<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
BANKVEST CAPITAL CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MASSACHUSETTS 7394 043124117
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
----------------
200 NICKERSON ROAD
MARLBORO, MA 01752
508-485-8080
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL
EXECUTIVE OFFICES)
----------------
PAUL S. GASS
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
BANKVEST CAPITAL CORP.
200 NICKERSON ROAD
MARLBORO, MA 01752
508-485-8080
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
----------------
COPIES TO:
RICHARD J. SNYDER, ESQ. STANLEY KELLER, ESQ.
GOLDSTEIN & MANELLO, P.C. PALMER & DODGE LLP
265 FRANKLIN STREET ONE BEACON STREET
BOSTON, MA 02110 BOSTON, MA 02108-3109
PHONE: (617) 946-8000 PHONE: (617) 573-0100
FAX: (617) 439-8988 FAX: (617) 227-4420
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, list the Securities Act registration statement number
of the earlier effective registration statement for the same offering and check
the following box. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1)(2) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $ 1.00 par value...... $42,550,000 $12,552.25
</TABLE>
================================================================================
(1) Includes shares of Common Stock (up to $5,550,000 of the aggregate offering
price) which may be purchased by the Underwriters to cover over-allotments,
if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to completion, dated September 30 , 1998
Prospectus
dated , 1998
Shares
[LOGO OF BANKVEST CAPITAL CORP. APPEARS HERE]
Common Stock
The shares of Common Stock (the "Common Stock") offered hereby (the "Offering")
are being sold by BankVest Capital Corp. ("BankVest" or the "Company") and
certain stockholders of the Company (the "Selling Stockholders"). The Company
will not directly receive any of the proceeds from the sale of shares by the
Selling Stockholders.
Prior to the Offering, there has been no public market for the Common Stock. It
is currently anticipated that the initial public offering price for the Common
Stock will be between $ and $ per share. See "Underwriting" for
information relating to the factors to be considered in determining the public
offering price. The Company has applied for quotation of the Common Stock on
the Nasdaq National Market under the symbol "BVST."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount (1) Company (2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share ................ $ $ $ $
- --------------------------------------------------------------------------------
Total (3) ................ $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at approximately
$ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional shares of Common Stock solely to cover over-allotments,
if any, at the Price to Public shown above, less the Underwriting Discount.
If this option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $
, respectively, and the Proceeds to Selling Stockholders will remain
unchanged. See "Underwriting."
The shares of Common Stock are offered by the Underwriters subject to prior
sale when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject orders in whole or in part. It is expected that
delivery of the certificates for such shares of Common Stock will be made at
the offices of Piper Jaffray Inc. in Minneapolis, Minnesota or in book-entry
form through the book-entry facilities of The Depository Trust Company on or
about , 1998.
Piper Jaffray Inc.
CIBC Oppenheimer Corp.
Friedman, Billings, Ramsey & Co., Inc.
<PAGE>
[LOGO OF BANKVEST CAPITAL CORP. APPEARS HERE]
Inside front cover sets forth four (4) bar graph charges which describe the
amount and size of lease applications, lease organizations, managed receivables
and total revenues of the Company for the years ended June 30, 1995, 1996, 1997
and 1998, except in the case of managed receivables which describes such
amounts for the period at June 30.
[GRAPHS APPEAR HERE]
(1) Managed receivables means the aggregate lease receivables as to which the
Company provides billing and collection services, whether or not the
Company actually owns such lease receivables.
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES OF COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK
FOLLOWING THE OFFERING TO COVER A SHORT POSITION IN THE COMMON STOCK OR FOR THE
PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK AND THE IMPOSITION OF
PENALTY BIDS. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME .
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements, including the related Notes,
appearing elsewhere in this Prospectus. Unless the context indicates otherwise,
all references to the "Company" or "BankVest" include BankVest Capital Corp., a
Massachusetts corporation, and its wholly-owned subsidiaries. The information
in this Prospectus (i) gives effect both to a two for one stock split effected
as of June 16, 1998, and the recapitalization (the "Recapitalization")
described under "Recapitalization" and (ii) assumes that the Underwriters'
over-allotment option is not exercised. Certain terms are defined in the
"Glossary" appearing as Appendix A.
THE COMPANY
BankVest Capital Corp. ("BankVest" or the "Company") is a commercial finance
company engaged in the origination, sale, securitization and servicing of non-
cancelable equipment leases to small and mid-sized businesses and the sale of
related services. The Company is a national provider of small-ticket leases
with original equipment acquisition costs typically ranging from $5,000 to
$250,000 and primarily financing automotive diagnostic, computer, printing,
manufacturing, automotive repair, office, healthcare and telecommunications
equipment. The Company also, from time to time, originates leases with original
equipment acquisition costs in excess of $250,000. The average cost of
equipment leased by the Company from its commencement of active operations in
late 1994 through June 30, 1998 was approximately $22,000, with terms generally
ranging from 12 to 87 months and a weighted average initial term of 51 months.
During the year ended June 30, 1998, the weighted average yield on leases
originated was 14.1%. Leases are originated through a direct sales force of 3l
sales professionals, including nine senior sales officers who have an average
of more than 14 years of leasing industry experience. The direct sales force
operates out of 16 sales locations and covers all regions of the continental
United States. The Company's centralized underwriting, servicing and collection
activities support its decentralized sales force and allow the Company to
manage the risks and costs associated with its growing lease portfolio.
The Company markets its customized, service-oriented lease products through
three sales channels: (i) national, regional and local equipment vendors; (ii)
directly to new and existing customers; and (iii) on a private label or co-
branded basis to customers of financial institutions which have become
participants in the Company's Bank Program. In addition, the Company has formal
and informal arrangements with a select group of approximately ten lease
brokers which provide a flow of referrals to the Company. To date,
approximately 87% of the Company's lease origination volume has been generated
through its vendor programs. However, the Company expects to originate an
increasing proportion of its leases from, among other sources, repeat business
from existing customers and through its Bank Program. The Company believes that
delivery of quality customer service has resulted in a significant amount of
repeat business. For the year ended June 30, 1998, 18% of the dollar volume of
the Company's lease originations were derived from customers who had previously
obtained lease financing from the Company. Management anticipates that the Bank
Program, whose participants include Star Bank, N.A. in Cincinnati, Ohio,
Firstar Bank Milwaukee, N.A. in Milwaukee, Wisconsin and other financial
institutions, will allow the Company to expand its customer base and
originations by marketing lease products to such banks' customers.
The Company uses a variety of sources of capital, including private equity,
subordinated debt, warehouse lines of credit, securitizations, sales by
assignment and term loans to fund its lease originations and operations.
Historically, the Company has sold, and intends to continue to sell, a
substantial portion of its lease originations through securitizations and sales
by assignment. The Company initially funds lease originations through warehouse
lines of credit and working capital. On a monthly or more frequent basis, the
Company transfers leases and the related equipment to a wholly-owned, special
purpose subsidiary. This subsidiary in turn sells and transfers its interest in
the leases being securitized and the related equipment to an unaffiliated bank
conduit which generally issues commercial paper. The Company may also sell its
lease receivables through a term note
3
<PAGE>
securitization. The Company completed its first term note securitization of
$ million on , 1998. Under this term note securitization, the leases and
the related equipment were purchased from the bank conduits by a special
purpose subsidiary of the Company which issued notes to investors secured by
the payments under the leases and the related equipment. This securitization
relied, in part, on credit enhancement provided by MBIA Insurance Company
("MBIA"), a monoline insurer, which guaranteed scheduled payments of interest
and ultimate payment of principal on one of the classes of notes issued in the
transaction in order to secure ratings for such notes of "AAA" by Standard &
Poor's Rating Group ("Standard & Poor's") and "Aaa" by Moody's Investors
Service ("Moody's").
Since it began active operations in late 1994, BankVest has experienced
significant growth in originations and net income. Originations increased from
$6.6 million to $206.4 million, and net income increased from ($332,000) to
$l.0 million, for the fiscal years ended June 30, 1995 and June 30, 1998,
respectively. To facilitate this growth, the Company has expanded from 3 to 17
sales locations and from 14 to 114 full-time employees from June 30, 1995 to
June 30, 1998. As of June 30, 1998, the Company managed 14,087 leases with
gross lease receivables of $317.0 million.
The Company believes that one of its major strengths is its seasoned
management team, whose extensive experience in the small-ticket leasing
industry provides the Company with expertise in sales and marketing,
operations, customer service, collections, accounting, management information
systems and legal matters. Paul S. Gass, the Company's Chief Executive Officer,
has over 34 years of experience in the leasing industry. John P. Colton, the
Company's Executive Vice President, has over 25 years of experience in the
leasing industry. Mr. Gass and Mr. Colton are supported by a senior management
team of seven additional professionals. This nine member management team has an
average of more than 16 years of experience in the leasing industry with a
variety of large commercial finance companies. Each member of senior management
has an equity interest in the Company. See "Management."
INDUSTRY OVERVIEW
The equipment leasing industry has grown rapidly in the United States over
the past decade and represents a large and growing source of business
financing. According to the Equipment Leasing Association of America ("ELA"),
80% of all United States businesses use leasing or financing to acquire capital
assets. Such lease financing in the United States increased from approximately
$122 billion in 1992 to an estimated $183 billion in 1998. The Company
estimates that approximately $70 to $80 billion of lease financing in 1998 will
be in the small-ticket segment of the market. The Company believes that small-
ticket equipment leasing is one of the most rapidly growing segments of the
industry primarily due to: (i) the increasing acceptance of leasing by small
and mid-sized businesses; (ii) the need for alternative providers of equipment
finance due to the significant increase in bank consolidations in the past
decade and the consequent loss of many community-based banks that traditionally
provided equipment financing to small and mid-sized businesses; (iii) the
inability or unwillingness of larger banks to adequately address the small-
ticket leasing market; (iv) the decrease in equipment cost as a result of
technological innovation; and (v) the need for flexible financing terms and
rapid turnaround times in processing equipment financing transactions and the
consequent recognition by small and mid-sized businesses that specialized
commercial finance companies such as the Company can provide faster and more
efficient service than traditional financial institutions.
BUSINESS STRATEGY
The Company intends to continue pursuing its goal of becoming a leading
provider of equipment financing in the small-ticket leasing market. The
following strategic elements are integral to the Company's success in achieving
its goal:
Operating Strategy
. Provide a superior level of customer service. The Company offers
consistent underwriting standards and rapid turnaround of lease
applications and documentation. The Company also provides flexible and
creative structuring of programs to its vendors, banks and lessees.
4
<PAGE>
. Capitalize on its experienced senior management team. The members of the
Company's senior management team have an average of more than 16 years of
leasing experience and have played key management roles in large, well-
known commercial finance companies. This experience has enabled the
Company to grow by building a quality sales force, operations staff,
infrastructure and sources of funding that are competitive with larger,
longer-established companies.
. Capitalize on its experienced sales and operations personnel. The
Company's sales team consists of 31 professionals, including nine senior
sales officers who have an average of more than 14 years of experience in
developing local, regional and national vendor lease referral
relationships. They are supported by a credit and operations staff of 48
persons who have an average of more than 10 years of experience in the
commercial finance industry. Together, the Company's sales and operations
personnel have significant skills and records of accomplishment in new
business development, lease originations, credit evaluation,
documentation and servicing and provide the Company with the ability to
develop innovative lease products, programs and systems to meet customer
needs.
. Utilize customized, state-of-the-art technologies. The Company utilizes
CreditWare, the Company's proprietary front-end booking system, LeasePak
U/X, a widely-used lease accounting and back-end servicing system
licensed to the Company, and CreditVest, the Company's sophisticated
proprietary credit scoring and evaluation system, as well as the
Company's website-based lease application, documentation and processing
capabilities to improve customer service and management reporting, while
reducing costs and enhancing efficiency and profitability.
. Maintain diversified sources of funding. Through the establishment and
maintenance of relationships with a diverse group of funding sources, the
Company is able to access capital at a cost which is competitive with
that available to larger companies.
Growth Strategy
. Expand vendor relationships and increase penetration of its core vendor
customer base. The Company intends to develop new vendor relationships,
including national vendor accounts, and increase its penetration into the
customer bases of its existing vendors by continuing to stress its
flexible, creative marketing programs, technology, personal service and
commitment to problem solving. The Company is also seeking to expand
vendor relationships by supporting vendors in new geographic areas, such
as Canada, and with new products, such as leases for equipment with costs
in excess of $250,000.
. Promote the Company's Bank Program. The Company is focused on expanding
the Bank Program by: (i) providing training, sales and marketing support
to bank loan officers and other bank personnel to enable them effectively
to promote the Company's lease programs; (ii) assisting bank personnel in
analyzing available customer data to develop suitable targets for the
Company's lease programs; (iii) initiating direct marketing campaigns
focused on reaching targeted bank customers; and (iv) using the Company's
customized technologies, including CreditWare, CreditVest and the
Company's website-based lease application, documentation and processing
capabilities which can be accessed directly or through hyperlink from the
websites of Bank Program participants. The Company also intends to
increase the number of participating financial institutions by continuing
to promote the advantages to such institutions of providing lease
programs.
. Increase the productivity of the Company's decentralized sales force. The
Company is undertaking a number of initiatives to increase the
productivity of its sales force, including: (i) providing superior
operations support and service to existing vendors to allow its sales
force to focus on developing new vendor programs; (ii) using marketing
research to target new vendors and customers; (iii) increasing awareness
and utilization of the Company's existing technology platform to
streamline the administrative process; and (iv) developing new lease
programs to meet the diverse needs of its customer base.
The Company's principal executive office is located at 200 Nickerson Road,
Marlboro, Massachusetts 01752 and its telephone number is (508) 485-8080. In
certain states, the Company operates through its wholly-owned subsidiary,
LeaseVest Capital Corp.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Compa- shares(1)
ny...............................
Common Stock offered by the Sell- shares
ing Stockholders.................
Common Stock and Non-Voting Common
Stock to be outstanding after the
Offering......................... shares(2)
Use of proceeds................... The net proceeds from the Offering will be
used for the repayment of $15.0 million of
subordinated indebtedness plus accrued
interest, payment of $ of accumulated
dividends on the Company's preferred stock,
and working capital and other general
corporate purposes, including the
origination of leases and the expansion of
operations. Pending application, the net
proceeds will be used to reduce short-term
indebtedness. See "Use of Proceeds."
Proposed Nasdaq National Market "BVST"
symbol...........................
</TABLE>
- --------
(1) Excludes up to an aggregate of shares of Common Stock, $1.00 par value,
that the Underwriters have the option to purchase from the Company to cover
over-allotments, if any. See "Underwriting."
(2) Includes outstanding shares of Common Stock and outstanding shares
of Non-Voting Common Stock, $1.00 par value (the "Non-Voting Common
Stock"). Excludes as of August 31, 1998: (i) 1,100,000 shares of Common
Stock reserved for issuance under the Company's 1995 Stock Option Plan (the
"1995 Plan"), of which options exercisable for 793,500 shares of Common
Stock were outstanding; (ii) 32,010 shares of Common Stock reserved for
issuance upon conversion of 32,010 outstanding shares of Non-Voting Common
Stock; (iii) 634,476 shares of Common Stock reserved for issuance under
outstanding warrants; and (iv) 72,000 shares of Non-Voting Common Stock
reserved for issuance under outstanding warrants and an equal number of
shares of Common Stock reserved for issuance upon conversion of such shares
of Non-Voting Common Stock into Common Stock. See "Management--Stock
Option, Incentive and Benefit Plans" and "Certain Transactions."
RISK FACTORS
See "Risk Factors" for a discussion of certain material factors that should
be considered in connection with an investment in the Common Stock offered
hereby.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------
1995 1996 1997 1998
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DA-
TA(1):
Revenues:
Earned income on lease
contracts............... $ 175 $ 1,251 $ 3,556 $ 5,217
Net gain from lease
contract sales.......... 203 1,228 4,681 13,812
Servicing fees and late
charges................. -- 51 435 1,885
Other income............. 24 124 383 1,537
----------- ----------- ----------- -----------
Total revenues......... 402 2,654 9,055 22,451
----------- ----------- ----------- -----------
Operating and other
expenses:
Selling, general and
administrative.......... 566 1,550 4,550 11,123
Provision for credit
losses and recourse on
sales of leases......... 105 528 2,529 5,902
Interest................. 63 551 1,541 3,384
----------- ----------- ----------- -----------
Total operating and
other expenses........ 734 2,629 8,620 20,409
----------- ----------- ----------- -----------
Income (loss) before
income tax provision...... (332) 25 435 2,042
Income tax provision...... -- -- 35 1,015
----------- ----------- ----------- -----------
Net income (loss)......... (332) 25 400 1,027
Accumulated preferred
stock dividends and
accretion................. -- (43) (529) (608)
----------- ----------- ----------- -----------
Net income (loss)
available for common
stockholders.............. $ (332) $ (18) $ (129) $ 419
=========== =========== =========== ===========
Basic net income (loss)
per common share.......... $ (0.25) $ (0.01) $ (0.05) $ 0.15
Diluted net income (loss)
per common share.......... $ (0.25) $ (0.01) $ (0.05) $ 0.13
Shares used to compute
basic net income (loss)
per common share......... 1,345,235 2,227,191 2,607,113 2,729,693
Shares used to compute
diluted net income (loss)
per common share......... 1,345,235 2,227,191 2,607,113 3,171,728
PRO FORMA STATEMENT OF
OPERATIONS DATA(2):
Pro forma net income
available for common
stockholders.............. $ 1,027
===========
Pro forma basic net income
per common share.......... $ 0.19
Pro forma diluted net
income per common share... $ 0.18
Pro forma shares used to
compute basic net income
per common share......... 5,331,640
Pro forma shares used to
compute diluted net
income per common share.. 5,773,675
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------
PRO FORMA
AS
PRO FORMA ADJUSTED
ACTUAL (3) (3)(4)
------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 1,140 $ 1,140
Restricted cash(5)................................ 16,224 16,224
Net investment in lease contracts(6).............. 55,541 55,541
Notes receivable.................................. 4,508 4,508
Due from funding sources.......................... 10,518 10,518
Total assets...................................... 95,834 95,834
Total liabilities................................. 78,722 79,699
Preferred stock and redeemable common stock
warrants......................................... 13,542 126
Stockholders' equity.............................. 3,570 16,009
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1995 1996 1997 1998
------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER DATA:
Dollar amount of applications......... $19,621 $ 81,642 $272,432 $598,253
Number of applications................ 613 3,283 10,977 19,884
Average application size (not in
thousands)........................... $32,008 $ 24,868 $ 24,818 $ 30,087
Credit approval percentage (as a
percentage of number of
applications)........................ 72% 61% 68% 71%
Approved applications resulting in
lease originations................... 72% 80% 66% 62%
Lease originations(7)................. $ 6,565 $ 29,595 $102,733 $206,430
Number of leases originated........... 316 1,609 4,931 8,796
Number of leases outstanding, end of
period............................... 316 1,831 6,459 14,087
Average equipment cost of lease
originations (not in thousands)...... $20,775 $ 18,394 $ 20,834 $ 23,469
Weighted average term of leases
originated (months).................. 48 48 48 53
Managed receivables, end of
period(8)............................ $ 7,923 $ 37,114 $136,938 $317,009
Total reserves as a percentage of net
managed receivables, end of period... 1.6% 2.0% 2.1% 2.4%
Delinquencies over 30 days past due,
end of period(9)..................... 0.7% 1.3% 2.7% 3.1%
Net charge-offs percentage(10)........ 0.2% 0.2% 1.0% 1.1%
Ratio of debt to total equity(11)..... 2.6x 0.4x 3.8x 2.2x
Ratio of debt to equity plus
subordinated debt(12)................ 2.6x 0.4x 0.8x 0.7x
Number of full-time employees, end of
period............................... 14 30 57 114
Number of sales locations, end of
period(13)........................... 3 6 13 16
</TABLE>
- --------
(1) From its inception in 1991 through June 30, 1994, the Company had no
operating activity and incurred nominal expenses.
(2) The pro forma net income available for common stockholders and pro forma
share and per share amounts assume the conversion of all classes of
preferred stock into Common Stock and Non-Voting Common Stock, as
applicable, pursuant to the Recapitalization and the payment of the
proceeds from the sale of the number of shares that would be issued in the
Offering to pay the estimated amount of the accumulated preferred stock
dividends as though such conversion and issuance occurred at the beginning
of the period. See "Recapitalization."
(3) After giving effect to the Recapitalization as though it had occurred as
of June 30, 1998. See "Recapitalization."
(4) Adjusted to reflect the sale of shares of Common Stock offered by the
Company hereby, at an assumed initial public offering price of $ per
share (the mid-point of the range set forth on the cover page of this
Prospectus), after deducting the estimated underwriting discount and
offering expenses, and the application of the net proceeds thereof. See
"Use of Proceeds."
(5) Restricted cash includes (i) cash held in escrow related to sales of lease
receivables originated through one vendor (see Note 9 to the Consolidated
Financial Statements) and (ii) amounts collected by the Company as part of
its servicing obligation and held for the benefit of the third parties to
whom the lease receivables were sold.
(6) The net investment in lease contracts includes the Company's net
investment in owned lease receivables and its retained interest in lease
receivables which have been sold by assignment or through securitization.
(7) Lease originations represent original equipment costs and related expenses
of all leases originated during the period, but do not include initial
direct costs and allowances for doubtful accounts associated with net
investment in lease contracts.
(8) Managed receivables means the aggregate lease receivables as to which the
Company provides billing and collection services, whether or not the
Company actually owns them, including leases sold by assignment or through
securitization.
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(9) Delinquencies over 30 days past due is calculated by dividing
delinquencies over 30 days past due by net managed receivables less lease
receivables originated but unbilled of $12.0 million and $7.6 million at
June 30, 1997 and 1998, respectively.
(10) Net charge-offs percentage is calculated by dividing net charge-offs by
average net managed receivables less lease receivables originated but
unbilled of $12.0 million and $7.6 million at June 30, 1997 and 1998,
respectively.
(11) For purposes of this ratio calculation, "debt" includes the balances of
revolving credit borrowings, bank notes payable and subordinated debt, and
"equity" includes total stockholders' equity plus the balance of preferred
stock and redeemable common stock warrants. All such balances were derived
from the Company's consolidated balance sheet as of the applicable year
end. The balance of the subordinated debt included within the calculation
will be repaid with a portion of the net proceeds of the Offering.
(12) This ratio is calculated as set forth in footnote 11, except subordinated
debt is included in "equity," not "debt."
(13) For 1998, represents the number of sales locations as of August 31, 1998
rather than June 30, 1998.
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RISK FACTORS
In addition to the other information in this Prospectus, an investor should
consider carefully the following factors before investing in the Common Stock
offered hereby.
The discussion in this Prospectus contains certain forward-looking
statements that involve risks and uncertainties, such as statements of the
Company's plans, objectives, expectations and intentions. The cautionary
statements made in this Prospectus, including the risk factors discussed
below, should be read as being applicable to all related forward looking
statements wherever they appear in this Prospectus. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include those discussed below,
as well as those discussed elsewhere herein or in the documents incorporated
by reference herein.
DEPENDENCE ON EXTERNAL FINANCING
Liquidity. The Company requires a substantial amount of cash to implement
its business strategy. The Company's primary operating cash requirements
include (a) funding of equipment leases, (b) interest and principal on
borrowings, (c) fees and expenses incurred in connection with lease sales and
securitizations, (d) income tax payments and (e) administrative and other
operating expenses. These cash requirements will increase as the Company's
lease originations increase. The Company historically has obtained cash
required for operations through (i) the sale of leases by assignment, (ii) the
sale of leases through securitization transactions, (iii) borrowings under
term loans and warehouse lines of credit and (iv) servicing and other fees, as
well as from private placements of subordinated debt and equity. The Company
will continue to be dependent on its ability to secure additional financing to
originate leases and to satisfy other working capital needs. No assurance can
be given that the Company will have access to capital markets in the future
for equity or debt issuances or for securitizations, or that financing through
warehouse lines of credit or other means will be available on acceptable
terms. The failure of the Company to access capital markets or obtain
acceptable financing could impede growth and have a material adverse effect on
its results of operations, financial condition, liquidity and prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Warehouse lines of credit. The Company funds a significant portion of the
leases it originates through its warehouse lines of credit, pursuant to which
leases are financed on a temporary basis pending aggregation of sufficient
pools of leases for permanent funding. The Company currently has three
warehouse lines of credit aggregating $41.5 million. Warehouse lines of credit
are generally of short maturity and, accordingly, the Company must replace or
renew them from time to time. There can be no assurance that the Company will
be successful in renewing, replacing or increasing as needed its lines of
credit, and the failure to do so could have a material adverse effect on the
Company's business, liquidity and cash flow. Borrowings under the warehouse
lines of credit are primarily repaid with the proceeds received by the Company
from sales of leases in securitization transactions and sales by assignment.
Any inability of the Company to securitize lease receivables or to transfer
lease receivables by assignment could have a material adverse effect on the
Company's ability to obtain new warehouse lines of credit, maintain or renew
its existing warehouse lines of credit or reduce indebtedness thereunder.
Further, the failure of the Company to obtain or maintain warehouse lines of
credit or other financings with acceptable pricing, advance rates and other
terms acceptable to the Company could have a material adverse effect on the
Company's cash flow, liquidity and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Sources of Funding--Warehouse Lines of Credit."
Securitizations and other lease sales. The Company depends in part on
securitizations, sales by assignment or other structured financings for
refinancing amounts outstanding under its warehouse lines of credit and to
generate cash for funding of new leases. For the year ended June 30, 1998,
gains resulting from the sale of the Company's leases through securitizations
represented 46% of the Company's total revenues and gains resulting from sales
by assignment represented 16% of the Company's total revenues. The Company
relies on two methods for securitization of its leases--conduit
securitizations and term note securitizations. In conduit
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securitizations, the Company transfers pools of leases and the related
equipment to a wholly-owned special purpose subsidiary. The subsidiary in turn
sells and transfers its interest in the leases and the related equipment to an
unaffiliated bank conduit which generally issues commercial paper. Each of the
Company's conduit facilities places limitations on the volume of the Company's
leases which may be securitized under that facility. The failure of the
Company to renew its existing conduit facilities, increase its capacity under
existing conduit facilities or to add new conduit facilities could have a
material adverse effect on the Company's financial condition, liquidity and
results of operations.
In term note securitizations, the leases and the related equipment are
purchased from the Company or bank conduits by a special purpose subsidiary of
the Company which issues notes secured by the payments under the leases and
the related equipment. The Company's ability to complete and control the
timing of term note securitization transactions is affected by a number of
factors, some of which are beyond the Company's control, including conditions
in the securities markets generally, conditions in the asset-backed securities
markets, the credit quality of the Company's lease originations, compliance of
the Company's leases with the eligibility requirements established in
connection with securitizations, the Company's ability to obtain third-party
credit enhancement and the Company's ability to service its managed
receivables adequately. The Company closed its first term note securitization
on , 1998. This securitization relied, in part, on credit enhancement
provided by MBIA, which guaranteed scheduled payments of interest and ultimate
payment of principal on one of the classes of notes issued in the
securitization in order to secure ratings for such class of notes of "AAA" by
Standard & Poor's and "Aaa" by Moody's. The Company anticipates utilizing
similar term note securitizations on a regular basis in the future, and the
unwillingness of MBIA or another such insurer to guarantee such notes, or any
impairment of the credit rating of any such insurer, could materially
adversely affect the interest rate on and the ability of the Company to sell
such notes. Any substantial reduction in the availability of the
securitization market for the Company's leases or any adverse change in the
terms of such securitizations could have an adverse effect on the Company's
financial condition, liquidity and results of operations.
In sales by assignment, the Company sells leases and the related equipment
to an institutional purchaser on a limited recourse basis. The failure of the
Company to renew its sales facilities, increase its capacity under such
facilities or add new facilities could have a material adverse effect on the
Company's financial condition, liquidity and results of operation. See "--
Interest Rate and Cost of Funds Risk" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Securitizations and
Other Lease Sales."
RISK OF REALIZATION OF RETAINED INTERESTS
The Company has securitized or sold by assignment a substantial portion of
the leases it originates. In each securitization transaction, the Company
transfers a pool of leases and the related equipment to a wholly-owned special
purpose subsidiary. Through its securitizations, the Company receives, as
consideration for transferring the leases, a substantial percentage of the
aggregate present value of adjusted future cash flows from such leases. In
addition, the Company retains a non-certificated undivided interest in the
remaining future cash flows (generally 12%), which is included on the
Company's balance sheet as a "retained interest" in the leases being sold or
securitized. The Company also holds a similar retained interest on its balance
sheet relating to sales by assignment (up to 15% of future cash flows), except
that these sales are made directly to the funding sources rather than to
wholly-owned subsidiaries.
The right to receive payment in respect of the retained interest is limited
to the cash flow available after payment of: (i) the portion of the lease
payments due to the purchaser of the securitized or sold leases; (ii) amounts
of principal and interest due to the noteholders to whom securitized leases
have been pledged as collateral; and (iii) servicing, backup servicing,
trustee, custodial and insurance and credit enhancement fees, if any, and
other securitization and sale expenses. As a result, the Company's retained
interest and its right to the equipment residual values, if any, are
effectively subordinated and consequently all credit losses incurred on the
entire portfolio of leases transferred in a particular securitization or sale
transaction are borne by the Company, to the extent of its retained interest.
Accordingly, relatively small fluctuations between estimated and actual
charge-off rates could be material in relation to the Company's retained
interest and its right to the equipment
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residual values, if any, and could have an adverse effect on the Company's
ability to realize its recorded basis in the retained interest and its right
to the equipment residual values, if any. In the event of an increase in
anticipated charge-offs, the Company would be required to reduce the carrying
amount of the retained interest and to record a charge to earnings in the
period in which the event occurred or became known to management.
In each securitization and sales transaction, the Company is entitled to
repurchase non-performing leases or substitute performing leases for non-
performing leases, subject to certain limitations. The right of lease
repurchase or substitution is exercised from time to time by the Company in
order to prevent non-performing leases from exceeding specified limitations in
each securitization or sale transaction. However, should these limitations be
exceeded because of a significant increase in non-performing leases which
renders repurchase or substitution impractical or untimely, the Company may be
precluded from securitizing or selling additional leases and its ability to
realize its recorded basis in the retained interest may be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Securitizations and Other Lease Sales."
EQUIPMENT RESIDUAL VALUE RISK
Certain leases originated by the Company have equipment residual values that
are retained by the Company notwithstanding the sale of the related lease
receivables. The equipment residual values are equal to the estimated fair
market value of the equipment at the end of the contract term of the lease and
are recorded as an asset on the Company's balance sheet. The Company's results
of operations depend, in part, upon its ability to realize these equipment
residual values. Realization of equipment residual values is achieved through
sale of the equipment to the lessee or on the secondary market or through re-
lease of the equipment. Realization of equipment residual values depends on
many factors that are outside the Company's control, including general market
conditions at the time of expiration of the lease, wear and tear on, or use
of, the equipment, the cost of comparable new equipment, the extent, if any,
to which the equipment has become technologically or economically obsolete
during the contract term and the effects of any additional or amended
government regulations. Additionally, the Company's equipment residual values
are available to the purchasers of the leases to satisfy the obligations to
such purchasers. To the extent that leases are in default, the Company's
ability to realize such equipment residual values may be impaired. Any
reductions in the estimated equipment residual values are charged to
operations in the period the change in estimate occurs. If, upon the
expiration of a lease, the Company sells or re-leases the underlying equipment
and the amount realized is less than the recorded equipment residual value of
such equipment, a loss reflecting the difference will be recognized by the
Company. Any failure by the Company to realize aggregate recorded equipment
residual values could have a material adverse effect on its financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Accounting Treatment."
INTEREST RATE AND COST OF FUNDS RISK
The Company's profitability is determined by, among other things, the
difference between the implicit lease rate charged to lessees and the
Company's cost of funds. The implicit lease rates charged by the Company are
based in part on interest rates prevailing in the market at the time of lease
approval. Until the Company obtains fixed rate funding for a lease through
securitization, sale by assignment or a term loan, the Company generally funds
the cost of the lease origination under its variable rate warehouse lines of
credit. The Company's operating margins would be adversely affected if
interest rates were to increase between the time the Company commits to
originate leases and obtains fixed rate funding. Future increases in the
Company's cost of funds could result in the Company raising the implicit lease
rate charged in connection with future originations, which could cause
customers to seek funding elsewhere. The Company does not currently hedge
against interest rate increases in the short-term (i.e. 30-90 days), but is
required under its conduit securitization facilities to hedge the Company's
variable interest rate risk under those facilities. In addition to the risk of
the counterparty failing to perform its obligations under the Company's
interest rate swap agreements, the potential for breakage costs under the swap
agreements could, during a period of adverse movements in interest rates,
increase the costs associated with a term note securitization and accordingly
reduce the Company's financing flexibility. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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LIMITED OPERATING HISTORY
The Company commenced leasing operations in September 1994, and therefore
has a limited history of operations. While the Company has had three
consecutive years of increasing profitability, there can be no assurance that
the Company's operations will remain profitable in future periods, nor can
there be any assurance that the Company will successfully implement its growth
strategy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
In addition, the Company has only recently established its Bank Program and
has, to date, entered into formal operating relationships with only six banks.
While the Company's management has experience in leasing to customers of banks
and other financial institutions, and believes that its Bank Program will be
attractive to financial institutions, there can be no assurance that a large
number of financial institutions will participate in the Bank Program. In
addition, the success of the Company's Bank Program will depend upon several
factors over which the Company has no control, including the continued
goodwill of the managements of such financial institutions, the stability of
the financial institutions involved in the Bank Program, and the continuing
decision of participating institutions not to provide such leasing services
themselves. See "Business--Sales and Marketing--Bank Program."
MANAGEMENT OF GROWTH
The Company has grown significantly since it commenced operations. This
growth has placed, and if sustained will continue to place, a burden on the
administrative and financial resources of the Company. Accordingly, the
Company's financial condition and results of operations will depend on
management's ability to manage effectively any future growth.
The Company's ability to sustain continued growth is dependent on its
capacity to attract, evaluate, finance and service increasing volumes of
leases of suitable yield and credit quality. Accomplishing such a result on a
cost-effective basis is largely a function of the Company's ability to market
its products effectively, to manage the credit evaluation process to assure
adequate portfolio quality, to provide competent, attentive and efficient
servicing, to maintain access to institutional financing sources to achieve an
acceptable cost of funds, to make investments in technology to support higher
volumes of leases, to maintain high quality customer service in response to
competitive conditions and to hire, train, supervise and manage new employees.
Any failure by the Company to market its products effectively, maintain its
portfolio quality, provide high quality customer service or support, service
its leases effectively, obtain institutional financing at reasonable rates,
successfully implement technological improvements, increase management,
financial and administrative resources or be able to identify, attract and
retain qualified personnel could have a material adverse effect on the
Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Business."
DEPENDENCE ON CREDITWORTHINESS OF LESSEES
The Company specializes in originating leases with respect to equipment
having original acquisition costs ranging from $5,000 to $250,000, generally
involving small and mid-size commercial lessees located throughout the United
States. Typically, the success of small businesses and their ability to make
payments under the Company's leases are dependent upon the management, talents
and efforts of one person or a small group of persons, and the death,
disability or resignation of one or more of these persons could have an
adverse impact on their business. Moreover, small businesses may be more
vulnerable to economic downturns and often need substantial additional capital
to expand or compete. Small business leases, therefore, generally entail a
greater risk of non-performance and higher delinquencies and losses than
leases entered into with larger, more creditworthy lessees. In addition, there
is limited publicly available information about such small businesses and they
often do not have audited financial statements. Accordingly, the Company must
rely on the diligence of its employees and agents to obtain information in
connection with the Company's credit decisions.
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The Company also, from time to time, originates leases with original
equipment acquisition costs in excess of $250,000. Approximately 7% of the
Company's managed receivables as of June 30, 1998 were in this segment. A
single delinquency or default of this magnitude could have a
disproportionately large impact on the Company's overall performance.
Because of the Company's short operating history, only limited performance
data is available with respect to leases originated by the Company. In
addition, as the size and age of the Company's managed receivables increase,
the Company may experience higher delinquency rates in the normal course of
business. Thus, historical delinquency and loss statistics are not necessarily
indicative of future performance. In addition, as a result of the Company's
exercise of its rights, subject to certain limitations, to repurchase non-
performing leases and to substitute performing leases for non-performing
leases in prior securitization and sales transactions, leases which are owned
by the Company could have higher delinquency rates than leases that have been
securitized or sold.
The failure of the Company's lessees to comply with certain terms of their
leases may result in the failure of such leases to qualify as collateral under
the Company's warehouse lines of credit and securitization and sales
transactions, and may have an adverse effect on the Company's financial
condition and results of operations. In the event the Company experiences
higher delinquencies or charge-offs than anticipated, the Company's earnings
could be impacted, perhaps materially. In addition, increasing rates of
delinquencies or charge-offs could result in adverse changes in the structure
of the Company's future securitization transactions, such as increased
interest rates payable to investors in such transactions and a requirement for
a greater level of credit enhancement. The Company has a limited history on
which to base its estimate of delinquencies and losses. Delinquencies and
losses experienced in excess of levels estimated by management in determining
the Company's allowance for credit losses and its retained interest could have
an adverse effect on the Company's ability to obtain financing in the future
and effect securitization and sale transactions which may, in turn, have a
material adverse effect on the Company's receipt of cash flows from its
retained interest and the Company's financial condition, liquidity and results
of operations. See "--Risk of Realization of Retained Interest," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business--Operations, Underwriting and Servicing."
CONCENTRATION OF LEASE SOURCES AND CREDIT RISKS
At any given time, one or a small number of customers or vendors may account
for a significant percentage of the Company's lease originations and, at June
30, 1998, one vendor accounted for 19% of the Company's managed receivables.
Business obtained from these customers and vendors may not be consistent from
quarter to quarter and there can be no assurance that the Company will be able
to retain such customers or vendors. As a result, the Company's results of
operations may fluctuate significantly from period to period, and any failure
by the Company to generate lease originations from new customers or new
vendors could reduce the volume of new leases that the Company is able to
originate, which could have an adverse effect on the Company's financial
condition and results of operations.
Although the Company's managed receivables include leases originated to
lessees located throughout the United States, at June 30, 1998 the Company had
significant concentrations of lessees in a few states, with 22% in New York,
16% in California and 12% in Massachusetts. The ability of these lessees to
honor their contracts may be substantially dependent on economic conditions in
these states.
A significant portion of the Company's leases are concentrated in certain
types of equipment, including automotive diagnostic, computer, printing,
manufacturing, automotive repair, office, healthcare and telecommunications
equipment. Changes in the economic or regulatory conditions prevalent in the
industries in which such equipment is used could adversely affect the demand
for lease financing, the ability of the Company's lessees to honor their lease
obligations and the ability of the Company to realize equipment residual
values in the future. See "Business--Portfolio Composition."
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RELATIONSHIPS WITH EQUIPMENT PROVIDERS
The Company relies to a significant degree on its relationships with the
vendors of the equipment which it leases to its lessees, and to date has
originated approximately 87% of its leases through its vendor programs. The
Company has formal agreements with many of its vendors, but these are
generally for terms of one year or less and do not commit the vendor to
provide the Company with any particular level of business. Thus, there can be
no assurance that any particular vendor will continue to provide lease
transactions to the Company. In addition, the termination of a vendor
relationship, a material adverse change in the financial condition or
operations of a vendor or a decision by a vendor to refer business to another
source could have a material adverse impact on the business of the Company,
its results from operations and financial condition. See "Business--Sales and
Marketing--Vendor Programs."
RISK OF GENERAL ECONOMIC DOWNTURN
The Company's business is directly related to business investment in
equipment, which is influenced by a variety of factors including the implicit
return on capital invested, prevailing interest rates, availability of capital
and other general economic conditions, all of which are outside the Company's
control. The Company's business also depends on the market for lease-backed
securities and the availability of other financing sources. Such markets are
influenced by several factors, including interest rates, the supply of
competing asset-backed securities and general economic conditions, all of
which are outside the Company's control. A future economic slow-down or
recession could adversely affect the Company's ability to originate leases and
to fund or securitize or sell leases. In addition, delinquencies and charge-
offs could be expected to rise in an adverse economic environment, which could
also adversely impact the Company's ability to sell or securitize leases and
its ability to recognize its basis in its retained interest and in leases
retained in its portfolio.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company may experience significant fluctuations in quarterly operating
results due to a number of factors, including the timing of securitization or
sale transactions, the interest rate on the securities issued in connection
with such securitization transactions, variations in the volume of leases
originated by the Company, differences between the Company's cost of funds and
the average implicit yield to the Company on its leases prior to being
securitized or sold, the degree to which the Company encounters competition in
its markets and general economic conditions. As a result of these fluctuations
and the significant impact that timing of securitization or sale transactions
may have on the Company's results of operations, results for any one quarter
should not be relied upon as being indicative of performance in future
quarters. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Securitizations and Other Lease Sales."
RESTRICTIVE COVENANTS UNDER CREDIT FACILITIES
The Company is subject to certain restrictive covenants under its credit
facilities which vary among the facilities and include, among other things,
prohibitions or limitations on the payment of dividends, limitations on the
incurrence of new indebtedness and minimum net worth and/or net income
requirements, interest coverage ratios, capital expenditures limitations, and
delinquency and default ceilings. At August 31, 1998, the Company was in
compliance with the provisions of such covenants, but there can be no
assurance that it will be in compliance in the future. In addition, the terms
of certain credit facilities require that advances be repaid upon a sale,
securitization or pledge of the leases funded under such facilities. To date,
proceeds received by the Company in a sale, securitization or loan transaction
have generally been sufficient to repay amounts borrowed as well as issuance
expenses, but there can be no assurance that this will be the case in the
future.
DEPENDENCE UPON KEY PERSONNEL
The Company depends to a large extent upon the experience, abilities and
continued efforts of Paul S. Gass, Chairman, President and Chief Executive
Officer, and John P. Colton, Executive Vice President, as well as other
members of senior management. The loss of the services of one or more of the
members of the Company's senior management could have an adverse effect on the
Company's performance. The loss of the services of either Mr. Gass or Mr.
Colton could result in a default under some of the Company's credit
facilities. The Company's future
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success will depend upon its ability to attract and retain additional skilled
management personnel necessary to support anticipated future growth. See
"Management."
COMPETITION
The business of small-ticket equipment lease financing is highly fragmented
and competitive, with no single company having a market share in excess of 5%.
The Company competes with (i) a large number of national, regional and local
finance companies, (ii) captive finance and leasing companies affiliated with
major equipment manufacturers and (iii) other sources of financing including
traditional financial services companies such as commercial banks, savings and
loan associations and credit unions. Many of the Company's competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. For example, some competitors may have a
lower cost of funds and access to other funding sources that may be
unavailable to the Company. In addition, certain of the Company's competitors
may have higher risk tolerances or different risk assessments which could
allow them to establish more vendor and lessee relationships and build their
market share. There can be no assurance that the Company will be able to
compete successfully against current and future competitors or that
competitive pressures faced by the Company will not materially adversely
affect its business, operating results and financial condition. See
"Business--Competition."
ADEQUATE INSURANCE ON LEASED EQUIPMENT
The Company provides casualty insurance for the leased equipment under
certain of the Company's leases through The Equipment Leasing Insurance Co.,
Ltd. ("ELI"), the Company's wholly-owned Bermuda subsidiary. ELI provides such
insurance for its own account without seeking reinsurance. ELI maintains
reserves to cover casualty claims; however, there can be no assurance that
such reserves will be sufficient to satisfy casualty claims in the future. Any
shortfall of such reserves could expose the Company to incomplete insurance
coverage on its leased equipment and such exposure could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, although the Company's lease documents require that
lessees maintain insurance against casualty loss to the leased equipment, on
occasion the Company may permit certain lessees to self-insure against such
risks. If a lessee defaults under its obligation to provide such insurance and
there is a casualty loss to the equipment which the lessee is otherwise unable
to financially bear, then the Company will be subject to the risk of such
uninsured loss. See "Business--Insurance Subsidiary."
