% of TFC's managed finance receivables were related to Textron products. TFC has full recourse to Textron on approximately three-quarters of managed Textron-related receivables. TFC's financing activities are confined almost exclusively to commercial markets and to lease and secured lending products. TFC's services are offered primarily in North America and, to a minor extent, in South America, Europe and Australia. TFC has approximately 26 offices nationwide, with division offices and operation centers in East Hartford, CT, Atlanta, GA, Portland, OR, Columbus, OH, King of Prussia, PA, Wichita, KS, Minneapolis, MN, Providence, RI and Ft. Worth, TX. TFC's principal executive offices are located at 40 Westminster Street, Providence, RI 02903. The results of TFC's operations and balance sheet data for each of the years in the three-year period ended January 2, 1999, and as of January 2, 1999, January 3, 1998, and December 28, 1996, respectively, were derived from the audited Consolidated Financial Statements of TFC, and the notes thereto, which are set forth in full in Annex I to this Offer to Purchase. The data presented below should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Annex I of this Offer to Purchase.
SIX MONTHS ENDED AT OR FOR THE YEARS ENDED(1) ----------------------------- ------------------------------------ ($ IN THOUSANDS) JUNE 30, 1999 JUNE 30, 1998 1998 1997 1996 ---------------- ------------- ------------- ---------- ---------- ---------- RESULTS OF OPERATIONS Finance charges and discounts.............. $ 168,739 $ 146,694 $ 297,091 $ 290,943 $ 281,830 Rental revenues on operating leases........ 8,136 8,645 17,181 18,664 19,071 Other income............................... 22,663 20,921 52,890 40,613 26,346 Net income................................. 34,417 31,622 69,576 67,741 58,339 BALANCE SHEET DATA Total finance receivables.................. $3,988,590 $3,256,738 $3,611,397 $3,069,123 $3,172,824 Reserve for losses......................... 85,687 78,676 83,887 77,394 74,824 Operating lease equipment, net............. 111,602 122,874 118,590 111,518 127,691 Total assets...................... 4,165,020 3,395,195 3,784,538 3,177,965 3,269,141 Commercial paper & short-term debt......... 1,233,693 1,110,641 1,424,872 1,073,665 1,014,613 Long-term senior notes..................... 1,917,486 1,354,931 1,403,958 1,290,903 1,426,783 Deferred income taxes...................... 330,118 307,744 321,521 319,293 315,366 Shareholders equity........................ 496,469 439,598 472,452 405,876 411,715 External debt to shareholder's equity...... 6.35x 5.61x 5.99x 5.83x 5.93x
15 18
SIX MONTHS ENDED AT OR FOR THE YEARS ENDED(1) ----------------------------- ------------------------------------ ($ IN THOUSANDS) JUNE 30, 1999 JUNE 30, 1998 1998 1997 1996 ---------------- ------------- ------------- ---------- ---------- ---------- SELECTED DATA AND RATIOS PROFITABILITY Net interest margins as a percentage of average net investment (2)............... 6.30% 6.62% 6.88% 6.51% 6.15% Return on equity........................... 14.3% 15.0% 16.2% 16.8% 14.8% Return on average assets(3)................ 1.73% 1.91% 2.06% 2.07% 1.84% Ratio of earnings to fixed charges......... 1.65x 1.67x 1.72x 1.70x 1.65x Salaries and administrative expenses as a percentage of average managed receivables(4)................... 1.78% 1.71% 1.73% 1.54% 1.46% CREDIT QAULITY 60+ days contractual delinquency as a percentage of finance receivables(5)..... 1.26% 0.93% 0.87% 0.86% 0.75% Nonperforming assets as a% of finance assets................................... 1.74% 2.73% 2.3% 3.1% 3.6% Reserves for losses as a percentage of finance receivables...................... 2.2% 2.4% 2.3% 2.5% 2.4%
- --------------- (1) TFC's year-end dates conform with Textron's year-end which falls on the nearest Saturday to December 31st. All interim periods are calendar month end. (2) Represents revenues earned less interest expense on borrowings as a percentage of average finance assets. Average finance assets include finance receivables plus operating leases. (3) Average assets include finance receivables less allowance for loan loss, operating leases and other assets. Investments in leveraged leases are not net of deferred taxes. (4) Average managed receivables include owned receivables plus receivables serviced under securitizations, participations and third party portfolio servicing agreements. (5) Delinquency excludes captive receivables with recourse to Textron. Captive receivables represent third party finance receivables originated in connection with the sale or lease of Textron manufactured products. Textron. Textron is a global multi-industry company with operations in four business segments -- Aircraft, Automotive, Industrial and Finance. Textron consists of two borrowing groups, Textron Finance and Textron Manufacturing. Textron Finance consists of TFC, consolidated with its subsidiaries, which are the entities through which Textron operates in the finance segment. Textron Manufacturing is Textron Inc., the parent company, consolidated with the entities through which Textron operates in the Aircraft, Automotive and Industrial business segments. Textron's principal executive offices are located at 40 Westminster Street, Providence, R.I. 02903. The telephone number of Textron at such offices is (401) 421-2800. Textron is subject to the informational filing requirements of the Exchange Act and in accordance therewith is obligated to file periodic reports and other information with the Commission relating to its business, financial condition and other matters. Such reports and other information should be available for inspection at the public reference facilities of the Commission located in Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and should also be available for inspection and copying at prescribed rates at the regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York, New York 10048. Such reports and other information may also be obtained at the Web site that the Commission maintains at http://www.sec.gov. Copies of this material may also be obtained by mail, upon payment of the Commission's customary fees, from the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. The name, citizenship, business address, present principal occupation or employment and five-year employment history of each of the directors and executive officers of the Purchaser, TFC and Textron are set forth on Schedule I hereto. None of the Purchaser, TFC, Textron nor, to the best knowledge of Purchaser, TFC and Textron, any of the persons listed on Schedule I hereto or any associate or majority-owned subsidiary of the Purchaser, TFC, Textron or any of the persons so listed, beneficially owns or has a right to acquire directly or indirectly any 16 19 Shares, and none of the Purchaser, TFC, Textron nor, to the best knowledge of the Purchaser, TFC and Textron, any of the entities referred to above, or any of the respective executive officers, directors or subsidiaries of any of the foregoing, has effected any transactions in the Shares during the past 60 days, other than as set forth in Section 11. Except as set forth in this Offer to Purchase, since January 1, 1996 there have been no (i) transactions or series of similar transactions between any of Textron, TFC, the Purchaser or, to the best knowledge of Textron, TFC and the Purchaser, any of the persons listed in Schedule I hereto, on the one hand, and the Company or any of its affiliates which are corporations or executive officers, directors or affiliates of the Company which are not corporations, on the other hand, involving an aggregate amount exceeding $40,000 or (ii) contacts, negotiations or transactions between any of Textron, TFC, the Purchaser or, to the best knowledge of Textron, TFC and the Purchaser, any of the persons listed in Schedule I hereto, on the one hand, and the Company or its affiliates, on the other hand, concerning a merger, consolidation or acquisition, a tender offer or other acquisition of securities, an election of directors, or a sale or other transfer of a material amount of assets, in each case other than as described in Section 11. 9. SOURCE AND AMOUNT OF FUNDS. The total amount of funds required by the Purchaser to purchase all of the outstanding Shares and pay related fees and expenses is expected to be approximately $188 million. The Purchaser will obtain such funds through capital contributions by TFC. TFC anticipates funding the capital contributions through one or more of a combination of cash on hand, internally generated funds and commercial paper. It is anticipated that any indebtedness incurred by TFC in connection with the Offer and the Merger will be repaid from funds generated internally by TFC and its subsidiaries (including, after the Merger, if consummated, funds generated by the surviving corporation and its subsidiaries), bank refinancing or other sources. No final decisions have been made, however, concerning the method TFC will employ to repay any such indebtedness. Such decisions, when made, will be based on TFC's review from time to time of the advisability of particular actions, as well as on prevailing interest rates and financial and other economic conditions. 10. BACKGROUND OF THE OFFER; CONTACTS WITH THE COMPANY. In 1997, TFC and the Company had discussions regarding a business combination. The parties determined not to pursue a transaction at such time. In the summer of 1998, the Company was approached by an investment banker to consider an acquisition proposal from a commercial bank. After some discussions with the inquiring bank, the Company retained CIBC World Markets Corp. ("CIBC World Markets") in July 1998 to serve as a financial advisor in that proposed transaction. After a series of meetings with the inquiring bank, it was concluded that the bank could not provide a form and level of consideration acceptable to the Company. Due to the downturn in the capital markets in the fall of 1998, the Company told its advisors that it would not entertain any additional proposals. In the spring of 1999, while the Company was developing its five-year business plan, it decided to ask CIBC World Markets to assist in evaluating means to fund its operations. The Company was exploring (i) the formation or acquisition of an industrial loan corporation, a bank or unitary thrift; (ii) a combination with a like-size specialty financial services company; (iii) a strategic investment by a financial investor who would provide funding in exchange for a minority interest in the Company; and (iv) the potential sale of the Company. An Offering Memorandum describing the Company was prepared in June of 1999. CIBC World Markets approached eighty-three (83) large and mid-cap financial services companies and financial investors in June and July of 1999. Of the parties contacted by CIBC World Markets, forty-six (46) received a Confidentiality Agreement, thirty-five (35) signed a Confidentiality Agreement and thirty-four (34) subsequently received information on the Company. TFC was not one of the parties to receive such information. 17 20 In May of 1999, TFC began separately studying the possibility of a strategic transaction with the Company. On June 30, 1999, Mr. David Wisen and Mr. Richard Mitterling, officers of TFC, spoke on the telephone with Mr. Richard Stratton, President and CEO of the Company, regarding an interest in exploring a possible business combination with, or acquisition of, the Company. On July 6, 1999, Messrs. Wisen, Mitterling and Stratton met in Hartford, CT, to follow up their earlier telephonic discussions on the possibility of a business combination. On July 20, 1999, TFC executed a Confidentiality Agreement with CIBC World Markets, as agent for the Company. On July 22, 1999 Heather Sica and Ronald Rabidou met with representatives of TFC in Hartford, CT to discuss the possibility of a business combination. During the week of July 26, 1999 CIBC World Markets asked interested parties to submit written preliminary non-binding indications of interest. On August 10, 1999, the Company received a letter from TFC expressing TFC's interest in acquiring 100% of the Common Stock of the Company for $24 per share in cash, or alternatively, some other amount of non-cash form of consideration. On August 18, 1999, Richard Stratton and Joseph Weingarten met with representatives of TFC in Providence, RI, to further discuss the possibility of a business combination. On August 19, 1999, the Company's Board of Directors had discussions with representatives of CIBC World Markets, who detailed the efforts of CIBC World Markets since the spring of 1999 in exploring potential third-party transactions on behalf of the Company. The CIBC World Markets representatives advised the Board that it was their belief that the dissemination of information to interested parties, along with CIBC World Markets' subsequent negotiations with several of the recipients of that information, constituted a sufficient market check to determine whether the approximate valuation that TFC placed on the Company represented fair value to the stockholders of the Company, and that on the basis of those efforts they felt it was unlikely that a third party would offer more than the price offered by TFC. Following a discussion among the members of the Board of Directors with respect to the proposed transaction and its timing, impact on employees and relation to the market in general, the Board authorized the Company to enter into a letter of understanding with TFC (the "Letter of Understanding") providing for the conduct of a due diligence review by TFC and the concurrent negotiation of an acquisition agreement relating to a potential acquisition of the Company by TFC, and all the relevant terms of such an acquisition, including price, and further providing that, in consideration of the mutual efforts being expended in connection therewith, for the Company to agree to not solicit other indications of interest for a period beginning with the acceptance by TFC of the Letter of Understanding and ending on September 8, 1999; providing, however, that if Textron's Executive Leadership Team determined to recommend the transaction to Textron's Board of Directors, the non-solicitation period would extend to September 23, 1999. On August 20, 1999, TFC executed the Letter of Understanding submitted by the Company. On September 7, 1999, TFC informed the Company that Textron's Executive Leadership Team had voted to recommend the proposed transaction to Textron's Board of Directors, thus extending the non-solicitation period to September 23, 1999 pursuant to the terms of the Letter of Understanding. During the two weeks following August 20, 1999, representatives of TFC and the Company negotiated the various aspects of the proposed offer. As a result of these negotiations, TFC's offer was presented as a cash tender offer for all of the outstanding shares of the Company's Common Stock, followed by a merger of the Purchaser with and into the Company. Pursuant to the MBCL, such a merger would be subject to the approval of two-thirds in interest of the holders of the Shares, or, if TFC was able to obtain at least 90% of the outstanding Shares, the approval of the Company's Board of Directors. TFC also completed its due diligence review of the Company, thereby obviating the need to include a due diligence condition in the Merger Agreement. On September 9, 1999, counsel for TFC presented a proposed form of merger agreement to the Company and its representatives, who distributed it among the members of the Board of Directors and discussed it with them. 18 21 On September 15, 1999, the Board of Directors met with its financial and legal advisors to consider the proposed transaction. At this meeting, the Company's advisors and members of senior management reported on the progress of the proposed transaction, including the status of TFC's due diligence review, the discussions management had conducted with TFC regarding the conduct of the business following the consummation of the proposed transaction, the impact of the proposed transaction on the Company's employees, and the possible roles for members of current management following the proposed transaction. The Company's legal advisor then outlined the material provisions of the draft Merger Agreement from TFC, copies of which had been previously circulated to the members of the Board. The representatives from CIBC World Markets explained the approach CIBC World Markets would take over the upcoming week in order to assess the fairness, from a financial point of view, of the proposed transaction. A discussion followed among the members of the Board of Directors with respect to the proposed transaction and its timing, impact on employees, and relation to the market in general. In particular, they noted that the terms of the Merger Agreement permitted the Board of Directors, if required in the exercise of the Board's fiduciary duties, to withdraw its recommendation of the Merger and to accept an acquisition proposal which is more favorable to the stockholders of the Company upon payment of a break up fee and expense reimbursement. The parties further negotiated the terms of the proposed Merger Agreement during the following seven days. During this period, the Company continued to conduct price negotiations with TFC. In addition, TFC negotiated the terms of an employment agreement with Richard A. Stratton, President and Chief Executive Officer of the Company, covering the period following the Merger, with the understanding that such employment agreement would be signed contemporaneously with the Merger Agreement. On September 22, 1999, the Board of Directors of the Company met to discuss the status of the offer from TFC. The Directors discussed at length the changes which had been made to the offer, including the final offering price of $24.50 per share. CIBC World Markets also delivered to the Directors its oral opinion that the consideration offered by TFC was fair to the Stockholders of the Company from a financial point of view. At approximately 4:45 p.m., by unanimous vote of all of the Directors present, the Board determined the Merger to be fair and in the bests interests of the Company and its stockholders, approved the Merger Agreement and the transactions contemplated thereby, including the Merger, and recommended that the stockholders vote in favor of approval and adoption of the Merger Agreement and the transactions contemplated thereby. The Company and TFC issued a joint press release to such effect prior to the opening of the market on the following day. The Board of Directors also considered whether it was appropriate to approve a severance agreement for Joseph Weingarten. After careful consideration, the Board of Directors determined that it was in the best interest of the Stockholders to insure that all members of senior management be given appropriate assurances that they would receive severance benefits in the event that their employments were terminated following an acquisition by TFC. Accordingly, the Board of Directors authorized the execution of the severance agreement with Mr. Weingarten pursuant to which he will be entitled to receive the same severance benefits as all other members of the Company's senior management. The Board of Directors, by unanimous vote of all of the Directors present, approved the Merger Agreement and the transactions contemplated thereby and determined that each of the Offer and the Merger is fair to, and in the best interest of, the stockholders of the Company. The Board of Directors recommends that all stockholders tender their Shares in response to the Offer and vote for Shares in favor of the Merger. In approving the Merger Agreement and the transactions contemplated thereunder, and recommending that all stockholders tender their Shares in response to the Offer and vote for Shares in favor of the Merger Agreement, the Board of Directors considered the following material factors: The Board of Directors and the Company's senior management have reviewed the Company's strategic position in the specialty finance industry, the near and longer term prospects for that industry, the consolidation trends within that industry and the strategic alternatives available to the Company, all with a view to maximizing stockholder value. In conducting its review, the Board of Directors considered the Company's results of operations for the quarter ended June 30, 1999, and for the six months then ended. The Board of Directors also considered the recent trading prices of the Company's Common Stock. In light of the Board's review of the Company's competitive position, recent operating results and stock price, anticipated trends in the industry in which the Company competes, and the price per Share being offered by TFC, the 19 22 Board of Directors determined that it would be in the best interest of the Company's stockholders to approve the Merger Agreement. In approving the Merger Agreement and the transactions contemplated thereby and recommending that all holders of Shares of the Company's Common Stock tender their Shares pursuant to the Offer, the Board of Directors considered the following material factors: (i) the terms of the Merger Agreement, and the fact that they were the product of arm's length negotiations among the parties; (ii) the trading price of shares of the Company's Common Stock since its initial public offering, recent trends and the expected trading prices for the foreseeable future; (iii) the Company's projected financial performance, competitive position and current trends in the specialty finance industry; (iv) the results of the Company's discussions during 1998 and 1999, and the results of the process undertaken by the Company in 1998 and 1999, with respect to a potential sale of the Company, and the low likelihood that a third party would propose a cash price higher than TFC's $24.50 per share; (v) the fact that TFC's offer was not subject to a financing contingency or a contingency linked to the condition of the securities or financial markets generally, but rather was subject only to the usual and customary conditions; (vi) views expressed by senior management at the meetings of the Board of Directors held on August 19, 1999, September 15, 1999 and September 22, 1999 with respect to the results of operations of the Company; (vii) the financial presentation of CIBC World Markets to the Board in connection with the Offer and Merger, including its written opinion dated September 22, 1999, to the effect that, as of such date and based upon and subject to certain matters stated in its opinion, the $24.50 per Share cash consideration to be received in the Offer and Merger by holders (other than TFC and its affiliates) of Shares pursuant to the Merger Agreement was fair, from a financial point of view, to such holders; (viii) the fact that the terms of the Merger Agreement allow the Board of Directors, if required by the Board's fiduciary duties, to withdraw its recommendation of the Merger to accept an acquisition proposal which is more favorable to the stockholders upon payment of a reasonable breakup fee and reimbursement of expenses; (ix) the fact that an affirmative vote of two-thirds of the outstanding shares of the Company is required to approve and adopt the Merger Agreement; and (x) the availability of the dissenters' rights of appraisal in the Merger. The Board of Directors did not assign relative weight to the above factors or determine that any factor was of particular importance. Rather, the Board of Directors viewed its position and recommendations as being based on the totality of the information presented to and considered by it. On September 22, 1999, the Boards of Directors of TFC and Textron approved the Merger Agreement and the transactions contemplated thereby. 11. THE MERGER AGREEMENT. The following is a summary of the Merger Agreement, which summary is qualified in its entirety by reference to the copy thereof filed as an exhibit to the Tender Offer Statement on Schedule 14D-1. The Offer. The Merger Agreement provides that no later than five business days from and including the date of initial public announcement of the Merger Agreement the Purchaser will commence the Offer. The parties to the Merger Agreement have agreed in the Merger Agreement that the obligations of the Purchaser to accept for payment and pay for Shares tendered pursuant to the Offer will be subject only to the satisfaction or waiver of the conditions described in Section 15 hereof, including the Minimum Condition. Under the Merger Agreement, the Purchaser expressly reserves the right, in its sole discretion, to waive any such condition (other than the Minimum Condition), provided, that, without the prior written consent of the Company, the Purchaser will not (i) decrease the amount to be paid per share in the Offer to below $24.50, 20 23 (ii) change the form of consideration to be paid in the Offer, (iii) reduce the maximum number of Shares to be purchased in the Offer or the Minimum Condition, (iv) impose conditions to the Offer in addition to the Offer conditions set forth in Annex A to the Merger Agreement (the "Offer Conditions") or (v) amend any other term of the Offer in a manner which, in the Company's reasonable judgment, is adverse to the holders of the Shares or the Company (provided that a waiver by Purchaser of any condition other than the Minimum Condition shall not be deemed to be adverse to the holders of the Shares). Notwithstanding the foregoing, Purchaser may, without the consent of the Company, extend the Offer for an aggregate period of up to five business days beyond the Expiration Date if there shall not have been tendered sufficient Shares so that the Merger could be effected without a meeting of the Company's stockholders in accordance with Section 82 of the MBCL. The Purchaser shall have no obligation to pay interest on the purchase price of tendered Shares. The rights reserved by the Purchaser in this Section 11 are in addition to the Purchaser's rights to terminate the Offer pursuant to Section 15. Company Board Representation. The Merger Agreement provides that, promptly upon purchase by the Purchaser of Shares pursuant to the Offer, and from time to time thereafter, the Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board of Directors of the Company as shall give the Purchaser representation on the Board of Directors equal to the product of the total number of directors on such Board (including any vacancies or unfilled newly-created directorships) multiplied by the percentage that the aggregate number of Shares beneficially owned by the Purchaser or any affiliate of the Purchaser bears to the total number of Shares then outstanding, and the Company shall amend, or cause to be amended, its by-laws to provide for the foregoing and shall, at such time, promptly take all action necessary to cause the Purchaser's designees to be so elected, including either increasing the size of the Board of Directors or securing the resignations of incumbent directors or both. The Merger Agreement further provides that the Company's obligations to appoint designees to its Board of Directors will be subject to Section 14(f) of the Exchange Act and Rule 14f-1 thereunder. The Merger. The Merger Agreement provides that, upon the terms and subject to the conditions thereof, at the Effective Time and in accordance with the MBCL, the Purchaser will be merged with and into the Company. As a result of the Merger, the separate corporate existence of the Purchaser will cease and the Company will continue as the Surviving Corporation. The Merger Agreement provides that the Amended and Restated Articles of Organization of the Company, as in effect immediately prior to Effective Time, shall be the certificate of incorporation of the Surviving Corporation until thereafter amended as provided by law. At the Effective Time, the by-laws of the Purchaser as in effect immediately prior to the Effective Time will be the by-laws of the Surviving Corporation, until thereafter altered, amended or repealed as provided by law. The Merger Agreement provides that the directors of the Purchaser immediately prior to the Effective Time will be the initial directors of the Surviving Corporation and the officers of the Company immediately prior to the Effective Time will be the initial officers of the Surviving Corporation, each to hold office until their respective successor shall be duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the certificate of incorporation and by-laws of the Surviving Corporation. The Merger Agreement provides that, at the Effective Time, each Share that is issued and outstanding immediately prior to the Effective Time (other than Shares owned by the Company or by TFC, the Purchaser or any direct or indirectly wholly-owned subsidiary of the Company, TFC or the Purchaser, which shall be cancelled, and other than Shares, if any (collectively, "Dissenting Shares"), held by stockholders who have properly exercised appraisal rights under Section 89 of the MBCL) will, by virtue of the Merger and without any action on the part of the Company, the Purchaser or the holders of the Shares, be cancelled, extinguished and converted into and become a right to receive $24.50 in cash (the "Merger Consideration"), payable to the holder thereof, without interest, upon surrender of the certificate formerly representing such Share, less any required withholding taxes. All Shares that are owned by the Company (as treasury stock or otherwise) and all Shares owned by TFC, the Purchaser or any direct or indirect wholly-owned subsidiary of the Company, TFC or the Purchaser, if any, will be canceled and retired and cease to exist, and no cash or other consideration will be delivered in exchange therefore. 21 24 The Merger Agreement provides that Shares that are issued and outstanding immediately prior to the Effective Time and which are held by a stockholder who has not voted in favor of the Merger and who is otherwise entitled to demand and who properly demands appraisal for such Shares in accordance with all the provisions of the MBCL concerning the rights of holders of Shares to dissent from the Merger and require appraisal of their Shares will not be converted into or exchangeable for the right to receive the Merger Consideration unless such holder fails to perfect or otherwise effectively withdraws or loses such holder's right to appraisal, if any. Such holders will be entitled to receive the appraised value of such Shares held by them in accordance with the applicable provisions of the MBCL. If, after the Effective Time, such holder fails to perfect or loses its right to appraisal, each Share of such holder will be treated as if it had been converted as of the Effective Time into the right to receive the Merger Consideration, without any interest thereon. The Merger Agreement provides that each share of common stock of the Purchaser will be converted into one share of common stock of the Surviving Corporation. The Merger Agreement provides that each option granted to a Company employee or director pursuant to the Company's 1990 Stock Option Plan, as amended and 1995 Stock Option Plan for Non-Employee Directors, as amended (together, the "Stock Plans") to acquire shares of Company Common Stock (each such option hereinafter is referred to as an "Option") that is outstanding immediately prior to the Effective Time, whether or not then vested or exercisable, shall, effective as of immediately prior to the Effective Time, be canceled and the holder thereof shall be entitled to receive at the Effective Time or as soon as practicable thereafter from the Company in consideration for such cancellation an amount in cash equal to the product of (1) the number of Shares previously subject to such Option and (2) the excess, if any, of the Merger Consideration over the exercise price per share of such Option (subject to any applicable withholding taxes). Representations and Warranties. The Merger Agreement contains various customary representations and warranties of the parties thereto including, without limitation, representations and warranties by the Company as to the Company's organization and authorizations, capital stock, subsidiaries, noncontravention and consents, filings with the Commission, financial statements, no material adverse change, legal proceedings, subsequent events, commissions and fees, offering documents, employee benefit plans, compliance with the law, intellectual property, taxes and opinion of financial advisor. Some of the representations are qualified by the limitation that, in order for the representation to have been breached, the event breaching the representation must have a Material Adverse Effect. A "Material Adverse Effect" as to the Company means any change or effect that would (i) be materially adverse to the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole or (ii) prevent or materially delay the consummation of the Offer or the Merger; provided, however, that a decline in the price of the Company's Common Stock as traded on the Nasdaq National Market as a result of certain changes in the Company's accounting practices shall not be deemed to have a Material Adverse Effect unless it is otherwise a result of an event or occurrence that is materially adverse to the business, financial condition or results of operations of the Company and its subsidiaries taken as a whole. In addition, the Merger Agreement contains representations and warranties of TFC and the Purchaser concerning their organization, authorization of the agreement, noncontravention and consents, commissions and fees, and funds. Agreements of the Company, the Purchaser and TFC. Conduct of Business Pending the Merger. Pursuant to the Merger Agreement, the Company has covenanted and agreed that, prior to the Effective Time, the Company and its subsidiaries will conduct their operations according to their ordinary and usual course of business and consistent with past practice. The Merger Agreement further provides that, without limiting the generality of the foregoing, and except as expressly contemplated by the Merger Agreement, prior to the Effective Time, neither the Company nor any of its subsidiaries will, without the prior written consent of TFC: (a) amend or otherwise change its articles of organization or by-laws or equivalent organizational documents; 22 25 (b) issue, deliver, sell, pledge, dispose of or encumber, or authorize or commit to the issuance, sale, pledge, disposition or encumbrance of, (i) any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including but not limited to stock appreciation rights or phantom stock), of the Company or any of its subsidiaries (except for the issuance of up to 913,720 Shares required to be issued pursuant to the terms of options outstanding as of September 22, 1999 or (ii) any assets of the Company or any of its subsidiaries, except in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans, advances or capital contributions to, or investments in, any other person (other than in the ordinary course of business consistent with past practice) and other than existing committed facilities; (iii) enter into any contract or agreement other than in the ordinary course of business consistent with past practice; or (iv) authorize or capital expenditures (during any three month period) which are, in the aggregate, in excess of $25,000 for the Company and its subsidiaries taken as a whole; (f) except to the extent required under existing employee and director benefit plans, agreements or arrangements as in effect on the date of the Merger Agreement or as provided in the Merger Agreement, increase the compensation or fringe benefits of any of its directors, officers or employees, except for increases in salary or wages of employees of the Company or its subsidiaries who are not officers of the Company in the ordinary course of business in accordance with past practice, or grant any severance or termination pay not currently required to be paid under existing severance plans to or enter into any employment, consulting or severance agreement or arrangement with any present or former director, officer or other employee of the Company or any of its subsidiaries, or establish, adopt, enter into or amend or terminate any collective bargaining agreement or employee benefit plan, including, but not limited to, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (g) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting practices or principles used by it, other than discontinuance of the gain on sale method; (h) make any material tax election, change any annual tax accounting period, change any method of tax accounting, file any amended tax return or settle or compromise any material federal, state, local or foreign tax liability; (i) settle or compromise any pending or threatened suit, action or claim which is material or which relates to the transactions contemplated hereby; (j) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries not constituting an inactive subsidiary (other than the Merger); (k) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction (i) in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the financial statements of the Company or incurred in the ordinary course of business and consistent with 23 26 past practice and (ii) of liabilities required to be paid, discharged or satisfied pursuant to the terms of any contract in existence on the date of the Merger Agreement; (l) (i) make or commit to make any financial services loan; (ii) make or commit to make any other loan except as specifically provided in clauses (iii) through (ix) of this paragraph (l); (iii) purchase or commit to purchase consumer land loans from a single dealer exceeding an aggregate amount of (y) $1,000,000 in the case of a dealer that is an approved dealer as of the date of the Merger Agreement or (z) $2,500,000 in the case of a dealer that becomes an approved dealer on or after the date of the Merger Agreement; (iv) purchase or commit to purchase consumer timeshare loans from a single seller exceeding an aggregate amount of (y) $500,000 in the case of a seller that is an approved seller as of the date of the Merger Agreement or (z) $1,000,000 in the case of a seller that becomes an approved seller on or after the date of the Merger Agreement; (v) make or commit to make loans for the acquisition and/or construction of timeshare units that exceed (y) $2,500,000 in the case of a new loan to an approved borrower (or group of affiliated borrowers) as of the date of the Merger Agreement; provided however, that any increase in an existing commitment shall not exceed $1,000,000, and provided, further, that any additional loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $2,500,000 or (z) $2,000,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of the Merger Agreement; (vi) make or commit to make loans for the acquisition and/or development of landlots that exceed (y) $500,000 in the case of a new loan to an approved borrower (or group of affiliated borrowers) as of the date of the Merger Agreement; provided however, that any increase in an existing commitment shall not exceed $100,000, and provided, further, that any additional loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $1,500,000 or (z) $1,000,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of the Merger Agreement; (vii) make or commit to make loans for the finance or purchase of land (not including consumer loans as provided in clause (iii) of this paragraph (l) that exceed (y) $1,000,000 in the case of a new loan to an approved borrower (or group of affiliated borrowers) as of the date of the Merger Agreement; provided however, that any increase in an existing commitment shall not exceed $250,000, and provided, further, that any additional loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $2,500,000 or (z) $500,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of the Merger Agreement; (viii) make or commit to make loans for the finance or purchase of timeshare units (not including consumer loans as provided in clause (iv) of Section 5.1(l) above) that exceed (y) $5,000,000 in the case of a new loan to an approved borrower (or group of affiliated borrowers) as of the date of the Merger Agreement; provided however, that any increase in an existing commitment shall not exceed $2,500,000, and provided, further,that any additional loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $5,000,000 or (z) $5,000,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of the Merger Agreement; or (ix) purchase or commit to purchase any tax lien certificate greater than $500,000; provided, that nothing in this paragraph (l) shall prohibit the Company from honoring any contractual obligation in existence on the date of the Merger Agreement. 24 27 (m) refinance or restructure any existing loan, except in the ordinary course of business consistent with past practice and prudent lending practices; (n) make any material changes in its polices or practices concerning loan underwriting and credit scoring, or which persons may approve loans or credit scoring; (o) except in the ordinary course of business consistent with past practice and prudent business practices, enter into any securities transaction for its own account or purchase or otherwise acquire any investment security for its own account other than (A) securities backed by the full faith and credit of the United States or an agency thereof and (B) other readily marketable securities not in excess of $100,000. (p) foreclose upon or otherwise take title to or possession or control of any real property (other than residential property) without first obtaining a phase one environmental report thereon; (q) enter into any new, or modify, amend or extend the terms of any existing, contracts relating to the purchase or sale of financial or other futures, or any put or call option relating to cash, securities or commodities or any interest rate swap agreements or other agreements relating to the hedging of interest rate risk, except in the ordinary course of business consistent with past practices and prudent business practices; or (r) take, or offer or propose to take, or agree to take in writing or otherwise, any of the actions described in paragraphs (a) through (q) or any action which would make any of the representations or warranties of the Company contained in the Merger Agreement untrue and incorrect as of the date when made if such action had then been taken, or would result in any of the Offer Conditions not being satisfied. No Solicitation of Transactions. The Merger Agreement provides that the Company, its affiliates and their respective officers, directors, employees, representatives and agents shall immediately cease any existing discussions or negotiations, if any, with any parties conducted theretofore with respect to any acquisition or exchange of all or any material portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any business combination with or involving the Company or any of its subsidiaries. The Merger Agreement also provides that, at any time prior to consummation of the Offer, the Company may, directly or indirectly, furnish information and access, in each case only in response to a request for such information or access to any person made after the date thereof which was not encouraged, solicited or initiated by the Company or any of its affiliates or any of its or their respective officers, directors, employees, representatives or agents after the date thereof, pursuant to appropriate confidentiality agreements, and may participate in discussions and negotiate with such person concerning any merger, sale of assets, sale of shares of capital stock or similar transaction (including an exchange of stock or assets) involving the Company or any subsidiary or division of the Company, in each case (whether furnishing information and access or participating in discussions and negotiations) only if such person has submitted a written proposal to the Board of Directors of the Company relating to any such transaction and the Board by majority vote determines in good faith, based upon the advice of outside counsel to the Company, that failing to take such action would constitute a breach of the Board's fiduciary duty under applicable law. The Board is required to provide a copy of any such written proposal to TFC immediately after receipt thereof, notify TFC immediately if any proposal (oral or written) is made and in such notice indicate in reasonable detail the identity of the offeror and the terms and conditions of any proposal and keep TFC promptly advised of all developments which could reasonably be expected to culminate in the Board of Directors withdrawing, modifying or amending its recommendation of the Offer, the Merger and the other transactions contemplated by the Merger Agreement. Except as set forth in Section 6.5 of the Merger Agreement, neither the Company or any of its affiliates, nor any of its or their respective officers, directors, employees, representatives or agents shall, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group (other than TFC and the Purchaser, any affiliate or associate of TFC and Purchaser or any designees of TFC or Purchaser) concerning any merger, sale of any material portion or assets, sale of any of the shares of capital stock or similar transactions (including an exchange of stock or assets) involving the Company or any subsidiary or division of the Company; provided, that the Board of Directors of the Company may take, and disclose to the Company's stockholders, a position contemplated 25 28 by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender offer; provided, further, that the Board of Directors may not recommend that the stockholders of the Company tender their Shares in connection with any such tender offer unless the Board by majority vote shall have determined in good faith, based upon the advice of outside counsel to the Company, that failing to take such action would constitute a breach of the Board's fiduciary duty under applicable law. The Merger Agreement provides that the Company shall not release any third party from, or waive any provisions of, any confidentiality or standstill agreement to which the Company is a party, unless the Board by majority vote shall have determined in good faith, based upon the advice of outside counsel to the Company, that failing to release such third party or waive such provisions would constitute a breach of the fiduciary duties of the Board of Directors under applicable law. Meeting of Stockholders; Proxy Statement. The Merger Agreement provides that if required by applicable law in order to consummate the Merger, the Company will duly call, give notice of, convene and hold a meeting of its stockholders ("Stockholders Meeting") promptly after the consummation of the Offer to consider and vote upon the Merger Agreement and the Merger. At the Stockholders Meeting, TFC and the Purchaser will cause all Shares then owned by them and their subsidiaries to be voted in favor of the approval and adoption of the Merger Agreement and approval of the Merger. If the Stockholders Meeting is called, the Company will prepare and file with the Commission a proxy statement (the "Proxy Statement") to be mailed to the stockholders of the Company in connection with the meeting of such stockholders to consider and vote upon the Merger and, except if the Board of Directors by majority vote determines in good faith, based on the advice of outside legal counsel to the Company that to do so would constitute a breach of fiduciary duty under applicable law, include in the Proxy Statement the unanimous recommendation of the Board of Directors that the stockholders of the Company vote in favor of the approval and adoption of the Merger Agreement and the transactions contemplated thereby. As soon as practicable following the consummation of the Offer, the Company will file the Proxy Statement with the Commission. The Company, TFC and the Purchaser will use their reasonable best efforts to respond promptly to all comments of and requests by the Commission and to cause the Proxy Statement and all required amendments and supplements thereto to be mailed to holders of Shares entitled to vote at the Stockholders Meeting at the earliest practicable time following expiration or termination of the Offer. The Merger Agreement provides that in the event that the Purchaser shall acquire at least 90% of the outstanding Shares, the Company will, at the request of the Purchaser, take all necessary and appropriate action to cause the Merger to become effective as soon as reasonably practicable after such acquisition, without a meeting of the Company's stockholders, in accordance with Section 82 of the MBCL. Access to Information; Confidentiality. The Merger Agreement provides that, prior to the Effective Time, the Company shall, and shall cause its subsidiaries, officers, directors, employees, auditors and other agents to, afford the officers, employees, auditors and other agents of TFC complete access, consistent with applicable law, at all reasonable times to its officers, employees, agents, properties, offices, plants and other facilities and to all books and records, and shall furnish TFC with all financial, operating and other data and information as TFC through its officers, employees or agents may from time to time reasonably request. Information obtained by TFC or the Purchaser will be subject to the confidentiality agreement between the Company and TFC (the "Confidentiality Agreement"). Public Disclosures. The Merger Agreement provides that TFC and the Company will consult with each other before issuing any press release or otherwise making any public statements with respect to the Offer or the Merger and will not issue any such press release or make any such public statement prior to such consultation and without the consent of the other party, except as may be required by applicable law or any listing agreement with its securities exchange. Indemnification and Insurance. The Merger Agreement provides that TFC will use its reasonable best efforts to cause to be maintained in effect for six years from the Effective Time the current policies of the directors' and officers' liability insurance maintained by the Company (provided that TFC may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less advantageous) with respect to matters occurring prior to the Effective Time to the extent available; provided, however, that in no event will TFC or the Company be required to expend more than an amount per year equal to 150% of current annual premiums paid by the Company (which the Company represented and warranted in 26 29 the Merger Agreement to be not more than $46,000) to maintain or procure insurance coverage pursuant to the Merger Agreement. The Merger Agreement also provides that, for six years after the Effective Time, TFC will or will cause the Surviving Corporation to indemnify and hold harmless each present and former director and officer of the Company, determined as of the Effective Time and their heirs and representatives (the "Indemnified Parties"), against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") (but only to the extent such Costs are not otherwise covered by insurance and paid) incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative (collectively, "Claims"), arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under applicable law (and TFC will, or will cause the Surviving Corporation to, also advance expenses as incurred to the fullest extent permitted under applicable law provided the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification). The Merger Agreement further provides that any Indemnified Party wishing to claim indemnification as described above, upon learning of any such Claim, shall promptly notify TFC thereof, but the failure to so notify shall not relieve TFC of any liability it may have to such Indemnified Party if such failure does not materially prejudice TFC. In the event of any such Claim (whether arising before or after the Effective Time), (i) TFC or the Surviving Corporation shall have the right to assume the defense thereof and TFC shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if TFC or the Surviving Corporation elects not to assume such defense, or counsel for the Indemnified Parties advises that there are issues that raise conflicts of interest between TFC or the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and TFC or the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that TFC shall be obligated to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) TFC shall not be liable for any settlement effected without its prior written consent, which consent shall not be unreasonably withheld; and provided, further, that TFC shall not have any obligation to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. Further Assurances. The Merger Agreement provides that, subject to the other provisions of the Merger Agreement, each of the parties will use its best efforts to take, or cause to be taken, all action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by the Merger Agreement, including, without limitation, the Offer and the Merger, which efforts shall include, without limitation, using its reasonable best efforts to promptly make all required regulatory filings and applications including, without limitation, responding promptly to requests for further information and to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company and its subsidiaries and TFC and its subsidiaries as are necessary for the consummation of the transactions contemplated by the Merger Agreement and to fulfill the conditions to the Offer and the Merger. Notice of Subsequent Events. The Merger Agreement provides that each party will give the other party notice of the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would be likely to cause any representation or warranty contained in the Merger Agreement to be untrue or inaccurate and any failure of a party to comply or satisfy any covenant, condition or agreement to be complied with under the Merger Agreement. Employment; Employee Welfare. The Merger Agreement provides that TFC will maintain for a period of one year following the Effective Time employee benefit plans and programs, for the benefit of employees of 27 30 the Company and its subsidiaries (other than those employees covered by collective bargaining arrangements) that are in the aggregate no less favorable in the aggregate than those provided to TFC's similarly situated employees, pursuant to the plans, programs and arrangements (other than those related to the equity securities of the Company) of TFC and its subsidiaries as in effect on the date of the Merger Agreement (the "Existing Plans"). TFC will credit the prior service of all employees of the Company and its subsidiaries for purposes of determining the eligibility, and vesting under any employee benefit plan provided by TFC for the benefit of the employees. Employees covered by collective bargaining agreements shall be provided with such benefits as shall be required under the terms of any applicable collective bargaining agreement. In addition, the Surviving Corporation will assume and honor in accordance with their terms all existing employment and severance agreements and arrangements which are set forth in the Company Disclosure Schedule. Conditions to the Merger. The Merger Agreement provides that the respective obligations of each party to effect the Merger is subject to the satisfaction, at or prior to the Effective Time, of each of the following conditions: (i) if required by the MBCL, the Merger Agreement shall have been adopted by the affirmative vote of the stockholders of the Company by the requisite vote in accordance with the Company's Certificate of Incorporation and the MBCL; (ii) no statute, rule, regulation, executive order, decree, ruling, injunction or other order (whether temporary, preliminary or permanent) shall have been enacted, entered, promulgated or enforced by any United States, foreign, federal or state court or governmental authority which prohibits, restrains, enjoins or restricts the consummation of the Merger; (iii) the Purchaser shall have purchased Shares pursuant to the Offer; and (iv) any waiting period applicable to the Merger under the HSR Act shall have terminated or expired. The conditions to the Merger set forth above are different from the conditions to the Offer, which are set forth in Section 15. Termination; Fees and Expenses. The Merger Agreement provides that it may be terminated at any time and the Offer and Merger may be abandoned at any time prior to the Effective Time: (a) by mutual written consent of TFC, the Purchaser and the Company; (b) by TFC or the Company if any court of competent jurisdiction or other governmental body located or having jurisdiction within the United States shall have issued a final order, injunction, decree, judgment or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Offer or the Merger and such order, injunction, decree, judgment, ruling or other action is or shall have become final and nonappealable; (c) by TFC if due to an occurrence or circumstance which resulted in a failure to satisfy any of the Offer Conditions, the Purchaser shall have (i) terminated the Offer or (ii) failed to pay for Shares pursuant to the Offer on or prior to the Outside Date (as defined below); (d) by the Company (only following the Outside Date, in the case of clause (ii)(B) of this paragraph) if (i) there shall have been a material breach of any covenant or agreement on the part of TFC or the Purchaser contained in the Merger Agreement which materially adversely affects TFC's or the Purchaser's ability to consummate (or materially delays commencement or consummation of) the Offer, and which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, (ii) Purchaser shall have (A) terminated the Offer or (B) failed to pay for Shares pursuant to the Offer on or prior to the Outside Date (unless such termination or failure is caused by or results from the failure of any representation or warranty of the Company to be true and correct in any material respect or the failure of the Company to perform in any material respect any of its covenants or agreements contained in the Merger Agreement) or (iii) prior to the purchase of Shares pursuant to the Offer, any person shall have made a bona fide offer to acquire the Company (A) that the Board of Directors of the Company by majority vote determines in its good faith judgment is more favorable to the Company and the Company's stockholders than the Offer and the Merger and (B) as a result of which the Board of Directors by majority vote determines in good faith, based upon the advice of outside counsel to the Company, that it is obligated by its fiduciary obligations under applicable law to terminate the Merger Agreement, provided that such termination under this clause (iii) shall not be effective until the Company has made payment of the full fee and expense reimbursement required to be paid as described below; and 28 31 (e) by TFC prior to the purchase of Shares pursuant to the Offer, if (i) there shall have been a breach of any representation, warranty, covenant or agreement on the part of the Company contained in the Merger Agreement which is reasonably likely to have a Material Adverse Effect on the Company or which materially adversely affects (or materially delays) the consummation of the Offer, which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, (ii) the Board shall have withdrawn or modified (including by amendment of the Schedule 14D-9) in a manner adverse to the Purchaser its approval or recommendation of the Offer, the Merger Agreement or the Merger or shall have recommended another offer or transaction, or shall have resolved to effect any of the foregoing, or (iii) the Minimum Condition shall not have been satisfied by the expiration date of the Offer as it may have been extended pursuant hereto and on or prior to such date (A) any person (including the Company but not including TFC or the Purchaser) shall have made a public announcement, disclosure or communication to the Company with respect to a Third Party Acquisition (as defined below) or (B) any person (including the Company or any of its affiliates or subsidiaries), other than TFC or any of its affiliates shall have become (and remain at the time of termination) the beneficial owner of 20% or more of the Shares (unless such person shall have tendered and not withdrawn such person's Shares pursuant to the Offer). The "Outside Date" is the latest to occur (but in no event later than 90 days following the date of the Merger Agreement) of (i) the date that is 60 days following the date of the Merger Agreement and (ii) provided that the Minimum Condition has been satisfied within 60 days following the date of the Merger Agreement, the date on which either (x) the applicable waiting period under the HSR Act shall have expired or been terminated or (y) the final terms of a consent decree between TFC and the appropriate governmental authority with respect to the Offer and the Merger shall have been agreed to. The Merger Agreement provides that if: (i) (x) TFC terminates the Merger Agreement pursuant to paragraph (e)(i) above and (y) prior to such termination a proposal or offer with respect to a Third Party Acquisition shall have been made to the Company and (z) within 12 months after such termination, the Company enters into an agreement with respect to a Third Party Acquisition, or a Third Party Acquisition occurs; or (ii) (x) the Company terminates the Merger Agreement pursuant to paragraph (d)(iii) above or (y) the Company terminates the Merger Agreement pursuant to paragraph (d)(ii)(B) above and at such time TFC would have been permitted to terminate the Merger Agreement under paragraph (e)(ii) or (iii) above or (z) TFC terminates the Merger Agreement pursuant to paragraph (e)(ii) or (iii) above; then the Company shall pay to TFC and the Purchaser, within three business days following the execution and delivery of such agreement or such occurrence, as the case may be, or simultaneously with any termination contemplated by paragraph (a)(ii) above, a fee, in cash, of $5.5 million (less any amounts previously paid as described in the next paragraph) provided, however, that the Company in no event shall be obligated to pay more than one such fee with respect to all such agreements and occurrences and such termination. "Third Party Acquisition" means the occurrence of any of the following events: (i) the acquisition of the Company by merger or similar business combination by any person other than TFC, the Purchaser or any affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of 20% or more of the book or fair market value of the consolidated assets of the Company and its subsidiaries, taken as a whole; or (iii) the acquisition by a Third Party of 20% or more of the outstanding Shares. The Merger Agreement provides that, upon the termination thereof (i) under circumstances in which TFC shall have been entitled to terminate the Agreement pursuant to paragraph (e)(i) above (whether or not expressly terminated on such basis) or (ii) if any of the representations and warranties of the Company contained in the Merger Agreement were untrue or incorrect in any material respect when made and at the time of termination remained untrue or incorrect in any material respect and such misrepresentation materially adversely affected the consummation (or materially delayed commencement or consummation) of the Offer, then the Company shall reimburse TFC, the Purchaser and their affiliates (not later than three 29 32 business days after submission of statements therefor) for all actual documented out-of-pocket fees and expenses actually incurred by any of them or on their behalf in connection with the Offer and the Merger and the consummation of all transactions contemplated by the Merger Agreement (including, without limitation, fees and disbursements payable to financing sources, investment bankers, counsel to the Purchaser or TFC or any of the foregoing, and accountants) up to a maximum amount of $1,000,000. Unless required to be paid earlier pursuant to paragraph (d) above, the Company shall in any event pay the amount requested within three business days of such request, subject to the Company's right to demand a return of any portion as to which invoices are not received in due course after request by the Company. The Merger Agreement further provides that, except as otherwise specifically provided therein, each party shall bear its own expenses in connection with the Merger Agreement and the transactions contemplated thereby. 12. PURPOSE OF THE OFFER; THE MERGER; PLANS FOR THE COMPANY. Purpose. The purpose of the Offer is to acquire control of, and the entire equity interest in, the Company. The Offer is being made pursuant to the Merger Agreement. As promptly as practicable following consummation of the Offer and after satisfaction or waiver of all conditions to the Merger set forth in the Merger Agreement, the Purchaser intends to acquire the remaining equity interest in the Company not acquired in the Offer by consummating the Merger. Vote Required to Approve the Merger. The Board of Directors of the Company has approved the Merger Agreement in accordance with the MBCL. If required for approval of the Merger, the Company has agreed, subject to the satisfaction of the conditions to the Merger set forth in the Merger Agreement, in accordance with and subject to the MBCL, to duly convene a meeting of its stockholders as promptly as practicable following the purchase of Shares pursuant to the Offer for the purpose of considering and taking action on the Merger Agreement. If stockholder approval is required, the Merger Agreement must be approved by the vote of the holders of two-thirds of the outstanding Shares. As a result, if the Minimum Condition is satisfied, the Purchaser will have the power to approve the Merger Agreement without the affirmative vote of any other stockholder. The Merger Agreement provides that, notwithstanding the foregoing, in the event that the Purchaser shall acquire at least 90% of the outstanding Shares, the Company shall, at the Purchaser's request, take all necessary and appropriate action to cause the Merger to become effective as soon as reasonably practicable after such acquisition, without a meeting of the Company's stockholders, in accordance with Section 82 of the MBCL. THIS OFFER TO PURCHASE DOES NOT CONSTITUTE A SOLICITATION OF A PROXY, CONSENT OR AUTHORIZATION FOR OR WITH RESPECT TO THE ANNUAL MEETING OR ANY SPECIAL MEETING OF THE COMPANY'S STOCKHOLDERS OR ANY ACTION IN LIEU THEREOF. ANY SUCH SOLICITATION WHICH THE PURCHASER OR THE COMPANY MAY MAKE WILL BE MADE ONLY PURSUANT TO SEPARATE PROXY MATERIALS IN COMPLIANCE WITH SECTION 14(a) OF THE EXCHANGE ACT. Appraisal Rights. Stockholders do not have appraisal rights as a result of the Offer. However, if the Merger is consummated, stockholders of the Company at the time of the Merger who do not vote in favor of the Merger and comply with all statutory requirements will have the right under the MBCL to demand appraisal of, and receive payment in cash of the fair value of, their Shares outstanding immediately prior to the effective date of the Merger in accordance with Sections 89 and 90 of the MBCL. Under the MBCL, stockholders who properly demand appraisal and otherwise comply with the applicable statutory procedures will be entitled to receive a judicial determination of the fair value of their Shares (exclusive of any element of value arising from the accomplishment or expectation of the Merger) and to receive payment of such fair value in cash. Any such judicial determination of the fair value of such Shares could be based upon considerations other than or in addition to the price paid in the Offer and the Merger and the market value of the Shares. In Piemonte v. New Boston Garden Corp., the Massachusetts Supreme Judicial Court approved, but did not require, that the appraisal value of stock be determined by assessing "the 30 33 market value, the earnings value, and the net asset value of the stock, followed by" assigning a percentage weight to each based on the relative importance of that value to the stock in the particular circumstances. THE FOREGOING SUMMARY OF THE RIGHTS OF STOCKHOLDERS DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE PROCEDURES TO BE FOLLOWED BY STOCKHOLDERS DESIRING TO EXERCISE ANY AVAILABLE APPRAISAL RIGHTS. THE PRESENTATION AND EXERCISE OF APPRAISAL RIGHTS REQUIRE STRICT ADHERENCE TO THE APPLICABLE PROVISIONS OF THE MASSACHUSETTS LAW. The foregoing description of certain provisions of the MBCL is not necessarily complete and is qualified in its entirety by reference to the MBCL. Rule 13e-3. The Commission has adopted Rule 13e-3 under the Exchange Act which is applicable to certain "going private" transactions and which may under certain circumstances be applicable to the Merger following the purchase of Shares pursuant to the Offer in which the Purchaser seeks to acquire any remaining Shares. Rule 13e-3 should not be applicable to the Merger if the Merger is consummated within one year after the expiration or termination of the Offer and the price paid in the Merger is not less than the per Share price paid pursuant to the Offer. However, in the event that the Purchaser is deemed to have acquired control of the Company pursuant to the Offer and if the Merger is consummated more than one year after completion of the Offer or an alternative acquisition transaction is effected whereby stockholders of the Company receive consideration less than that paid pursuant to the Offer, in either case at a time when the Shares are still registered under the Exchange Act, the Purchaser may be required to comply with Rule 13e-3 under the Exchange Act. If applicable, Rule 13e-3 would require, among other things, that certain financial information concerning the Company and certain information relating to the fairness of the Merger or such alternative transaction and the consideration offered to minority stockholders in the Merger or such alternative transaction, be filed with the Commission and disclosed to stockholders prior to consummation of the Merger or such alternative transaction. The purchase of a substantial number of Shares pursuant to the Offer may result in the Company being able to terminate its Exchange Act registration. See Section 14. If such registration were terminated, Rule 13e-3 would be inapplicable to any such future Merger or such alternative transaction. Plans for the Company. If the Purchaser obtains control of the Company pursuant to the Offer, TFC expects to conduct a detailed review of the Company and its businesses, assets, corporate structure, capitalization, operations, properties, policies, management and personnel and to consider what, if any, changes would be desirable in light of the circumstances that then exist. Such changes could include changes in the Company's businesses, corporate structure, articles of organization, by-laws, capitalization, board of directors, management or dividend policy. Except as described in this Offer to Purchase, neither TFC nor the Purchaser has any present plans or proposals that would relate to or result in an extraordinary corporate transaction such as a merger, reorganization or liquidation involving the Company or any of its subsidiaries or a sale or other transfer of a material amount of assets of the Company or any of its subsidiaries, any material change in the capitalization or dividend policy of the Company or any other material change in the Company's corporate structure or business or the composition of its Board of Directors or management. 13. DIVIDENDS AND DISTRIBUTIONS. If on or after the date of the Merger Agreement (except as set forth in the Merger Agreement -- See Section 6), the Company should declare or pay any cash or stock dividend or other distribution on, or issue any right with respect to, the Shares that is payable or distributable to stockholders of record on a date prior to the transfer to the name of the Purchaser or the nominee or transferee of the Purchaser on the Company's stock transfer records of such Shares that are purchased pursuant to the Offer, then without prejudice to the Purchaser's rights under Section 15, (i) the purchase price payable per Share by the Purchaser pursuant to the Offer will be reduced to the extent any such dividend or distribution is payable in cash and (ii) any non-cash dividend, distribution (including additional Shares) or right received and held by a tendering stockholder shall be required to be promptly remitted and transferred by the tendering stockholder to the Depositary for the account of the Purchaser, accompanied by appropriate documentation of transfer. Pending such remittance or appropriate assurance thereof, the Purchaser will, subject to applicable law, be entitled to all rights and privileges as owner of any such non-cash dividend, distribution or right and 31 34 may withhold the entire purchase price or deduct from the purchase price the amount or value thereof, as determined by the Purchaser in its sole discretion. 14. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES, NASDAQ LISTING AND EXCHANGE ACT REGISTRATION. The purchase of Shares pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and will reduce the number of holders of Shares. This could adversely affect the liquidity and market value of the remaining Shares held by the public. Depending upon the number of Shares purchased pursuant to the Offer, the Shares may no longer meet the requirements of Nasdaq for continued inclusion on the Nasdaq National Market. If as a result of the purchase of Shares pursuant to the Offer or otherwise, the Shares no longer meet the requirements of Nasdaq for continued inclusion on Nasdaq and the Shares are no longer included on Nasdaq, as the case may be, the market for the Shares could be adversely affected. In the event that the Shares no longer meet the requirements of Nasdaq, it is possible that such Shares would continue to trade on other securities exchanges or in the over-the-counter market and that price quotations would be reported by such exchanges or through other sources. However, the extent of the public market for the Shares and the availability of such quotations would depend upon such factors as the number of stockholders and/or the aggregate market value of the Shares remaining at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration under the Exchange Act as described below and other factors. The Purchaser cannot predict whether the reduction in the number of Shares that might otherwise trade publicly would have an adverse or beneficial effect on the market price for or marketability of the Shares. The Shares are currently registered under the Exchange Act. The purchase of Shares pursuant to the Offer may result in the Shares becoming eligible for deregistration under the Exchange Act. Registration of the Shares may be terminated upon application of the Company to the Commission if the Shares are not listed on a national securities exchange and there are fewer than 300 record holders. The termination of the registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to holders of the Shares and would make certain provisions of the Exchange Act, such as the short-swing profit recovery provisions of Section 16(b), the requirement of furnishing a proxy statement in connection with stockholders' meetings and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions, no longer applicable to the Shares. Furthermore, "affiliates" of the Company and persons holding "restricted securities" of the Company may be deprived of the ability to dispose of the securities pursuant to Rule 144 under the Securities Act of 1933. 15. CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provision of the Offer, but subject to the terms and conditions of the Merger Agreement, the Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to the Purchaser's obligation to pay for or return tendered Shares promptly after termination or withdrawal of the Offer), pay for any Shares tendered pursuant to the offer, and may postpone the acceptance for payment or, subject to the restriction referred to above, payment for any Shares tendered pursuant to the Offer, and may amend or terminate the offer (whether or not any Shares have theretofore been purchased or paid for) to the extent permitted by the Merger Agreement if, (i) at the expiration of the Offer, the Minimum Condition has not been satisfied or (ii) at any time prior to the Expiration Date: (a) there shall have been entered any order, preliminary or permanent injunction, decree, judgment or ruling in any action or proceeding before any court or governmental, administrative or regulatory authority or agency, or any statute, rule or regulation enacted, entered, enforced, promulgated, amended or issued that is applicable to TFC, the Purchaser, the Company or any subsidiary or affiliate of the Purchaser or the Company or the Offer or the Merger, by any legislative body, court, government or governmental, administrative or regulatory authority or agency that is reasonably likely to have the effect of : (i) making illegal or otherwise directly or indirectly restraining or prohibiting the making of the Offer in accordance with the terms of the Merger Agreement, the acceptance for payment of, or payment for, some of or all the Shares by the Purchaser or any of its affiliates or the consummation of the Merger; (ii) prohibiting the ownership or operation by the Company or any of its subsidiaries, or TFC or any of its subsidiaries, of all or any material portion of the business or assets of the Company or any of its 32 35 subsidiaries, taken as a whole, or TFC or its subsidiaries, taken as a whole, or (iii) materially limiting the ownership or operation by the Company or any of its subsidiaries, or TFC or any of its subsidiaries, of all or any material portion of the business or assets of the Company or any of its subsidiaries, taken as a whole, or TFC or its subsidiaries, taken as a whole (other than, in either case, assets or businesses of the Company or its subsidiaries that are not material (measured in relation to the combined assets or revenues of the Company and its subsidiaries, taken as a whole)) or compelling TFC or any of its subsidiaries to dispose of or hold separate all or any portion of the businesses or assets of the Company or any of its subsidiaries or TFC or any of its subsidiaries (other than, in either case, assets or businesses of the Company or its subsidiaries that are not material (measured in relation to the combined assets or revenues of the Company and its subsidiaries, taken as a whole)), as a result of the transactions contemplated by the Offer or the Merger Agreement; (iv) imposing limitations on the ability of TFC, the Purchaser or any of TFC's affiliates effectively to acquire or hold or to exercise full rights of ownership of the Shares, including without limitation the right to vote any Shares acquired or owned by TFC or Purchaser or any of its affiliates on all matters properly presented to the stockholders of the Company, including without limitation the adoption and approval of the Merger Agreement and the Merger or the right to vote any shares of capital stock of any subsidiary directly or indirectly owned by the Company; or (v) requiring divestiture by TFC or the Purchaser or any of their affiliates of any Shares; (b) there shall have occurred any event, other than events arising out of the announcement of the Offer and the transactions contemplated by the Merger Agreement, that is reasonably likely to have a Material Adverse Effect; (c) there shall have occurred (i) any general suspension of trading in, or limitation on prices (other than suspensions or limitations triggered on the New York Stock Exchange by price fluctuations on a trading day) for, securities on any national securities exchange or in the over-the-counter market in the United States, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any material limitation (whether or not mandatory) by any government or governmental, administrative or regulatory authority or agency in the United States on the extension of credit by banks or other lending institutions, (iv) a commencement of a war directly involving the United States and materially adversely affecting (or material delaying) the consummation of the Offer or (v) in the case of any of the foregoing existing at the time of commencement of the Offer, a material acceleration or worsening thereof; (d)(i) it shall have been publicly disclosed or the Purchaser shall have otherwise learned that beneficial ownership (determined for the purposes of this paragraph as set forth in Rule 13d-3 promulgated under the Exchange Act) of more than 20% of the outstanding Shares has been acquired by any corporation (including the Company or any of its subsidiaries or affiliates), partnership, person or other entity or group (as defined in Section 13(d)(3) of the Exchange Act), other than TFC or any of its affiliates; or (ii) (A) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified in a manner adverse to TFC or the Purchaser the approval or recommendation of the Offer, the Merger or the Merger Agreement, or approved or recommended any takeover proposal or any other acquisition of Shares other than the Offer and the Merger, (B) any such corporation, partnership, person or other entity or group shall have entered into a definitive agreement or an agreement in principle with the Company with respect to a tender offer or exchange offer for any Shares or a merger, consolidation or other business combination with or involving the Company or any of its subsidiaries, or (C) the Board of Directors of the Company or any committee thereof shall have resolved to do any of the foregoing; (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified by reference to materiality or a Material Adverse Effect shall not be true and correct, or any such representations and warranties that are not so qualified shall not be true and correct in all material respects, in each case as if such representations and warranties were made at the time of such determination; 33 36 (f) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Merger Agreement; (g) the Merger Agreement shall have been terminated in accordance with its terms or the Offer shall have been terminated with the consent of the Company; or (h) any waiting periods under the HSR Act applicable to the purchase of Shares pursuant to the Offer or the Merger, and any applicable waiting periods under any foreign statutes or regulations, shall not have expired or been terminated; (i) the Company shall have terminated the employment agreement of Richard A. Stratton, without the prior written consent of the Purchaser; or (j) the Company shall not have obtained the consent of each member of the Board of Directors of the Company to the cancellation of all options held by such Directors as contemplated by the Merger Agreement; which, in the reasonable judgment of the Purchaser with respect to each and every matter referred to above and regardless of the circumstances (except for any action or inaction by the Purchaser or any of its affiliates constituting a breach of the Merger Agreement) giving rise to any such condition, makes it inadvisable to proceed with the Offer or with such acceptance for payment of or payment for Shares or to proceed with the Merger. The foregoing conditions are for the sole benefit of the Purchaser and may be asserted by the Purchaser regardless of the circumstances giving rise to any such condition (except for any action or inaction by the Purchaser or any of its affiliates constituting a breach of the Merger Agreement) or (other than the Minimum Condition) may be waived by the Purchaser in whole or in part at any time and from time to time in its sole discretion (subject to the terms of the Merger Agreement). The failure by the Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances, and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. 16. CERTAIN LEGAL MATTERS AND REGULATORY APPROVALS. General. Except as set forth below, neither the Purchaser, nor TFC is aware of any licenses or other regulatory permits that appear to be material to the business of the Company and its subsidiaries, taken as a whole, that might be adversely affected by the Purchaser's acquisition of Shares (and the indirect acquisition of the stock of the Company's subsidiaries) as contemplated herein, or of any filings, approvals or other actions by or with any domestic (Federal or state), foreign or supranational governmental authority or administrative or regulatory agency that would be required prior to the acquisition of Shares (or the indirect acquisition of the stock of the Company's subsidiaries) by the Purchaser pursuant to the Offer as contemplated herein. Should any such approval or other action be required, it is TFC's present intention to seek such approval or action. There can be no assurance that any such approval or other action, if needed, would be obtained without substantial conditions or that adverse consequences might not result to the business of the Company, TFC or the Purchaser or that certain parts of the businesses of the Company, TFC or the Purchaser might not have to be disposed of or held separate or other substantial conditions complied with in order to obtain such approval or other action or in the event that such approval was not obtained or such other action was not taken, any of which could cause the Purchaser to elect (subject to the terms of the Merger Agreement) to terminate the Offer without the purchase of the Shares thereunder. The Purchaser's obligation under the Offer to accept for payment and pay for Shares is subject to certain conditions, including conditions relating to the legal matters discussed in this Section 16. State Takeover Laws. A number of states have adopted takeover laws and regulations which purport to varying degrees to be applicable to attempts to acquire securities of corporations which are incorporated in such states or which have or whose business operations have substantial economic effects in such states, or 34 37 which have substantial assets, security holders, principal executive offices or principal places of business therein. In 1982, the Supreme Court of the United States, in Edgar v. Mite Corp., invalidated on constitutional grounds the Illinois Business Takeovers Act, which as a matter of state securities law made takeovers of corporations meeting certain requirements more difficult, and the reasoning in such decision is likely to apply to certain other state takeover statutes. However, in 1987, in CTS Corp. v. Dynamics Corp. of America, the Supreme Court of the United States held that the State of Indiana could, as a matter of corporate law and in particular those aspects of corporate law concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without the prior approval of the remaining stockholders, provided that such laws were applicable only under certain conditions. Subsequently, in TLX Acquisition Corp. v. Telex Corp., a Federal district court in Oklahoma ruled that the Oklahoma statutes were unconstitutional insofar as they applied to corporations incorporated outside Oklahoma in that they would subject such corporations to inconsistent regulations. Similarly, in Tyson Foods, Inc. v. McReynolds, a Federal district court in Tennessee ruled that four Tennessee takeover statutes were unconstitutional as applied to corporations incorporated outside Tennessee. This decision was affirmed by the United States Court of Appeals for the Sixth Circuit. In December 1988, a Federal district court in Florida held in Grand Metropolitan PLC v. Butterworth that the provisions of the Florida Affiliated Transactions Act and the Florida Control Share Acquisition Act were unconstitutional as applied to corporations incorporated outside of Florida. Except as described herein, the Purchaser has not attempted to comply with any state takeover statutes in connection with the Offer. The Purchaser reserves the right to challenge the validity or applicability of any state law allegedly applicable to the Offer and nothing in this Offer to Purchase nor any action taken in connection herewith is intended as a waiver of that right. In the event that any state takeover statute is found applicable to the Offer, the Purchaser might be unable to accept for payment or purchase Shares tendered pursuant to the Offer or be delayed in continuing or consummating the Offer. In such case, the Purchaser may not be obligated to accept for purchase or pay for, any Shares tendered. See Section 16. Pursuant to the Merger Agreement, the Company has represented to TFC that the Company has taken all action necessary so as to render the limitations on business combinations contained in Chapter 110D and Chapter 110F, Section 1, of the Massachusetts Corporation Related Laws inapplicable to the Offer and the Merger. Antitrust. Under the HSR Act and the rules that have been promulgated thereunder by the Federal Trade Commission ("FTC"), certain acquisition transactions may not be consummated unless certain information has been furnished to the Antitrust Division of the Department of Justice (the "Antitrust Division") and the FTC and certain waiting period requirements have been satisfied. TFC and the Company filed on September 27, 1999 with the FTC and the Antitrust Division a Premerger Notification and Report Form in connection with the purchase of Shares pursuant to the Offer. Under the provisions of the HSR Act applicable to the Offer, the purchase of Shares pursuant to the Offer may not be consummated until the expiration of a 15-calendar day waiting period following the filing by TFC, unless both the Antitrust Division and the FTC terminate the waiting period prior thereto. If, within such 15-calendar day waiting period, either the Antitrust Division or the FTC requests additional information or documentary material from TFC, the waiting period would be extended for an additional 10 calendar days following substantial compliance by TFC with such request. Thereafter, the waiting period could be extended only by court order. If the acquisition of Shares is delayed pursuant to a request by the FTC or the Antitrust Division for additional information or documentary material pursuant to the HSR Act, the Offer may, but need not (except as otherwise provided in the Merger Agreement), be extended and in any event the purchase of and payment for Shares will be deferred until 10 days after the request is substantially complied with, unless the waiting period is sooner terminated by the FTC and the Antitrust Division. See Section 2. Only one extension of such waiting period pursuant to a request for additional information is authorized by the HSR Act and the rules promulgated thereunder, except by court order. Any such extension of the waiting period will not give rise to any withdrawal rights not otherwise provided for by applicable law. See Section 4. The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of Shares by the Purchaser pursuant to the Offer. At any time before or after the purchase by the Purchaser of Shares pursuant to the Offer, either of the FTC and the 35 38 Antitrust Division could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Shares pursuant to the Offer or seeking the divestiture of Shares purchased by the Purchaser or the divestiture of substantial assets of TFC, its subsidiaries or the Company. Private parties and state attorneys general may also bring legal action under Federal or state antitrust laws under certain circumstances. Based upon an examination of publicly available information relating to the businesses in which the Company and its subsidiaries are engaged, TFC and the Purchaser believe that the acquisition of Shares pursuant to the Offer would not violate the antitrust laws. There can be no assurance, however, that a challenge to the Offer on antitrust grounds will not be made or, if such challenge is made, what the outcome will be. See Section 15 for certain conditions to the Offer, including conditions with respect to litigation and certain government actions. Margin Credit Regulations. Federal Reserve Board Regulations G, T, U and X (the "Margin Credit Regulations") restrict the extension or maintenance of credit for the purpose of buying or carrying margin stock, including the Shares, if the credit is secured directly or indirectly thereby. Such secured credit may not be extended or maintained in an amount that exceeds the maximum loan value of the margin stock. Under the Margin Credit Regulations, the Shares are presently margin stock and the maximum loan value thereof is generally 50% of their current market value. The definition of "indirectly secured" contained in the Margin Credit Regulations provides that the term does not include an arrangement with a customer if the lender in good faith has not relied upon margin stock as collateral in extending or maintaining the particular credit. State Mortgage Banker and Lender Licenses. The Company has represented in the Merger Agreement that, in order for the Surviving Corporation to conduct its business after the Merger as it is presently conducted by the Company, the Surviving Corporation must hold certain state mortgage banker, supervised lending and certain other licenses in a number of states. The Company has represented that certain of such licenses require notification to the applicable state regulatory authority of the transactions contemplated by the Merger Agreement, whereas other such licenses require the consent of the applicable state regulatory authority. 17. FEES AND EXPENSES. Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") is acting as Dealer Manager in connection with the Offer and serving as TFC's exclusive financial advisor in connection with the transactions pursuant to the Merger Agreement. As compensation for its services, DLJ will receive (a) a retainer fee of $25,000 and (b) an additional fee of $1,725,000 (against which the retainer fee will be credited), payable promptly upon consummation of the Offer. If, in connection with the termination or abandonment of a proposed transaction with TFC and the Company during the term of TFC's engagement letter with DLJ or within twelve months thereafter, TFC receives any "break up" or similar fee or any profit arising from any shares of the Company or its affiliates in connection with such a transaction, then DLJ will be entitled to a termination fee equal to 5% of such break-up or similar fee, plus $100,000 (against which the retainer fee will be credited). TFC will also reimburse DLJ for all reasonable out-of-pocket expenses including reasonable fees and expenses of its legal counsel, and has also agreed to indemnify DLJ and certain related parties against certain liabilities, including certain liabilities under the Federal securities laws, arising out of the engagement. In the ordinary course of business, Donaldson, Lufkin & Jenrette and its affiliates may actively trade or hold the securities of TFC and the Company for their account or for the account of customers and, accordingly, may at any time hold a long or short position in such securities. The Purchaser has retained D. F. King & Co., Inc. to act as the Information Agent and EquiServe Limited Partnership to act as the Depositary in connection with the Offer. The Information Agent may contact holders of Shares by mail, telephone, telex, telegraph and personal interview and may request brokers, dealers and other nominee stockholders to forward the Offer materials to beneficial owners. The Information Agent and the Depositary will receive reasonable and customary compensation for services relating to the Offer and will be reimbursed for certain out-of-pocket expenses. The Purchaser and TFC have also agreed to indemnify the Information Agent and the Depositary against certain liabilities and expenses in connection with the Offer, including certain liabilities under the Federal securities laws. 36 39 The Purchaser will not pay any fees or commissions to any broker or dealer or any other person for soliciting tenders of Shares pursuant to the Offer (other than to the Dealer Manager, the Information Agent and the Depositary). Brokers, dealers, commercial banks and trust companies will, upon request, be reimbursed by the Purchaser for customary mailing and handling expenses incurred by them in forwarding offering materials to their customers. 18. MISCELLANEOUS. The Offer is being made solely by this Offer to Purchase and the related Letter of Transmittal and is being made to all holders of Shares. The Purchaser is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If the Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, the Purchaser will make a good faith effort to comply with any such state statute. If after such good faith effort, the Purchaser cannot comply with such state statute, the Offer will not be made to nor will tenders be accepted from or on behalf of the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser by the Dealer Manager or one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. The Purchaser and TFC have filed with the Commission a Schedule 14D-1 (including exhibits) pursuant to Rule 14d-3 under the Exchange Act, furnishing certain additional information with respect to the Offer. Such statement and any amendments thereto, including exhibits, may be inspected and copies may be obtained from the offices of the Commission (except that they will not be available at the regional offices of the Commission) in the manner set forth in Section 8 of this Offer to Purchase. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION ON BEHALF OF THE PURCHASER OR TFC NOT CONTAINED HEREIN OR IN THE LETTER OF TRANSMITTAL AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. LIGHTHOUSE ACQUISITION CORP. TEXTRON FINANCIAL CORPORATION September 29, 1999 37 40 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS 1. Directors of the Purchaser. The name, business address, age, present principal occupation or employment and five-year employment history of each director of the Purchaser are set forth below. All directors listed below are citizens of the United States of America. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with Purchaser. Unless otherwise indicated the business address of each such director and officer is c/o Textron Financial Corporation, 40 Westminster Street, Providence, Rhode Island 02903.
AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- Stephen A. Giliotti Mr. Giliotti, 51, has been a Director of the Purchaser since its formation on September 21, 1999. He has been Chairman, President and Chief Executive Officer of TFC since 1999. He was President of TFC from 1995 to 1999 and Executive Vice President and Chief Operating Officer of TFC from 1994 to 1995. Buell J. Carter Mr. Carter, 53, has been a Director of the Purchaser since its formation on September 21, 1999. He has been Executive Vice President and Chief Operating Officer of TFC since 1999. He was Senior Vice President -- Operations of TFC from 1997 to 1999 and Vice President, Division Manager, Asset Based Finance of TFC from 1991 to 1997. Elizabeth C. Perkins Ms. Perkins, 45, has been a Director of the Purchaser since its formation on September 21, 1999. She has been Senior Vice President and General Counsel of TFC since 1994.
2. Executive Officers of the Purchaser. The name, business address, age, present principal occupation or employment and five-year employment history of each executive officer of the Purchaser are set forth below. All executive officers listed below are citizens of the United States of America. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with Purchaser. Unless otherwise indicated the business address of each such director and officer is c/o Textron Financial Corporation, 40 Westminster Street, Providence, Rhode Island 02903.
AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- Buell J. Carter Mr. Carter has been the President of the Purchaser since its formation on September 21, 1999. For additional information, see "Directors of the Purchaser," above.
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AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- Elizabeth C. Perkins Ms. Perkins has been the Secretary of the Purchaser since its formation on September 21, 1999. For additional information, see "Directors of the Purchaser," above. Brian F. Lynn Mr. Lynn has been the Treasurer of the Purchaser since its formation on September 21, 1999.
3. Directors of TFC. The name, business address, age, present principal occupation or employment and five-year employment history of each director of TFC are set forth below. All directors listed below are citizens of the United States of America. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with TFC. Unless otherwise indicated, the business address of each such director is c/o Textron Inc., 40 Westminster Street, Providence, Rhode Island 02903.
AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- Edward C. Arditte Mr. Arditte, 45, has been a TFC Director since May of 1997. He has been Vice President and Treasurer of Textron since 1997 and was Vice President Finance of Business Development, Textron Fastening Systems, from 1995 to 1997, and Vice President -- Communications and Risk Management of Textron from 1994 to 1995. Lewis B. Campbell Mr. Campbell, 53, has been a TFC Director since January of 1993. He has been Chairman and Chief Executive Officer of Textron since 1999 and was President and Chief Executive Officer from 1998 to 1999, and President and Chief Operating Officer of Textron from 1994 to 1998. Stephen A. Giliotti c/o Textron Financial Mr. Giliotti, 51, has been a TFC Corporation Director since December of 1994. For 40 Westminster Street additional information, see "Directors Providence, RI 02903 of the Purchaser" above. John A. Janitz Mr. Janitz, 56, has been a TFC Director since May 1999. He has been President and Chief Operating Officer of Textron Inc. since 1999. He was Chairman, President and Chief Executive Officer of Textron Automotive Company From 1996 to 1999, and Executive Vice President, General Manager, Occupant Restraint, Seat Belt and Fasteners of TRW, Inc. from 1990 to 1996.
I-2 42
AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- Wayne W. Juchatz Mr. Juchatz, 52, has been a TFC Director since May of 1995. He has been Executive Vice President and General Counsel of Textron since 1995, and was Executive Vice President, General Counsel and Secretary of RJ Reynolds Co. from 1994 to 1995.
I-3 43 4. Executive Officers of TFC. The name, business address, age, present principal occupation or employment and five-year employment history of each executive officer of TFC are set forth below. All executive officers listed below are citizens of the United States of America. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with TFC. Unless otherwise indicated, the business address of each such officer is c/o Textron Financial Corporation, 40 Westminster Street, Providence, Rhode Island 02903.
AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- Stephen A. Giliotti See "Directors of the Purchaser" above. Buell J. Carter See "Directors of the Purchaser" above. Andrew M. Chester Mr. Chester, 45, has been Senior Vice President, Human Resources since 1998. He was Vice President, Human Resources from 1989 to 1998. Thomas J. Cullen Mr. Cullen, 43, has been Senior Vice President and Chief Financial Officer since 1997. He was Senior Vice President, Finance from 1995 to 1997 and was Vice President, and Controller from 1992 to 1995. He was formerly Senior Manager at Ernst & Young. O. Lewis Humphrey Mr. Humphrey, 52, has been Senior Vice President and Chief Credit Officer since 1995. He was Vice President, Corporate Investment Control from 1991 to 1995. John W. Mayers, Jr. Mr. Mayers, 45, has been Senior Vice President, Corporate Development since 1999. He was Vice President, Risk Management and Insurance for Textron from 1997 to 1999 and was Director, Risk Management and Insurance for Textron from 1993 to 1997. Dan R. McCullough Mr. McCullough, 55, has been Senior Vice President, Operations since 1995. He was Vice President Vendor Finance and Floorplan Finance from 1991 to 1995. Richard H. Mitterling Mr. Mitterling, 52, has been Senior Vice President, Operations since 1998. He was Vice President, Division Manager, Resort Receivable Division from 1994 to 1998.
I-4 44 Ronald W. Oake Mr. Oake, 55, has been Senior Vice President, Operations since 1999. He was Vice President, Division Manager, Floorplan Finance Division from 1998 to 1999; General Manager of Avco Financial Services from 1995 to 1998; and was Vice President, Operations, Floorplan Finance Division from 1992 to 1995. Elizabeth C. Perkins See "Directors of the Purchaser" above. David A. Raspallo Mr. Raspallo, 40, has been Senior Vice President and Chief Information Officer since 1998. He was Vice President, Financial Segments TFC/AFS from 1998 to 1999 and was Vice President, Information Systems from 1993 to 1998. Barry L. Elfstrom Mr. Elfstrom, 47, has been Vice President, Controller Financial Reporting since 1999. He was Vice President and Controller or Assistant Controller 1986 to 1999. Brian F. Lynn Mr. Lynn, 39, has been Vice President and Treasurer since 1999. He was Vice President, Division Manager, Vendor Finance Division from 1996 to 1999 and was Vice President and Treasurer from 1994 to 1996. Eric Salander Mr. Salander, 40, has been Vice President, Finance since 1999. He was Vice President, Strategic Planning from 1996 to 1999. He was Vice President Administration for AAA South Central NE from 1995 to 1996 and was Manager at Ernst & Young from 1989 to 1995. Kathleen A. Smith Ms. Smith, 50, has been Vice President, Tax since 1998. She was Assistant Vice President, Tax from 1996 to 1998 and was Senior Manager of Tax for Lefkowitz, Garfunkel, Champi & DiRenzo from 1992 to 1996.
I-5 45 5. Directors of Textron. The name, business address, age, present principal occupation or employment and five-year employment history of each director and executive officer of Textron are set forth below. All directors listed below are citizens of the United States of America except for Mr. Gagne (who is a citizen of Canada). Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with Textron. Unless otherwise indicated the business address of each such director is c/o Textron Inc., 40 Westminster Street, Providence, Rhode Island 02903.
AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- H. Jesse Arnelle Womble, Carlyle, Sandridge & Rice Mr. Arnelle, 65, was a senior partner in the law 200 W. Second Street firm of Arnelle, Hastie, McGee, Willis & Greene, Winston-Salem, NC 27102 San Francisco, with which he had been associated from 1985 through his retirement in 1996. Following his retirement, he became Of Counsel to the North Carolina law firm of Womble, Carlyle, Sandridge & Rice. Mr. Arnelle is a director of FPL Group, Inc., Waste Management, Inc., Eastman Chemical Corporation, Armstrong World Industries and Union Pacific Resources, Inc. and served from November 1990 through 1998 as a director of Wells Fargo Bank, N.A. and Wells Fargo & Company. Teresa Beck 1681 South Mowhawk Way Ms. Beck, 45, is the former President of American Salt Lake City, UT 84108 Stores Company, one of the nation's largest food and drug retailers. She joined American Stores Company in 1982 and progressed through various executive positions. Ms. Beck was named Senior Vice President of Finance and Assistant Secretary in 1989, became Executive Vice President, Administration in 1992 and Executive Vice President, Finance in 1994 and assumed the additional position of Chief Financial Officer from 1995. She became President in 1998 and served in that capacity until 1999 when she left the Company. Lewis B. Mr. Campbell, 53, is Chairman and Chief Executive Campbell Officer of Textron. He joined Textron in 1992 as Executive Vice President and Chief Operating Officer, became President and Chief Operating Officer in 1994, assumed the title of Chief Executive Officer and relinquished the title of Chief Operating Officer in July 1998 and assumed the title of Chairman and relinquished the title of President in February 1999. Prior to joining Textron he was a Vice President of General Motors Corporation and General Manager of its GMC Truck Division. Mr. Campbell is a director of Bristol Myers Squibb Co. R. Stuart Ruddick Corporation Mr. Dickson, 70, was Chairman of the Board of Dickson 2000 First Union Plaza Ruddick Corporation, a diversified holding company Charlotte, NC 28282 with interests in industrial sewing thread and regional supermarkets, from 1968 until 1994. Mr. Dickson currently serves as Chairman of the Ruddick Executive Committee. Mr. Dickson is a director of Ruddick Corporation, First Union Corporation, PCA International, United Dominion Industries and Dimon Incorporated.