DISRUPTIONS DUE TO TRANSITION TO INTERNAL SERVICING OF LEASE PORTFOLIO
The Company currently contracts with a third party, Portfolio Financial
Services, Inc. ("PFS"), for certain lease accounting and portfolio management
services. However, the Company has commenced an initiative to perform such
accounting and portfolio management services internally to improve customer
service and management reporting and to reduce servicing costs. There can be
no assurance that the transition from PFS to internal systems will not result
in disruptions to the Company's servicing of its lease portfolio. Such
disruptions could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Operations,
Underwriting and Servicing--Servicing."
YEAR 2000 COMPLIANCE
There is significant uncertainty regarding the effect of the Year 2000
problem because computer systems which do not properly recognize date
sensitive information when the year changes to 2000 could generate erroneous
data or altogether fail. The Company believes that its own internal software
and hardware are fully Year 2000 compliant. Based upon information received
from certain independent third party vendors which perform certain data
processing functions in connection with servicing the Company's portfolios,
certain software of these third parties has been identified as non-Year 2000
compliant. However, the Company is implementing a strategic initiative to
perform all of its portfolio servicing internally on its own system utilizing
LeasePak U/X, which has been certified by the licensor to be Year 2000
compliant, and plans to cease using the third party outside portfolio servicer
in early 1999.
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The Company is undertaking this initiative for reasons unrelated to the Year
2000 problem in an effort to improve customer service and management reporting
and ultimately reduce servicing costs and enhance profitability. The Company's
continued use of a vendor which is not Year 2000 compliant to perform
servicing functions or the failure of the Company's own computerized systems
to be fully Year 2000 compliant could materially adversely affect the
Company's business, financial condition and results of operations. For
example, such failure could prevent the Company from originating new leases,
pricing such leases with accuracy, operating its proprietary software systems
such as CreditVest and CreditWare, or determining the existence or extent of
any delinquencies.
The Company cannot measure the impact that the Year 2000 issue will have on
its vendors, suppliers, lessees and other parties with which the Company
conducts business. Year 2000 problems experienced by any of these parties
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Year 2000 Compliance."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Restated Articles of Organization, as amended (the "Articles
of Organization" or the "Charter"), and Amended and Restated Bylaws (the
"Bylaws") contain certain provisions that may have the effect of discouraging,
delaying or preventing a change in control of the Company or unsolicited
acquisition proposals that a stockholder might consider favorable, including
providing for a Board of Directors with staggered three-year terms, requiring
super-majority voting to effect certain amendments to the Charter and Bylaws
or to approve certain business combinations, limiting the persons who may call
special stockholders' meetings, and establishing advance notice requirements
for nominations for election to the Board of Directors or for proposing
matters that can be acted upon at stockholders' meetings. In addition, certain
provisions of Massachusetts law may have the effect of discouraging, delaying
or preventing a change in control of the Company or unsolicited acquisition
proposals. See "Description of Capital Stock--Certain Anti-Takeover
Provisions."
SUBSTANTIAL INFLUENCE BY EXISTING STOCKHOLDERS
Following the Offering, the Company's executive officers and directors and
their affiliates will, in the aggregate, beneficially own up to approximately
% of the Company's outstanding shares of Common Stock. These stockholders,
if acting together, may be able effectively to control most matters requiring
approval by the stockholders of the Company, including the election of the
members of the Board of Directors, the authorization of an increase in the
Company's capital stock, or the dissolution, merger or sale of the Company.
The voting power of such stockholders under certain circumstances could have
the effect of delaying or preventing a change in control of the Company. See
"Principal and Selling Stockholders."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active market for the Common Stock will
develop upon completion of the Offering or, if developed, that such market
will be sustained. The initial public offering price of the Common Stock was
determined through negotiations between the Company, the Selling Stockholders
and the Underwriters and may bear no relationship to the market price of the
Common Stock after the Offering. Prices for the Common Stock after the
Offering may be influenced by a number of factors, including the liquidity of
the market for the Common Stock, investor perception of the Company and the
equipment lease financing industry in general, and general economic and other
conditions. For information relating to the factors considered in determining
the initial public offering price, see "Underwriting." The trading price of
the Common Stock also could be subject to wide fluctuations in response to
variations in financial estimates by securities analysts and other events or
facts.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no market for the Common Stock of the
Company. Future sales of substantial amounts of Common Stock in the public
market, or the perception that such sales could occur, could adversely affect
prevailing market prices. In addition, several of the Company's principal
stockholders and their affiliates hold a significant portion of the Company's
outstanding Common Stock, and a decision by one or more of these stockholders
to sell their shares could adversely affect the market price of the Common
Stock.
17
<PAGE>
Upon completion of the Offering, the Company will have outstanding
shares of Common Stock ( shares if the Underwriters' over-allotment option
is exercised in full). Of these shares, the shares offered hereby (
shares if the Underwriters' over-allotment option is exercised in full) will
be freely tradeable without restriction or registration under the Securities
Act of 1933, as amended (the "Securities Act"), except to the extent purchased
by affiliates of the Company.
The remaining shares of the Common Stock outstanding are "restricted
securities" (the "Restricted Shares") as that term is defined in Rule 144
promulgated under the Securities Act. The Restricted Shares were issued and
sold by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act and may not be sold without registration
except in compliance with Rule 144 or another exemption from registration
under the Securities Act. Pursuant to Rule 144, of the Restricted Shares
are eligible for sale without restriction under the Securities Act on the date
of this Prospectus and will be eligible for sale subject to the
conditions set forth in Rule 144, 90 days after the date of this Prospectus.
However, of the foregoing Restricted Shares are subject to lock-up
agreements and will not be eligible for sale until 180 days after the date of
this Prospectus. At such time, of the Restricted Shares will be eligible
for sale subject to Rule 144. See "Shares Eligible for Future Sale."
Following the date of this Prospectus, the Company intends to register for
sale approximately 1,100,000 shares of Common Stock issuable under the
Company's 1995 Stock Option Plan (the "1995 Plan"). Of these shares, 793,500
are subject to outstanding options as of August 31, 1998, all of which are
subject to lock-up agreements. Upon the expiration of such lock-up agreements,
options exercisable for approximately 339,075 shares of Common Stock will be
exercisable. Shares issued to persons who are not affiliates upon exercise of
such options after the effective date of such registration and the expiration
of the lock-up agreements will be tradeable without restriction under the
Securities Act.
The Company also has reserved 1,821,024 shares of Common Stock for issuance
upon the exercise of warrants and the conversion of shares of Non-Voting
Common Stock. Although such warrants and shares of Non-Voting Common Stock are
currently exercisable or convertible, the shares of Common Stock issuable
thereunder are subject to lock-up agreements. In the event the warrants are
exercised or shares of Non-Voting Common Stock are converted during the period
ending 180 days after the date of this Prospectus, the shares issued upon
exercise of such warrants or conversion of such Non-Voting Common Stock will
not be eligible for sale until the completion of such period. At such time,
such shares will be eligible for sale subject to Rule 144. See "Certain
Transactions" and "Shares Eligible for Future Sale."
The holders of an aggregate of 3,069,951 shares of Common Stock (the
"Registrable Shares") which are outstanding or which are issuable upon the
exercise of certain outstanding warrants or the conversion of the shares of
Non-Voting Common Stock are entitled to rights with respect to registration of
such shares under the Securities Act beginning 180 days after the date of this
Prospectus. The holders of such shares have waived their right to have such
shares of Common Stock registered as part of this Offering. See "Shares
Eligible for Future Sale--Registration Rights."
DILUTION
The initial public offering price is substantially higher than the book
value per outstanding share of the Common Stock. Accordingly, purchasers in
this Offering will experience immediate and substantial dilution in net
tangible book value of $ per share ($ per share if the Underwriters'
over-allotment option is exercised in full). See "Dilution."
ABSENCE OF DIVIDENDS
The Company intends to retain earnings to finance the growth and development
of its business. Accordingly, the Company does not anticipate declaring or
paying cash dividends on the Common Stock in the foreseeable future. In
addition, certain of the Company's credit agreements contain restrictive
covenants which, among other things, limit the payment of dividends and
contain other financial covenants that may limit the availability of funds for
the payment of dividends in the future. See "Dividend Policy."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $ million
(or approximately $ million if the Underwriters' over-allotment option is
exercised in full), after deducting the estimated underwriting discount and
offering expenses and assuming an initial offering price of $ per share. Of
these net proceeds, $ million will be used to repay subordinated
indebtedness plus accrued interest, which becomes payable in full upon the
closing of the Offering and bears interest at the rate of 10.101% (the
"Subordinated Note"), and $ will be used to pay accumulated dividends on
the Company's preferred stock. See "Recapitalization" and "Certain
Transactions." The remaining net proceeds will be used for working capital and
other general corporate purposes, including origination of leases and the
expansion of operations.
Pending ultimate application, the net proceeds will be used to reduce
temporarily the Company's aggregate amount of indebtedness outstanding under
its warehouse lines of credit. At June 30, 1998, the aggregate amount of
indebtedness that would have been temporarily repaid would have been $ .
This indebtedness bears interest at variable rates, which at June 30, 1998 was
% on a weighted average basis. One such credit line is terminable at will,
the others will mature on December 12, 1998 and August 12, 1999, and each may
be repaid without premium or penalty. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Company will not directly receive any proceeds from the sale of shares
of Common Stock offered by the Selling Stockholders hereby; however, a portion
of these proceeds will be used by certain Selling Stockholders who are all
employees to repay loans made by the Company to such employees to assist them
with the purchase of their shares of Common Stock. See "Certain Transactions"
and "Principal and Selling Stockholders."
DIVIDEND POLICY
The Company currently intends to retain earnings to finance the growth and
development of its business and does not anticipate paying any cash dividends
on the Common Stock and Non-Voting Common Stock in the foreseeable future. In
addition, provisions in certain of the Company's credit agreements contain
restrictions on the payment of dividends on the Common Stock and Non-Voting
Common Stock. Any future change in the Company's dividend policy will be made
at the discretion of the Company's Board of Directors in light of the
financial condition, capital requirements, earnings and prospects of the
Company and any restrictions under the Company's credit agreements, as well as
other factors the Board of Directors may deem relevant.
RECAPITALIZATION
Except as otherwise noted, all information in this Prospectus reflects the
following actions (collectively the "Recapitalization"), which will be
effected prior to or simultaneous with the completion of this Offering: (i) a
three for two Common Stock split; (ii) the reclassification of Class A Common
Stock as Common Stock; (iii) the reclassification of Class B Common Stock as
Non-Voting Common Stock; (iv) the increase in the number of authorized shares
of capital stock to 25,000,000 shares of Common Stock and 2,000,000 shares of
Non-Voting Common Stock; (v) the conversion of 30,000 shares of Class A
Convertible Preferred Stock, $1.00 par value (the "Class A Preferred Stock"),
into 720,000 shares of Common Stock; (vi) the conversion of 30,000 shares of
Class B Convertible Preferred Stock, $1.00 par value (the "Class B Preferred
Stock"), into 720,000 shares of Non-Voting Common Stock; (vii) the conversion
of 37,500 shares of Class C Convertible Preferred Stock, $1.00 par value (the
"Class C Preferred Stock"), into 523,500 shares of Common Stock; (viii) the
conversion of 37,500 shares of Class D Convertible Preferred Stock, $1.00 par
value (the "Class D Preferred Stock"), into 523,500 shares of Non-Voting
Common Stock; and (ix) the elimination of all of such classes of preferred
stock (the "Preferred Stock") from authorized capital. In connection with the
conversion of the Preferred Stock into Common Stock and Non-Voting Common
Stock, the holders thereof will receive in cash at the closing of the Offering
the accumulated dividends on such shares of Preferred Stock through that date.
At August 31, 1998, the amount of such accumulated dividends was $1,123,970.
See "Certain Transactions."
19
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1998, (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the
Company reflecting the Recapitalization, and (iii) the pro forma
capitalization of the Company as adjusted to reflect the sale by it of
shares of Common Stock offered hereby, after deducting the underwriting
discount and offering expenses, at an assumed initial public offering price of
$ per share and the application of the estimated net proceeds therefrom as
set forth in "Use of Proceeds." This table should be read in conjunction with
the Consolidated Financial Statements, including the related Notes, and other
financial information included herein.
<TABLE>
<CAPTION>
JUNE 30, 1998
---------------------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(2) ADJUSTED(2)(3)
---------------- ---------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
DEBT:
Revolving credit
borrowings.............. $ 17,056 $ 17,056 $
Bank notes payable....... 6,431 6,431
Subordinated debt........ 14,928 14,928
---------------- ---------------- -------------
Total debt.............. 38,415 38,415
---------------- ---------------- -------------
Preferred Stock and
redeemable common stock
warrants.................. 13,542 126
---------------- ---------------- -------------
STOCKHOLDERS' EQUITY:
Common Stock, $1.00 par
value; authorized
15,000,000 shares
(actual) and 25,000,000
shares (pro forma and
pro forma as adjusted);
issued and outstanding
2,784,219 shares
(actual), 4,027,719
shares (pro forma), and
shares (pro forma as
adjusted)(1)............ 2,784 4,028
Non-Voting Common Stock,
$1.00 par value;
authorized 792,000
shares (actual) and
2,000,000 shares (pro
forma and pro forma as
adjusted); issued and
outstanding 32,010
shares (actual),
1,275,510 shares
(pro forma), and shares
(pro forma as
adjusted)(1)............ 32 1,275
Additional paid-in
capital................. 2,097 12,049
Accumulated deficit...... (69) (69)
Notes receivable from
officers and employees.. (1,274) (1,274)
---------------- ---------------- -------------
Total stockholders'
equity................. 3,570 16,009
---------------- ---------------- -------------
Total capitalization.... $ 55,527 $ 54,550 $
================ ================ =============
</TABLE>
- -------
(1) Excludes as of August 31, 1998: (i) 1,100,000 shares of Common Stock
reserved for issuance under the Company's 1995 Plan as of the closing of
the Offering of which options exercisable for 793,500 shares of Common
Stock are outstanding; (ii) 32,010 shares of Common Stock reserved for
issuance upon conversion of 32,010 outstanding shares of Non-Voting Common
Stock; (iii) 634,476 shares of Common Stock reserved for issuance under
outstanding warrants; and (iv) 72,000 shares of Non-Voting Common Stock
reserved for issuance under outstanding warrants, and an equal number of
shares of Common Stock reserved for issuance upon conversion of such
shares of Non-Voting Common Stock. See "Management--Stock Option,
Incentive and Benefit Plans," and "Certain Transactions."
(2) Reflects the conversion of 30,000 shares of Class A Preferred Stock into
720,000 shares of Common Stock, the conversion of 30,000 shares of Class B
Preferred Stock into 720,000 shares of Non-Voting Common Stock, the
conversion of 37,500 shares of Class C Preferred Stock into 523,500 shares
of Common Stock and the conversion of 37,500 shares of Class D Preferred
Stock into 523,500 shares of Non-Voting Common Stock. The effects of the
conversion of the Class A and Class C Preferred Stock and the Class B and
Class D Preferred Stock into Common Stock and Non-Voting Common Stock,
respectively, are to decrease Preferred Stock by $13,416,000, and increase
Common Stock by $1,243,500, Non-Voting Common Stock by $1,243,500, and
additional paid-in capital by $9,952,000.
(3) Reflects the sale by the Company of shares of Common Stock for $
after deducting the underwriting discount and offering expenses, at an
assumed initial public offering price of $ per share, the termination
of a certain warrant and the application of the estimated net proceeds to
repay the Subordinated Note, plus accumulated interest and accumulated
dividends on the Preferred Stock. The effects of the Offering are to
increase Common Stock by and additional paid-in capital by $ . The
effects of the termination of the warrant are to decrease Preferred Stock
and redeemable common stock warrants and to increase additional paid-in
capital by $ . The effects of the use of proceeds are to reduce
subordinated debt by $ and accumulated dividends on Preferred Stock by
$ and to increase the accumulated deficit by $ . The increase in the
accumulated deficit relates to the loss on extinguishment of debt, net of
an income tax benefit of $ , which will be recorded as an extraordinary
charge by the Company upon prepayment of the subordinated debt. See
"Certain Transactions."
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1998 was
approximately $15.6 million, or approximately $2.94 per share of Common Stock.
Pro forma net tangible book value per share represents the total tangible
assets of the Company, less total liabilities, divided by shares of Common
Stock and Non-Voting Common Stock outstanding after giving effect to the
Recapitalization. Assuming the receipt by the Company of the net proceeds from
the sale of the shares of Common Stock offered hereby at an assumed
initial public offering price of $ per share, the pro forma net tangible
book value of the Company as of June 30, 1998 would have been $ , or $
per share. This represents an immediate increase in the pro forma net tangible
book value of $ per share to existing stockholders of the Company and an
immediate dilution of $ per share to new investors purchasing Common Stock
in this Offering. The following table illustrates the per share dilution to be
incurred by new investors calculated as of June 30, 1998:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........................ $
Pro forma net tangible book value per share at June 30, 1998.......... $
Increase in net tangible book value per share attributable to new
investors............................................................
---
Pro forma net tangible book value per share after the Offering.........
---
Pro forma net tangible book value dilution per share to new
investors(1).......................................................... $
===
</TABLE>
- --------
(1) Dilution is determined by subtracting pro forma net tangible book value
per share after the Offering from the amount of cash paid by a new
investor for a share of Common Stock.
The following table sets forth, on a pro forma basis calculated as of June
30, 1998 (after giving effect to the Recapitalization), the differences
between the existing stockholders and the new investors with respect to the
number of shares of Common Stock acquired from the Company, the total
consideration paid and the average price per share (assuming an initial public
offering price of $ per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- -------- --------- ---------- --------- ---
<S> <C> <C> <C> <C> <C> <C>
Existing
stockholders(1)........ % $ % $
New investors...........
-------- -------- --------- ---------
Total................. 100% 100%
======== ======== ========= =========
</TABLE>
- --------
(1) Includes shares of Non-Voting Common Stock. Sales by the Selling
Stockholders in this Offering will reduce the number of shares held by
existing stockholders to , or % of the total number of shares
outstanding after this Offering, and will increase the number of shares of
Common Stock held by new investors to shares, or % of the total
number of shares of Common Stock outstanding after this Offering. See
"Principal and Selling Stockholders."
The above information excludes an aggregate of 1,350,639 shares of Common
Stock issuable upon the exercise of options and warrants outstanding at June
30, 1998, with a weighted average exercise price of $4.80 per share, and
160,962 shares issuable under the Vesting Warrant. To the extent that such
options or warrants are exercised, there will be further dilution to new
investors. See "Management--Option Grants in Last Fiscal Year," "Stock Option,
Incentive and Benefit Plans" and Note 12 of Notes to Consolidated Financial
Statements.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected financial and other data of the
Company for the periods indicated. Selected financial data for each of the
four years in the period ended June 30, 1998 have been derived from the
Company's audited historical consolidated financial statements. The selected
consolidated financial and other data set forth below is qualified in its
entirety by, and should be read in conjunction with, the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements, which have been audited by Deloitte &
Touche LLP, independent auditors, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------
1995 1996 1997 1998
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(1):
Revenues:
Earned income on lease
contracts............... $ 175 $ 1,251 $ 3,556 $ 5,217
Net gain from lease
contract sales.......... 203 1,228 4,681 13,812
Servicing fees and late
charges................. -- 51 435 1,885
Other income............. 24 124 383 1,537
----------- ----------- ----------- -----------
Total revenues.......... 402 2,654 9,055 22,451
----------- ----------- ----------- -----------
Operating and other
expenses:
Selling, general and
administrative.......... 566 1,550 4,550 11,123
Provision for credit
losses and recourse on
sales of leases......... 105 528 2,529 5,902
Interest................. 63 551 1,541 3,384
----------- ----------- ----------- -----------
Total operating and
other expenses......... 734 2,629 8,620 20,409
----------- ----------- ----------- -----------
Income (loss) before
income tax provision..... (332) 25 435 2,042
Income tax provision...... -- -- 35 1,015
----------- ----------- ----------- -----------
Net income (loss)......... (332) 25 400 1,027
Accumulated preferred
stock dividends and
accretion................ -- (43) (529) (608)
----------- ----------- ----------- -----------
Net income (loss)
available for common
stockholders............. $ (332) $ (18) $ (129) $ 419
=========== =========== =========== ===========
Basic net income (loss)
per common share......... $ (0.25) $ (0.01) $ (0.05) $ 0.15
Diluted net income (loss)
per common share......... $ (0.25) $ (0.01) $ (0.05) $ 0.13
Shares used to compute
basic net income (loss)
per common share......... 1,345,235 2,227,191 2,607,113 2,729,693
Shares used to compute
diluted net income (loss)
per common share......... 1,345,235 2,227,191 2,607,113 3,171,728
PRO FORMA STATEMENT OF
OPERATIONS DATA(2):
Pro forma net income
available for common
stockholders............. $ 1,027
===========
Pro forma basic net income
per common share......... $ 0.19
Pro forma diluted net
income per common share.. $ 0.18
Pro forma shares used to
compute basic net income
per common share......... 5,331,640
Pro forma shares used to
compute diluted net
income per common share.. 5,773,675
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1995 1996 1997 1998
------ ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 893 $ 2,576 $ 2,533 $ 1,140
Restricted cash(3)............................. -- -- 1,670 16,224
Net investment in lease contracts(4)........... 2,732 12,236 43,019 55,541
Notes receivable............................... -- 473 634 4,508
Due from funding sources....................... 190 -- 8,192 10,518
Total assets................................... 4,622 16,588 60,356 95,834
Total liabilities.............................. 3,424 8,406 51,689 78,722
Preferred stock and redeemable common stock
warrants...................................... -- 5,573 6,188 13,542
Stockholders' equity........................... 1,198 2,609 2,479 3,570
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------
1995 1996 1997 1998
------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
OTHER DATA:
Dollar amount of applications........... $19,621 $81,642 $272,432 $598,253
Number of applications.................. 613 3,283 10,977 19,884
Average application size (not in
thousands)............................. $32,008 $24,868 $ 24,818 $ 30,087
Credit approval percentage (as a
percentage of number of applications).. 72% 61% 68% 71%
Approved applications resulting in lease
originations........................... 72% 80% 66% 62%
Lease originations(5)................... $ 6,565 $29,595 $102,733 $206,430
Number of leases originated............. 316 1,609 4,931 8,796
Number of leases outstanding, end of
period................................. 316 1,831 6,459 14,087
Average equipment cost of lease
originations (not in thousands)........ $20,775 $18,394 $ 20,834 $ 23,469
Weighted average term of leases
originated, (months)................... 48 48 48 53
Managed receivables, end of period(6)... $ 7,923 $37,114 $136,938 $317,009
Total reserves as a percentage of net
managed receivables, end of period..... 1.6% 2.0% 2.1% 2.4%
Delinquencies over 30 days past due, end
of period(7)........................... 0.7% 1.3% 2.7% 3.1%
Net charge-offs percentage(8)........... 0.2% 0.2% 1.0% 1.1%
Ratio of debt to total equity(9)........ 2.6x 0.4x 3.8x 2.2x
Ratio of debt to equity plus
subordinated debt(10).................. 2.6x 0.4x 0.8x 0.7x
Number of full-time employees, end of
period................................. 14 30 57 114
Number of sales locations, end of
period(11)............................. 3 6 13 16
</TABLE>
- --------
(1) From its inception in 1991 through June 30, 1994, the Company had no
operating activity and incurred nominal expenses.
(2) The pro forma net income available for common stockholders and pro forma
per share and share amounts assume the conversion of all classes of
Preferred Stock into Common Stock and Non-Voting Common Stock, as
applicable, pursuant to the Recapitalization, and the payment of the
proceeds from the sale of the number of shares to be issued in the
Offering to pay the estimated amount of the accumulated Preferred Stock
dividends, as though such conversion and issuance occurred at the
beginning of the period.
23
<PAGE>
(3) Restricted cash includes (i) cash held in escrow related to sales of lease
receivables originated through one vendor (see Note 9 in the Consolidated
Financial Statements) and (ii) amounts collected by the Company as part of
its servicing obligation and held for the benefit of the third parties to
whom the lease receivables were sold.
(4) The net investment in lease contracts includes the Company's net
investment in owned lease receivables plus its retained interest in lease
receivables which were sold by assignment or through securitization.
(5) Lease originations represent the original equipment cost and related
expenses of all leases originated during the period, but do not include
initial direct cost and allowances for doubtful accounts associated with
net investment in lease contracts.
(6) Managed receivables means the aggregate lease receivables as to which the
Company provides billing and collection services, whether or not the
Company actually owns them, including leases sold by assignment or through
securitization.
(7) Delinquencies over 30 days past due is calculated by dividing
delinquencies over 30 days past due by net managed receivables less lease
receivables originated but unbilled of $12.0 million and $7.6 million at
June 30, 1997 and 1998, respectively.
(8) Net charge-offs percentage is calculated by dividing net charge-offs by
average net managed receivables less lease receivables originated but
unbilled of $12.0 million and $7.6 million at June 30, 1997 and 1998,
respectively.
(9) For purposes of this ratio calculation, "debt" includes the balances of
revolving credit borrowings, bank notes payable and subordinated debt, and
"equity" includes total stockholders' equity plus the balance of Preferred
Stock and redeemable common stock warrants. All such balances were derived
from the Company's consolidated balance sheet as of the applicable year
end. The balance of the subordinated debt included within the calculation
will be repaid with a portion of the net proceeds of the Offering.
(10) This ratio is calculated as set forth in footnote 9 except subordinated
debt is included in "equity" not "debt."
(11) For 1998, represents the number of sales locations as of August 31, 1998
rather than June 30, 1998.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
The Company provides lease financing and leasing services primarily in the
small-ticket equipment leasing market. The leases originated by the Company
are generally non-cancelable, with terms equal to or less than the leased
equipment's estimated economic life. The Company seeks to price its leases
such that they result in an implicit yield (without regard to fee income, late
fees, insurance fees, rental income on expired leases or gains on sales of
equipment at the end of the lease term) of 600 to 800 basis points over the
blended average of the discount rates and interest rates of all of its funding
sources. The average cost of equipment leased by the Company from its
commencement of active operations in late 1994 through June 30, 1998, is
approximately $22,000, with terms generally ranging from 12 to 87 months and a
weighted average initial term of 51 months.
The Company initially funds the origination of its leases through warehouse
lines of credit. Upon achieving a portfolio of sufficient size and
diversification, the Company obtains long-term financing of its portfolio
through term loan borrowings or the sale of the lease receivables through
securitizations or sales by assignment. Generally, the Company retains
servicing rights on leases it originates and earns servicing fee income over
the life of the lease.
The Company's leases are collateralized by the equipment leased as well as,
in many cases, a personal guarantee provided by one or more principals of the
lessee's business. The Company seeks to manage credit risk through adherence
to the Company's underwriting criteria and its ongoing effort to increase the
diversification of its customer base, geographic location of lessees and the
type of equipment leased. In addition, credit risk is further mitigated by the
recoveries that the Company may be able to obtain on the leased equipment. The
Company believes that prepayment risks are mitigated by the non-cancelable
provisions of its leases.
The Company established its insurance subsidiary in June 1996 to make
insurance coverage available on certain of the equipment leased by the
Company.
ACCOUNTING TREATMENT
Substantially all of the leases originated by the Company are direct finance
leases. A lease is classified as a direct finance lease for accounting
purposes if the collection of the minimum lease payments is reasonably
predictable, no significant uncertainties exist relating to unreimbursable
costs yet to be incurred by the lessor under the lease and the lease meets one
of the following criteria: (i) ownership of the property is transferred to the
lessee at the end of the lease term; (ii) the lease contains a bargain
purchase option exercisable at the end of the lease term; (iii) the term of
the lease is at least equal to 75% of the estimated economic life of the
leased equipment; or (iv) the present value of the minimum lease payments is
at least equal to 90% of the fair value of the leased equipment at the
inception of the lease.
The Company records total scheduled lease payments and any estimated
equipment residual values of its direct finance leases as the gross investment
in the lease. The difference between the gross investment in the lease and the
cost of the leased equipment is recorded as unearned income. Initial direct
costs (consisting of fees and brokerage commissions and other origination
costs) are deferred as part of the net investment in lease contracts and are
amortized over the lease term. Interest income is recognized over the term of
the lease by amortizing the unearned income, net of deferred initial direct
costs, using the interest method.
At June 30, 1998, approximately 74% of the leases outstanding contained
bargain purchase options that permit the lessee to buy the leased equipment
for a nominal amount at the end of the term of the lease. With respect to the
remaining leases, equipment residual values recorded by the Company typically
ranged from 10% to 15% of the original cost of the leased equipment. At June
30, 1998, the equipment residual values were approximately $8.0 million, or
2.6% of the original cost of all leased equipment, excluding equipment
residual values under originated and unbilled lease contracts. The estimated
equipment residual values are recorded as a
25
<PAGE>
component of net investment in lease contracts on the Company's consolidated
balance sheet until the end of the lease term, at which time the Company
generally seeks to realize that value through sale of the equipment, either to
the lessee or on the secondary market. At such time, the Company may also seek
to realize the equipment residual values through renewal or extension of the
original lease or lease of the equipment to a new user. On an annual basis,
the Company reviews its estimated equipment residual values for
recoverability. Any reductions in the estimated equipment residual values are
charged to operations in the period the change in estimate occurs. The
difference between the proceeds of a sale and the remaining estimated
equipment residual values is recorded as a gain or loss in revenues when title
is transferred to the buyer.
The Company maintains reserves for credit losses in connection with payments
due under lease contracts held in the Company's portfolio and its retained
interest in leases securitized or sold. The reserves are based on management's
analysis of the Company's delinquency and historical loss experience,
projected future potential loss rates, the level of recourse provided, if any,
economic conditions and trends, estimates of future trends, industry
statistics and lease portfolio characteristics and other assumptions. The
Company's policy is to review delinquent lease receivables accounts on a
monthly basis for collectibility. Based on that review, the portion of the
lease receivables believed to be uncollectible at that time is charged off.
Recoveries on leases previously charged off are restored to reserves. The
Company believes its reserves for credit losses are adequate. See "Selected
Consolidated Financial and Other Data" and "Business--Asset Quality."
SECURITIZATIONS AND OTHER LEASE SALES
Historically, the Company has sold, and intends to continue to sell, a
substantial portion of its lease originations through securitizations and
sales by assignment. The Company initially funds lease originations through
warehouse lines of credit and working capital. On a monthly or more frequent
basis, the Company transfers leases and the related equipment to a wholly-
owned, special purpose subsidiary. This subsidiary in turn sells and transfers
its interest in the leases being securitized and the related equipment to an
unaffiliated bank conduit which generally issues commercial paper. The Company
may also sell its lease receivables through a term note securitization. The
Company completed its first term note securitization of $ million on ,
1998. Under this term note securitization, the leases were purchased from the
bank conduits by a special purpose subsidiary of the Company which issued
notes to investors secured by the payments under the leases and the related
equipment. This securitization relied, in part, on credit enhancement provided
by MBIA which guaranteed scheduled payments of interest and ultimate payment
of principal on one of the classes of notes issued in the transaction, in
order to secure ratings for such notes of "AAA" by Standard & Poor's and "Aaa"
by Moody's.
Gain on sale of leases sold or securitized is recognized at the time of the
sale. Income related to the retained interest is recognized over the remaining
term of the leases sold. Any servicing fees specified in the sale agreements,
which approximate market-rate servicing fees, are recognized by the Company as
revenue over the term of the servicing period.
In each securitization transaction, the Company transfers a pool of leases
and the related equipment to a wholly-owned special purpose subsidiary.
Through its securitizations, the Company receives, as consideration for
transferring the leases, a substantial percentage of the aggregate present
value of adjusted future cash flows from such leases. In addition, the Company
retains a non-certificated undivided interest in the remaining future cash
flows. The balance is included in the Company's balance sheet as a retained
interest in the leases being sold or securitized. To date, the retained
interest resulting from conduit securitizations has been approximately 12% of
the present value of the aggregate future cash flows due under the pool of
leases securitized and, in the term note securitization, %. In addition, the
Company also holds a similar retained interest on its balance sheet related to
sales by assignment, except that these sales are made directly to funding
sources rather than to wholly-owned subsidiaries. The retained interest
resulting from sales by assignment has not exceeded 15% of the present value
of the aggregate future cash flows due under the pool of leases sold. To date,
the Company has retained the right to service the leases it has securitized or
sold by assignment.
26
<PAGE>
At the time of each securitization or sale, the Company's net investment in
the lease contracts securitized or sold is allocated between the portion of
the leases transferred, the retained interest and the equipment residual
values, if any. The allocation is based on each component's estimated fair
value. The fair value of the retained interest is based on the Company's
estimate of future cash flows of the pool of leases sold, net of defaults,
fees and expenses, discounted at a market interest rate. The Company estimates
the expected levels of cash flows available to the retained interest after
taking into consideration estimated charge-offs, recoveries and other factors.
Over the life of the lease pool securitized, the Company, through its
subsidiary, is eligible to receive the excess cash flow attributable to the
retained interest resulting from the excess, if any, of the lease payments
received, net of defaults, over the sum of (i) the portion of the lease
payments due to the purchaser of the securitized leases, (ii) amounts of
principal and interest due to the noteholders to whom securitized leases have
been pledged as collateral and (iii) servicing, backup servicing, trustee,
custodial and insurance and credit enhancement fees, if any, and other
securitization and sale expenses. As a result, the Company's retained interest
and its interest in the equipment residual values, if any, are effectively
subordinated and consequently all credit losses incurred on the entire
portfolio of leases transferred in a particular securitization or sale
transaction are borne by the Company, to the extent of its retained interest
and its interest in the equipment residual values, if any. Accordingly,
relatively small fluctuations between estimated and actual charge-off rates
could be material in relation to the Company's retained interest and its
interest in the equipment residual values, if any, and could have an adverse
effect on the Company's ability to realize its recorded basis in the retained
interest and its interest in the equipment residual values, if any. In the
event of an increase in anticipated charge-offs, the Company would be required
to reduce the carrying amount of the retained interest or its interest in the
equipment residual values and record a charge to earnings in the period in
which the event occurred or became known to management.
The Company's conduit securitization facilities, which are at variable rates
of interest, require the Company to enter into interest rate swap agreements
for the benefit of the purchaser of the leases. Such swap agreements
effectively provide for the payment by the Company of a fixed rate of interest
from the pool of securitized leases to the bank conduit purchasing the leases,
notwithstanding the payment by the conduit of a variable rate of interest on
the commercial paper issued by it. The Company does not hold or issue interest
rate swap agreements or any other derivative financial instruments for trading
purposes. At the time of each securitization, the Company's special purpose
subsidiary assigns its right, title and interest in the interest rate swap
agreement to the purchaser of the leases. At June 30, 1998, the uncollected
balance of leases sold under the securitization facilities was approximately
$216.1 million. Related interest rate swap agreements outstanding at June 30,
1998 had an aggregate notional value of approximately $170.5 million, required
payments based on fixed rates ranging from 5.63% to 8.00% and had a negative
estimated fair value of approximately $895,000.
In addition to selling leases through securitization transactions, the
Company has sold portfolios on a limited recourse basis to institutional
purchasers. Upon these sales by assignment, the Company records gains or
losses based on the proceeds received, net of related selling expenses and the
cost of leases sold. The Company estimates defaults on these portfolios and
has included estimated losses within the assumptions underlying the accounting
for the sale of these leases. See "Business--Asset Quality."
In each securitization and sale transaction, the Company is entitled to
repurchase non-performing leases or substitute performing leases for non-
performing leases, subject to certain limitations. The right of lease
repurchase or substitution is exercised from time to time by the Company in
order to prevent non-performing leases from exceeding specified limitations in
each securitization or sale transaction. However, should these limitations be
exceeded because of a significant increase in non-performing leases which
renders repurchase or substitution impractical or untimely, the Company may be
precluded from securitizing or selling additional leases and its ability to
realize its recorded basis in the retained interest may be materially
adversely affected. See "Risk Factors--Risk of Realization of Retained
Interests."
27
<PAGE>
Through December 31, 1996, gains on sale of leases sold or securitized were
recorded by the Company in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 77, "Reporting by Transferors for
Transfers of Financial Assets and Extinguishments of Liabilities." In June
1996, the Financial Accounting Standards Board adopted SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." SFAS No. 125 is effective for transactions occurring after
December 31, 1996. Among other things, SFAS No. 125 requires the recognition
of gain at the time the Company sells the leases in a securitization, and that
servicing assets and other retained interests in transferred assets be
measured by allocating the previous carrying amount between the assets sold,
if any, and retained interests, if any, based on relative fair values at the
date of transfer. The Company's implementation of SFAS No. 125 did not have a
material effect on the Company's financial position or results of operations.
The Company's reported earnings during any particular period will be
significantly affected by the amount and timing of recognition of gain
resulting from the securitizations or sales which the Company may consummate
in such period. See "Risk Factors--Dependence on External Financing" and "Risk
Factors--Fluctuations in Quarterly Results."
RESULTS OF OPERATIONS
Year Ended June 30, 1998, Compared to Year Ended June 30, 1997
Total revenues increased $13.4 million, or 148%, to $22.5 million for the
year ended June 30, 1998 from $9.1 million for the year ended June 30, 1997,
due to the continued growth of the Company's leasing operations. The dollar
value of lease originations increased 101% to $206.4 million for the year
ended June 30, 1998 from $102.7 million for the prior year due to the 78%
increase in the number of leases originated to 8,796 from 4,931, as well as a
13% increase in the average equipment cost of lease originations to $23,469
from $20,834. The increase in lease originations during the year ended June
30, 1998 was due, in part, to $45.0 million of lease originations referred to
the Company by one new vendor which accounted for 43% of the increase in lease
originations in 1998.
Earned income on lease contracts increased $1.6 million, or 47%, to $5.2
million for the year ended June 30, 1998, from $3.6 million for the year ended
June 30, 1997. The increase was primarily due to an increase in the Company's
net investment in lease contracts, which increased by $12.5 million, or 29%,
to $55.5 million at June 30, 1998, from $43.0 million at June 30, 1997.
Net gain from lease contract sales increased $9.1 million, or 195%, to $13.8
million for the year ended June 30, 1998, from $4.7 million for the year ended
June 30, 1997. The increase was principally due to a 190% increase in the
proceeds of lease contracts sold to $192.8 million for the year ended June 30,
1998, from $66.4 million for the year ended June 30, 1997, as a result of
higher lease originations. Approximately 17% of the gains on sale were
effectively attributable to the leases referred by the new vendor discussed
above.
Servicing fees and late charges increased $1.5 million, or 333%, to $1.9
million for the year ended June 30, 1998, from $435,000 for the year ended
June 30, 1997. The increase was the result of the increase in the volume of
leases originated, as discussed above. At June 30, 1998, the Company serviced
14,087 receivables with aggregate future minimum lease payments of $317.0
million, compared to 6,459 receivables with aggregate future minimum lease
payments of $136.9 million at June 30, 1997.
Other income increased $1.2 million, or 301%, to $1.5 million for the year
ended June 30, 1998, from $383,000 for the year ended June 30, 1997. Most of
the increase in 1998 was the result of increases in interest income of
$286,000, gains on sales of equipment at lease maturity or upon early
termination of $240,000, casualty insurance premiums of $232,000 paid to ELI
and bank program fees of $164,000.
Selling, general and administrative expenses increased $6.5 million, or
144%, to $11.1 million for the year ended June 30, 1998, from $4.6 million for
the year ended June 30, 1997. The increase primarily resulted from the
increase in salaries and benefits to $8.1 million for the year ended June 30,
1998, from $3.9 million for the
28
<PAGE>
year ended June 30, 1997, and increases in related general and administrative
expenses incurred to support the Company's increased staffing levels, as well
as an increase in professional fees. The increase in staff from 57 full-time
employees to 114 full-time employees was necessary to support the growth of
the Company's business.
Provision for credit losses and recourse on sales of leases increased $3.4
million, or 133%, to $5.9 million for the year ended June 30, 1998, from $2.5
million for the year ended June 30, 1997. The increase was primarily the
result of the increase in lease originations in the year ended June 30, 1998
and additional experience with the portfolio.
Interest expense increased $1.9 million, or 120%, to $3.4 million for the
year ended June 30, 1998, from $1.5 million for the year ended June 30, 1997.
The increase was due to the increased average balances outstanding under the
Company's warehouse lines of credit and other credit facilities and an
increase in the Company's average cost of borrowing resulting from the
issuance of the $15.0 million Subordinated Note in February 1997, which was
outstanding in all of fiscal 1998.
Provision for income taxes increased to $1.0 million for the year ended June
30, 1998, from $35,000 for the year ended June 30, 1997. The increase was due
primarily to the increase in income before provision for income taxes to $2.0
million for the year ended June 30, 1998, from $435,000 for the year ended
June 30, 1997. The Company also experienced an increase in the effective tax
rate to 49.7% for the year ended June 30, 1998, compared to 8.1% for the year
ended June 30, 1997. The 1997 rate was low primarily due to the utilization of
federal net operating loss carryforwards which were fully recognized in fiscal
year 1997 and not available in 1998. In addition, state taxes in fiscal year
1998 were impacted by the large volume of leases originated in states with
higher tax rates and in states that do not allow the consolidation of the
operations of related entities. The Company's tax planning strategies are
expected to result in the origination of larger percentages of its leases in
states with lower tax rates in the future as it expands the business and the
origination of more leases with equipment residual values which will give the
Company the opportunity to reduce its effective tax rate.
Net income increased $627,000, or 157%, to $1.0 million for the year ended
June 30, 1998, from $400,000 for the year ended June 30, 1997, due to the
foregoing factors.
Year Ended June 30, 1997, Compared to Year Ended June 30, 1996
Total revenues increased $6.4 million, or 241%, to $9.1 million for the year
ended June 30, 1997, from $2.7 million for the year ended June 30, 1996, due
to the continued growth of the Company's leasing operations. The dollar value
of lease originations increased 247% to $102.7 million for the year ended June
30, 1997 from $29.6 million for the prior year due to the 206% increase in the
number of leases originated to 4,931 from 1,609, as well as a 13% increase in
the average equipment cost of lease originations to $20,834 from $18,394.
Earned income on lease contracts increased $2.3 million, or 184%, to $3.6
million for the year ended June 30, 1997, from $1.3 million for the year ended
June 30, 1996. The increase was primarily due to an increase in the Company's
net investment in lease contracts, which increased by $30.8 million, or 252%,
to $43.0 million at June 30, 1997, from $12.2 million at June 30, 1996.
Net gain from lease contract sales increased $3.5 million, or 281%, to $4.7
million for the year ended June 30, 1997, from $1.2 million for the year ended
June 30, 1996. The increase was principally due to a 207% increase in the
proceeds of lease contracts sold to $66.4 million for the year ended June 30,
1997, from $21.6 million for the year ended June 30, 1996. This increase was
due, in part, to the Company's initiation of securitization transactions in
November 1996.
Servicing fees and late charges increased $384,000, or 753%, to $435,000 for
the year ended June 30, 1997, from $51,000 for the year ended June 30, 1996.
The increase was the result of the increase in the volume of leases
originated, as discussed above, and the increase in service fees attributable
principally to the initiation of securitization transactions. At June 30,
1997, the Company serviced 6,459 receivables with aggregate future
29
<PAGE>
minimum lease payments of $136.9 million, compared to 1,831 receivables with
aggregate future minimum lease payments of $37.1 million at June 30, 1996.
Other income increased $259,000, or 209%, to $383,000 for the year ended
June 30, 1997, from $124,000 for the year ended June 30, 1996. The increase
was largely the result of higher levels of gains on sale of equipment at lease
maturity or upon early termination, as well as a small contribution from
insurance operations which commenced on July 1, 1996.
Selling, general and administrative expenses increased $3.0 million, or
194%, to $4.6 million for the year ended June 30, 1997, from $1.6 million for
the year ended June 30, 1996. The increase primarily resulted from an increase
in salaries and benefits to $3.9 million for the year ended June 30, 1997,
from $1.5 million for the year ended June 30, 1996, as well as increases in
professional fees. These increases reflect the addition of staff necessary to
support the growth of the Company's business.
Provision for credit losses and recourse on sales of leases increased $2.0
million, or 379%, to $2.5 million for the year ended June 30, 1997, from
$528,000 for the year ended June 30, 1996. This increase was primarily
attributable to increases in lease originations and additional experience with
the portfolio.
Interest expense increased $1.0 million, or 180%, to $1.5 million for the
year ended June 30, 1997, from $551,000 for the year ended June 30, 1996. The
increase was due to the increased average balances outstanding under the
Company's warehouse lines of credit and other credit facilities and an
increase in the Company's average cost of borrowing resulting from the
issuance of a $15.0 million Subordinated Note in February 1997.
Provision for income taxes increased $35,000 for the year ended June 30,
1997, from no provision for the year ended June 30, 1996. The increase was due
primarily to the increase in income to $435,000 for the year ended June 30,
1997, from $25,000 for the year ended June 30, 1996. The effective tax rate
for the year ended June 30, 1997 was 8.1% compared to no tax for the year
ended 1996. The low tax rates were due to federal loss carryforwards from
prior years.
Net income increased to $400,000 for the year ended June 30, 1997 from
$25,000 for the year ended June 30, 1996, due to the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
The Company's lease finance business is capital intensive and requires
access to substantial short-term and long-term credit to fund new equipment
leases. The Company's uses of cash include the origination of leases, payment
of interest expense, repayment of borrowings under its warehouse facilities,
payment of operating and administrative expenses, payment of income taxes and
capital expenditures. Since inception, the Company has funded its operations
primarily through borrowings under its warehouse lines of credit, subordinated
debt, sales of equity, term loans, sales by assignment and securitizations.
The Company also generates cash flow from ongoing servicing and other fees,
including late charges on managed leases, distributions made with respect to
the retained interest in leases securitized or sold by assignment and the
liquidation of equipment residual values. In addition, the Company structures
its securitization transactions to qualify as financings for income tax
purposes and, accordingly, no income tax is payable on the gain on sale of
lease contracts in the period in which the gain is recognized. The Company
will continue to require access to significant additional capital to maintain
and expand its volume of leases originated, and expects to fund its business
in the future from similar sources.
Cash provided by (used in) operating activities. The Company's operating
activities provided (used) cash of $780,000, ($2.1 million) and $2.2 million
for the years ended June 30, 1996, 1997 and 1998, respectively. Cash provided
by (used in) operating activities represents cash received by the Company as
earned income on lease contracts, servicing fees and late charges and other
income, net of cash paid for selling, general and administrative expenses,
interest and income taxes. Changes in assets and liabilities, which result
principally from the timing of operating cash receipts and disbursements,
positively (negatively) impacted operating cash
30
<PAGE>
flows by $1.2 million, ($655,000) and $6.7 million for the years ended June
30, 1996, 1997 and 1998, respectively.
Cash used in investing activities. The Company's investing activities used
cash of ($6.6) million, ($26.5) million and ($16.3) million for the years
ended June 30, 1996, 1997 and 1998, respectively. Cash paid for acquisitions
of equipment for lease totaled $32.2 million, $90.8 million and $196.1 million
for the years ended June 30, 1996, 1997 and 1998, respectively. Cash proceeds
from sales of receivables and lease payments received were $27.8 million,
$68.6 million and $205.2 million for the years ended June 30, 1996, 1997 and
1998, respectively.
Cash provided by financing activities. The Company's financing activities
provided cash of $7.5 million, $28.5 million and $12.7 million for the years
ended June 30, 1996, 1997 and 1998, respectively. Financing cash flows include
net proceeds from borrowings, other than subordinated debt, of $511,000, $14.6
million and $5.3 million for the years ended June 30, 1996, 1997 and 1998,
respectively. Net proceeds from the issuance of subordinated debt were $13.9
million for the year ended June 30, 1997. Net proceeds from the issuances of
preferred and common stock were $7.0 million and $7.3 million for the years
ended June 30, 1996 and 1998, respectively.
The Company believes that its cash flows from the net proceeds from future
securitization transactions and sales by assignment and amounts available
under its warehouse and other borrowing facilities will be sufficient to fund
the Company's operations for at least the next twelve months.
SOURCES OF FUNDING
As of August 31, 1998, the Company had 15 credit sources which permitted
funding in the aggregate amount of $409.5 million. The Company's borrowings
and sales under these sources totaled approximately $277.8 million.
The following table sets forth information concerning the Company's sources
of funding as of August 31, 1998. In addition to the following amounts, $
million is expected to be available to the Company from the proceeds of the
Offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
TOTAL AMOUNTS AVAILABLE
NUMBER OF COMMITTED AMOUNTS AT
SOURCE OF FUNDING SOURCES OR FUNDED OUTSTANDING AUGUST 31, 1998 MATURITIES
----------------- --------- --------- ----------- ----------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Warehouse lines of 3 $41.5 $25.4 $ 16.1 At will--
credit................. August 21, 1999
Term loans.............. 4 12.0 6.5 5.5 At will--
December 27, 2001
Subordinated Note(1).... 1 15.0 15.0 0.0 February 27, 2005
Conduit securitization April 28, 1999 and
facilities(2).......... 2 275.0 179.7 95.3 October 31, 2001
Sales facilities........ 5 66.0 51.2 14.8 At will--
--- ----- ----- ------ March 28, 1999
Total facilities...... 15 409.5 277.8 131.7
Term note 1 --
securitization(2)......
--- ----- ----- ------
Total sources......... 16 $ $ $131.7
=== ===== ===== ======
</TABLE>
- --------
(1) The Subordinated Note will be repaid with a portion of the net proceeds
from the Offering.
(2) The term note securitization closed on , 1998. Upon the closing of
the term note securitization, the total amount available under the
Company's conduit securitization facilities was reduced from $275.0
million to $225.0 million and the total utilized under the conduit
securitization facilities was reduced by $ million, resulting in a pro
forma amount available under the conduit securitization facilities of $
million at , 1998.
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<PAGE>
Warehouse lines of credit. At August 31, 1998, the Company maintained three
warehouse lines of credit which permitted borrowings in the aggregate amount
of $41.5 million and, on that date, the Company's borrowings under these
facilities totaled approximately $25.4 million. One of these facilities (the
"BankBoston Facility") has a credit line of $20.0 million and expires on
December 12, 1998. Under the terms of this facility, the Company may borrow at
variable interest rates equal to, at the Company's option, either (i) the
Eurodollar Rate or (ii) the higher of the bank's Base Rate or the Federal
Funds Effective Rate plus 0.5%. At August 31, 1998, the interest rate on the
BankBoston Facility was 8.5%. The Company has pledged as collateral all of the
receivables of, and equipment subject to leases funded through, the facility,
any liens or security interests that the Company has in any such collateral,
and chattel paper representing such leases. In addition, the terms of the
facility require that advances be repaid upon the permanent financing or
securitization of leases funded under the facility. Historically, the
BankBoston Facility has not been hedged and is, therefore, subject to
movements in interest rates.
A second warehouse facility is with MetroWest Bank in the amount of $6.5
million. At August 31, 1998, $6.5 million was outstanding and the interest
rate on this facility was 8.25%. This facility is terminable by MetroWest Bank
at will.
The third warehouse facility is with Fleet Bank, N.A. in the amount of $15.0
million. At August 31, 1998, the Company had not yet utilized any amounts
available under this facility. This facility expires on August 21, 1999.
Term loans. The Company is party to term financing agreements with various
banks. Such agreements provide maximum aggregate borrowings of $12.0 million
and, at August 31, 1998, $6.5 million was outstanding under them. The annual
interest rates on such outstanding borrowings ranged from 8.11% to 10.0% and
had a weighted average of 8.30% at August 31, 1998. Under certain of these
arrangements, the Company assigns specific lease contracts and the underlying
equipment as collateral. Certain of these facilities are terminable at will
while others have various expiration dates through December 27, 2001.
Subordinated Note. In February 1997, the Company received $15.0 million in
connection with the issuance of the Subordinated Note. The Subordinated Note
bears interest at the rate of 10.101%. The Company will prepay the
Subordinated Note, together with accrued interest with a portion of the net
proceeds of the Offering. While there is no premium or penalty for such
prepayment, the Company will record an extraordinary loss upon prepayment
related to the unamortized debt issue costs and discount.
Conduit securitization facilities. The Company has established two conduit
securitization facilities through two wholly-owned, bankruptcy-remote special
purpose subsidiaries. On September 30, 1996, the Company established its first
securitization facility for $50.0 million with a BankBoston conduit, which was
subsequently increased to $125.0 million. On August 21, 1997, the Company
established its second securitization facility for $75.0 million with a First
Union National Bank conduit, which was subsequently increased to $150.0
million. Upon the completion of the Company's term note securitization, the
maximum amount available under the First Union National Bank conduit was
reduced to $100.0 million, resulting in an aggregate conduit securitization
capacity of $225.0 million.
Sales facilities. The Company is party to five sales facilities under which
the Company has sold portfolios of leases to institutional purchasers on a
limited recourse basis. Such sales facilities provide maximum available sales
capacity of $66.0 million and had $51.2 million outstanding as of August 31,
1998. The annual interest rates on such facilities ranged from 8.07% to 9.11%
and had a weighted average of 8.35% as of August 31, 1998. These facilities
have various expiration dates from at will to March 28, 1999.
Term note securitization. On , 1998, the Company completed a $
term note securitization. Timely payment of interest and ultimate payment of
principal on one of the classes of the medium term notes issued by the
Company's special purpose subsidiary in the term note securitization has been
guaranteed by MBIA and rated "AAA" by Standard & Poor's and "Aaa" by Moody's.
The leases which back the term notes were purchased from the Company's conduit
securitization facilities, reducing the amounts outstanding under those
facilities to $ and increasing availability (after reduction in the total
amount available under those facilities from to ) to .
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QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The market risk exposure inherent in the Company's financial instruments and
consolidated financial position creates the potential for losses arising from
adverse changes in interest rates. The Company is exposed to such interest
rate risk in three operational areas: (i) the time lag between lease
origination and permanent funding; (ii) interest rate swap agreements related
to the Company's securitization transactions; and (iii) the use of fixed and
variable rate debt. The Company does not hold or issue financial instruments
for trading purposes.
The Company's primary exposure to interest rate risk relates to changes in
interest rates between the time a lease contract is originated and the time
fixed-rate funding is secured (e.g., securitization, sale, term loan). The
Company attempts to mitigate this exposure by obtaining such fixed rate
financing within 15-30 days of the lease origination date, and expects to be
able to continue this strategy.
In connection with the Company's conduit securitization transactions, the
Company is required to enter into off-balance sheet interest rate swap
agreements. Such swap agreements effectively provide for the payment by the
Company of a fixed rate of interest from the pool of securitized leases to the
bank conduit purchasing the leases, notwithstanding the payment by the conduit
of a variable rate of interest on the commercial paper issued by it.
Consequently, any reduction in interest rates could have an adverse effect on
the value of the swap agreements. At June 30, 1998, the fair value of the swap
agreements was approximately ($895,000) due to a reduction in interest rates
from the time each agreement was consummated to that date.
The Company utilizes both fixed and variable rate debt to fund its
operations. At June 30, 1998, the carrying value of the Company's fixed rate
debt was approximately $21.4 million, which is estimated to approximate its
fair value. The Company also had approximately $17.1 million of variable rate
borrowings outstanding, which amount approximated fair value. Market risk for
the fixed rate debt is estimated as the potential change in the fair value of
the debt resulting from a hypothetical 10% adverse change in interest rates,
which would have resulted in an increase in the fair value of the related debt
of approximately $760,000 at June 30, 1998. The effect of a similar
hypothetical change in interest rates on the Company's variable rate debt
would have had a negative impact on the Company's interest expense of
approximately $80,000 for the year ended June 30, 1998.
The Company's other market rate sensitive instruments include notes
receivable, amounts due from/to funding sources, and certain accounts payable
and accrued expense amounts. The carrying values for such instruments
approximated the fair values at June 30, 1998.
For additional information about the Company's financial instruments, see
"Risk Factors--Interest Rate Cost of Funds Risk" and Notes 3, 4 and 13 in
Notes to Consolidated Financial Statements.
YEAR 2000 COMPLIANCE
There is significant uncertainty regarding the effect of the Year 2000
problem because computer systems which do not properly recognize date
sensitive information when the year changes to 2000 could generate erroneous
data or altogether fail. The Company believes that its own internal software
and hardware are fully Year 2000 compliant. Based upon information received
from certain independent third party vendors which perform certain data
processing functions in connection with servicing the Company's portfolios,
certain software of these third parties has been identified as non-Year 2000
compliant. However, the Company is implementing a strategic initiative to
perform all of its portfolio servicing internally on its own system utilizing
LeasePak U/X, which has been certified as Year 2000 compliant, and plans to
cease using the third party outside portfolio servicer in early 1999.
The Company is undertaking this initiative for reasons unrelated to the Year
2000 problem in an effort to improve customer service and management reporting
and, ultimately reduce servicing costs and enhance profitability. The
Company's continued use of a vendor which is not Year 2000 compliant to
perform servicing functions or the failure of the Company's own computer
systems to be fully Year 2000 compliant could materially adversely affect the
Company's business, financial condition and results of operations. For
example, such failure could prevent the Company from originating new leases,
pricing such leases with accuracy, operating its proprietary software systems
such as CreditVest and CreditWare, or determining the existence or extent of
any delinquencies.
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However, the Company's computer systems are expected to be fully Year 2000
compliant as a consequence of the Company's strategic initiative to bring all
servicing functions in-house. The Company is undertaking this initiative for
reasons unrelated to any Year 2000 concerns; accordingly, the Company has not
incurred, and does not expect to incur any costs specifically associated with
Year 2000 compliance.
Further, the Company cannot measure the impact that the Year 2000 issue will
have on its vendors, suppliers, lessees and other parties with which the
Company conducts business. Year 2000 problems experienced by any of these
parties could negatively affect the ability of lessees to make lease payments,
or could otherwise have a material adverse effect on the Company's business,
financial condition or results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," relate
to additional reporting and disclosure requirements and are effective for
fiscal years beginning after December 15, 1997. It is not expected that the
adoption of SFAS Nos. 130 and 131 will have a material effect on the Company's
consolidated operating results or financial condition.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
on the accounting for the costs of software developed or obtained for internal
use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
The Company does not expect the statement to have a material impact on its
consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivative instruments be recognized as assets or
liabilities at fair value in the statement of financial position and
establishes the accounting for changes in the fair value of such derivatives
depending on the use of the derivative. The provisions of this statement will
be effective for the Company for fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not yet assessed the effect of this
statement on its consolidated financial position and results of operations.
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BUSINESS
GENERAL
BankVest is a commercial finance company engaged in the origination, sale,
securitization and servicing of non-cancelable equipment leases to small and
mid-sized businesses and the sale of related services. The Company is a
national provider of small-ticket leases with original equipment acquisition
costs typically ranging from $5,000 to $250,000 and primarily financing
automotive diagnostic, computer, printing, manufacturing, automotive repair,
office, healthcare and telecommunications equipment. The Company also, from
time to time, originates leases with original equipment acquisition costs in
excess of $250,000. The average cost of equipment leased by the Company from
its commencement of active operations in late 1994 through June 30, 1998 was
approximately $22,000, with terms generally ranging from 12 to 87 months and a
weighted average initial term of 51 months. During the year ended June 30,
1998, the weighted average yield on leases originated was 14.1%. Leases are
originated through a direct sales force of 3l sales professionals, including
nine senior sales officers who have an average of more than 14 years of
leasing industry experience. The direct sales force operates out of 16 sales
locations and covers all regions of the continental United States. The
Company's centralized underwriting, servicing and collection activities
support its decentralized sales force and allow the Company to manage the
risks and costs associated with its growing lease portfolio.
The Company markets its customized, service-oriented lease products through
three sales channels: (i) national, regional and local equipment vendors; (ii)
directly to new and existing customers; and (iii) on a private label or co-
branded basis to customers of financial institutions which have become
participants in the Company's Bank Program. In addition, the Company has
formal and informal arrangements with a select group of approximately ten
lease brokers which provide a flow of referrals to the Company. To date,
approximately 87% of the Company's lease origination volume has been generated
through its vendor programs. However, the Company expects to originate an
increasing proportion of its leases from, among other sources, repeat business
from existing customers and through its Bank Program. The Company believes
that delivery of quality customer service has resulted in a significant amount
of repeat business. For the year ended June 30, 1998, 18% of the dollar volume
of the Company's lease originations were derived from customers who had
previously obtained lease financing from the Company. Management anticipates
that the Bank Program, whose participants include Star Bank, N.A. in
Cincinnati, Ohio, Firstar Bank Milwaukee, N.A. in Milwaukee, Wisconsin and
other financial institutions, will allow the Company to expand its customer
base and originations by marketing lease products to such banks' customers.
The Company uses a variety of sources of capital, including private equity,
subordinated debt, warehouse lines of credit, securitizations, sales by
assignment and term loans, to fund its lease originations and operations.
Historically, the Company has sold, and intends to continue to sell, a
substantial portion of its lease originations through securitizations and
sales by assignment. The Company initially funds lease originations through
warehouse lines of credit and working capital. On a monthly or more frequent
basis, the Company transfers leases and the related equipment to a wholly-
owned, special purpose subsidiary. This subsidiary in turn sells and transfers
its interest in the leases being securitized and the related equipment to an
unaffiliated bank conduit which generally issues commercial paper. The Company
may also sell its lease receivables through a term note securitization. The
Company completed its first term note securitization of $ million on ,
1998. Under this term note securitization, the leases and the related
equipment were purchased from the bank conduits by a special purpose
subsidiary of the Company which issued notes to investors secured by the
payments under the leases and the related equipment. This securitization
relied, in part, on credit enhancement provided by MBIA, a monoline insurer,
which guaranteed scheduled payments of interest and ultimate payment of
principal on one of the classes of notes issued in the transaction in order to
secure ratings for such notes of "AAA" by Standard & Poor's and "Aaa" by
Moody's.
The Company believes that one of its major strengths is its seasoned
management team, whose extensive experience in the small-ticket leasing
industry provides the Company with expertise in sales and marketing,
operations, customer service, collections, accounting, management information
systems and legal matters. Paul
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S. Gass, the Company's Chief Executive Officer, has over 34 years of
experience in the leasing industry. John P. Colton, the Company's Executive
Vice President, has over 25 years of experience in the leasing industry. Mr.
Gass and Mr. Colton are supported by a senior management team of seven
additional professionals. This nine member management team has an average of
more than 16 years of experience in the leasing industry with a variety of
large commercial finance companies. Each member of senior management has an
equity interest in the Company. See "Management."
INDUSTRY OVERVIEW
The equipment leasing industry has grown rapidly in the United States over
the past decade and represents a large and growing source of business
financing. According to the ELA, 80% of all United States businesses use
leasing or financing to acquire capital assets. The ELA estimates that $183
billion of the $600 billion to be spent on productive assets in 1998 will be
financed through leasing. The Company estimates that approximately $70 to $80
billion will be in the small-ticket leasing market. The Company believes that
small-ticket equipment leasing is one of the most rapidly growing segments of
the industry, primarily due to (i) the increasing acceptance of leasing by
small and mid-sized businesses; (ii) the need for alternative providers of
equipment finance due to the significant increase in bank consolidations in
the past decade and consequent loss of many community-based banks and
diminished service to small and mid-sized businesses; (iii) the inability or
unwillingness of larger banks to adequately address the small-ticket leasing
market; (iv) the decrease in equipment cost as a result of technological
innovation; and (v) the need for flexibility in structuring finance programs
and rapid turnaround times and processing of equipment financing transactions
and the consequent recognition by small and mid-sized businesses that
specialized commercial finance companies such as the Company can provide
faster and more efficient service than traditional financial institutions.
BUSINESS STRATEGY
The Company intends to continue pursuing its goal of becoming a leading
provider of equipment financing in the small-ticket leasing market. The
following strategic elements are integral to the Company's success in
achieving its goal:
Operating Strategy
. Provide a superior level of customer service. The Company's management
and sales staff are dedicated to offering consistent underwriting
standards for, and rapid turnaround of, lease applications, credit
analyses and documentation, as well as flexible and creative structuring
of programs to provide a superior level of service to its vendors, banks
and lessees.
. Capitalize on its experienced senior management team. The members of the
Company's senior management team have an average of more than 16 years of
leasing experience and have played key management roles in large, well-
known commercial finance companies. This experience has enabled the
Company to grow by building a quality sales force, operations staff,
infrastructure and sources of funding that are competitive with larger,
longer-established companies.
. Capitalize on its experienced sales and operations personnel. The
Company's sales team consists of 31 professionals, including nine senior
sales officers who have an average of more than 14 years of experience in
developing local, regional and national vendor lease referral
relationships. They are supported by a credit and operations staff of 48
persons who have an average of more than 10 years of experience in the
commercial finance industry. Together, the Company's sales and operations
personnel have significant skills and records of accomplishment in new
business development, lease originations, credit evaluation,
documentation and servicing and provide the Company with the ability to
develop innovative lease products, programs and systems to meet customer
needs.
. Utilize customized, state-of-the-art technologies. The Company utilizes
CreditWare, the Company's proprietary front-end booking system; LeasePak
U/X, a widely-used lease accounting and back-end
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servicing system; and CreditVest, the Company's sophisticated proprietary
credit scoring and evaluation system, as well as the Company's website-
based lease application, documentation and processing capabilities to
improve customer service and management reporting, while reducing costs
and enhancing efficiency and profitability. CreditVest is specially
tailored to the small-ticket leasing market, and is designed to provide
quick, efficient and disciplined credit evaluation, incorporating the
industry experience of the Company's senior management. In addition, the
Company's website is designed to allow vendors to submit lease
applications, track approval status and documentation and access
information on the Company's services.
. Maintain diversified sources of funding. The Company intends to continue
to pursue a funding strategy which provides the Company with a diverse
base of financing sources at rates which are competitive with those
available to larger companies, and which may include short-term warehouse
and other revolving facilities and conduit and term note securitizations,
as well as sales by assignment.
Growth Strategy
. Expand vendor relationships and increase penetration of its core customer
vendor base. The Company intends to develop new vendor relationships,
including national vendor accounts, and increase its penetration into the
customer base of existing vendors by continuing to stress its flexible,
creative marketing programs, technology, personal service and problem-
solving approach. This focus includes: (i) direct vendor support on sales
calls and at trade shows; (ii) marketing programs that are tailored to
the needs of the vendors' customer bases; (iii) co-branded and private
label programs; and (iv) technology systems which increase capabilities
for fast, accurate application input, processing and tracking, document
generation and vendor reporting. In addition, the Company intends to
expand its product coverage to assist the vendor's penetration into new
product markets, such as the middle market, and geographic markets such
as Canada.
. Promote the Company's Bank Program. The Company is focused on expanding
the Bank Program by: (i) providing training, sales and marketing support
to bank loan officers and other bank personnel to enable them effectively
to promote the Company's lease programs; (ii) assisting bank personnel in
analyzing available customer data to develop suitable targets for the
Company's lease programs; (iii) initiating direct marketing campaigns
focused on reaching targeted bank customers; and (iv) using the Company's
customized technologies, including CreditWare, CreditVest and the
Company's website-based lease application, documentation and processing
capabilities, which can be accessed directly or through hyperlink from
the websites of the Bank Program participants. The Company also intends
to increase the number of participating financial institutions by
continuing to promote the advantages for such institutions of providing
the Company's lease programs.
. Increase the productivity of the Company's decentralized sales force. The
Company is undertaking a number of initiatives to increase the
productivity of its sales force, including: (i) providing superior
operations support and service to existing vendors to allow its sales
force to focus on developing new vendor programs; (ii) using marketing
research to target new vendors and customers; (iii) increasing awareness
and utilization of the Company's existing technology to streamline the
administrative process; and (iv) developing new lease programs to meet
the diverse needs of its customer base.
TERMS OF LEASES
Leases originated by the Company from the commencement of active operations
in late 1994 through June 30, 1998 have terms which range generally between 12
and 87 months with a weighted average initial term of 51 months. The Company
typically uses standardized net lease contracts to simplify the documentation
process and improve turn-around time from approval to funding. The leases are
non-cancelable, require the lessee to make all payments for all expenses
associated with the operation and maintenance of the leased equipment and
contain "hell-or-high-water" provisions requiring the lessee to make all
payments unconditionally and without defense, offset, counterclaim or
reduction. The leases generally do not permit prepayment. Among other
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things, lessees are obligated to: (i) remit all lease payments regardless of
equipment performance and bear all risks of loss of the equipment; (ii)
operate equipment in a careful and proper manner in accordance with applicable
governmental regulations; (iii) maintain and service the equipment; (iv)
insure the equipment against certain liabilities and contingencies; and (v)
pay directly or reimburse the Company for payment of all taxes resulting from
the use, possession or lease of the equipment. Upon any default, the Company
may exercise remedies which include repossession and remarketing of the
equipment and payment of liquidated damages.
At June 30, 1998, approximately 74% of the leases outstanding contain
bargain purchase options that permit the lessee to buy the leased equipment
for a nominal amount at the end of the term of the lease. Purchase options on
the remaining leases are based on the fair market value of the leased
equipment at the end of the lease term. The Company generally retains an
equipment residual value even after selling lease receivables. An equipment
residual value is recorded as an asset on the Company's balance sheet,
generally in an amount equal to 10%-15% of the original cost of the leased
equipment. At June 30, 1998, booked equipment residual values were
approximately $8.0 million, or 2.6% of the original cost of all leased
equipment, excluding equipment residual values under originated and unbilled
lease contracts. At the end of the lease term, the Company remarkets the
equipment either by sale or re-lease to the lessee or to a new third-party. As
part of its growth strategy, the Company intends to broaden its lease product
offerings which may increase the proportion of leases on which the Company
retains an equipment residual value.
SALES AND MARKETING
Sales Force
The Company's sales force consists of 31 professionals, including nine
senior sales officers who have an average of more than 14 years of experience
in the lease finance industry. Most of the members of the Company's sales
force have developed relationships throughout their careers with many of the
Company's vendors, manufacturers and customers. Currently, the Company has a
national sales presence and operates out of 16 sales locations in the
following metropolitan areas: Boston, Massachusetts; New York, New York;
Philadelphia, Pennsylvania; Charlotte, North Carolina; Atlanta, Georgia;
Melbourne, Florida; Chicago, Illinois; Dallas, Texas; Los Angeles and San
Francisco, California; and Seattle, Washington. The sales force markets the
Company's lease finance programs and related services nationwide through all
three of the Company's sales channels, emphasizing a relationship marketing
approach which builds relationships and promotes an ability and willingness to
develop creative, customized solutions for both lessees and sources of lease
originations.
The Company believes that the use of a direct sales force offers significant
advantages over broker or acquisition driven origination strategies. Such
advantages include: (i) greater control over the underwriting process; (ii)
the ability to retain the equipment residual values under certain leases;
(iii) the creation of relationships with lessees and equipment providers which
the Company believes are conducive to the generation of recurring business;
and (iv) the creation of a marketing database enabling the Company to more
efficiently target potential customers and tailor new products to meet the
needs of its target markets.
The sales force is paid commission incentives based not only on volume, but
also on funding efficiency and profitability. The Company has hired both
highly experienced sales representatives, as well as less experienced
representatives, and has established a "mentor" training program in which new
sales representatives are paired with experienced sales representatives until
the new representatives gain sufficient knowledge and experience to operate
independently.
Marketing Strategy
The Company markets its customized, service-oriented lease products through
three sales channels: (i) national, regional and local equipment vendors; (ii)
directly to new and existing customers; and (iii) on a private label or co-
branded basis to customers of financial institutions which have become
participants in the Company's Bank Program. In addition, the Company has
formal and informal arrangements with a select group of
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approximately ten lease brokers which provide a flow of referrals. The Company
uses several methods and technologies to obtain application data from
potential lessees. Applicants can complete lease applications using the
Company's website (accessed directly or through hyperlink from the websites of
the Bank Program participants), remote terminals located in the offices of
vendors and Bank Program participants, mail, e-mail, fax and telephone.
Management believes that all of the methods of communicating application data
to the Company are user-friendly and are designed to be accessible to a
diverse group of businesses and individuals.
Vendor programs. The Company currently originates approximately 87% of its
annual lease origination volume through its vendor programs. The Company
strives to develop formal and informal relationships with vendors, including
national, regional and local manufacturers and distributors of small-ticket
equipment, in order to establish the Company as a recommended provider of
financing for the creditworthy customers of such vendors. The vendor programs
assist vendors by providing timely, convenient and competitive value-added
service, which simultaneously promotes equipment sales and lease originations.
Upon establishing a relationship with a vendor, the Company typically enters
into an agreement with the vendor, which may include representations and
warranties relating to the activities of the vendor in the relationship,
requirements relating to applications, the approval process, documentation and
funding, volume targets, remarketing support to be provided by the vendor and
other provisions which address customized features of a particular program.
Vendor involvement in the lease financing process varies among vendors,
ranging from simple customer referrals where the Company performs all of the
lease-related activities, to private label or co-branded programs. In a
private label program, the vendor completes the lease documentation in its own
name and then assigns it to the Company after Company credit approval. In a
co-branded program, the vendor is featured prominently on the lease
documentation and completes such documentation with its customers for
submission to the Company upon credit approval.
The Company believes its success in attracting and retaining quality vendors
has been due in large part to (i) the experience of its senior sales officers
and management team and their collective experience with various products,
equipment and vendors; (ii) its high level of vendor service and rapid
response time; (iii) flexible, creative marketing programs; (iv) vendor access
to the Company through technological innovation; and (v) the high level of
personal service and commitment to problem-solving provided by the Company's
sales force and operations staff. The Company has demonstrated an ability to
compete effectively for national vendor accounts. In fiscal 1998, lease
originations from such accounts grew to 31% of total originations, up from 6%
in fiscal 1997 and 2% in fiscal 1996.
Bank Program. The Company began to implement its Bank Program in September
1997. Under the Bank Program, the Company offers leasing services to the
bank's customer base on a private label or co-branded basis, depending on the
program. Typically, the participating bank agrees that the Company will be
either a preferred or exclusive provider of small-ticket leasing services to
the bank's commercial customers, and provides to the Company its proprietary
list of existing customers and prospects with information regarding such
customers. A marketing plan is then devised and the Company provides the bank
with training to support the program, and marketing and sales support related
to equipment leasing, including brochures, marketing materials and lease
applications. The Company markets to the customer base of the participating
bank either in the name of the bank in a private label program or jointly in a
co-branded program. Lease applications may be available to bank customers at
the bank via point-of-sale displays, by e-mail and on the Company's website,
which may be accessed by hyperlink from a participating bank's website. The
Company maintains a toll-free telemarketing support service through which bank
customers can make inquiries, process lease applications and obtain assistance
in identifying, selecting or designing appropriate lease programs. The
Company's decentralized sales staff is available to support bank personnel and
meet with customers of the bank to effect lease originations.
The Company has entered into formal agreements with six banks, including
Star Bank, N.A. in Cincinnati, Ohio and Firstar Bank Milwaukee, N.A. in
Milwaukee, Wisconsin. The Company currently is focusing on
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improved penetration of the customer base of its existing banks, but is also
in negotiations with several other banks and financial institutions.
The participating bank may pay fees to the Company upon execution of the
Bank Program agreement and annually thereafter, and may provide an agreed
level of financial support to market the program throughout the term of the
program agreement. The Company, in turn, agrees to pay the bank a monthly fee
equal to a percentage of the equipment cost of leases referred by the bank to
the Company and funded by the Company. The percentage varies depending upon
the length of the lease term, equipment cost, credit risk and lease product
type.
In a private label program, the bank is shown as the lessor on the lease
with the bank's customer and the lease is serviced by the Company in the name
of the bank, but the lease itself and the underlying equipment is owned by the
Company. Upon default, the Company may pursue remedies in its own name but,
absent default, the bank's name remains before its customer. In a co-branded
program, the bank is prominently featured in the lease documentation, but the
Company appears as lessor and bills and collects the lease in its own name. In
either case, the Bank Program provides the Company with an effective means to
penetrate new markets, increase its name recognition and profile in the
marketplace and reach new customers that would otherwise be unknown or
unavailable to it. The participating bank is able to more effectively compete
with non-bank financing sources by offering financial products and full
service support that it otherwise would lack in order to meet the needs of
such customers. This program allows participating banks to earn fee income
without risk to their capital.
Direct leasing. Through its direct leasing channel, the Company markets its
products and services directly to the end users of leased equipment rather
than using relationships with vendors or banks to generate originations. The
Company's sales and marketing force uses a variety of methods to market the
Company's products to new and existing customers, such as periodically
conducting both general and targeted direct mail campaigns, targeted
telemarketing and participating in selected industry trade shows. The Company
also targets advertising in trade press designed to generate inbound calls and
person-to-person contact. Finally, the Company has formal and informal
arrangements with a select group of lease brokers which provide a flow of
referrals to the Company.
OPERATIONS, UNDERWRITING AND SERVICING
Overview
Upon submission of a lease application, the Company's credit professionals
review the application and render a credit decision based on the information
in the application, credit bureau reports and, in appropriate circumstances,
personal financial statements, bank and trade references and other credit and
financial information. The information required and the time necessary for
making credit decisions vary according to the strength of the lease
application and the nature, size and complexity of the transaction. The
application is entered into the Company's proprietary CreditWare front-end
booking system, which tracks the status of the transaction from application
through approval and documentation to funding. Upon approval, the Company's
standard lease documentation package is prepared and sent to the customer for
execution and return to the Company. When the equipment is shipped and
installed, the vendor invoices the Company. The Company then verifies
acceptance of the equipment by the lessee, the lease irrevocably commences and
the vendor's invoice is paid. At funding, the lease is booked on the Company's
lease accounting and portfolio servicing systems for billing, servicing,
financial reporting and accounting processing. Because vendor relationships
are important, the Company places particular emphasis on assuring that vendors
receive timely payments, typically within 24 hours of receipt of notification
of lessee acceptance.
There are typically two types of leasing business which the Company
processes. The first is flow type business which involves transactions of
$100,000 or less per lease. The flow type of business is generated by
equipment suppliers and vendors that have multiple lease transactions per
month, by the Bank Program and by direct customers. For flow type business,
the Company provides same day credit approval, simple documentation and
competitive lease rates.
The second is transaction type business. Transaction type business involves
transactions generally between $100,000 and $250,000 and from time to time in
excess of $250,000 per lease. This business requires specialized
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experience in marketing, credit analysis and documentation relating to the
equipment being financed; therefore, the Company utilizes senior sales and
credit officers and corporate counsel to address the needs of this segment,
effectively service customers and responsibly manage risk.
Underwriting
The Company's successful execution of its business and operating strategy is
dependent upon, among other things, its credit underwriting and administrative
policies and procedures. The Company relies primarily on the creditworthiness
of its lessees, vendor support and personal guarantees provided by one or more
principals of the lessees business, rather than on the value of the underlying
equipment, in making its credit decisions. The Company's credit professionals
apply specialized underwriting criteria and procedures and utilize independent
credit investigations to identify creditworthy lessees. Basic financial
information is provided in the credit application and, depending on the size
and complexity of the transaction and the results of initial analysis of the
credit, the Company may also utilize (i) customer data, including financial
statements and tax returns, bank and trade references, payment history, and
credit line availability; (ii) statistical data from databases provided by
TRW, Dun and Bradstreet and/or Equifax; and (iii) vendor historical support
and portfolio performance, including losses, approvals and delinquency ratios.
The Company has recently implemented its proprietary credit scoring system,
"CreditVest." This credit system automatically extracts financial and credit
information from the credit application and on-line credit bureaus, analyzes
the information based on algorithms developed by the Company, and then assigns
a numerical rating to each application indicating approval, rejection or
further review by a credit professional. The Company uses CreditVest to
analyze all lease transactions with an equipment cost of $50,000 or less. This
threshold may be raised in the future. The Company continues to use credit
professionals, in addition to CreditVest, to review lease transactions with an
equipment cost in excess of this amount.
The Company believes that CreditVest is a powerful credit scoring tool
because (i) it combines personal and commercial information in evaluating
lease applications; (ii) it is highly specialized and is designed specifically
for the small-ticket leasing industry; (iii) it provides rapid credit
decisions; and (iv) it is flexible and can be modified quickly based on
Company strategy, economic conditions or specific industry and customer
variables. Additionally, CreditVest will also be used as a marketing tool by
the Company since it can use information regarding customers, equipment and
industries to target the new and existing customers most likely to generate
repeat business. CreditVest will also assist the Company in developing
collection strategies for particular types of customers through analysis of
payment histories and trends based on lease receivable balances, customer
type, equipment type, prior delinquencies and location.
Servicing
The Company generally services all of the leases it originates, including
leases sold or securitized. The Company currently utilizes the services of a
third party, PFS, to provide certain services, including (i) creating
electronic files containing contract information; (ii) establishing initial
lease accounting; (iii) preparing invoice and payment information; (iv)
posting payments to customer accounts; and (v) performing limited customer
service functions and reports. Otherwise, the Company handles collections with
its own in-house accounts receivable and asset management staff.
Earlier this year, the Company made the strategic decision to bring all
servicing functions in-house. The Company believes that this will improve
customer service and management reporting and, ultimately, reduce servicing
costs and enhance profitability. The Company has acquired a software license
for the LeasePak U/X lease accounting and portfolio servicing system from
McCue Systems, Inc., a leading provider of lease accounting software to the
equipment leasing industry. The Company has been servicing the portfolio on a
parallel track with PFS, and anticipates that it will be fully servicing its
own portfolio not later than December 31, 1998, on a server located at
Dimension Servicing Corporation in Portland, Oregon, which is providing
consulting and other services to the Company during this conversion. The
Company expects that full implementation to the Company's own server at its
corporate headquarters will be completed not later than March 31, 1999. The
Company has also retained Norwest Bank Minnesota, N.A. to serve as its back-up
servicer. The Company has also acquired a license to the Lewtan securitization
reporting software which enhances the
41
<PAGE>
Company's ability to structure its securitization programs and furnish timely,
accurate reporting to all of its securitization facilities.
Typical servicing activities include billing, collecting, posting payments
received, responding to lessee inquiries, taking all necessary action to
maintain the Company's title to, or security interest in, the underlying
leased equipment, and dealing with delinquencies and defaults, including
communicating with lessees to assure timely payments and, where necessary,
repossessing and remarketing equipment and pursuing legal, equitable and
contractual remedies. All payments are made to the Company's lockbox at PNC
Bank, N.A. and are disbursed from the lockbox to the Company or to the
assignees of the leases according to the Company's agreements with its various
sources of funds. The Company receives a monthly servicing fee with respect to
leases sold or securitized which it continues to service.
The Company manages its risk of credit losses through adherence to its
underwriting guidelines and diligent collection procedures. The Company's
accounts receivable staff, which consists of 11 full-time employees with an
average of more than ten years of experience, is dedicated to providing high
quality customer service and effectively performing collection procedures. To
this end, the Company generally initiates telephone contact at the beginning
of each lease to review the payment terms and other material terms of the new
lease and to confirm the lessee's receipt and approval of the leased
equipment. Subsequent to the initial phone conversation, the accounts
receivable staff proactively addresses issues before they become problems,
such as responding to questions about the lease or its terms, invoicing,
insurance, taxes and other issues. In addition, the staff generally monitors
lease payment histories, contacts any lessees that become delinquent to effect
a cure as soon as possible and effects contractual and legal remedies when
appropriate.
Equipment Management
At the end of the lease term, the equipment may be purchased by the lessee
pursuant to the purchase option in the lease (or if there is no purchase
option, by further agreement of the Company and the lessee), the lease may be
renewed for an agreed term by the lessee or the equipment may be returned to
the Company. If and when leased equipment is returned to the Company following
the termination of a lease (whether upon a lease default or by expiration of
the scheduled term), the Company remarkets the equipment through its internal
asset managers and/or the original equipment vendor to maximize residual
return. The Company has entered into agreements with most of its vendors under
which such vendors, among other things, have agreed to provide remarketing
support for equipment sold by such vendor to the Company for lease. When
returned equipment is not subject to vendor remarketing, the remarketing is
conducted by the Company's asset management staff through independent
equipment remarketers throughout the United States.
PORTFOLIO COMPOSITION
Equipment Type, Geographic and Customer Mix
The Company's managed receivables are diversified along equipment type and
geographic lines as well as by customer. The concentration of equipment type
and the distribution of such equipment along geographic lines has fluctuated
since the Company began active leasing operations.
Equipment type. The following table illustrates the distribution of the
Company's managed receivables by equipment type as of June 30, 1998:
<TABLE>
<S> <C>
Automotive diagnostic.................................................. 20%
Computer............................................................... 16%
Printing............................................................... 15%
Manufacturing.......................................................... 15%
Automotive repair...................................................... 14%
Office................................................................. 7%
Healthcare............................................................. 7%
Telecommunications..................................................... 2%
Other.................................................................. 4%
---
100%
===
</TABLE>
42
<PAGE>
Geographic. The following table illustrates the geographic distribution of
the Company's managed receivables based on location of the Company's lessees
as of June 30, 1998:
<TABLE>
<S> <C>
New York................................................................ 22%
California.............................................................. 16%
Massachusetts........................................................... 12%
Florida................................................................. 6%
New Jersey.............................................................. 5%
Texas................................................................... 4%
Connecticut............................................................. 3%
North Carolina.......................................................... 3%
Georgia................................................................. 3%
Pennsylvania............................................................ 2%
Other................................................................... 24%
---
100%
===
</TABLE>
Customer mix. The Company has a broad lessee customer base. As of June 30,
1998: (i) no lessee accounted for more than 0.6% of the Company's managed
receivables; and (ii) the Company's 25 largest lessees accounted for less than
6% of the Company's managed receivables. Except for one vendor which accounted
for 19% of the Company's managed receivables, no other vendor accounted for
more than 2.0%. The Company's top 25 vendors accounted for 41% of managed
receivables. See "Risk Factors--Concentration of Lease Sources and Credit
Risks."
ASSET QUALITY
The table below sets forth certain lease delinquencies for net managed
receivables at:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------------------------------
1996 1997 1998
--------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
DOLLARS PERCENT DOLLARS PERCENT DOLLARS PERCENT
------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net managed receiv-
ables(1).................. $30,272 100.0% $102,152 100.00% $254,714 100.00%
======= ===== ======== ====== ======== ======
Current.................... $29,866 98.66% $ 99,431 97.34% $246,919 96.94%
======= ===== ======== ====== ======== ======
Delinquencies:
31-60 days past due...... $ 241 0.80% $ 1,247 1.22% $ 3,092 1.21%
61-90 days past due...... 65 0.21 581 0.57 1,492 0.59
Over 90 days past due.... 100 0.33 893 0.87 3,211 1.26
------- ----- -------- ------ -------- ------
Total delinquencies.... $ 406 1.34% $ 2,721 2.66% $ 7,795 3.06%
======= ===== ======== ====== ======== ======
</TABLE>
- --------
(1) Net managed receivables represent the net investment in lease contracts,
calculated as if the Company had not sold such lease contracts, excluding
lease receivables originated but unbilled of $12.0 million and $7.9
million at June 30, 1997 and 1998, respectively.