I-6 46 Lawrence K. Fish Citizens Financial Group, Inc. Mr. Fish, 54, is Chairman, President and Chief Executive One Citizens Plaza Officer of Citizens Financial Group, Inc., a multi-state Providence, RI 02903 bank holding company headquartered in Providence, Rhode Island, a position he has held since joining the bank in 1992. He is a director of the Royal Bank of Scotland Group. Mr. Fish is a member of the Federal Reserve Advisory Council and the past co-chair of the Rhode Island Economic Development Council. Joe T. Ford ALLTEL Corporation Mr. Ford, 62, is Chairman of the Board and chief One Allied Drive executive officer of ALLTEL Corporation, a Little Rock, AR 72202 telecommunications and information services company. He was named President of ALLTEL upon its formation in 1983 from a merger between Allied Telephone Company in Little Rock and Mid-Continental Telephone Corporation, became chief executive officer in 1987 and assumed his current position in 1991. Mr. Ford is a director of The Dial Corporation. Paul E. Gagne Krager, Inc. Mr. Gagne, 53, was President and Chief Executive Officer 3285 Bedford Road of Avenor Inc., a forest products company, and is now a Montreal, Quebec H35 1G5 consultant in the area of corporate strategic planning Canada and acquisitions. He joined Avenor in 1976, became President and chief operating officer in 1990 and assumed the additional position of chief executive officer in 1991 serving in that capacity until November 1997, when he left the company. In 1998, Mr. Gagne joined Kroger Inc., a major privately held producer of paper and tissue, as advisor, corporate strategy and acquisitions. He is a director of Inmet Mining Corporation, Wajax Limited, Celanese Canada Limited and Kroger Tissue Group (U.K.), and a member of the board of the C.D. Howe Institute. John A. Janitz Mr. Janitz, 56, is President and Chief Operating Officer of Textron. He joined Textron in 1996 as Chairman, President and Chief Executive Officer of Textron Automotive Company and assumed his present position in March 1999. From 1990 to 1996 he was Executive Vice President and General Manager of TRW Inc.'s Occupant Restraint Group based in Cleveland, Ohio, a worldwide business that develops, manufactures and markets air bags, seat belts and fastening systems. Prior to joining TRW, he was President of Wickes Manufacturing Company, an automotive supplier based in Southfield, Michigan. John D. Macomber JDM Investment Group Mr. Macomber, 71, is Principal of JDM Investment Group, 2806 N Street, N.W. a private investment firm. He joined the firm as Washington, DC 20007 Principal in 1992. He served as Chairman and President of the Export-Import Bank of the United States from 1989 to 1992. Mr. Macomber was chief executive officer of Celanese Corporation, a diversified chemical company, from 1977 to 1986 and also served as Chairman from 1980 to 1986. He is a director of The Brown Group, Inc., IRI International, Lehman Brothers Holdings Inc., and Mettler-Toledo International Inc.
I-7 47 Dana G. Mead Tenneco, Inc. Mr. Mead, 63, is Chairman and chief executive officer of 1275 King Street Tenneco Inc., a global manufacturing company that owns Greenwich, CT 06831 and manages businesses in two sectors: automotive parts and packaging. He joined the company as President and chief operating officer in 1992 and assumed his current position in 1994. Prior to joining Tenneco, Mr. Mead was Executive Vice President and a director of International Paper Company, a manufacturer of paper, pulp and wood products. Mr. Mead is also a director of Pfizer Inc., the Zurich Insurance Group, Unisource Worldwide, Inc. and Newport News Shipbuilding Inc., a former Tenneco subsidiary. Brian H. Rowe GE Aircraft Engines Mr. Rowe, 68, is the retired Chairman and now a General Electric Company consultant of GE Aircraft Engines, General Electric 1 Newmann Way, N178 Company, a manufacturer of combustion turbine engines for Cincinnati, OH 45215 aircraft, marine and industrial applications. He joined General Electric in 1957, became President and Chief Executive Officer of GEAE in 1979 and Chairman in 1993, serving in that capacity until his retirement in 1994. Mr. Rowe is a director of Atlas Air, Inc., B/E Aerospace, Canadian Marconi, Fifth Third Bank, Stewart & Stevenson Services, Inc., Cincinnati Bell Inc., Convergys and Dynatech Corporation. Sam F. Segnar 10077 Grogan's Mill Road Mr. Segnar, 72, is the retired Chairman and Chief Suite 530 Executive Officer of Enron Corporation and former The Woodlands, TX 77380 Chairman of the Board of Vista Chemical Co. and Collecting Bank, N.A., Houston, TX. Mr. Segnar is a director of Seagull Energy Corporation and Gulf States Utilities Company, and an advisory director of Pilko and Associates Inc. Jean Head Sisco Sisco Associates Mrs. Sisco, 74, is a partner in the international trade 5335 Wisconsin Avenue consulting firm of Sisco Associates. She is a director of Suite 440 The Neiman Marcus Group, Inc., Newmont Mining Washington, DC 20015-2034 Corporation, Chiquita Brands International, Inc., K-Tron International, Inc., American Funds -- Series I and Socrates Technology. She held various executive offices with the Washington, D.C. department store chain of Woodward & Lothrop from 1950 to 1974. She served as a consultant on governmental and public affairs to the American Retail Federation from 1974 to 1977 and is a past Chairman and a director of the National Association of Corporate Directors. Martin D. Walker M. A. Hanna Company Mr. Walker, 67, is Chairman of M. A. Hanna Company, an 200 Public Square international specialty chemicals company. He held the Suite 36-50000 position of Chairman and Chief Executive Officer from Cleveland, OH 44114-2304 September 1986 until December 1996, and then continued as chairman of the board until June 1997, when he retired. Mr. Walker was again elected to Chairman and Chief Executive Officer in October 1998 and relinquished the title of Chief Executive Officer in June 1989. He is a director of Comerica, Inc., The Timken Company, The Goodyear Tire & Rubber Co. and Lexmark International, Inc.
I-8 48 Thomas B. Massachusetts Mutual Life Mr. Wheeler, 63, is Chairman of Massachusetts Mutual Wheeler Insurance Company Life Insurance Company. He was a member of the 1295 State Street Massachusetts Mutual field sales force from 1962 to Springfield, MA 01111 1983, served as Executive Vice President of Massachusetts Mutual's insurance and financial management line from 1983 to 1986, became President and chief operating officer in 1987, President and Chief Executive Officer in 1988 and Chairman and Chief Executive Officer in 1996. He relinquished the title of Chief Executive Officer in January 1999. He is a director of The Bank of Boston Corporation and Chairman of Oppenheimer Acquisition Corp. and David L. Babson & Co. Inc.
6. Executive Officers of Textron. The name, business address, age, present principal occupation or employment and five-year employment history of each executive officer of TFC are set forth below. All executive officers listed below are citizens of the United States of America. Unless otherwise indicated, each occupation set forth opposite an individual's name refers to employment with TFC. The business address of each such executive officer is c/o Textron Inc., 40 Westminster Street, Providence, Rhode Island 02903.
AGE, PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT AND FIVE-YEAR NAME BUSINESS ADDRESS EMPLOYMENT HISTORY ---- ---------------- --------------------------------- Lewis B. Campbell See "Directors of TFC" above. John A. Janitz See "Directors of TFC" above. John D. Butler Mr. Butler, 52, is Executive Vice President Administration and Chief Human Resources Officer, a title he assumed in January 1999. He previously was Executive Vice President and Chief Human Resources Officer (1997 to December 1998) and Vice President Personnel of General Motors International Operations, Zurich, Switzerland (1993 to 1997). Mary L. Howell Ms. Howell, 47, is Executive Vice President Government, International, Communications and Investor Relations, a title she assumed in July 1998. She previously was Executive Vice President Government and International (1995 to July 1998) and Senior Vice President Government and International Relations (1993 to 1995). Wayne W. Juchatz See "Directors and executive officers of Purchaser" above. Stephen L. Key Mr. Key, 56, is Executive Vice President and Chief Financial Officer, a title he assumed in 1995. He previously was Executive Vice President and Chief Financial Officer of ConAgra, Inc. (1992 to 1995).
7. Ownership of Shares by Directors and Officers of Purchaser, TFC or Textron. None. I-9 49 ANNEX I REPORT OF INDEPENDENT AUDITORS The Board of Directors Textron Financial Corporation We have audited the accompanying consolidated balance sheet of Textron Financial Corporation as of January 2, 1999 and January 3, 1998, and the related consolidated statements of income, cash flows, and changes in shareholder's equity for each of the three years in the period ended January 2, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Textron Financial Corporation at January 2, 1999 and January 3, 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended January 2, 1999, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP Boston, Massachusetts January 26, 1999 A-1 50 TEXTRON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF INCOME For each of the three years in the period ended January 2, 1999
1998 1997 1996 -------- -------- -------- (IN THOUSANDS) Revenues Finance charges and discounts............................... $297,091 $290,943 $281,830 Rental revenues on operating leases......................... 17,181 18,664 19,071 Other income................................................ 52,890 40,613 26,346 -------- -------- -------- 367,162 350,220 327,247 Expenses Interest.................................................... 155,126 153,127 146,615 Selling and administrative.................................. 71,587 57,757 50,121 Provision for losses........................................ 20,483 22,824 26,350 Depreciation of equipment on operating leases............... 7,340 8,433 8,437 -------- -------- -------- 254,536 242,141 231,523 -------- -------- -------- Income before income taxes.................................. 112,626 108,079 95,724 Income taxes................................................ 43,050 40,338 37,385 -------- -------- -------- Net income.................................................. $ 69,576 $ 67,741 $ 58,339 ======== ======== ========
See notes to consolidated financial statements A-2 51 TEXTRON FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEET
JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Cash and equivalents........................................ $ 22,396 $ 13,597 Finance receivables, net of unearned income: Installment contracts.................................. 1,338,644 1,140,460 Floorplan receivables.................................. 572,289 408,721 Revolving loans........................................ 555,571 392,787 Finance leases......................................... 424,436 392,326 Leveraged leases....................................... 345,873 329,811 Golf course and resort mortgages....................... 342,844 355,357 Commercial real estate mortgages....................... 31,740 49,661 ---------- ---------- Total finance receivables......................... 3,611,397 3,069,123 Allowance for losses on receivables.................... (83,887) (77,394) ---------- ---------- Finance receivables -- net.................................. 3,527,510 2,991,729 Equipment on operating leases -- net........................ 118,590 111,518 Other assets................................................ 116,042 61,121 ---------- ---------- Total assets...................................... $3,784,538 $3,177,965 ---------- ---------- LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities Accrued interest and other liabilities...................... $ 143,316 $ 81,812 Amounts due to Textron Inc.................................. 18,419 6,416 Deferred income taxes....................................... 321,521 319,293 Debt........................................................ 2,828,830 2,364,568 ---------- ---------- Total liabilities................................. 3,312,086 2,772,089 ---------- ---------- Shareholder's equity Common stock, $100 par value (4,000 shares authorized; 2,500 shares issued and outstanding)............................ 250 250 Capital surplus............................................. 155,171 95,871 Retained earnings........................................... 317,031 309,755 ---------- ---------- Total shareholder's equity........................ 472,452 405,876 ---------- ---------- Total liabilities and shareholder's equity........ $3,784,538 $3,177,965 ========== ==========
See notes to consolidated financial statements A-3 52 TEXTRON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS For each of the three years in the period ended January 2, 1999
1998 1997 1996 ---------- ---------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 69,576 $ 67,741 $ 58,339 Adjustments to reconcile net income to net cash provided by operating activities: Increase (decrease) in accrued interest and other liabilities....................................... 42,209 (4,901) (4,532) Provision for losses................................ 20,483 22,824 26,350 Depreciation and amortization....................... 13,716 11,221 10,936 Deferred income taxes............................... 2,228 3,927 12,625 Leveraged lease earnings in excess of cash received.......................................... (7,646) (5,162) (7,707) Gain on receivables securitization.................. (3,400) (3,500) -- Other............................................... 7,141 462 2,860 ---------- ---------- ---------- Net cash provided by operating activities...... 144,307 92,612 98,871 CASH FLOWS FROM INVESTING ACTIVITIES: Finance receivables originated or purchased.............. (4,069,256) (2,711,680) (2,287,293) Finance receivables repaid or sold....................... 3,458,873 2,444,301 2,090,923 Proceeds from receivables securitization................. 259,577 373,046 -- Acquisitions, net of cash acquired....................... (203,203) -- -- Purchase of assets for operating leases.................. (36,840) (38,073) (52,572) Proceeds from disposition of operating lease and other assets................................................. 25,892 45,409 43,061 Other capital expenditures............................... (12,948) (7,443) (2,559) Proceeds from real estate owned.......................... 2,028 5,460 6,134 Other investments........................................ (5,997) -- -- ---------- ---------- ---------- Net cash provided by (used in) investing activities................................... (581,874) 111,020 (202,306) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt................. 370,000 200,000 345,000 Principal payments on long-term debt..................... (304,311) (335,880) (185,128) Net increase in commercial paper......................... 188,176 23,313 10,034 Net increase (decrease) in short-term bank debt.......... 163,031 35,739 (5,182) Proceeds from issuance of non-recourse debt.............. 60,404 -- -- Principal payments on non-recourse debt.................. (39,937) (38,938) (34,882) Net increase (decrease) in amounts due to Textron Inc.... 12,003 (7,744) 6,576 Capital contribution from Textron Inc.................... 59,300 -- -- Dividends paid to Textron Inc............................ (62,300) (73,580) (29,100) ---------- ---------- ---------- Net cash provided by (used in) financing activities................................... 446,366 (197,090) 107,318 ---------- ---------- ---------- Net increase in cash..................................... 8,799 6,542 3,883 Cash and equivalents at beginning of year................ 13,597 7,055 3,172 ---------- ---------- ---------- Cash and equivalents at end of year...................... $ 22,396 $ 13,597 $ 7,055 ========== ========== ==========
See notes to consolidated financial statements A-4 53 TEXTRON FINANCIAL CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY For each of the three years in the period ended January 2, 1999
COMMON CAPITAL RETAINED STOCK SURPLUS EARNINGS TOTAL ------ -------- -------- -------- (IN THOUSANDS) Balance December 30, 1995........................... $250 $ 95,871 $286,355 $382,476 Net income.......................................... -- -- 58,339 58,339 Dividends to Textron Inc............................ -- -- (29,100) (29,100) ---- -------- -------- -------- Balance December 28, 1996........................... 250 95,871 315,594 411,715 Net income.......................................... -- -- 67,741 67,741 Dividends to Textron Inc............................ -- -- (73,580) (73,580) ---- -------- -------- -------- Balance January 3, 1998............................. 250 95,871 309,755 405,876 Net income.......................................... -- -- 69,576 69,576 Capital contribution from Textron................... -- 59,300 -- 59,300 Dividend to Textron Inc............................. -- -- (62,300) (62,300) ---- -------- -------- -------- Balance January 2, 1999............................. $250 $155,171 $317,031 $472,452 ==== ======== ======== ========
See notes to consolidated financial statements A-5 54 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Textron Financial Corporation ("TFC") is a diversified commercial finance company offering specialized lending for equipment finance, revolving credit arrangements and leveraged leasing. TFC originates loan and lease transactions for numerous industries including aircraft, golf, timeshare resorts, transportation and machine tool. TFC's other financial services and products include syndications, asset management, portfolio servicing and insurance brokerage. TFC is a subsidiary of Textron Inc. ("Textron"), a $10 billion global, multi-industry company with market-leading businesses in Aircraft, Automotive, Industrial and Finance. At January 2, 1999, TFC's finance receivables which were related to Textron or Textron's products comprised 27% of TFC's total managed finance receivables. TFC's principal markets are located in North America. Principles of Consolidation The accompanying consolidated financial statements include the accounts of TFC and its subsidiaries, all of which are wholly-owned. All significant inter-company transactions are eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in those statements and accompanying notes. Actual results may differ from such estimates. Finance Charges, Discounts and Investment Tax Credits Finance charges and discounts include interest on loans, capital lease earnings and discounts on certain revolving credit arrangements. Finance charges and investment tax credits are recognized in finance charge revenues using the interest method to produce a constant rate of return over the terms of the receivables. Accrual of interest income is suspended for accounts which are contractually delinquent by more than three months, unless collection is not doubtful. In addition, detailed reviews of loans may result in earlier suspension if collection is doubtful. Accrual of interest is resumed when the loan becomes contractually current, and suspended interest income is recognized at that time. Other Income Other income includes late charges, prepayment penalties, residual gains and other miscellaneous fees which are primarily recognized as income when received. Other income also includes gains on the sale of loans and leases. When TFC sells loans and leases in securitizations, it retains interest-only strips, subordinated tranches, servicing rights, and cash reserve accounts. Gain or loss on sale depends in part on the previous carrying amount of retained interest, allocated in proportion to their fair value. Subsequent to the sales, certain retained interests are carried at fair value and accounting for other retained interests is based in part on fair values. TFC generally estimates fair value based on the present value of future cash flows expected under management's best estimates of the key assumptions-credit losses, prepayment speeds, forward yield curves, and discount rates commensurate with the risks involved. Finance Receivable Origination Fees and Costs Fees received and direct loan origination costs are deferred and amortized to finance charge revenues over the contractual lives of the respective receivables using the interest method. Unamortized amounts are recognized in revenues when receivables are sold or paid in full. A-6 55 Allowance for Losses on Receivables Provisions for losses on finance receivables are charged to income in amounts sufficient to maintain the allowance at a level considered adequate to cover losses in the existing receivable portfolio. Management evaluates the allowance by examining current delinquencies, the characteristics of the existing accounts, historical loss experience, the value of the underlying collateral and general economic conditions and trends. Finance receivables are written off when they are deemed uncollectible. Finance receivables are written down to the fair value (less estimated costs to sell) of the related collateral when the collateral is repossessed or when no payment has been received for six months, unless management deems the receivable collectible. Foreclosed real estate loans and repossessed assets are transferred out of finance receivables into other assets at the lower of fair value (less estimated costs to sell) or the outstanding loan balance. The difference between the amount transferred and the outstanding loan balance is written off. The carrying value of real estate owned is periodically reevaluated, and where appropriate, adjustments are made through a valuation allowance to reflect subsequent changes in fair value, but the carrying amount is never increased above the amount originally transferred. Equipment on Operating Leases Income from operating leases is recognized in equal amounts over the lease term. The cost of such assets is capitalized and depreciated to estimated residual values using the straight-line method over the estimated useful lives of the assets or the lease term. Employee Benefits The Company participates in a Textron pension plan which provides pension benefits to substantially all of the Company's employees. The benefits are based on the employees' compensation and years of service. Textron's funding policy is consistent with the funding requirements of federal law and regulation. Plan assets consist principally of corporate and government bonds and common stocks. Pension cost in 1998, 1997 and 1996 was $1.2 million, $0.9 million and $0.7 million, respectively. Foreign Currency Exchange Contracts TFC has entered into foreign currency exchange contracts to minimize its currency exchange risk on its foreign currency receivables and debt. Gains and losses on foreign currency exchange contracts that hedge foreign currency receivables and debt are recognized in income as the exchange rates change and offset foreign currency gains and losses on the foreign currency receivables and debt. While TFC is exposed to credit loss in the event of nonperformance by the other parties to the contracts, TFC does not anticipate nonperformance by any of those parties. Foreign currency exchange gains and losses in 1998, 1997 and 1996 were not material. Interest Rate Exchange Agreements As part of managing interest rate exposure on its variable interest rate borrowings, TFC is a party to various interest rate exchange agreements. While TFC is exposed to credit loss for the periodic settlement of amounts due under such agreements in the event of nonperformance by the counterparties, TFC does not anticipate nonperformance by any of those parties. TFC currently minimizes this potential for risk by entering into contracts exclusively with major, financially sound counterparties having no less than a long-term bond rating of "A" by continuously monitoring the counterparties' credit rating and by limiting exposure with any one financial institution. The risk of loss in the event of nonperformance by the counterparties was insignificant at January 2, 1999. Interest differentials to be paid or received are accrued and recognized in interest expense over the lives of the agreements. Fees and expenses incurred to enter into interest rate exchange agreements are deferred and subsequently amortized to expense over the terms of the agreements. A-7 56 Income Taxes TFC's revenues and expenses are included in Textron's consolidated tax return. Current tax expense is based on allocated federal tax charges and benefits on the basis of statutory U.S. tax rates applied to the Company's taxable income or loss included in Textron's consolidated returns. Deferred income taxes are recognized for temporary differences between the financial reporting basis and income tax basis of assets and liabilities, based on enacted tax rates expected to be in effect when such amounts are expected to be realized or settled. Intangible Assets Goodwill is amortized over its estimated period of benefit on a straight-line basis; other intangible assets, including internal-use software, are amortized on a straight-line basis over their estimated lives. No amortization period exceeds 25 years. Fair Value of Financial Instruments Fair values of financial instruments are based upon estimates at a specific point in time using available market information and appropriate valuation methodologies. These estimates are subjective in nature and involve uncertainties and significant judgment in the interpretation of current market data. Therefore, the fair values presented are not necessarily indicative of amounts TFC could realize or settle currently. TFC does not necessarily intend to dispose of or liquidate such instruments prior to maturity. Cash and Equivalents Cash and equivalents consist of cash in banks and overnight interest bearing deposits in banks. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. NOTE 2 RELATIONSHIP WITH TEXTRON INC. TFC is a wholly-owned subsidiary of Textron and derives a portion of its business from financing the sale and lease of products manufactured and sold by Textron. TFC recognized finance charge revenues from Textron and affiliates (net of payments or reimbursements for interest charged at more or less than market rates on Textron manufactured products) of $3.7 million in 1998, $0.1 million in 1997, with no net revenue in 1996 and operating lease revenues of $10.8 million in 1998, $13.3 million in 1997 and $13.7 million in 1996. In 1998, 1997 and 1996, TFC paid Textron $980.4 million, $736.3 million and $662.9 million, respectively, for the purchase of receivables and operating lease assets. TFC and Textron are parties to several agreements, collectively referred to as operating agreements, which govern many areas of the TFC-Textron relationship. Under operating agreements with Textron, TFC has recourse to Textron with respect to certain finance receivables and operating leases. Finance receivables of $540.2 million at January 2, 1999 and $518.9 million at January 3, 1998 and operating leases of $76.6 million at both January 2, 1999 and January 3, 1998 were subject to recourse to Textron or due from Textron. In addition, TFC had recourse to Textron on subordinated certificates of $27 million and $16 million at year-end 1998 and 1997, respectively, and on cash reserves of $10 million and $6 million at year-end 1998 and 1997 respectively. Both the subordinated certificates and the cash reserves were related to receivable securitizations. Under the operating agreements between Textron and TFC, Textron has made available to TFC a $100 million line of credit for junior subordinated borrowings at the prime interest rate (7.75% at January 2, 1999). TFC had no borrowings under this line at January 2, 1999 or January 3, 1998. In addition, Textron has A-8 57 agreed to lend TFC, interest-free, an amount not to exceed the deferred income tax liability of Textron attributable to the manufacturing profit deferred for tax purposes on products manufactured by Textron and financed by TFC. TFC had borrowings from Textron of $18.8 million at January 2, 1999 ($20.2 million at January 3, 1998) under this arrangement, which are reflected in Amounts due to Textron Inc. and in Accrued Interest and Other Liabilities on TFC's consolidated balance sheet. Textron has also agreed with TFC to cause TFC's pretax income available for fixed charges to be not less than 125% of its fixed charges and its consolidated shareholder's equity to be not less than $200 million. No related payments were required for 1998, 1997 or 1996. TFC has an income tax liability of $4.6 million at January 2, 1999, as compared to an income tax receivable of $5.8 million at January 3, 1998. These amounts are included in Accrued Interest and Other Liabilities on TFC's consolidated balance sheet, and will be settled with Textron as Textron manages its consolidated federal tax position. NOTE 3 ACQUISITIONS During 1998, TFC acquired two businesses -- Systran Financial Services Corporation and Business Leasing Group. These transactions were accounted for using the purchase method. Each company's results of operations are included in TFC's consolidated financial statements from the date of each acquisition. Systran Financial Services Corporation, a receivable factoring company, was acquired in the first quarter of 1998. The total purchase price was $22.8 million. The fair value of the assets acquired was $67.5 million and liabilities assumed were $59.2 million. The goodwill associated with this transaction is being amortized over 25 years. Business Leasing Group, an equipment leasing division of a commercial bank, was acquired on December 31, 1998. The total purchase price was $186.4 million. TFC is in the process of finalizing the purchase price allocation for this acquisition. Had the acquisitions occurred on January 4, 1998, the effect on TFC's 1998 results would not have been material. Consequently, pro forma information has not been presented. NOTE 4 RECEIVABLE SECURITIZATIONS TFC securitized $273 million and $401 million of loan and lease receivables in the third quarters of 1998 and 1997, respectively. These transactions resulted in gains of $3.4 million and $3.5 million in 1998 and 1997, respectively. Retained interests in transferred assets consist primarily of subordinated certificates totaling $27 million at year-end 1998 and $16 million at year-end 1997, as well as interest-only securities. Additionally, $4 million of proceeds were used to fund a restricted cash reserve to support the 1998 transaction, as compared to $6 million in 1997. Both the subordinated certificates and the cash reserve are included in Other Assets on TFC's consolidated balance sheet. TFC did not recognize a servicing asset or liability. Interest-only securities represent the right to receive certain cash flows which exceed the amount of cash flows sold in TFC's securitized contract sale. Interest-only securities generally represent the value of interest to be collected on the underlying financial contracts of the securitization over the sum of the interest to be paid to security classes sold, contractual servicing fees and credit losses. These cash flows are projected and discounted over the expected life of the financial contracts using prepayment, default, loss and interest rate assumptions that TFC believes market participants would use for similar financial instruments. TFC has entered into certain interest rate exchange agreements to mitigate its exposure to decreases in interest rates on its interest-only securities. Under the interest rate exchange agreements, TFC makes periodic variable rate payments based upon the prime rate and the one and six month London Interbank Offered Rate (LIBOR) and receives fixed rate payments. These interest rate exchange agreements are adjusted periodically A-9 58 to match the amortization of the variable rate contracts in the securitized portfolio and are summarized in the following table:
JAN. 2, JAN. 3, 1999 1998 ------- ------- (DOLLARS IN MILLIONS) Prime rate.................................................. 7.75% 8.50% One-Month LIBOR............................................. 4.94% -- ----- ----- 1998 Securitization Notional principal -- variable............................ -- payments tied to the prime rate........................... $55.3 -- Fixed Rate................................................ 7.94% ----- ----- Notional principal -- variable............................ -- Payments tied to LIBOR................................. $34.3 -- Fixed rate............................................. 5.13% Six-month LIBOR............................................. 4.94% 5.72% ----- ----- 1997 Securitization Notional principal variable payments tied to the prime rate........................ $46.6 $69.5 Fixed rate........................................... 8.77% 8.77% ----- ----- Notional principal -- variable Payments tied to LIBOR................................. $21.2 $44.4 Fixed rate........................................... 5.97% 5.97% ===== =====
Interest rate floor agreements, entered into through AAA-rated counterparties to the Textron Financial Corporation Receivables Trust 1998-A and 1997-A (the Trusts), provide a minimum interest rate on variable rate receivables held by the Trusts and are tied to both the prime rate and the one- and six-month LIBOR. These interest rate floor agreements are adjusted periodically to match the amortization of the variable rate contracts in the securitized portfolio and are summarized as follows:
JAN. 2, JAN. 3, 1999 1998 ------- ------- (DOLLARS IN MILLIONS) Prime rate.................................................. 7.75% 8.50% One-month LIBOR............................................. 4.94% -- ----- ----- 1998 Securitization Notional principal tied to the prime rate.............. $57.6 -- Floor rate............................................. 8.50% -- Notional principal tied to LIBOR....................... $36.5 -- ----- ----- Floor rate.................................................. 5.34% Six-month LIBOR............................................. 4.94% 5.72% 1997 Securitization Notional principal tied to the prime rate.............. $70.5 $72.5 Floor rate............................................. 8.50% 8.50% Notional principal tied to LIBOR....................... $37.1 $45.7 Floor rate............................................. $5.65% $5.65% ----- -----
TFC also has a securitization program consisting of a $160 million interest in a designated pool of installment contracts. Subsequent collections of installment contracts sold typically are reinvested in the pool of eligible assets to maintain an aggregate outstanding balance of sold installment contracts at a constant amount. Receivables sold which remained uncollected at January 2, 1999 were $160 million. The ongoing purchase arrangement is discretionary on the part of both parties and has been extended through 2000. A-10 59 NOTE 5 FINANCE RECEIVABLES Contractual Maturities The contractual maturities of finance receivables outstanding at January 2, 1999 were as follows:
1999 2000 2001 2002 2003 THEREAFTER TOTAL ---------- -------- -------- -------- -------- ---------- ---------- (IN THOUSANDS) Installment contracts....................... $ 306,325 $224,078 $185,854 $134,902 $113,532 $373,953 $1,338,644 Floorplan receivables....................... 435,811 102,048 34,004 426 -- -- 572,289 Revolving loans............................. 376,286 19,882 57,400 91,259 8,726 2,018 555,571 Finance leases.............................. 101,276 93,066 90,320 53,279 35,384 51,111 424,436 Leveraged leases............................ 3,553 8,458 (4,411) (6,240) (5,286) 349,799 345,873 Golf course and resort mortgages............ 18,291 56,782 73,830 21,290 56,368 116,283 342,844 Commercial real estate mortgages............ 22,080 9,660 -- -- -- -- 31,740 ---------- -------- -------- -------- -------- -------- ---------- Total finance receivables........... $1,263,622 $513,974 $436,997 $294,916 $208,724 $893,164 $3,611,397 ========== ======== ======== ======== ======== ======== ==========
Finance receivables often are repaid or refinanced prior to contractual maturity. Accordingly, the foregoing tabulation should not be regarded as a forecast of future cash collections. During 1998 and 1997, cash collections of finance receivables (excluding proceeds from sales of receivable portfolios) were $3.41 billion and $2.29 billion, respectively. Revolving loans generally have terms of one to three years, and at times convert to term loans that contractually amortize over an average term of seven years. Floorplan and revolving loans are cyclical and result in cash turnover that is several times larger than contractual maturities. In 1998, such cash turnover was 4.0 times contractual maturities. Finance leases include residual values expected to be realized at contractual maturity. The ratio of cash collections (net of finance charges) to average net receivables, excluding floorplan and revolving receivables, was approximately 56% in 1998 and 48% in 1997. Leveraged leases reflect contractual maturities net of contractual non-recourse debt payments and include residual values expected to be realized at contractual maturity. Installment contracts have initial terms generally ranging from one to 12 years. Commercial real estate and golf course mortgages have initial terms generally ranging from three to seven years with amortization periods from 15 to 20 years. Finance leases have initial terms generally up to 12 years. Leveraged leases have initial terms up to approximately 30 years. Floorplan and revolving receivables generally mature within one year. Finance leases and installment contracts are secured by the financed equipment and, in some instances, by the personal guarantee of the principals or recourse arrangements with the originating vendor. Golf course and resort mortgages are generally secured by real property and are limited to 70% or less of the property's appraised market value at loan origination. Commercial real estate loans are secured by real property and are generally limited to 80% or less of the property's appraised market value at loan origination. Leveraged leases are secured by the ownership of the leased asset. Floorplan receivables are secured by the inventory of the financed distributor or dealer and, in some programs, by recourse arrangements with the originating manufacturer. Revolving loans consist of loans secured by pools of vacation interval notes receivable and the underlying real property, trade receivables, inventory, and plant and equipment. TFC's finance receivables are diversified across geographic region, borrower industry and type of collateral. TFC's owned and securitized receivable geographic concentrations at January 2, 1999 were as follows: Southeast 25%; Far West 16%; Southwest 10%; Great Lakes 10%; Mideast 10%; Plains 9%; New England 5%; other domestic 4%; and international 11%. TFC's most significant collateral concentration was aircraft, which accounted for 26% of owned and securitized receivables at January 2, 1999. There were no significant industry concentrations at January 2, 1999. A-11 60 Loan Impairment At January 2, 1999 and January 3, 1998, TFC had nonaccrual loans and leases totaling $69.9 million and $85.6 million, respectively. Approximately $46.5 million and $63.5 million of these respective amounts were considered impaired, which excludes finance leases and homogeneous loan portfolios. TFC's nonaccrual loans consist primarily of delinquent and/or restructured commercial real estate loans. Cash payments, including finance charges on nonaccrual accounts, generally are applied to reduce loan principal. The allowance for losses on receivables related to impaired loans was $14.9 million at January 2, 1999 and $13.5 million at January 3, 1998. The average recorded investment in impaired loans during 1998 and 1997 was $50.7 million and $67.5 million, respectively. Nonaccrual accounts resulted in TFC's revenues being reduced by $5.1 million in 1998, $5.6 million in 1997 and $6.1 million in 1996. No interest income was recognized using the cash basis method. Finance Leases
JAN. 2, JAN. 3, 1999 1998 -------- -------- (IN THOUSANDS) Total minimum lease payments receivable.................. $390,232 $348,886 Estimated residual values of leased equipment............ 130,403 130,732 -------- -------- 520,635 479,618 Unearned income.......................................... (96,199) (87,292) -------- -------- Net investment in finance leases......................... $424,436 $392,326 ======== ========
Minimum lease payments due under finance leases for each of the next five years and the aggregate amounts due thereafter are as follows: $117.3 million in 1999; $101.6 million in 2000; $81.5 million in 2001; $38.5 million in 2002; $23.7 million in 2003; and $27.6 million thereafter. Leveraged Leases
JAN. 2, JAN. 3, 1999 1998 -------- -------- (IN THOUSANDS) Rental receivable (net of principal and interest on non-recourse debt)..................................... $200,134 $188,151 Estimated residual values of leased assets............... 428,809 425,222 Less unearned income..................................... (283,070) (283,562) -------- -------- Investment in leveraged leases........................... 345,873 329,811 Deferred income taxes arising from leveraged leases...... (255,034) (253,123) Fees payable............................................. (1,607) (2,854) -------- -------- Net investment in leveraged leases....................... $ 89,232 $ 73,834 ======== ========
Approximately 63% of TFC's investment in leveraged leases is collateralized by real estate. TFC has a forward interest rate exchange arrangement which will have the effect of fixing interest rates at 7.5% on $60 million of non-recourse debt beginning in 1999. A-12 61 The components of income from leveraged leases were as follows:
1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Income recognized including investment tax credits......................................... $16,426 $14,717 $15,446 Income tax expense................................ (6,237) (5,089) (5,324) ------- ------- ------- Income from Leveraged leases...................... $10,189 $ 9,628 $10,122 ======= ======= =======
Allowance for Losses on Receivables
JAN. 2, JAN. 3, 1999 1998 -------- -------- (IN THOUSANDS) Balance at beginning of year............................ $ 77,394 $ 74,824 Provision for losses on receivables..................... 18,033 21,124 Receivable charge-offs.................................. (21,181) (24,848) Recoveries of prior charge-offs......................... 4,860 6,294 Acquisitions............................................ 4,781 -- -------- -------- Balance at end of year.................................. $ 83,887 $ 77,394 ======== ========
Managed Finance Receivables TFC manages finance receivables for a variety of investors, participants and third party portfolio owners.
JAN. 2, JAN. 3, 1999 1998 ---------- ---------- (IN THOUSANDS) Owned receivables.................................... $3,611,397 $3,069,123 Securitized receivables.............................. 616,220 520,676 ---------- ---------- 4,227,617 3,589,799 Non-recourse participations.......................... 228,357 174,377 Third party portfolio servicing...................... 30,908 51,437 SBA sales agreements................................. 21,958 13,732 ---------- ---------- Total managed finance receivables.................... $4,508,840 $3,829,345 ========== ==========
NOTE 6 EQUIPMENT ON OPERATING LEASES
JAN. 2, JAN. 3, 1999 1998 -------- -------- (IN THOUSANDS) Equipment on Operating leases, at cost.................. $147,261 $137,249 Accumulated depreciation................................ (28,671) (25,731) -------- -------- Net investment in operating leases...................... $118,590 $111,518 ======== ========
Initial lease terms of rental equipment range from one year to ten years. Future minimum rental payments on operating leases at January 2, 1999 were $14.3 million in 1999; $11.7 million in 2000; $10.3 million in 2001; $11.5 million in 2002; $4.7 million in 2003; and $3.9 million thereafter. A-13 62 NOTE 7 OTHER ASSETS
JAN. 2, JAN. 3, 1999 1998 -------- ------- (IN THOUSANDS) Real estate owned....................................... $ 17,412 $13,960 Real estate valuation allowance......................... (5,783) (3,333) -------- ------- Net real estate owned................................... 11,629 10,627 Subordinated certificates............................... 27,214 16,181 Goodwill -- net......................................... 27,093 -- Fixed assets -- net..................................... 19,853 9,660 Trustee cash reserve.................................... 10,210 6,009 Interest-only securities................................ 8,668 8,941 Repossessed equipment................................... 5,149 3,182 Other................................................... 6,226 6,521 -------- ------- Total other assets............................ $116,042 $61,121 ======== =======
Sales of real estate owned totaled $2.0 million in 1998 and $5.4 million in 1997, of which TFC received $2.0 million and $5.4 million in cash in 1998 and 1997, respectively. The cost of fixed assets is being depreciated based on estimated useful lives of the assets using the straight-line method. Depreciation expense was $3.5 million in 1998, $2.1 million in 1997 and $1.6 million in 1996. REAL ESTATE VALUATION ALLOWANCE
JAN. 2, JAN. 3, 1999 1998 ------- ------- (IN THOUSANDS) Balance at beginning of year.............................. $3,333 $ 2,633 Provision for losses on real estate owned................. 2,450 1,700 Charge-offs............................................... -- (1,000) ------ ------- Balance at end of year.................................... $5,783 $ 3,333 ====== =======
NOTE 8 DEBT AND CREDIT FACILITIES
JAN. 2, 1999 JAN. 3, 1998 ------------ ------------ (IN THOUSANDS) Short-term debt: Commercial paper............................... $1,185,591 $ 997,415 Short-term bank debt........................... 239,281 76,250 ---------- ---------- Total short-term debt..................... 1,424,872 1,073,665 Long-term debt: 5.72% -- 5.86% notes; due 2000 to 2001......... 33,000 21,000 6.13% -- 6.51% notes; due 1999 to 2001......... 204,000 112,000 7.14% -- 7.67% notes; due 1999 to 2000......... 234,958 258,903 Variable rate notes due 1999 to 2001........... 932,000 899,000 ---------- ---------- Total long-term debt...................... 1,403,958 1,290,903 ---------- ---------- Total debt................................ $2,828,830 $2,364,568 ========== ==========
TFC has lines of credit with a bank group aggregating $1.2 billion at January 2, 1999, of which $400 million will expire in 1999 and $800 million will expire in 2003. TFC's lines of credit, including the line of credit with Textron, not used or reserved as support for commercial paper or short-term bank borrowings at January 2, 1999 were $114.4 million. TFC generally pays fees in support of these lines. A-14 63 The weighted average interest rates on short-term borrowings, before consideration of the effect of interest rate exchange agreements, were as follows:
JAN. 2, JAN. 3, DEC. 28, 1999 1998 1996 ------- ------- -------- Commercial paper................................... 6.12% 6.14% 5.64% Short-term bank debt............................... 6.91% 5.54% 5.56%
The corresponding weighted average interest rates on these borrowings during the last three years were 5.83% in 1998, 5.77% in 1997 and 5.65% in 1996. Weighted average interest rates have been determined by relating interest costs for each year to the daily average dollar amounts outstanding. Interest on TFC's variable rate notes is tied predominantly to the three-month LIBOR for U.S. dollar deposits. The weighted average interest rate on these notes was 5.79% at January 2, 1999 and 6.11% at January 3, 1998. The amount of net assets available for dividends and other payments to Textron is restricted by the terms of TFC's lending agreements. As of January 2, 1999, approximately $168.9 million of net assets was unrestricted and available to be transferred to Textron. The lending agreements also contain various restrictive provisions regarding additional debt (not in excess of 800% of consolidated net worth and qualifying subordinated obligations), the creation of liens and the maintenance of a fixed charges coverage ratio of no less than 125%. Required principal payments during the next five years on debt outstanding at January 2, 1999 (excluding short-term debt) are as follows: $558.5 million in 1999; $507.5 million in 2000; and $338.0 million in 2001. Cash payments made by TFC for interest were $152.9 million in 1998, $153.0 million in 1997 and $149.8 million in 1996. NOTE 9 INTEREST RATE EXCHANGE AGREEMENTS Under interest rate exchange agreements, TFC makes periodic fixed payments in exchange for periodic variable payments and vice versa. TFC has entered into such agreements to mitigate its exposure to increases in interest rates on a portion of its fixed and variable debt. Interest rate exchange agreements, excluding those related to securitizations, were designated against long-term notes and had the effect of adjusting the average rate of interest during the year to 6.03% from 5.96% on a variable rate notes and to 6.79% from 6.89% on the long-term fixed rate notes. Interest rate exchange agreements in effect on January 2, 1999 will expire in 1999.