The Company maintains reserves for credit losses in connection with payments
due under lease contracts held in the Company's portfolio and its retained
interest in leases securitized or sold. The reserves are based on management's
analysis of the Company's delinquency and historical loss experience,
projected future potential loss rates, the level of recourse provided, if any,
economic conditions and trends, estimates of future trends, industry
statistics and lease portfolio characteristics and other assumptions. The
Company's policy is to review delinquent lease receivables accounts on a
monthly basis for collectibility. Based on that review, the portion of the
lease receivables believed to be uncollectible at that time is charged off.
Recoveries on leases previously charged off are restored to reserves.
43
<PAGE>
The table below sets forth information regarding the Company's total
reserves for credit losses on managed receivables at:
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1996 1997 1998
----- ------ -------
(IN THOUSANDS)
<S> <C> <C> <C>
Allowance for doubtful accounts:
Beginning balance.................................... $ 35 $ 193 $ 1,868
Provision for credit losses.......................... 528 2,529 5,902
Net transfer to reserve for contingent obligations to
repurchase lease receivables sold(1)................ (336) (165) (688)
Charge-offs.......................................... (34) (703) (2,183)
Recoveries........................................... -- 14 191
----- ------ -------
Ending balance....................................... 193 1,868 5,090
Reserve for contingent obligations to repurchase lease
receivables sold(1)................................... 401 566 1,254
----- ------ -------
Total.............................................. $ 594 $2,434 $ 6,344
===== ====== =======
</TABLE>
- --------
(1) The Company has contingent obligations to repurchase leases sold by
assignment. The Company's maximum exposure under the repurchase provisions
is generally limited to 5% to 10% of the lease receivables sold. The
Company's reserve for such contingent obligations is included in Other
Liabilities in the Company's consolidated balance sheets.
INSURANCE SUBSIDIARY
The Company provides casualty insurance for equipment with original costs of
up to $100,000 under certain of the Company's leases through ELI, the
Company's wholly-owned Bermuda subsidiary. ELI provides such insurance for its
own account without seeking reinsurance. For the year ended June 30, 1998,
ELI's operations were modestly profitable and net insurance premiums of ELI
and related servicing fees accounted for less than 2% of the Company's total
revenues for that year.
Lessees are not obligated to obtain insurance from ELI. However, in the
event a lessee does not provide the Company with evidence that the equipment
is insured as of the commencement of the lease, the Company will include on
the lessee's monthly invoice a charge applicable to the insurance premium for
ELI casualty insurance. If the lessee responds with evidence that the
equipment otherwise is insured, the charge is removed and no insurance from
ELI is placed on the equipment. If the lessee pays the premium, casualty
insurance provided by ELI commences as of the date the premium was paid. In
the event the Company receives no response from the lessee, either through
payment or proof of insurance, the Company, depending upon the dollar amount
involved, either (i) contacts the lessee to confirm that the equipment is
otherwise insured in accordance with the requirements of the lease or (ii)
makes a decision to rely on the lessee's standard contractual obligation to
insure the equipment.
COMPETITION
The business of small-ticket equipment lease financing is highly fragmented
and competitive, with no single company having a market share in excess of 5%.
The Company competes with (i) a large number of national, regional and local
finance companies; (ii) captive finance and leasing companies affiliated with
major equipment manufacturers; and (iii) other sources of financing including
traditional financial services companies such as commercial banks, savings and
loan associations and credit unions. Many of the Company's competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. For example, some competitors may have a
lower cost of funds and access to other funding sources that may be
unavailable to the Company. In addition, certain of the Company's competitors
may have higher risk tolerances
44
<PAGE>
or different risk assessments which could allow them to establish more vendor
and lessee relationships and build their market share.
The Company competes based on the quality of the service it provides to both
its lessees and its vendors, bank participants and other originators. The
Company has and will continue to encounter significant competition and there
can be no assurance that the Company will be able to successfully compete in
its chosen markets. However, the Company believes that its experienced
management team and sales force and its strong vendor relationships will allow
the Company to continue to compete successfully in the small-ticket leasing
segment of the market. See "Risk Factors--Competition."
REGULATION
The Company's business is subject to certain federal and state regulations
which, among other things, require the Company to obtain and maintain certain
licenses and qualifications. These regulations also address collection
practices, including the rights to repossess and sell equipment. Under certain
circumstances, the Company may also be required to comply with the Equal
Credit Opportunity Act ("ECOA"). Pursuant to the terms of the ECOA, the
Company is required to give all credit applicants notice of the right to
receive a written statement of reasons an application for credit is denied,
unless the applicant had gross revenues exceeding $1.0 million during its last
fiscal year. The Company is also required by the ECOA to give oral or written
notice of a credit denial within 30 days after receipt of a completed lease
application, or within a reasonable time for applicants whose gross revenues
exceeded $1.0 million during its last fiscal year. The Company believes that
it is currently in material compliance with applicable statutes and
regulations.
The Company's wholly-owned insurance subsidiary, ELI, is registered under
the Bermuda Insurance Act of 1978, as amended and related regulations which
require that the Company maintain minimum levels of solvency and liquidity.
The Company believes it is currently in material compliance with these
requirements.
FACILITIES
The Company's headquarters are located at 200 Nickerson Road, Marlboro,
Massachusetts. The Company leases approximately 23,000 square feet, pursuant
to a lease agreement which expires on January 19, 2003. The current monthly
rent for the Marlboro office is $34,430; monthly rent will increase to $36,600
over the next five years. The Company also leases space for certain of its
sales locations. The Company believes that its facilities are both suitable
and adequate for the current business activities conducted at its corporate
headquarters and at its existing sales locations.
EMPLOYEES
At August 31, 1998, the Company employed 123 full-time employees. None of
the Company's employees are represented by a labor union. The Company
considers its employee relations to be good.
LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to its business. As of the date hereof, there were
no legal proceedings which management anticipates would have a material
adverse effect on the Company.
45
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information regarding the executive officers
and directors of the Company as of August 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Paul S. Gass................... 60 President, Chief Executive Officer and
Chairman of the Board of Directors
John P. Colton................. 62 Executive Vice President and Director
Kellie D. Jacques.............. 40 Senior Vice President, Chief Financial
Officer, Treasurer and Director
Alan J. Catterson.............. 37 Senior Vice President and Chief Information
Officer
Charles W. Cross............... 43 Senior Vice President, Chief Legal Officer
and Clerk
Michael P. Karman.............. 33 Senior Vice President and Manager, East
Region
Sandra T. King................. 46 Senior Vice President and Manager, West
Region and Director
Robert M. McFadden............. 32 Senior Vice President--Sales, Mid-Atlantic
Region
Joseph R. Bannick.............. 41 Senior Vice President--Sales, Western
Region
James H. Fordyce(1)............ 39 Director
James D. Gerson(1)............. 55 Director
Kevin J. McGinty(1)............ 49 Director
</TABLE>
- --------
(1) Member of Compensation Committee, Audit Committee and Stock Option
Committee.
Set forth below is a brief description of the business experience of the
executive officers and directors of the Company.
PAUL S. GASS has served as President, Chief Executive Officer and Chairman
of the Board of Directors since January 1995. Prior to joining the Company,
Mr. Gass served as president of AT&T Capital Leasing Services Division of AT&T
Capital Corp. from 1989 to July 1993 and thereafter as a consultant until
December 1994. From 1974 to 1989, Mr. Gass served as the President and Chief
Executive Officer of Eaton Financial, a small-ticket leasing company, and was
responsible for taking Eaton Financial public in 1983 and accomplishing the
acquisition of Eaton Financial by AT&T Capital in 1989. Mr. Gass serves as
Chair of the Foundation of Leasing Education and is a past director of the
ELA.
JOHN P. COLTON has served as Executive Vice President of the Company since
July 1995, and a Director since January 1995. From 1994 until joining the
Company, Mr. Colton was an independent consultant. From 1989 to 1994, Mr.
Colton served as senior vice president and senior credit officer of AT&T
Capital Leasing Services Division. From 1983 until its sale to AT&T Capital
Leasing Services Division in 1989, Mr. Colton served as senior vice president,
senior credit officer and director of Eaton Financial. Mr. Colton is a
director of the United Association of Equipment Lessors, past president and
director of the Eastern Association of Equipment Lessors and serves on the
Small-Ticket Council of the ELA.
KELLIE D. JACQUES has served as Senior Vice President, Chief Financial
Officer and Treasurer of the Company since February 1995, and a Director since
May 1995. From 1994 until joining the Company, Ms. Jacques served as U.S.
controller for Newcourt Financial USA, Inc., an equipment leasing company.
From 1992 to 1994, she served as controller for Chancellor Corporation, an
equipment leasing company. From 1990 to 1992, Ms. Jacques served as controller
for Georgetown Collection Corporation. Prior to 1990, Ms. Jacques worked for
eight years in public accounting and she is a Certified Public Accountant.
46
<PAGE>
ALAN J. CATTERSON has served as Senior Vice President and Chief Information
Officer of the Company since December 1996. From 1995 until joining the
Company, Mr. Catterson served as vice president of information technology and
customer support for the Auto Financial Services Division of GE Capital
Corporation. From 1991 to 1995, Mr. Catterson held various positions at
General Systems Solutions, Inc., a systems integration firm, including systems
engineering manager and vice president of operations.
CHARLES W. CROSS joined the Company in August 1997, and is Senior Vice
President, Chief Legal Officer and Clerk. From 1994 until joining the Company,
Mr. Cross served as senior counsel for BTM Capital Corporation, the investment
banking subsidiary of The Bank of Tokyo-Mitsubishi. From 1989 to 1994, Mr.
Cross served as chief legal officer to Fleet Capital Corporation.
MICHAEL P. KARMAN joined the Company in January 1995, and is Senior Vice
President and Manager of the Company's East Region. From 1989 until joining
the Company, Mr. Karman served as a regional sales manager at AT&T Capital
Leasing Services Division. From 1986 until its sale to AT&T Capital Leasing
Services Division in 1989, Mr. Karman was employed by Eaton Financial.
SANDRA T. KING joined the Company as a Senior Vice President in March 1998,
and is Manager of the Company's West Region. She has served as a Director
since June 1995. Prior to joining BankVest as an officer, Ms. King served as
vice president of marketing for Babson College in Wellesley, Massachusetts
since May 1992. From 1990 to 1992, Ms. King served as director of marketing
for Babson College. Ms. King served as a management consultant with Arthur D.
Little, Inc. from 1980 to 1985.
ROBERT M. MCFADDEN joined the Company in November 1995, and is Senior Vice
President for Sales, Mid-Atlantic Region. From 1989 until joining the Company,
Mr. McFadden served as regional sales manager for AT&T Capital Leasing
Services Division. From 1986 until its sale to AT&T Capital Leasing Services
Division in 1989, Mr. McFadden was employed by Eaton Financial.
JOSEPH R. BANNICK joined the Company in June 1996, and is Senior Vice
President for Sales, Western Region. From 1989 until joining the Company, Mr.
Bannick served as regional sales manager for AT&T Capital Leasing Services
Division. From 1988 until its sale to AT&T Capital Leasing Services Division
in 1989, Mr. Bannick served as regional sales manager of Eaton Financial.
JAMES H. FORDYCE has served as a Director since May 1997. Mr. Fordyce has
been a general partner of Whitney & Co. and its affiliated partnerships since
July 1996. From 1988 to 1996, Mr. Fordyce was a senior vice president of
Heller Financial, Inc.
JAMES D. GERSON has served as a Director since December 1995. Since 1993,
Mr. Gerson has been employed by Fahnestock & Co. and since October 1995, has
served as portfolio manager for Hudson Capital Appreciation Fund, a mutual
fund. Mr. Gerson serves as a director of Ag Services of America, Inc.,
American Power Conversion Corporation, Arguss Holdings, Inc., Energy Research
Corp., and Hilite Industries, Inc. Mr. Gerson was also a director of Eaton
Financial prior to its sale to AT&T Capital.
KEVIN J. MCGINTY has served as a Director since May 1996. Since December
1993, Mr. McGinty has been a managing director of Primus Venture Partners,
Inc., the sole general partner of Primus Venture Partners III Limited
Partnership, which is the sole general partner of Primus Capital Fund III
Limited Partnership, a venture capital investment firm and stockholder of the
Company. Mr. McGinty has served in similar capacities with other affiliates of
Primus Venture Partners, Inc. since 1990. Mr. McGinty has served as an
executive vice president of Society National Bank and a senior vice president
of Society Corporation (now KeyCorp).
The Company's Board of Directors is divided into three classes, with the
term of office of one class expiring each year. The term of office of each
director included in Class I, Class II and Class III expires at the time of
the annual meeting of stockholders in 2001, 1999 and 2000, respectively, or
when his or her successor has been duly elected and qualified. Class I
consists of John P. Colton and Sandra T. King; Class II consists of James D.
47
<PAGE>
Gerson and Kellie D. Jacques; and Class III consists of Paul S. Gass, Kevin J.
McGinty and James H. Fordyce. See "Description of Capital Stock--Certain Anti-
Takeover Provisions."
DIRECTOR COMPENSATION
The Company has granted non-qualified stock options to each of its non-
employee directors, including options to purchase 9,000 shares of Common Stock
to each of Mr. Gerson, Mr. McGinty and Mr. Fordyce. In addition, prior to her
employment by the Company Ms. King served as a non-employee director of the
Company and was granted options to purchase 18,000 shares of Common Stock in
this capacity. In June 1998, after becoming an officer of the Company, Ms.
King was granted options to purchase 37,500 shares of Common Stock. Mr. Gerson
also receives $500 for each Board of Directors meeting attended and $500 per
quarter as compensation for his services as director. Except for Mr. Gerson no
other non-employee director of the Company receives cash compensation for his
or her services as a director.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the compensation paid for services rendered in the fiscal year
ended June 30, 1998, by the Company to its Chief Executive Officer and each of
the other four most highly compensated executive officers whose total
compensation for the 1998 fiscal year exceeded $100,000 (collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION(1) COMPENSATION
----------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------- -------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Paul S. Gass...................... $250,962 $116,875 37,500 $35,367(2)
President, Chief Executive Offi-
cer and Chairman
John P. Colton.................... 140,538 68,250 7,500 18,237(3)
Executive Vice President
Kellie D. Jacques................. 100,384 48,750 3,000 12,220(4)
Chief Financial Officer and
Senior Vice President
Michael P. Karman................. 114,577 56,065 -- 11,962(5)
Senior Vice President, Sales
Cathy F. Sutton(7)................ 109,614 46,250 -- 12,982(6)
Former Senior Vice President,
Operations
</TABLE>
- --------
(1) Other compensation in the form of perquisites and other personal benefits
has been omitted because the aggregate amount of such benefits constituted
less than the lesser of $50,000 or 10% of such executive officer's total
annual salary and bonus for such years.
(2) Consists of $11,983 for car allowance, $17,924 for life insurance premiums
and $5,460 for 401(k) contributions.
(3) Consists of $9,250 for car allowance, $3,317 for life insurance premiums
and $5,670 for 401(k) contributions.
(4) Consists of $6,000 for car allowance, $395 for life insurance premiums and
$5,825 for 401(k) contributions.
(5) Consists of $6,000 for car allowance, $420 for life insurance premiums and
$5,542 for 401(k) contributions.
(6) Consists of $6,000 for car allowance, $395 for life insurance premiums and
$6,587 for 401(k) contributions.
(7) Ms. Sutton resigned from her position and voluntarily terminated her
employment with the Company effective July 3, 1998. The Company and Ms.
Sutton entered into a severance agreement ("Severance Agreement") pursuant
to which the Company will continue to pay Ms. Sutton's annual salary on a
bi-weekly basis through July 3, 1999. See "Certain Transactions."
48
<PAGE>
Option Grants. The following table sets forth each grant of stock options
made during the fiscal year ended June 30, 1998, to the Named Executive
Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------- VALUE AT
PERCENT OF ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE OR TERM
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ------------------------
NAME GRANTED(1) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ---------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Paul S. Gass............ 37,500 10.48% $7.89 6/17/2003 $ 377,620 $ 476,510
John P. Colton.......... 7,500 2.10 7.17 6/17/2003 68,632 86,605
Kellie D. Jacques....... 3,000 0.84 7.17 6/17/2003 27,453 34,642
</TABLE>
- --------
(1) In shares of Common Stock calculated after giving effect to the
Recapitalization. With the exception of Mr. Gass, whose option was fully
exercisable on the date of grant, each of the options for each of the
Named Executive Officers become exercisable as to 25% of the shares of
Common Stock underlying such options on each anniversary of date of grant,
with such options becoming fully exercisable on the fourth anniversary of
the date of grant.
Option Values. The following table sets forth the number and value of shares
of Common Stock underlying unexercised options as of June 30, 1998, for each
of the Named Executive Officers. There were no stock options exercised by any
such officer during that fiscal year:
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
AT FISCAL YEAR-END(1) YEAR-END(2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Paul S. Gass................ 90,000 37,500 $ $
John P. Colton.............. 28,500 27,000
Kellie D. Jacques........... 19,500 13,500
Michael P. Karman........... 18,000 12,000
Cathy F. Sutton(3).......... 18,000 12,000
</TABLE>
- --------
(1) In shares of Common Stock calculated after giving effect to the
Recapitalization.
(2) There was no public trading market for the Common Stock as of June 30,
1998. These values were calculated based on a value of $ per share,
the assumed initial public offering price, minus the per share exercise
price, multiplied by the number of shares underlying the option.
(3) Ms. Sutton terminated her employment with the Company effective July 3,
1998 at which time she exercised options to purchase 18,000 shares of
Common Stock constituting all of her exercisable options. The remainder of
her options (12,000 shares) were terminated pursuant to the terms of her
Severance Agreement and the 1995 Plan. See "Certain Transactions."
49
<PAGE>
STOCK OPTION, INCENTIVE AND BENEFIT PLANS
1995 Stock Option Plan. In January 1995, the Company adopted the 1995 Plan
to provide an additional incentive to directors, employees and consultants
through the award of options to purchase Common Stock. Upon the closing of the
Offering, 1,100,000 shares of Common Stock will be reserved for issuance under
the 1995 Plan (900,000 at June 30, 1998). As of June 30, 1998, options to
purchase 805,125 shares of Common Stock had been granted under the 1995 Plan.
The 1995 Plan is administered by the Stock Option Committee of the Board of
Directors. Under the 1995 Plan, the Company may grant both incentive stock
options intended to qualify under Section 422 of the Internal Revenue Code of
1986, as amended, (the "Code") and options that are not qualified as incentive
stock options ("non-qualified stock options"). Non-qualified stock options may
be granted to directors, employees, consultants and vendors of the Company and
its subsidiaries. The exercise price of non-qualified stock options will be
determined by the Board of Directors or a committee thereof and will not be
less than the fair market value of the Common Stock on the date the options
are granted. Incentive stock options may be granted only to individuals who
are employees of the Company or a subsidiary on the date of grant. The
exercise price of incentive stock options must be at least equal to 100% of
the fair market value of the Common Stock on the date of grant. Subject to the
terms of the 1995 Plan, the Stock Option Committee is authorized to select the
recipients of options and determine the number of shares that may be issued
under each option. The 1995 Plan provides that the total number of shares
covered by the plan, the maximum number of shares which may be the subject of
options awarded to any one individual in a calendar year, the number of shares
covered by each option, and the exercise price per share under each option
will be proportionately adjusted in the event of a stock split, reverse stock
split, stock dividend, or similar capital adjustment effected without receipt
of consideration by the Company.
Employee Stock Ownership Plan. In November 1997, the Company's Board of
Directors authorized the establishment of an Employee Stock Ownership Plan
(the "ESOP"), for the benefit of employees. The purpose of the ESOP is to
encourage broad-based ownership of the Company by its employees and, as a
result, to provide an incentive for employees at all levels to contribute to
the profitability and success of the Company. The ESOP will enable the Company
to offer a means for employees to own Common Stock, without requiring them to
invest their personal savings. To date, the Company has made no contributions
to the ESOP.
The assets of the ESOP will be held in a trust whose trustee will be
appointed by the Board of Directors. The ESOP will be administered by a
committee, all of whose members, except for one, shall be appointed by the
Board of Directors. The member of the committee not appointed by the Board of
Directors will be elected by the participants according to rules specified by
the Board of Directors. The Company may make deductible contributions to the
ESOP, which contributions will be invested primarily in the Common Stock. The
form of the contributions, at the Company's discretion, will be either Common
Stock, cash to purchase Common Stock, a combination of Common Stock and cash,
or a leveraged transaction (wherein the ESOP will borrow from a bank, with the
Company's guaranty, purchase Common Stock with loan proceeds, and repay the
debt through periodic deductible contributions by the Company to the ESOP).
The maximum contribution that the Company may make is the lower of (i) 15%
of the total Compensation paid to all ESOP participants or (ii) the lower of
the aggregate of (A) $30,000 per participant or (B) 25% of each participant's
compensation. Assuming that aggregate participant compensation will be the
limiting factor, if all employees are participants, the annual contribution
maximum would be less than $1.25 million. The Company has not determined the
form or amount of its future contributions, if any.
Accounts will be subject to vesting over time. The ESOP provides that,
unless the participant otherwise elects, payment of benefits will begin not
later than 60 days after the latest of the close of the plan year in which the
participant (i) attains age 65 or, if earlier, normal retirement age under the
ESOP, (ii) celebrates his or her tenth anniversary of participation in the
ESOP, or (iii) terminates his or her service with the Company. At
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the discretion of the Board, the benefits will be payable to a participant
either in a lump sum, or in equal annual installments over a period generally
not to exceed five years.
Shares of Common Stock in the trust shall be voted by the trustee as
directed by each participant with respect to his or her shares of Common Stock
then allocated to his or her Common Stock account. Any allocated Common Stock
with respect to which voting instructions are not received from participants
shall be voted in the same proportion as those shares for which directions are
received from participants (and beneficiaries).
The ESOP provides that a participant who is entitled to receive a
distribution may demand that benefits be distributed in the form of Common
Stock. A participant also has the right to require the Company (not the ESOP)
to repurchase for cash under a fair valuation formula the Common Stock
distributable to such employee.
The Company will receive an income tax deduction equal to the contribution
to the ESOP in the Company's tax year for which the contribution is made.
Generally, an employee/participant will not pay income taxes on vested
accounts in the ESOP until the date he or she receives a distribution of the
Common Stock from the account and the date on which he or she sells such
Common Stock.
Annual and Long-term Incentive Plans. The Company maintains an annual
incentive plan which provides for cash compensation to employees of the
Company on a quarterly basis based on performance objectives of the individual
employee and on an annual basis based on the attainment of the Company's pre-
tax profit objectives for that year. The Company also maintains a long-term
incentive plan, which provides for additional cash compensation to long-term
employees of the Company based upon the Company's attainment of pre-tax profit
objectives. Under the long-term incentive plan, profit objectives are measured
and reviewed over three-year periods, commencing in each of fiscal years 1997,
1998 and 1999 of the Company.
401(k) Plan. The Company maintains a 401(k) savings and retirement plan (the
"401(k) Plan") which covers substantially all employees of the Company. The
401(k) Plan allows participants to agree to certain salary deferrals which the
Company allocates to the participants' plan account. These amounts may not
exceed statutorily mandated annual limits set forth in the Code. During the
Company's most recent fiscal year, the Company matched employee contributions
to the 401(k) Plan with fifty cents for each dollar, up to a maximum Company
contribution of six percent of the employee's gross salary contributed to the
plan per calendar year.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Paul S. Gass,
dated , 1998, pursuant to which Mr. Gass serves as Chief Executive Officer
for a five-year term commencing on the closing of this Offering. Mr. Gass's
employment agreement also contains non-competition and confidentiality
provisions and a minimum base salary of $300,000 throughout the term thereof,
together with incentive bonuses equal to 60% of his base salary for each
fiscal year, subject to adjustment based on Company performance and approval
of the Compensation Committee of the Company's Board of Directors. The
Company's employment agreement with Mr. Gass provides him with the option to
terminate his employment with the Company upon an acquisition or other change
of control of the Company. Upon such termination or a termination of Mr.
Gass's employment without cause, the Company must pay Mr. Gass the greater of
(i) an amount equal to his base salary plus cash bonuses due over the
remaining term of his employment agreement, or (ii) an amount equal to his
annual base salary plus any cash bonuses due over a two-year period. Such
agreement also grants to Mr. Gass fully vested five-year options to purchase
an aggregate of 37,500 shares of Common Stock at an option price of 110% of
the initial public offering price of the Common Stock offered pursuant to this
Prospectus.
The Company also has entered into employment agreements with each of its
other Named Executive Officers, executive officers, senior managers and
certain other employees of the Company. The employment agreement with Cathy F.
Sutton was terminated pursuant to her Severance Agreement. See "Certain
Transactions." Each such employment agreement contains substantially similar
terms and conditions, which include provisions for (i) a two-year term; (ii)
annual base salary and bonuses; (iii) benefits in accordance with
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Company policies including medical, life and disability insurance and other
fringe benefits; (iv) covenants by the employee of non-disclosure of
confidential information of the Company; (v) covenants by the employee not to
compete with the Company; and (vi) a severance payment equal to the employee's
annual base salary plus any accrued but unpaid bonuses over a period of one
year after the date of such employee's termination, if such termination was
without cause.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Kevin J. McGinty, a Director and member of the Compensation Committee, is a
managing director of the sole general partner of Primus Venture Partners,
Inc., the sole general partner of Primus Venture Partners III Limited
Partnership, the sole general partner of Primus Capital Fund III Limited
Partnership ("Primus"). In addition, James H. Fordyce, who is also a Director
and a member of the Compensation Committee, is a general partner of Whitney
Subordinated Debt Fund, L.P. ("Whitney"). Primus and Whitney are investors in
the Company and have engaged in certain transactions with the Company as
described under "Certain Transactions."
CERTAIN TRANSACTIONS
On October 18, 1995, the Company received a loan from Paul Gass under a
demand note issued in the principal amount of $250,000. The interest rate on
the demand note was equal to the Prime Rate as published in The Wall Street
Journal, plus 1.25% per annum on the basis of a 360-day year, payable on a
quarterly basis commencing on December 30, 1995. On November 2, 1995 this loan
was repaid.
During the fiscal year ended June 30, 1996, the Company issued and sold an
aggregate of 486,000 shares of Common Stock at $4.17 per share and warrants to
purchase an aggregate of 48,600 shares of Common Stock at $4.58 per share, to
Messrs. Bannick, Colton, Gass, Karman, McFadden and Mss. Jacques and Sutton
and to certain other employees and non-employee investors.
On February 5, 1996, the Company received a loan in the principal amount of
$250,000 from Mr. Gass and a loan in the principal amount of $250,000 from Mr.
Colton. Each loan was made pursuant to a demand note with an interest rate of
10% per annum on the basis of a 360-day year, payable on a quarterly basis
commencing on March 31, 1996. On March 25, 1996, both of these loans were
repaid.
On May 30, 1996, for an aggregate purchase price of $6.0 million, the
Company issued (i) 30,000 shares of Class A Preferred Stock to Primus; (ii)
30,000 shares of Class B Preferred Stock to PNC, (iii) a warrant to purchase
72,000 shares of Common Stock to Primus; and (iv) a warrant to purchase 72,000
shares of Non-Voting Common Stock to PNC. In connection with the
Recapitalization, the Class A Preferred Stock will be converted into 720,000
shares of Common Stock and the Class B Preferred Stock will be converted into
720,000 shares of Non-Voting Common Stock. In connection with the issuance and
sale of the Class A Preferred Stock and Class B Preferred Stock to Primus and
PNC, the Company granted Primus and PNC certain rights to put such shares back
to the Company. Such put rights will be eliminated as part of the
Recapitalization.
On May 30, 1996, the Company and certain of its executive officers also
entered into a stockholders agreement (the "Stockholders Agreement") with
Primus and PNC and the Company entered into a registration rights agreement
(the "Registration Rights Agreement") with Primus and PNC. The Stockholders
Agreement and the Registration Rights Agreement were subsequently amended on
February 28, 1997, to include Whitney as a party. All of the current members
of the Company's Board of Directors were elected pursuant to the terms of the
Stockholders Agreement, which provided for the election of three designees of
management, one designee of Primus, one designee of Whitney and two designees
mutually acceptable to management, Primus and Whitney. The Stockholders
Agreement will be terminated upon the closing of this Offering and thereafter
future members of the Board of Directors will be elected in accordance with
the Company's Articles of Organization. The Registration Rights Agreement will
remain in place and provides Primus, PNC and Whitney with certain registration
rights. See "Shares Eligible for Future Sale--Registration Rights."
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<PAGE>
On February 28, 1997, the Company issued to Whitney the Subordinated Note in
the principal amount of $15.0 million which bears an interest rate of 10.101%
per annum, a vested warrant exercisable for 354,114 shares of Common Stock and
a vesting warrant exercisable for 160,962 shares of Common Stock. The
Registration Rights Agreement includes the shares exercisable under the
warrants issued to Whitney. The Registration Rights Agreement will remain in
place after the Offering and 354,114 shares of Common Stock issuable under the
vested warrant will be registrable under it. A portion of the proceeds
received by the Company from this Offering will be used to repay the principal
and interest on the Subordinated Note. In connection with the payment of the
Subordinated Note at the closing of the Offering, the vesting warrant
exercisable for 160,962 shares of Common Stock will be terminated. See "Use of
Proceeds" and "Recapitalization."
In connection with the issuance of the Subordinated Note, the Company
entered into a put and call agreement (the "Put and Call Agreement") with
Whitney under which, upon the occurrence of certain events including an event
requiring mandatory prepayment of the Subordinated Note, Whitney has the right
to put its warrants (subject to certain limitations) back to the Company.
Although the vested warrant will remain outstanding following the closing of
this Offering, the vesting warrant and the Put and Call Agreement will
terminate upon the closing of this Offering in connection with the
Recapitalization.
Since November 1, 1997, the Company has issued and sold (i) an aggregate of
131,250 shares of Common Stock to certain employees of the Company, including
Mr. Bannick, Mr. Catterson, Mr. Colton, Mr. Cross, Mr. Gass and Mr. McFadden,
at a purchase price of $6.67 per share; (ii) 32,010 and 20,817 shares of
Common Stock to Primus and Whitney, respectively, at a purchase price of $6.67
per share; and (iii) 32,010 shares of Non-Voting Common Stock to PNC at a
purchase price of $6.67 per share. The shares were issued to Primus, PNC and
Whitney pursuant to their exercise of preemptive rights.
On May 28, 1998, for an aggregate purchase price of $7.5 million, the
Company issued (i) 37,500 shares of Class C Preferred Stock to Primus; and
(ii) 37,500 shares of Class D Preferred Stock to PNC. In connection with the
Recapitalization, the Class C Preferred Stock will be converted into 523,500
shares of Common Stock and the Class D Preferred Stock will be converted into
523,500 shares of Non-Voting Common Stock.
During the years ended June 30, 1995 and 1996, and in November 1997, the
Company made loans to Messrs. Bannick, Catterson, Colton, Cross, Gass, Karman,
McFadden and Mss. Jacques and Sutton and other employees of the Company on a
non-recourse basis to fund their purchase of Common Stock. Such loans
originally bore an interest rate of 8% per annum until April 1998, when the
interest rate was reduced to 6%. The outstanding aggregate indebtedness to the
Company under such loans as of June 30, 1996, 1997 and 1998, was $496,000,
$489,000 and $1,274,000, respectively. In addition, during the years ended
June 30, 1995 and 1996, Mr. Gass made loans to Mr. McFadden and Mss. Jacques
and Sutton to fund a portion of their purchase of Common Stock from him on a
non-recourse basis. The loans from Mr. Gass to Mss. Jacques and Sutton bear
interest at the prime interest rate charged by BankBoston, while the loan to
Mr. McFadden bears interest at 8.75% per annum. The aggregate indebtedness to
Mr. Gass under such loans as of June 30, 1996, 1997 and 1998 was approximately
$42,000, $50,000 and $42,500, respectively. As part of this Offering, the
Company is registering a sufficient number of shares of each such employee's
Common Stock so that such employee may sell the number of shares necessary to
realize net after tax proceeds sufficient to allow such employee to pay in
full the outstanding principal and interest on such employee's loan.
The Company also has entered into an agreement with each of Primus, PNC,
Whitney and certain other stockholders of the Company, pursuant to which the
parties have agreed to, among other things, the terms of the Recapitalization
and the termination or amendment of certain of the foregoing agreements among
such parties and the Company. See "Recapitalization."
As of July 3, 1998, Ms. Sutton resigned from her position as Senior Vice
President, Operations. Pursuant to the terms of Ms. Sutton's Severance
Agreement, the Company agreed to: (i) purchase 36,000 shares of Common Stock
from Ms. Sutton for a purchase price of $5.00 per share; (ii) pay Ms. Sutton a
severance payment equal to her annual base salary of $100,000, payable over
the one year period ending on July 3, 1999 (the "Severance
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<PAGE>
Period"); (iii) provide her with health and dental insurance coverage during
the Severance Period; and (iv) permit her to continue participating in the
Company's 401(k) Plan during the Severance Period (but with no matching
contribution by the Company). The Company also agreed to reimburse Ms. Sutton
for up to $10,000 in out-of-pocket expenses incurred in connection with her
search for new employment and for reasonable attorney's fees incurred in
connection with the negotiation of the Severance Agreement. Amounts payable to
Ms. Sutton by the Company were first applied to pay in full loans from the
Company and Mr. Gass incurred to fund Ms. Sutton's purchase of Common Stock.
Ms. Sutton also received 18,000 shares of Common Stock pursuant to the
exercise of vested options upon payment of $32,070. Ms. Sutton's remaining
unvested options to purchase 12,000 shares of Common Stock were terminated
upon termination of her employment with the Company.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's capital stock as of August 31, 1998, (as adjusted
to reflect the Recapitalization) by: (i) each person known by the Company to
beneficially own 5% or more of the Company's outstanding capital stock; (ii)
each director of the Company; (iii) each of the Named Executive Officers of
the Company; (iv) all directors, executive officers and their affiliates as a
group; and (v) each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
AND NON-VOTING SHARES AND NON-VOTING
COMMON STOCK OWNED BEING COMMON STOCK OWNED
BEFORE THE OFFERING(1) OFFERED AFTER THE OFFERING(1)
------------------------ ------- -------------------------
NUMBER OF NUMBER OF
NAME OF BENEFICIAL OWNER SHARES PERCENT SHARES PERCENT
- ------------------------ ------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Paul S. Gass(2)......... 1,161,264 21.53%
John P. Colton(3)....... 212,406 4.00
Kellie D. Jacques(4).... 53,700 1.01
Michael P. Karman(5).... 67,200 1.27
Cathy F. Sutton(6)...... 25,200 * -- 25,200
James H.
Fordyce(7)(13)......... 377,181 6.69 -- 377,181
James D. Gerson(8)...... 86,958 1.64 -- 86,958
Sandra T. King(9)....... 13,500 * -- 13,500
Kevin J.
McGinty(10)(11)........ 1,349,760 25.18 -- 1,349,760
Primus Capital Fund III
Limited 1,347,510 25.15 -- 1,347,510
Partnership(11)........
5900 Lanbrook Drive
Suite 200
Cleveland, OH 44124
PNC Venture Corp.(12)... 1,347,510 25.15 -- 1,347,510
c/o PNC Equity
Management Corp.
One PNC Plaza
19th Floor
249 Fifth Avenue
Pittsburgh, PA 15222
J.H. Whitney
Subordinated 374,931 6.65 -- 374,931
Debt Fund, L.P.(13)....
177 Broad Street
15th Floor
Stamford, CT 06901
All directors and
executive officers as a
group (13 persons
)(14).................. 3,459,852 57.84 --
Babson College.......... 75,000 1.42 75,000 0 *
Babson Park, MA 02157
Chabad Center of 10,100 * 10,100 0 *
Natick.................
159 Boden Lane
Natick, MA 01760
Merkos Chabad Lubavitch, 32,200 * 32,200 0 *
Inc. ..................
2411 E. Elm Street
Tucson, AZ 85719
Aish Hatora Inc. ....... 9,000 * 9,000 0 *
1318 Beacon Street
Brookline, MA 02446
</TABLE>
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<PAGE>
- --------
* Denotes ownership of less than 1% of the Company's outstanding Common
Stock.
(1) Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person has beneficial ownership of any securities as to which
such person, directly or indirectly, through any contract, arrangement,
undertaking, relationship or otherwise has or shares voting power and/or
investment power and as to which such person has the right to acquire
such voting and/or investment power within 60 days. Percentage of
beneficial ownership as to any person as of a particular date is
calculated by dividing the number of shares beneficially owned by such
person by the sum of the number of shares outstanding as of such date and
the number of shares as to which such person has the right to acquire
voting and/or investment power within 60 days.
(2) Includes 105,000 shares of Common Stock subject to options exercisable
within 60 days after August 31, 1998, and 2,400 shares subject to
warrants exercisable within 60 days after August 31, 1998. Mr. Gass'
address is c/o BankVest Capital Corp., 200 Nickerson Road, Marlboro, MA
01752.
(3) Includes 28,500 shares of Common Stock subject to options exercisable
within 60 days after August 31, and 2,400 shares subject to warrants. Mr.
Colton's address is c/o BankVest Capital Corp., 200 Nickerson Road,
Marlboro, MA 01752.
(4) Includes 19,500 shares of Common Stock subject to options and 1,200
shares subject to warrants exercisable within 60 days after August 31,
1998. Ms. Jacques address is c/o BankVest Capital Corp., 200 Nickerson
Road, Marlboro, MA 01752.
(5) Includes 18,000 shares of Common Stock subject to options exercisable
within 60 days after August 31, 1998, and 1,200 shares subject to
warrants exercisable within 60 days after August 31, 1998. Mr. Karman's
address is c/o BankVest Capital Corp., 200 Nickerson Road, Marlboro, MA
01752.
(6) Includes 1,200 shares subject to warrants exercisable within 60 days
after August 31, 1998. Ms. Sutton's address is 216 Main Street, Medway,
MA 02053.
(7) Mr. Fordyce, a Director of the Company, is a general partner of Whitney.
The listed number of shares includes 20,817 shares of Common Stock, and
354,114 shares of Common Stock subject to warrants beneficially owned by
Whitney, as to which Mr. Fordyce disclaims beneficial ownership except to
the extent of his pecuniary interest therein. Also includes 2,250 shares
of Common Stock subject to options exercisable within 60 days of August
31, 1998. Mr. Fordyce's address is c/o Whitney & Co., 177 Broad Street,
15th Floor, Stamford, CT 06901.
(8) Includes 4,500 shares of Common Stock subject to options exercisable
within 60 days after August 31, 1998, and 3,600 shares subject to
warrants exercisable within 60 days after August 31, 1998. Also includes
42,858 shares of Common Stock owned by or on behalf of Mr. Gerson's minor
children, as to all of which Mr. Gerson disclaims beneficial ownership.
Mr Gerson's address is c/o Hudson Capital Advisors, Inc., 780 3rd Avenue,
11th Floor, New York, NY 10017.
(9) Includes 13,500 shares of Common Stock subject to options exercisable
within 60 days after August 31, 1998. Ms. King's address is c/o BankVest
Capital Corp., 200 Nickerson Road, Marlboro, MA 01752.
(10) Includes 2,250 shares of Common Stock subject to options exercisable
within 60 days after August 31, 1998. The listed number of shares also
includes 1,347,510 shares of Common Stock beneficially owned by Primus,
including 72,000 shares subject to warrants exercisable within 60 days
after August 31, 1998. Mr. McGinty, a Director of the Company, is a
managing director of Primus Venture Partners, Inc., the sole general
partner of Primus Venture Partners III Limited Partnership, which is the
sole general partner of Primus. Mr. McGinty shares voting and investment
power with respect to the shares of the Company's stock held by Primus
with five other executive officers of Primus Venture Partners, Inc. Mr.
McGinty disclaims beneficial ownership of the shares held by Primus,
except to the extent of his pecuniary interest therein. Mr. McGinty's
address is c/o Primus Ventures Partners, Inc., 5900 Lanbrook Drive, Suite
200, Cleveland, OH 44124.
(11) Includes 72,000 shares of Common Stock subject to warrants exercisable
within 60 days after August 31, 1998.
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<PAGE>
(12) PNC holds shares of Non-Voting Common Stock of the Company, which shares
are not being registered for sale in this Offering. Such shares of Non-
Voting Common Stock are identical to shares of Common Stock except that
they do not carry voting rights. Includes 72,000 shares of Non-Voting
Common Stock subject to warrants exercisable within 60 days after August
31, 1998.
(13) Includes 354,114 shares subject to warrants exercisable within 60 days
after August 31, 1998.
(14) Includes 656,115 shares that may be acquired within 60 days after August
31, 1998, upon exercise of outstanding stock options and warrants.
DESCRIPTION OF CAPITAL STOCK
After giving effect to the Recapitalization, as of the date of this
Prospectus the Company's authorized capital stock consists of 25,000,000
shares of Common Stock, par value $1.00, and 2,000,000 shares of Non-Voting
Common Stock, par value $1.00.
Common Stock and Non-Voting Common Stock. As of August 31, 1998, 4,027,719
shares of Common Stock were issued and outstanding and held of record by 72
persons and 1,275,510 shares of Non-Voting Common Stock were issued and
outstanding and held of record by one person. Upon completion of the Offering,
shares of Common Stock and shares of Non-Voting Common Stock will be
outstanding, excluding shares of Common Stock issuable upon exercise of
options granted under the 1995 Plan, as amended, 634,476 shares of Common
Stock issuable upon exercise of warrants to purchase Common Stock, and 72,000
shares of Non-Voting Common Stock issuable upon exercise of warrants to
purchase Non-Voting Common Stock.
The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of holders of Common Stock. The Common Stock
does not have cumulative voting rights. Each share of Common Stock is entitled
to participate equally in dividends, if, as and when declared by the Company's
Board of Directors, and in the distribution of assets in the event of
liquidation. The Company has never paid cash dividends on its Common Stock.
See "Dividends." The shares of Common Stock have no preemptive rights or
redemption rights. The outstanding shares of Common Stock are, and the shares
of Common Stock offered hereby upon issuance and sale will be, duly
authorized, validly issued, fully-paid and nonassessable.
The holders of Non-Voting Common Stock are entitled to all of the rights of
holders of Common Stock, except for the right to vote. Non-Voting Common Stock
is convertible upon the occurrence of certain conversion events into an equal
number of shares of Common Stock. The shares of Non-Voting Common Stock have
no preemptive rights or redemption rights. The outstanding shares of Non-
Voting Common Stock are duly authorized, validly issued, fully-paid and
nonassessable.
CERTAIN ANTI-TAKEOVER PROVISIONS
Charter Provisions. The Company's Articles of Organization and Bylaws
contain certain provisions that may have the effect of discouraging, delaying
or preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including providing for
a Board of Directors with staggered three-year terms, requiring super-majority
voting to effect certain amendments to the Articles of Organization and Bylaws
or to approve certain business combinations, limiting the persons who may call
special stockholders' meetings, and establishing advance notice requirements
for nominations for election to the Board of Directors or for proposing
matters that can be acted upon at stockholders' meetings.
The Articles of Organization also require that, unless the Board of
Directors previously has approved certain transactions in the nature of an
acquisition, the vote of two-thirds of all shares of stock must approve a sale
of all or substantially all the assets of the Company or a merger or
consolidation.
Business Combination Statute. The Massachusetts "Business Combination"
statute provides that, if a person acquires 5% or more of the stock of a
Massachusetts corporation without the approval of its Board of
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<PAGE>
Directors (an "interested stockholder"), he or she may not engage in certain
transactions with the corporation for a period of three years. There are
certain exceptions to this prohibition; for example, if the Board of Directors
approves the acquisition of stock or the transaction prior to the time that
the person became an interested stockholder, or if the interested stockholder
acquires 90% of the voting stock of the corporation (excluding voting stock
owned by directors who are also officers and certain employee stock plans) in
one transaction, or if the transaction is approved by the Board of Directors
and by the affirmative vote of two-thirds of the outstanding voting stock
which is not owned by the interested stockholder, the prohibition does not
apply.
The Company is subject to the Massachusetts Business Combination statute
unless it elects not to be governed by the statute in its Articles of
Organization or Bylaws. The Company has not made, and does not currently
intend to make, such an election.
Control Share Acquisition Statute. The Massachusetts "Control Share
Acquisition" statute provides that a person (the "acquirer") who makes a bona
fide offer to acquire, or acquires, shares of stock of a corporation that,
when combined with shares already owned, would increase the acquirer's
ownership to at least 20%, 33 1/3% or a majority of the voting stock of the
corporation, must obtain the approval of a majority-in-interest of the shares
held by all stockholders, excluding shares held by the acquirer and the
officers and inside directors of the corporation, in order to vote the shares
acquired. The statute does not require the acquirer to consummate the purchase
before the stockholder vote is taken.
The Company is subject to the Massachusetts Control Share Acquisition
statute unless it elects not to be governed by the Statute in its Articles of
Organization or Bylaws. The Company has not made, and does not currently
intend to make, such an election.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market, or
the perception that such sales could occur, could adversely affect market
prices prevailing from time to time. In addition, several of the Company's
principal stockholders and entities affiliated with them hold a significant
portion of the Company's outstanding Common Stock, and a decision by one or
more of these stockholders to sell their shares could adversely affect the
market price of the Common Stock.
Upon completion of the Offering, the Company will have outstanding
shares of Common Stock ( shares if the Underwriters' over-allotment option
is exercised in full). Of these shares, the shares of Common Stock offered
hereby ( shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradable without restriction or registration under the
Securities Act, except to the extent purchased by affiliates of the Company.
The remaining shares of Common Stock outstanding are Restricted Shares
which were issued and sold by the Company in private transactions in reliance
upon exemptions from registration under the Securities Act and may not be sold
without registration except in compliance with Rule 144 or another exemption
from registration under the Securities Act. Pursuant to Rule 144, of the
Restricted Shares are eligible for sale without restriction under the
Securities Act on the date of this Prospectus and will be eligible for
sale subject to the conditions set forth in Rule 144, 90 days after the date
of this Prospectus. However, of the foregoing Restricted Shares are
subject to lock-up agreements and will not be eligible for sale until 180 days
after the date of this Prospectus. At such time, of the Restricted Shares
will be eligible for sale subject to Rule 144. See "--Lock-up Agreements."
58
<PAGE>
Following the date of this Prospectus, the Company intends to register for
sale approximately 1,100,000 shares of Common Stock issuable under the 1995
Plan. Of these shares, 793,500 are subject to outstanding options as of August
31, 1998, all of which are subject to lock-up agreements. Upon the expiration
of such lock-up agreements, options exercisable for approximately 339,075
shares of Common Stock will be exercisable. Shares issued to persons who are
not affiliates upon exercise of such options after the effective date of such
registration and the expiration of the lock-up agreements will be tradeable
without restriction under the Securities Act.
The Company has also reserved 1,821,024 shares of Common Stock for issuance
upon the exercise of warrants and the conversion of shares of Non-Voting
Common Stock. Although such warrants and shares of Non-Voting Common Stock are
currently exercisable or convertible, the shares of Common Stock issuable
thereunder are subject to lock-up agreements. In the event the warrants are
exercised or the shares of Non-Voting Common Stock are converted during the
period ending 180 days after the date of this Prospectus, the shares issued
upon exercise of such warrants or conversion of such Non-Voting Common Stock
will not be eligible for sale until the completion of such period. At such
time, such shares will be eligible for sale subject to Rule 144. See "Certain
Transactions."
In general, under Rule 144 as currently in effect, beginning 90 days after
the Offering, a non-affiliated person (or persons whose shares are aggregated)
who has beneficially owned restricted shares for at least one year, would be
entitled to sell in brokers' transactions or to market makers within any three
month period a number of Restricted Shares that does not exceed the greater of
1% of the then outstanding shares of the Company's Common Stock (approximately
shares, based on the number of shares outstanding after the Offering
assuming no exercise of the Underwriters' over-allotment option) or the
average weekly trading volume of the Common Stock on the Nasdaq National
Market during the four calendar weeks preceding the date on which the notice
of sale is filed with the Commission. Such sales under Rule 144 are also
subject to certain manner of sale provisions, notice requirements and
availability of current public information about the Company. Further, a
person who is not an affiliate of the Company at any time during the 90 days
preceding the sale and who has beneficially owned Restricted Shares for at
least two years, would be entitled to sell such Restricted Shares under Rule
144(k) without regard to the availability of current public information,
volume limitations, manner of sale provisions or notice requirements.
Restricted Shares held by affiliates of the Company eligible for sale in the
public market under Rule 144 are subject to the foregoing volume limitations
and other restrictions, regardless of holding period. Affiliates may sell
shares not constituting Restricted Shares only in accordance with the
foregoing volume limitations and other Rule 144 restrictions.
Rule 144A provides a non-exclusive safe harbor exemption from the
registration requirements of the Securities Act for specified resales of
restricted securities to certain institutional investors. Rule 144A allows
unregistered resales of restricted securities to a qualified institutional
buyer, which generally includes an entity acting for its own account or the
account of other qualified institutional buyers, that in the aggregate owns
and invests on a discretionary basis at least $100.0 million in securities of
unaffiliated issuers. Rule 144A does not extend an exemption to the offer or
sale of securities that, when issued were of the same class as securities
listed on a national securities exchange or quoted in an automated inter-
dealer quotation system. Because the Restricted Shares, when they were issued
were not of the same class as any listed or quoted securities, all of such
securities are eligible for resale under Rule 144A.
59
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock
and no prediction can be made as to the effect, if any, that market sales of
Restricted Shares or the availability of such Restricted Shares for sale will
have on the market price of the Common Stock. Nevertheless, sales of
substantial amounts of Common Stock in the public market may have an adverse
impact on such market price.
REGISTRATION RIGHTS
The holders of an aggregate of 3,069,951 shares of Common Stock which are
outstanding or which are issuable upon the exercise of outstanding warrants or
the conversion of the outstanding shares of Non-Voting Common Stock are
entitled to rights with respect to registration of such shares under the
Securities Act beginning 180 days after the date of this Prospectus. Holders
of Registrable Shares may require the Company to file at its expense up to two
registration statements under the Securities Act with respect to their
Registrable Shares, subject to certain conditions and limitations. The Company
is required to use its best efforts to effect such registration. In addition,
if the Company proposes to register any of its securities under the Securities
Act (except in the case of a shelf registration on behalf of the Company's
employees), holders of Registrable Shares are entitled to notice of such
registration and are entitled to include their Registrable Shares in the
registration. The rights of such holders are subject to certain conditions and
limitations, among them the right of the Company to limit the number of shares
to be included in a registration if the underwriters retained in connection
with such registration advise the Company that the number of shares requested
for registration would adversely affect the marketability of the registration.
Furthermore, such holders may require the Company to file an unlimited number
of registrations on Form S-3 with respect to such Registrable Shares, subject
to certain conditions and limitations. Such holders have waived their right to
have shares of Common Stock registered under the Securities Act as part of
this Offering.
LOCK-UP AGREEMENTS
Pursuant to "lock-up agreements" entered into by the Company's directors and
officers and certain other stockholders, of the Restricted Shares and
2,614,524 shares issuable upon exercise of warrants and options or conversion
of the Non-Voting Common Stock are subject to certain resale restrictions in
addition to those imposed under Rule 144. For a period of 180 days from the
date of this Prospectus, without the prior written consent of Piper Jaffray
Inc., each party to a lock-up agreement has agreed not to (i) offer for sale,
sell, pledge or otherwise dispose of, or (ii) execute any swap or other
derivatives transaction that transfers to another, in whole or in part, any of
the economic benefits or risks of ownership of such shares of Common Stock,
whether any such transaction is settled by delivery of Common Stock or other
securities, in cash or otherwise. Gifts to recipients who concurrently deliver
to Piper Jaffray Inc. a lock-up agreement and transfers which occur by
operation of law will not require consent. Any consent to sale granted by
Piper Jaffray Inc., on behalf of the Underwriters, will not, however, affect
the resale restrictions under Rule 144. See "Underwriting."
60
<PAGE>
UNDERWRITING
Subject to the terms of a Purchase Agreement, the Underwriters named below
have agreed to purchase from the Company and the Selling Stockholders the
number of shares of Common Stock set forth opposite each Underwriter's name in
the table below. The Underwriters are committed to purchase and pay for all
such shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Piper Jaffray Inc..................................................
CIBC Oppenheimer Corp. ............................................
Friedman, Billings, Ramsey & Co., Inc..............................
----
Total............................................................
====
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
they propose to offer the shares directly to the public at the Price to Public
set forth on the cover page of this Prospectus and to selected dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $ per
share to certain other brokers and dealers. After the Offering, the initial
public offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable within
the 30-day period after the date of this Prospectus, under which the
Underwriters may purchase up to an additional shares of Common Stock from
the Company at the Price to Public less the Underwriting Discount set forth on
the cover page of the Prospectus. The Underwriters may exercise the option
solely for the purpose of covering over-allotments, if any, made in connection
with the distribution of the Common Stock offered hereby. To the extent such
option is exercised, each Underwriter will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as it was obligated to purchase under the Purchase
Agreement.
At the request of the Company, the Underwriters have reserved up to
shares of Common Stock to be issued by the Company and offered hereby for
sale, at the Price to Public, to directors, officers, employees, business
associates and other individuals and entities related to the Company. The
number of shares of Common Stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not so purchased will be offered by the Underwriters
to the general public on the same basis as the other shares offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the
right to reject any order for the purchase of shares in whole or in part.
In connection with the Offering, the Company and certain of its stockholders
have agreed that they will not sell any shares of Common Stock other than the
shares to be sold in the Offering without the prior consent of Piper Jaffray
Inc., acting on behalf of the Underwriters, for a period of 180 days after the
date of this Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock
will be determined by negotiations between the Company, the Selling
Stockholders and the Underwriters. Among the factors to be considered in
determining the initial public offering price will be the Company's record of
operations, the Company's current financial position and future prospects, the
experience of its management, the economics of the equipment leasing industry
in general, the general condition of the securities markets and the price-
earnings ratios, price-sales ratios, market prices of securities and certain
financial and operating information of companies engaged in activities similar
to those of
61
<PAGE>
the Company. The estimated public offering price range set forth on the cover
page of this Prospectus is subject to change as a result of market conditions
and other factors. See "Risk Factors--No Prior Market for Common Stock;
Possible Volatility of Stock Price."
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot or otherwise
create a short position in the Common Stock for their own account by selling
more shares of Common Stock than have been sold to them by the Company and the
Selling Stockholders. The Underwriters may elect to cover any such short
position by purchasing shares of Common Stock in the open market or by
exercising the over-allotment option granted to the Underwriters. In addition,
the Underwriters may stabilize or maintain the price of the Common Stock by
imposing penalty bids, under which selling concessions allowed to broker-
dealers participating in the Offering are reclaimed if shares of Common Stock
previously distributed in the Offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may
be to stabilize or maintain the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. The imposition of
a penalty bid may also affect the price of the Common Stock to the extent that
it discourages resales thereof. No representations are made as to the
magnitude or effect of any such stabilization or other transactions. Such
transactions may be effected on the Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Goldstein & Manello, P.C., Boston,
Massachusetts. Certain legal matters relating to the Common Stock offered
hereby will be passed upon for the Underwriters by Palmer & Dodge LLP, Boston,
Massachusetts.
CHANGE IN ACCOUNTANTS
Coopers & Lybrand L.L.P. served as auditor to the Company prior to May 1997,
and had audited the Company's consolidated financial statements through the
year ended June 30, 1996. Subsequent to June 30, 1996, Coopers & Lybrand
L.L.P. advised the Company that it was not deemed to be independent of the
Company under the rules of the Commission, due to the fact that a partner of
Coopers & Lybrand L.L.P. was a sibling of an executive officer of the Company
and, therefore, that it was required to resign as auditor. Accordingly, the
Board of Directors of the Company appointed Deloitte & Touche LLP, in May
1997, to reaudit the Company's consolidated financial statements included in
this Prospectus. The reports of Coopers & Lybrand L.L.P. on the Company's June
30, 1995 and 1996, consolidated financial statements expressed an unqualified
opinion and were not modified as to uncertainty, audit scope or accounting
principles. In addition, there were no disagreements between the Company and
Coopers & Lybrand L.L.P. on matters of accounting and financial disclosure
during the period Coopers & Lybrand L.L.P. served as auditor to the Company.
EXPERTS
The Consolidated Financial Statements as of June 30, 1997 and 1998, and for
each of the three years in the period ended June 30, 1998, included in this
Prospectus have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report appearing herein, and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the Common Stock offered hereby (together with all amendments,
exhibits, schedules and supplements thereto, the "Registration Statement").
This
62
<PAGE>
Prospectus, which forms a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain parts of
which have been omitted in accordance with the rules and regulations of the
Commission. For further information with respect to the Company and the Common
Stock offered hereby, reference is made to the Registration Statement.
Statements contained in this Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete, and in each
instance, reference is made to the copy of the document filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference. The Registration Statement may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices at Suite 1400, Northwest Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661, and 7 World Trade Center (13th Floor), New
York, New York 10048. Copies of such material can also be obtained from the
Commission at prescribed rates through its Public Reference Section at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World
Wide Web site on the Internet that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
"http://www.sec.gov."
The Company is not currently subject to the informational requirements of
the Exchange Act. As a result of the Offering, the Company will become subject
to the informational requirements of the Exchange Act. The Company will
fulfill its obligations with respect to such requirements by filing periodic
reports and other information with the Commission. In addition, the Company
intends to furnish to its stockholders annual reports containing consolidated
financial statements audited by an independent public accounting firm.
63
<PAGE>
APPENDIX A
GLOSSARY
Charge-off means that amount of the net book value of the lease receivables
which the Company writes-off against its reserves due to uncertainties of
collection.
Conduit means an entity utilized by a bank or other financial institution to
purchase leases from the Company's special purpose subsidiary in a
securitization.
Conduit securitization means a securitization in which the special purpose
subsidiary sells lease receivables and the related equipment to a third-party
bank conduit which issues commercial paper or other securities backed by
payments on the lease receivables and the related equipment.
Credit enhancement means a written undertaking from a third party to the
holder or purchaser of an obligation, which makes the likelihood of collection
of the obligation from the actual obligor of a higher probability, therefore
affording the obligation a higher rating in the marketplace.
Credit scoring means that method regularly used by a lessor to determine the
credit risk associated with a potential lessee.
Direct finance lease means, for accounting purposes, a lease in which the
collection of the minimum lease payments is reasonably predictable, no
significant uncertainties exist relating to unreimbursable costs yet to be
incurred by the lessor under the lease and the lease meets one of the
following criteria: (i) ownership of the property is transferred to the lessee
at the end of the lease term; (ii) the lease contains a bargain purchase
option exercisable at the end of the lease term; (iii) the term of the lease
is at least equal to 75% of the estimated economic life of the leased
equipment; or (iv) the present value of the minimum lease payments is at least
equal to 90% of the fair value of the leased equipment at the inception of the
lease.
Equipment residual value means the estimated unguaranteed value of leased
equipment at the expiration of the lease term.
Funding sources means the sources of capital utilized by the Company to fund
the origination of leases and operations, including warehouse lines of credit,
securitization, sale by assignment and term loans.
Implicit yield means the rate of return to be received by the Company if all
lease payments are made. In a direct finance lease the implicit yield is
calculated using the scheduled lease payments, the periods in which the lease
payments are to be received, the original equipment cost and the equipment
residual value.
Initial direct costs means the fees, brokerage commissions and other costs
directly related to lease originations.
Interest rate hedge is an interest rate swap agreement used in a
securitization to afford the Company's special purpose subsidiary a fixed rate
of interest notwithstanding the terms of the documentation between the conduit
and the special purpose subsidiary which provide for payment of a variable
rate of interest to the conduit.
Lease delinquency means a lease as to which a payment due thereunder remains
unpaid for more than 30 days after its due date.
Lease origination means the execution of a lease contract and its entry on
the books of the Company.
Lease receivable(s) means the aggregate stream of payments under a lease for
a stated period of time.
Managed receivable(s) means the aggregate lease receivables as to which the
Company provides billing and collection services, whether or not the Company
actually owns them, including leases sold by assignment or through
securitization.
A-1
<PAGE>
Net investment in lease contracts means the sum of the minimum future lease
receivables, equipment residual values, initial direct costs and retained
interest net of unearned lease income and allowance for doubtful accounts.
Net managed receivables means the net investment in lease contracts,
calculated as if the Company had not sold such lease contracts.
Portfolio means all or a portion of the lease contracts owned or managed by
the Company, as the context requires.
Retained interest means the Company's undivided interest in lease
receivables sold or securitized.
Sale by assignment means a transaction pursuant to which the Company sells
lease receivables with or without the Company's rights in the underlying
equipment, which sale is with limited recourse to the Company.
Securitization means a transaction in which lease receivables and the
related equipment are sold to a special purpose subsidiary which, in turn,
resells them to a conduit, or issues notes, the payments of which are backed
by payments on the lease receivables and the related equipment. See conduit
securitization and term note securitization.
Special purpose subsidiary means a wholly-owned subsidiary of the Company
which is formed solely for, and whose purposes are limited to, accomplishing
particular lease securitizations for the Company, and which is a transferee of
leases and related equipment from the Company.
Term loan means a loan requiring specific installment payments over a
specified period, at a fixed rate of interest.
Term note securitization means a securitization in which the special purpose
subsidiary issues medium-term notes, the payments on which are backed by the
payments on the lease receivables and the related equipment.
Warehouse line of credit means a line of credit made available by a
financial institution to the Company for a stated period of time, with
advances made thereunder based upon the collateral value of leases and related
equipment pledged at the time of the advance. It is contemplated that the
advances will be repaid within a relatively short period of time using
proceeds of a securitization, term loan or sale by assignment.
A-2
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of June 30, 1997 and 1998................. F-3
Consolidated Statements of Operations for the Years Ended June 30, 1996,
1997 and 1998........................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended June 30, 1996, 1997 and 1998...................................... F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996,
1997 and 1998........................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
BankVest Capital Corp.:
We have audited the accompanying consolidated balance sheets of BankVest
Capital Corp. and subsidiaries (the "Company") as of June 30, 1997 and 1998,
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of three years in the period
ended June 30, 1998. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies as of June 30,
1997 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended June 30, 1998 in conformity with
generally accepted accounting principles.
Boston, Massachusetts
August 21, 1998 ( , 1998 as to Note 14)
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of
the reclassification of Class A and Class B common stock into Common Stock and
Non-Voting Common Stock, respectively, and the 3 for 2 stock split as
described in Note 14 of the Notes to Consolidated Financial Statements.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
September 29, 1998
F-2
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, PRO FORMA
---------------- JUNE 30,
1997 1998 1998
------- ------- ---------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.......................... $ 2,533 $ 1,140 $ 1,140
Restricted cash.................................... 1,670 16,224 16,224
Net investment in lease contracts.................. 43,019 55,541 55,541
Notes receivable................................... 634 4,508 4,508
Due from funding sources........................... 8,192 10,518 10,518
Property and equipment, net........................ 1,490 3,140 3,140
Deferred subordinated debt and securitization
fees.............................................. 1,470 1,314 1,314
Inventory and other assets......................... 1,348 3,449 3,449
------- ------- -------
TOTAL ASSETS................................... $60,356 $95,834 $95,834
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
DEBT:
Revolving credit borrowings...................... $ 7,686 $17,056 $17,056
Bank notes payable............................... 10,552 6,431 6,431
Subordinated debt................................ 14,918 14,928 14,928
OTHER LIABILITIES:
Accounts payable................................. 13,361 24,269 24,269
Accrued expenses................................. 1,396 4,220 5,197
Due to funding sources........................... 1,279 5,213 5,213
Other liabilities................................ 2,490 6,021 6,021
Deferred income taxes............................ 7 584 584
------- ------- -------
Total liabilities.............................. 51,689 78,722 79,699
------- ------- -------
COMMITMENTS (Note 7)
PREFERRED STOCK (Liquidation preference of $6,473
and $14,476 at June 30, 1997 and 1998, respective-
ly) AND REDEEMABLE COMMON STOCK WARRANTS (Liquida-
tion preference of $858 and $1,116 at June 30,
1997 and 1998, respectively)...................... 6,188 13,542 126
------- ------- -------
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value; 15,000,000 shares
authorized; 2,716,290 and 2,784,219 shares is-
sued at June 30, 1997 and 1998, respectively;
2,606,142 and 2,784,219 shares outstanding at
June 30, 1997 and 1998, respectively (pro forma
25,000,000 shares authorized and 4,027,719
shares issued and outstanding).................. 2,716 2,784 4,028
Non-Voting common stock, $1.00 par value; 792,000
shares authorized;
0 and 32,010 shares issued and outstanding at
June 30, 1997 and 1998, respectively (pro forma
2,000,000 shares authorized and 1,275,510 shares
issued and outstanding)......................... -- 32 1,275
Additional paid-in capital....................... 886 2,097 12,049
Accumulated deficit.............................. (488) (69) (69)
Notes receivable from officers and employees..... (489) (1,274) (1,274)
Treasury stock, at cost (110,148 and 0 shares at
June 30, 1997 and 1998, respectively)........... (146) -- --
------- ------- -------
Total stockholders' equity..................... 2,479 3,570 16,009
------- ------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..... $60,356 $95,834 $95,834
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Earned income on lease contracts........ $ 1,251 $ 3,556 $ 5,217
Net gain from lease contract sales...... 1,228 4,681 13,812
Servicing fees and late charges......... 51 435 1,885
Other income............................ 124 383 1,537
---------- ---------- ----------
Total revenues........................ 2,654 9,055 22,451
---------- ---------- ----------
OPERATING AND OTHER EXPENSES:
Selling, general and administrative..... 1,550 4,550 11,123
Provision for credit losses and recourse
on sales of leases..................... 528 2,529 5,902
Interest................................ 551 1,541 3,384
---------- ---------- ----------
Total operating and other expenses.... 2,629 8,620 20,409
---------- ---------- ----------
INCOME BEFORE INCOME TAX PROVISION........ 25 435 2,042
INCOME TAX PROVISION...................... -- 35 1,015
---------- ---------- ----------
NET INCOME................................ 25 400 1,027
ACCUMULATED PREFERRED STOCK DIVIDENDS AND
ACCRETION................................ (43) (529) (608)
---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE FOR COMMON
STOCKHOLDERS............................. $ (18) $ (129) $ 419
========== ========== ==========
BASIC NET INCOME (LOSS) PER COMMON SHARE.. $ (0.01) $ (0.05) $ 0.15
========== ========== ==========
DILUTED NET INCOME (LOSS) PER COMMON
SHARE.................................... $ (0.01) $ (0.05) $ 0.13
========== ========== ==========
SHARES USED TO COMPUTE BASIC NET INCOME
(LOSS) PER COMMON SHARE.................. 2,227,191 2,607,113 2,729,693
========== ========== ==========
SHARES USED TO COMPUTE DILUTED NET INCOME
(LOSS) PER COMMON SHARE.................. 2,227,191 2,607,113 3,171,728
========== ========== ==========
PRO FORMA NET INCOME AVAILABLE FOR COMMON
STOCKHOLDERS............................. $ 1,027
==========
PRO FORMA BASIC NET INCOME PER COMMON
SHARE.................................... $ 0.19
==========
PRO FORMA DILUTED NET INCOME PER COMMON
SHARE.................................... $ 0.18
==========
PRO FORMA SHARES USED TO COMPUTE BASIC NET
INCOME PER COMMON SHARE.................. 5,331,640
==========
PRO FORMA SHARES USED TO COMPUTE DILUTED
NET INCOME PER COMMON SHARE.............. 5,773,675
==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NON-VOTING NOTES
COMMON STOCK COMMON STOCK ADDITIONAL RECEIVABLE TREASURY STOCK
----------------- ------------- PAID-IN ACCUMULATED FROM OFFICERS ---------------
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT AND EMPLOYEES SHARES COST TOTAL
--------- ------ ------ ------ ---------- ----------- ------------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JULY 1,
1995.................... 2,230,290 $2,230 -- $-- $ (528) $ (341) $ (58) (92,148) $(107) $1,196
Net income............. -- -- -- -- -- 25 -- -- -- 25
Issuance of common
stock, net of related
issuance costs of $87.. 486,000 486 -- -- 1,371 -- (450) -- -- 1,407
Issuance of common
stock warrants......... -- -- -- -- 20 -- -- -- -- 20
Interest and principal
on notes receivable.... -- -- -- -- 6 -- (2) -- -- 4
Purchase of treasury
stock.................. -- -- -- -- -- -- 14 (12,000) (14) --
Accretion of preferred
stock offering costs... -- -- -- -- -- (8) -- -- -- (8)
Accumulated preferred
stock dividends........ -- -- -- -- -- (36) -- -- -- (36)
--------- ------ ------ ---- ------ ------ ------- -------- ----- ------
BALANCE AT JUNE 30,
1996.................... 2,716,290 2,716 -- -- 869 (360) (496) (104,148) (121) 2,608
Net income............. -- -- -- -- -- 400 -- -- -- 400
Interest and principal
on notes receivable.... -- -- -- -- 17 -- (15) -- -- 2
Purchase of treasury
stock.................. -- -- -- -- -- -- 22 (6,000) (25) (3)
Accretion of preferred
stock offering costs... -- -- -- -- -- (91) -- -- -- (91)
Accumulated preferred
stock dividends........ -- -- -- -- -- (437) -- -- -- (437)
--------- ------ ------ ---- ------ ------ ------- -------- ----- ------
BALANCE AT JUNE 30,
1997.................... 2,716,290 2,716 -- -- 886 (488) (489) (110,148) (146) 2,479
Net income............. -- -- -- -- -- 1,027 -- -- -- 1,027
Issuance of common
stock, net of related
issuance costs of $27.. 184,077 184 32,010 32 1,198 -- (788) -- -- 626
Interest and principal
on notes receivable.... -- -- -- -- 68 -- (19) -- -- 49
Purchase of treasury
stock.................. -- -- -- -- -- -- 22 (6,000) (25) (3)
Retirement of treasury
stock.................. (116,148) (116) -- -- (55) -- -- 116,148 171 --
Accretion of preferred
stock offering costs... -- -- -- -- -- (105) -- -- -- (105)
Accumulated preferred
stock dividends........ -- -- -- -- -- (503) -- -- -- (503)
--------- ------ ------ ---- ------ ------ ------- -------- ----- ------
BALANCE AT JUNE 30,
1998.................... 2,784,219 $2,784 32,010 $ 32 $2,097 $ (69) $(1,274) -- $ -- $3,570
========= ====== ====== ==== ====== ====== ======= ======== ===== ======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------
1996 1997 1998
-------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $ 25 $ 400 $ 1,027
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 220 285 1,148
Amortization of initial direct costs........... -- -- 514
Provision for credit losses and recourse on
sales of leases............................... 528 2,529 5,902
Net gain from lease contract sales............. (1,228) (4,681) (13,375)
Accounts payable interest and other............ -- -- 336
Changes in assets and liabilities:
Restricted cash--servicing..................... -- (1,670) (2,301)
Other assets................................... (173) (997) (1,025)
Accrued expenses............................... 846 470 2,824
Due to funding sources......................... -- -- 3,934
Other liabilities.............................. 562 1,535 2,673
Deferred income taxes.......................... -- 7 577
-------- -------- ---------
Net cash provided by (used in) operating ac-
tivities.................................... 780 (2,122) 2,234
-------- -------- ---------
Cash flows from investing activities:
Acquisitions of equipment for lease............ (32,198) (90,778) (196,113)
Proceeds from sales of lease receivables....... 21,569 58,640 176,581
Collections on lease finance receivables, net
of amounts included in income................. 6,263 9,975 28,662
Restricted cash--escrow........................ -- -- (12,253)
Deferred initial direct costs.................. (1,235) (3,371) (7,225)
Acquisitions of property and equipment......... (817) (772) (2,114)
Increase in notes receivable, net.............. (133) (160) (3,874)
-------- -------- ---------
Net cash used in investing activities........ (6,551) (26,466) (16,336)
-------- -------- ---------
Cash flows from financing activities:
Proceeds from borrowings, other than subordi-
nated debt.................................... 12,047 92,645 153,004
Repayment of borrowings, other than subordi-
nated debt.................................... (11,536) (78,010) (147,741)
Proceeds from issuance of subordinated debt,
net........................................... -- 13,900 --
Proceeds from issuance of preferred stock,
net........................................... 5,550 -- 6,706
Proceeds from issuance of common stock, net.... 1,407 -- 626
Interest on employee loans..................... -- -- 102
Officer and stockholder loan proceeds.......... 750 -- --
Repayment of officer and stockholder loans..... (750) 35 37
Purchase of treasury stock..................... (14) (25) (25)
-------- -------- ---------
Net cash provided by financing activities.... 7,454 28,545 12,709
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.......................................... 1,683 (43) (1,393)
Cash and cash equivalents, beginning of year.... 893 2,576 2,533
-------- -------- ---------
Cash and cash equivalents, end of year.......... $ 2,576 $ 2,533 $ 1,140
======== ======== =========
Supplemental disclosures of cash flow informa-
tion:
Cash paid for interest......................... $ 530 $ 1,483 $ 2,982
Cash paid for taxes............................ 9 16 160
Noncash investing and financing activities:
Reduction in notes receivable applied to pur-
chase of leased equipment..................... $ 4,198 $ 8,460 $ 43,391
Inventory acquired through repossession........ -- 730 3,570
Notes received from officers and employees for
common stock issuance......................... 450 -- 788
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BankVest Capital Corp. and subsidiaries (the "Company" or "BankVest") is a
national provider of small-ticket lease financing and related services, with
transactions typically ranging from $5,000 to $250,000. The Company's
noncancelable, direct finance leases primarily finance the acquisition of
automotive diagnostic, computer, printing, manufacturing, automotive repair,
office, healthcare, and telecommunications equipment. The consolidated
financial statements include the Company and two of its subsidiaries:
LeaseVest Capital Corp., which was formed in 1994 for organizational purposes
in certain states, and The Equipment Leasing Insurance Co., Ltd., which was
formed to provide insurance to the Company's lessees for equipment leased. All
intercompany transactions have been eliminated. In addition, the Company has
two qualifying special-purpose bankruptcy remote subsidiaries, BV Funding
Corp. ("BV Funding" or "BV") and BVFU Funding Corp. ("BVFU Funding" or
"BVFU"), which were formed in connection with separate securitization
transactions. The Company's consolidated financial statements include only the
portion of the assets of the qualifying special-purpose bankruptcy remote
subsidiaries in which the Company has beneficial or undivided interest.
Basis of Presentation and Pro Forma Consolidated Balance Sheet Information--
As discussed in Note 14, Common Stock and Non-Voting Common Stock will be
established, the Company's Class A common stock will be reclassified to Common
Stock, the Company's Class B common stock will be reclassified to Non-Voting
Common Stock and a 3 for 2 stock split will occur not later than the day prior
to the expected effective date of the registration statement in which these
consolidated financial statements are included. All share and per share
information included in the consolidated financial statements and in the notes
to consolidated financial statements have been restated to reflect the
reclassifications and stock split. In addition, as discussed in Note 14, the
Company's preferred stock will be converted to shares of the Company's Common
Stock and Non-Voting Common Stock prior to, or simultaneous with, the issuance
of shares of Common Stock pursuant to the registration statement in which
these consolidated financial statements are included. The accompanying pro
forma consolidated balance sheet gives effect to this conversion as if it had
occurred as of June 30, 1998.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Lease Accounting and Revenue Recognition--At lease commencement, the Company
records the minimum future lease payments receivable, estimated residual value
of the leased equipment, and unearned lease income. Initial direct costs
related to lease origination are deferred as part of the investment and
amortized over the lease term in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs
of Leases." Unearned lease income is the amount by which the total lease
receivable plus the estimated residual value of the leased equipment exceeds
the cost of the related equipment. Unearned lease income, net of initial
direct costs, is recognized as revenue over the lease term so as to
approximate a level rate of return on the net investment. Recognition of
unearned lease income as revenue is suspended when a lease contract becomes 90
days delinquent. Residual values are established upon acquisition of the
equipment based upon the estimated value of the equipment at the time the
Company expects to dispose of the equipment under financing leases. The
Company acquires equipment to be leased from vendors at customary selling
prices. Periodically, and at least annually, the Company reviews its residual
values in accordance with SFAS No. 13, "Accounting for Leases."
Substantially all of the Company's financing agreements with its customers
are noncancelable and provide for a fixed financing rate with a fixed payment
schedule generally over a term of one to seven years. All leases are
classified as direct financing leases.
F-7
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales of Lease Contracts and Interest Rate Swap Agreements--In the normal
course of its business, the Company sells certain lease contracts through
sales by assignment agreements or conduit securitization facilities. The
Company recognizes gains at the time of sale. With respect to sales through
the securitization facilities, the Company sells and transfers the lease
contracts to a wholly owned, bankruptcy-remote special purpose subsidiary that
sells the lease contracts to an unaffiliated third party. Such subsidiary is a
"qualifying" special purpose entity, as defined under SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," Emerging Issues Task Force ("EITF") Issue No.
96-20, "Impact of FASB Statement No. 125 on Consolidation of Special-Purpose
Entities" and EITF Topic D-66, "Effect of a Special-Purpose Entity's Powers to
Sell, Exchange, Repledge, or Distribute Transferred Financial Assets under
FASB Statement No. 125." In a sale transaction, the Company generally receives
cash equal to a substantial percentage of the net present value of the future
cash flows of lease contracts sold and retains a non-certificated,
subordinated, undivided interest in the remaining cash flows (the "retained
interest"). The retained interest is classified with the Company's net
investment in lease contracts in its consolidated balance sheet (see Note 2).
At the time of sale, the Company allocates the carrying value of its net
investment in the lease contracts sold between the portion which is sold, the
retained interest and the residual values of the leased equipment based on
each component's estimated fair value. The Company, via its subsidiary in
securitization transactions, receives excess cash flows, if any, from the
lease payments received after deducting (i) principal and interest payments
due to the purchaser of the lease contracts sold, (ii) servicing fees, and
(iii) any other securitization fees, such as credit enhancement fees, hedge
fees or backup servicing fees. The fair value of the retained interest is
calculated based on the Company's estimate of its portion of the future cash
flows of the lease contracts sold, net of certain fees and expenses, and
estimated losses, discounted at a market rate of interest. Under the terms of
the securitization and sale agreements, the Company effectively subordinates
its retained interest to the interests of the purchaser and other parties
involved in the transaction. Accordingly, all losses incurred on the portfolio
of lease contracts sold will be borne by the Company to the extent of its
retained interest. In addition, under certain sales agreements, the Company
has a contingent obligation to repurchase lease contracts sold, which is
generally limited to 5% to 10% of the lease contracts sold (see Notes 2 and
3).
Generally, the Company retains the servicing of lease contracts sold.
Servicing fees, specified in the applicable sale or securitization
transaction, approximate market-rate servicing fees and are recognized in
revenues in proportion to the periodic servicing costs.
The Company's securitization facility agreements require the Company to
enter into interest rate swap agreements for the benefit of the purchaser of
the lease contracts. Such swap agreements generally provide for the payment of
a fixed rate of interest by the Company from the collections of the related
lease contracts sold and the receipt of a variable rate of interest which is
paid to the purchaser of the related lease contracts over the term of the
lease contracts sold. The Company does not hold or issue interest rate swap
agreements, or any other derivative financial instruments, for trading
purposes.
Through December 31, 1996, the net gains from lease contract sales were
recorded by the Company in accordance with the provisions of SFAS No. 77,
"Reporting by Transferors for Transfers of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," was issued
and became effective for the Company for such transfers of assets occurring on
and after January 1, 1997. SFAS No. 125 provides new methods of accounting and
reporting for transfers and servicing of financial assets and extinguishments
of liabilities. The Company's adoption of SFAS No. 125 did not have a material
effect on the Company's consolidated financial position or results of
operations.
Allowance for Doubtful Accounts--The Company maintains an allowance for
doubtful accounts in connection with payments due under lease contracts held
in the Company's portfolio and its retained interest in
F-8
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
lease contracts sold. The allowance is determined by management's estimate of
future uncollectible lease contracts based on the Company's historical loss
experience, an analysis of delinquencies, industry statistics and assumptions
of future losses. The Company's policy is to review on a monthly basis those
lease contracts which are delinquent and to charge off amounts which
management has determined the probability of collection to be remote.
Recoveries on leases previously charged off are restored to the allowance.
Increases in delinquencies and loss rates in the future could have a material
adverse effect on the Company's business and consolidated operating results
and financial condition.
Concentration of Credit and Financial Instrument Risk--At June 30, 1998, the
Company's owned and sold lease portfolio ("managed receivables") consisted of
leases of certain equipment types and in select geographic regions in which
the Company has focused its marketing efforts. Specifically, 20%, 16%, 15%,
15% and 14% of the Company's managed receivables were for automotive
diagnostic, computer, printing, manufacturing and automotive repair equipment,
respectively. In addition, 22%, 16% and 12% of the Company's managed
receivables were with lessees located in New York, California and
Massachusetts, respectively. The Company controls its credit risk through
credit standards, limits on exposure and by monitoring the financial condition
of its lessees. The Company uses a credit scoring system as a guide in
evaluating the credit risk of applicants. The Company generally requires the
leased assets to serve as collateral for the leases.
Financial instruments which potentially subject the Company to concentration
of credit risk consist principally of cash and cash equivalents and lease
contracts receivable. The Company generally places its cash with insured
depository institutions that are "well capitalized" under regulatory
definitions.
Cash and Cash Equivalents--The Company considers all highly liquid
investments with an original maturity of three months or less at date of
purchase to be cash equivalents.
Restricted Cash--Restricted cash includes cash collected by the Company
which is placed in escrow and held for payment to one of the Company's
significant vendors as discussed in Note 9. Certain other cash balances are
collected by the Company as part of its servicing of lease contracts sold to
third parties. These amounts collected by the Company are held in a separate
account for the benefit of the third parties to whom the lease contracts were
sold, and are remitted to such parties on a monthly basis.
Inventory--The Company may repossess leased equipment from lessees due to
delinquencies. The lease receivable is removed from the books at the time of
repossession, and the equipment is recorded in inventory at the lower of its
original cost, fair value, or carrying value at the time of repossession.
Notes Receivable--The Company enters into agreements with certain equipment
vendors whereby cash advances are made which bear interest and are callable at
the Company's request.
Property and Equipment--Property and equipment is comprised of computer
systems and equipment, furniture and fixtures, and telephone equipment and is
recorded at cost, using the straight-line method of depreciation over a period
of three to seven years. Upon retirement or other disposition, the cost and
related accumulated depreciation of the assets are removed from the accounts,
and the resulting gain or loss is reflected in operations.
Income Taxes--The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Current tax liabilities or assets are
recognized, through charges or credits to the current tax provision, for the
estimated taxes payable or refundable for the current year. Net deferred tax
liabilities or assets are recognized, through charges or credits to the
deferred tax provision, for the estimated future tax effects, based on enacted
tax rates attributable to temporary differences. Deferred tax liabilities are
recognized for temporary differences that will result in amounts taxable in
the future, and deferred tax assets are recognized for temporary
F-9
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
differences and tax benefit carryforwards that will result in amounts
deductible or creditable in the future. The effect of enacted changes in tax
law, including changes in tax rates, on these deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date. A deferred tax valuation reserve is established if it is more likely
than not that all or a portion of the Company's deferred tax assets will not
be realized. Changes in the deferred tax valuation reserve are recognized
through charges or credits to the deferred tax provision.
Stock-Based Compensation--In October 1995, SFAS No. 123, "Accounting for
Stock-Based Compensation," was issued. The disclosure requirements of this
statement were effective for the Company on July 1, 1996. The statement
encourages, but does not require, adoption of a fair value-based accounting
method for stock-based compensation arrangements and would supersede the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB Opinion No. 25"). An entity may continue to
apply the provisions of APB Opinion No. 25 provided that the entity discloses
its pro forma net income (loss) as if the fair value-based method has been
applied in measuring compensation cost. The Company continues to apply the
provisions of APB Opinion No. 25 and has disclosed in Note 12 the pro forma
information required by SFAS No. 123.
Reclassifications--Certain reclassifications have been made to the prior
years' consolidated financial statements in order to conform to the current
year presentation. Such reclassifications had no effect on previously reported
results of operations.
Recent Accounting Pronouncements--Other relevant recently issued accounting
standards are SFAS No. 130, "Reporting Comprehensive Income," and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
each of which relate to additional reporting and disclosure requirements
effective for fiscal years beginning after December 15, 1997. It is not
expected that the adoption of SFAS Nos. 130 and 131 will have a material
effect on the Company's consolidated operating results or financial condition.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 981, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
on the accounting for the costs of software developed or obtained for internal
use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
The Company does not expect the statement to have a material impact on its
consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires that all derivative instruments be recognized as assets or
liabilities at fair value in the statement of financial position and
establishes the accounting for changes in the fair value of such derivatives
depending on the use of the derivative. The provisions of this statement will
be effective for the Company for fiscal quarters of fiscal years beginning
after June 15, 1999. The Company has not yet assessed the effect of this
statement on its consolidated financial position and results of operations.
F-10
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. LEASE CONTRACTS
The Company's net investment in lease contracts was comprised of the
following:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Minimum future lease payments receivable..................... $39,658 $30,237
Estimated unguaranteed residual values of leased equipment... 3,780 8,022
Initial direct costs......................................... 1,170 1,247
Less unearned lease income................................... (9,138) (8,849)
------- -------
35,470 30,657
Retained interest in lease contracts sold.................... 9,417 29,974
------- -------
44,887 60,631
Less allowance for doubtful accounts......................... (1,868) (5,090)
------- -------
Net investment in lease contracts............................ $43,019 $55,541
======= =======
</TABLE>
Activity in the allowance for doubtful accounts was as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------
1996 1997 1998
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance...................................... $ 35 $ 193 $ 1,868
Provision for credit losses............................ 528 2,529 5,902
Net transfer to recourse reserve....................... (336) (165) (688)
Charge-offs............................................ (34) (703) (2,183)
Recoveries............................................. -- 14 191
----- ------- -------
Ending balance......................................... $ 193 $ 1,868 $ 5,090
===== ======= =======
</TABLE>
The Company has contingent obligations to repurchase leases sold under
certain purchase and sale agreements (see Note 3). The Company's maximum
exposure under the repurchase provisions of its purchase and sale agreements
is generally limited to 5% to 10% of the lease receivables sold. The Company's
reserve for such contingent obligations, which is included in other
liabilities in the Company's consolidated balance sheets, totaled
approximately $566,000 and $1,254,000 at June 30, 1997 and 1998, respectively.