JAN. 2, 1999 JAN. 3, 1998 ------------ ------------ (DOLLARS IN THOUSANDS) Weighted average original term.................. 2.5 years 2.7 years ---------- ---------- Notional principal-fixed rate payments.......... $ 250,000 $ 450,000 Fixed weighted average interest rate............ 6.26% 6.02% Variable weighted average interest rate......... 5.27% 5.89% Notional principal -- variable rate payments.... $ 50,000 $ 50,000 Fixed weighted average interest rate............ 6.30% 6.30% Variable weighted average interest rate......... 5.22% 5.94% ========== ==========
A-15 64 NOTE 10 INCOME TAXES The components of income taxes were as follows:
1998 1997 1996 ------- ------- ------- (IN THOUSANDS) Current: Federal........................................ $35,445 $33,187 $21,301 State.......................................... 5,377 3,224 3,459 ------- ------- ------- Total current income taxes..................... 40,822 36,411 24,760 Deferred: Federal........................................ 544 3,045 9,700 State.......................................... 1,684 882 2,925 ------- ------- ------- Total deferred income taxes.................... 2,228 3,927 12,625 ------- ------- ------- Total income taxes............................. $43,050 $40,338 $37,385 ======= ======= =======
Cash paid for income taxes was $26.1 million in 1998, $44.3 million in 1997 and $24.7 million in 1996. The federal statutory income tax rate is reconciled to the effective income tax rate as follows:
1998 1997 1996 ---- ---- ---- Federal statutory income tax rate................... 35.0% 35.0% 35.0% State income taxes.................................. 4.1 2.6 4.3 Tax exempt interest................................. (0.3) (0.4) (0.4) Other, net.......................................... (0.6) 0.1 0.2 ---- ---- ---- Effective income tax rate........................... 38.2% 37.3% 39.1% ==== ==== ====
The components of TFC's deferred tax assets and liabilities were as follows:
JANUARY 2, JANUARY 3, 1999 1998 ---------- ---------- (IN THOUSANDS) Deferred tax assets: Allowance for losses on receivables................. $ 31,599 $ 29,798 Earnings on nonaccrual loans........................ 2,674 4,682 Other............................................... 12,002 2,508 -------- -------- Total deferred tax assets........................... 46,275 36,988 ======== ======== Deferred tax liabilities: Leveraged leases.................................... 255,034 253,123 Finance leases...................................... 76,179 70,310 Equipment on operating leases....................... 25,719 20,139 Other............................................... 10,864 12,709 -------- -------- Total deferred tax liabilities...................... 367,796 356,281 -------- -------- Net deferred tax liabilities........................ $321,521 $319,293
NOTE 11 FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used in estimating the fair value of TFC's financial instruments: Finance Receivables The estimated fair values of fixed rate installment contracts, real estate loans, floorplan receivables and revolving loans were estimated based on discounted cash flow analyses using interest rates currently being A-16 65 offered for similar loans to borrowers of similar credit quality. Estimated future cash flows were adjusted for TFC's estimates of prepayments, refinances and loan losses based on internal historical data. The estimated fair values of all variable rate receivables approximated the net carrying value of such receivables. The estimated fair values of nonperforming loans were based on independent appraisals, discounted cash flow analyses using risk adjusted interest rates, or TFC valuations based on the fair value of the related collateral. The fair values of TFC's finance leases, leveraged leases and operating leases ($424.4 million, $345.9 million and $118.6 million, net carrying amount, respectively, at January 2, 1999 and $392.3 million, $329.8 million and $111.5 million, net carrying amount, respectively, at January 3, 1998) are not required to be disclosed under generally accepted accounting principles. As a result, a significant portion of the assets which are included in TFC's asset and liability management strategy are excluded from this fair value disclosure. Debt, Interest Rate Exchange Agreements and Foreign Currency Exchange Agreements The estimated fair value of fixed rate debt was determined by either independent investment bankers or discounted cash flow analyses using interest rates for similar debt with maturities similar to the remaining terms of the existing debt. The fair values of variable rate debt and short-term borrowings supported by credit facilities approximated their carrying values. The estimated fair values of interest rate exchange agreements and foreign currency exchange agreements were determined by independent investment bankers and represent the estimated amounts that TFC would be required to pay to (or collect from) a third party to assume TFC's obligations under the agreements. The carrying values and estimated fair values of TFC's financial instruments for which it is practicable to calculate a fair value are as follows:
JANUARY 2, 1999 JANUARY 3, 1998 ----------------------- ----------------------- CARRYING ESTIMATED CARRYING ESTIMATED VALUE FAIR VALUE VALUE FAIR VALUE ---------- ---------- ---------- ---------- (IN THOUSANDS) ASSETS Installment contracts........................ $1,338,644 $1,343,642 $1,140,460 $1,142,651 Floorplan receivables........................ 572,289 571,810 408,721 408,105 Revolving loans.............................. 555,571 555,577 392,787 392,787 Golf course and resort mortgages............. 342,844 347,988 355,357 355,826 Commercial real estate mortgages............. 31,740 18,015 49,661 34,251 Subordinated certificates.................... 27,214 27,214 16,181 16,181 Trustee cash reserve......................... 10,210 10,210 6,009 6,009 Interest-only securities..................... 8,668 8,668 8,941 8,941 Investments in equity partnerships........... 5,997 5,997 -- -- Allowance for loan losses.................... (67,024) -- (66,806) -- ---------- ---------- ---------- ---------- $2,826,153 $2,889,121 $2,311,311 $2,364,751 LIABILITIES Commercial paper and short-term bank debt.... $1,424,872 $1,424,872 $1,073,665 $1,073,665 Variable rate long-term notes................ 932,000 932,000 899,000 899,000 Fixed rate long-term debt.................... 471,958 479,075 391,903 407,492 Amounts due to Textron Inc................... 18,810 15,662 20,151 16,502 Foreign currency exchange agreements......... -- (55) -- (13) Interest rate exchange agreements............ -- 1,301 -- 429 ---------- ---------- ---------- ---------- $2,847,640 $2,852,855 $2,384,719 $2,397,075 ========== ========== ========== ==========
NOTE 12 COMMITMENTS TFC makes future loan commitments to accommodate the financial needs of its customers, for which TFC receives commitment fees. Loan commitments of $432.4 million were outstanding at January 2, 1999. Generally, interest rates on these commitments are not set until the loans are funded; therefore, TFC is not A-17 66 exposed to interest rate changes. Loan commitments have credit risk essentially the same as that involved in extending loans to customers and are subject to TFC's normal credit policies. Creditworthiness and collateral are both considered before a loan commitment is approved. TFC's offices are occupied under non-cancelable operating leases expiring on various dates through 2004. Rental expense was $3.5 million in 1998 ($2.5 million in 1997 and $2.3 million in 1996). Future minimum rental commitments for all non-cancelable operating leases in effect at January 2, 1999 approximated $2.9 million for 1999; $2.0 million for 2000; $1.2 million for 2001; $0.9 million for 2002; $0.6 million for 2003; and $0.3 million thereafter. Of these amounts, $0.9 million per year through the year 2000 and $0.3 million in 2001 are payable to Textron. NOTE 13 CONTINGENCIES There are pending or threatened against TFC and its subsidiaries lawsuits and other proceedings. Among these suits and proceedings are some which seek compensatory, treble or punitive damages in substantial amounts. These suits and proceedings are being defended or contested on behalf of TFC and its subsidiaries. On the basis of information presently available, TFC believes any such liability would not have a material effect on TFC's net income or financial condition. NOTE 14 FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS At year-end 1998, the Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which requires segment data to be measured and analyzed on a basis that is consistent with how business activities are reported internally for management. The Company's operating segments are organized based on the nature of products and services provided. The accounting policies for these segments are the same as those described for the consolidated entity. The Company evaluates the performance of its operating segments primarily on the basis of revenues, income before taxes, and finance assets. Details of total revenues, income before taxes, and finance assets by operating segment are provided below:
YEAR ENDED YEAR ENDED YEAR ENDED 1998 % 1997 % 1996 % ---------- --- ---------- --- ---------- --- Revenues Term loans and leases.................. $ 216,643 59 $ 240,419 69 $ 228,088 70 Revolving loans and leases............. 87,835 24 62,784 18 54,493 17 Specialty finance...................... 62,685 17 45,364 13 36,200 11 Commercial real estate................. (1) -- 1,653 -- 8,466 2 ---------- --- ---------- --- ---------- --- Total Revenue............................... $ 367,162 100 $ 350,220 100 $ 327,247 100 Income before taxes(1)(2) Term loans............................. $ 70,304 $ 81,809 $ 70,954 Revolving loans and leases............. 26,398 18,524 17,879 Specialty finance...................... 26,752 19,509 17,105 Commercial real estate................. (10,828) (11,763) (10,214) ---------- ---------- ---------- Total income before taxes................... $ 112,626 $ 108,079 $ 95,724
A-18 67
YEAR ENDED YEAR ENDED YEAR ENDED 1998 % 1997 % 1996 % ---------- --- ---------- --- ---------- --- Finance assets(3) Term loans............................. $2,145,854 $1,939,622 $2,244,305 Revolving loans and leases............. 831,165 548,215 480,147 Specialty finance...................... 722,653 643,143 481,797 Commercial real estate................. 30,315 49,661 94,266 ---------- ---------- ---------- Total Finance Receivables................... $3,729,987 $3,180,641 $3,300,515
- --------------- (1) Interest expense is allocated to each segment in proportion to its net investment in finance assets. Net investment in finance assets includes deferred income taxes, security deposits and other specifically identified liabilities. The interest allocated matches variable rate debt with variable rate finance assets and fixed rate debt with fixed rate finance assets. (2) Indirect expenses are allocated to each segment based on the utilization of such resources. Some allocations are based on the segments proportion of net investment in finance assets, headcount, number of transactions, computer resources and senior management time. (3) Finance assets include finance receivables and equipment on operating leases, net of accumulated depreciation. Excludes repossessed assets and beneficial interests in securitized assets (classified as other assets in TFC's Consolidated Balance Sheet). NOTE 15 QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER ----------------- ----------------- ----------------- ----------------- 1998 1997 1998 1997 1998 1997 1998 1997 ------- ------- ------- ------- ------- ------- ------- ------- (IN THOUSANDS) Revenues...................................... $85,390 $82,789 $90,870 $89,378 $98,509 $91,509 $92,393 $86,544 Expenses...................................... 60,812 58,901 63,898 62,528 65,365 61,954 64,461 58,758 Net income.................................... 15,074 14,473 16,548 16,331 20,317 19,004 17,637 17,933 ======= ======= ======= ======= ======= ======= ======= =======
A-19 68 TEXTRON FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
SIX SIX MONTHS ENDED MONTHS ENDED JUNE 30, 1999 JUNE 30, 1998 ------------- ------------- (IN THOUSANDS) REVENUES Finance charges and discounts............................. $168,739 $146,694 Rental revenues on operating leases....................... 8,136 8,645 Other income.............................................. 22,663 20,921 -------- -------- 199,538 176,260 EXPENSES Interest.................................................. 85,467 76,360 Selling and administrative................................ 42,695 34,484 Provision for losses...................................... 11,706 10,271 Depreciation of equipment on operating leases............. 3,565 3,595 -------- -------- 143,433 124,710 Income before income taxes.................................. 56,105 51,550 Income taxes................................................ 21,688 19,928 -------- -------- NET INCOME.................................................. $ 34,417 $ 31,622 ======== ========
A-20 69 TEXTRON FINANCIAL CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1999 JANUARY 2, 1999 ------------- --------------- (DOLLARS IN THOUSANDS) ASSETS Cash and equivalents...................................... $ 12,149 $ 22,396 Finance receivables, net of unearned income: Installment contracts.................................. 1,508,308 1,338,644 Floorplan receivables.................................. 615,203 572,289 Revolving loans........................................ 595,169 555,571 Finance leases......................................... 520,237 424,436 Golf course and resort mortgages....................... 387,138 342,844 Leveraged leases....................................... 348,448 345,873 Commercial real estate mortgages....................... 14,087 31,740 ---------- ---------- Total finance receivables......................... 3,988,590 3,611,397 Allowance for losses on receivables......................... (85,687) (83,887) ---------- ---------- Finance receivables -- net........................ 3,902,903 3,527,510 Equipment on operating leases -- net........................ 111,602 118,590 Other assets................................................ 138,366 116,042 ---------- ---------- Total assets...................................... $4,165,020 $3,784,538 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Accrued interest and other liabilities.................... $ 165,226 $ 143,316 Amounts due to Textron Inc................................ 22,028 18,419 Deferred income taxes..................................... 330,118 321,521 Debt...................................................... 3,151,179 2,828,830 ---------- ---------- Total liabilities................................. 3,668,551 3,312,086 SHAREHOLDER'S EQUITY Common stock, $100 par value (4,000 shares authorized; 2,500 shares issued and outstanding)................... 250 250 Capital surplus........................................... 163,471 155,171 Retained earnings......................................... 332,748 317,031 ---------- ---------- Total shareholder's equity........................ 496,469 472,452 ---------- ---------- Total liabilities and shareholder's equity........ $4,165,020 $3,784,538 ========== ==========
A-21 70 TEXTRON FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX SIX MONTHS ENDED MONTHS ENDED JUNE 30, 1999 JUNE 30, 1998 ------------- ------------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 34,417 $ 31,622 Adjustments to reconcile net income to net cash provided by operating activities: Increase in accrued interest and other liabilities..... 21,206 31,162 Provision for losses................................... 11,706 10,271 Deferred income taxes.................................. 8,597 (11,549) Depreciation and amortization.......................... 7,700 5,728 Leveraged lease noncash earnings....................... (701) (3,522) Other.................................................. (5,950) 7,625 ----------- ----------- Net cash provided by operating activities......... 76,975 71,337 CASH FLOWS FROM INVESTING ACTIVITIES: Finance receivables originated or purchased................. (2,129,783) (1,857,093) Finance receivables repaid or sold.......................... 1,837,821 1,749,074 Acquisitions, net of cash acquired.......................... (53,152) (16,762) Proceeds from disposition of operating lease and other assets.................................................... 17,706 13,001 Purchase of assets for operating leases..................... (14,302) (27,904) Other capital expenditures.................................. (5,059) (4,555) Proceeds from real estate owned............................. 2,312 2,028 Other investments........................................... (10,053) -- ----------- ----------- Net cash used in investing activities............. (354,510) (142,211) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt.................... 660,000 300,000 Net decrease in short-term debt............................. (189,320) (3,926) Principal payments on long-term debt........................ (141,472) (283,338) Principal payments on non-recourse debt..................... (53,271) (26,969) Net increase (decrease) in commercial paper................. (1,859) 40,902 Net increase in amounts due to Textron Inc.................. 3,609 51,026 Capital contributions from Textron Inc...................... 8,300 22,800 Dividends paid to Textron Inc............................... (18,700) (20,700) ----------- ----------- Net cash provided by financing activities......... 267,287 79,795 ----------- ----------- NET INCREASE (DECREASE) IN CASH............................. (10,248) 8,921 Cash and equivalents at beginning of year................... 22,397 13,597 ----------- ----------- Cash and equivalents at end of period....................... $ 12,149 $ 22,518 =========== ===========
A-22 71 TEXTRON FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY (UNAUDITED)
COMMON CAPITAL RETAINED STOCK SURPLUS EARNINGS TOTAL ------ -------- -------- -------- (IN THOUSANDS) Balance January 3, 1998................................ $250 $ 95,871 $309,755 $405,876 Net income............................................. -- -- 69,576 69,576 Capital contribution from Textron Inc.................. -- 59,300 -- 59,300 Dividend to Textron Inc................................ -- -- (62,300) (62,300) ---- -------- -------- -------- Balance January 2, 1999................................ 250 155,171 317,031 472,452 Net income............................................. -- -- 34,417 34,417 Capital contribution from Textron Inc.................. -- 8,300 -- 8,300 Dividend to Textron Inc................................ -- -- (18,700) (18,700) ---- -------- -------- -------- Balance June 30, 1999.................................. $250 $163,471 $332,748 $496,469 ==== ======== ======== ========
A-23 72 TEXTRON FINANCIAL CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of TFC included in the 1998 Annual Report include additional notes, which should be read in conjunction with the consolidated financial statements included in this Financial and Statistical Summary. The accompanying consolidated financial statements include the accounts of TFC and its subsidiaries, all of which are wholly owned. All significant intercompany transactions are eliminated. The consolidated financial statements are unaudited and reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of TFC's consolidated financial position at June 30, 1999 and January 2, 1999 and its consolidated results of operations for each of the respective three and six month periods ended June 30, 1999 and 1998 and its consolidated cash flows for each of the six month periods ended June 30, 1999 and 1998. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year. NOTE 2. CASH AND EQUIVALENTS Cash and equivalents consist of cash in banks and overnight interest bearing deposits in banks. NOTE 3. ACQUISITION On March 31, 1999, TFC acquired an asset portfolio from Southern Capital Corporation. The total purchase price was $52.8 million. The fair value of the assets acquired was $50.3 million. The goodwill associated with this transaction is being amortized over 10 years. Had the acquisition occurred on January 3, 1999, the effect on TFC's 1999 results would not have been material. Consequently, pro forma information has not been presented. NOTE 4. LOAN IMPAIRMENT TFC measures reserves for credit losses on non-homogeneous impaired loans based on the present value of expected future cash flows discounted at the loan's effective interest rate, or at the observable market price or at the fair value of collateral if the loan is collateral dependent. This evaluation is inherently subjective as it requires estimates, including the amount and timing of future cash flows expected to be received on impaired loans, that are likely to differ from actual results. Accrual of interest income is suspended for accounts which are contractually delinquent by more than three months, unless collection is not doubtful. Cash payments on nonaccrual accounts, including finance charges, generally are applied to reduce loan principal. At June 30, 1999, TFC had nonaccrual loans and leases totaling $53.5 million and $69.9 million on January 2, 1999, of which approximately $32.8 million and $46.5 million, respectively, was considered impaired, excluding finance leases and homogeneous loan portfolios. The allowance for losses on receivables related to impaired loans was $11.5 million at June 30, 1999 and $14.9 million at January 2, 1999. The average recorded investment in impaired loans during the first six months of 1999 was $44.4 million and $61.2 million in the corresponding period in 1998. Nonaccrual loans resulted in TFC's revenues being reduced by approximately $2.4 million and $2.9 million for the first six months of 1999 and 1998, respectively, and by approximately $0.9 million and $1.5 million for the second quarters of 1999 and 1998, respectively. No interest income was recognized using the cash basis method. A-24 73 NOTE 5. MANAGED FINANCE RECEIVABLES TFC manages finance receivables for a variety of investors, participants and third party portfolio owners. Owned receivables........................................... $3,988,590 $3,611,397 Securitized receivables..................................... 505,120 616,220 ---------- ---------- 4,493,710 4,227,617 Non-recourse participations................................. 308,970 228,357 Third party portfolio servicing............................. 58,301 30,908 SBA sales agreements........................................ 26,143 21,958 ---------- ---------- Total managed finance receivables........................... $4,887,124 $4,508,840 ========== ==========
NOTE 6. DEBT AND CREDIT FACILITIES
JUNE 30, JANUARY 2, 1999 1999 ------------ -------------- (IN THOUSANDS) Short-term debt: Commercial paper............................................ $1,183,732 $1,185,591 Other short-term debt....................................... 49,961 239,281 ---------- ---------- Total short-term debt............................. 1,233,693 1,424,872 Long-term debt: 5.66%-5.86% notes; due 2000 to 2002......................... 233,000 33,000 6.13%-6.51% notes; due 2000 to 2001......................... 112,500 204,000 7.14%-7.67% notes; due 1999 to 2000......................... 184,986 234,958 Variable rate notes; due 1999 to 2001....................... 1,387,000 932,000 ---------- ---------- Total long-term debt.............................. 1,917,486 1,403,958 ---------- ---------- Total debt........................................ $3,151,179 $2,828,830 ========== ==========
Combined commercial paper and short-term bank debt weighted average interest rates, before consideration of the effect of interest rate exchange agreements, have been determined by relating the annualized interest cost to the daily average dollar amounts outstanding. The combined weighted average interest rate during the six months ended June 30, 1999 was 5.22%. The combined weighted average interest rate, before consideration of the effect of interest rate exchange agreements, at June 30, 1999 was 5.11%. Interest on variable rate notes is tied predominantly to the three-month London Interbank Offered Rate for U.S. dollar deposits. The weighted average interest rate on variable rate notes at June 30, 1999 was 5.27%. The terms of certain of the Company's loan agreements and credit facilities limit the payment of dividends to $193 million at June 30, 1999. In the first six months of 1999, TFC paid dividends of $18.7 million. TFC has entered into a revolving credit facility with Textron whereby TFC can borrow up to $1.25 billion from Textron. As of June 30, 1999, nothing was outstanding under this agreement and the agreement was cancelled. The maximum amount outstanding under this facility during the first six months of 1999 was $1.0 billion. The interest rate was at a rate equivalent to the Federal Reserve Banks' A2/P2 commercial paper rate on the date the funds are drawn upon. Approximately $14.6 million of interest expense related to this facility is included in TFC's consolidated financial statements for the six months ended June 30, 1999. A-25 74 NOTE 7. INTEREST RATE EXCHANGE AGREEMENTS Under interest rate exchange agreements, TFC makes period fixed payments in exchange for periodic variable payments and vice versa. TFC has entered into such agreements to mitigate its exposure to increases in interest rates on a portion of its fixed and variable debt.
JUNE 30, 1999 JANUARY 2, 1999 ------------- --------------- (DOLLARS IN THOUSANDS) Weighted average original term.............................. 1.9 years 2.5 years -------- -------- Notional principal -- fixed rate payments................... $400,000 $250,000 Fixed weighted average interest rate........................ 5.87% 6.26% Variable weighted average interest rate..................... 5.23% 5.27% -------- -------- Notional principal -- variable rate payments................ $ -- $ 50,000 Fixed weighted average interest rate........................ -- 6.30% Variable weighted average interest rate..................... -- 5.22% -------- --------
NOTE 8. INTEREST RATE EXCHANGE AGREEMENTS FOR RECEIVABLE SECURITIZATIONS TFC has entered into certain interest rate exchange agreements to mitigate its exposure to decreases in interest rates on its interest-only securities. Under the interest rate exchange agreements, TFC makes periodic variable rate payments based upon the prime rate and the one- and six-month London Interbank Offered Rate (LIBOR) and receives fixed rate payments. These interest rate exchange agreements are adjusted periodically to match the amortization of the variable rate contracts in the securitized portfolio and are summarized in the following table:
JUNE 30, 1999 JANUARY 2, 1999 ------------- --------------- (DOLLARS IN MILLIONS) Prime rate.................................................. 7.75% 7.75% One-month LIBOR............................................. 5.24% 4.94% ===== ===== 1998 Securitization Notional principal -- variable payments tied to the prime rate............................................ $47.9 $55.3 Fixed rate............................................. 7.94% 7.94% ----- ----- Notional principal -- variable payments tied to LIBOR................................................. $22.6 $34.3 Fixed rate............................................. 5.13% 5.13% ===== ===== Six-month LIBOR............................................. 5.65% 4.94% ===== ===== 1997 Securitization Notional principal -- variable payments tied to the prime rate............................................ $17.1 $46.6 Fixed rate............................................. 8.77% 8.77% ----- ----- Notional principal -- variable payments tied to LIBOR................................................. $15.2 $21.2 Fixed rate............................................. 5.97% 5.97% ===== =====
Interest rate floor agreements, entered into through AAA-rated counterparties to the Textron Financial Corporation Receivables Trusts 1998-A and 1997-A (the Trusts), provide a minimum interest rate on variable rate receivables held by the Trusts and are tied to both the prime rate and the one- and six-month LIBOR. These interest rate floor agreements are adjusted periodically to match the amortization of the variable rate contracts in the securitized portfolio and are summarized as follows:
JUNE 30, 1999 JANUARY 2, 1999 ------------- --------------- Prime rate.................................................. 7.75% 7.75% One-month LIBOR............................................. 5.24% 4.94% ===== ===== 1998 Securitization Notional principal -- variable payments tied to the prime rate............................................ $51.1 $57.6 Floor rate............................................. 8.50% 8.50% ----- ----- Notional principal -- variable payments tied to LIBOR................................................. $23.1 $36.5 Floor rate............................................. 5.34% 5.34% ===== =====
A-26 75
JUNE 30, 1999 JANUARY 2, 1999 ------------- --------------- Six-month LIBOR............................................. 5.65% 4.94% ===== ===== 1997 Securitization Notional principal -- variable payments tied to the prime rate............................................ $17.1 $70.5 Floor rate............................................. 8.50% 8.50% ----- ----- Notional principal -- variable payments tied to LIBOR................................................. $15.2 $37.1 Floor rate............................................. 5.65% 5.65% ===== =====
TFC also has a securitization program consisting of a $150 million interest in a designated pool of installment contracts. Subsequent collections of installment contracts sold are typically reinvested in the pool of eligible assets to maintain an aggregate outstanding balance of sold installment contracts at a constant amount. Receivables sold which remained uncollected at June 30, 1999 were $150 million. The ongoing purchase arrangement is discretionary on the part of both parties and has been extended through 2000. NOTE 9. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS At year-end 1998, the Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which requires segment data to be measured and analyzed on a basis that is consistent with how business activities are reported internally for management. The Company's operating segments are organized based on the nature of products and services provided. The accounting policies for these segments are the same as those described for the consolidated entity. The Company evaluates the performance of its operating segments primarily on the basis of revenues, income before taxes, and finance assets. Details of total revenues, income before taxes and finance assets by operating segment are provided below:
SIX MONTHS ENDED SIX MONTHS ENDED ---------------- ---------------- JUNE 30, JUNE 30, 1999 % 1998 % ---------- --- ---------- --- Revenues Term loans.......................................... $ 116,803 58 $ 105,586 59 Revolving loans and leases.......................... 49,960 25 41,610 24 Specialty finance................................... 32,715 17 29,065 17 Commercial real estate.............................. 60 -- (1) -- ---------- --- ---------- --- Total Revenue............................................ $ 199,538 100 $ 176,260 100 Income before taxes(1)(2) Term loans.......................................... $ 31,901 $ 31,707 Revolving loans and leases.......................... 13,721 12,960 Specialty finance................................... 12,278 11,971 Commercial real estate.............................. (1,795) (5,088) ---------- ---------- Total income before taxes................................ $ 56,105 $ 51,550 Finance assets(3) Term loans.......................................... $2,403,420 $1,961,291 Revolving loans and leases.......................... 925,085 748,584 Specialty finance................................... 757,600 635,328 Commercial real estate.............................. 14,087 34,409 ---------- ---------- Total Finance Receivables................................ $4,100,192 $3,379,612
- --------------- (1) Interest expense is allocated to each segment in proportion to its net investment in finance assets. Net investment in finance assets includes deferred income taxes, security deposits and other specifically identified liabilities. The interest allocated matches variable rate debt with variable rate finance assets and fixed rate debt with fixed rate finance assets. A-27 76 (2) Indirect expenses are allocated to each segment based on the utilization of such resources, some allocations are based on the segments proportion of net investment in finance assets, headcount, numbers of transactions, computer resources and senior management time. (3) Finance assets include finance receivables and equipment on operating leases, net of accumulated depreciation. Excludes repossessed assets and beneficial interests in securitized assets (classified as other assets in TFC's Consolidated Balance Sheet). A-28 77 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES TFC utilizes a broad base of financial resources for its liquidity and capital requirements. Cash is provided from operations and several different sources of borrowings, including the issuance of commercial paper and short-term bank debt, sales of medium- and long-term debt in the U.S. and foreign financial markets and junior subordinated borrowings under a $100 million line of credit with Textron. For liquidity purposes, TFC has a policy of maintaining sufficient unused lines of credit to support its outstanding commercial paper and short-term bank debt. TFC has line of credit agreements of $1.2 billion, of which $400 million will expire in 2000 and $800 million will expire in 2003. TFC's lines of credit not used or reserved as support for commercial paper and bank borrowings were $16 million at June 30, 1999, as compared to $114 million at January 2, 1999. In 1999, TFC entered into a short-term promissory note program with Textron at market rates of interest. As of June 30, 1999, TFC had no borrowings under this program and the agreement was cancelled. TFC has two medium-term note facilities, totaling $1.5 billion, under Rule 144A of the Securities Act of 1933, as amended. Proceeds from issuances of these facilities have been used to refinance maturing commercial paper and long-term debt and to fund receivable growth. During 1998, TFC issued $237 million of variable rate notes and $133 million of fixed rate notes through these facilities. At January 2, 1999, TFC had $472 million available through its medium-term note facilities. During the first six months of 1999, TFC issued $200 million of fixed rate notes and $405 million of variable rate notes through these facilities. At June 30, 1999, TFC had $117 million available through its medium-term note facilities. Cash flows from operations during the first six months of 1999 were $77 million, as compared to $71 million in the corresponding period last year. The increase in operating cash flows primarily reflects higher net income and the timing of income tax payments, partially offset by an increase in other assets and the timing of the payments of accrued interest and other liabilities. Cash flows used in investing activities were funded from the collection of receivables and through the issuance of long- and short-term bank debt. Short-term borrowings decreased by $191 million and long-term borrowings increased by $519 million. Borrowings under a junior subordinated facility increased by $4 million, reflecting the funding of finance receivables related to Textron's manufacturing divisions. During the first six months of 1999, Textron contributed capital of $8.3 million to TFC to finance an acquisition. Cash flows provided by operations were $144 million in 1998, as compared to $93 million in 1997. The increase in operating cash flows primarily reflects the timing of the payments of income taxes and accrued interest and other liabilities, and includes increase in payables for receivable additions originated in late December. Cash flows from operations of $93 million in 1997 were $6 million less than in 1996. The decrease from 1996 is primarily due to the timing of income tax payments and a non-cash gain on a receivables securitization, partially offset by a 7% increase in income before provision for losses. Cash flows used in investing activities in 1998 were funded from the collection of receivables and through the issuance of long-term bank debt. Short-term borrowings increased by $351 million and $59 million in 1998 and 1997, respectively, reflecting the financing of acquisitions and receivable growth. Long-term borrowings increased in 1998 by $66 million as compared to a decrease of $136 million in the prior year. The increase in 1998 reflects refinancing of short-term debt. The decrease in 1997 reflected the use of proceeds from a securitization of receivables. In 1998, TFC paid dividends to Textron of $62.3 million as compared to $73.6 million in 1997. The decrease was primarily due to additional dividends paid in 1997 for the purpose of adjusting TFC's leverage. Because the finance business involves the purchase and carrying of receivables, a relatively high ratio of borrowings to net worth is customary. Debt as a percentage of total capitalization was 86%, unchanged from year-end. Commercial paper and short-term debt as a percentage of total debt was 39% at June 30, 1999, down from 50% at year-end. A-29 78 TFC's ratio of income to fixed charges decreased to 1.65 during the first six months of 1999, as compared to a ratio of 1.67 for the same period last year. The decrease is attributable to a 12% increase in interest expense, versus an 11% increase in income before interest expense and income taxes. TFC's ratio of income to fixed charges was 1.72 in 1998 (1.70 in 1997 and 1.65 in 1996). The ratio increased in 1998 due to a 4% increase in income before income taxes, partially offset by an increase in interest expense. FINANCE RECEIVABLES Total finance receivables increased to $3.989 billion at June 30, 1999, up from $3.611 billion at January 2, 1999. Equipment on operating leases at June 30, 1999 decreased to $112 million, as compared to $119 million at year-end. The increase in receivables primarily relates to growth in term loan segment, which included an acquisition of a portfolio of equipment loans and leases, as well as growth in the revolving credit segment. In 1998, owned finance receivables increased 18% from $3.086 billion at January 3, 1998. The increase reflects growth in TFC's revolving credit segment, and the aircraft finance business of the term loan segment. Receivables growth also reflects the acquisitions of an equipment finance portfolio and a receivable factoring company. Managed finance receivables, defined as owned receivables plus receivables serviced under securitizations, participations, and third-party portfolio servicing agreements, increased to $4.887 billion from $4.509 billion at year-end. Finance receivable additions for the first six months of 1999 were $2.130 million, as compared to $1.857 million for the corresponding period in 1998. The increase in additions was due to growth in the term loan, revolving credit and specialty finance segments. Finance receivable additions in 1998 were $4.009 billion, as compared to $2.712 billion of additions in 1997. The increase in additions was primarily due to growth in the revolving credit segment and golf and aircraft financing in the term loan segment. NONPERFORMING ASSETS Nonperforming assets were $70 million at June 30, 1999, down from $87 million at year-end. This decrease was primarily due to a decrease in the real estate portfolio, partially offset by an increase in nonperforming assets in the term loan portfolio. Nonperforming commercial real estate assets represent 27% of total nonperforming assets, down from 44% at year-end. Nonperforming assets decreased 13% to $87 million at January 2, 1999, from $99 million at January 3, 1998. The improvement relates to a decrease in nonperforming real estate, partially offset by increases in the revolving and term loan portfolios. Nonaccrual commercial real estate loans were $32 million in 1998 and $50 million in 1997. Commercial real estate owned was $6 million in 1998 ($9 million in 1997), and other real estate owned was $5 million in 1998 and $2 million in 1997, net of valuation allowances. The allowance for losses on receivables as a percentage of nonperforming assets increased to 123% at June 30, 1999 from 97% at year-end. The increase from year-end primarily reflects a decrease of nonperforming assets, principally in the commercial real estate portfolio. INTEREST RATE SENSITIVITY Management's strategy of matching interest-sensitive assets with interest-sensitive liabilities limits the company's risk to changes in interest rates and includes entering into interest rate exchange agreements as part of this matching strategy. At June 30, 1999, TFC's interest-sensitive liabilities in excess of interest-sensitive assets were $378 million, net of $400 million of fixed-rate interest rate exchange agreements. Interest-sensitive liabilities in excess of interest-sensitive assets were $463 million at January 2, 1999, net of $300 million of interest rate exchange agreements ($250 million fixed rate and $50 million variable rate). The change in the Company's net position does not reflect a change in management's match funding strategy. A-30 79 FINANCIAL RISK MANAGEMENT As part of managing its interest rate risks, TFC utilizes interest rate exchange agreements. The objective of TFC's use of such agreements is not to speculate for profit, but generally to convert variable rate debt into fixed rate debt with respect to specific liabilities. These agreements do not involve a high degree of complexity or risk. TFC does not trade interest rate exchange agreements or enter into leveraged interest rate exchange agreements. The difference between the variable rate TFC received and the fixed rate TFC paid on the interest rate exchange agreements increased interest expense by $1.3 million in the first six months in 1999 and $0.9 million in the corresponding period in 1998. The net effect of these agreements increased TFC's interest expense by $2.0 million in 1998, $1.2 million in 1997 and $2.5 million in 1996. TFC manages its foreign currency exposure by funding certain foreign currency denominated assets with liabilities in the same currency and, as such, certain exposures are naturally offset. In addition, as part of managing its foreign currency exposure, TFC enters into foreign currency forward exchange contracts. The objective of such agreements is to manage the exposure to changes in currency rates. RESULTS OF OPERATIONS REVENUES For six months ended June 30, 1999 vs. June 30, 1998 Revenues for the first six months of 1999 increased by $23.3 million, or 13%, as compared to the corresponding six month period last year, on a 20% higher level of average finance receivables. The increase in revenue is primarily due to increases in average finance receivables and other income, partially offset by lower finance receivable yields. Finance receivable yields decreased to 9.61% for the six months ended June 30, 1999, as compared to 10.13% in the corresponding period in 1998. The change reflects a decrease in the prime rate during the first six months from the corresponding period in 1998 and a change in portfolio mix. The increase in other income primarily reflects an increase in syndication income, partially offset by a decrease in prepayment income. Operating lease rental revenue of $8.1 million decreased from $8.6 million in the corresponding period in 1998, on 7% lower average operating lease assets. Years ended 1998 vs. 1997 and 1996 Total revenues in 1998 increased $17 million from 1997, to $367 million, reflecting a higher level of average finance receivables and higher other income. Total revenues in 1997 were $350 million, as compared to $327 million in 1996. Finance charge revenues increased 2% in 1998, as compared to a 3% increase in 1997. The 1998 results reflect a 2% higher level of average owned finance receivables while yields on owned finance receivables remained constant at 10.0% for both 1998 and 1997. Finance charge revenues of $291 million increased 3% in 1997, as compared to a 4% increase in 1996. The 1997 results reflect a 3% higher level of average owned finance receivables and constant finance receivables yields at 10.0% in both 1997 and 1996. Rental revenue from operating leases in 1998 was $17 million, down from $19 million in both 1997 and 1996, on lower average operating lease assets of 3% in 1998 and 2% in 1997. Other income of $53 million in 1998 increased by $12 million from 1997, reflecting higher syndications fees, residual income, servicing fees and prepayment income. Other income of $41 million in 1997 increased by $14 million from 1996, reflecting higher syndications fees, a $3.5 million gain on a securitization of Textron-related receivables and higher prepayment income. INTEREST EXPENSE Six months ended June 30, 1999 vs. June 30, 1998 Interest expense for the six months ended June 30, 1999 was $9.5 million higher than the amount reported during the first six months of 1998. Interest expense reflects a 26% increase in average debt A-31 80 outstanding and a decrease in the average borrowing rate to 5.56% for the six months ended June 30, 1999, as compared to 6.22% for the first six months of 1998. The decrease in the average borrowing rate for the six months ended June 30, 1999, as compared to the same period last year, is primarily attributable to lower short-term interest rates reflecting a lower prevailing interest rate environment, partially offset by higher credit spreads in January in TFC's commercial paper program. Years ended 1998 vs. 1997 and 1996 Interest expense of $155 million in 1998 increased 1%, or $2 million, from 1997, reflecting a 2% increase in average debt outstanding, partially offset by a decrease in the cost of borrowed funds. TFC's average borrowing rate primarily reflects a reduction in long-term variable rate debt costs. Interest expense of $153 million in 1997 increased 4%, or $6 million, from 1996, reflecting a 4% increase in average debt outstanding and an increase in the cost of borrowed funds. TFC's average borrowing rate was 6.2% in 1998, 6.3% in 1997 and 6.2% in 1996. INTEREST MARGIN Six months ended June 30, 1999 vs. June 30, 1998 TFC's earnings are influenced by the interest margin earned on finance receivables (i.e., the excess of revenues over interest expense on borrowings). Interest margin decreased to 6.30% from 6.62%, as compared to the corresponding period last year, reflecting a decrease in interest earned on variable rate receivables due to lower prevailing interest rates, slower growth in fee income and competitive pressures. Years ended 1998 vs. 1997 and 1996 Interest margin increased to 6.88% in 1998 from 6.51% in 1997, primarily reflecting higher other income and a lower average borrowing rate. The increase was partially offset by a decrease in variable rate receivables which are generally tied to changes in the prime rate offered by major U.S. banks and the London Interbank Offered Rate (LIBOR). These decreases preceded a decrease in short-term borrowing costs in the fourth quarter of 1998. Interest margin increased to 6.51% in 1997 from 6.15% in 1996, primarily reflecting higher other income which included a gain on a receivable securitization. The increase was partially offset by an increase in short-term interest rates on borrowings that preceded the repricing of TFC's variable rate receivables, which are generally tied to changes in the prime rate offered by major U.S. banks and LIBOR, and competitive pressures. OPERATING EXPENSES Six months ended June 30, 1999 vs. June 30, 1998 Selling and administrative expenses increased by $8.2 million for the first six months of 1999, as compared to the first six months of 1998, reflecting higher expenses related to the acquisition of a small-ticket vendor equipment leasing division, growth in managed receivables, growth in businesses with higher operating expenses and investments in start-up fee initiatives. Years ended 1998 vs. 1997 and 1996 Selling and administrative expenses of $72 million in 1998 increased by $14 million from 1997, as compared to an increase of $8 million in 1997 from 1996. The increase in 1998 principally reflects higher expenses related to an acquisition of a receivable factoring company, growth in managed receivables and growth in businesses with higher operating expenses. The 1997 increase principally reflects higher expenses related to the growth of managed finance receivables, an increase in collection expenses related to the equipment portfolio and a change in business mix. A-32 81 PROVISION FOR LOSSES Six months ended June 30, 1999 vs. June 30, 1998 The provision for losses of $11.7 million increased by $1.4 million for the first six months of 1999, as compared to the corresponding period in 1998. The increase in the provision is related to higher provision for losses in the term loan and revolving credit segments, partially offset by a lower provision in the commercial real estate portfolio in 1999 as compared to 1998. The allowance for looses on receivables increased to $86 million at June 30, 1999, as compared to $84 million at the end of 1998. This increase represents general strengthening of reserves for receivable growth. Net charge-offs were $8.9 million in the first six months of 1999, as compared to $8.2 million in the corresponding period of 1998. Approximately $2.3 million of net charge-offs were related to commercial real estate assets, as compared to $3.4 million in the corresponding period in 1998. Years ended 1998 vs. 1997 and 1996 The provision for losses of $20 million in 1998 decreased from $23 million in 1997. The decrease in the 1998 provision for losses reflects lower real estate charge-offs and lower nonperforming assets. The provision for losses in 1997 decreased by $3 million from $26 million in 1996, reflecting lower real estate charge-offs, higher recoveries of previously charged off aircraft and equipment loans and lower nonperforming assets. The allowance for losses on receivables was $84 million at January 2, 1999 and $77 million at January 3, 1998. The increase is primarily related to portfolio growth. Net charge-offs were $16 million in 1998, as compared to $20 million in 1997 and $27 million in 1996 (including $1 million and $2 million charged to the real estate owned valuation allowance in 1997 and 1996, respectively). Net charge-offs related to commercial real estate assets were $5 million in 1998, down from $6 million in 1997. Equipment related net charge-offs decreased to $11 million in 1998, as compared to $14 million in 1997. The allowance for losses as a percent of receivables was 2.3% at January 2, 1999, and 2.5% at January 3, 1998 (2.7% and 3.0% excluding receivables with recourse to Textron in 1998 and 1997, respectively). Although management believes it has made adequate provision for anticipated losses, realization of these assets remains subject to uncertainties. Subsequent evaluations of nonperforming assets, in light of factors then prevailing, including economic conditions, may require additional increases in the allowance for losses for such assets. NET INCOME Six months ended June 30, 1999 vs. June 30, 1998 Net income for the first six months of 1999 was $34.4 million, 9% higher than the corresponding period of 1998. Earnings were favorably impacted by higher average receivables and fee income. The favorable results were partially offset by lower finance yields, an increase in selling and administrative expenses and a higher provision for losses. Years ended 1998 vs. 1997 and 1996 Net income increased by 3% to $70 million in 1998. Net income was favorably affected by an increase in other income, higher average managed finance receivables, a lower provision for losses and lower borrowing costs, partially offset by a higher tax provision rate and higher selling and administrative expenses. Net income increased by 16% in 1997, to $68 million, favorably affected by an increase in other income, higher average managed finance receivables, a lower provision for losses and a lower tax provision rate, partially offset by higher borrowing costs and higher selling and administrative expenses. YEAR 2000 COMPUTER CONVERSION Many computer programs, including those used by TFC and TFC's suppliers and customers, use only two digits to identify a year and were not designed to handle years beginning after 1999. These programs, some of A-33 82 which are critical to our operation, could fail to operate properly after 1999 unless they are modified. As of June 30, 1999, TFC substantially completed and tested the necessary modifications to its critical operations' computer programs. TFC is also working with its principal suppliers and customers to ensure that it will not be affected by Year 2000 problems in their computer programs. Management believes TFC's Year 2000 Program will solve any remaining issues in a timely fashion without having a material adverse effect on TFC's business operations or financial condition. The remaining cost of the Year 2000 compliance effort is not expected to be material. However, it is possible that unanticipated problems may arise in the course of TFC's implementation of its Year 2000 Program. In addition, while monitoring of Year 2000 readiness by TFC's suppliers and customers is a major part of the Year 2000 Program, TFC has very limited ability to ensure Year 2000 readiness by such parties. TFC could also be affected by failure of government agencies, in the U.S. and elsewhere, to maintain governmental services that are essential to TFC's operations. TFC cannot identify all possible worst case Year 2000 scenarios. However, the most reasonably likely worse case scenario would be the inability of third parties, including utilities, to deliver supplies and services that are critical to TFC's operations and that could not quickly be replaced by other suppliers or internally. In such a situation, operations at the affected TFC facilities would be interrupted, with adverse effects on TFC's financial results. Contingency plans to cover situations in which Year 2000 problems arise despite TFC's efforts are substantially ready. Through June 1999, TFC incurred $6.5 million of cost related to the replacement of systems to meet TFC business requirements. These costs were capitalized in accordance with TFC policy. TFC's cost directly related to making its systems Year 2000 compliant were expensed as incurred. Such expense was $0.2 million through June 30, 1999. The remaining cost of the Year 2000 effort is not expected to be material. Forward looking statements herein relating to Year 2000 issues, including expectations of readiness, possible effects on TFC and similar matters, are subject to the risks described in this section. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires that companies capitalize certain internal-use software once certain criteria are met. The statement is effective for financial statements of fiscal years beginning after December 15, 1998. In April 1998, the Accounting Standards Executive Committee issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5 will require all costs of start-up activities, including organization costs, to be expensed as incurred. This statement is effective for financial statements of fiscal years beginning after December 15, 1998. In June 1998, the Financial Accounting Standards Board issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities." FAS 133 requires entities to recognize all derivatives as either assets or liabilities and measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 1999. These statements will not have a material effect on TFC's financial position or results of operations when adopted. RISK MANAGEMENT TFC's business activities contain various elements of risk. TFC considers the principal types of risk to be: - Credit risk; - Asset/liability risk (including interest rate and foreign exchange risk); and - Liquidity risk. Proper management of these risks is essential to maintaining profitability. Accordingly, TFC has designed its risk management systems and procedures to identify and quantify these risks. TFC has established A-34 83 appropriate policies and sets prudent limits in these areas. TFC's management of these risks, and its compliance with these policies and limits, is continuously monitored by means of administrative and information systems. Credit Risk Management TFC manages credit risk through: - Underwriting procedures; - Centralized approval of individual transactions exceeding certain dollar limits; and - Active portfolio and account management. TFC has developed underwriting procedures for each business unit that assesses a prospective borrower's ability to perform in accordance with proposed loan terms. These procedures include: - Analyzing business or property cash flows and collateral values; - Performing financing sensitivity analyses; and - Assessing potential exit strategies. Certain receivables transactions are originated with the intent of fully or partially selling them. This strategy provides an additional tool to manage credit risk. TFC has developed a tiered credit approval system which allows certain transaction types and dollar amounts to be approved at the business unit level. The delegation of credit authority is done under strict policy guidelines. TFC business units are also subject to semi-annual audits by TFC's Corporate Investment Control Department. Transactions outside of business unit authority require the approval of a Group Investment Control officer and/or TFC's Credit Committee, which is comprised of its Chairman, President and Chief Executive Officer, Executive Vice President and Chief Operating Officer, Senior Vice President and Chief Credit Officer, Senior Vice President and Chief Financial Officer, and Senior Vice President, General Counsel and Secretary. TFC controls the credit risk associated with its portfolio by limiting transaction sizes, as well as diversifying transactions by: (1) industry, (2) geographic area, (3) property type and (4) borrower. Through these practices, TFC identifies and limits exposure to unfavorable risks and seeks favorable financing opportunities. Management reviews receivable aging trends and watch list reports, and conducts regular business reviews, in order to monitor business unit portfolio performance. Geographic Concentration -- TFC continuously monitors its portfolio to avoid any undue geographic concentration in any region of the U.S. or in any foreign country. The largest concentration of domestic receivables was in the Southeastern United States representing 25% of TFC's total owned and securitized portfolio at June 30, 1999. International receivables are mostly generated in support of Textron product sales. At June 30, 1999 international receivables represented 11% of TFC's total owned and securitized portfolio, with no single country representing more than 6%. Asset/Liability Risk Management The Company continuously measures and quantifies: (1) interest rate risk, (2) foreign exchange risk, and (3) liquidity risk, in each case taking into account the effect of derivatives hedging activity. TFC uses derivatives as an integral part of its asset/liability management program, in order to reduce: - Interest rate exposure arising from mismatches between assets and liabilities; and - Foreign currency exposure arising from changes in exchange rates. The Company does not use derivative products for the purpose of generating earnings from changes in market conditions. Before entering into a derivative transaction, the Company determines that a high correlation exists between the change in value of the hedged transaction and the value of the derivative. When A-35 84 TFC executes a transaction, it designates the derivative to specific debt. The risk that a derivative will become an ineffective hedge is generally limited to the possibility that an asset being hedged will prepay before the related derivative matures. Accordingly, after the inception of a hedge transaction, TFC monitors the effectiveness of derivatives through an ongoing review of the amounts and maturities of assets, liabilities and swap positions. This information is reviewed by TFC's Treasurer and Chief Financial Officer so that appropriate remedial action can be taken, as necessary. TFC carefully manages exposure to counterparty risk in connection with its derivatives transactions. In general, the Company limits its transactions to counterparties having ratings of at least "A" by Standard & Poors Rating Service, or "A2" by Moody's Investor Service. Total notional counterparty exposure is limited to $500 million. This maximum notional exposure equates to approximately $15 million of potential credit exposure (within two standard deviations of probability) for the types of derivative transactions typically entered into by TFC (e.g. interest rate swaps, basis swaps, and short-term currency swaps and forward contracts). Interest Rate Risk Management -- TFC manages interest rate risk by monitoring the duration and interest rate sensitivity of its assets, and by incurring liabilities (either directly or synthetically with derivatives) having a similar duration and interest sensitivity profile. TFC's internal policies limit the aggregate mismatch of interest sensitive assets and liabilities to 10% of total assets. From a quantitative perspective, TFC assesses its exposure to interest rate changes using an analysis that measures the potential loss in net income, over a 12 month period, resulting from a hypothetical increase in interest rates of 100 basis points across all maturities occurring at the outset of the measurement period (sometimes referred to as a "shock test"). The Company also assumes in its analysis that: prospective receivables additions will be perfectly match funded, existing portfolio will not prepay, and all other relevant factors will remain constant. Applying this "shock test" model to TFC's asset and liability position as of June 30, 1999, the Company's net income for the following 12-month period would be reduced by approximately $1.9 million. Foreign Exchange Risk Management -- A small portion of the finance assets owned by TFC are located outside of the United States. These receivables are generally in support of Textron's overseas product sales and are predominantly denominated in U.S. dollars. TFC presently has foreign currency receivables denominated in Canadian and Australian dollars. In order to minimize the effect of fluctuations in foreign currency exchange rates in TFC's financial results, the Company enters into forward exchange contracts, on a monthly basis, in amounts sufficient to hedge TFC's total asset exposure. As a result, TFC has no material exposure to changes in foreign currency exchange rates. Liquidity Risk Management The Company uses cash to fund asset growth and to meet debt obligations and other commitments. TFC's primary sources of funds are: - commercial paper borrowings; - issuances of medium-term notes and other term debt securities; and - syndication, securitization or sale of receivables. All commercial paper borrowings are fully backed by committed bank lines, providing liquidity in the event of capital market dislocation. TFC generally maintains less than 50% of debt obligations in commercial paper and short-term debt. If TFC is unable to access these markets on acceptable terms, it can draw on its bank credit facilities and use cash flow from operations and portfolio liquidations to satisfy its liquidity needs. Forward Looking Information Certain statements in this Offer to Purchase, and other oral and written statements made by TFC from time to time, are forward-looking statements, including those that discuss strategies, goals, outlook or other non-historical matters; or project revenues, income, returns or other financial measures. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those A-36 85 contained in the statements, including the following: (a) the extent to which TFC is able to successfully integrate acquisitions, (b) changes in worldwide economic and political conditions and associated impact on interest and foreign exchange rates, (c) the level of sales of Textron products for which TFC offers financing, (d) the ability to maintain credit quality and control costs when entering new markets, (e) the actions of our competitors and our ability to respond, and (f) our ability to attract and retain qualified and experienced personnel. A-37 86 Facsimile copies of the Letter of Transmittal, properly completed and duly executed, will be accepted. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each stockholder of the Company or his broker, dealer, commercial bank, trust company or other nominee to the Depositary as follows: The Depositary for the Offer is: EQUISERVE LIMITED PARTNERSHIP By Hand: By Mail: By Overnight Courier Delivery: Securities Transfer & EquiServe Limited Partnership EquiServe Limited Partnership Reporting Services, Inc. Corporate Actions Corporate Actions c/o EquiServe Limited P.O. Box 9573 40 Campanelli Drive Partnership Boston, MA 02205-9573 Braintree, MA 02184 100 Williams Street, Galleria New York, NY 10038
By Facsimile Transmission: (for Eligible Institutions Only) (781) 575-4826 Confirm by telephone: (781) 575-4816 Any questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective telephone numbers and addresses listed below. Additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may also be obtained from the Information Agent. You may also contact your broker, dealer, commercial bank or trust company for assistance concerning the Offer. THE INFORMATION AGENT FOR THE OFFER IS: D.F. KING & CO., INC. 77 Water Street New York, New York 10005 Banks and Brokers Call Collect: (212) 269-5550 All Others Call Toll Free: (800) 431-9646 THE DEALER MANAGER FOR THE OFFER IS: DONALDSON, LUFKIN & JENRETTE 277 Park Avenue New York, New York 10172 Call Collect: (212) 892-7700 EX-99.A.2 3 LETTER OF TRANSMITTAL 1 LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF LITCHFIELD FINANCIAL CORPORATION PURSUANT TO THE OFFER TO PURCHASE DATED SEPTEMBER 29, 1999 BY LIGHTHOUSE ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF TEXTRON FINANCIAL CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, OCTOBER 27, 1999, UNLESS THE OFFER IS EXTENDED. THE DEPOSITARY FOR THE OFFER IS: EQUISERVE LIMITED PARTNERSHIP By Hand: By Mail: By Overnight Courier Delivery: Securities Transfer & EquiServe Limited Partnership EquiServe Limited Partnership Reporting Services, Inc. Corporate Actions Corporate Actions c/o EquiServe Limited Partnership P.O. Box 9573 40 Campanelli Drive 100 Williams Street, Galleria Boston, MA 02205-9573 Braintree, MA 02184 New York, NY 10038
Facsimile: (for Eligible Institutions Only) (781) 575-4826 Confirm by telephone: (781) 575-4816 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE, OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by stockholders if certificates for Shares (as defined below) are to be forwarded herewith or, unless an Agent's Message (as defined in the Offer to Purchase) is utilized, if tenders of Shares (as defined herein) are to be made by book-entry transfer into the account of EquiServe Limited Partnership as Depositary (the "Depositary"), at the Depository Trust Company ("DTC") (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in Section 3 of the Offer to Purchase (as defined below). Stockholders who tender Shares by book-entry transfer are referred to herein as "Book-Entry Stockholders". Holders of Shares whose certificates for such Shares (the "Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase), or who cannot complete the procedure for book-entry transfer on a timely basis, must tender their Shares according to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. See Instruction 2. DELIVERY OF DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. 2 - -------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED - --------------------------------------------------------------------------------
NAME(S) & ADDRESSES OF REGISTERED HOLDER(S) (PLEASE FILL IN, IF BLANK, EXACTLY AS SHARE CERTIFICATE(S) AND SHARE(S) NAME(S) APPEAR(S) ON CERTIFICATE(S)) (ATTACH ADDITIONAL SIGNED LIST IF NECESSARY) - ---------------------------------------------------------------------------------------------------------------------- TOTAL NUMBER OF SHARES SHARE REPRESENTED NUMBER OF CERTIFICATE BY SHARES NUMBER(S)* CERTIFICATE(S)* TENDERED** ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- ----------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------- TOTAL SHARES - ----------------------------------------------------------------------------------------------------------------------
* Need not be completed by Book-Entry Stockholders. ** Unless otherwise indicated, all Shares represented by certificates delivered to the Depositary will be deemed to have been tendered. See Instruction 4. - ------------------------------------------------------------------------------- [ ]CHECK HERE IF SHARES ARE BEING TENDERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE DEPOSITARY WITH THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN THE BOOK-ENTRY TRANSFER FACILITY MAY DELIVER SHARES BY BOOK-ENTRY TRANSFER): Name of Tendering Institution: --------------------------------------------- Check box of Book-Entry Transfer Facility (check one): [ ] The Depository Trust Company Account Number ---------------------------------- Transaction Code Number --------------------------------- [ ] CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s): -------------------------------------------- Window Ticket Number (if any): --------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: ------------------------ Name of Institution that Guaranteed Delivery: ------------------------------ If delivered by Book-Entry Transfer, check box of Book-Entry Transfer Facility (check one): [ ] The Depository Trust Company Account Number ---------------------------------- Transaction Code Number ---------------------------------- 3 NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to Lighthouse Acquisition Corp., a Massachusetts corporation (the "Purchaser") which is a wholly owned subsidiary of Textron Financial Corporation, a Delaware corporation ("TFC"), the above- described shares of common stock, par value $.01 per share (the "Shares") of Litchfield Financial Corporation, a Massachusetts corporation, (the "Company") at a purchase price of $24.50 per Share, net to the seller in cash without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase dated September 29, 1999 (the "Offer to Purchase") and in this Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). The undersigned understands that the Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to any direct or indirect wholly owned subsidiary or subsidiaries of TFC, the right to purchase all or any portion of the Shares tendered pursuant to the Offer, receipt of which is hereby acknowledged. Subject to, and effective upon, acceptance for payment for the Shares tendered herewith in accordance with the terms of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, the Purchaser all right, title and interest in and to all of the Shares that are being tendered hereby and any and all dividends, distributions (including additional Shares) or rights declared, paid or issued with respect to the tendered Shares on or after the date hereof and payable or distributable to the undersigned on a date prior to the transfer to the name of the Purchaser or nominee or transferee of the Purchaser on the Company's stock transfer records of the Shares tendered herewith (collectively, a "Distribution"), and appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares (and any Distribution) with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest) to (a) deliver such Share Certificates (as defined herein) (and any Distribution) or transfer ownership of such Shares (and any Distribution) on the account books maintained by a Book-Entry Transfer Facility, together in either case with appropriate evidences of transfer, to the Depositary for the account of the Purchaser, (b) present such Shares (and any Distribution) for transfer on the books of the Company and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares (and any Distribution), all in accordance with the terms and subject to the conditions of the Offer. The undersigned irrevocably appoints designees of the Purchaser as such stockholder's proxy, with full power of substitution, to the full extent of such stockholder's rights with respect to the Shares tendered by such stockholder and accepted for payment by the Purchaser and with respect to any and all other shares or other securities issued or issuable in respect of such Shares on or after the date hereof. Such appointment will be effective when, and only to the extent that, the Purchaser accepts such Shares for payment. Upon such acceptance for payment, all prior proxies given by such stockholder with respect to such Shares (and such other shares and securities) will be revoked without further action, and no subsequent proxies may be given nor any subsequent written consents executed (and, if given or executed, will not be deemed effective). The designees of the Purchaser will be empowered to exercise all voting and other rights of such stockholder as they in their sole discretion may deem proper at any annual or special meeting of the Company's stockholders or any adjournment or postponement thereof, by written consent in lieu of any such meeting or otherwise. The Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon the Purchaser's payment for such Shares the Purchaser must be able to exercise full voting rights with respect to such Shares. The undersigned hereby represents and warrants that (a) the undersigned has full power and authority to tender, sell, assign and transfer the Shares (and any Distribution) tendered hereby and (b) when the Shares are accepted for payment by the Purchaser, the Purchaser will acquire good, marketable and unencumbered title to the Shares (and any Distribution), free and clear of all liens, restrictions, charges and encumbrances, and the same will not be subject to any adverse claim. The undersigned, upon request, will execute and deliver any additional documents deemed by the Depositary or the Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby (and any Distribution). In addition, the undersigned shall promptly remit and transfer to the Depositary for the account of the Purchaser any and all Distributions in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer; and pending such remittance or appropriate assurance thereof, the Purchaser will be, subject to applicable law, entitled to all rights and privileges as owner of any such Distribution and may withhold the entire purchase price or deduct from the purchase price the amount or value thereof, as determined by the Purchaser in its sole discretion. 4 All authority herein conferred or agreed to be conferred shall not be affected by and shall survive the death or incapacity of the undersigned and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Tenders of Shares made pursuant to the Offer are irrevocable, except that Shares tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Date (as defined in the Offer to Purchase) and, unless theretofore accepted for payment by the Purchaser pursuant to the Offer, may also be withdrawn at any time after November 27, 1999. See Section 4 of the Offer to Purchase. The undersigned understands that tenders of Shares pursuant to any of the procedures described in Section 3 of the Offer to Purchase and in the instructions hereto will constitute a binding agreement between the undersigned and the Purchaser upon the terms and subject to the conditions set forth in the Offer, including the undersigned's representation that the undersigned owns the Shares being tendered. Unless otherwise indicated herein under "Special Payment Instructions," please issue the check for the purchase price and/or issue or return any certificate(s) for Shares not tendered or not accepted for payment in the name(s) of the registered holder(s) appearing under "Description of Shares Tendered." Similarly, unless otherwise indicated herein under "Special Delivery Instructions," please mail the check for the purchase price and/or any certificates) for Shares not tendered or not accepted for payment (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing under "Description of Shares Tendered." In the event that both the Special Delivery Instructions and the Special Payment Instructions are completed please issue the check for the purchase price and/or any certificate(s) for Shares not tendered or accepted for payment in the name of, and deliver such check and/or such certificates to, the person or persons so indicated. Unless otherwise indicated herein under "Special Payment Instructions," please credit any Shares tendered herewith by book-entry transfer that are not accepted for payment by crediting the account at the Book-Entry Transfer Facility (as defined herein) designated above. The undersigned recognizes that the Purchaser has no obligation, pursuant to the Special Payment Instructions, to transfer any Shares from the name(s) of the registered holder(s) thereof if the Purchaser does not accept for payment any of the Shares so tendered. 5 ------------------------------------------------------------ SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if certificate(s) for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be issued in the name of someone other than the undersigned or if Shares tendered by book-entry transfer which are not accepted for payment are to be returned by credit to an account maintained at a Book-Entry Transfer Facility other than the account indicated above. Issue: [ ] check [ ] certificates to: Name ------------------------------------------------------ (Please Print) Address --------------------------------------------------- ----------------------------------------------------------- (Include Zip Code) ----------------------------------------------------------- (Tax Id. or Social Security No.) (See Substitute Form W-9) [ ] Credit Shares tendered by book-entry transfer that are not accepted for payment to the Book-Entry Transfer Facility account. ----------------------------------------------------------- (DTC Account No.) ----------------------------------------------------------- ----------------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if certificate(s) for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be sent to someone other than the undersigned at an address other than that shown above. Issue: [ ] check [ ] certificates to: Name ------------------------------------------------------ (Please Print) Address --------------------------------------------------- ----------------------------------------------------------- (Include Zip Code) ----------------------------------------------------------- (Tax Id. or Social Security No.) (See Substitution Form W-9) ----------------------------------------------------------- 6 SIGN HERE AND COMPLETE SUBSTITUTE FORM W-9 X ------------------------------------------------------------------------------ X ------------------------------------------------------------------------------ (Signature(s) of Stockholder(s)) Dated: , 1999 ------------------------------ (Must be signed by registered holder(s) exactly as name(s) appear(s) on Share Certificate(s) or on a security position listing or by person(s) authorized to become registered holder(s) by certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information and see Instruction 5.) Name(s) ------------------------------------------------------------------------ (Please Print) Capacity (full title) ----------------------------------------------------------------- Address ------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone Number ----------------------------------------------------- Tax Identification or Social Security Number ---------------------------------------------- COMPLETE SUBSTITUTE FORM W-9 GUARANTEE OF SIGNATURE(S) (SEE INSTRUCTIONS 1 AND 5) Authorized Signature ---------------------------------------------------------------- Name(s) ------------------------------------------------------------------------ Name of Firm --------------------------------------------------------------------- (Please Print) Address ------------------------------------------------------------------------- (Include Zip Code) Area Code and Telephone Number ----------------------------------------------------- Dated: , 1999 ------------------------------ 7 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. No signature guarantee is required on this Letter of Transmittal (a) if this Letter of Transmittal is signed by the registered holder(s) of Shares (which term, for purposes of this document, shall include any participant in the Book-Entry Transfer Facility whose name appears on a security position listing as the owner of Shares tendered) herewith, unless such holder(s) has completed either the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" above, or (b) if such Shares are tendered for the account of a firm which is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program (each of the foregoing being referred to as an "Eligible Institution"). In all other cases, all signatures on this Letter of Transmittal must be guaranteed by an Eligible Institution. See Instruction 5 of this Letter of Transmittal. 2. REQUIREMENTS OF TENDER. This Letter of Transmittal is to be completed by stockholders either if certificates are to be forwarded herewith or, unless an Agent's Message is utilized, if tenders are to be made pursuant to the procedure for tender by book-entry transfer set forth in Section 3 of the Offer to Purchase. Share Certificates evidencing tendered Shares, or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of Shares into the Depositary's account at the Book-Entry Transfer Facility, as well as this Letter of Transmittal (or a facsimile hereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other documents required by this Letter of Transmittal, must be received by the Depositary at one of its addresses set forth herein prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase). Stockholders whose Share Certificates are not immediately available or who cannot deliver their Share Certificates and all other required documents to the Depositary prior to the Expiration Date or who cannot complete the procedure for delivery by book-entry transfer on a timely basis may tender their Shares by properly completing and duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Pursuant to such procedure: (i) such tender must be made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by the Purchaser, must be received by the Depositary prior to the Expiration Date; and (iii) the Share Certificates (or a Book-Entry Confirmation) representing all tendered Shares, in proper form for transfer, in each case together with the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees (or, in the case of a book-entry delivery, an Agent's Message) and any other documents required by this Letter of Transmittal, must be received by the Depositary within three Nasdaq National Market trading days after the date of execution of such Notice of Guaranteed Delivery, all as provided in Section 3 of the Offer to Purchase. If Share Certificates are forwarded separately to the Depositary, a properly completed and duly executed Letter of Transmittal must accompany each such delivery. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY (INCLUDING, IN THE CASE OF BOOK ENTRY TRANSFER, BY BOOK-ENTRY CONFIRMATION). IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. All tendering stockholders, by execution of this Letter of Transmittal (or a facsimile hereof), waive any right to receive any notice of the acceptance of their Shares for payment. 3. INADEQUATE SPACE. If the space provided herein is inadequate, the certificate numbers and/or the number of Shares and any other required information should be listed on a separate signed schedule attached hereto. 4. PARTIAL TENDERS. (Not Applicable to Book-Entry Stockholders) If fewer than all the Shares evidenced by any Share Certificates submitted are to be tendered, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered". In such case, new Share Certificates for the Shares that were evidenced by your old Share Certificates, but were not tendered by you, will be sent to you, unless otherwise provided in the appropriate box on this Letter of Transmittal, as soon as practicable after the Expiration Date. All Shares represented by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 8 5. SIGNATURES ON LETTER OF TRANSMITTAL, STOCK POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the Share Certificate(s), without alteration, enlargement or any change whatsoever. If any of the Shares tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any of the tendered Shares are registered in different names on several Share Certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of certificates. If this Letter of Transmittal or any Share Certificates or stock powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and proper evidence satisfactory to the Purchaser of their authority so to act must be submitted. If this Letter of Transmittal is signed by the registered holder(s) of the Shares listed and transmitted hereby, no endorsements of Share Certificates or separate stock powers are required unless payment is to be made to or Share Certificates for Shares not tendered or not purchased are to be issued in the name of a person other than the registered holder(s). Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the certificate(s) listed, the Share Certificate(s) must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear on the certificate(s). Signatures on such certificates or stock powers must be guaranteed by an Eligible Institution. 6. STOCK TRANSFER TAXES. Except as otherwise provided in this Instruction 6, the Purchaser will pay any stock transfer taxes with respect to the transfer and sale of Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or if certificate(s) for Shares not tendered or accepted for payment are to be registered in the name of, any person other than the registered holder(s), or if tendered certificate(s) are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any stock transfer taxes (whether imposed on the registered holder(s) or such person) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes or an exemption therefrom, is submitted. Except as otherwise provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the certificate(s) listed in this Letter of Transmittal. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check is to be issued in the name of, and/or certificates for Shares not tendered or not accepted for payment are to be issued or returned to, a person other than the signer of this Letter of Transmittal or if a check and/or such certificates are to be returned to a person other than the person(s) signing this Letter of Transmittal or to an address other than that shown in this Letter of Transmittal, the appropriate boxes on this Letter of Transmittal must be completed. A Book-Entry Stockholder may request that Shares not accepted for payment be credited to such account maintained at the Book-Entry Transfer Facility as such Book-Entry Stockholder may designate under "Special Payment Instructions". If no such instructions are given, such Shares not accepted for payment will be returned by crediting the account at the Book-Entry Transfer Facility designated above. 8. WAIVER OF CONDITIONS. Subject to the terms and conditions of the Merger Agreement (as defined in the Offer to Purchase), the conditions of the Offer (other than the Minimum Condition (as defined in the Offer to Purchase)) may be waived by the Purchaser in whole or in part at any time and from time to time in its sole discretion. 9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal income tax law, a stockholder whose tendered Shares are accepted for payment is required to provide the Depositary with such stockholder's correct taxpayer identification number ("TIN") on Substitute Form W-9 below. If the Depositary is not provided with the correct TIN, the Internal Revenue Service may subject the stockholder or other payee to a $50 penalty. In addition, payments that are made to such stockholder or other payee with respect to Shares purchased pursuant to the Offer may be subject to 31% backup withholding. Certain stockholders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, the stockholder must submit a Form W-8, signed under penalties of perjury, attesting to that individual's exempt status. A Form W-8 can be obtained from the Depositary. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for more instructions. 9 If backup withholding applies, the Depositary is required to withhold 31% of any such payments made to the stockholder or other payee. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. The box in Part 3 of the Substitute Form W-9 may be checked if the tendering stockholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the box in Part 3 is checked, the stockholder or other payee must also complete the Certificate of Awaiting Taxpayer Identification Number below in order to avoid backup withholding. Notwithstanding that the box in Part 3 is checked and the Certificate of Awaiting Taxpayer Identification Number is completed, the Depositary will withhold 31% of all payments made prior to the time a properly certified TIN is provided to the Depositary. The stockholder is required to give the Depositary the TIN (e.g., social security number or employer identification number) of the record owner of the Shares or of the last transferee appearing on the transfers attached to, or endorsed on, the Shares. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. 10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions or requests for assistance may be directed to the Dealer Manager or the Information Agent at their respective addresses and telephone numbers set forth below. Additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may also be obtained from the Information Agent or the Dealer Manager or from brokers, dealers, commercial banks or trust companies. 11. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate representing Shares has been lost, destroyed or stolen, the stockholder should promptly notify the Depositary. The stockholder will then be instructed as to the steps that must be taken in order to replace the certificate. This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed certificates have been followed. 12. DIVIDENDS. Pursuant to the Merger Agreement, the Company, among other things, has agreed that it will not declare or pay dividends on, or make other distributions in respect of, the Shares. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE HEREOF), TOGETHER WITH SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER OR THE NOTICE OF GUARANTEED DELIVERY, AND ALL OTHER REQUIRED DOCUMENTS, MUST BE RECEIVED BY THE DEPOSITARY PRIOR TO THE EXPIRATION DATE. 10 - -------------------------------------------------------------------------------- PAYER'S NAME: EQUISERVE LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- SUBSTITUTE PART 1--PLEASE PROVIDE YOUR TIN IN THE BOX AT --------------------------------- FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. Social Security Number OR --------------------------------- Employer Identification Number ------------------------------------------------------------------------------------------- PART 2--CERTIFICATION--Under Penalties of Perjury, PART 3-- DEPARTMENT OF THE I Certify that: Awaiting TIN [ ] TREASURY INTERNAL REVENUE SERVICE (1) The number shown on this form is my correct Taxpayer Identification Number (or I am PAYER'S REQUEST FOR waiting for a number to be issued to me) and TAXPAYER IDENTIFICATION NUMBER (TIN) (2) I am not subject to backup withholding because (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. - ---------------------------------------------------------------------------------------------------------------------------
CERTIFICATE INSTRUCTIONS-- You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are currently subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out such item (2). SIGNATURE ___________________________________________________________ DATE , 1999 - -------------------------------------------------------------------------------- NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9 - -------------------------------------------------------------------------------- CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of all reportable payments made to me will be withheld. SIGNATURE _______________________________________ DATE ___________________ , 1999 - -------------------------------------------------------------------------------- 11 THE INFORMATION AGENT FOR THE OFFER IS: D.F. KING & CO., INC. 77 Water Street New York, New York 10005 Banks and Brokers Call Collect: (212) 269-5550 All Others Call Toll-Free: (800) 431-9646 THE DEALER MANAGER FOR THE OFFER IS: DONALDSON, LUFKIN & JENRETTE 277 Park Avenue New York, New York 10172 Call Collect: (212) 892-7700 September 29, 1999 EX-99.A.3 4 NOTICE OF GUARANTEED DELIVERY 1 NOTICE OF GUARANTEED DELIVERY TO TENDER SHARES OF COMMON STOCK OF LITCHFIELD FINANCIAL CORPORATION As set forth in Section 3 of the Offer to Purchase described below, this instrument or one substantially equivalent hereto must be used to accept the Offer (as defined below) if certificates for Shares (as defined below) are not immediately available or the certificates for Shares and all other required documents cannot be delivered to EquiServe Limited Partnership (the "Depositary") on or prior to the Expiration Date (as defined in Section 1 of the Offer to Purchase) or if the procedure for delivery by book-entry transfer cannot be completed on a timely basis. This instrument may be delivered by hand or transmitted by facsimile transmission or mailed to the Depositary. THE DEPOSITARY FOR THE OFFER IS: EQUISERVE LIMITED PARTNERSHIP By Hand: By Mail: By Overnight Courier Delivery: Securities Transfer & EquiServe Limited Partnership EquiServe Limited Partnership Reporting Services, Inc. Corporate Actions Corporate Actions c/o EquiServe Limited P.O. Box 9573 40 Campanelli Drive Partnership Boston, MA 02205-9573 Braintree, MA 02184 100 Williams Street, Galleria New York, NY 10038
Facsimile: (for Eligible Institutions Only) (781) 575-4826 Confirm by telephone: (781) 575-4816 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an Eligible Institution under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box in the Letter of Transmittal. THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED. 2 Ladies and Gentlemen: The undersigned hereby tender(s) to Lighthouse Acquisition Corp., a Massachusetts corporation, which is a wholly owned subsidiary of Textron Financial Corporation, a Delaware corporation ("TFC"), upon the terms and subject to the conditions set forth in the Offer to Purchase dated September 29, 1999 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"), receipt of which is hereby acknowledged, the number of shares of common stock, par value $.01 per share (the "Shares"), of Litchfield Financial Corporation, a Massachusetts corporation, pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Signature(s) ----------------------------------------------- Name(s) of Record Holders - ----------------------------------------------------------- Please Type or Print Number of Shares ------------------------------------------- Certificate Nos. (if Available) - ----------------------------------------------------------- - ----------------------------------------------------------- Dated , 1999 ------------------------ Address(es) ------------------------------------------------- - ------------------------------------------------------------ - ------------------------------------------------------------ Zip Code Area Code and Tel. No(s) ------------------------------------ Check box if Shares will be tendered by book-entry transfer: [ ] The Depository Trust Company Account Number ---------------------------------------------- GUARANTEE (NOT TO BE USED FOR SIGNATURE GUARANTEE) The undersigned, a firm which is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program, (a) represents that the above named person(s) "own(s)" the Shares tendered hereby within the meaning of Rule 14e-4 under the Securities Exchange Act of 1934, as amended ("Rule 14e-4"), (b) represents that such tender of Shares complies with Rule 14e-4 and (c) guarantees to deliver to the Depositary either the certificates evidencing all tendered Shares, in proper form for transfer, or to deliver Shares pursuant to the procedure for book-entry transfer into the Depositary's account at The Depository Trust Company (the "Book-Entry Transfer Facility"), in either case together with the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees or an Agent's Message (as defined in the Offer to Purchase) in the case of a book-entry delivery, and any other required documents, all within three Nasdaq National Market trading days after the date hereof. - ------------------------------------------------------------ Name of Firm - ------------------------------------------------------------ Address - ------------------------------------------------------------ Zip Code - ------------------------------------------------------------ Area Code and Tel. No - ------------------------------------------------------------ Authorized Signature Name -------------------------------------------------------- Please Type or Print Title ------------------------------------------------------- Dated , 1999 -------------------------------- NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS NOTICE. CERTIFICATES FOR SHARES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. EX-99.A.4 5 BROKER, DEALER LETTER 1 DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION 277 PARK AVENUE NEW YORK, NEW YORK 10172 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF LITCHFIELD FINANCIAL CORPORATION AT $24.50 NET PER SHARE BY LIGHTHOUSE ACQUISITION CORP., A WHOLLY OWNED SUBSIDIARY OF TEXTRON FINANCIAL CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, OCTOBER 27, 1999, UNLESS THE OFFER IS EXTENDED. September 29, 1999 TO BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER NOMINEES: We have been appointed by Lighthouse Acquisition Corp., a Massachusetts corporation (the "Purchaser"), which is a wholly owned subsidiary of Textron Financial Corporation, a Delaware corporation ("TFC"), to act as dealer manager in connection with the Purchaser's offer to purchase for cash all the outstanding shares of common stock, par value $.01 per share (the "Shares"), of Litchfield Financial Corporation, a Massachusetts corporation (the "Company"), at a purchase price of $24.50 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated September 29, 1999 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer") enclosed herewith. Holders of Shares whose certificates for such Shares (the "Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other required documents to EquiServe Limited Partnership (the "Depositary") prior to the Expiration Date (as defined in the Offer to Purchase), or who cannot complete the procedures for book-entry transfer on a timely basis, must tender their Shares according to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares registered in your name or in the name of your nominee. Enclosed herewith for your information and forwarding to your clients for whom you hold Shares registered in your name or in the name of your nominee are copies of the following documents: 1. THE OFFER TO PURCHASE. 2. THE LETTER OF TRANSMITTAL to tender Shares for your use and for the information of your clients. Facsimile copies of the Letter of Transmittal may be used to tender Shares. 3. THE NOTICE OF GUARANTEED DELIVERY for Shares to be used to accept the Offer if Share Certificates are not immediately available or if such certificates and all other required documents cannot be delivered to the Depositary by the Expiration Date or if the procedure for book-entry transfer cannot be completed by the Expiration Date. 2 4. THE LETTER TO STOCKHOLDERS of the Company from the Chairman of the Board and President and Chief Executive Officer of the Company, accompanied by the Company's Solicitation/Recommendation Statement on Schedule 14D-9, which includes the recommendation of the Board of Directors of the Company that stockholders accept the Offer and tender their Shares to the Purchaser pursuant to the Offer. 5. A printed form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer. 6. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 7. A return envelope addressed to the Depositary. YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, OCTOBER 27, 1999, UNLESS THE OFFER IS EXTENDED. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of September 22, 1999 (the "Merger Agreement"), by and among TFC, the Purchaser and the Company. The Merger Agreement provides, among other things, for the making of the Offer by the Purchaser, and further provides that, following the completion of the Offer, upon the terms and subject to the conditions of the Merger Agreement, and in accordance with the Massachusetts Business Corporation Law, the Purchaser will be merged with and into the Company (the "Merger"). Following the Merger, the Company will continue as the surviving corporation and become a wholly owned subsidiary of TFC, and the separate corporate existence of the Purchaser will cease. The Board of Directors of the Company has approved, by unanimous vote of the directors, the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger and determined that terms of the Offer and the Merger are fair to, and in the best interests of, the holders of the Shares and recommends that the holders of the Shares accept the Offer and tender their Shares to the Purchaser pursuant to the Offer. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PURSUANT TO THE OFFER PRIOR TO THE EXPIRATION DATE (AS DEFINED IN SECTION 1 OF THE OFFER TO PURCHASE) SUCH NUMBER OF SHARES WHICH CONSTITUTES MORE THAN 66 2/3% OF THE SHARES (DETERMINED ON A FULLY DILUTED BASIS) (THE "MINIMUM CONDITION"), AND (II) THE EXPIRATION OR TERMINATION OF ANY APPLICABLE WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED. In order to take advantage of the Offer, (i) a duly executed and properly completed Letter of Transmittal and any required signature guarantees, or an Agent's Message (as defined in the Offer to Purchase) in connection with a book-entry delivery of Shares, and other required documents should be sent to the Depositary, and (ii) either Share Certificates representing the tendered Shares should be delivered to the Depositary, or such Shares should be tendered by book-entry transfer into the Depositary's account maintained at the Book-Entry Transfer Facility (as described in the Offer to Purchase), all in accordance with the instructions set forth in the Letter of Transmittal and the Offer to Purchase. The Purchaser will not pay any commissions or fees to any broker, dealer or other person (other than the Dealer Manager, the Depositary and D.F. King & Co., Inc. (the "Information Agent") (as described in the Offer to Purchase)) for soliciting tenders of Shares pursuant to the Offer. The Purchaser will, however, upon request, reimburse you for customary clerical and mailing expenses incurred by you in forwarding any of the enclosed materials to your clients. The Purchaser will pay or cause to be paid any stock transfer taxes payable on the transfer of Shares to it, except as otherwise provided in Instruction 6 of the Letter of Transmittal. 2 3 Inquiries you may have with respect to the Offer should be addressed to the Information Agent or the undersigned, at the respective addresses and telephone numbers set forth on the back cover of the Offer to Purchase. Additional copies of the enclosed materials may be obtained from the Information Agent. Very truly yours, Donaldson, Lufkin & Jenrette Securities Corporation NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT OF THE PURCHASER, TFC, THE DEALER MANAGER, THE COMPANY, THE DEPOSITARY OR THE INFORMATION AGENT, OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN. 3 EX-99.A.5 6 LETTER TO CLIENTS 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF LITCHFIELD FINANCIAL CORPORATION AT $24.50 NET PER SHARE BY LIGHTHOUSE ACQUISITION CORP., A WHOLLY OWNED SUBSIDIARY OF TEXTRON FINANCIAL CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, OCTOBER 27, 1999, UNLESS THE OFFER IS EXTENDED. TO OUR CLIENTS: Enclosed for your consideration is an Offer to Purchase dated September 29, 1999 (the "Offer to Purchase"), and the related Letter of Transmittal relating to an offer by Lighthouse Acquisition Corp., a Massachusetts corporation (the "Purchaser"), which is a wholly owned subsidiary of Textron Financial Corporation, a Delaware corporation ("TFC"), to purchase all of the outstanding shares of common stock, par value $.01 per share (the "Shares"), of Litchfield Financial Corporation, a Massachusetts corporation (the "Company"), at a purchase price of $24.50 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). Holders of Shares whose certificates for such Shares (the "Share Certificates") are not immediately available or who cannot deliver their Share Certificates and all other required documents to EquiServe Limited Partnership, (the "Depositary") prior to the Expiration Date (as defined in the Offer to Purchase), or who cannot complete the procedures for book-entry transfer on a timely basis, must tender their Shares according to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. WE ARE THE HOLDER OF RECORD OF SHARES HELD BY US FOR YOUR ACCOUNT. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. We request instructions as to whether you wish to have us tender on your behalf any or all of such Shares held by us for your account, pursuant to the terms and subject to the conditions set forth in the Offer to Purchase. Your attention is directed to the following: 1. The tender price is $24.50 per share, net to the seller in cash, without interest thereon. 2. The Offer is made for all of the outstanding Shares. 3. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of September 22, 1999 (as may be amended from time to time, the "Merger Agreement"), by and among TFC, the Purchaser and the Company. The Merger Agreement provides, among other things, that, subject to the terms and conditions of the Merger Agreement, subsequent to the consummation of the Offer, the Purchaser will merge with and into the Company (the "Merger"). At the effective time of the Merger (the "Effective Time,") each Share issued and outstanding immediately prior to the Merger (other than Shares held in the treasury of the Company and Shares, if any, owned by the Purchaser, TFC or any direct or indirect subsidiary of TFC or of the Company and other than Shares, if any, held by stockholders who have not voted in favor of the Merger Agreement or consented to in writing and have timely delivered to the Company demand for appraisal of such Shares in accordance with the 2 Massachusetts Business Corporation Law) shall be cancelled, extinguished, and converted automatically into the right to receive $24.50 in cash, without interest. 4. The Board of Directors of the Company has approved, by unanimous vote of the directors, the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger, and determined that the terms of the Offer and the Merger are fair to, and in the best interests of, the holders of Shares and recommends that holders of Shares accept the Offer and tender their Shares to the Purchaser pursuant to the Offer. 5. The Offer and withdrawal rights will expire at 12:00 Midnight, New York City time, on Wednesday, October 27, 1999, unless the Offer is extended. 6. Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in Instruction 6 of the Letter of Transmittal, stock transfer taxes on the purchase of Shares pursuant to the Offer. 7. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn pursuant to the Offer prior to the expiration of the Offer such number of Shares which constitutes more than 66 2/3% of the Shares (determined on a fully-diluted basis) and (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Offer is being made solely by the Offer to Purchase and the related Letter of Transmittal and is being made to all holders of Shares. The Purchaser is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If the Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, the Purchaser will make a good faith effort to comply with any such state statute. If, after such good faith effort, the Purchaser cannot comply with such state statute, the Offer will not be made to, nor will tenders be accepted from or on behalf of, the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser by Donaldson Lufkin & Jenrette Securities Corporation, the Dealer Manager for the Offer, or one or more registered brokers or dealers that are licensed under the laws of such jurisdiction. If you wish to have us tender any or all of the Shares held by us for your account, please instruct us by completing, executing and returning to us the instruction form contained in this letter. If you authorize a tender of your Shares, all such Shares will be tendered unless otherwise specified in such instruction form. Your instructions should be forwarded to us in ample time to permit us to submit a tender on your behalf prior to the expiration of the Offer. 2 3 INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF LITCHFIELD FINANCIAL CORPORATION BY LIGHTHOUSE ACQUISITION CORP., A WHOLLY OWNED SUBSIDIARY OF TEXTRON FINANCIAL CORPORATION The undersigned acknowledge(s) receipt of your letter enclosing the Offer to Purchase dated September 29, 1999 (the "Offer to Purchase") and the related Letter of Transmittal pursuant to an offer by Lighthouse Acquisition Corp., a Massachusetts corporation, which is a wholly owned subsidiary of Textron Financial Corporation, a Delaware corporation, to purchase all of the outstanding shares of common stock, par value $.01 per share (the "Shares"), of Litchfield Financial Corporation, a Massachusetts corporation, at a purchase price of $24.50 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal. This will instruct you to tender the number of Shares indicated below (or, if no number is indicated below, all Shares which are held by you for the account of the undersigned), upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal furnished to the undersigned. Number of Shares to be Tendered* --------------------- Shares Date: ------------------------------------------- - --------------- * Unless otherwise indicated, it will be assumed that all of your Shares held by us for your account are to be tendered. SIGN HERE --------------------------------------------------- Signature(s) --------------------------------------------------- Please Print Name(s) --------------------------------------------------- --------------------------------------------------- Address --------------------------------------------------- Area Code and Telephone Number --------------------------------------------------- Tax Identification or Social Security Number 3 EX-99.A.6 7 W-9 TAX GUIDELINES 1 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER FOR THE PAYEE (YOU) TO GIVE THE PAYER. -- Social security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employee identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer. All "Section" references are to the Internal Revenue Code of 1986, as amended. "IRS" is the Internal Revenue Service. - --------------------------------------------------------- - ---------------------------------------------------------
FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF -- 1. Individual The individual 2. Two or more individuals The actual owner of (joint account) the account or, if combined funds, the first individual on the account(1) 3. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 4. a. The usual revocable The grantor- savings trust account trustee(1) (grantor is also trustee) b. So-called trust account The actual owner(1) that is not a legal or valid trust under state law 5. Sole proprietorship The owner(3) - --------------------------------------------------------- FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER IDENTIFICATION NUMBER OF -- - --------------------------------------------------------- 6. Sole proprietorship The owner(3) 7. A valid trust, estate, or The legal entity(4) pension trust 8. Corporate The corporation 9. Association, club, The organization religious, charitable, educational, or other tax-exempt organization account 10. Partnership The partnership 11. A broker or registered The broker or nominee nominee 12. Account with the Department The public entity of Agriculture in the name of a public entity (such as a state or local government, school district, or prison) that receives agricultural program payments
- --------------------------------------------------------- - --------------------------------------------------------- (1) List first and circle the name of the person whose number you furnish. If only one person on a joint account has a social security number, that person's number must be furnished. (2) Circle the minor's name and furnish the minor's social security number. (3) You must show your individual name, but you may also enter your business or "doing business as" name. You may use either your social security number or your employer identification number (if you have one). (4) List first and circle the name of the legal trust, estate, or pension trust. (Do not furnish the taxpayer identification number of the personal representative or trustee unless the legal entity itself is not designated in the account title.) NOTE:If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER OF SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Card, at the local Social Administration office, or Form SS-4, Application for Employer Identification Number, by calling 1 (800) TAX-FORM, and apply for a number. If you have applied for a TIN check the box in Part 3 of the Form W-9. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from withholding include: - An organization exempt from tax under Section 501(a), an individual retirement account (IRA), or a custodial account under Section 403(b)(7), if the account satisfies the requirements of Section 401(f)(2). - The United States or a state thereof, the District of Columbia, a possession of the United States, or a political subdivision or wholly-owned agency or instrumentality of any one or more of the foregoing. - An international organization or any agency or instrumentality thereof. - A foreign government and any political subdivision, agency or instrumentality thereof. Payees that may be exempt from backup withholding include: - A corporation. - A financial institution. - A dealer in securities or commodities required to register in the United States, the District of Columbia, or a possession of the United States. - A real estate investment trust. - A common trust fund operated by a bank under Section 584(a). - An entity registered at all times during the tax year under the Investment Company Act of 1940. - A middleman known in the investment community as a nominee or who is listed in the most recent publication of the American Society of Corporate Secretaries, Inc., Nominee List. - A futures commission merchant registered with the Commodity Futures Trading Commission. - A foreign central bank of issue. Payments of dividends and patronage dividends generally exempt from backup withholding include: - Payments to nonresident aliens subject to withholding under Section 1441. - Payments to partnerships not engaged in a trade or business in the United States and that have at least one nonresident alien partner. - Payments of patronage dividends not paid in money. - Payments made by certain foreign organizations. - Section 404(k) payments made by an ESOP. Payments of interest generally exempt from backup withholding include: - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under Section 852). - Payments described in Section 6049(b)(5) to nonresident aliens. - Payments on tax-free covenant bonds under Section 1451. - Payments made by certain foreign organizations. - Mortgage interest paid to you. Certain payments, other than payments of interest, dividends, and patronage dividends, that are exempt from information reporting are also exempt from backup withholding. For details, see the regulations under sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050A and 6050N. Exempt payees described above must file Form W-9 or a substitute Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" IN PART 2 OF THE FORM, AND RETURN IT TO THE PAYER. IF THE PAYMENTS ARE OF INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO SIGN AND DATE THE FORM. PRIVACY ACT NOTICE. -- Section 6109 requires you to provide your correct taxpayer identification number to payers, who must report the payments to tje IRS. The IRS uses the number for identification purposes and may also provide this information to various government agencies for tax enforcement or litigation purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to payer. Certain penalties may also apply. PENALTIES (1) FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make a false statement with no reasonable basis that results in no backup withholding, you are subject to a $500 penalty. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.A.7 8 SUMMARY ADVERTISEMENT 1 This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares (as defined below). The Offer (as defined below) is made solely by the Offer to Purchase dated September 29, 1999 and the related Letter of Transmittal (and any amendments thereto) and is being made to all holders of Shares. The Purchaser (as defined below) is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If the Purchaser becomes aware of any state where the making of the Offer is prohibited, the Purchaser will make a good faith effort to comply with any such statute. If, after such good faith effort, the Purchaser cannot comply with any such statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In those jurisdictions where the securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser by Donaldson, Lufkin & Jenrette Securities Corporation or one or more registered brokers or dealers licensed under the laws of such jurisdictions. Notice of Offer to Purchase for Cash All Outstanding Shares of Common Stock of Litchfield Financial Corporation at $24.50 Net Per Share by Lighthouse Acquisition Corp., a wholly owned subsidiary of Textron Financial Corporation Lighthouse Acquisition Corp., a Massachusetts corporation (the "Purchaser") and a wholly-owned subsidiary of Textron Financial Corporation, a Delaware corporation (the "Parent"), hereby offers to purchase for cash all of the outstanding shares of common stock, par value $0.01 per share (the "Shares"), of Litchfield Financial Corporation, a Massachusetts corporation (the "Company"), at a purchase price of $24.50 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase dated September 29, 1999 (the "Offer to Purchase") and in the related Letter of Transmittal (which, as amended from time to time, together constitute the "Offer"). THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON WEDNESDAY, OCTOBER 27, 1999, UNLESS THE OFFER IS EXTENDED. The offer is conditioned upon, among other things, (1) there being validly tendered and not properly withdrawn prior to the expiration of the offer two-thirds of the shares of common stock of Litchfield Financial Corporation (determined on a fully-diluted basis) (the "Minimum Condition") and (2) the expiration or termination of any waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of September 22, 1999 (as amended from time to time, the "Merger Agreement"), among the Parent, the Purchaser and the Company. The Merger Agreement provides, among other things, for the making of the Offer by the Purchaser, and further provides that, following the completion of the Offer, upon the terms and subject to the conditions of the Merger Agreement and the Massachusetts Business Corporation Law ("MBCL"), the Purchaser will be merged with and into the Company (the "Merger"). The purpose of the Offer is to acquire control of, and the entire equity interest in, the Company. Following the consummation of the Offer and after satisfaction or waiver of all conditions to the Merger set forth in the Merger Agreement, the Purchaser intends to acquire the remaining equity interest in the Company not acquired by the Offer by consummating the Merger. At the effective time of the Merger (the "Effective Time"), each Share issued and 2 outstanding immediately prior to the Effective Time (other than (1) any Shares held by Parent, the Purchaser, any wholly-owned subsidiary of Parent or the Purchaser, in the treasury of the Company or by any wholly-owned subsidiary of the Company, which Shares, by virtue of the Merger, shall be cancelled and shall cease to exist with no payment being made with respect thereto, and (2) Shares, if any, held by stockholders who have not voted in favor of the Merger Agreement or consented thereto in writing and have timely delivered to the Company demand for appraisal of such Shares in accordance with the MBCL) will, by virtue of the Merger and without any action on the part of the holders be cancelled, extinguished and converted into the right to receive $24.50 in cash payable to the holder thereof, and without interest, upon surrender of the certificate formerly representing such Share. The Merger Agreement is more fully described in Section 11 of the Offer to Purchase. The Board of Directors of the Company has unanimously determined that the Merger Agreement and the transactions contemplated thereby, including each of the Offer and the Merger, are fair to, and in the best interests of the stockholders of, the Company and recommends that all stockholders accept the Offer and tender all of their Shares to the Purchaser. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not properly withdrawn as, if and when the Purchaser gives oral or written notice to EquiServe Limited Partnership (the "Depositary") of the Purchaser's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payments from the Purchaser and transmitting such payments to stockholders whose Shares have been accepted for payment. Under no circumstances will interest on the Purchase Price for Shares be paid, regardless of any extension of the Offer or any delay in making such payment. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates representing such Shares (the "Share Certificates") or timely confirmation of a book-entry transfer of such Shares into the Depositary's account at the Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in Section 3 of the Offer to Purchase, (ii) the Letter of Transmittal (or a facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined in Section 2 of the Offer to Purchase) in connection with a book-entry transfer and (iii) any other documents required by the Letter of Transmittal. Subject to the provisions of the Merger Agreement and the applicable rules and regulations of the Securities and Exchange Commission (the "Commission"), the Purchaser reserves the right, in its sole discretion, to waive any or all conditions to the Offer (other than the Minimum Condition) and to make any other changes in the terms and conditions to the Offer. Subject to the provisions of the Merger Agreement and the applicable rules and regulations of the Commission, if by the Expiration Date any or all of such Offer conditions have not been satisfied, the Purchaser reserves the right (but shall not be obligated) to (i) terminate the Offer and return all tendered Shares to tendering stockholders, (ii) waive such unsatisfied conditions (other than the Minimum Condition) and purchase all Shares validly tendered or (iii) extend the Offer and, subject to the terms of the Offer (including the rights of stockholders to withdraw their Shares), retain the Shares which have been tendered, until the termination of the Offer, as extended. Subject to the applicable rules and regulations of the Commission and the terms of the Merger Agreement, the Purchaser expressly reserves the right, in its sole discretion, at any time and from time to time, and regardless of whether or not 3 any of the events set forth in Section 15 of the Offer to Purchase shall have occurred or shall have been determined by the Purchaser to have occurred, to (i) extend the period of time during which the Offer is open and thereby delay acceptance for payment of, and the payment for, any Shares, by giving oral or written notice of such extension to the Depositary and (ii) amend the Offer in any respect by giving oral or written notice of such amendment to the Depositary. Any extension, delay, termination, waiver or amendment will be followed as promptly as practicable by public announcement thereof to be made no later than 9:00 A.M., New York City time, on the next business day after the previously scheduled Expiration Date. During any such extension, all Shares previously tendered and not properly withdrawn will remain subject to the Offer, subject to the rights of a tendering stockholder to withdraw such stockholder's Shares. The term "Expiration Date" means 12:00 Midnight, New York City time, on Wednesday, October 27, 1999, unless and until the Purchaser, in its discretion (but subject to the terms and conditions of the Merger Agreement), shall have extended the period during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by the Purchaser, shall expire. Tenders of Shares made pursuant to the Offer are irrevocable, except that Shares tendered pursuant to the Offer may be withdrawn at any time on or prior to the Expiration Date and, unless theretofore accepted for payment by the Purchaser pursuant to the Offer, may also be withdrawn at any time after November 27, 1999. For a withdrawal to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase. Any notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If Share Certificates to be withdrawn have been delivered or otherwise identified to the Depositary, then prior to the physical release of such certificates, the name of the registered holder (if different from the tendering stockholder) and the serial numbers shown on such certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in Section 3 of the Offer to Purchase) unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer as set forth in Section 3 of the Offer to Purchase, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares, in which case a notice of withdrawal will be effective if delivered to the Depositary by any method of delivery described in the second sentence of this paragraph. All questions as to the form and validity (including time of receipt) of any notice of withdrawal will be determined by the Purchaser, in its sole discretion, whose determination will be final and binding. None of the Purchaser, the Parent, any of their affiliates, successors or assigns, the Dealer Manager, the Depositary, the Information Agent or any person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give such notification. Withdrawal of Shares may not be rescinded. Any Shares properly withdrawn will thereafter be deemed not to have been validly tendered for purposes of the Offer. However, withdrawn Shares may be re-tendered at any time prior to the Expiration Date by following one of the procedures described in Section 3 of the Offer to Purchase. The information required to be disclosed by Rule 14d-6(e)(1)(vii) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. 4 The Company has provided the Purchaser with the Company's stockholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase and the related Letter of Transmittal and other relevant materials will be mailed by the Purchaser to record holders of Shares and furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. The Offer to purchase and the related Letter of Transmittal contain important information which should be read carefully before any decision is made with respect to the Offer. Questions and requests for assistance may be directed to the Dealer Manager or the Information Agent as set forth below. Requests for copies of the Offer to Purchase and the related Letter of Transmittal and all other tender offer materials may be directed to the Information Agent or the above-described brokers, dealers, commercial banks and trust companies, and copies will be furnished promptly at the Purchaser's expense. The Purchaser will not pay any fees or commissions to any broker or dealer or any other person (other than the Dealer Manager and the Information Agent) for soliciting tenders of Shares pursuant to the Offer. The Information Agent for the Offer is: D.F. King & Co., Inc. 77 Water Street New York, New York 10005 Banks and Brokers Call Collect: (212) 269-5550 All Others Call Toll Free: (800) 431-9646 The Dealer Manager for the Offer is: Donaldson, Lufkin & Jenrette 277 Park Avenue New York, New York 10172 (Call Collect) (212) 892-7700 September 29, 1999 EX-99.A.8 9 PRESS RELEASE 1 TFC TEXTRON THE FIRST CHOICE TEXTRON FINANCIAL CORPORATION 40 Westminster Street Subsidiary of Textron Inc. Providence, Rhode Island 02903 (401) 621-4200 INVESTOR CONTACTS: Mary Lovejoy -- Textron Vice President, Communications and Investor Relations 401-457-6009 Ronald E. Rabidou -- Litchfield Chief Financial Officer 413-458-1000, ext. 160 MEDIA CONTACT: David Wisen -- Textron Financial Vice President, Corporate Development 401-621-4480 TEXTRON FINANCIAL CORPORATION AGREES TO ACQUIRE LITCHFIELD FINANCIAL CORPORATION SPECIALIZED COMMERCIAL FINANCE COMPANY TO SIGNIFICANTLY ENHANCE TEXTRON FINANCIAL'S RESORT AND RECREATION PORTFOLIO PROVIDENCE, RHODE ISLAND AND WILLIAMSTOWN, MASSACHUSETTS -- SEPTEMBER 23, 1999 -- Textron Financial Corporation and Litchfield Corporation (NASDAQ:LTCH) today announced the signing of a definitive merger agreement whereby Textron Financial Corporation will acquire the entire outstanding capital stock of Litchfield for $24.50 per share in a cash transaction valued at approximately $183 million. The Boards of Directors of Textron Inc. and Litchfield have approved the agreement. Litchfield is a commercial finance company specializing in receivables-based finance agreements for the vacation ownership (timeshare) industry and other commercial finance niches. With estimated fiscal 1999 revenues of $51 million and over $550 million in managed finance receivables, Litchfield has a ten-year track record of over 20% annual earnings growth. 2 - more - Textron Financial to Acquire Litchfield Financial / 2 This agreement provides for an all-cash tender offer by Textron Financial for all of Litchfield's outstanding shares of common stock, commencing within five business days. The tender is expected to close by late October, 1999, unless extended, and is subject to the valid tender of at least 66.66% of the outstanding Litchfield shares on a fully diluted basis, and to customary government filings and other customary conditions. "Litchfield bolsters Textron Financial Corporation's competitive position in one of our fastest-growing core niches -- resort and recreation finance. It also complements our existing portfolio by adding other niches consistent with TFC's strategy. We have known Litchfield management for a long time. Their track record and culture mirror our own, and we are eager to have this highly successful organization join our family of businesses," remarked Stephen A. Giliotti, Textron Financial Corporation Chairman, President and CEO. Richard A. Stratton, President and CEO of Litchfield commented, "This is a great combination of skills, culture and resources. Our timeshare and factoring lending groups will complement Textron Financial's resort and recreation finance and factoring businesses, which focus on slightly different market segments. Our land receivables, tax lien and financial services businesses will provide Textron Financial new opportunities in growing markets. And by improving our access to lower cost capital, the combination will enable us to expand the growth of our core businesses." Mr. Stratton will remain President of Litchfield and will also become Senior Vice President - Operations of Textron Financial Corporation. The tender offer for shares of Litchfield common stock will be made only through definitive tender offer documents, which will be filed with the Securities and Exchange Commission and mailed to the shareholders of Litchfield. Following completion of the tender offer, it is contemplated that the holders of any then-outstanding shares of common stock will receive, in a second-step merger, the same $24.50 per share cash consideration as holders will receive in the tender offer. - more - 3 Textron Financial to Acquire Litchfield Financial / 3 With 140 employees, Litchfield has offices in Williamstown, Massachusetts; Atlanta, Georgia; Denver, Colorado; and Scottsdale, Arizona. The company's customers consist of developers of vacation ownership (timeshare) properties and rural land, small finance companies, and municipalities selling real estate tax liens. More information is available at www.ltchfld.com. With over $5 billion in managed receivables and a twenty-year history of record earnings, Textron Financial Corporation is a diversified commercial finance company with three groups of products and services: term financing for Aircraft, Equipment and Golf (including the financing of Textron products); revolving credit arrangements; and specialty finance. Other services include syndications, asset management, portfolio servicing and insurance brokerage. More information is available at www.tfc.textron.com. Textron Financial Corporation is a subsidiary of Textron Inc. (NYSE: TXT), a $10 billion, global, multi-industry company with market-leading operations in Aircraft, Automotive, Industrial and Finance. Textron has a workforce of over 64,000 employees and major manufacturing facilities in 23 countries. Textron is among Fortune magazine's "America's Most Admired Companies." XXX EX-99.C 10 AGREEMENT AND PLAN OF MERGER 1 EXECUTION COPY ---------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Among TEXTRON FINANCIAL CORPORATION, LIGHTHOUSE ACQUISITION CORP. and LITCHFIELD FINANCIAL CORPORATION Dated as of September 22, 1999 ---------------------------------------------------------- 2 TABLE OF CONTENTS
Page ---- ARTICLE I THE OFFER.................................................................................1 SECTION 1.1 The Offer....................................................................1 SECTION 1.2 Company Action...............................................................2 ARTICLE II THE MERGER................................................................................3 SECTION 2.1 The Merger...................................................................3 SECTION 2.2 Closing; Effective Time......................................................4 SECTION 2.3 Effects of the Merger........................................................4 SECTION 2.4 Articles of Organization; By-Laws............................................4 SECTION 2.5 Directors and Officers.......................................................4 SECTION 2.6 Conversion of Securities.....................................................4 SECTION 2.7 Treatment of Options.........................................................5 SECTION 2.8 Dissenting Shares............................................................5 SECTION 2.9 Surrender of Shares; Stock Transfer Books....................................6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY.............................................7 SECTION 3.1 Organization and Qualification; Subsidiaries.................................7 SECTION 3.2 Articles of Organization and By-Laws.........................................7 SECTION 3.3 Capitalization...............................................................8 SECTION 3.4 Authority Relative to This Agreement.........................................9 SECTION 3.5 No Conflict; Required Filings and Consents...................................9 SECTION 3.6 Compliance..................................................................10 SECTION 3.7 SEC Filings; Financial Statements...........................................10 SECTION 3.8 Absence of Certain Changes or Events........................................11 SECTION 3.9 Absence of Litigation.......................................................12 SECTION 3.10 Employee Benefit Plans.....................................................12 SECTION 3.11 Tax Matters................................................................13 SECTION 3.12 Offer Documents; Proxy Statement...........................................14 SECTION 3.13 Environmental Matters......................................................15 SECTION 3.14 Real Estate Matters........................................................17 SECTION 3.15 Loans; Investments.........................................................18 SECTION 3.16 Licenses...................................................................21 SECTION 3.17 Allowance for Possible Loan Losses.........................................21 SECTION 3.18 Brokers....................................................................22 SECTION 3.19 Sole Representations and Warranties........................................22
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Page ---- ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER...................................22 SECTION 4.1 Corporate Organization......................................................22 SECTION 4.2 Authority Relative to This Agreement........................................22 SECTION 4.3 No Conflict; Required Filings and Consents..................................23 SECTION 4.4 Offer Documents; Proxy Statement............................................23 SECTION 4.5 Brokers.....................................................................24 SECTION 4.6 Funds.......................................................................24 ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER...................................................24 SECTION 5.1 Conduct of Business of the Company Pending the Merger.......................24 ARTICLE VI ADDITIONAL AGREEMENTS....................................................................27 SECTION 6.1 Stockholders Meeting........................................................27 SECTION 6.2 Proxy Statement.............................................................27 SECTION 6.3 Company Board Representation; Section 14(f).................................28 SECTION 6.4 Access to Information; Confidentiality......................................29 SECTION 6.5 No Solicitation of Transactions.............................................29 SECTION 6.6 Employee Benefits Matters...................................................30 SECTION 6.7 Directors' and Officers' Indemnification and Insurance......................31 SECTION 6.8 Intentionally Omitted.......................................................32 SECTION 6.9 Notification of Certain Matters.............................................32 SECTION 6.10 Further Action; Commercially Reasonable Efforts............................33 SECTION 6.11 Public Announcements.......................................................34 SECTION 6.12 Disposition of Litigation..................................................34 ARTICLE VII CONDITIONS OF MERGER.....................................................................34 SECTION 7.1 Conditions to Obligation of Each Party to Effect the Merger.................34 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER........................................................35 SECTION 8.1 Termination.................................................................35 SECTION 8.2 Effect of Termination.......................................................36 SECTION 8.3 Fees and Expenses...........................................................36 SECTION 8.4 Amendment...................................................................38
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Page ---- SECTION 8.5 Waiver......................................................................38 ARTICLE IX GENERAL PROVISIONS.......................................................................38 SECTION 9.1 Non-Survival of Representations, Warranties and Agreements..................38 SECTION 9.2 Notices.....................................................................38 SECTION 9.3 Certain Definitions.........................................................39 SECTION 9.4 Severability................................................................40 SECTION 9.5 Entire Agreement; Assignment................................................40 SECTION 9.6 Parties in Interest.........................................................41 SECTION 9.7 Governing Law...............................................................41 SECTION 9.8 Headings....................................................................41 SECTION 9.9 Counterparts................................................................41 SECTION 9.10 Specific Performance.......................................................41
Annex A - Offer Conditions iii 5 AGREEMENT AND PLAN OF MERGER, dated as of September 22, 1999 (the "Agreement"), among TEXTRON FINANCIAL CORPORATION, a Delaware corporation ("Parent"), LIGHTHOUSE ACQUISITION CORP., a Massachusetts corporation and a wholly owned subsidiary of Parent ("Purchaser"), and LITCHFIELD FINANCIAL CORPORATION, a Massachusetts corporation (the "Company"). WHEREAS, the Board of Directors of the Company has determined that it is in the best interests of the Company and the stockholders of the Company to enter into this Agreement with Parent and Purchaser, providing for the merger (the "Merger") of Purchaser with the Company in accordance with the Massachusetts Business Corporation Law ("MBCL"), upon the terms and subject to the conditions set forth herein; and WHEREAS, the Board of Directors of Parent and Purchaser have each approved the Merger of Purchaser with the Company in accordance with the MBCL upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Purchaser and the Company hereby agree as follows: ARTICLE I THE OFFER SECTION 1.1 The Offer. (a) Provided that this Agreement shall not have been terminated in accordance with Section 8.1 and no event shall have occurred and no circumstance shall exist which would result in a failure to satisfy any of the conditions or events set forth in Annex A hereto (the "Offer Conditions"), Purchaser shall, as soon as reasonably practicable after the date hereof (and in any event within five business days from the date of initial public announcement of the execution hereof), commence an offer (the "Offer") to purchase for cash all of the issued and outstanding shares of Common Stock, par value $0.01 per share (referred to herein as either the "Shares" or "Company Common Stock"), of the Company at a price of $24.50 per Share, net to the seller in cash. The obligation of Purchaser to accept for payment Shares tendered pursuant to the Offer shall be subject only to the satisfaction or waiver by Purchaser of the Offer Conditions. Purchaser expressly reserves the right, in its sole discretion, to waive any such condition (other than the Minimum Condition as defined in the Offer Conditions) and make any other changes in the terms and conditions of the Offer, provided that, unless previously approved by the Company in writing, no change may be made which changes the Minimum Condition or decreases the price per Share payable in the Offer, changes the form of consideration payable in the Offer (other than by adding consideration), reduces the maximum number of Shares to be purchased in the Offer, or amends the terms or Offer Conditions in a manner which, in the Company's reasonable judgment, is adverse to the holders of the Shares or the Company, or which imposes conditions or terms to the Offer in addition to those set forth herein. Purchaser covenants and agrees that, subject to the terms and conditions of this Agreement, including but not limited to the Offer Conditions, it will accept for payment and pay for Shares as soon as it is permitted to do so under applicable law; provided that 6 2 Purchaser shall have the right, in its sole discretion, to extend the Offer for up to five business days, notwithstanding the prior satisfaction of the Offer, solely if necessary in order to attempt to satisfy the requirements of Section 82 of the MBCL. It is agreed that the Offer Conditions are for the benefit of Purchaser and may be asserted by Purchaser regardless of the circumstances giving rise to any such condition (except for any action or inaction by Purchaser or Parent constituting a breach of this Agreement) or, except with respect to the Minimum Condition, may be waived by Purchaser, in whole or in part at any time and from time to time, in its sole discretion. Subject to the terms and conditions of the Offer, Parent and Purchaser will each use reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate the Offer. (b) As soon as reasonably practicable on the date the Offer is commenced, Purchaser shall file a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") with respect to the Offer with the Securities and Exchange Commission (the "SEC"). The Schedule 14D-1 shall contain an Offer to Purchase and forms of the related letter of transmittal (which Schedule 14D-1, Offer to Purchase and other documents, together with any supplements or amendments thereto, are referred to herein collectively as the "Offer Documents"). Parent and Purchaser agree that the Company and its counsel shall be given an opportunity to review the Schedule 14D-1 before it is filed with the SEC. Parent, Purchaser and the Company each agrees promptly to correct any information provided by it for use in the Offer Documents that shall have become false or misleading in any material respect, and Parent and Purchaser further agree to take all steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. SECTION 1.2 Company Action. (a) The Company hereby approves of and consents to the Offer and represents and warrants that: (i) its Board of Directors, at a meeting duly called and held on September 22, 1999, has unanimously (A) determined that this Agreement and the transactions contemplated hereby, including the Offer and the Merger, are advisable and are fair to and in the best interests of the holders of Shares and the Company, (B) approved this Agreement and the transactions contemplated hereby, including each of the Offer and the Merger, and (C) resolved to recommend that the stockholders of the Company accept the Offer, tender their Shares to Purchaser thereunder and approve this Agreement and the transactions contemplated hereby (it being understood that, notwithstanding anything in this Agreement to the contrary, if the Company's Board of Directors by majority vote shall have determined in good faith, based upon the advice of outside counsel to the Company, that failure to modify or withdraw its recommendation would constitute a breach of the Board's fiduciary duty under applicable law, the Board of Directors may so modify or withdraw its recommendation); and (ii) CIBC World Markets (the "Financial Advisor") has delivered to the Board of Directors of the Company its written opinion that, subject to the limitations and qualifications stated therein, the consideration to be received by holders of Shares, other than Parent and Purchaser, pursuant to the Offer and the Merger is fair to such holders from a financial point of view. The Company has been authorized by the Financial Advisor to permit, subject to prior review by such Financial Advisor, the inclusion of such fairness opinion (or a reference thereto with the consent of the Financial Adviser) in the Schedule 14D-9 referred to below and the Proxy Statement referred to in Section 3.12. The Company hereby consents to the inclusion in the Offer 7 3 Documents of the recommendations of the Company's Board of Directors described in this Section 1.2(a). (b) The Company shall file with the SEC, contemporaneously with the commencement of the Offer pursuant to Section 1.1, a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, the "Schedule 14D-9"), containing the recommendations of the Company's Board of Directors described in Section 1.2(a)(i) and shall promptly mail the Schedule 14D-9 to the stockholders of the Company. The Schedule 14D-9 and all amendments thereto will comply in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder. The Company, Parent and Purchaser each agrees promptly to correct any information provided by it for use in the Schedule 14D-9 that shall have become false or misleading in any material respect, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the SEC and disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. (c) In connection with the Offer, if requested by Purchaser, the Company shall promptly furnish Purchaser with mailing labels, security position listings, any non-objecting beneficial owner lists and any available listings or computer files containing the names and addresses of the record holders of Shares, each as of a recent date, and shall promptly furnish Purchaser with such additional information (including but not limited to updated lists of stockholders, mailing labels, security position listings and non-objecting beneficial owner lists) and such other assistance as Parent, Purchaser or their agents may reasonably require in communicating the Offer to the record and beneficial holders of Shares. Subject to the requirements of law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer and the Merger, Parent, Purchaser and each of their affiliates and associates shall hold in confidence the information contained in any of such lists, labels or additional information and, if this Agreement is terminated, shall promptly deliver to the Company all copies and extracts of such information then in their possession or under their control. ARTICLE II THE MERGER SECTION 2.1 The Merger. Upon the terms and subject to the conditions of this Agreement and in accordance with the MBCL, at the Effective Time (as defined in Section 2.2), Purchaser shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Purchaser shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). At Parent's election, any direct or indirect subsidiary of Parent other than Purchaser may be merged with and into the Company instead of the Purchaser. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election. 8 4 SECTION 2.2 Closing; Effective Time. Subject to the provisions of Article VII, the closing of the Merger (the "Closing") shall take place in New York City at the offices of Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, New York, as soon as practicable but in no event later than the first business day after the satisfaction or waiver of the conditions set forth in Article VII, or at such other place or at such other date as Parent and the Company may mutually agree. The date on which the Closing actually occurs is hereinafter referred to as the "Closing Date." At the Closing, the parties hereto shall cause the Merger to be consummated by filing this Agreement or articles of merger (the "Certificate of Merger") with the Secretary of State of the Commonwealth of Massachusetts, in such form as required by and executed in accordance with the relevant provisions of the MBCL (the date and time of the filing of the Certificate of Merger with the Secretary of State of the Commonwealth of Massachusetts (or such later time as is specified in the Certificate of Merger) being the "Effective Time"). SECTION 2.3 Effects of the Merger. The Merger shall have the effects set forth in the applicable provisions of the MBCL. Without limiting the generality of the foregoing and subject thereto, at the Effective Time all the property, rights, privileges, immunities, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Purchaser shall become the debts, liabilities and duties of the Surviving Corporation. SECTION 2.4 Articles of Organization; By-Laws. (a) At the Effective Time and without any further action on the part of the Company and Purchaser, the Amended and Restated Articles of Organization of the Company (as amended, the "Articles of Organization"), as in effect immediately prior to the Effective Time, shall be the articles of organization of the Surviving Corporation until thereafter and further amended as provided therein and under the MBCL. (b) At the Effective Time and without any further action on the part of the Company and Purchaser, the By-Laws of Purchaser, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation and thereafter may be amended or repealed in accordance with their terms or the Articles of Organization of the Purchaser and as provided by law. SECTION 2.5 Directors and Officers. The directors of Purchaser immediately prior to the Effective Time shall be the initial directors of the Surviving Corporation, each to hold office in accordance with the Articles of Organization and By-Laws of the Surviving Corporation (directors of the Company shall tender their resignations effective upon the Effective Time), and the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation, in each case until their respective successors are duly elected or appointed (as the case may be) and qualified. Nothing herein shall be deemed to limit the ability of Parent to cause the Surviving Corporation to elect or appoint different or additional officers. SECTION 2.6 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the following securities: 9 5 (a) Each Share issued and outstanding immediately prior to the Effective Time (other than any Shares to be canceled pursuant to Section 2.6(b) and any Dissenting Shares (as defined in Section 2.8(a))) shall be canceled, extinguished and converted into the right to receive $24.50 in cash or any higher price that may be paid pursuant to the Offer (the "Merger Consideration") payable to the holder thereof, without interest, upon surrender of the certificate formerly representing such Share in the manner provided in Section 2.9, less any required withholding taxes. (b) Each share of Company Common Stock held in the treasury of the Company and each Share owned by Parent, Purchaser or any other direct or indirect subsidiary of Parent or of the Company, in each case immediately prior to the Effective Time, shall be canceled and retired without any conversion thereof and no payment or distribution shall be made with respect thereto. (c) Each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and become one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation. SECTION 2.7 Treatment of Options. Immediately prior to the Effective Time, each outstanding stock option and any related stock appreciation right granted to employees and non-employee directors of the Company and its subsidiaries (together, an "Option"), whether or not then exercisable or vested, shall be canceled by the Company, and the holder thereof shall be entitled to receive at the Effective Time or as soon as practicable thereafter from the Company in consideration for such cancellation an amount in cash equal to the product of (a) the number of Shares previously subject to such Option and (b) the excess, if any, of the Merger Consideration over the exercise price per Share previously subject to such Option (such payment to be net of applicable withholding taxes). SECTION 2.8 Dissenting Shares. (a) Notwithstanding anything in this Agreement to the contrary, shares of Company Common Stock that are issued and outstanding immediately prior to the Effective Time and which are held by stockholders who have not voted in favor of or consented to the Merger and shall have delivered a written demand for appraisal of such shares of Company Common Stock in the time and manner provided in Section 89 of the MBCL and shall not have failed to perfect or shall not have effectively withdrawn or lost their rights to appraisal and payment under the MBCL (the "Dissenting Shares") shall not be converted into the right to receive the Merger Consideration, but shall be entitled to receive the consideration as shall be determined pursuant to Sections 89 and 90 of the MBCL; provided, however, that if such holder shall have failed to perfect or shall have effectively withdrawn or lost his, her or its right to appraisal and payment under the MBCL, such holder's shares of Company Common Stock shall thereupon be deemed to have been converted, at the Effective Time, into the right to receive the Merger Consideration set forth in Section 2.6(a) of this Agreement, without any interest thereon. (b) The Company shall give Parent (i) prompt notice of any demands for appraisal pursuant to Section 85 of the MBCL received by the Company, withdrawals of such demands, and any other instruments served pursuant to the MBCL and received by the Company and (ii) the 10 6 opportunity to direct all negotiations and proceedings with respect to demands for appraisal under the MBCL. The Company shall not, except with the prior written consent of Parent, make any payment with respect to any such demands for appraisal or offer to settle or settle any such demands. SECTION 2.9 Surrender of Shares; Stock Transfer Books. (a) Prior to the Effective Time, Purchaser shall designate a bank or trust company to act as agent for the holders of Shares in connection with the Merger (the "Paying Agent") to receive the Merger Consideration to which holders of Shares shall become entitled pursuant to Section 2.6(a). When and as needed, Parent or Purchaser will make available to the Paying Agent sufficient funds to make all payments pursuant to Section 2.9(b). Such funds shall be invested by the Paying Agent as directed by Purchaser or, after the Effective Time, the Surviving Corporation, provided that such investments shall be in obligations of or guaranteed by the United States of America, in commercial paper obligations rated A-1 or P-1 or better by Moody's Investors Service, Inc. or Standard & Poor's Corporation, respectively, or in certificates of deposit, bank repurchase agreements or banker's acceptances of commercial banks with capital exceeding $500 million. Any net profit resulting from, or interest or income produced by, such investments will be payable to the Surviving Corporation or Parent, as Parent directs. (b) Promptly after the Effective Time, the Surviving Corporation shall cause to be mailed to each record holder, as of the Effective Time, of an outstanding certificate or certificates which immediately prior to the Effective Time represented Shares (the "Certificates"), a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent) and instructions for use in effecting the surrender of the Certificates for payment of the Merger Consideration therefor. Upon surrender to the Paying Agent of a Certificate, together with such letter of transmittal, duly completed and validly executed in accordance with the instructions thereto, and such other documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in exchange therefor the Merger Consideration for each Share formerly represented by such Certificate, and such Certificate shall then be canceled. No interest shall be paid or accrued for the benefit of holders of the Certificates on the Merger Consideration payable upon the surrender of the Certificates. If payment of the Merger Consideration is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or shall be otherwise in proper form for transfer and that the person requesting such payment shall have paid any transfer and other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered or shall have established to the satisfaction of the Surviving Corporation that such tax either has been paid or is not applicable. (c) At any time following one year after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds (including any interest received with respect thereto) which had been made available to the Paying Agent and which have not been disbursed to holders of Certificates, and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat or other similar laws) only as general creditors thereof with respect to the Merger Consideration payable upon due surrender of their Certificates. Notwithstanding the foregoing, neither the Surviving Corporation nor the Paying 11 7 Agent shall be liable to any holder of a Certificate for Merger Consideration delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. (d) At the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of shares of Company Common Stock on the records of the Company. From and after the Effective Time, the holders of Certificates evidencing ownership of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided for herein or by applicable law. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent and Purchaser that, except as set forth in the disclosure schedule delivered by the Company to Purchaser prior to the date of execution of this Agreement (the "Company Disclosure Schedule"): SECTION 3.1 Organization and Qualification; Subsidiaries. Except as set forth in Section 3.1 of the Company Disclosure Schedule, each of the Company and each of its subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power and authority and any necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals is not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect (as defined below). Each of the Company and each of its subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned, leased or operated by it or the nature of its activities makes such qualification or licensing necessary, except for such failures to be so duly qualified or licensed and in good standing as are not reasonably likely, individually or in the aggregate, to have a Material Adverse Effect. When used in connection with the Company or any of its subsidiaries, the term "Material Adverse Effect" means any change or effect that would (i) be materially adverse to the business, financial condition or results of operations of the Company and its subsidiaries taken as a whole or (ii) prevent or materially delay the consummation of the Offer or the Merger; provided, however, that a decline in the price of the Company's Common Stock as traded on the Nasdaq National Market as a result of changes in the accounting practices or business practices set forth in Section 5.1 of the Company Disclosure Schedule shall not be deemed to have a Material Adverse Effect unless it is otherwise a result of an event or occurrence that is materially adverse to the business, financial condition or results of operations of the Company and its subsidiaries taken as a whole. SECTION 3.2 Articles of Organization and By-Laws. The Company has heretofore furnished to Parent a complete and correct copy of the Articles of Organization and the By-Laws of the Company as currently in effect. Such Articles of Organization and By-Laws are in full force and 12 8 effect and no other organizational documents are applicable to or binding upon the Company. The Company is not in violation of any of the provisions of its Articles of Organization or By-Laws. SECTION 3.3 Capitalization. The authorized capital stock of the Company consists of 12,000,000 shares of Company Common Stock and 1,000,000 shares of Preferred Stock, par value $0.01 per share ("Company Preferred Stock"). As of September 22, 1999, (i) 6,984,601 shares of Company Common Stock were issued and outstanding, all of which were duly authorized, validly issued, fully paid and nonassessable and were issued free of preemptive (or similar) rights, (ii) no shares of Company Common Stock were held in the treasury of the Company and (iii) an aggregate of 913,720 shares of Company Common Stock were reserved for issuance and issuable upon or otherwise deliverable in connection with the exercise of outstanding Options issued pursuant to the Company Plans (as defined in Section 3.10). Since September 22, 1999, no options to purchase shares of Company Common Stock have been granted and no shares of Company Common Stock have been issued except for shares issued pursuant to the exercise of Options outstanding as of September 22, 1999. As of the date hereof, no shares of Company Preferred Stock are issued and outstanding. Except (i) as set forth above or (ii) as a result of the exercise of Options outstanding as of September 22, 1999, there are outstanding (a) no shares of capital stock or other voting securities of the Company, (b) no securities of the Company convertible into or exchangeable for shares of capital stock or voting securities of the Company, (c) no options or other rights to acquire from the Company, and no obligation of the Company to issue, any capital stock, voting securities or securities convertible into or exchangeable for capital stock or voting securities of the Company and (d) no equity equivalents, interests in the ownership or earnings of the Company or other similar rights (collectively, "Company Securities"). Except as set forth in Section 3.3 of the Company Disclosure Schedule, there are no outstanding obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any Company Securities. Except as set forth in Section 3.3 of the Company Disclosure Schedule, there are no other options, calls, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or any of its subsidiaries to which the Company or any of its subsidiaries is a party. All shares of Company Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, shall be duly authorized, validly issued, fully paid and nonassessable and free of preemptive (or similar) rights. Except as set forth in Section 3.3 of the Company Disclosure Schedule, there are no outstanding contractual obligations of the Company or any of its subsidiaries to repurchase, redeem or otherwise acquire any shares of Company Common Stock or the capital stock of any subsidiary or to provide funds to or make any investment (in the form of a loan, capital contribution or otherwise) in any such subsidiary or any other entity. Except as set forth in Section 3.3 of the Company Disclosure Schedule, each of the outstanding shares of capital stock of each of the Company's subsidiaries is duly authorized, validly issued, fully paid and nonassessable and all such shares are owned by the Company or another wholly owned subsidiary of the Company and are owned free and clear of all security interests, liens, claims, pledges, agreements, limitations in voting rights, charges or other encumbrances of any nature whatsoever, except where the failure to own such shares free and clear is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. The Company has delivered to Parent prior to the date hereof a list of the subsidiaries and associated entities of the Company which evidences, among other things, the percentage of capital stock or other equity interests owned by the Company, directly or indirectly, 13 9 in such subsidiaries or associated entities. No entity in which the Company owns, directly or indirectly, less than a 50% equity interest is, individually or when taken together with all such other entities, material to the business of the Company and its subsidiaries taken as a whole. SECTION 3.4 Authority Relative to This Agreement. The Company has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated (other than, with respect to the Merger, the approval of this Agreement by the holders of two-thirds of the outstanding shares of Company Common Stock if and to the extent required by applicable law, and the filing of appropriate merger documents as required by the MBCL). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery hereof by Parent and Purchaser, constitutes a legal, valid and binding obligation of the Company enforceable against the Company in accordance with its terms. The Board of Directors of the Company has approved this Agreement and the transactions contemplated hereby (including but not limited to the Offer and the Merger) so as to render inapplicable hereto and thereto the limitation on business combinations contained in Chapter 110D and Chapter 110F, Section 1, of the Massachusetts Corporation-Related Laws. As a result of the foregoing actions, subject to Section 82 of the MBCL, the only vote required to authorize the Merger is the affirmative vote of two-thirds of the outstanding Shares. SECTION 3.5 No Conflict; Required Filings and Consents. (a) Except as set forth in Section 3.5(a) of the Company Disclosure Schedule, the execution, delivery and performance of this Agreement by the Company do not and will not: (i) conflict with or violate the Articles of Organization or By-Laws of the Company or the equivalent organizational documents of any of its subsidiaries; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the properties or assets of the Company or any of its subsidiaries pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (b) Except as set forth in Section 3.5(b) of the Company Disclosure Schedule, the execution, delivery and performance of this Agreement by the Company and the consummation of 14 10 the Merger by the Company do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, domestic or foreign, or any other person, except for (i) applicable requirements, if any, of the Exchange Act and the rules and regulations promulgated thereunder, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), or other foreign filings or approvals, state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the MBCL and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to (x) prevent or materially delay the Company from performing its obligations under this Agreement or (y) have a Material Adverse Effect. (c) if the adoption of this Agreement and the approval of the Merger by the stockholders of the Company is required by the MBCL, such adoption and approval may be accomplished in accordance with the Company's Articles of Organization and the MBCL solely by the affirmative vote of two-thirds of the outstanding Shares. SECTION 3.6 Compliance. Neither the Company nor any of its subsidiaries is in conflict with, or in default or violation of, (i) any law, rule, regulation, order, judgment or decree applicable to the Company or any of its subsidiaries or by which its or any of their respective properties are bound or affected, or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or its or any of their respective properties are bound or affected, except, in the case of each of clauses (i) and (ii), for any such conflicts, defaults or violations which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. SECTION 3.7 SEC Filings; Financial Statements. (a) The Company and, to the extent applicable, each of its then or current subsidiaries, has filed all forms, reports, statements and documents required to be filed with the SEC since January 1, 1996 (collectively, the "SEC Reports"), each of which has complied in all material respects with the applicable requirements of the Securities Act of 1933, as amended (the "Securities Act"), and the rules and regulations promulgated thereunder, or the Exchange Act, and the rules and regulations promulgated thereunder, each as in effect on the date so filed. None of the SEC Reports (including but not limited to any financial statements or schedules included or incorporated by reference therein) contained when filed, or (except to the extent revised or superseded by a subsequent filing with the SEC) contains, any untrue statement of a material fact or omitted or omits to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) Each of the audited and unaudited consolidated financial statements of the Company (including any related notes thereto) included in its Annual Reports on Form 10-K for each of the two fiscal years ended December 31, 1997 and 1998 filed with the Commission has been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and fairly presents 15 11 the consolidated financial position of the Company and its subsidiaries at the respective date thereof and the consolidated results of its operations and changes in cash flows for the periods indicated. (c) Except as and to the extent set forth on the consolidated balance sheet of the Company and its subsidiaries at December 31, 1998, including the notes thereto, neither the Company nor any of its subsidiaries has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) which would be required to be reflected on a balance sheet or in the notes thereto prepared in accordance with generally accepted accounting principles, except for liabilities or obligations incurred since December 31, 1998 (i) in the ordinary course of business consistent with past practice and (ii) which are not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect. (d) The Company has heretofore furnished or made available to Parent a complete and correct copy of any amendments or modifications which have not yet been filed with the SEC to agreements, documents or other instruments which previously had been filed by the Company with the SEC pursuant to the Securities Act and the rules and regulations promulgated thereunder or the Exchange Act and the rules and regulations promulgated thereunder. SECTION 3.8 Absence of Certain Changes or Events. Since December 31, 1998, except as contemplated by this Agreement or disclosed in the SEC Reports filed and publicly available prior to the date of this Agreement, the Company and its subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and, since such date, there has not been: (i) any changes in the business, financial condition or results of operations of the Company or any of its subsidiaries having or reasonably likely to have a Material Adverse Effect; (ii) any damage, destruction or loss (whether or not covered by insurance) with respect to any assets of the Company or any of its subsidiaries which is reasonably likely, individually or in the aggregate, to have a Material Adverse Effect; (iii) any material change by the Company in its accounting methods, principles or practices; (iv) any revaluation by the Company of any of its material assets, including but not limited to writing down the value of inventory or writing off notes or accounts receivable other than in the ordinary course of business; (v) any entry by the Company or any of its subsidiaries into any commitment or transactions material to the Company and its subsidiaries taken as a whole (other than commitments or transactions entered into in the ordinary course of business); (vi) any declaration, setting aside or payment of any dividends or distributions in respect of the Shares; (vii) any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option (including without limitation the granting of stock options, stock appreciation rights, performance awards, or restricted stock awards), stock purchase or other employee benefit plan or agreement or arrangement, or any other increase in the compensation payable or to become payable to any present or former directors, officers or key employees of the Company or any of its subsidiaries, except for increases in base compensation in the ordinary course of business consistent with past practice, or pursuant to any employment, consulting or severance agreement or arrangement previously entered into with any such present or former directors, officers or key employees; or (viii) any other action which, if it had been taken after the date hereof, would have required the consent of Parent under Section 5.1 (except for the actions described in Sections 5.1(e)(iii), 5.1(e)(iv), 5.1(h), 5.1(l) and 5.1(p) hereof). 16 12 SECTION 3.9 Absence of Litigation. Except as disclosed in the SEC Reports filed and publicly available prior to the date of this Agreement, there are no suits, claims, actions, proceedings or investigations pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries, or any properties or rights of the Company or any of its subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign, that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect. As of the date hereof, neither the Company nor any of its subsidiaries nor any of their respective properties is or are subject to any order, writ, judgment, injunction, decree, determination or award having, or which, insofar as can be reasonably foreseen, is reasonably likely to have a Material Adverse Effect. SECTION 3.10 Employee Benefit Plans. Except (i) as set forth in the SEC Reports filed and publicly available prior to the date of this Agreement, (ii) as set forth in Section 3.10 of the Company Disclosure Schedule, or (iii) with respect to subsections (b) through (g) of this Section 3.10, as is not, individually or in the aggregate, reasonably likely to have a Material Adverse Effect: (a) Section 3.10 of the Company Disclosure Schedule contains a true and complete list of each "employee benefit plan" (within the meaning of section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), including, without limitation, multiemployer plans within the meaning of ERISA section 3(37)), stock purchase, stock option, severance, employment, change-in-control, fringe benefit, collective bargaining, bonus, incentive, deferred compensation and all other employee benefit plans, agreements, programs, policies or other arrangements, whether or not subject to ERISA (including any funding mechanism therefor now in effect), whether formal or informal, oral or written, legally binding or not, under which any employee or former employee of the Company or any of its subsidiaries, has any present or future right to benefits or under which the Company or any of its subsidiaries has any present or future liability. All such plans, agreements, programs, policies and arrangements shall be collectively referred to as the "Company Plans". (b) With respect to each Company Plan, the Company has delivered or made available to Parent a current, accurate and complete copy (or, to the extent no such copy exists, an accurate description) thereof and, to the extent applicable: (i) any related trust agreement or other funding instrument; (ii) the most recent determination letter, if applicable; (iii) any summary plan description and other written communications by the Company or any of its subsidiaries to their employees concerning the extent of the benefits provided under a Company Plan; and (iv) for the three most recent years (A) the Form 5500 and attached schedules, (B) audited financial statements and (C) actuarial valuation reports. (c) (i) Each Company Plan has been established and administered in accordance with its terms, and in compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the "Code"), and other applicable laws, rules and regulations; (ii) each Company Plan which is intended to be qualified within the meaning of Code section 401(a) has received a favorable determination letter as to its qualification, and nothing has occurred, whether by action or failure to act, that would cause the revocation of such 17 13 determination letter; (iii) no event has occurred and no condition exists that would subject the Company or any of its subsidiaries, either directly or by reason of their affiliation with any member of their "Controlled Group" (defined as any organization which is a member of a controlled group of organizations within the meaning of Code sections 414(b), (c), (m) or (o)), to any tax, fine, lien or penalty imposed by ERISA, the Code or other applicable laws, rules and regulations; (iv) for each Company Plan with respect to which a Form 5500 has been filed, no material change has occurred with respect to the matters covered by the most recent Form since the date thereof; and (v) no "reportable event" (as such term is defined in ERISA section 4043), "prohibited transaction" (as such term is defined in ERISA section 406 and Code section 4975) or "accumulated funding deficiency" (as such term is defined in ERISA section 302 and Code section 412 (whether or not waived)) has occurred with respect to any Company Plan. (d) With respect to each of the Company Plans that is not a multiemployer plan within the meaning of section 4001(a)(3) of ERISA but is subject to Title IV of ERISA, as of the Effective Time, the assets of each such Company Plan are at least equal in value to the present value of the accrued benefits (vested and unvested) of the participants in such Company Plan on a termination basis, based on the actuarial methods and assumptions indicated in the most recent actuarial valuation reports. (e) With respect to any multiemployer plan (within the meaning of ERISA section 4001(a)(3)): (i) none of the Company, any of its subsidiaries or any member of their Controlled Group has incurred any withdrawal liability under Title IV of ERISA or would be subject to such liability if, as of the Effective Time, the Company, any of its subsidiaries or any member of their Controlled Group were to engage in a complete withdrawal (as defined in ERISA section 4203) or partial withdrawal (as defined in ERISA section 4205) from any such multiemployer plan; and (ii) no multiemployer plan to which the Company, any of its subsidiaries or any member of their Controlled Group has any liabilities or contributes, is in reorganization or insolvent (as those terms are defined in ERISA sections 4241 and 4245, respectively). (f) With respect to any Company Plan, (i) no actions, suits or claims (other than routine claims for benefits in the ordinary course) are pending or, to the knowledge of the Company, threatened, and (ii) no facts or circumstances exist, to the knowledge of the Company, that are likely to give rise to any such actions, suits or claims. (g) No Company Plan exists that could result in the payment to any present or former employee of the Company or any of its subsidiaries of any money or other property or accelerate or provide any other rights or benefits to any present or former employee of the Company or any of its subsidiaries as a result of the transaction contemplated by this Agreement, whether or not such payment would constitute a parachute payment within the meaning of Code section 280G. SECTION 3.11 Tax Matters. The Company and each of its subsidiaries, and any consolidated, combined, unitary or aggregate group for tax purposes of which the Company or any 18 14 of its subsidiaries is or has been a member has timely filed all Tax Returns required to be filed by it in the manner provided by law, has paid all Taxes (including interest and penalties) owed (whether or not shown on any Tax Returns) other than Taxes that (i) are being contested in good faith, (ii) have not been finally determined and (iii) for which an adequate reserve has been provided in its financial statements according to generally accepted accounting principles. All such Tax Returns were true, correct and complete in all material respects. No claim has been made in writing by any Taxing authority in a jurisdiction where any of the Company or its Subsidiaries does not file Tax Returns that it is or may be subject to taxation by that jurisdiction. Except as has been disclosed to Parent in Section 3.11 of the Company Disclosure Schedule: (i) no material claim for unpaid Taxes has become a lien or encumbrance of any kind against the property of the Company or any of its subsidiaries or is being asserted against the Company or any of its subsidiaries; (ii) as of the date hereof there are no audits or disputes for Taxes upon the Company or any of its subsidiaries; and (iii) none of the payments required by this Agreement would be non-deductible under Code Section 162(m). Proper and accurate amounts have been withheld by the Company and its subsidiaries from their employees in compliance with the tax withholding provisions of applicable federal, state and local laws and have been paid over to the appropriate taxing authorities. None of the Company and its subsidiaries has filed a consent under Code Section 341(f) concerning collapsible corporations. None of the Company and its subsidiaries has been required to include in income any adjustment pursuant to Code Section 481 (or any similar provision of state, local or foreign tax law) by reason of a voluntary change in accounting method initiated by the Company or any of its subsidiaries, and, to the Company's best knowledge, the IRS has not initiated or proposed any such adjustment or change in accounting method. Except as set forth in Section 3.11 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries (i) has been a member of an affiliated group filing consolidated federal income tax return (other than a group the common parent of which was the Company), (ii) is a party to a Tax allocation or Tax sharing agreement (other than an agreement solely among members of a group the common parent of which is the Company), or (iii) has any liability for the Taxes of any person (other than any of the Company or its subsidiaries) under Treasury Regulation section 1.1502-6 (or any similar provision of state, local or foreign law), as a transferee or successor, by contract or otherwise. As used herein, "Taxes" shall mean any taxes of any kind, including but not limited to those on or measured by or referred to as income, gross receipts, capital, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, value added, property or windfall profits taxes, customs, duties or similar fees, assessments or charges of any kind whatsoever, together with any interest and any penalties, additions to tax or additional amounts imposed by any governmental authority, domestic or foreign. As used herein, "Tax Return" shall mean any return, report or statement required to be filed with any governmental authority with respect to Taxes, including any schedule or attachment thereto or amendment thereof. SECTION 3.12 Offer Documents; Proxy Statement. Neither the Schedule 14D-9, nor any of the information supplied by the Company for inclusion in the Offer Documents, shall, at the respective times such Schedule 14D-9, the Offer Documents or any amendments or supplements thereto are filed with the SEC or are first published, sent or given to stockholders, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Neither the proxy statement to be sent to the 19 15 stockholders of the Company in connection with the Stockholders Meeting (as defined in Section 6.1) or the information statement to be sent to such stockholders, as appropriate (such proxy statement or information statement, as amended or supplemented, is herein referred to as the "Proxy Statement"), shall, at the date the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to stockholders and at the time of the Stockholders Meeting and at the Effective Time, be false or misleading with respect to any material fact, or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to any information supplied by Parent or Purchaser or any of their respective representatives which is contained in the Schedule 14D-9 or the Proxy Statement. The Schedule 14D-9 and the Proxy Statement will comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. SECTION 3.13 Environmental Matters. (a) Except as disclosed in SEC Reports filed and publicly available prior to the date of this Agreement and to the extent that the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy), individually or in the aggregate, is not reasonably likely to have a Material Adverse Effect: (i) (A) the Company and its subsidiaries are, and within the period of all applicable statutes of limitation have been, in compliance with all applicable Environmental Laws; and (B) the Company and each of its subsidiaries believes that each of them will, and will not incur material expense in excess of the amounts reflected in the Company's financial statements and capital budgets to, timely attain or maintain compliance with any Environmental Laws applicable to any of their current operations or properties or to any of their planned operations over the next three years; (ii) (A) the Company and its subsidiaries hold all Environmental Permits (each of which is in full force and effect) required for any of their current operations and for any property owned, leased, or otherwise operated by any of them, and are, and within the period of all applicable statutes of limitation have been, in compliance with all such Environmental Permits; and (B) neither the Company nor any of its subsidiaries has knowledge that over the next three years: any of their Environmental Permits will not be, or will entail material expense to be, timely renewed or complied with; any additional Environmental Permits required of any of them for current operations or for any property owned, leased, or otherwise operated by any of them, or for any of their planned operations, will not be timely granted or complied with; or any transfer or renewal of, or reapplication for, any Environmental Permit required as a result of the Merger will not be, timely effected; (iii) no review by, or approval of, any Governmental Authority or other person is required under any Environmental Law in connection with the execution or delivery of this Agreement or the consummation of the transactions contemplated hereby; 20 16 (iv) neither the Company nor any of its subsidiaries has received any Environmental Claim (as hereinafter defined) against any of them, and neither the Company nor any of its subsidiaries has knowledge of any such Environmental Claim being threatened; (v) Hazardous Materials are not present on any property owned, leased, or operated by the Company or any of its subsidiaries, that is reasonably likely to form the basis of any Environmental Claim against any of them; and neither the Company nor any of its subsidiaries has reason to believe that Hazardous Materials are present on any other property that is reasonably likely to form the basis of any Environmental Claim against any of them; (vi) neither the Company nor any of its subsidiaries has knowledge of any material Environment Claim pending or threatened, or of the presence or suspected presence of any Hazardous Materials that is reasonably likely to form the basis of any Environmental Claim, in any case against any person or entity (including without limitation any predecessor of the Company or any of its subsidiaries) whose liability the Company or any of its subsidiaries has or may have retained or assumed either contractually or by operation of law or against any real or personal property which the Company or any of its subsidiaries formerly owned, leased, or operated, in whole or in part; and (vii) the Company has informed the Parent and the Purchaser of: all material facts which the Company or any of its subsidiaries reasonably believes could form the basis of a material Environmental Claim against the Company or any of its subsidiaries arising out of the non-compliance or alleged non-compliance with any Environmental Law, or the presence or suspected presence of Hazardous Materials at any location; all material costs the Company reasonably expects it and any of its subsidiaries to incur to comply with Environmental Laws during the next three years; and all material costs the Company and any of its subsidiaries expect to incur for ongoing, and reasonably anticipated, investigation and remediation of Hazardous Materials (including, without limitation, any payments to resolve any threatened or asserted Environmental Claim for investigation and remediation costs). (b) For purposes of this Agreement, the terms below shall have the following meanings: "Environmental Claim" means any claim, demand, action, suit, complaint, proceeding, directive, investigation, lien, demand letter, or notice (written or oral) of noncompliance, violation, or liability, by any person or entity asserting liability or potential liability (including without limitation liability or potential liability for enforcement, investigatory costs, cleanup costs, governmental response costs, natural resource damages, property damage, personal injury, fines or penalties) arising out of, based on or resulting from (i) the presence, discharge, emission, release or threatened release of any Hazardous Materials at any location, (ii) circumstances forming the basis of any violation or alleged violation of any Environmental Laws or Environmental Permits, or (iii) otherwise relating to obligations or liabilities under any Environmental Law. 21 17 "Environmental Laws" means any and all laws, rules, orders, regulations, statutes, ordinances, guidelines, codes, decrees, or other legally enforceable requirement (including, without limitation, common law) of any foreign government, the United States, or any state, local, municipal or other governmental authority, regulating, relating to or imposing liability or standards of conduct concerning protection of human health as affected by the environment or Hazardous Materials (including without limitation employee health and safety) or the environment (including without limitation indoor air, ambient air, surface water, groundwater, land surface, subsurface strata, or plant or animal species). "Environmental Permits" means all permits, licenses, registrations, approvals, exemptions and other filings with or authorizations by any Governmental Authority under any Environmental Law. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity (including, without limitation, a court) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Materials" means all hazardous or toxic substances, wastes, materials or chemicals, petroleum (including crude oil or any fraction thereof), petroleum products, asbestos, asbestos-containing materials, pollutants, contaminants, radioactivity, electromagnetic fields and all other materials, whether or not defined as such, that are regulated pursuant to any Environmental Laws or that could result in liability under any applicable Environmental Laws. SECTION 3.14 Real Estate Matters. (a) Except as set forth in Section 3.14 of the Company Disclosure Schedule, the Company or its subsidiaries has good, valid, and, in the case of Owned Properties (as defined below), marketable fee title to: (i) all of the material real property and interests in real property owned by the Company or its subsidiaries and used by the Company or its subsidiaries in the conduct of their business, except for properties hereafter sold or otherwise disposed of in the ordinary course of business (the "Owned Properties"), and (ii) all of the material leasehold estates in all real properties leased by the Company or its subsidiaries, except leasehold interests hereafter terminated in the ordinary course of business (the "Leased Properties"; the Owned Properties and Leased Properties being sometimes referred to herein as the "Real Properties"), in each case free and clear of all mortgages, liens, security interests, easements, covenants, rights-of-way, subleases and other similar restrictions and encumbrances ("Encumbrances"), except for Encumbrances which, (i) individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect or (ii) are disclosed in Section 3.14(a) of the Company Disclosure Schedule. (b) Except as disclosed in Section 3.14 of the Company Disclosure Schedule, and except to the extent that the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy), individually or in the aggregate, are not reasonably likely to have a Material Adverse Effect: (i) each of the agreements by which the Company has obtained a leasehold interest in each Leased Property (individually, a "Lease" and collectively, the "Leases") is in full force and effect in accordance with its respective terms and the Company or its subsidiary is the holder of the 22 18 lessee's or tenant's interest thereunder; to the knowledge of the Company, there exists no default under any Lease and no circumstance exists which, with the giving of notice, the passage of time or both, is reasonably likely to result in such a default; the Company and its subsidiaries have complied with and timely performed all conditions, covenants, undertakings and obligations on their parts to be complied with or performed under each of the Leases; the Company and its subsidiaries have paid all rents and other charges to the extent due and payable under the Leases; (ii) there are no leases, subleases, licenses, concessions or any other contracts or agreements granting to any person or entity other than the Company or any of its subsidiaries any right to the possession, use, occupancy or enjoyment of any Real Property or any portion thereof; (iii) the current operation and use of the Real Properties does not violate any statute, law, regulation, rule, ordinance, permit, requirement, order or decree now in effect; (iv) the use being made of each Real Property at present is in conformity with the certificate of occupancy issued for such Real Property; (v) there are no existing, or to the knowledge of the Company, threatened, condemnation or eminent domain proceedings (or proceedings in lieu thereof) affecting the Real Properties or any portion thereof and (vi) no default or breach exists under any of the covenants, conditions, restrictions, rights-of-way, or easements, if any, affecting all or any portion of a Real Property, which are to be performed or complied with by the Company or any of its subsidiaries. (c) Neither the Company nor any of its subsidiaries is obligated under or bound by any option, right of first refusal, purchase contract, or other contractual right to sell or dispose of any Owned Property or any portions thereof or interests therein which property, portions and interests, individually or in the aggregate, are material to the Company and its subsidiaries. SECTION 3.15 Loans; Investments. (a) The following terms shall have the meaning ascribed to them below: (i) "Investor" means any person or entity who has acquired a Loan from the Company or any of its subsidiaries, other than the Parent or any of its subsidiaries. (ii) "Investor Requirements" means any outstanding contractual, legal and regulatory obligation of the Company or any of its subsidiaries to any Investor, including but not limited to, the representations, warranties and covenants made by the Company or any of its subsidiaries to any Investor. (iii) "Loan" means any loan or lease at any time held, serviced or sold by the Company or any of its subsidiaries to the extent that the Company or any of its subsidiaries could have any liability, obligation or duties with respect thereto. (iv) "Loan Documents" means the note, mortgage, deed of trust, security agreement, or other instrument securing the note and the related documents for each Loan. (v) "Mortgage Loan" shall mean a Loan secured by a mortgage. (vi) "Serviced Loans" means all Loans serviced by the Company or its subsidiaries for its own account or for others. 23 19 (vii) "Servicing Requirements" means prudent practice and industry standards together with any contractual, legal or regulatory obligation of the Company or any of its subsidiaries relating to the Serviced Loans. (b) Except as would not have a material adverse effect on the Company's portfolio of Loans, the Loan Documents evidencing each Loan (other than Serviced Loans serviced for the account of others that have never been owned by the Company or its subsidiaries) that is currently outstanding constitute the legal, valid and binding obligations of the parties thereto and are enforceable against such parties in accordance with their terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the rights of lending institutions or creditors generally and by general equitable principles. Expect as would not have a material adverse effect on the Company's portfolio of Loans, no Loan is subject to any legally enforceable right of rescission, set-off, counterclaim or defense, including the defense of usury or, to the knowledge of the Company, lack of legal capacity of any borrower or guarantor, nor will the operation of any of the terms of any Loan, or the exercise of any legally enforceable right thereunder, render any Loan or any of the Loan Documents unenforceable, in whole or in part, or subject to any right of rescission, setoff, counterclaim or defense, including the defense of usury or, to the knowledge of the Company, lack of legal capacity of any borrower or guarantor, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect to any Loan for which there is any recourse against, or responsibility or exposure of, the Company or any of its subsidiaries. (c) Except as would not have a material adverse effect on the Company's portfolio of Loans, the Loan Documents for each Loan (other than Serviced Loans serviced for the account of others that have never been owned by the Company or its subsidiaries) have been duly executed and recorded, or are in the process of being recorded, and are in due and proper form. Except as would not have a material adverse effect on the Company's portfolio of Loans, the Company has at all times maintained the Loan Documents in all material respects in accordance with Investor Requirements, Servicing Requirements and otherwise in accordance with all legal and regulatory requirements and contractual obligations applicable to the Company and its subsidiaries. (d) Except as would not have a material adverse effect on the Company's portfolio of Loans, all outstanding Loans sold by the Company or any of its subsidiaries complied in all material respects with Investor Requirements on the date of sale. (e) Except as would not have a material adverse effect on the Company's portfolio of Loans, the Company and its subsidiaries have at all times been and are in compliance in all material respects with the Servicing Requirements relating to the Serviced Loans and Loans previously serviced by any of them. (f) Except as would not have a material adverse effect on the Company's portfolio of Loans, each advance outstanding with respect to any Loan has been made in accordance with all material requirements of the Loan Documents. 24 20 (g) Except as would not have a material adverse effect on the Company's portfolio of Loans, neither the Company nor any of its subsidiaries is in material default with respect to any of its obligations under any Loan. (h) Neither the Company nor any of its subsidiaries is in violation in any material respect of any federal, state, or local law, statute, ordinance, rule, regulation, order or guideline applicable to the Company or its subsidiaries pertaining to the Loans or otherwise relating to its purchase or sale of Loans or its lending business. (i) Except as would not have a material adverse effect on the Company's portfolio of Loans, all Loans securitized in a pool, at the time of inclusion in the pool, and at the time of any pool certification or any recertification, met all applicable guidelines for such pool. The principal balance outstanding and owing on the Serviced Loans in each pool equals or exceeds the principal amount owing to the corresponding security holder of such pool. (j) Set forth in Section 3.15(j) of the Company Disclosure Schedule is a list, as of the date hereof, of all interest rate swaps, caps, floors, and option agreements and other interest rate risk management arrangements to which the Company or any of its subsidiaries is a party or by which any of their properties or assets may be bound. Except as would not have a material adverse effect on the Company's portfolio of Loans, all interest rate swaps, caps, floors and option agreements and other interest rate risk management arrangements to which the Company or any of its subsidiaries is a party or by which any of their properties or assets may be bound were entered into in the ordinary course of business and, to the best knowledge of the Company, in accordance with then-customary practice and all applicable rules and regulations and with counterparties believed to be financially responsible at the time and are legal, valid and binding obligations and are in full force and effect, except as the enforceability thereof may be limited by bankruptcy, insolvency, moratorium, reorganization, receivership, conservatorship or similar laws relating to or affecting the enforcement of creditors' rights generally, and by general principles of equity, whether applied by a court of law or equity. The Company and its subsidiaries have duly performed in all material respects all of their respective obligations thereunder to the extent that such obligations to perform have accrued, and to the best knowledge of the Company, there are no material breaches, violations or defaults or allegations or assertions of such by any party thereunder. Except as set forth in Section 3.15(l), of the Company Disclosure Schedule, none of the transactions contemplated by this Agreement would permit: (i) a counterparty under any interest rate swap, cap, floor and option agreement or any other interest rate risk management agreement or (ii) any party to any financing arrangement, including, but not limited to mortgage-backed financing, to accelerate, discontinue, terminate or otherwise modify any such agreement or arrangement or would require the Company or any of its subsidiaries to recognize any gain or loss with respect to such arrangement. (k) Except as set forth in Section 3.15(k) of the Company Disclosure Schedule, the Company has not received notice from any governmental, quasi-governmental or private agency of pending or threatened actions or investigations relating to the Company's activities in respect of the Loans. 25 21 (l) Except as would not have a material adverse effect on the Company's portfolio of Loans, the terms of each Loan have not been impaired, waived, altered or modified in any material respect from the date of its origination except by a written instrument, which written instrument has been recorded if recordation is necessary to protect the interests of the owner thereof. The substance of any such waiver, alteration or modification has been communicated to and approved in writing by: (i) the relevant Investor, to the extent required by the relevant Investor Requirements; and (ii) the title insurer, to the extent required by the relevant policies, and its terms are reflected in the Loan Documents. Where the Investor's authorization is required, neither the Company nor any of its subsidiaries has, without the Investor's knowledge: (i) subordinated the lien of any Mortgage Loan to any other mortgage or lien or given any other mortgage or lien equal priority with the lien of a mortgage loan; or (ii) executed any instrument of release, cancellation or satisfaction with, in whole or in part, respect to any Mortgage Loan. (m) Except as would not have a material adverse effect on the Company's portfolio of Loans and except as set forth in Section 3.15(o) of the Company Disclosure Schedule, as of the date hereof, neither the Company nor any of its subsidiaries is subject to any repurchase obligation under any Loan. (n) Except as would not have a material adverse effect on the Company's portfolio of Loans, neither the Company nor any of its subsidiaries has received notice of a servicing default for any Loan, and each Loan serviced by the Company or its subsidiaries has been properly serviced and accounted for in all material respects in accordance with the applicable Servicing Requirements. All pools for which the Company or any of its subsidiaries is responsible are in compliance in all material respects with all applicable Investor Requirements, procedures, rules, regulations and guidelines. (o) To the knowledge of the Company, no facts currently exist with respect to existing securitizations heretofore undertaken by the Company that would be reasonably likely to materially and adversely affect the ability of the Company or any of its subsidiaries to continue to do securitizations in the future in accordance with existing practices. SECTION 3.16 Licenses. Section 3.16 of the Company Disclosure Schedule sets forth all licenses, permits, franchises and other authorizations of any governmental authority (collectively, "Licenses") that are material to the operation of its business as currently conducted. Except as set forth in Section 3.16 of the Company Disclosure Schedule, the Company has been granted and possesses all such Licenses, all such Licenses are in full force and effect and no proceeding is pending or threatened seeking the revocation or limitation of any such License. Except as set forth in Section 3.16 of the Company Disclosure Schedule, none of such Licenses will be subject to revocation or other limitation as a result of this Agreement or the transactions contemplated hereby. SECTION 3.17 Allowance for Possible Loan Losses. The reserve for losses shown on the audited consolidated financial statements as of December 31, 1998 was adequate in all material respects to provide for possible or specific losses, and contained an additional amount of unallocated reserves for unanticipated future losses, at a level considered adequate under generally 26 22 accepted accounting principles and standards applied to the specialty finance business conducted by the Company and its subsidiaries. To the knowledge of the Company, the aggregate principal amount of all receivables including, but not limited to, Loans and leases contained in the Loan and lease portfolio of the Company and its subsidiaries as of December 31, 1998, arose in the ordinary course of business and are not the subject of any asserted claim or set off, except to the extent reserves have been taken against such receivables. SECTION 3.18 Brokers. No broker, finder or investment banker (other than the Financial Adviser) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and the Financial Adviser pursuant to which such firm would be entitled to any payment relating to the transactions contemplated hereby. SECTION 3.19 Sole Representations and Warranties. The representations and warranties set forth in this Article III and elsewhere in this Agreement, as modified by the Company Disclosure Schedule, are the only representations and warranties of the Company in connection with this Agreement and the transactions contemplated hereby, and supersede any and all previous written and oral statements made to Parent. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Parent and Purchaser hereby, jointly and severally, represent and warrant to the Company that: SECTION 4.1 Corporate Organization. Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of organization and has the requisite corporate power and authority and any necessary governmental approval to own, operate or lease its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing and in good standing or to have such power, authority and governmental approvals is not, individually or in the aggregate, reasonably likely to prevent or materially delay the consummation of the Offer or the Merger. SECTION 4.2 Authority Relative to This Agreement. Each of Parent and Purchaser has all necessary corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance of this Agreement by each of Parent and Purchaser and the consummation by each of Parent and Purchaser of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Purchaser other than filing and recordation of appropriate merger documents as required by the MBCL. This Agreement has been duly executed and delivered by Parent and Purchaser and, assuming due authorization, execution and delivery by 27 23 the Company, constitutes a legal, valid and binding obligation of each such corporation enforceable against such corporation in accordance with its terms. SECTION 4.3 No Conflict; Required Filings and Consents. (a) The execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not: (i) conflict with or violate the respective certificates of incorporation or by-laws of Parent or Purchaser; (ii) assuming that all consents, approvals and authorizations contemplated by clauses (i), (ii) and (iii) of subsection (b) below have been obtained and all filings described in such clauses have been made, conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent or Purchaser or by which either of them or their respective properties are bound or affected; or (iii) result in any breach or violation of or constitute a default (or an event which with notice or lapse of time or both could become a default) or result in the loss of a material benefit under, or give rise to any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or encumbrance on any of the property or assets of Parent or Purchaser pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which Parent or Purchaser is a party or by which Parent or Purchaser or any of their respective properties are bound or affected, except, in the case of clauses (ii) and (iii), for any such conflicts, violations, breaches, defaults or other occurrences which are not, individually or in the aggregate, reasonably likely to prevent or materially delay the consummation of the Offer or the Merger. (b) Except for the Licenses identified in Section 3.16 of the Company Disclosure Schedule and any other consents, approvals, authorizations, permits or filings as may be required by any governmental authority in order for the Surviving Corporation to operate after the Effective Time the business of the Company as currently conducted, including, without limitation, the filing of applications and notices with federal and state regulatory authorities governing consumer finance, commercial finance, mortgage lending and insurance in the states in which the Company and its subsidiaries operate their respective businesses, the execution, delivery and performance of this Agreement by Parent and Purchaser do not and will not require any consent, approval, authorization or permit of, action by, filing with or notification to, any governmental or regulatory authority, domestic or foreign, except (i) for applicable requirements, if any, of the Exchange Act and the rules and regulations promulgated thereunder, the HSR Act or other foreign filings or approvals, state securities, takeover and "blue sky" laws, (ii) the filing and recordation of appropriate merger or other documents as required by the MBCL, and (iii) such consents, approvals, authorizations, permits, actions, filings or notifications the failure of which to make or obtain are not, individually or in the aggregate, reasonably likely to prevent or materially delay the consummation of the Offer or the Merger. SECTION 4.4 Offer Documents; Proxy Statement. The Offer Documents, as filed pursuant to Section 1.1, will not, at the time such Offer Documents are filed with the SEC or are first published, sent or given to stockholders, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The information supplied by Parent for inclusion in the Proxy Statement shall not, on the date the Proxy Statement is first mailed to stockholders, at the time 28 24 of the Stockholders Meeting (as defined in Section 6.1), if any, or at the Effective Time, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state a material fact required to be stated therein or necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which has become false or misleading. Notwithstanding the foregoing, Parent and Purchaser make no representation or warranty with respect to any information supplied by the Company or any of its representatives which is contained in or incorporated by reference in any of the foregoing documents or the Offer Documents. The Offer Documents, as amended and supplemented, will comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations promulgated thereunder. SECTION 4.5 Brokers. No broker, finder or investment banker (other than Donaldson, Lufkin & Jenrette, Inc.) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of Parent or Purchaser. SECTION 4.6 Funds. Parent or Purchaser, at the expiration date of the Offer and at the Effective Time, will have the funds necessary to consummate the Offer and the Merger, respectively. ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER SECTION 5.1 Conduct of Business of the Company Pending the Merger. The Company covenants and agrees that, during the period from the date hereof to the Effective Time, unless Parent shall otherwise agree in writing, the businesses of the Company and its subsidiaries shall be conducted only in, and the Company and its subsidiaries shall not take any action except in, the ordinary course of business and in a manner consistent with past practice; and the Company and its subsidiaries shall each use its commercially reasonable efforts to preserve substantially intact the business organization of the Company and its subsidiaries, to keep available the services of the present officers, employees and consultants of the Company and its subsidiaries and to preserve the present relationships of the Company and its subsidiaries with customers, suppliers and other persons with which the Company or any of its subsidiaries has significant business relations. By way of amplification and not limitation, except as set forth in Section 5.1 of the Company Disclosure Schedule, neither the Company nor any of its subsidiaries shall, between the date of this Agreement and the Effective Time, directly or indirectly do, or commit to do, any of the following without the prior written consent of Parent: (a) amend or otherwise change its Articles of Organization or by-laws or equivalent organizational documents; 29 25 (b) issue, deliver, sell, pledge, dispose of or encumber, or authorize or commit to the issuance, sale, pledge, disposition or encumbrance of, (i) any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of capital stock, or any other ownership interest (including but not limited to stock appreciation rights or phantom stock), of the Company or any of its subsidiaries (except for the issuance of up to 913,720 shares of Company Common Stock required to be issued pursuant to the terms of Options outstanding as of September 22, 1999 or (ii) any assets of the Company or any of its subsidiaries, except in the ordinary course of business and in a manner consistent with past practice; (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; (d) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; (e) (i) acquire (by merger, consolidation, or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person, or make any loans, advances or capital contributions to, or investments in, any other person (other than in the ordinary course of business consistent with past practice and other than existing committed facilities); (iii) enter into any contract or agreement other than in the ordinary course of business consistent with past practice; or (iv) authorize capital expenditures (during any three month period) which are, in the aggregate, in excess of $25,000 for the Company and its subsidiaries taken as a whole; (f) except to the extent required under existing employee and director benefit plans, agreements or arrangements as in effect on the date of this Agreement or as provided under Section 2.7, increase the compensation or fringe benefits of any of its directors, officers or employees, except for increases in salary or wages of employees of the Company or its subsidiaries who are not officers of the Company in the ordinary course of business in accordance with past practice, or grant any severance or termination pay not currently required to be paid under existing severance plans to or enter into any employment, consulting or severance agreement or arrangement with any present or former director, officer or other employee of the Company or any of its subsidiaries, or establish, adopt, enter into or amend or terminate any collective bargaining agreement or Company Plan, including, but not limited to, bonus, profit sharing, thrift, compensation, stock option, restricted stock, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any directors, officers or employees; (g) except as may be required as a result of a change in law or in generally accepted accounting principles, change any of the accounting practices or principles used by it, other than discontinuance of the gain on sale method; 30 26 (h) make any material Tax election, change any annual Tax accounting period, change any method of Tax accounting, file any amended Tax Return or settle or compromise any material federal, state, local or foreign Tax liability; (i) settle or compromise any pending or threatened suit, action or claim which is material or which relates to the transactions contemplated hereby; (j) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries not constituting an inactive subsidiary (other than the Merger); (k) pay, discharge or satisfy any claims, liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), other than the payment, discharge or satisfaction (i) in the ordinary course of business and consistent with past practice of liabilities reflected or reserved against in the financial statements of the Company or incurred in the ordinary course of business and consistent with past practice and (ii) of liabilities required to be paid, discharged or satisfied pursuant to the terms of any contract in existence on the date hereof; (l)(i) make or commit to make any financial services Loan; (ii) make or commit to make any other Loan except as specifically provided in clauses (iii) through (ix) of this paragraph (l); (iii) purchase or commit to purchase consumer land Loans from a single dealer exceeding an aggregate amount of (y) $1,000,000 in the case of a dealer that is an approved dealer as of the date of this Agreement or (z) $2,500,000 in the case of a dealer that becomes an approved dealer on or after the date of this agreement; (iv) purchase or commit to purchase consumer timeshare Loans from a single seller exceeding an aggregate amount of (y) $500,000 in the case of a seller that is an approved seller as of the date of this Agreement or (z) $1,000,000 in the case of a seller that becomes an approved seller on or after the date of this Agreement; (v) make or commit to make Loans for the acquisition and/or construction of timeshare units that exceed (y) $2,500,000 in the case of a new Loan to an approved borrower (or group of affiliated borrowers) as of the date of this Agreement; provided however, that any increase in an existing commitment shall not exceed $1,000,000, and provided, further, that any additional Loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $2,500,000 or (z) $2,000,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of this Agreement; (vi) make or commit to make Loans for the acquisition and/or development of landlots that exceed (y) $500,000 in the case of a new Loan to an approved borrower (or group of 31 27 affiliated borrowers) as of the date of this Agreement; provided however, that any increase in an existing commitment shall not exceed $100,000, and provided, further, that any additional Loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $1,500,000 or (z) $1,000,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of this Agreement; (vii) make or commit to make Loans for the finance or purchase of land (not including consumer Loans as provided in clause (iii) of Section 5.1(l) above) that exceed (y) $1,000,000 in the case of a new Loan to an approved borrower (or group of affiliated borrowers) as of the date of this Agreement; provided however, that any increase in an existing commitment shall not exceed $250,000, and provided, further, that any additional Loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $2,500,000 or (z) $500,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of this Agreement; (viii) make or commit to make Loans for the finance or purchase of timeshare units (not including consumer Loans as provided in clause (iv) of Section 5.1(l) above) that exceed (y) $5,000,000 in the case of a new Loan to an approved borrower (or group of affiliated borrowers) as of the date of this Agreement; provided however, that any increase in an existing commitment shall not exceed $2,500,000, and provided, further, that any additional Loans or increases as described in this clause (y) shall not cause the aggregate commitments to such borrower to exceed $5,000,000 or (z) $5,000,000 in the case of a borrower (or group of affiliated borrowers) which becomes an approved borrower on or after the date of this Agreement; or (ix) purchase or commit to purchase any tax lien certificate greater than $500,000; provided, that nothing in this Section 5.1(l) shall prohibit the Company from honoring any contractual obligation in existence on the date of this Agreement. (m) refinance or restructure any existing Loan, except in the ordinary course of business consistent with past practice and prudent lending practices; (n) make any material changes in its polices or practices concerning Loan underwriting and credit scoring, or which persons may approve Loans or credit scoring; (o) except in the ordinary course of business consistent with past practice and prudent business practices, enter into any securities transaction for its own account or purchase or otherwise acquire any investment security for its own account other than (A) securities backed by the full faith and credit of the United States or an agency thereof and (B) other readily marketable securities not in excess of $100,000. (p) foreclose upon or otherwise take title to or possession or control of any real property (other than residential property) without first obtaining a phase one environmental report thereon; 32 28 (q) enter into any new, or modify, amend or extend the terms of any existing, contracts relating to the purchase or sale of financial or other futures, or any put or call option relating to cash, securities or commodities or any interest rate swap agreements or other agreements relating to the hedging of interest rate risk, except in the ordinary course of business consistent with past practices and prudent business practices; or (r) take, or offer or propose to take, or agree to take in writing or otherwise, any of the actions described in Sections 5.1(a) through 5.1(q) or any action which would make any of the representations or warranties of the Company contained in this Agreement untrue and incorrect as of the date when made if such action had then been taken, or would result in any of the conditions set forth in Annex A not being satisfied. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.1 Stockholders Meeting. (a) If adoption of this Agreement is required by applicable law, the Company, acting through its Board of Directors, shall in accordance with and subject to applicable law and the Company's Articles of Organization and By-Laws, (i) duly call, give notice of, convene and hold a meeting of its stockholders as soon as practicable following consummation of the Offer for the purpose of adopting this Agreement and the transactions contemplated hereby (the "Stockholders Meeting") and except if the Board of Directors by majority vote determines in good faith, based on the advice of outside legal counsel to the Company that to do so would constitute a breach of fiduciary duty under applicable law, (A) include in the Proxy Statement the unanimous recommendation of the Board of Directors that the stockholders of the Company vote in favor of the adoption of this Agreement and the approval of the transactions contemplated hereby and the written opinion of the Financial Adviser that the consideration to be received by the stockholders of the Company pursuant to the Offer and the Merger is fair to such stockholders and (B) use its reasonable best efforts to obtain the necessary adoption of this Agreement and the approval of the transactions contemplated hereby by its stockholders. At the Stockholders Meeting, Parent and Purchaser shall cause all Shares then owned by them and their subsidiaries to be voted in favor of adoption of this Agreement and the approval of the transactions contemplated hereby. (b) Notwithstanding the foregoing, in the event that Purchaser shall acquire at least 90% of the outstanding Shares, the Company agrees, at the request of Purchaser, subject to Article VII, to take all necessary and appropriate action to cause the Merger to become effective as soon as reasonably practicable after such acquisition, without a meeting of the Company's stockholders, in accordance with Section 82 of the MBCL. SECTION 6.2 Proxy Statement. If required by applicable law, as soon as practicable following Parent's request, the Company shall file with the SEC under the Exchange Act and the rules and regulations promulgated thereunder, and shall use its reasonable best 33 29 efforts to have cleared by the SEC, the Proxy Statement with respect to the Stockholders Meeting. Parent, Purchaser and the Company will cooperate with each other in the preparation of the Proxy Statement; without limiting the generality of the foregoing, each of Parent and Purchaser will furnish to the Company the information relating to it required by the Exchange Act and the rules and regulations promulgated thereunder to be set forth in the Proxy Statement. The Company agrees to use its reasonable best efforts, after consultation with the other parties hereto, to respond promptly to any comments made by the SEC with respect to the Proxy Statement and any preliminary version thereof filed by it and cause such Proxy Statement to be mailed to the Company's stockholders at the earliest practicable time. SECTION 6.3 Company Board Representation; Section 14(f). (a) Promptly upon the purchase by Purchaser of Shares pursuant to the Offer, and from time to time thereafter, Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board of Directors of the Company as shall give Purchaser representation on the Board of Directors equal to the product of the total number of directors on such Board (giving effect to the directors elected pursuant to this sentence and including any vacancies or unfilled newly-created directorships) multiplied by the percentage that the aggregate number of Shares beneficially owned by Purchaser or any affiliate of Purchaser bears to the total number of Shares then outstanding, and the Company shall amend, or cause to be amended, its by-laws to provide for each of the matters set forth in this Section 6.3 and shall, at such time, promptly take all action necessary to cause Purchaser's designees to be so elected, including either increasing the size of the Board of Directors or securing the resignations of incumbent directors or both. At such times, the Company will use its reasonable best efforts to cause persons designated by Purchaser to constitute the same percentage as is on the board of (i) each committee of the Board of Directors, (ii) each board of directors of each subsidiary of the Company and (iii) each committee of each such board, in each case only to the extent permitted by law. Until Purchaser acquires 662/3% of the outstanding Shares on a fully diluted basis, the Company shall use its commercially reasonable efforts to ensure that all the members of the Board of Directors and such boards and committees as of the date hereof who are not employees of the Company shall remain members of the Board of Directors and such boards and committees. (b) The Company's obligations to appoint designees to its Board of Directors shall be subject to Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. The Company shall promptly take all actions required pursuant to Section 14(f) and Rule 14f-1 in order to fulfill its obligations under this Section 6.3 and shall include in the Schedule 14D-9 or a separate Rule 14f-1 information statement provided to stockholders such information with respect to the Company and its officers and directors as is required under Section 14(f) and Rule 14f-1 to fulfill its obligations under this Section 6.3. Parent or Purchaser will supply to the Company and be solely responsible for any information with respect to either of them and their nominees, officers, directors and affiliates required by Section 14(f) and Rule 14f-1. (c) Following the election or appointment of Purchaser's designees pursuant to this Section 6.3 and prior to the Effective Time, any amendment, or waiver of any term or condition of this Agreement or the Articles of Organization or By-Laws of the Company, any termination of this Agreement by the Company, any extension by the Company of the time for 34 30 the performance of any of the obligations or other acts of Purchaser or waiver or assertion of any of the Company's rights hereunder, and any other consent or action by the Board of Directors with respect to this Agreement, will require only the concurrence of a majority of the directors of the Company then in office who are neither designated by Purchaser nor are employees of the Company (the "Disinterested Directors") and such concurrence shall constitute the authorization of the Board of Directors of the Company and no other action by the Company, including any action by any other director of the Company, shall be required for purposes of this Agreement. Notwithstanding the foregoing, the number of Disinterested Directors shall be not less than two. SECTION 6.4 Access to Information; Confidentiality. (a) From the date hereof to the Effective Time, the Company shall, and shall cause its subsidiaries, officers, directors, employees, auditors and other agents to, afford the officers, employees, auditors and other agents of Parent, and financing sources who shall agree to be bound by the provisions of this Section 6.4 as though a party hereto, complete access, consistent with applicable law, at all reasonable times to its officers, employees, agents, properties, offices, plants and other facilities and to all books and records, and shall furnish Parent and such financing sources with all financial, operating and other data and information as Parent, through its officers, employees or agents, or such financing sources may from time to time reasonably request. Parent, Purchaser and their respective officers, employees, agents and financing sources shall exercise such right of access in a manner which does not unduly interfere with the conduct by the Company of its business. (b) Each of Parent and Purchaser will hold and will cause its officers, employees, auditors and other agents to hold in confidence all documents and information concerning the Company and its subsidiaries furnished to Parent or Purchaser in connection with the transactions contemplated in this Agreement pursuant to the terms and provisions of that Confidentiality Agreement dated July 20, 1999 between Parent and the Company (the "Confidentiality Agreement"). (c) No investigation or information provided pursuant to this Section 6.4 shall affect any representations or warranties of the parties herein or the conditions to the obligations of the parties hereto. SECTION 6.5 No Solicitation of Transactions. The Company, its affiliates and their respective officers, directors, employees, representatives and agents shall immediately cease any existing discussions or negotiations, if any, with any parties conducted heretofore with respect to any acquisition or exchange of all or any material portion of the assets of, or any equity interest in, the Company or any of its subsidiaries or any business combination with or involving the Company or any of its subsidiaries. At any time prior to consummation of the Offer, the Company may, directly or indirectly, furnish information and access, in each case only in response to a request for such information or access to any person made after the date hereof which was not encouraged, solicited or initiated by the Company or any of its affiliates or any of its or their respective officers, directors, employees, representatives or agents after the date hereof, pursuant to appropriate confidentiality agreements, and may participate in discussions and negotiate with such person concerning any merger, sale of assets, sale of shares of capital stock or similar transaction (including an exchange of stock or assets) involving the Company or any 35 31 subsidiary or division of the Company, in each case (whether furnishing information and access or participating in discussions and negotiations) only if such person has submitted a written proposal to the Board of Directors of the Company relating to any such transaction and the Board by majority vote determines in good faith, based upon the advice of outside counsel to the Company, that failing to take such action would constitute a breach of the Board's fiduciary duty under applicable law. The Board shall provide a copy of any such written proposal to Parent immediately after receipt thereof, shall notify Parent immediately if any proposal (oral or written) is made and shall in such notice, indicate in reasonable detail the identity of the offeror and the terms and conditions of any proposal and shall keep Parent promptly advised of all developments which could reasonably be expected to culminate in the Board of Directors withdrawing, modifying or amending its recommendation of the Offer, the Merger and the other transactions contemplated by this Agreement. Except as set forth in this Section 6.5, neither the Company or any of its affiliates, nor any of its or their respective officers, directors, employees, representatives or agents, shall, directly or indirectly, encourage, solicit, participate in or initiate discussions or negotiations with, or provide any information to, any corporation, partnership, person or other entity or group (other than Parent and Purchaser, any affiliate or associate of Parent and Purchaser or any designees of Parent or Purchaser) concerning any merger, sale of any material portion or assets, sale of any of the shares of capital stock or similar transactions (including an exchange of stock or assets) involving the Company or any subsidiary or division of the Company; provided, however, that nothing herein shall prevent the Board from taking, and disclosing to the Company's stockholders, a position contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with regard to any tender offer; provided, further, that the Board shall not recommend that the stockholders of the Company tender their Shares in connection with any such tender offer unless the Board by majority vote shall have determined in good faith, based upon the advice of outside counsel to the Company, that failing to take such action would constitute a breach of the Board's fiduciary duty under applicable law. The Company agrees not to release any third party from, or waive any provisions of, any confidentiality or standstill agreement to which the Company is a party, unless the Board by majority vote shall have determined in good faith, based upon the advice of outside counsel to the Company, that failing to release such third party or waive such provisions would constitute a breach of the fiduciary duties of the Board of Directors under applicable law. SECTION 6.6 Employee Benefits Matters. (a) Subject to paragraphs (b) and (d) below, on and after the Effective Time, Parent shall cause the Surviving Corporation and its subsidiaries to promptly pay or provide when due all compensation and benefits earned through or prior to the Effective Time as provided pursuant to the terms of any compensation arrangements, employment agreements and employee or director benefit plans, programs and policies in existence as of the date hereof for all employees (and former employees) and directors (and former directors) of the Company and its subsidiaries (unless superseded by an employment agreement between such employee and the Parent or Purchaser). Parent and the Company agree that the Surviving Corporation and its subsidiaries shall pay promptly or provide when due all compensation and benefits required to be paid pursuant to the terms of any individual agreement with any employee, former employee, director or former director in effect as of the date hereof and disclosed in Section 3.10(a) of the Company Disclosure Schedule. 36 32 (b) Parent shall cause the Surviving Corporation, for the period commencing at the Effective Time and ending on the first anniversary thereof, to provide employee benefits under plans, programs and arrangements which, in the aggregate, will provide benefits to the employees of the Surviving Corporation and its subsidiaries (other than employees covered by a collective bargaining agreement) which are no less favorable in the aggregate than those provided to Parent's similarly situated employees pursuant to the plans, programs and arrangements (other than those related to the equity securities of the Company) of the Parent and its subsidiaries in effect on the date hereof and employees covered by collective bargaining agreements shall be provided with such benefits as shall be required under the terms of any applicable collective bargaining agreement; provided, however, that nothing herein shall prevent the amendment or termination of any specific plan, program or arrangement, require that the Surviving Corporation provide or permit investment in the securities of Parent, the Company or the Surviving Corporation or interfere with the Surviving Corporation's right or obligation to make such changes as are necessary to conform with applicable law. Employees of the Surviving Corporation shall be given credit for all service with the Company and its subsidiaries, to the same extent as such service was credited for such purpose by the Company, under each employee benefit plan, program, or arrangement of the Parent in which such employees are eligible to participate for purposes of eligibility and vesting; provided, however, that in no event shall the employees be entitled to any credit to the extent that it would result in a duplication of benefits with respect to the same period of service. (c) If employees of the Surviving Corporation and its subsidiaries become eligible to participate in a medical, dental or health plan of Parent or its subsidiaries, Parent shall cause such plan to (i) waive any preexisting condition limitations for conditions covered under the applicable medical, health or dental plans of the Company and its subsidiaries and (ii) honor any deductible and out of pocket expenses incurred by the employees and their beneficiaries under such plans during the portion of the calendar year prior to such participation. (d) Nothing in this Section 6.6 shall require the continued employment of any person or, with respect to clauses (a), (b) and (c) hereof, prevent the Company and/or the Surviving Corporation and their subsidiaries from taking any action or refraining from taking any action which the Company and its subsidiaries prior to the Effective Time, could have taken or refrained from taking. SECTION 6.7 Directors' and Officers' Indemnification and Insurance. (a) The Articles of Organization and By-Laws of the Surviving Corporation shall contain provisions no less favorable with respect to indemnification than are set forth in the Articles of Organization and By-laws of the Company, which provisions shall not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would adversely affect the rights thereunder of individuals who at the Effective Time were directors, officers or employees of the Company. (b) Parent shall use its reasonable best efforts to cause to be maintained in effect for six years from the Effective Time the current policies of the directors' and officers' liability insurance maintained by the Company (provided that Parent may substitute therefor policies of at 37 33 least the same coverage containing terms and conditions which are not materially less advantageous) with respect to matters occurring prior to the Effective Time to the extent available; provided, however, that in no event shall Parent or the Company be required to expend more than an amount per year equal to 150% of current annual premiums paid by the Company (which the Company represents and warrants to be not more than $46,000) to maintain or procure insurance coverage pursuant hereto. (c) For six years after the Effective Time, Parent agrees that it will or will cause the Surviving Corporation to indemnify and hold harmless each present and former director and officer of the Company, determined as of the Effective Time and their heirs and representatives (the "Indemnified Parties"), against any costs or expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages or liabilities (collectively, "Costs") (but only to the extent such Costs are not otherwise covered by insurance and paid) incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative (collectively, "Claims"), arising out of or pertaining to matters existing or occurring at or prior to the Effective Time, whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent permitted under applicable law (and Parent shall ,or shall cause the Surviving Corporation to, also advance expenses as incurred to the fullest extent permitted under applicable law provided the person to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification). (d) Any Indemnified Party wishing to claim indemnification under paragraph (c) of this Section 6.7, upon learning of any such Claim, shall promptly notify Parent thereof, but the failure to so notify shall not relieve Parent of any liability it may have to such Indemnified Party if such failure does not materially prejudice Parent. In the event of any such Claim (whether arising before or after the Effective Time), (i) Parent or the Surviving Corporation shall have the right to assume the defense thereof and Parent shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if Parent or the Surviving Corporation elects not to assume such defense, or counsel for the Indemnified Parties advises that there are issues that raise conflicts of interest between Parent or the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and Parent or the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that Parent shall be obligated pursuant to this paragraph (d) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) Parent shall not be liable for any settlement effected without its prior written consent, which consent shall not be unreasonably withheld; and provided, further, that Parent shall not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable law. 38 34 SECTION 6.8 Intentionally Omitted. SECTION 6.9 Notification of Certain Matters. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) the occurrence or non-occurrence of any event the occurrence or non-occurrence of which would, if such representation or warranty were required to be made at such time, be likely to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect and (ii) any failure of the Company, Parent or Purchaser, as the case may be, to comply with or satisfy in any material respect any covenant, condition or agreement to be complied with or satisfied by it hereunder; provided, however, that the delivery of any notice pursuant to this Section 6.8 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 6.10 Further Action; Commercially Reasonable Efforts. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall use commercially reasonable efforts to take, or cause to be taken, all appropriate action, and to do or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement as soon as practicable, including but not limited to (i) cooperation in the preparation and filing of the Offer Documents, the Schedule 14D-9, the Proxy Statement, any required filings under the HSR Act and any amendments to any thereof and (ii) using commercially reasonable efforts to promptly make all required regulatory filings and applications including, without limitation, responding promptly to requests for further information and to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of governmental authorities and parties to contracts with the Company and its subsidiaries and Parent and its subsidiaries as are necessary for the consummation of the transactions contemplated by this Agreement and to fulfill the conditions to the Offer and the Merger, including, without limitation, those listed in Section 3.16 of the Company Disclosure Schedule. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use commercially reasonable efforts to take all such necessary action. (b) The Company and Parent each shall keep the other apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by Parent or the Company, as the case may be, or any of their subsidiaries, from any Governmental Authority with respect to the Offer or the Merger or any of the other transactions contemplated by this Agreement. The parties hereto will consult and cooperate with one another, and consider in good faith the views of one another in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the HSR Act or any other antitrust law. (c) Each party shall timely and promptly make all filings which are required under the HSR Act. Each party will furnish to the other such necessary information and 39 35 reasonable assistance as it may request in connection with its preparation of such filings. Each party will supply the other with copies of all correspondence, filings or communications between such party or its representatives and the Federal Trade Commission, the Antitrust Division of the United States Department of Justice or any other governmental agency or authority or members of their respective staffs with respect to this Agreement or the transactions contemplated hereby. SECTION 6.11 Public Announcements. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to the Offer or the Merger and shall not issue any such press release or make any such public statement prior to such consultation and without the consent of the other party, except as may be required by law or any listing agreement with its securities exchange. SECTION 6.12 Disposition of Litigation. (a) The Company agrees that it will not settle any litigation currently pending, or commenced after the date hereof, against the Company or any of its directors by any stockholder of the Company relating to the Offer or this Agreement, without the prior written consent of Parent (which shall not be unreasonably withheld). (b) The Company will not voluntarily cooperate with any third party which has sought or may hereafter seek to restrain or prohibit or otherwise oppose the Offer or the Merger and will cooperate with Parent and Purchaser to resist any such effort to restrain or prohibit or otherwise oppose the Offer or the Merger. ARTICLE VII CONDITIONS OF MERGER SECTION 7.1 Conditions to Obligation of Each Party to Effect the Merger. The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions: (a) If required by the MBCL, this Agreement shall have been adopted by the affirmative vote of the stockholders of the Company by the requisite vote in accordance with the Company's Articles of Organization and the MBCL. (b) No statute, rule, regulation, executive order, decree, ruling, injunction or other order (whether temporary, preliminary or permanent) shall have been enacted, entered, promulgated or enforced by any United States, foreign, federal or state court or governmental authority which prohibits, restrains, enjoins or restricts the consummation of the Merger; provided, however, that prior to invoking this condition the invoking party shall have complied with Section 6.10. (c) Purchaser shall have purchased Shares pursuant to the Offer. 40 36 (d) Any waiting period applicable to the Merger under the HSR Act shall have terminated or expired. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.1 Termination. This Agreement may be terminated and the Merger contemplated hereby may be abandoned at any time prior to the Effective Time, notwithstanding approval thereof by the stockholders of the Company: (a) By mutual written consent of Parent, Purchaser and the Company; (b) By Parent or the Company if any court of competent jurisdiction or other governmental body located or having jurisdiction within the United States shall have issued a final order, injunction, decree, judgment or ruling or taken any other final action restraining, enjoining or otherwise prohibiting the Offer or the Merger and such order, injunction, decree, judgment, ruling or other action is or shall have become final and nonappealable; provided, however, that prior to invoking this right of termination the invoking party shall have complied with Section 6.10; (c) By Parent if due to an occurrence or circumstance which resulted in a failure to satisfy any of the Offer Conditions, Purchaser shall have (i) terminated the Offer or (ii) failed to pay for Shares pursuant to the Offer on or prior to the Outside Date (as defined below); (d) By the Company (only following the Outside Date, in the case of clause (ii)(B) below) if (i) there shall have been a material breach of any covenant or agreement on the part of Parent or the Purchaser contained in this Agreement which materially adversely affects Parent's or Purchaser's ability to consummate (or materially delays commencement or consummation of) the Offer, and which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, (ii) Purchaser shall have (A) terminated the Offer or (B) failed to pay for Shares pursuant to the Offer on or prior to the Outside Date (unless such termination or failure is caused by or results from the failure of any representation or warranty of the Company to be true and correct in any material respect or the failure of the Company to perform in any material respect any of its covenants or agreements contained in this Agreement) or (iii) prior to the purchase of Shares pursuant to the Offer, any person shall have made a bona fide offer to acquire the Company (A) that the Board of Directors of the Company by majority vote determines in its good faith judgment is more favorable to the Company and the Company's stockholders than the Offer and the Merger and (B) as a result of which the Board of Directors by majority vote determines in good faith, based upon the advice of outside counsel to the Company, that it is obligated by its fiduciary obligations under applicable 41 37 law to terminate this Agreement, provided that such termination under this clause (iii) shall not be effective until the Company has made payment of the full fee and expense reimbursement required by Section 8.3; or (e) By Parent prior to the purchase of Shares pursuant to the Offer, if (i) there shall have been a breach of any representation, warranty, covenant or agreement on the part of the Company contained in this Agreement which is reasonably likely to have a Material Adverse Effect on the Company or which materially adversely affects (or materially delays) the consummation of the Offer, which shall not have been cured prior to the earlier of (A) 10 business days following notice of such breach and (B) two business days prior to the date on which the Offer expires, (ii) the Board shall have withdrawn or modified (including by amendment of the Schedule 14D-9) in a manner adverse to Purchaser its approval or recommendation of the Offer, this Agreement or the Merger or shall have recommended another offer or transaction, or shall have resolved to effect any of the foregoing, or (iii) the Minimum Condition shall not have been satisfied by the expiration date of the Offer as it may have been extended pursuant hereto and on or prior to such date (A) any person (including the Company but not including Parent or Purchaser) shall have made a public announcement, disclosure or communication to the Company with respect to a Third Party Acquisition or (B) any person (including the Company or any of its affiliates or subsidiaries), other than Parent or any of its affiliates shall have become (and remain at the time of termination) the beneficial owner of 20% or more of the Shares (unless such person shall have tendered and not withdrawn such person's Shares pursuant to the Offer). As used herein, the "Outside Date" shall mean the latest to occur (but in no event later than 90 days following the date hereof) of (i) the date that is 60 days following the date hereof and (ii) provided that the Minimum Condition has been satisfied within 60 days following the date hereof, the date on which either (x) the applicable waiting period under the HSR Act shall have expired or been terminated or (y) the final terms of a consent decree between Parent and the appropriate governmental authority with respect to the Offer and the Merger shall have been agreed to. SECTION 8.2 Effect of Termination. In the event of the termination of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto except as set forth in Section 8.3 and Section 9.1; provided, however, that nothing herein shall relieve any party from liability for any wilful breach hereof. SECTION 8.3 Fees and Expenses. (a) If: (i) (x) Parent terminates this Agreement pursuant to Section 8.1(e)(i) hereof and (y) prior to such termination a proposal or offer with respect to a Third Party Acquisition shall have been made to the Company and (z) within 12 months after such termination, the Company enters into an agreement with respect to a Third Party Acquisition, or a Third Party Acquisition occurs; or 42 38 (ii) (x) the Company terminates this Agreement pursuant to 8.1(d)(iii) or (y) the Company terminates this Agreement pursuant to Section 8.1(d)(ii)(B) hereof and at such time Parent would have been permitted to terminate this Agreement under Section 8.1(e)(ii) or (iii) hereof or (z) Parent terminates this Agreement pursuant to Section 8.1(e)(ii) or (iii) hereof; then the Company shall pay to Parent and Purchaser, within three business days following the execution and delivery of such agreement or such occurrence, as the case may be, or simultaneously with any termination contemplated by Section 8.3(a)(ii) above, a fee, in cash, of $5.5 million (less any amounts previously paid pursuant to Section 8.3(b)), provided, however, that the Company in no event shall be obligated to pay more than one such fee with respect to all such agreements and occurrences and such termination. "Third Party Acquisition" means the occurrence of any of the following events: (i) the acquisition of the Company by merger or similar business combination by any person other than Parent, Purchaser or any affiliate thereof (a "Third Party"); (ii) the acquisition by a Third Party of 20% or more of the book or fair market value of the consolidated assets of the Company and its subsidiaries, taken as a whole; or (iii) the acquisition by a Third Party of 20% or more of the outstanding Shares. (b) Upon the termination of this Agreement (i) under circumstances in which Parent shall have been entitled to terminate this Agreement pursuant to Section 8.1(e)(i) hereof (whether or not expressly terminated on such basis) or (ii) if any of the representations and warranties of the Company contained in this Agreement were untrue or incorrect in any material respect when made and at the time of termination remained untrue or incorrect in any material respect and such misrepresentation materially adversely affected the consummation (or materially delayed commencement or consummation) of the Offer, then the Company shall reimburse Parent, Purchaser and their affiliates (not later than three business days after submission of statements therefor) for all actual documented out-of-pocket fees and expenses actually incurred by any of them or on their behalf in connection with the Offer and the Merger and the consummation of all transactions contemplated by this Agreement (including, without limitation, fees and disbursements payable to financing sources, investment bankers, counsel to Purchaser or Parent or any of the foregoing, and accountants) up to a maximum amount of $1,000,000. Unless required to be paid earlier pursuant to Section 8.1(d), the Company shall in any event pay the amount requested within three business days of such request, subject to the Company's right to demand a return of any portion as to which invoices are not received in due course after request by the Company. (c) Except as otherwise specifically provided herein, each party shall bear its own expenses in connection with this Agreement and the transactions contemplated hereby. SECTION 8.4 Amendment. Subject to Section 6.3, this Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, however, that, after approval of the Merger by the stockholders of the Company, no amendment may be made which would reduce 43 39 the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto. SECTION 8.5 Waiver. Subject to Section 6.3, at any time prior to the Effective Time, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto and (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE IX GENERAL PROVISIONS SECTION 9.1 Non-Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 8.1, as the case may be, except that the agreements set forth in Article II, Section 6.6, Section 6.7 and Article IX shall survive the Effective Time and those set forth in Section 6.4, Section 8.3 and Article IX shall survive termination of this Agreement. SECTION 9.2 Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by cable, telecopy, telegram or telex or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified by like notice): if to Parent or Purchaser: Textron Financial Corporation 40 Westminster Street P.O. Box 6687 Providence, RI 02940-6687 Attention: David Wisen with an additional copy to: Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Attention: Mario A. Ponce, Esq. 44 40 if to the Company: Litchfield Financial Corporation 430 Main Street Williamstown, MA 02167 Attention: Richard A. Stratton with a copy to: Hutchins, Wheeler & Dittmar, A Professional Corporation 101 Federal Street Boston, MA, 02110 Attention: James Westra, Esq. SECTION 9.3 Certain Definitions. For purposes of this Agreement, the term: (a) "affiliate" of a person means a person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, the first mentioned person; (b) "beneficial owner" with respect to any Shares means a person who shall be deemed to be the beneficial owner of such Shares (i) which such person or any of its affiliates or associates beneficially owns, directly or indirectly, (ii) which such person or any of its affiliates or associates (as such term is defined in Rule 12b-2 of the Exchange Act) has, directly or indirectly, (A) the right to acquire (whether such right is exercisable immediately or subject only to the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of consideration rights, exchange rights, warrants or options, or otherwise, or (B) the right to vote pursuant to any agreement, arrangement or understanding or (iii) which are beneficially owned, directly or indirectly, by any other persons with whom such person or any of its affiliates or person with whom such person or any of its affiliates or associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares; provided, however, that no person nor any affiliate or associate of such person shall be deemed to be the beneficial owner of any securities by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such person nor any such affiliate or associate is otherwise deemed the beneficial owner; (c) "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of stock, as trustee or executor, by contract or credit arrangement or otherwise; 45 41 (d) "generally accepted accounting principles" shall mean the generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession in the United States, in each case applied on a basis consistent with the manner in which the audited financial statements for the fiscal year of the Company ended December 31, 1998 were prepared; (e) "person" means an individual, corporation, partnership, association, trust, unincorporated organization, other entity or group (as defined in Section 13(d)(3) of the Exchange Act); and (f) "subsidiary" or "subsidiaries" of the Company, the Surviving Corporation, Parent or any other person means any corporation, partnership, joint venture or other legal entity of which the Company, the Surviving Corporation, Parent or such other person, as the case may be (either alone or through or together with any other subsidiary), owns, directly or indirectly, 50% or more of the stock or other equity interests the holder of which is generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 9.4 Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that the transactions contemplated hereby are fulfilled to the fullest extent possible. SECTION 9.5 Entire Agreement; Assignment. This Agreement, together with the Confidentiality Agreement, constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Purchaser may assign all or any of their respective rights and obligations hereunder to any direct or indirect wholly owned subsidiary or subsidiaries of Parent, provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations. SECTION 9.6 Parties in Interest. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, except for the provisions of Section 6.7, is intended to or shall confer upon any other 46 42 person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. SECTION 9.7 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. SECTION 9.8 Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.9 Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. SECTION 9.10 Specific Performance. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any court of the United States located in the Commonwealth of Massachusetts or in any court of the Commonwealth of Massachusetts, this being in addition to any other remedy to which such party is entitled at law or in equity. In addition, each of the parties hereto (i) consents to submit itself to the personal jurisdiction of any Federal court located in the Commonwealth of Massachusetts or any court of the Commonwealth of Massachusetts in the event any dispute arises out of this Agreement or any of the transactions contemplated by this Agreement, (ii) agrees that it will not attempt to deny or defeat such personal jurisdiction by motion or other request for leave from any such court, (iii) agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than a Federal or state court sitting in the Commonwealth of Massachusetts, and (iv) consents to service being made through the notice procedures set forth in Section 9.2. 47 43 IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. TEXTRON FINANCIAL CORPORATION By: ----------------------------------------- Name: Title: LIGHTHOUSE ACQUISITION CORP. By: ----------------------------------------- Name: Title: President By: ----------------------------------------- Name: Title: Treasurer LITCHFIELD FINANCIAL CORPORATION By: ----------------------------------------- Name: Title: By: ----------------------------------------- Name: Title: Treasurer 48 ANNEX A Offer Conditions The capitalized terms used in this Annex A have the meanings set forth in the attached Agreement. Notwithstanding any other provision of the Offer, but subject to the terms and conditions of the Merger Agreement, Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Purchaser's obligation to pay for or return tendered Shares promptly after termination or withdrawal of the Offer), pay for any Shares tendered pursuant to the Offer, and may postpone the acceptance for payment or, subject to the restriction referred to above, payment for any Shares tendered pursuant to the Offer, and may amend or terminate the Offer (whether or not any Shares have theretofore been purchased or paid for) to the extent permitted by the Merger Agreement if, (i) at the expiration of the Offer, a number of shares of Company Common Stock which, together with any Shares owned by Parent or Purchaser, constitutes more than 66-% of the voting power (determined on a fully-diluted basis), on the date of purchase, of all the securities of the Company entitled to vote generally in the election of directors or in a merger shall not have been validly tendered and not properly withdrawn prior to the expiration of the Offer, the ("Minimum Condition") or (ii) at any time on or after the date of this Agreement and prior to the acceptance for payment of Shares, any of the following conditions occurs or has occurred: (a) there shall have been entered any order, preliminary or permanent injunction, decree, judgment or ruling in any action or proceeding before any court or governmental, administrative or regulatory authority or agency, or any statute, rule or regulation enacted, entered, enforced, promulgated, amended or issued that is applicable to Parent, Purchaser, the Company or any subsidiary or affiliate of Purchaser or the Company or the Offer or the Merger, by any legislative body, court, government or governmental, administrative or regulatory authority or agency that is reasonably likely to have the effect of: (i) making illegal or otherwise directly or indirectly restraining or prohibiting the making of the Offer in accordance with the terms of the Merger Agreement, the acceptance for payment of, or payment for, some of or all the Shares by Purchaser or any of its affiliates or the consummation of the Merger; (ii) prohibits the ownership or operation by the Company or any of its subsidiaries, or Parent or any of its subsidiaries, of all or any material portion of the business or assets of the Company or any of its subsidiaries, taken as a whole, or Parent or its subsidiaries, taken as a whole, or (iii) materially limits the ownership or operation by the Company or any of its subsidiaries, or Parent or any of its subsidiaries, of all or any material portion of the business or assets of the Company or any of its subsidiaries, taken as a whole, or Parent or its subsidiaries, taken as a whole (other than, in either case, assets or businesses of the Company or its subsidiaries that are not material (measured in relation to the combined assets or revenues of the Company and its subsidiaries, taken as a whole)) or compels Parent or any of its subsidiaries to dispose of or hold separate all or any portion of the businesses or assets of the Company or any of its subsidiaries or Parent or any of its subsidiaries (other than, in either case, assets or A-1 49 businesses of the Company or its subsidiaries that are not material (measured in relation to the combined assets or revenues of the Company and its subsidiaries, taken as a whole)), as a result of the transactions contemplated by the Offer or the Merger Agreement; (iv) imposes limitations on the ability of Parent, Purchaser or any of Parent's affiliates effectively to acquire or hold or to exercise full rights of ownership of the Shares, including without limitation the right to vote any Shares acquired or owned by Parent or Purchaser or any of its affiliates on all matters properly presented to the stockholders of the Company, including without limitation the adoption and approval of the Merger Agreement and the Merger or the right to vote any shares of capital stock of any subsidiary directly or indirectly owned by the Company; or (v) requires divestiture by Parent or Purchaser or any of their affiliates of any Shares; (b) since the date hereof, there shall have occurred any event, other than events arising out of the announcement of the Offer and the transactions contemplated hereby, that is reasonably likely to have a Material Adverse Effect; (c) there shall have occurred (i) any general suspension of trading in, or limitation on prices (other than suspensions or limitations triggered on the New York Stock Exchange by price fluctuations on a trading day) for, securities on any national securities exchange or in the over-the-counter market in the United States, (ii) a declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) any material limitation (whether or not mandatory) by any government or governmental, administrative or regulatory authority or agency in the United States on the extension of credit by banks or other lending institutions, (iv) a commencement of a war directly involving the United States and materially adversely affecting (or materially delaying) the consummation of the Offer or (v) in the case of any of the foregoing existing at the time of commencement of the Offer, a material acceleration or worsening thereof; (d) (i) it shall have been publicly disclosed or Purchaser shall have otherwise learned that beneficial ownership (determined for the purposes of this paragraph as set forth in Rule 13d-3 promulgated under the Exchange Act) of more than 20% of the outstanding Shares has been acquired by any corporation (including the Company or any of its subsidiaries or affiliates), partnership, person or other entity or group (as defined in Section 13(d)(3) of the Exchange Act), other than Parent or any of its affiliates or (ii) (A) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified in a manner adverse to Parent or Purchaser the approval or recommendation of the Offer, the Merger or the Merger Agreement, or approved or recommended any takeover proposal or any other acquisition of Shares other than the Offer and the Merger, (B) any such corporation, partnership, person or other entity or group shall have entered into a definitive agreement or an agreement in principle with the Company with respect to a tender offer or exchange offer for any Shares or a merger, consolidation or other business combination with or involving the Company or any of its subsidiaries, or (C) the Board of Directors of the Company or any committee thereof shall have resolved to do any of the foregoing; A-2 50 (e) any of the representations and warranties of the Company set forth in the Merger Agreement that are qualified by reference to materiality or a Material Adverse Effect shall not be true and correct, or any such representations and warranties that are not so qualified shall not be true and correct in all material respects, in each case as if such representations and warranties were made at the time of such determination; (f) the Company shall have failed to perform in any material respect any material obligation or to comply in any material respect with any material agreement or material covenant of the Company to be performed or complied with by it under the Merger Agreement; (g) the Merger Agreement shall have been terminated in accordance with its terms or the Offer shall have been terminated with the consent of the Company; or (h) any waiting periods under the HSR Act applicable to the purchase of Shares pursuant to the Offer or the Merger, and any applicable waiting periods under any foreign statutes or regulations, shall not have expired or been terminated; (i) the Company shall have terminated the employment agreement of Richard A. Stratton without the prior written consent of the Purchaser; and (k) the Company shall not have obtained the consent of each member of the Board of Directors of the Company to the cancellation of all Options held by such Directors as contemplated by Section 2.7 of the Merger Agreement. which, in the reasonable judgment of Purchaser with respect to each and every matter referred to above and regardless of the circumstances (except for any action or inaction by Purchaser or any of its affiliates constituting a breach of the Merger Agreement) giving rise to any such condition, makes it inadvisable to proceed with the Offer or with such acceptance for payment of or payment for Shares or to proceed with the Merger. The foregoing conditions are for the sole benefit of Purchaser and may be asserted by Purchaser regardless of the circumstances giving rise to any such condition (except for any action or inaction by Purchaser or any of its affiliates constituting a breach of the Merger Agreement) or (other than the Minimum Condition) may be waived by Purchaser in whole or in part at any time and from time to time in its sole discretion (subject to the terms of the Merger Agreement). The failure by Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, the waiver of any such right with respect to particular facts and other circumstances shall not be deemed a waiver with respect to any other facts and circumstances, and each such right shall be deemed an ongoing right that may be asserted at any time and from time to time. A-3 -----END PRIVACY-ENHANCED MESSAGE-----