The Company's lease contracts with its lessees are noncancelable and provide
for a fixed rate with a fixed payment schedule generally over a one-to-seven
year lease term. Scheduled future minimum lease payments, including interest
and excluding the residual value of the equipment, were approximately as
follows at June 30, 1998:
<TABLE>
<CAPTION>
OWNED SOLD AND
AND SERVICED SERVICED
PORTFOLIO PORTFOLIO TOTAL
------------ --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending June 30, 1999...................... $ 8,678 $ 87,394 $ 96,072
Year ending June 30, 2000...................... 7,734 79,188 86,922
Year ending June 30, 2001...................... 5,995 56,876 62,871
Year ending June 30, 2002...................... 4,194 36,656 40,850
Year ending June 30, 2003...................... 3,021 18,731 21,752
Thereafter..................................... 615 7,927 8,542
------- -------- --------
Total........................................ $30,237 $286,772 $317,009
======= ======== ========
</TABLE>
F-11
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SALES OF LEASE CONTRACTS
Purchase and Sale Agreements--The Company has facilities with banks and
other financial services companies which allow for the sale of qualifying
lease contracts with limited recourse. The purchase and sale agreement
facilities totaled approximately $73,028,000 at June 30, 1998. One of the
facilities allows the Company to borrow cash up to the related commitment
amount of $21,000,000 with amounts outstanding under the facility accruing
interest at an amount equal to the two-year treasury rate, plus 2.25%. The
purchase and sale agreement facilities contain certain covenants that, among
other matters, may require the Company to repurchase the assets sold due to
the failure of the underlying debtors to pay when due (the "recourse
provisions"). At the time of sale, the Company recognizes its estimated
liability under the recourse provisions (see Note 1). The aggregate
outstanding balance of lease contracts sold subject to recourse provisions was
approximately $33,810,000 and $70,648,000 at June 30, 1997 and 1998,
respectively.
Securitization Facilities--On November 1, 1996, the Company, along with its
wholly owned, special-purpose subsidiary, BV Funding, entered into a
securitization transaction which provided for up to $50,000,000 of qualifying
lease contracts to be sold to Eagle Funding Corporation (the "BV
Securitization"). On August 24, 1997, the Company, along with its wholly
owned, special-purpose subsidiary, BVFU Funding, entered into a securitization
transaction which provided for up to $75,000,000 of qualifying lease contracts
to be sold to Variable Funding Capital Corporation (the "BVFU
Securitization"). The BV and BVFU facilities have been amended, effectively
increasing the limits to $125,000,000 and $150,000,000, respectively, at June
30, 1998. BV and BVFU's businesses consist solely of the purchase of certain
assets from BankVest and other subsidiaries of BankVest. BV and BVFU are
separate corporate entities with separate creditors, which upon liquidation of
BV and BVFU, will be entitled to be satisfied solely out of the respective
entity's assets. BankVest Capital Corp.'s creditors will be entitled to be
satisfied solely out of the assets of BankVest Capital Corp. and will have no
rights against the assets of BV and BVFU except by virtue of the rights of
BankVest Capital Corp. as a stockholder of BV and BVFU. Under the terms of the
securitization transactions, BV and BVFU, to which the Company sells and may
continue to sell or contribute certain of its portfolio assets, sell their
interests in these assets to commercial paper conduit entities. The required
monthly payments of principal and interest to purchasers of the commercial
paper are guaranteed by BankBoston under the BV Securitization and First Union
National Bank of North Carolina under the BVFU Securitization pursuant to the
terms of the securitization agreements. Sales under the securitization
facilities are subject to certain covenants regarding BV and BVFU's portfolio
performance and asset base calculations. Monthly settlements of principal and
interest payments are made from the collection of payments on BV and BVFU's
transactions. The terms of the facilities restrict the use of certain cash
which is collected by the Company in its role as servicer of the lease
contracts which have been sold. Such restricted cash amounted to approximately
$1,670,000 and $3,971,000 at June 30, 1997 and 1998, respectively.
In connection with the securitization facilities, at the date of each sale
of portfolio assets, BV and BVFU are required to enter into an interest rate
swap agreement with BankBoston and First Union National Bank of North
Carolina, respectively, under which BV and BVFU are required to make fixed
rate payments in exchange for variable rate payments from BankBoston and First
Union National Bank of North Carolina, respectively. The notional amount and
term of each swap is designed to be not less than 93% and 100% under the BV
Securitization and BVFU Securitization, respectively, of the estimated
uncollected discounted balance of the portfolio assets sold. At the time of
each sale, BV and BVFU each assigns its right, title, and interest in the
interest rate swap agreement to the purchaser of the portfolio assets. At June
30, 1998, the uncollected balance of portfolio assets sold under the
securitization facilities, before discounting, was approximately $216,123,000.
Related interest rate swap agreements outstanding at June 30, 1998 had an
aggregate notional value of approximately $170,466,000 and required payments
based on fixed rates ranging from 5.63% to 8.00%, and had a negative estimated
fair value of approximately $895,000.
F-12
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. REVOLVING CREDIT BORROWINGS AND OTHER LONG-TERM DEBT
Revolving credit borrowings and other long-term debt were as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Revolving credit borrowings.................................... $ 7,686 $17,056
Bank notes payable............................................. 10,552 6,431
Subordinated debt.............................................. 14,918 14,928
------- -------
$33,156 $38,415
======= =======
</TABLE>
Revolving Credit Borrowings (Warehouse Lines of Credit)--The Company has a
Revolving Credit Loan Facility (the "Facility") with BankBoston which provides
for borrowings of up to $20,000,000. The Facility expires on December 12,
1998. Under the terms of the Facility, the Company may borrow at variable
interest rates equal to either (i) the Eurodollar Rate plus 2.25%, or (ii) the
higher of BankBoston's Base Rate plus 0.75% or the Federal Funds Effective
Rate plus 0.25%. Outstanding borrowings at June 30, 1998 under the Facility
totaled approximately $11,056,000. In addition, the Company has a Loan
Agreement (the "Loan Agreement") with MetroWest Bank ("MetroWest") which
provides for borrowings of up to $6,000,000. Under the terms of the Loan
Agreement, the Company may borrow at a variable interest rate, equal to
MetroWest's Base Rate. Outstanding borrowings at June 30, 1998 under the Loan
Agreement totaled $6,000,000. The interest rate on both the BankBoston and
MetroWest revolving credit facilities was 8.5% at June 30, 1998. The Company
has pledged as collateral for its revolving credit borrowings certain of its
lease contracts receivable, the underlying equipment and chattel paper of such
lease contracts, and any liens or security interests that the Company has in
any such collateral. Borrowings under the Company's revolving credit
facilities have not historically been hedged and are, therefore, exposed to
upward movements in interest rates.
Bank Notes Payable--The Company provides for financing for its operations
through other financing agreements and notes payable to various banks. Such
agreements and notes provided maximum borrowings of up to $15,300,000 at June
30, 1998. Under certain financing agreements, the Company assigns specific
lease contracts and the underlying equipment to the banks. The annual interest
rates on such outstanding borrowings ranged from 7.59% to 9.37% at June 30,
1998.
Subordinated Debt and Redeemable Common Stock Warrants--In February 1997,
the Company received $15,000,000 in connection with the issuance of a 10.101%
subordinated promissory note and related detachable common stock warrants (see
Notes 11 and 12). Of the $15,000,000 received by the Company, approximately
$14,914,000 was allocated to subordinated debt and approximately $86,000 to
detachable common stock warrants based on the estimated fair value of the
warrants. The note requires quarterly interest payments through February 27,
2005 when the note becomes due. The Company will be required to prepay all or
a portion of the note if certain mandatory prepayment events occur. Such
mandatory prepayment events include (i) the completion of a qualified public
offering of the Company's common stock with net proceeds exceeding
$15,000,000, and (ii) a change in control of the Company, as well as other
events. The note is subordinated to senior indebtedness (as defined in the
note agreement) of the Company.
Covenants--Certain of the above debt agreements contain restrictive
covenants which, among other things, prohibit or limit the payment of
dividends, limit new indebtedness, and include minimum net worth, capital
expenditures, and portfolio performance guidelines. At June 30, 1998, the
Company was in compliance with the provisions of such debt covenants.
F-13
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debt Maturities--Scheduled principal payments on revolving credit borrowings
and other long-term debt at June 30, 1998 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending June 30, 1999..................................... $20,056
Year ending June 30, 2000..................................... 2,619
Year ending June 30, 2001..................................... 811
Year ending June 30, 2002..................................... --
Year ending June 30, 2003..................................... --
Thereafter.................................................... 15,000
-------
38,486
Less unamortized discount on subordinated debt................ 71
-------
$38,415
=======
</TABLE>
5. INCOME TAXES
Tax Provision--Deferred income taxes reflect the impact of "temporary
differences" between the amount of assets and liabilities for financial
reporting purposes and the amounts as measured by tax laws and regulations.
The income tax provision consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------
1996 1997 1998
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal:
Current................................................ $ -- $ 11 $ 386
Deferred............................................... -- 6 312
State:
Current................................................ -- 17 52
Deferred............................................... -- 1 265
------ ----- --------
Income tax provision..................................... $ -- $ 35 $ 1,015
====== ===== ========
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pretax income for each year was as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------
1996 1997 1998
------- ------- ------
<S> <C> <C> <C>
Statutory rate...................................... 34.00 % 34.00 % 34.00%
State taxes, net of federal tax benefit............. 6.00 2.79 7.93
Nondeductible expenses.............................. 22.70 3.71 1.62
Valuation allowance................................. (62.70) (26.16) 6.15
Other............................................... -- (6.28) --
------- ------- ------
-- % 8.06 % 49.70%
======= ======= ======
</TABLE>
F-14
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of the deferred tax assets and liabilities were as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................... $ 1,826 $ 3,642
Tax credit carryforwards................................... 12 390
Provision for credit losses................................ 953 2,538
Deferred income............................................ 178 474
Accrued expenses........................................... 110 --
Miscellaneous.............................................. 5 11
------- -------
3,084 7,055
Valuation allowance.......................................... (68) (141)
------- -------
Deferred tax asset........................................... 3,016 6,914
------- -------
Deferred tax liabilities:
Gain on sale of lease contracts............................ (2,949) (7,313)
Miscellaneous.............................................. (74) (185)
------- -------
Deferred tax liability....................................... (3,023) (7,498)
------- -------
Net deferred tax liability................................... $ (7) $ (584)
======= =======
</TABLE>
Net Operating Loss Carryforwards--At June 30, 1998, the Company had federal
and state net operating loss carryforwards of approximately $9,085,000 and
$9,199,000, respectively, of which approximately $1,300,000 is limited in
usage to approximately $500,000 per year due to changes in ownership. The
federal net operating loss carryforwards expire in the years 2007 through
2013, while the state net operating loss carryforwards expire in the years
1999 through 2003. Additional changes in ownership could reduce the amount of
benefits that would be available to offset future taxable income each year.
6. PROPERTY AND EQUIPMENT
Components of property and equipment were as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------
USEFUL LIFE 1997 1998
----------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Telephone equipment............................... 5 years $ 170 $ 288
Furniture and fixtures............................ 5-7 years 308 1,085
Computer systems and equipment.................... 3-5 years 1,306 2,479
------- -------
1,784 3,852
Less accumulated depreciation..................... (294) (712)
------- -------
Property and equipment, net....................... $ 1,490 $ 3,140
======= =======
</TABLE>
7. COMMITMENTS
Lease Commitments--In October 1997, the Company entered into a lease
commitment for its headquarters in Marlboro, Massachusetts. The lease
commitment requires monthly rental payments over a five-year term which
commenced on January 16, 1998. The Company also leases office space for its
sales offices under
F-15
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
noncancelable leases with terms of one to three years. These lease commitments
are accounted for as operating leases.
Minimum future lease payments under operating leases at June 30, 1998 were
as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending June 30, 1999..................................... $ 474
Year ending June 30, 2000..................................... 429
Year ending June 30, 2001..................................... 428
Year ending June 30, 2002..................................... 433
Year ending June 30, 2003..................................... 255
------
Total....................................................... $2,019
======
</TABLE>
Rent expense for the years ended June 30, 1996, 1997 and 1998 was
approximately $75,000, $146,000 and $338,000, respectively.
Service Provider--In April 1996, the Company entered into a two-year
agreement to receive billing, collection, and other accounting services (the
"Service Agreement") from a service provider. The Service Agreement requires
the Company to pay the service provider a monthly fee per lease serviced. For
the years ended June 30, 1996, 1997 and 1998, total expense related to the
Service Agreement was approximately $123,000, $484,000 and $1,186,000,
respectively. The Company has negotiated a month-to-month extension of the
agreement which requires 120 days notice of termination.
8. EMPLOYEE BENEFIT PLANS
Defined Contribution Benefit Plan--On January 1, 1996, the Company
established a defined contribution benefit plan covering substantially all
employees under which the Company matches certain contributions made by the
employee. The Company's contributions to the plan for the years ended June 30,
1996, 1997 and 1998 were approximately $23,000, $84,000 and $162,000,
respectively.
Employee Stock Ownership Plan--In November 1997, the Company's Board of
Directors authorized the establishment of an Employee Stock Ownership Plan
("ESOP") for the benefit of all employees. The ESOP will invest primarily in
Common Stock of the Company on behalf of employees. The maximum annual
contribution that the Company may make is the lower of $30,000 per participant
or 25% of each participant's compensation (as defined in the ESOP). Such
contribution is determined annually by the Company's Board of Directors.
Accounts of the ESOP will be subject to vesting over time. As of June 30,
1998, no contributions for the ESOP year ending December 31, 1998 have been
approved by the Board of Directors.
Annual and Long-Term Incentive Plans--The Company maintains an annual
incentive bonus plan which provides for cash compensation to employees of the
Company on a quarterly basis based on performance objectives of the individual
employee and the attainment of profit, sales, portfolio performance and
conversion of lease applications to lease originations of the Company. The
Company also maintains a long-term incentive plan, which provides for cash
compensation to employees of the Company based upon, among other things, the
Company's attainment of certain profit objectives. Under the long-term
incentive plan, profit objectives are measured and reviewed over three-year
periods, commencing each fiscal year of the Company.
Employment Agreements--The Company entered into an employment agreement with
its Chief Executive Officer for a five-year term which commenced July 1, 1996.
The employment agreement contains noncompetition and confidentiality
provisions, and a base salary of $150,000 in the first year, with annual
increases of $50,000,
F-16
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to a base salary of $350,000 in the fifth year. The employment agreement also
provides for (i) incentive bonuses equal to 50% of his base salary for each
fiscal year, subject to adjustment based on Company performance and approval
of the Company's Board of Directors, and (ii) the continuation of compensation
following termination for varying periods depending upon the reason for
termination.
The Company also has entered into employment agreements with each of the
other executive officers of the Company. Each such employment agreement
contains substantially similar terms and conditions, which include provisions
for (i) a two-year term; (ii) base salary and bonuses; (iii) benefits in
accordance with Company policies including medical, life and disability
insurance and other fringe benefits; (iv) nondisclosure of confidential
information; (v) covenants not to compete; and (vi) termination for cause. In
addition, in the event that an executive officer of the Company is terminated
without cause, that executive officer will be entitled to receive his or her
base salary plus any accrued but unpaid bonus as of the date of termination
for a one-year period.
9. VENDOR REFERRALS
The Company focuses on developing relationships with vendors, including
manufacturers and distributors, in order to establish itself as a recommended
provider of financing for the customers of such vendors.
During the year ended June 30, 1998, the Company's total lease originations
included approximately $45.0 million of amounts that were referred to the
Company by one vendor (the "Significant Vendor"). The Significant Vendor
manufactures certain automotive diagnostic equipment relating to emissions
standards required by the Clean Air Act of 1990. During the year ended June
30, 1998, the Company sold certain of the leases it had originated through
referrals from the Significant Vendor for gains totaling approximately
$2,316,000, or 17% of total gains on sales of lease contracts for the year
ended June 30, 1998. In connection with the sale of the leases referred from
the Significant Vendor, certain of the proceeds received by the Company were
placed in escrow and are being held for payment to the Significant Vendor.
Such amounts held in escrow totaled approximately $12,253,000 at June 30,
1998.
10. RELATED-PARTY LOANS
During the year ended June 30, 1996, the Company received loans from certain
of its officers and stockholders totaling $750,000. Amounts received in 1996
were repaid in full with interest. The terms of the loans provided for
interest to be accrued at rates of 8% to 10% per annum. The Company also sold
Common Stock to certain officers, employees and stockholders during 1996 and
1998 in exchange for cash and notes as discussed in Note 12.
11. PREFERRED STOCK AND REDEEMABLE COMMON STOCK WARRANTS
Preferred Stock--The Company has authorized 500,000 shares of preferred
stock, par value $1.00, of which 60,000 shares have been designated as Class A
preferred stock, 30,000 shares have been designated as Class B preferred
stock, 37,500 shares have been designated as Class C preferred stock, and
37,500 shares have been designated as Class D preferred stock. At June 30,
1996, 1997 and 1998, 30,000 shares each of Class A and Class B preferred stock
were issued and outstanding. At June 30, 1998, 37,500 shares each of Class C
and Class D preferred stock were issued and outstanding.
The following summarizes certain features of the Company's preferred stock:
. Conversion--Each share of Class A and Class B preferred stock is
initially convertible into 24 shares of Common Stock and Non-Voting
Common Stock, respectively, at a conversion price of $4.58 per share.
Each share of Class C and Class D preferred stock is initially
convertible into 13.96 shares of
F-17
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Common Stock and Non-Voting Common Stock, respectively, at a conversion
price of $7.16 per share. The Class A and Class B preferred stock are
convertible, at the election of the Company, into shares of Common Stock
and Non-Voting Common Stock, respectively, upon a qualified public stock
offering (as defined in the Purchase Agreement dated May 30, 1996). The
Class C and Class D preferred stock are convertible, at the election of
the Company, into shares of Common Stock and Non-Voting Common Stock,
respectively, upon a qualified public stock offering (as defined in the
Purchase Agreement dated May 28, 1998).
. Liquidation Preference--In the event of a liquidation, merger,
consolidation, or sale of the Company's assets, the holders of the Class
A, Class B, Class C and Class D preferred stock will be entitled to
receive a liquidation preference, equal to their aggregate purchase
price plus any accumulated and unpaid dividends, prior to any
distributions to holders of common stock of the Company.
. Dividends--On May 31, 1996, the Class A and Class B preferred stock
began accruing dividends on a daily basis at a rate of 7% per annum on
the sum of the liquidation value of the Class A and Class B preferred
stock. On May 29, 1998, the Class C and Class D preferred stock began
accruing dividends on a daily basis at a rate of 5% per annum on the sum
of the liquidation value of the Class C and Class D preferred stock. At
June 30, 1998, the accumulated and unpaid dividends totaled
approximately $976,000.
. Redemption--Beginning on May 30, 2001, or earlier under certain
circumstances, the holders of the Class A and Class B preferred stock
may require the Company to redeem for cash all issued and outstanding
shares of Class A and Class B preferred stock at an amount equal to the
liquidation preference. Beginning May 28, 2003, or earlier under certain
circumstances, the holders of the Class C and Class D preferred stock
may require the Company to redeem for cash all issued and outstanding
shares of Class C and Class D preferred stock at an amount equal to the
liquidation preference.
. Voting Rights--Each share of Class A and Class C preferred stock
entitles the holder to the number of votes per share equivalent to twice
the number of shares of Common Stock into which each share of Class A
and Class C preferred stock is then convertible. The Class B and Class D
preferred stock have no voting rights.
. Redeemable Common Stock Warrants--In connection with the issuance of a
subordinated promissory note (see Note 4), the Company issued two
detachable common stock warrants. The holders of the warrants may put
the value of the warrants, or shares purchased through exercise of the
warrants, to the Company commencing on February 28, 2004 or on the
occurrence of certain events (see Note 12). The Company accretes
interest expense, using the interest method, for any increases in the
estimated intrinsic value of the warrants.
F-18
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Changes in preferred stock and redeemable common stock warrants were as
follows:
<TABLE>
<CAPTION>
REDEEMABLE
CLASS A CLASS B CLASS C CLASS D COMMON
PREFERRED PREFERRED PREFERRED PREFERRED STOCK
STOCK STOCK STOCK STOCK WARRANTS TOTAL
--------- --------- --------- --------- ---------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995... $ -- $ -- $ -- $ -- $ -- $ --
Sale of Class A and
Class B preferred
stock, net of offering
costs.................. 2,765 2,765 -- -- -- 5,530
Accretion and
accumulating dividends
on preferred stock..... 22 22 -- -- -- 44
------ ------ ------ ------ ------ -------
Balance, June 30, 1996.. 2,787 2,787 -- -- -- 5,574
Issuance of redeemable
common stock warrants.. -- -- -- -- 86 86
Accretion and
accumulating dividends
on preferred stock..... 264 264 -- -- -- 528
------ ------ ------ ------ ------ -------
Balance, June 30, 1997.. 3,051 3,051 -- -- 86 6,188
Sale of Class C and
Class D preferred
stock, net of offering
costs.................. -- -- 3,353 3,353 -- 6,706
Accretion and
accumulating dividends
on preferred stock..... 281 281 23 23 40 648
------ ------ ------ ------ ------ -------
Balance, June 30, 1998.. $3,332 $3,332 $3,376 $3,376 $ 126 $13,542
====== ====== ====== ====== ====== =======
Liquidation preference,
June 30, 1998.......... $3,471 $3,471 $3,767 $3,767 $1,116 $15,592
====== ====== ====== ====== ====== =======
</TABLE>
12. STOCKHOLDERS' EQUITY
Common Stock and Non-Voting Common Stock--On May 29, 1996, the Company's
Board of Directors increased the number of authorized shares of $1.00 par
value Common Stock to 15,000,000 shares and $1.00 par value Non-Voting Common
Stock to 792,000 shares. On April 10, 1998, the Board of Directors approved a
2 for 1 stock split of the Company's Common Stock, which was effective on June
16, 1998.
Net Income Per Common Share--In February 1997, SFAS No. 128, "Earnings per
Share," was issued. SFAS No. 128 superseded APB Opinion No. 15, "Earnings per
Share," by establishing new requirements for calculating and reporting
earnings per share. The Company's basic net income per common share
calculation is based on the weighted average number of common shares
outstanding, which does not include treasury stock or any shares issuable upon
the exercise of outstanding stock options or common stock warrants. Diluted
net income per common share includes the weighted average number of stock
options and common stock warrants outstanding as calculated under the treasury
stock method.
F-19
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per common share. For the years ended June 30,
1996 and 1997, stock option and common stock warrant shares were excluded from
the diluted net income per common share calculations due to their antidilutive
effect. For the years ended June 30, 1996, 1997 and 1998, the equivalent
number of common shares issuable upon conversion of all classes of outstanding
preferred stock are excluded from the diluted net income (loss) per common
share calculations as the effect would have been antidilutive.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic net income (loss) per common share:
Net income (loss) available for common
stockholders............................. $ (18) $ (129) $ 419
Weighted average common shares outstand-
ing...................................... 2,227,191 2,607,113 2,729,693
---------- ---------- ----------
Basic net income (loss) per common share.... $ (0.01) $ (0.05) $ 0.15
========== ========== ==========
Diluted net income (loss) per share:
Net income (loss) available for common
stockholders............................. $ (18) $ (129) $ 419
---------- ---------- ----------
Denominator:
Weighted average common shares outstand-
ing...................................... 2,227,191 2,607,113 2,729,693
Stock option and common stock warrant
shares................................... -- -- 442,035
---------- ---------- ----------
2,227,191 2,607,113 3,171,728
---------- ---------- ----------
Diluted net income (loss) per common share.. $ (0.01) $ (0.05) $ 0.13
========== ========== ==========
</TABLE>
Pro Forma Net Income Per Common Share--The pro forma weighted average number
of common shares assumes the exchange of all classes of preferred stock for
Common Stock and Non-Voting Common Stock and the estimated number of shares to
be issued in the proposed initial public offering required to pay the
preferred stock dividends, both as described in Note 14. Common equivalent
shares are not included in the per share calculations where the effect of
their inclusion would be antidilutive. The following is a reconciliation of
the numerators and denominators of the pro forma basic net income per common
share and pro forma diluted net income per common share:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30, 1998
---------------------------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C>
Pro forma basic net income per common share:
Net income available for common stockhold-
ers......................................... $ 1,027
Weighted average common shares outstanding... 5,331,640
----------
Pro forma basic net income per common share.... $ 0.19
==========
Pro forma diluted net income per common share:
Net income available for common stockhold-
ers......................................... $ 1,027
----------
Denominator:
Weighted average common shares outstand-
ing....................................... 5,331,640
Stock option and common stock warrant
shares.................................... 442,035
----------
5,773,675
----------
Pro forma diluted net income per common share.. $ 0.18
==========
</TABLE>
F-20
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Option Plan--On January 31, 1995, the Company's Board of Directors
approved the 1995 Stock Option Plan (the "Option Plan"). The Option Plan, as
amended through June 30, 1998, provides for the granting of stock options to
purchase up to 900,000 shares of Common Stock with exercise prices of not less
than the fair market value at the date of the grant. As of June 30, 1998, an
aggregate of up to 1,500 shares of Common Stock were available for grant under
the Option Plan, and 60,000 shares of Common Stock had been authorized for
grant. Stock options are exercisable in four equal installments beginning on
the first anniversary date of the grant. All stock options expire five years
after the date of the grant.
The following is a summary of stock option activity under the Option Plan
and employee warrant activity:
<TABLE>
<CAPTION>
1996 1997 1998
----------------- ----------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning of year......... 181,800 $1.25 377,250 $2.25 523,500 $3.26
Granted................. 227,250 2.92 185,250 5.47 357,975 6.95
Forfeited............... (31,800) 1.33 (39,000) 3.99 (28,950) 5.15
------- ----- ------- ----- ------- -----
End of year............... 377,250 $2.25 523,500 $3.26 852,525 $4.75
======= ===== ======= ===== ======= =====
</TABLE>
The following table summarizes information regarding stock options and
warrants outstanding at June 30, 1998:
<TABLE>
<CAPTION>
OPTIONS AND WARRANTS OUTSTANDING OPTIONS AND WARRANTS EXERCISABLE
-------------------------------------- -----------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE AT JUNE 30, LIFE EXERCISE AT JUNE 30, EXERCISE
PRICES 1998 (YEARS) PRICE 1998 PRICE
-------- ------------ ---------- ---------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
$1.17-$1.29 132,000 1.63 $ 1.21 99,000 $ 1.21
1.67 - 2.29 153,000 2.29 2.09 81,750 2.05
4.17 - 4.59 101,100 3.06 4.40 70,988 4.46
5.00 - 7.89 466,425 4.38 6.69 65,362 7.03
- ------------ ------------ --------- ---------- ----------------- ---------------
$1.17-$7.89 852,525 3.42 $ 4.75 317,100 $ 3.35
============ ============ ========= ========== ================= ===============
</TABLE>
The weighted average grant date fair value of stock options and warrants
granted for the years ended June 30, 1996, 1997 and 1998 were $.67, $1.43 and
$1.69, respectively.
Stock Warrants--The following summarizes common stock warrant activity of
the Company:
. In connection with the sale of Class A and Class B preferred stock on
May 30, 1996, the Company sold a Class A warrant and a Class B warrant
for $20,000. The Class A warrant and the Class B warrant are exercisable
for the purchase of 72,000 shares each of Common Stock and Non-Voting
Common Stock at a purchase price of $4.58 per share. The warrants are
exercisable from the date of issuance through the earlier of May 30,
2006 or the completion of a qualified public offering (as defined in the
Purchase Agreement, dated May 30, 1996).
. In February 1997, in connection with the issuance of a subordinated
promissory note (see Notes 4 and 11), the Company issued two detachable
common stock warrants. One warrant was exercisable in full at the date
of issuance (the "Vested Warrant"), and another warrant was exercisable
beginning August 21, 2000 (the "Vesting Warrant"). The Vested Warrant
gives the holder the right to purchase 354,114 shares of Common Stock at
$5.00 per share through February 27, 2007. The Vesting Warrant gives the
F-21
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
holder the right to purchase 160,962 shares of Common Stock at $5.00 per
share between August 31, 2000 and February 27, 2007. The number of
shares for which the Vesting Warrant is exercisable is subjected to a
downward adjustment of the number of shares if the related debt
outstanding under the promissory note is less than $15,000,000 at the
time of exercise of the Vesting Warrant. At the date of issuance of the
Vested and Vesting Warrants, the Company entered into a put and call
agreement with the holder of the Vested and Vesting Warrants. Pursuant
to the put and call agreement, the Company may call the warrants, or
shares purchased through exercise of the warrants, or the holder may put
the warrants, or shares purchased through exercise of the warrants, to
the Company commencing on the earliest of (i) February 28, 2004; (ii)
the acceleration of the subordinated note upon an event of default; or
(iii) the occurrence of any event requiring a mandatory prepayment of
the subordinated note (see Note 14) and terminating on the earliest of
(a) the effective time of a qualified public offering, or (b) February
27, 2007. Upon a put or call, the Company is required to pay the holder
of the warrants in cash the excess, if any, of the fair market value per
share as determined in accordance with the put and call agreement over
$5.00.
. Between January 1996 and July 1996, the Company issued exercisable
warrants to purchase Common Stock to employees, officers and others. The
warrants are exercisable for a total of 47,000 shares of Common Stock
with an exercise price per share of $4.58. The warrants expire five
years after the date of grant.
Pro Forma Disclosure--As described in Note 1, the Company uses the intrinsic
value method to measure compensation expense associated with the grants of
stock options and stock warrants to employees. Had the Company used the fair-
value method to measure compensation expense, reported net income (loss) and
basic and diluted net income (loss) per common share would have been as
follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------
1996 1997 1998
------- ------- ------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss) available for common stockhold-
ers................................................ $ (18) $ (129) $ 419
Fair value-based compensation expense............... (29) (61) (270)
------- ------- ------
Adjusted net income (loss) available for common
stockholders....................................... $ (47) $ (190) $ 149
======= ======= ======
Basic net income (loss) per common share............ $ (0.02) $ (0.07) $ 0.05
======= ======= ======
Diluted net income (loss) per common share.......... $ (0.02) $ (0.07) $ 0.05
======= ======= ======
</TABLE>
For purposes of determining the disclosure required by SFAS No. 123, the
fair value of stock options and stock warrants on their grant dates was
measured using the Black-Scholes option-pricing model. Key assumptions used to
apply this pricing model were as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate................... 5.20%-6.77% 5.90%-6.79% 5.32%-6.31%
Expected life of option and warrant
grants................................... 5 years 5 years 5 years
Expected volatility of underlying stock... 0.00% 0.00% 0.00%
</TABLE>
Reserved Shares--The Company has reserved 2,118,486 shares of Common Stock
for issuance upon the conversion of the Non-Voting Common Stock and for the
exercise of stock options and warrants.
F-22
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes Receivable from Officers and Employees--During the years ended June
30, 1996 and 1998, the Company sold shares of Common Stock in exchange for
cash and notes receivable to certain officers and employees. The notes
receivable are full recourse and accrue interest, which is payable annually.
The interest rate was 8% per annum through April 9, 1998 and was reduced to 6%
per annum thereafter. The notes receivable become due five years after the
date of issuance, and are collateralized by the Common Stock purchased.
13. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires the Company to disclose the estimated fair values for certain of its
financial instruments. Fair value of a financial instrument is the amount at
which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale.
The following table presents a comparison of the carrying value and
estimated fair value of the Company's financial instruments:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
JUNE 30, 1997:
Financial assets:
Cash, cash equivalents, and restricted cash.............. $ 4,203 $ 4,203
Notes receivable and due from funding sources............ 8,826 8,826
Interest rate swap agreements assigned................... -- 195
Financial liabilities:
Accounts payable, accrued expenses, and due to funding
source.................................................. 16,036 16,036
Revolving credit borrowings and other long-term debt..... 33,156 33,156
Interest rate swap agreements............................ -- 195
JUNE 30, 1998:
Financial assets:
Cash, cash equivalents, and restricted cash.............. $17,364 $17,364
Notes receivable and due from funding sources............ 15,026 15,026
Interest rate swap agreements assigned................... -- 895
Financial liabilities:
Accounts payable, accrued expenses, and due to funding
source.................................................. 33,702 33,702
Revolving credit borrowings and other long-term debt..... 38,415 38,415
Interest rate swap agreements............................ -- 895
</TABLE>
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash and Cash Equivalents and Restricted Cash--For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Notes Receivable, Due from/to Funding Sources, Accounts Payable and
Accrued Expenses--Amounts related to these financial instruments are
generally outstanding for less than 90 days. Accordingly, the carrying
amount of these assets and liabilities approximates their fair value.
Interest Rate Swap Agreements--The estimated fair value of the Company's
interest rate swap agreements and the related interest rate swap agreements
assigned are based on the estimated amounts that the Company would receive
or pay to terminate the agreements at the reporting date.
F-23
<PAGE>
BANKVEST CAPITAL CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revolving Credit Borrowings and Other Long-Term Debt--The Company's
obligations, as shown on the accompanying consolidated balance sheets, reflect
their approximate fair market values. The fair market value is estimated based
on the quoted market prices for the same or similar issues or on the current
rates offered to the Company for debt of the same terms and maturity.
14. SUBSEQUENT EVENTS
Recapitalization--On September , 1998, the Company and approximately % of
its stockholders agreed to a Plan of Recapitalization and Reclassification
(the "Recapitalization Agreement"), whereby prior to or simultaneous with the
completion of the offering of Common Stock pursuant to this Prospectus, the
following will occur:
. Common Stock, $1.00 par value, authorized for 25,000,000 shares, and
Non-Voting Common Stock, $1.00 par value, authorized for 2,000,000
shares, will be established.
. Each issued and outstanding share of Class A common stock and Class B
common stock will each be reclassified into one share of Common Stock
and Non-Voting Common Stock, respectively (the "reclassification"). All
references to Class A common stock and Class B common stock in the
consolidated financial statements and notes to consolidated financial
statements have been changed to Common Stock and Non-Voting Common
Stock, respectively.
. All issued and outstanding shares of Class A and Class B preferred stock
will be converted to 720,000 shares of Common Stock and 720,000 shares
of Non-Voting Common Stock, respectively. Additionally, all issued and
outstanding shares of Class C and Class D preferred stock will be
exchanged for 523,500 shares of Common Stock and 523,500 shares of Non-
Voting Common Stock, respectively. The authorized preferred stock will
be cancelled.
. All Common Stock and Non-Voting Common Stock will be split 3 for 2 (the
"stock split"). All share and per share information included in the
consolidated financial statements and in the notes to consolidated
financial statements have been restated to reflect this stock split.
In addition, pursuant to the Recapitalization Agreement, the following will
occur on the date of the closing of the initial public offering contemplated
by the registration statement in which these consolidated financial statements
are included:
. The accumulated unpaid dividends on the then previously issued and
outstanding Class A, Class B, Class C and Class D preferred stock will
be paid in cash.
. The subordinated note, together with accrued interest, will be paid in
full.
. The Vesting Warrant and the put and call provisions of the Vested
Warrant, both issued in connection with the subordinated debt, will be
terminated.
F-24
<PAGE>
[LOGO OF BANKVEST CAPITAL CORP. APPEARS HERE]
Back inside cover sets forth a map of the continental United States and a
statement which describes the Company as having 16 sales locations in 11
metropolitan areas throughout the United States
[MAP APPEARS HERE]
- --------------------------------------------------------------------------------
NATIONAL SALES LOCATIONS
BANKVEST CURRENTLY OPERATES 16 SALES LOCATIONS IN 11
METROPOLITAN AREAS THROUGHOUT THE UNITED STATES.
<PAGE>
No person is authorized in connection with any offering made hereby to give
any information or to make any representation other than as contained in this
Prospectus, and if given or made, such information or representation must not
be relied upon as having been authorized by the Company, the Selling Stock-
holders or by any Underwriter. This Prospectus does not constitute an offer to
sell or a solicitation of any offer to buy any security other than the shares
of Common Stock offered hereby, nor does it constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
persons in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of the Prospectus nor any
sale made hereunder shall under any circumstance create any implication that
the information contained herein is correct as of any date subsequent to the
date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Recapitalization......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial and Other Data........................... 22
Management's Discussion and Analysis of Changes in Financial Condition
and Results of Operations............................................... 25
Business................................................................. 35
Management............................................................... 46
Certain Transactions..................................................... 52
Principal and Selling Stockholders....................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 61
Legal Matters............................................................ 62
Change in Accountants.................................................... 62
Experts.................................................................. 62
Available Information.................................................... 62
Glossary................................................................. A-1
Index to Consolidated Financial Statements............................... F-1
</TABLE>
----------------
Until , 1998 (25 days after commencement of the Offering), all dealers
effecting transactions in the Common Stock, whether or not participating in
this distribution, may be required to deliver a Prospectus. This delivery re-
quirement is in addition to the obligation of dealers to deliver a Prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
Shares
[LOGO OF BANKVEST CAPITAL CORP. APPEARS HERE]
Common Stock
-----------------
PROSPECTUS
-----------------
Piper Jaffray inc.
CIBC Oppenheimer Corp.
Friedman, Billings,
Ramsey & Co., Inc.
, 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
the Common Stock being registered hereby. All amounts are estimates except the
SEC registration fee and the NASD filing fee:
<TABLE>
<CAPTION>
AMOUNT TO BE
PAID BY
COMPANY
------------
<S> <C>
SEC Registration Fee......................................... $12,552
NASD Filing Fee.............................................. 4,755
Nasdaq Listing Fee...........................................
Printing, Postage and Mailing................................
Legal Fees and Expenses......................................
Accounting Fees and Expenses.................................
Blue Sky Fees and Expenses...................................
Custodial Fees...............................................
Transfer Agent and Registrar Fees............................
Miscellaneous................................................
-------
Total.................................................... $
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Articles of Organization of the Company, as amended (Exhibit
3.1 hereto) and the Restated Bylaws (Exhibit 3.2 hereto) provide for
indemnification of the Company's directors and officers unless such
indemnification is prohibited by the Massachusetts Business Corporation Law.
The Massachusetts Business Corporation Law generally permits indemnification
of the Company's directors and officers for liabilities and expenses that they
may incur in such capacities, except with respect to any matter that the
indemnified person shall have been adjudicated in any proceeding not to have
acted in good faith in the reasonable belief that his or her action was in the
best interest of the Company.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for cross-
indemnification between the Company and the Selling Stockholders and the
Underwriters with respect to certain matters and liabilities, including
matters and liabilities under the Securities Act of 1933, as amended.
The Company also maintains directors and officers liability insurance for
the benefit of its directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since September, 1995, the Company has issued and sold the unregistered
securities set forth below. The following information reflects: (i) a two for
one Common Stock split effective on November 14, 1995; (ii) a two for one
Common Stock split effective on June 17, 1998; (iii) a three for two Common
Stock split to be effected prior to or simultaneously with the completion of
this Offering; (iv) the reclassification of Class A Common Stock as Common
Stock; and (v) the reclassification of Class B Common Stock as Non-Voting
Common Stock.
1. From December 1995 through June 1996, the Company issued and sold to
certain investors and employees an aggregate of 486,000 shares of Common Stock
for a purchase price of $4.17 per share, together with warrants, exercisable
for an aggregate of 48,600 shares of Common Stock at an exercise price of
$4.58 per share.
II-1
<PAGE>
Consideration for such shares of Common Stock was paid in cash, except for
120,000 shares of Common Stock sold to certain employees of the Company, which
shares were paid for by way of a 10% cash down payment and the balance by
delivery to the Company of non-recourse promissory notes and stock pledge
agreements. Each promissory note originally bore interest at 8.0% per annum
which was subsequently reduced to 6.0% per annum on April 10, 1998. Interest
is payable on the first anniversary date of the promissory note and on each
anniversary thereafter until the fifth anniversary when principal and all
accrued and unpaid interest becomes payable in full.
2. In May 1996, the Company issued and sold to Primus 30,000 shares of Class
A Preferred Stock and a warrant to purchase 72,000 shares of Common Stock at
an exercise price of $4.58 per share, for the aggregate price of $3,000,000
which was paid in cash. The Class A Preferred Stock is convertible into
720,000 shares of Common Stock.
3. In May 1996, the Company issued and sold to PNC 30,000 shares of Class B
Preferred Stock and warrants to purchase 72,000 shares of Non-Voting Common
Stock at an exercise price of $4.58 per share, for the aggregate price of
$3,000,000 which was paid in cash. The Class B Preferred Stock is convertible
into 720,000 shares of Non-Voting Common Stock.
4. In February 1997, the Company issued to Whitney the Subordinated Note in
the principal amount of $15.0 million which bears interest at 10.101% per
annum and warrants to purchase an aggregate of 515,076 shares of Common Stock
at an exercise price of $5.00 per share.
5. In November 1997, the Company issued and sold an aggregate of 131,250
shares of Common Stock for a purchase price of $6.67 per share to certain
employees. Consideration for such shares of Common Stock was paid by way of a
10% cash down payment and the balance by delivery to the Company of non-
recourse promissory notes and stock pledge agreements. The promissory notes
originally bore interest at 8.0% per annum, which was subsequently reduced to
6.0% per annum on April 10, 1998. Interest is payable on the first anniversary
date of the promissory note and thereafter on each anniversary until the fifth
anniversary when principal and all accrued and unpaid interest becomes payable
in full.
6. In December 1997, the Company issued and sold 32,010 and 20,817 shares of
Common Stock to Primus and Whitney, respectively, at a purchase price of $6.67
per share and 32,010 shares of Non-Voting Common Stock to PNC at a purchase
price of $6.67 per share.
7. On May 28, 1998, the Company issued and sold to Primus 37,500 shares of
Class C Preferred Stock for the price of $3,750,000 which was paid in cash.
The Class C Preferred Stock is convertible into 523,500 shares of Common
Stock.
8. On May 28, 1998, the Company issued and sold to PNC 37,500 shares of
Class D Preferred Stock for the price of $3,750,000 which was paid in cash.
The Class D Preferred Stock is convertible into 523,500 shares of Non-Voting
Common Stock.
9. Effective as of July 3, 1998, the Company issued and sold to a former
employee 18,000 shares of Common Stock upon exercise of such former employee's
options under the 1995 Plan for an aggregate price of $32,070.
There was no underwriter involved in connection with any transaction set
forth above. The foregoing issuances of securities were made in each case in
reliance on an exemption from registration under the Securities Act, under
Section 4(2) thereof or on Regulation D promulgated thereunder. In all of such
transactions, the recipients of securities represented their intention to
acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof, and appropriate legends were
affixed to the securities issued. All of the foregoing securities are deemed
restricted securities for the purposes of the Securities Act. The proceeds
from such sales were used for working capital and general corporate purposes.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*1.1 --Form of Underwriting Agreement
3.1 --Restated Articles of Organization of the Company, as amended
3.2 --Amended and Restated Bylaws of the Company
*4.1 --Specimen Common Stock certificates
4.2 --Agreement of Recapitalization dated , 1998 by and among the
Company, Primus, PNC Whitney and certain other stockholders of the
Company
*4.3 --Amended and Restated Stockholders Agreement dated as of May 28, 1998
by and among the Company, Primus, PNC Whitney and certain other
stockholders of the Company
*4.4 --Amended and Restated Registration Rights Agreement dated February
28, 1997 by and among the Company, Primus, PNC and Whitney, as
amended by that certain First Amendment to Amended and Restated
Registration Rights Agreement dated May 28, 1998
*4.5 --Purchase Agreement dated as of May 30, 1996, by and among the
Company, Primus and PNC as amended by Amendment No. 1 dated as of
February 28, 1997
*4.6 --Purchase Agreement dated as of May 28, 1998 by and among the
Company, Primus and PNC
*4.7 --Common Stock Purchase Warrants dated as of May 30, 1996 between the
Company and Primus, as amended and restated by that certain Amended
and Restated Common Stock Purchase Warrants dated as of , 1997.
*4.8 --Securities Purchase Agreement dated as of February 28, 1998 by and
between the Company and Whitney
*4.9 --10.101% Subordinated Promissory Note of the Company dated February
28, 1997 held by Whitney
*4.10 --Vested Warrant dated February 28, 1997 held by Whitney
*4.11 --Vesting Warrant dated February 28, 1997 held by Whitney
*4.12 --Put and Call Agreement dated as of February 28, 1997 by and between
the Company and Whitney
*5.1 --Opinion of Goldstein & Manello, P.C.
*10.1 --BankVest Capital Corp. 1995 Stock Option Plan
*10.2 --BankVest Capital Corp. 1998 Employee Stock Ownership Plan
*10.3 --Employment Agreement between Paul S. Gass and the Company
*10.4 --Employment Agreement between Joseph Bannick and the Company
*10.5 --Employment Agreement between Lewis Caliento and the Company
*10.6 --Employment Agreement between John P. Colton and the Company
*10.7 --Employment Agreement between Charles Cross and the Company
*10.8 --Employment Agreement between Kellie D. Jacques and the Company
*10.9 --Employment Agreement between Michael Karman and the Company
*10.9 --Employment Agreement between Sandra T. King and the Company
*10.10 --Severance Agreement between Cathy F. Sutton and the Company
*10.11 --Form of Stock Option Agreement in connection with 1995 Plans
*10.12 --Real Estate Lease between Glenborough Corp. and the Company
(Marlboro, MA)
*10.13 --Receivables Purchase Agreement dated as of August 15, 1997 among
BVFU Funding Corp., the Company, Variable Funding Capital
Corporation, First Union Capital Markets Corp., First Union National
Bank of North Carolina and Northwest Bank Minnesota, N.A
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*10.14 --Purchase Agreement dated August 15, 1997 between BVFU and BV
*10.15 --Lease Receivables Sale and Contribution Agreement dated September
30, 1996 by and among BV Funding Corp., the Company and Lease Vest
Capital Corp.
*10.16 --Lease Receivables Purchase Agreement dated as of September 30, 1996
among BV Funding Corp. the Company, EagleFunding Capital Corporation
and BankBoston, as amended by Amendment No. 1 dated February 28,
1997, as amended by Amendment No. 2 dated June 30, 1997, as amended
by Amendment No. 3 dated December 7, 1997, as amended by Amendment
No. 4 dated January 7, 1998, and as amended by Amendment No. 5 dated
by May 1, 1998
*10.17 --Revolving Credit Agreement dated as of June 18, 1998 by and between
BankVest Capital Corp. and Middlesex Savings Bank
*10.18 --$1,000,000 Revolving Credit Note to Middlesex Savings Bank dated as
of June 18, 1998
*10.19 --Line of Credit Agreement dated as of October 31, 1995 by and between
Framingham Savings Bank and BankVest Capital Corp.
*10.20 --$2,000,000 Promissory Note--Demand (Variable Rate) to Framingham
Savings Bank dated October 31, 1995
*10.21 --Loan and Security Agreement dated as of December 9, 1996 by and
between MetroWest Bank and BankVest Capital Corp.
*10.22 --$2,000,000 Promissory Note--Monthly Installment to MetroWest Bank
dated December 9, 1996
*10.23 --Loan Agreement dated as of December 9, 1996 by and between MetroWest
Bank and BankVest Capital Corp.
*10.24 --$3,000,000 Promissory Note--Demand to MetroWest Bank dated December
9, 1996
*10.25 --Security Agreement dated as of December 9, 1996 by and between
MetroWest Bank and BankVest Capital Corp.
*10.26 --$500,000 Promissory Note--Monthly Installment to MetroWest Bank
dated December 9, 1996
*10.27 --Line of Credit Agreement dated as of February 5, 1998 by and between
MetroWest Bank and BankVest Capital Corp.
*10.28 --$5,000,000 Promissory Note--Demand to MetroWest Bank dated February
5, 1998
*10.29 --$2,500,000 Promissory Note to MetroWest Bank dated September 2, 1998
*10.30 --Loan and Security Agreement dated as of December 27, 1996 by and
between Century Bank and Trust Company and BankVest Capital Corp.
*10.31 --Loan and Security Agreement dated as of May 9, 1997 by and among
BankVest Capital Corp., LeaseVest Capital Corp., and PNC Bank, N.A.
*10.32 --Revolving Credit Agreement dated as of September 12, 1996, by and
between BankVest Capital Corp., LeaseVest Capital Corp. and
BankBoston, N.A. (f/k/a The First National Bank of Boston)
*10.33 --Amendment to Revolving Credit Agreement dated January 1, 1997 by and
between BankVest Capital Corp., LeaseVest Capital Corp. and
BankBoston, N.A.
*10.34 --Amendment No. 2 to Revolving Credit Agreement dated December 5, 1997
by and between BankVest Capital Corp., LeaseVest Capital Corp. and
BankBoston, N.A.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*10.35 --Amendment No. 3 to Revolving Credit Agreement dated December 24,
1997 by and between BankVest Capital Corp., LeaseVest Capital Corp.
and BankBoston, N.A.
*10.36 --$20,000,000 Amended and Restated Revolving Credit Note to
BankBoston, N.A. dated December 5, 1997 of BankVest Capital Corp.
*10.37 --MetroWest Bank Line of Credit Agreement dated February 5, 1998 by
and between MetroWest Bank and BankVest Capital Corp.
*10.38 --$5,000,000 Promissory Note--Demand to MetroWest Bank dated as of
February 5, 1998 of BankVest Capital Corp.
*10.39 --Credit Agreement, dated as of August 21, 1998, by and between
BankVest Capital Corp. and Fleet Bank, N.A.
*10.40 --$15,000,000 Revolving Credit Note to Fleet Bank, National
Association dated as of August 21, 1998
*10.41 --Amended and Restated Master Sale of Chattel Paper And Security
Agreement dated as of March 21, 1996, among European American Bank,
BankVest Capital Corp. and LeaseVest Capital Corp.
*10.42 --Amendment dated as of January 14, 1997 to Amended and Restated
Master Sale of Chattel Paper And Security Agreement dated as of March
21, 1996, among European American Bank, BankVest Capital Corp. and
LeaseVest Capital Corp.
*10.43 --Second Amendment dated as of June 30, 1997 to Amended and Restated
Master Sale of Chattel Paper And Security Agreement dated as of March
21, 1996, among European American Bank, BankVest Capital Corp. and
LeaseVest Capital Corp.
*10.44 --Third Amendment dated as of January , 1998 to Amended and Restated
Master Sale of Chattel Paper And Security Agreement dated as of March
21, 1996, among European American Bank, BankVest Capital Corp. and
LeaseVest Capital Corp.
*10.45 --Master Agreement dated November 27, 1995 between First Sierra
Financial, Inc. and BankVest Capital Corp.
*10.46 --First Amendment dated April 10, 1997 to Master Agreement dated
November 27, 1995 between First Sierra Financial, Inc. and BankVest
Capital Corp.
*10.47 --Loan and Security Agreement dated as of August 7, 1995 between
BankVest Capital Corp. and Heller Financial, Inc.
*10.48 --First Amendment dated as of February 12, 1996 to Loan and Security
Agreement, dated as of August 7, 1995 by and between Heller
Financial, Inc. and BankVest Capital Corp.
*10.49 --Second Amendment dated as of June 24, 1996 to Loan and Security
Agreement, dated as of August 7, 1995 by and between Heller
Financial, Inc. and BankVest Capital Corp.
*10.50 --Third Amendment dated as of July 11, 1997 to Loan and Security
Agreement, dated as of August 7, 1995 by and between Heller
Financial, Inc. and BankVest Capital Corp.
*10.51 --Purchase and Sale Agreement, dated as of August 7, 1995 by and
between Heller Financial Leasing, Inc. and BankVest Capital Corp.
*10.52 --First Amendment dated as of February 12, 1996 to Purchase and Sale
Agreement, dated as of August 7, 1995 by and between Heller Financial
Leasing, Inc. and BankVest Capital Corp.
*10.53 --Second Amendment dated as of June 24, 1996 to Purchase and Sale
Agreement, dated as of August 7, 1995 by and between Heller Financial
Leasing, Inc. and BankVest Capital Corp.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*10.54 --Third Amendment dated as of July 11, 1997 to Purchase and Sale
Agreement, dated as of August 7, 1995 by and between Heller Financial
Leasing, Inc. and BankVest Capital Corp.
*10.55 --Sale of Chattel Paper and Security Agreement dated as of March 28,
1996 by and between UJB Leasing Corporation and BankVest Capital
Corp.
*10.56 --First Amendment dated as of June 1, 1997 to Sale of Chattel Paper
and Security Agreement by and between Summit Leasing Corporation
(f/k/a UJB Leasing Corporation) and BankVest Capital Corp.
*10.57 --Second Amendment to Sale of Chattel Paper and Security Agreement by
and between Summit Leasing Corporation (f/k/a UJB Leasing
Corporation) and BankVest Capital Corp.
*10.58 --Master Sale and Assignment Agreement dated as of November 21, 1997
by and between BankVest Capital Corp., LeaseVest Capital Corp., and
Marquette National Bank
*10.59 --Receivables Purchase Agreement dated as of September , 1998 among
BVFU Funding LLC, BankVest Capital Corp., the Investors, Variable
Funding Capital Corporation, First Union Capital Markets, First Union
National Bank of North Carolina and Norwest Bank Minnesota, N.A.
*10.60 --Purchase Agreement, dated as of September , 1998 between BVFU and
BankVest Capital Corp.
*10.61 --Purchase and Assignment Agreement, dated as of September , 1998
between BVFU Funding Corp. and BVFU Funding LLC.
*10.62 --Transfer and Sale Agreement dated as of , 1998, by and among
BankVest Capital Corp., BVFU, BFC, VFCC, Eagle and the BV Equipment
Lease Company 1998-1, LLC
*10.63 --Indenture dated as of , 1998 by and between BV Equipment Lease
Company 1998-1, LLC and Norwest.
11.1 --Computation of earnings per share
*21.1 --Subsidiaries of the Company
23.1 --Consent of Deloitte & Touche LLP
*23.2 --Letter from PricewaterhouseCoopers LLP
*23.3 --Consent of Goldstein & Manello, P.C. (contained in Exhibit 5.1
hereto)
24.1 --Powers of Attorney (included on the signature page to this
Registration Statement)
27.1 --Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Company hereby undertakes:
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with
II-6
<PAGE>
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(b) The undersigned Registrant hereby undertakes:
(1) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
(2) That, for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(3) That, for purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE TOWN OF MARLBORO, COMMONWEALTH
OF MASSACHUSETTS, ON THE 30TH DAY OF SEPTEMBER, 1998.
Bankvest Capital Corp.
/s/ Paul S. Gass
By: _________________________________
PAUL S. GASS
PRESIDENT, CHIEF EXECUTIVE
OFFICER AND CHAIRMAN OF THE BOARD
POWER OF ATTORNEY
Each undersigned person hereby constitutes and appoints Paul S. Gass and
Charles W. Cross and each of them with full power of substitution and full
power to act without the other, as his true and lawful attorney-in-fact and
agent, with full power to sign any and all amendments to this Registration
Statement on Form S-1 of BankVest Capital Corp. and to file the same with the
Securities and Exchange Commission, including any and all post-effective
amendments and any subsequent Registration Statement for the same offering
which may be filed under Rule 462(b) and to execute all other documents and
take all other actions on behalf of such undersigned person as may be
necessary or advisable in connection with the registration of the shares
covered by this Registration Statement under the Securities Act of 1933, as
amended, hereby ratifying and confirming all that said attorneys-in-fact may
lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT AND POWER OF ATTORNEY HAVE BEEN SIGNED BELOW BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Paul S. Gass President, Chief Executive September 30, 1998
______________________________________ Officer and Chairman of
PAUL S. GASS the Board of Directors
(Principal Executive
Officer)
/s/ Kellie D. Jacques Senior Vice President, September 30, 1998
______________________________________ Chief Financial Officer,
KELLIE D. JACQUES Treasurer and Director
(Principal Financial and
Accounting Officer)
/s/ John P. Colton Executive Vice President September 30, 1998
______________________________________ and Director
JOHN P. COLTON
/s/ James H. Fordyce Director September 30, 1998
______________________________________
JAMES H. FORDYCE
/s/ James D. Gerson Director September 30, 1998
______________________________________
JAMES D. GERSON
/s/ Sandra T. King Director September 30, 1998
______________________________________
SANDRA T. KING
/s/ Kevin J. McGinty Director September 30, 1998
______________________________________
KEVIN J. MCGINTY
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*1.1 --Form of Underwriting Agreement
3.1 --Restated Articles of Organization of the Company, as amended
3.2 --Amended and Restated Bylaws of the Company
*4.1 --Specimen Common Stock certificates
4.2 --Agreement of Recapitalization dated , 1998 by and among the
Company, Primus, PNC Whitney and certain other stockholders of the
Company
*4.3 --Amended and Restated Stockholders Agreement dated as of May 28, 1998
by and among the Company, Primus, PNC Whitney and certain other
stockholders of the Company
*4.4 --Amended and Restated Registration Rights Agreement dated February
28, 1997 by and among the Company, Primus, PNC and Whitney, as
amended by that certain First Amendment to Amended and Restated
Registration Rights Agreement dated May 28, 1998
*4.5 --Purchase Agreement dated as of May 30, 1996, by and among the
Company, Primus and PNC as amended by Amendment No. 1 dated as of
February 28, 1997
*4.6 --Purchase Agreement dated as of May 28, 1998 by and among the
Company, Primus and PNC
*4.7 --Common Stock Purchase Warrants dated as of May 30, 1996 between the
Company and Primus, as amended and restated by that certain Amended
and Restated Common Stock Purchase Warrants dated as of , 1997.
*4.8 --Securities Purchase Agreement dated as of February 28, 1998 by and
between the Company and Whitney
*4.9 --10.101% Subordinated Promissory Note of the Company dated February
28, 1997 held by Whitney
*4.10 --Vested Warrant dated February 28, 1997 held by Whitney
*4.11 --Vesting Warrant dated February 28, 1997 held by Whitney
*4.12 --Put and Call Agreement dated as of February 28, 1997 by and between
the Company and Whitney
*5.1 --Opinion of Goldstein & Manello, P.C.
*10.1 --BankVest Capital Corp. 1995 Stock Option Plan
*10.2 --BankVest Capital Corp. 1998 Employee Stock Ownership Plan
*10.3 --Employment Agreement between Paul S. Gass and the Company
*10.4 --Employment Agreement between Joseph Bannick and the Company
*10.5 --Employment Agreement between Lewis Caliento and the Company
*10.6 --Employment Agreement between John P. Colton and the Company
*10.7 --Employment Agreement between Charles Cross and the Company
*10.8 --Employment Agreement between Kellie D. Jacques and the Company
*10.9 --Employment Agreement between Michael Karman and the Company
*10.9 --Employment Agreement between Sandra T. King and the Company
*10.10 --Severance Agreement between Cathy F. Sutton and the Company
*10.11 --Form of Stock Option Agreement in connection with 1995 Plans
*10.12 --Real Estate Lease between Glenborough Corp. and the Company
(Marlboro, MA)
*10.13 --Receivables Purchase Agreement dated as of August 15, 1997 among
BVFU Funding Corp., the Company, Variable Funding Capital
Corporation, First Union Capital Markets Corp., First Union National
Bank of North Carolina and Northwest Bank Minnesota, N.A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*10.14 --Purchase Agreement dated August 15, 1997 between BVFU and BV
*10.15 --Lease Receivables Sale and Contribution Agreement dated September
30, 1996 by and among BV Funding Corp., the Company and Lease Vest
Capital Corp.
*10.16 --Lease Receivables Purchase Agreement dated as of September 30, 1996
among BV Funding Corp. the Company, EagleFunding Capital Corporation
and BankBoston, as amended by Amendment No. 1 dated February 28,
1997, as amended by Amendment No. 2 dated June 30, 1997, as amended
by Amendment No. 3 dated December 7, 1997, as amended by Amendment
No. 4 dated January 7, 1998, and as amended by Amendment No. 5 dated
by May 1, 1998
*10.17 --Revolving Credit Agreement dated as of June 18, 1998 by and between
BankVest Capital Corp. and Middlesex Savings Bank
*10.18 --$1,000,000 Revolving Credit Note to Middlesex Savings Bank dated as
of June 18, 1998
*10.19 --Line of Credit Agreement dated as of October 31, 1995 by and between
Framingham Savings Bank and BankVest Capital Corp.
*10.20 --$2,000,000 Promissory Note--Demand (Variable Rate) to Framingham
Savings Bank dated October 31, 1995
*10.21 --Loan and Security Agreement dated as of December 9, 1996 by and
between MetroWest Bank and BankVest Capital Corp.
*10.22 --$2,000,000 Promissory Note--Monthly Installment to MetroWest Bank
dated December 9, 1996
*10.23 --Loan Agreement dated as of December 9, 1996 by and between MetroWest
Bank and BankVest Capital Corp.
*10.24 --$3,000,000 Promissory Note--Demand to MetroWest Bank dated December
9, 1996
*10.25 --Security Agreement dated as of December 9, 1996 by and between
MetroWest Bank and BankVest Capital Corp.
*10.26 --$500,000 Promissory Note--Monthly Installment to MetroWest Bank
dated December 9, 1996
*10.27 --Line of Credit Agreement dated as of February 5, 1998 by and between
MetroWest Bank and BankVest Capital Corp.
*10.28 --$5,000,000 Promissory Note--Demand to MetroWest Bank dated February
5, 1998
*10.29 --$2,500,000 Promissory Note to MetroWest Bank dated September 2, 1998
*10.30 --Loan and Security Agreement dated as of December 27, 1996 by and
between Century Bank and Trust Company and BankVest Capital Corp.
*10.31 --Loan and Security Agreement dated as of May 9, 1997 by and among
BankVest Capital Corp., LeaseVest Capital Corp., and PNC Bank, N.A.
*10.32 --Revolving Credit Agreement dated as of September 12, 1996, by and
between BankVest Capital Corp., LeaseVest Capital Corp. and
BankBoston, N.A. (f/k/a The First National Bank of Boston)
*10.33 --Amendment to Revolving Credit Agreement dated January 1, 1997 by and
between BankVest Capital Corp., LeaseVest Capital Corp. and
BankBoston, N.A.
*10.34 --Amendment No. 2 to Revolving Credit Agreement dated December 5, 1997
by and between BankVest Capital Corp., LeaseVest Capital Corp. and
BankBoston, N.A.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*10.35 --Amendment No. 3 to Revolving Credit Agreement dated December 24,
1997 by and between BankVest Capital Corp., LeaseVest Capital Corp.
and BankBoston, N.A.
*10.36 --$20,000,000 Amended and Restated Revolving Credit Note to BankBoston
N.A. dated December 5, 1997 of BankVest Capital Corp.
*10.37 --MetroWest Bank Line of Credit Agreement dated February 5, 1998 by
and between MetroWest Bank and BankVest Capital Corp.
*10.38 --$5,000,000 Promissory Note--Demand to MetroWest Bank dated as of
February 5, 1998 of BankVest Capital Corp.
*10.39 --Credit Agreement, dated as of August 21, 1998, by and between
BankVest Capital Corp. and Fleet Bank, N.A.
*10.40 --$15,000,000 Revolving Credit Note to Fleet Bank, National
Association dated as of August 21, 1998
*10.41 --Amended and Restated Master Sale of Chattel Paper And Security
Agreement dated as of March 21, 1996, among European American Bank,
BankVest Capital Corp. and LeaseVest Capital Corp.
*10.42 --Amendment dated as of January 14, 1997 to Amended and Restated
Master Sale of Chattel Paper And Security Agreement dated as of March
21, 1996, among European American Bank, BankVest Capital Corp. and
LeaseVest Capital Corp.
*10.43 --Second Amendment dated as of June 30, 1997 to Amended and Restated
Master Sale of Chattel Paper And Security Agreement dated as of March
21, 1996, among European American Bank, BankVest Capital Corp. and
LeaseVest Capital Corp.
*10.44 --Third Amendment dated as of January , 1998 to Amended and Restated
Master Sale of Chattel Paper And Security Agreement dated as of March
21, 1996, among European American Bank, BankVest Capital Corp. and
LeaseVest Capital Corp.
*10.45 --Master Agreement dated November 27, 1995 between First Sierra
Financial, Inc. and BankVest Capital Corp.
*10.46 --First Amendment dated April 10, 1997 to Master Agreement dated
November 27, 1995 between First Sierra Financial, Inc. and BankVest
Capital Corp.
*10.47 --Loan and Security Agreement dated as of August 7, 1995 between
BankVest Capital Corp. and Heller Financial, Inc.
*10.48 --First Amendment dated as of February 12, 1996 to Loan and Security
Agreement, dated as of August 7, 1995 by and between Heller
Financial, Inc. and BankVest Capital Corp.
*10.49 --Second Amendment dated as of June 24, 1996 to Loan and Security
Agreement, dated as of August 7, 1995 by and between Heller
Financial, Inc. and BankVest Capital Corp.
*10.50 --Third Amendment dated as of July 11, 1997 to Loan and Security
Agreement, dated as of August 7, 1995 by and between Heller
Financial, Inc. and BankVest Capital Corp.
*10.51 --Purchase and Sale Agreement, dated as of August 7, 1995 by and
between Heller Financial Leasing, Inc. and BankVest Capital Corp.
*10.52 --First Amendment dated as of February 12, 1996 to Purchase and Sale
Agreement, dated as of August 7, 1995 by and between Heller Financial
Leasing, Inc. and BankVest Capital Corp.
*10.53 --Second Amendment dated as of June 24, 1996 to Purchase and Sale
Agreement, dated as of August 7, 1995 by and between Heller Financial
Leasing, Inc. and BankVest Capital Corp.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
*10.54 --Third Amendment dated as of July 11, 1997 to Purchase and Sale
Agreement, dated as of August 7, 1995 by and between Heller Financial
Leasing, Inc. and BankVest Capital Corp.
*10.55 --Sale of Chattel Paper and Security Agreement dated as of March 28,
1996 by and between UJB Leasing Corporation and BankVest Capital
Corp.
*10.56 --First Amendment dated as of June 1, 1997 to Sale of Chattel Paper
and Security Agreement by and between Summit Leasing Corporation
(f/k/a UJB Leasing Corporation) and BankVest Capital Corp.
*10.57 --Second Amendment to Sale of Chattel Paper and Security Agreement by
and between Summit Leasing Corporation (f/k/a UJB Leasing
Corporation) and BankVest Capital Corp.
*10.58 --Master Sale and Assignment Agreement dated as of November 21, 1997
by and between BankVest Capital Corp., LeaseVest Capital Corp., and
Marquette National Bank
*10.59 --Receivables Purchase Agreement dated as of September , 1998 among
BVFU Funding LLC, BankVest Capital Corp., the Investors, Variable
Funding Capital Corporation, First Union Capital Markets, First Union
National Bank of North Carolina and Norwest Bank Minnesota, N.A.
*10.60 --Purchase Agreement, dated as of September , 1998 between BVFU and
BankVest Capital Corp.
*10.61 --Purchase and Assignment Agreement, dated as of September , 1998
between BVFU Funding Corp. and BVFU Funding LLC.
*10.62 --Transfer and Sale Agreement dated as of , 1998, by and among
BankVest Capital Corp., BVFU, BFC, VFCC, Eagle and the BV Equipment
Lease Company 1998-1, LLC
*10.63 --Indenture dated as of , 1998 by and between BV Equipment Lease
Company 1998-1, LLC and Norwest.
11.1 --Computation of earnings per share
*21.1 --Subsidiaries of the Company
23.1 --Consent of Deloitte & Touche LLP
*23.2 --Letter from PricewaterhouseCoopers LLP
*23.3 --Consent of Goldstein & Manello, P.C. (contained in Exhibit 5.1
hereto)
24.1 --Powers of Attorney (included on the signature page to this
Registration Statement)
27.1 --Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
FEDERAL IDENTIFICATION
NO. 04-3124117
---------------------
<TABLE>
<CAPTION>
The Commonwealth of Massachusetts
William Francis Galvin
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
- ------------
EXAMINER
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
- ------------
<S> <C>
Name We, Paul S. Gass , President,
Approved ---------------------------------------------------------------------------------
and Charles W. Cross , *Clerk,
---------------------------------------------------------------------------------
of BankVest Capital Corp. ,
---------------------------------------------------------------------------------
(Exact name of corporation)
located at 200 Nickerson Road, Marlboro, MA 01752 ,
--------------------------------------------------------------------------
(Street address of corporation in Massachusetts)
do hereby certify that the following Restatement of the Articles of Organization was duly adopted at a
meeting held on May 26 , 1998 by a vote of the directors/or:
------------ --
1,266,344 shares of Class A Common 5,000,000,000 of Class A Common 1,408,073 shares outstanding,
--------- ---------------------------- ------------------------
(type, class & series, if any)
30,000 shares of Class A Preferred 30,000 of Class A Preferred 30,000 shares outstanding, and
------ ------------------------- ------------------------
(type, class & series, if any)
30,000 shares of Class B Preferred 30,000 of Class B Preferred 30,000 shares outstanding,
------ ------------------------ ------------------------
(type, class & series, if any)
**being at least a majority of each type, class or series outstanding and entitled to vote
thereon:/**being at least two-thirds of each type, class or series outstanding and entitled to vote
thereon and of each type, class or series of stock whose rights are adversely affected thereby:
</TABLE>
<TABLE>
<CAPTION>
C [_] ARTICLE I
P [_] The name of the corporation is:
M [_] BankVest Capital Corp.
R.A. [_] ARTICLE II
The purpose of the corporation is to engage in the following business activities:
See Continuation Sheet 2(1)
---
- ------------
<S> <C>
P.C. *Delete the inapplicable words. **Delete the inapplicable clause.
Note: If the space provided under any article or item on this form is insufficient, additions shall
be set forth on separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 inch.
Additions to more than one article may be made on a single sheet so long as each article requiring
each addition is clearly indicated.
</TABLE>
<PAGE>
ARTICLE III
State the total number of shares and par value, if any, of each class of stock
which the corporation is authorized to issue:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
WITHOUT PAR VALUE WITH PAR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 5,000,000 Class A Common Stock $1.00
- -------------------------------------------------------------------------------------------------------------------------------
1,000,000 Class B Common Stock $1.00
- -------------------------------------------------------------------------------------------------------------------------------
Preferred: Preferred: 500,000 (of which shares) $1.00
60,000 Class A Convertible
Preferred $1.00
- -------------------------------------------------------------------------------------------------------------------------------
30,000 Class B Convertible
Preferred $1.00
75,000 Class C Convertible
Preferred $1.00
- -------------------------------------------------------------------------------------------------------------------------------
37,500 Class D Convertible
Preferred $1.00
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ARTICLE IV
If more than one class of stock is authorized, state a distinguishing
designation for each class. Prior to the issuance of any shares of a class, if
shares of another class are outstanding, the corporation must provide a
description of the preferences, voting powers, qualifications, and special or
relative rights or privileges of that class and of each other class of which
shares are outstanding and of each series then established within any class.
See Continuation Sheets 4(1) through 4(49)
---
ARTICLE V
The restrictions, if any, imposed by the Articles of Organization upon the
transfer of shares of stock of any class are:
None
ARTICLE VI
**Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or for
limiting, defining, or regulating the powers of the corporation, or of its
directors or stockholders, or of any class of stockholders:
See Continuation Sheets 6(1) through 6(8)
---
**If there are no provisions state "None".
Note: The preceding six (6) articles are considered to be permanent and may ONLY
be changed by filing appropriate Articles of Amendment.
<PAGE>
ARTICLE VII
The effective date of the restated Articles or Organization of the corporation
shall be the date approved and filed by the Secretary of the Commonwealth. If a
later effective date is desired, specify such date which shall not be more than
thirty days after the date of filing.
ARTICLE VIII
The information contained in Article VIII is not a permanent part of the
Articles of Organization.
a. The street address (post office boxes are not acceptable) of the principal
office of the corporation in Massachusetts is:
200 Nickerson Road, Marlboro, MA 01752
b. The name, residential address and post office address of each director and
officer of the corporation is as follows:
<TABLE>
<CAPTION>
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS
<S> <C> <C> <C>
President:: Paul S. Gass 555 Concord Rd., Sudbury, MA 01776 Same
Treasurer: Kellie D. Jacques 38 Walker St., Newton, MA 02160 Same
Clerk: Charles W. Cross 16 Lincoln Dr., North Smithfield, RI 02896 Same
Directors: Paul S. Gass 555 Concord Rd., Sudbury, MA 01776 Same
John P. Colton 141 Cole Ave., Providence, RI 02906 Same
Kellie D. Jacques 38 Walker St., Newton, MA 02160 Same
Sandra T. King 83 Haynes Rd., Sudbury, MA 01776 Same
Kevin J. McGinty 8 Pepperwood Ln., Pepper Pike, OH 44124 Same
James H. Fordyce 774 Hollow Tree Ridge Rd., Darien, CT 06820 Same
James D. Gerson 19 West 95th St., New York, NY 10025 Same
</TABLE>
c. The fiscal year (i.e., tax year) of the corporation shall end on the last
day of the month: June 30
d. The name and business address of the resident agent, if any, of the
corporation is:
Richard J. Snyder, Esq.
c/o Goldstein & Manello, P.C.
265 Franklin Street
Boston, MA 02110
**We further certify that the foregoing Restated Articles of Organization affect
no amendments to the Articles of Organization of the corporation as heretofore
amended, except amendments to the following articles. Briefly describe
amendments below:
Articles III, IV, VI and VIII as incorporated herein by reference.
SIGNED UNDER THE PENALTIES OF PERJURY, this 26th day of May , 1998.
---- ---
/s/ Paul S. Gass , *President
- ----------------------------------
/s/ Charles W. Cross , *Clerk
- ----------------------------------
*Delete the inapplicable words.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
==============================================================================
I hereby approve the within Articles of Amendment and, the filing fee in the
amount of $1,136 having been paid, said articles are deemed to have been
------
filed with me this 26th day of May 1998.
---- --- -
Effective date:
----------------------------------------------------
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
Photocopy of document to be sent to:
Richard J. Snyder, Esq.
---------------------------------------------------------------
Goldstein & Manello, P.C.
---------------------------------------------------------------
265 Franklin Street
---------------------------------------------------------------
Boston, Massachusetts 02110
---------------------------------------------------------------
Telephone: (617) 439-8900
-----------------------------------------------------
<PAGE>
ARTICLE IV
A. AUTHORIZED SHARES
-----------------
The total number of shares of capital stock which BankVest Capital
Corp. has authority to issue is 6,500,000 shares, consisting of:
(1) 500,000 shares of preferred stock, par value $1.00 per share,
of which (A) 60,000 shares shall be classified as Class A Convertible
Preferred Stock, par value $1.00 per share, (B) 30,000 shares shall be
classified as Class B Convertible Preferred Stock, par value $1.00 per
share, (C) 75,000 shares shall be classified as Class C Convertible
Preferred Stock, par value $1.00 per share and (D) 37,500 shares shall be
classified as Class D Convertible Preferred Stock, par value $1.00 per
share;
(2) 5,000,000 shares of Class A Common Stock, par value $1.00 per
share; and
(3) 1,000,000 shares of Class B Common Stock, par value $1.00 per
share.
B. PREFERRED STOCK
---------------
Shares of preferred stock may be issued from time to time in one or
more classes or series. The Board of Directors of BankVest Capital Corp. is
hereby authorized to determine and alter all rights, preferences and privileges
and qualifications, limitations and restrictions thereof (including, without
limitation, voting rights and the limitation and exclusion thereof) granted to
or imposed upon any wholly unissued classes or series of preferred stock and the
number of shares constituting any such class or series and the designation
thereof, and to increase or decrease (but not below the number of shares of such
class or series then outstanding) the number of shares of any class or series
subsequent to the issue of shares of that class or series then outstanding. In
the event that the number of shares of any class or series is so decreased, the
shares constituting such reduction shall resume the status which such shares had
prior to the adoption of the resolution originally fixing the number of shares
of such class or series.
C. COMMON STOCK
------------
Except as otherwise provided in this Part C or as otherwise required
by applicable law, all shares of Class A Common Stock, par value $1.00 per share
(the "Class A Common"), and Class B Common Stock, par value $1.00 per share (the
--------------
"Class B Common"), shall be identical in all respects and shall entitle the
--------------
holders thereof to the same rights, preferences and privileges, subject to the
same qualifications, limitations and restrictions, as set forth herein. The
Class A Common and the Class B Common are hereafter collectively referred to as
the "Common Stock." All defined
------------
<PAGE>
terms in this Part C shall have the meanings ascribed to such terms in this Part
C, unless otherwise indicated.
Section 1 Voting Rights. Except as otherwise provided in this Part C or as
-------------
otherwise required by applicable law, the holders of Class A Common shall be
entitled to one vote per share on all matters to be voted on by the stockholders
of BankVest Capital Corp. (the "Corporation"), and the holders of Class B Common
-----------
shall have no right to vote on any matters to be voted on by the stockholders of
the Corporation; provided that the holders of Class B Common shall have the
-------- ----
right to one vote per share together with the Class A Common as one class on (i)
any merger or consolidation of the Corporation with or into another entity or
entities and (ii) any sale of all or substantially all of the Corporation's
assets; and provided further that the holders of Class B Common shall have the
-------- -------
right to vote as a separate class on any merger or consolidation of the
Corporation with or into another entity or entities, or any recapitalization or
reorganization, in which shares of Class B Common would receive or be exchanged
for consideration different on a per share basis from consideration received
with respect to or in exchange for the shares of Class A Common or would
otherwise be treated differently from shares of Class A Common in connection
with such transaction.
Section 1 Dividends. As and when dividends are declared or paid with
---------
respect to shares of Common Stock, whether in cash, property or securities of
the corporation, the holders of Class A Common and the holders of Class B Common
shall be entitled to receive such dividends pro rata at the same rate per share
of each class of Common Stock; provided that (i) if dividends are declared or
-------- ----
paid in shares of Common Stock, the dividends payable to holders of Class A
Common shall be payable in shares of Class A Common and the dividends payable to
the holders of Class B Common shall be payable in shares of Class B Common and
(ii) if the dividends consist of other voting securities of the Corporation,
the Corporation shall make available to each holder of Class B Common, at such
holder's request, dividends consisting of non-voting securities (except as
otherwise required by law) of the Corporation which are otherwise identical to
the voting securities and which are convertible into such voting securities on
the same terms as the Class B Common is convertible into the Class A Common.
The right of the holders of Common Stock to receive dividends are subject to the
provisions of the preferred stock.
Section 1 Liquidation. Subject to the provisions of the preferred stock,
-----------
the holders of the Class A Common and the holders of the Class B Common shall be
entitled to participate pro rata at the same rate per share of each class of
Common Stock in all distributions to the holders of Common stock in any
liquidation, dissolution or winding up of the Corporation.
Section 1 Conversion.
----------
41. Conversion of Class A Common. Each holder of Class A Common
----------------------------
shall be entitled at any time to convert any or all of the shares of such
holder's Class A Common into an equal number of shares of Class B Common.
42. Conversion of Class B Common.
----------------------------
<PAGE>
(i) In connection with the occurrence (or the expected occurrence as
described in clause (iii) below) of any Conversion Event, each holder of Class B
Common shall be entitled to convert into an equal number of shares of Class A
Common any or all of the shares of such holder's Class B Common being (or
expected to be) distributed, disposed of or sold in connection with such
Conversion Event.
(ii) For purposes of this paragraph 4B, a "Conversion Event" shall
----------------
mean (a) any public offering or public sale of securities of the Corporation
(including a public offering registered under the Securities Act of 1933 and a
public sale pursuant to Rule 144 of the Securities and Exchange Commission or
any similar rule then in force), (b) any sale of securities of the Corporation
to a person or group of persons (within the meaning of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) if, after such sale, such person or
--------
group of persons in the aggregate would own or control securities which possess
in the aggregate the ordinary voting power to elect a majority of the
Corporation's directors (provided that such sale has been approved by the
Corporation's Board of Directors or a committee thereof), (c) any sale of
securities of the Corporation to a person or group of persons (within the
meaning of the 1934 Act) if, after such sale, such person or group of persons in
the aggregate would own or control securities of the Corporation (excluding any
Class B Common being converted and disposed of in connection with such
Conversion Event) which possess in the aggregate the ordinary voting power to
elect a majority of the Corporation's directors, (d) any sale of securities of
the Corporation to a person or group of persons (within the meaning of the 1934
Act) if, after such sale, such person or group of persons would not, in the
aggregate, own, control or have the right to acquire more than two percent (2%)
of the outstanding securities of any class of voting securities of the
Corporation, and (e) a merger, consolidation or similar transaction involving
the Corporation if, after such transaction, a person or group of persons (within
the meaning of the 1934 Act) in the aggregate would own or control securities
which possess in the aggregate the ordinary voting power to elect a majority of
the surviving corporation's directors (provided that the transaction has been
approved by the Corporation's Board of Directors or a committee thereof). For
purposes of this paragraph 4B, "person" shall include any natural person and any
------
corporation, partnership, joint venture, trust, unincorporated organization and
any other entity or organization.
(iii) Each holder of Class B Common shall be entitled to convert
shares of Class B Common in connection with any Conversion Event if such holder
reasonably believes that such Conversion Event shall be consummated, and a
written request for conversion from any holder of Class B Common to the
Corporation stating such holder's reasonable belief that a Conversion Event
shall occur shall be conclusive and shall obligate the Corporation to effect
such conversion in a timely manner so as to enable each such holder to
participate in such Conversion Event. The Corporation shall not cancel the
shares of Class B Common so converted before the tenth day following such
Conversion Event and shall reserve such shares until such tenth day for
reissuance in compliance with the next sentence. If any shares of Class B
Common are converted into shares of Class A Common in connection with a
Conversion Event and such shares of Class A Common are not actually distributed,
disposed of or sold pursuant to such Conversion Event, such shares of
<PAGE>
Class A Common shall be promptly converted back into the same number of shares
of Class B Common.
43. Conversion Procedure.
--------------------
(i) Unless otherwise provided in connection with a Conversion Event
with respect to the Class B Common, each conversion of shares of one class of
Common Stock into shares of the other class of Common Stock shall be effected by
the surrender of the certificate or certificates representing the shares to be
converted at the principal office of the Corporation at any time during normal
business hours, together with a written notice by the holder of such Common
Stock stating that such holder desires to convert the shares, or a stated number
of the shares, of such Common Stock represented by such certificate or
certificates into shares of the other class of Common Stock. Unless otherwise
provided in connection with a Conversion Event, each conversion shall be deemed
to have been effected as of the close of business on the date on which such
certificate or certificates have been surrendered and such notice has been
received, and at such time the rights of the holder of the converted Class B
Common or Class A Common, as the case may be, as such holder shall cease and the
person or persons in whose name or names the certificate or certificates for
shares of Class A Common or Class B Common are to be issued upon such conversion
shall be deemed to have become the holder or holders of record of the shares of
Class A Common or Class B Common represented thereby.
(ii) Promptly after the surrender of certificates and the receipt of
written notice, the Corporation shall issue and deliver in accordance with the
surrendering holder's instructions (a) the certificate or certificates for the
Class A Common or Class B Common issuable upon such conversion and (b) a
certificate representing any Class B Common or Class A Common which was
represented by the certificate or certificates delivered to the Corporation in
connection with such conversion but which was not converted.
(iii) The issuance of certificates for Class A Common upon conversion
of Class B Common and for Class B Common upon conversion of Class A Common shall
be made without charge to the holders of such shares for any issuance tax in
respect thereof or other cost incurred by the Corporation in connection with
such conversion and the related issuance of Class A Common or Class B Common, as
the case may be.
(iv) The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Class A Common and Class B Common,
solely for the purpose of issuance upon the conversion of the Class B Common and
Class A Common, respectively, such number of shares of Class B Common and Class
A Common issuable upon the conversion of all outstanding Class A Common and
Class B Common, as the case may be. All shares of Common Stock which are so
issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such shares of
Common Stock may be so issued without violation of any applicable law or
governmental regulation or any requirements of any domestic
<PAGE>
securities exchange upon which shares of Common Stock may be listed (except for
official notice of issuance which shall be immediately transmitted by the
Corporation upon issuance).
(v) The Corporation shall not close its books against the transfer of
shares of Common Stock in any manner which would interfere with the timely
conversion of any shares of Common Stock. The Corporation shall assist and
cooperate with any holder of Common Stock required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of Common Stock hereunder (including, without limitation, making any
filings required to be made by the Corporation) and the Corporation shall pay
all filing fees and other expenses incurred by such holder in connection with
any required filings or other actions under any applicable laws and regulations
(including Hart-Scott-Rodino Antitrust Improvements Act of 1976 and related laws
and regulations, as amended).
44. Stock Splits. If the Corporation in any manner subdivides or
------------
combines the outstanding shares of one class of Common Stock, the outstanding
shares of the other class of Common Stock shall be proportionately subdivided or
combined in a similar manner.
Section 1 Registration of Transfer. The Corporation shall keep at its
------------------------
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of shares of Common Stock. Upon the surrender
of any certificate representing shares of any class of Common Stock at such
place, the Corporation shall, at the request of the registered holder of such
certificate, execute and deliver a new certificate or certificates in exchange
therefor representing in the aggregate the number of shares of such class
represented by the surrendered certificate, and the Corporation forthwith shall
cancel such surrendered certificate. Each such new certificate shall be
registered in such name and shall represent such number of shares of such class
as is requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate. The issuance of
new certificates shall be made without charge to the holders of the surrendered
certificates for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such issuance.
Section 1 Replacement. Upon receipt of evidence reasonably satisfactory to
-----------
the Corporation (an affidavit of the registered holder shall be satisfactory) to
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing one or more shares of any class of Common Stock, an din the case of
any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 1 Notices. All notices referred to herein shall be in writing,
-------
shall be delivered personally or by first class mail, postage prepaid, and shall
be deemed to have been given when so delivered or mailed to the Corporation at
its principal executive offices and to any
<PAGE>
stockholder at such holder's address as it appears in the stock records of the
Corporation (unless otherwise specified in a written notice to the Corporation
by such holder).
Section 1 Amendment and Waiver. No amendment or waiver of any provision of
--------------------
this Part C shall be effective without the prior written approval of the holders
of a majority of the then outstanding Class B Common voting as a separate class.
D. CLASS A AND CLASS B CONVERTIBLE PREFERRED STOCK
-----------------------------------------------
Except as otherwise provided in this Part D or as otherwise required
by applicable law, all shares of Class A Preferred and Class B Preferred shall
be identical in all respects and shall entitle the holders thereof to the same
rights, preferences and privileges, subject to the same qualifications,
limitations and restrictions, as set forth herein. All defined terms in this
Part D shall have the meanings ascribed to such terms in this Part D, unless
otherwise indicated.
Section 1 Dividends.
---------
91. General Obligation. When and as declared by BankVest Capital
------------------
Corp.'s (the "Corporation") Board of Directors and to the extent permitted under
-----------
the Business Corporation Law of Massachusetts, the Corporation shall pay
preferential dividends in cash to the holders of the Junior Preferred as
provided in this Section 1. Except as otherwise provided in this Part D,
dividends on each share of the Junior Preferred (a "Share") shall accrue on a
-----
daily basis at the rate of 7% per annum of the sum of the Liquidation Value
thereof plus all accumulated and unpaid dividends thereon from and including the
date of issuance of such Share to and including the first to occur of (i) the
date on which the Liquidation Value of such Share (plus all accrued and unpaid
dividends thereon and all other amounts payable with respect thereto) is paid to
the holder thereof in connection with the liquidation or deemed liquidation of
the Corporation or the redemption of such Share by the Corporation, (ii) the
date on which such Share is converted into shares of Conversion Stock under this
Part D or (iii) the date on which such Share is otherwise acquired by the
Corporation. Such dividends shall accrue whether or not they have been declared
and whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends, and such dividends shall be
cumulative such that all accrued and unpaid dividends shall be fully paid or
declared with funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with respect to any
Junior Securities. The date on which the Corporation initially issues any Share
shall be deemed to be its "date of issuance" regardless of the number of times
----------------
transfer of such Share is made on the stock records maintained by or for the
Corporation and regardless of the number of certificates which may be issued to
evidence such Share.
92. Dividend Reference Dates. To the extent not paid on March 31,
------------------------
June 30, September 30 and December 31 of each year, beginning June 30, 1996 (the
"Dividend Reference Dates"), all dividends which have accrued on each Share
------------------------
outstanding during the three-month period (or other period in the case of the
initial Dividend Reference Date) ending upon each such Dividend
<PAGE>
Reference Date shall be accumulated and shall remain accumulated dividends with
respect to such Share until paid to the holder thereof.
93. Distribution of Partial Dividend Payments. Except as otherwise
-----------------------------------------
provided in this Part D, if at any time the Corporation pays less than the total
amount of dividends then accrued with respect to the Junior Preferred, such
payment shall be distributed pro rata among the holders thereof based upon the
number of Shares held by each such holder.
94. Participating Dividends. In the event that the Corporation
-----------------------
declares or pays any dividends upon the Common Stock (whether payable in cash,
securities or other property) other than dividends payable solely in shares of
Common Stock, the Corporation shall also declare and pay to the holders of the
Junior Preferred at the same time that it declares and pays such dividends to
the holders of the Common Stock, the dividends which would have been declared
and paid with respect to the Common Stock issuable upon conversion of the Junior
Preferred had all of the outstanding Junior Preferred been converted immediately
prior to the record date for such dividend, or if no record date is fixed, the
date as of which the record holders of Common Stock entitled to such dividends
are to be determined; provided that if any dividend consists of voting
-------- ----
securities, the Corporation shall make available to each holder of Class B
Preferred, at such holder's request, dividends consisting of securities which
are non-voting (except as otherwise required by law), which are otherwise
identical to the dividends consisting of voting securities and which are
convertible into such voting securities on the same terms as Class B Common
Stock is convertible into Class A Common Stock.
Section 1 Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation (whether voluntary or involuntary), each holder of Junior
Preferred shall be entitled to be paid, after payment to the holders of the
Senior Preferred of the aggregate amounts they are entitled to be paid pursuant
to Section 2 of Part E hereof but before any distribution or payment is made
upon any Junior Securities, an amount in cash equal to the aggregate Liquidation
Value of all Shares held by such holder (plus all accrued and unpaid dividends
thereon) (the "Junior Preferred Liquidation Preference"). In addition to and
---------------------------------------
after payment in full of the Junior Preferred Liquidation Preference to the
holders of the Junior Preferred under this Section 2, upon any liquidation,
dissolution or winding up of the Corporation (whether voluntary or involuntary),
the holders of the Junior Preferred shall be entitled to participate on an as if
converted basis with the holders of Common Stock as a single class in the
distribution of assets of the Corporation with respect to the Common Stock. If
upon any such liquidation, dissolution or winding up of the Corporation the
Corporation's assets to be distributed among the holders of the Junior Preferred
are insufficient to permit payment to such holders of the aggregate amount of
the Junior Preferred Liquidation Preference, then the entire assets available to
be distributed to the Corporation's stockholders (after payment to the holders
of the Senior Preferred of the aggregate amounts which they are entitled to be
paid under Section 2 of Part E hereof) shall be distributed pro rata among such
holders of Junior Preferred based upon the aggregate Liquidation Value (plus all
accrued and unpaid dividends) of the Junior Preferred held by each such holder.
Prior to the liquidation, dissolution or winding up of the Corporation, the
Corporation shall declare for payment all accrued and unpaid dividends with
respect to the Class B Preferred, but only to the extent of funds of the
Corporation legally available for the
<PAGE>
payment of dividends. Not less than 30 days prior to the payment date stated
therein, the Corporation shall mail written notice of any such liquidation,
dissolution or winding up (including any deemed liquidation, dissolution or
winding up described in the next sentence) to each record holder of Junior
Preferred by registered or certified mail (return receipt requested and postage
prepaid), setting forth in reasonable detail the amount of proceeds to be paid
with respect to each Share and each share of Common Stock in connection with
such liquidation, dissolution or winding up (or deemed liquidation, dissolution
or winding up described in the next sentence). Upon the election of the holders
of a majority of the outstanding Shares delivered to the Corporation within 20
days after receipt of the Corporation's notice to the holders of Junior
Preferred under this Section 2, any Fundamental Change or Change in Ownership
shall be deemed to be a liquidation, dissolution and winding up of the
Corporation for purposes of this Section 2, and each holder of the Junior
Preferred shall be entitled to receive payment from the Corporation (after
payment to the holders of the Senior Preferred of the aggregate amounts which
they are entitled to be paid under Section 2 of Part E hereof) of an amount in
cash equal to the aggregate Liquidation Value of all Shares held by such holder
(plus all accrued and unpaid dividends thereon) plus an amount equal to the
number of shares of Conversion Stock then issuable upon conversion of all Shares
held by such holder multiplied by the consideration payable with respect to each
share of Common Stock in such Fundamental Change or such Change in Ownership, as
the case may be. Notwithstanding anything to the contrary in this Section 2, if,
following the third anniversary of the Closing (as defined in the Purchase
Agreement), there shall occur a liquidation, dissolution or winding up of the
Corporation (or a deemed liquidation, dissolution or winding up of the
Corporation as provided in the immediately preceding sentence) and the aggregate
consideration receivable by the holders of Junior Preferred in connection
therewith in respect of the aggregate number of shares of Conversion Stock then
issuable upon conversion of all Shares held by such holders (taking into account
the payment of all accrued and unpaid dividends payable with respect to the
Junior Preferred at the time of such liquidation, dissolution or winding up or
deemed liquidation, dissolution or winding up but not taking into account the
aggregate Liquidation Value of the Junior Preferred otherwise payable in
connection therewith) is equal to or greater than such holders' Aggregate Junior
Preferred Target Return Price, then in connection with such liquidation,
dissolution or winding up or deemed liquidation, dissolution or winding up the
holders of Junior Preferred shall only be entitled to receive (after payment to
the holders of the Senior Preferred of the aggregate amounts which they are
entitled to be paid under Section 2 of Part E hereof) (i) the consideration that
would otherwise be payable in connection therewith in respect of the aggregate
number of shares of Conversion Stock then issuable upon conversion of all Shares
held by such holders (with such amount being determined without regard to the
payment of the aggregate Liquidation Value of the Junior Preferred otherwise
payable in connection therewith), plus (ii) all accrued and unpaid dividends on
the Shares of Junior Preferred held by such holders (or, if less, only so much
of such accrued and unpaid dividends as shall be necessary to cause the
aggregate consideration to be received by such holders in connection with such
liquidation, dissolution or winding up or deemed liquidation, dissolution or
winding up to be equal to each such holder's Aggregate Junior Preferred Target
Return Price).
Section 1 Priority of Junior Preferred on Dividends and Redemptions. So
---------------------------------------------------------
long as at least 33 % of the Junior Preferred remains outstanding, without the
__
prior written consent of the holders of a majority of the outstanding shares of
Junior Preferred, the Corporation shall not, nor
<PAGE>
shall it permit any Subsidiary to, redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities, nor shall the Corporation directly
or indirectly pay or declare any dividend or make any distribution upon any
Junior Securities (other than dividends payable in shares of Common Stock issued
upon the outstanding shares of Common Stock); provided that the Corporation may
-------- ----
repurchase Stockholder Shares (as defined in the Stockholders Agreement)
pursuant to an exercise of the Put (as defined in the Stockholders Agreement);
and provided further that the Corporation may repurchase shares of Common Stock
-------- -------
from former employees of the Corporation and its Subsidiaries in accordance with
arrangements approved by the Corporation's Board of Directors for an aggregate
purchase price of no more than $250,000 in any twelve-month period so long as no
Event of Noncompliance is in existence at the time of or immediately after such
repurchase or would be caused by such repurchase.
Section 1 Redemptions of Class B Preferred.
--------------------------------
121. Optional Redemptions. The Corporation may at any time and from
--------------------
time to time (but only under the circumstances and subject to the limitations
described in paragraph 3F of the Purchase Agreement and at no other time and
under no other circumstances) redeem all (but not less than all) of the Shares
of Class B Preferred then outstanding out of funds of the Corporation legally
available therefor or as otherwise specifically provided in this Section 4. The
Corporation shall become obligated to redeem all such Shares of Class B
Preferred at the time of redemption determined pursuant to paragraph 3F of the
Purchase Agreement.
122. Optional Redemption Payments. For each Share of Class B
----------------------------
Preferred which is to be redeemed under this Part D, the Corporation shall be
obligated on the Redemption Date to pay to the holder thereof (upon surrender by
such holder at the Corporation's principal office of the certificate
representing such Share) an amount in immediately available funds equal to the
Liquidation Value of such Share (plus all accrued and unpaid dividends thereon)
(the "Optional Redemption Payment"); provided that if and to the extent any such
--------------------------- -------- ----
Optional Redemption Payment for cash is prohibited by the provisions of the
Business Corporation Law of Massachusetts or would result in an event of default
under any of the Corporation's material financing agreements or if such purchase
is prohibited by any lending institution under such financing agreements in
accordance with the terms thereof, the amount of the Optional Redemption Payment
which is not able to be paid in cash shall be paid for by the issuance of
subordinated promissory notes in form and substance satisfactory to the holders
of the Class B Preferred with the principal amount payable in five equal annual
installments beginning on the first anniversary of the Redemption Date, bearing
interest (payable quarterly) at a floating rate per annum equal to the interest
rate per annum announced from time to time in the Wall Street Journal as the
-------------------
current prime rate plus 400 basis points. Prior to any redemption of Class B
Preferred, the Corporation shall declare for payment all accrued and unpaid
dividends with respect to the Shares which are to be redeemed, but only to the
extent of funds of the Corporation legally available for the payment of
dividends.
123. Dividends After Redemption Date. No Share shall be entitled to
-------------------------------
any dividends accruing after the date on which the Liquidation Value of such
Share (plus all accrued and unpaid dividends thereon) is paid to the holder of
such Share (whether in cash or the delivery of a
<PAGE>
subordinated promissory note as provided in paragraph 4B of this Part D). On
such date, all rights of the holder of such Share shall cease, and such Share
shall no longer be deemed to be issued and outstanding.
124. Redeemed or Otherwise Acquired Shares. Any Shares which are
-------------------------------------
redeemed or otherwise acquired by the Corporation shall return to the status of
authorized but unissued shares of preferred stock.
125. Other Redemptions or Acquisitions. The Corporation shall not,
---------------------------------
nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of
Junior Preferred, except as expressly authorized in this Part D.
126. Issuance of Warrants. Upon any redemption of Shares pursuant to
--------------------
paragraph 4A of this Part D, the Corporation shall issue to each holder of
redeemed Shares a warrant or warrants pursuant to the provisions of paragraph 3N
of the Purchase Agreement.
Section 1 Voting Rights. The holders of Class A Preferred shall be
-------------
entitled to notice of all stockholders meetings in accordance with the
Corporation's bylaws, and the holders of Class A Preferred shall be entitled to
vote on all matters submitted to the stockholders for a vote together with the
holders of the Class A Common Stock and Class C Preferred voting together as a
single class with each share of Class A Common Stock entitled to one vote per
share and each share of Class C Preferred entitled to the number of votes per
share determined pursuant to Section 5 of Part E hereof and each Share of Class
A Preferred entitled to a number of votes equal to (A) the number of shares of
Class A Common Stock issuable upon conversion of each share of Class A Preferred
as of the record date for such vote or, if no record date is specified, as of
the date of such vote, multiplied by (B) the quotient determined by dividing (i)
the aggregate number of shares of Common Stock issuable upon conversion of the
Junior Preferred as of the record date for such vote or, if no record date is
specified, as of the date of such vote, by (ii) the aggregate number of shares
of Class A Common Stock issuable upon conversion of the Class A Preferred as of
the record date for such vote or, if no record date is specified, as of the date
of such vote. Except as otherwise provided in this Part D and as otherwise
required by applicable law, the Class B Preferred shall have no voting rights;
provided that each holder of Class B Preferred shall be entitled to notice of
- -------- ----
all stockholders meetings at the same time and in the same manner as notice is
given to all stockholders entitled to vote at such meetings.
Section 1 Conversion of Junior Preferred into Common Stock.
------------------------------------------------
141. Conversion Procedure.
--------------------
(i) At any time and from time to time, any holder of Junior Preferred
may convert all or any portion of the Junior Preferred held by such holder into
a number of shares of Conversion Stock computed by multiplying the number of
Shares to be converted by $100 and dividing the result by the Conversion Price
then in effect.
<PAGE>
(ii) Except as otherwise provided in this Part D, each conversion of
Junior Preferred shall be deemed to have been effected as of the close of
business on the date on which the certificate or certificates representing the
Junior Preferred to be converted have been surrendered for conversion at the
principal office of the Corporation. At the time any such conversion has been
effected, the rights of the holder of the Shares converted as a holder of Junior
Preferred shall cease and the Person or Persons in whose name or names any
certificate or certificates for shares of Conversion Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of record
of the shares of Conversion Stock represented thereby.
(iii) The conversion rights of any Share subject to redemption under
this Part D shall terminate on the Redemption Date for such Share unless the
Corporation has failed to pay to the holder thereof the Liquidation Value of
such Share (plus all accrued and unpaid dividends thereon) or has failed to
issue the warrant to the holder of such Share pursuant to the provisions of
paragraph 3N of the Purchase Agreement.
(iv) Notwithstanding any other provision of this Part D, if a
conversion of Junior Preferred is to be made in connection with a Public
Offering, a Change in Ownership, a Fundamental Change or other transaction
affecting the Corporation, the conversion of any Shares of Junior Preferred may,
at the election of the holder thereof, be conditioned upon the consummation of
such transaction, in which case such conversion shall not be deemed to be
effective until such transaction has been consummated.
(v) As soon as possible after a conversion has been effected (but in
any event within five business days in the case of subparagraph (a) below), the
Corporation shall deliver to the converting holder:
(1) a certificate or certificates representing the number of shares
of Conversion Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified;
(2) subject to subparagraph (vi) below, payment in an amount equal to
all accrued dividends with respect to each Share converted which have not
been paid prior thereto, plus the amount payable under subparagraph (x)
below with respect to such conversion; and
(3) a certificate representing any Shares of Junior Preferred which
were represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not
converted.
(vi) Except as otherwise provided in this subparagraph (vi), the
Corporation shall declare the payment of all dividends payable under
subparagraph (v)(b) above. If the Corporation is not permitted under applicable
law to pay any portion of the accrued and unpaid dividends on the Junior
Preferred being converted, the Corporation shall pay such dividends to the
converting holder as soon thereafter as funds of the Corporation are legally
available for such payment. At the request
<PAGE>
of any such converting holder, the Corporation shall provide such holder with
written evidence of its obligation to such holder. Notwithstanding the
foregoing, all (but not less than all) of the accrued and unpaid dividends on
the Junior Preferred may, at the Corporation's option and in lieu of the
declaration and payment thereof, be converted into an additional number of
shares of Conversion Stock determined by dividing the amount of such accrued and
unpaid dividends by the Conversion Price then in effect.
(vii) The issuance of certificates for shares of Conversion Stock
upon conversion of Junior Preferred shall be made without charge to the holders
of such Junior Preferred for any issuance tax in respect thereof or other cost
incurred by the Corporation in connection with such conversion and the related
issuance of shares of Conversion Stock. Upon conversion of each Share of Junior
Preferred, the Corporation shall take all such actions as are necessary in order
to insure that the Conversion Stock issuable with respect to such conversion
shall be validly issued, fully paid and nonassessable, free and clear of all
taxes, liens, charges and encumbrances with respect to the issuance thereof.
(2) The Corporation shall not close its books against the transfer of
Junior Preferred or of Conversion Stock issued or issuable upon conversion of
Junior Preferred in any manner which interferes with the timely conversion of
Junior Preferred. The Corporation shall assist and cooperate with any holder of
Shares required to make any governmental filings or obtain any governmental
approval prior to or in connection with any conversion of Shares under this Part
D (including, without limitation, making any filings required to be made by the
Corporation).
(ix) The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion of the Junior Preferred, such number of
shares of Conversion Stock issuable upon the conversion of all outstanding
Junior Preferred. All shares of Conversion Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges. The Corporation shall take all such actions
as may be necessary to assure that all such shares of Conversion Stock may be so
issued without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Conversion
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Conversion Stock to be less than the number of such
shares required to be reserved under this Part D for issuance upon conversion of
the Junior Preferred.
(x) If any fractional interest in a share of Conversion Stock would,
except for the provisions of this subparagraph, be delivered upon any conversion
of the Junior Preferred, the Corporation, in lieu of delivering the fractional
share therefor, shall pay an amount to the holder thereof equal to the Market
Price of such fractional interest as of the date of conversion.
(xi) If the shares of Conversion Stock issuable by reason of
conversion of Junior Preferred are convertible into or exchangeable for any
other stock or securities of the Corporation, the Corporation shall, at the
converting holder's option, upon surrender of the Shares to be converted by such
holder as provided in this Part D together with any notice, statement or payment
required to effect such conversion or exchange of Conversion Stock, deliver to
such holder or as otherwise specified by such holder a certificate or
certificates representing the stock or securities into which the shares of
Conversion Stock issuable by reason of such conversion are so convertible or
exchangeable, registered in such name or names and in such denomination or
denominations as such holder has specified.
<PAGE>
142. Conversion Price.
----------------
(i) The initial Conversion Price shall be $12.50. In order to prevent
dilution of the conversion rights granted under this Section 6, the Conversion
Price shall be subject to adjustment from time to time pursuant to this
paragraph 6B.
(ii) If and whenever the Corporation issues or sells, or in accordance
with paragraph 6C of this Part D is deemed to have issued or sold, any shares of
its Common Stock for a consideration per share less than the Conversion Price in
effect immediately prior to the time of such issue or sale, then immediately
upon such issue or sale or deemed issue or sale the Conversion Price shall be
reduced to the Conversion Price determined by dividing (a) the sum of (1) the
product derived by multiplying the Conversion Price in effect immediately prior
to such issue or sale by the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (2) the consideration, if any,
received by the Corporation upon such issue or sale and any other issuances or
sales made contemporaneously therewith, by (b) the number of shares of Common
Stock Deemed Outstanding immediately after such issue or sale and any other
issuances or sales made contemporaneously therewith.
(iii) Notwithstanding the foregoing, there shall be no adjustment in
the Conversion Price (A) as a result of any issue or sale (or deemed issue or
sale) of up to an aggregate of 300,000 shares of Common Stock to employees and
directors of the Corporation and its Subsidiaries pursuant to stock option plans
and stock ownership plans approved by the Corporation's Board of Directors (as
such number of shares is proportionately adjusted for subsequent stock splits,
combinations and dividends affecting the Common Stock and as such number
includes all such stock options and purchase rights outstanding at the time of
the issuance of the Senior Preferred or exercised for shares of Common Stock
prior to the time of issuance of the Senior Preferred) or (B) upon conversion of
any shares of Senior Preferred.
143. Effect on Conversion Price of Certain Events. For purposes of
--------------------------------------------
determining the adjusted Conversion Price under paragraph 6B of this Part D, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any manner
-----------------------------
grants or sells any Options and the price per share for which Common Stock is
issuable upon the exercise of such Options, or upon conversion or exchange of
any Convertible Securities issuable upon exercise of such Options, is less than
the Conversion Price in effect immediately prior to the time of the granting or
sale of such Options, then the total maximum number of shares of Common Stock
<PAGE>
issuable upon the exercise of such Options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the exercise
of such Options shall be deemed to be outstanding and to have been issued and
sold by the Corporation at the time of the granting or sale of such Options for
such price per share. For purposes of this paragraph, the "price per share for
-------------------
which Common Stock is issuable" shall be determined by dividing (A) the total
- ------------------------------
amount, if any, received or receivable by the Corporation as consideration for
the granting or sale of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon exercise of all such
Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance or sale of such Convertible
Securities and the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Conversion Price in effect immediately prior to the time of such issue or
sale, then the maximum number of shares of Common Stock issuable upon conversion
or exchange of such Convertible Securities shall be deemed to be outstanding and
to have been issued and sold by the Corporation at the time of the issuance or
sale of such Convertible Securities for such price per share. For the purposes
of this paragraph, the "price per share for which Common Stock is issuable"
--------------------------------------------------
shall be determined by dividing (A) the total amount received or receivable by
the Corporation as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration, if
any, payable to the Corporation upon the conversion or exchange thereof, by (B)
the total maximum number of shares of Common Stock issuable upon the conversion
or exchange of all such Convertible Securities. No further adjustment of the
Conversion Price shall be made when Common Stock is actually issued upon the
conversion or exchange of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustments of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 6, no further adjustment of the Conversion
Price shall be made by reason of such issue or sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock changes at any time, the Conversion Price in effect at the time of such
change shall be immediately adjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold. For purposes of this paragraph 6C, if the terms of any Option or
Convertible Security which was outstanding as of the date of issuance of the
Junior Preferred are changed in the
<PAGE>
manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change; provided that no such change shall at any time cause the
-------- ----
Conversion Price under this Part D to be increased.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any right
- ----------
to convert or exchange any Convertible Security without the exercise of any such
Option or right, the Conversion Price then in effect under this Part D shall be
adjusted immediately to the Conversion Price which would have been in effect at
the time of such expiration or termination had such Option or Convertible
Security, to the extent outstanding immediately prior to such expiration or
termination, never been issued. For purposes of this paragraph 6C, the
expiration or termination of any Option or Convertible Security which was
outstanding as of the date of issuance of the Junior Preferred shall not cause
the conversion Price under this Part D to be adjusted unless, and only to the
extent that, a change in the terms of such Option or Convertible Security caused
it to be deemed to have been issued after the date of issuance of the Junior
Preferred.
(v) Calculation of Consideration Received. If any Common Stock,
-------------------------------------
Option or Convertible Security is issued or sold or deemed to have been issued
or sold for cash, the consideration received therefor shall be deemed to be the
amount received by the Corporation therefor (net of discounts, commissions and
related expenses). If any Common Stock, Option or Convertible Security is
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Corporation shall be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Corporation shall be the Market Price thereof as of the date of receipt. If any
Common Stock, Option or Convertible Security is issued to the owners of the non-
surviving entity in connection with any merger in which the Corporation is the
surviving corporation, the amount of consideration therefor shall be deemed to
be the fair value of such portion of the net assets and business of the non-
surviving entity as is attributable to such Common Stock, Option or Convertible
Security, as the case may be. The fair value of any consideration other than
cash and securities shall be determined jointly by the Corporation and the
holders of a majority of the outstanding Junior Preferred. If such parties are
unable to reach agreement within a reasonable period of time, the fair value of
such consideration shall be determined by an independent appraiser experienced
in valuing such type of consideration jointly selected by the Corporation and
the holders of a majority of the outstanding Junior Preferred. The
determination of such appraiser shall be final and binding upon the parties, and
the fees and expenses of such appraiser shall be borne one-half by the
Corporation and one-half by the holders of the outstanding Junior Preferred (pro
rata among such holders based upon the number of Shares held by each such
holder).
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the Option
shall be deemed to have been issued for a consideration of $.01.
<PAGE>
(vii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Corporation takes a record of the holders
-----------
of Common Stock for the purpose of entitling them (a) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (b) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or upon the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the case
may be.
144. Subdivision or Combination of Common Stock. If the Corporation
------------------------------------------
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced, and if the Corporation at any
time combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
145. Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Corporation's assets or other
transaction, in each case which is effected in such a manner that the holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock, is referred to in this Part D as an "Organic Change." Prior to
--------------
the consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance reasonably satisfactory to the holders of a
majority of the Junior Preferred then outstanding) to insure that each of the
holders of Junior Preferred shall thereafter have the right to acquire and
receive, in lieu of or in addition to (as the case may be) the shares of
Conversion Stock immediately theretofore acquirable and receivable upon the
conversion of such holder's Junior Preferred, such shares of stock, securities
or assets as such holder would have received in connection with such Organic
Change if such holder had converted its Junior Preferred immediately prior to
such Organic Change. In each such case, the Corporation shall also make
appropriate provisions (in form and substance satisfactory to the holders of a
majority of the Junior Preferred then outstanding) to insure that the provisions
of this Section 6 and Sections 8 and 9 of this Part D shall thereafter be
applicable to the Junior Preferred (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is other than the Corporation, an immediate adjustment of the Conversion Price
to the value for the Common Stock reflected by the terms of such consolidation,
merger or sale, and a corresponding immediate adjustment in the number of shares
of Conversion Stock acquirable and receivable upon conversion of Junior
Preferred, if the value so reflected is less than the Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Corporation shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the
<PAGE>
successor entity (if other than the Corporation) resulting from consolidation or
merger or the entity purchasing such assets assumes by written instrument (in
form and substance reasonably satisfactory to the holders of a majority of the
Junior Preferred then outstanding), the obligation to deliver to each such
holder such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire. The provisions of
Section 2 of this Part D shall apply in lieu of the provisions of this paragraph
6E in the event that any such Organic Change also constitutes a Fundamental
Change or a Change in Ownership.
146. Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 6 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Corporation's Board of Directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of Junior Preferred;
provided that no such adjustment shall increase the Conversion Price as
- -------- ----
otherwise determined pursuant to this Section 6 or decrease the number of shares
of Conversion Stock issuable upon conversion of each Share of Junior Preferred.
147. Notices.
-------
(1) Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Junior
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders of
Junior Preferred at least 20 days prior to the date on which the Corporation
closes its books or takes a record (a) with respect to any dividend or
distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the holders
of Junior Preferred at least 20 days prior to the date on which any Organic
Change shall take place.
148. Mandatory Conversion. The Corporation may at any time require
--------------------
the conversion of all of the outstanding Junior Preferred if the Corporation is
at such time effecting a Qualified Public Offering. Any such mandatory
conversion shall only be effected at the time of and subject to the closing of
the sale of such shares pursuant to such Qualified Public Offering and upon
written notice of such mandatory conversion delivered to all holders of Junior
Preferred at least seven days prior to such closing.
Section 1 Conversion of Class B Preferred into Class A Preferred.
------------------------------------------------------
151. Conversion.
----------
<PAGE>
(i) In connection with the occurrence (or the expected occurrence as
described in subparagraph 7A(iii) of this Part D) of any Conversion Event, each
holder of Class B Preferred shall be entitled to convert into an equal number of
shares of Class A Preferred any or all of the shares of such holder's Class B
Preferred being (or expected to be) distributed, disposed of or sold in
connection with such Conversion Event. In addition, PNC shall be entitled to
convert into an equal number of Shares of Class A Preferred any or all of the
Shares of such holder's Class B Preferred at any time following approval from
the Federal Reserve Board permitting PNC to hold voting securities of the
Corporation.
(ii) For purposes of this paragraph 7A, a "Conversion Event" shall
----------------
mean (a) any public offering or public sale of securities of the Corporation
(including a public offering registered under the Securities Act of 1933 and a
public sale pursuant to Rule 144 of the Securities and Exchange Commission or
any similar rule then in force), (b) any sale of securities of the Corporation
to a Person or group of Persons (within the meaning of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) if, after such sale, such Person or
--------
group of Persons in the aggregate would own or control securities which possess
in the aggregate the ordinary voting power to elect a majority of the
Corporation's directors (provided that such sale has been approved by the
Corporation's Board of Directors or a committee thereof), (c) any sale of
securities of the Corporation to a Person or group of Persons (within the
meaning of the 1934 Act) if, after such sale, such Person or group of Persons in
the aggregate would own or control securities of the Corporation (excluding any
Class B Preferred being converted and disposed of in connection with such
Conversion Event) which possess in the aggregate the ordinary voting power to
elect a majority of the Corporation's directors, (d) any sale of securities of
the Corporation to a Person or group of Persons (within the meaning of the 1934
Act) if, after such sale, such Person or group of Persons would not, in the
aggregate, own, control or have the right to acquire more than two percent (2%)
of the outstanding securities of any class of voting securities of the
Corporation, and (e) a merger, consolidation or similar transaction involving
the Corporation if, after such transaction, a Person or group of Persons (within
the meaning of the 1934 Act) in the aggregate would own or control securities
which possess in the aggregate the ordinary voting power to elect a majority of
the surviving corporation's directors (provided that the transaction has been
approved by the Corporation's Board of Directors or a committee thereof).
(iii) Each holder of Class B Preferred shall be entitled to convert
shares of Class B Preferred in connection with any Conversion Event if such
holder reasonably believes that such Conversion Event shall be consummated, and
a written request for conversion from any holder of Class B Preferred to the
Corporation stating such holder's reasonable belief that a Conversion Event
shall occur shall be conclusive and shall obligate the Corporation to effect
such conversion in a timely manner so as to enable each such holder to
participate in such Conversion Event. The Corporation shall not cancel the
shares of Class B Preferred so converted before the tenth day following such
Conversion Event and shall reserve such shares until such tenth day for
reissuance in compliance with the next sentence. If any shares of Class B
Preferred are converted into shares of Class A Preferred in connection with a
Conversion Event and such shares of Class A Preferred are not actually
distributed, disposed of or sold pursuant to such Conversion Event, such shares
of
<PAGE>
Class A Preferred shall be promptly converted back into the same number of
shares of Class B Preferred.
152. Conversion Procedure.
--------------------
(i) Unless otherwise provided in connection with a Conversion Event,
each conversion of Shares of Class B Preferred shall be effected by the
surrender of the certificate or certificates representing the Shares of Class B
Preferred to be converted at the principal office of the Corporation at any time
during normal business hours, together with a written notice by the holder of
such Class B Preferred stating that (a) such holder desires to convert the
Shares, or a stated number of the Shares, of such Class B Preferred represented
by such certificate or certificates into Shares of Class A Preferred and (b) in
the case of a conversion pursuant to the last sentence of subparagraph 7A(i) of
this Part D, such holder has received the requisite approval referred to therein
(and such statement shall obligate the Corporation to issue such shares of Class
A Preferred). Unless otherwise provided in connection with a Conversion Event,
each conversion shall be deemed to have been effected as of the close of
business on the date on which such certificate or certificates have been
surrendered and such notice has been received, and at such time the rights of
the holder of the converted Class B Preferred as such holder shall cease and the
Person or Persons in whose name or names the certificate or certificates for
Shares of Class A Preferred are to be issued upon such conversion shall be
deemed to have become the holder or holders of record of the Shares of Class B
Preferred represented thereby.
(ii) Promptly (and in any event within three business days) after the
surrender of certificates and the receipt of written notice, the Corporation
shall issue and deliver in accordance with the surrendering holder's
instructions (a) the certificate or certificates for the Shares of Class A
Preferred issuable upon such conversion and (b) a certificate representing any
Class B Preferred which was represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but which was
not converted.
(iii) The issuance of certificates for Class A Preferred upon
conversion of Class B Preferred shall be made without charge to the holders of
such shares for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such conversion and the related issuance of
Class A Preferred.
(iv) The Corporation shall at all times reserve and keep available out
of its authorized but unissued Shares of Class A Preferred, solely for the
purpose of issuance upon the conversion of the Class B Preferred, such number of
Shares of Class A Preferred as are issuable upon the conversion of all
outstanding Class B Preferred. All shares of Class A Preferred which are so
issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such Shares of
Class A Preferred may be so issued without violation of any applicable law or
governmental regulation.
<PAGE>
(v) The Corporation shall not close its books against the transfer of
Shares of Class A Preferred in any manner which would interfere with the timely
conversion of any shares of Class B Preferred. The Corporation shall assist and
cooperate with any holder of Class B Preferred required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of Class B Preferred under this Part D (including, without
limitation, making any filings required to be made by the Corporation) and the
Corporation shall pay all filing fees and other expenses incurred by any such
holder in connection with any required filings or other actions under any
applicable laws and regulations (including the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended).
153. Stock Splits. If the Corporation in any manner subdivides or
------------
combines the outstanding shares of one class of Junior Preferred, the
outstanding shares of the other class of Junior Preferred shall be
proportionately subdivided or combined in a similar manner.
Section 1 Purchase Rights. If at any time the Corporation grants, issues
---------------
or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of Common Stock (the "Purchase Rights"), then each holder of Junior
---------------
Preferred shall be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Conversion Stock
acquirable upon conversion of such holder's Junior Preferred immediately before
the date on which a record is taken for the grant, issuance or sale of such
Purchase Rights, or if no such record is taken, the date as of which the record
holders of Common Stock are to be determined for the grant, issue or sale of
such Purchase Rights; provided that if the Purchase Rights involve voting
-------- ----
securities, the Corporation shall make available to each holder of Class B
Preferred, at such holder's request, Purchase Rights involving securities which
are non-voting (except as otherwise required by law), which are otherwise
identical to the Purchase Rights involving voting securities and which are
convertible into such voting securities on the same terms as Class B Common
Stock is convertible into Class A Common Stock.
Section 1 Events of Noncompliance.
-----------------------
171. Definition. An Event of Noncompliance shall have occurred if:
----------
(i) the Corporation fails to pay the full amount of the Put Price (as
defined in the Stockholders Agreement) in cash at the Put Closing (as defined in
the Stockholders Agreement) in accordance with the terms of the Stockholders
Agreement at a time it is prevented from doing so under the provisions of its
material financing agreements with financial institutions or other institutional
lenders;
(ii) the Corporation fails to pay the full amount of the Put Price (as
defined in the Stockholders Agreement) in cash at the Put Closing (as defined in
the Stockholders Agreement) in accordance with the terms of the Stockholders
Agreement to the extent it is permitted to do so under the provisions of its
material financing agreements with financial institutions or other institutional
lenders;
<PAGE>
(iii) the Corporation breaches or otherwise fails to perform or
observe any covenant set forth in paragraphs 3D, 3F, 3J or 3N of the Purchase
Agreement;
(iv) the Corporation breaches or otherwise fails to perform or observe
any other covenant set forth in this Part D or in the Purchase Agreement;
(v) any representation or warranty contained in the Purchase Agreement
or required to be furnished to any holder of Junior Preferred pursuant to the
Purchase Agreement, or any information contained in writing required to be
furnished by the Corporation or any Subsidiary to any holder of Junior
Preferred, is false or misleading in any material respect on the date made or
furnished;
(vi) the Corporation or any material Subsidiary makes an assignment
for the benefit of creditors or admits in writing its inability to pay its debts
generally as they become due; or an order, judgment or decree is entered
adjudicating the Corporation or any material Subsidiary bankrupt or insolvent;
or any order for relief with respect to the Corporation or any material
Subsidiary is entered under the Federal Bankruptcy Code; or the Corporation or
any material Subsidiary petitions or applies to any tribunal for the appointment
of a custodian, trustee, receiver or liquidator of the Corporation or any
material Subsidiary or of any substantial part of the assets of the Corporation
or any material Subsidiary, or commences any proceeding (other than a proceeding
for the voluntary liquidation and dissolution of a Subsidiary) relating to the
Corporation or any material Subsidiary under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution or liquidation law of
any jurisdiction; or any such petition or application is filed, or any such
proceeding is commenced, against the Corporation or any material Subsidiary and
either (a) the Corporation or any such Subsidiary by any act indicates its
approval thereof, consent thereto or acquiescence therein or (b) such petition,
application or proceeding is not dismissed within 60 days;
(vii) a judgment in excess of $250,000 is rendered against the
Corporation or any material Subsidiary and, within 60 days after entry thereof,
such judgment is not discharged or execution thereof stayed pending appeal, or
within 60 days after the expiration of any such stay, such judgment is not
discharged;
(viii) the Corporation or any Subsidiary defaults in the performance
of any obligation or agreement if the effect of such default is to cause an
amount exceeding $250,000 to become due prior to its stated maturity; or
(ix) there shall have occurred an Event of Noncompliance (as defined
in Part E hereof).
172. Consequences of Events of Noncompliance.
---------------------------------------
<PAGE>
(i) If an Event of Noncompliance of the type described in subparagraph
9A(iv) of this Part D has occurred and continues for a period of 30 days or any
other Event of Noncompliance has occurred, the dividend rate on the Junior
Preferred shall increase immediately by an increment of two (2) percentage
points. Thereafter, until such time as no Event of Noncompliance exists, the
dividend rate shall increase automatically at the end of each succeeding 90-day
period by an additional increment of two (2) percentage points (but in no event
shall the dividend rate exceed 13%). Any increase of the dividend rate
resulting from the operation of this subparagraph shall terminate as of the
close of business on the date on which no Event of Noncompliance exists, subject
to subsequent increases pursuant to this paragraph.
(ii) If an Event of Noncompliance of the type described in
subparagraph 9A(ii) or (viii) of this Part D has occurred, the holder or holders
of a majority of the Junior Preferred then outstanding may demand (by written
notice delivered to the Corporation) immediate redemption of all or any portion
of the Junior Preferred owned by such holder or holders at a price per Share
equal to the Liquidation Value thereof (plus all accrued and unpaid dividends
thereon) plus an amount equal to the number of shares of Conversion Stock then
issuable upon conversion of such Share multiplied by the Market Price per share
of Conversion Stock as of such date. The Corporation shall give prompt written
notice of such election to the other holders of Junior Preferred (but in any
event within five days after receipt of the initial demand for redemption), and
each such other holder may demand immediate redemption of all or any portion of
such holder's Junior Preferred by giving written notice thereof to the
Corporation within seven days after receipt of the Corporation's notice. The
Corporation shall redeem all Junior Preferred as to which rights under this
paragraph have been exercised within 15 days after receipt of the initial demand
for redemption.
(iii) If an Event of Noncompliance of the type described in
subparagraph 9A(vi) of this Part D has occurred, all of the Junior Preferred
then outstanding shall be subject to immediate redemption by the Corporation
(without any action on the part of the holders of the Junior Preferred) at a
price per Share equal to the Liquidation Value thereof (plus all accrued and
unpaid dividends thereon) plus an amount equal to the number of shares of
Conversion Stock then issuable upon conversion of such Share multiplied by the
Market Price per share of Conversion Stock as of such date. The Corporation
shall immediately redeem all Junior Preferred upon the occurrence of such Event
of Noncompliance.
(iv) If an Event of Noncompliance of the type described in
subparagraph 9A(ii), 9A(iii), 9A(vi) or 9A(viii) of this Part D has occurred,
the number of directors constituting the Corporation's Board of Directors shall,
at the request of the holders of a majority of the Class A Preferred then
outstanding, be increased by such number which shall constitute a minimum
majority of the Board of Directors, and the holders of Class A Preferred shall
have the special right, voting separately as a single class (with each Share
being entitled to one vote) and to the exclusion of all other classes of the
Corporation's stock, to elect individuals to fill such newly created
directorships, to remove any individuals elected to such directorships and to
fill any vacancies in such directorships. The special right of the holders of
Class A Preferred to elect members of the Board of Directors may be exercised at
the special meeting called pursuant to this subparagraph (iv), at any annual or
other special meeting of stockholders and, to the extent and in the manner
permitted by
<PAGE>
applicable law, pursuant to a written consent in lieu of a stockholders meeting.
Such special right shall continue until such time as there is no longer any
Event of Noncompliance in existence, at which time such special right shall
terminate subject to revesting upon the occurrence and continuation of any Event
of Noncompliance which gives rise to such special right under this Part D. At
any time when such special right has vested in the holders of Class A Preferred,
a proper officer of the Corporation shall, upon the written request of the
holder of at least 10% of the Class A Preferred then outstanding, addressed to
the secretary of the Corporation, call a special meeting of the holders of Class
A Preferred for the purpose of electing directors pursuant to this subparagraph.
Such meeting shall be held at the earliest legally permissible date at the
principal office of the Corporation, or at such other place designated by the
holders of at least 10% of the Class A Preferred then outstanding. If such
meeting has not been called by a proper officer of the Corporation within 10
days after personal service of such written request upon the secretary of the
Corporation or within 20 days after mailing the same to the secretary of the
Corporation at its principal office, then the holders of at least 10% of the
Class A Preferred then outstanding may designate in writing one of their number
to call such meeting at the expense of the Corporation, and such meeting may be
called by such Person so designated upon the notice required for annual meetings
of stockholders and shall be held at the Corporation's principal office, or at
such other place designated by the holders of at least 10% of the Class A
Preferred then outstanding. Any holder of Class A Preferred so designated shall
be given access to the stock record books of the Corporation for the purpose of
causing a meeting of stockholders to be called pursuant to this subparagraph. At
any meeting or at any adjournment thereof at which the holders of Class A
Preferred have the special right to elect directors, the presence, in person or
by proxy, of the holders of a majority of the Class A Preferred then outstanding
shall be required to constitute a quorum for the election or removal of any
director by the holders of the Class A Preferred exercising such special right.
The vote of a majority of such quorum shall be required to elect or remove any
such director. Any director so elected by the holders of Class A Preferred shall
continue to serve as a director until the expiration of the lesser of (a) a
period of 30 days following the date on which there is no longer any Event of
Noncompliance in existence or (b) the remaining period of the full term for
which such director has been elected. After the expiration of such 30-day period
or when the full term for which such director has been elected ceases (provided
that the special right to elect directors has terminated), as the case may be,
the number of directors constituting the board of directors of the Corporation
shall decrease to such number as constituted the whole board of directors of the
Corporation immediately prior to the occurrence of the Event or Events of
Noncompliance giving rise to the special right to elect directors.
(v) If any Event of Noncompliance exists, each holder of Junior
Preferred shall also have any other rights which such holder is entitled to
under any contract or agreement at any time and any other rights which such
holder may have pursuant to applicable law.
Section 1 Registration of Transfer. The Corporation shall keep at its
------------------------
principal office a register for the registration of Junior Preferred. Upon the
surrender of any certificate representing Junior Preferred at such place, the
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Shares represented by the
<PAGE>
surrendered certificate. Each such new certificate shall be registered in such
name and shall represent such number of Shares as is requested by the holder of
the surrendered certificate and shall be substantially identical in form to the
surrendered certificate, and dividends shall accrue on the Junior Preferred
represented by such new certificate from the date to which dividends have been
fully paid on such Preferred Stock represented by the surrendered certificate.
Section 1 Replacement. Upon receipt of evidence reasonably satisfactory to
-----------
the Corporation (an affidavit of the registered holder shall be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of Junior Preferred, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor its own agreement shall be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of Shares of such class
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate, and dividends
shall accrue on the Junior Preferred represented by such new certificate from
the date to which dividends have been fully paid on such lost, stolen, destroyed
or mutilated certificate.
Section 1 Definitions.
-----------
"Aggregate Junior Preferred Target Return Price" means, with respect
----------------------------------------------
to each holder of Junior Preferred, an amount equal to the Junior Preferred
Return Price multiplied by the number of Shares of Junior Preferred held by such
holder.
"Change in Ownership" means any sale, transfer or issuance or series
-------------------
of sales, transfers and/or issuances of Common Stock (and/or securities
convertible directly or indirectly into, or exercisable or exchangeable directly
or indirectly for, Common Stock) by the Corporation or any holders thereof which
results in any Person or group of Persons (as the term "group" is used under the
1934 Act), other than the holders of Common Stock and Junior Preferred as of the
date of the Purchase Agreement, owning more than 50% of the Common Stock
outstanding at the time of such sale, transfer or issuance or series of sales,
transfers and/or issuances (including for this purpose securities held by such
Person or Persons that are convertible directly or indirectly into, or
exercisable or exchangeable directly or indirectly for, Common Stock).
"Class A Common Stock" means the Corporation's Class A Common Stock,
--------------------
par value $1.00 per share.
"Class A Preferred" means the Corporation's Class A Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Class B Common Stock" means the Corporation's Class B Common Stock,
--------------------
par value $1.00 per share.
<PAGE>
"Class B Preferred" means the Corporation's Class B Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Class C Preferred" means the Corporation's Class C Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Class D Preferred" means the Corporation's Class D Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Common Stock" means, collectively, the Class A Common Stock, the
------------
Class B Common Stock and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time, the number
-------------------------------
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to subparagraphs 6C(i)
and 6C(ii) of this Part D whether or not the Options or Convertible Securities
are actually exercisable at such time.
"Conversion Stock" means, with respect to the Class A Preferred,
----------------
shares of Class A Common Stock and, with respect to the Class B Preferred,
shares of Class B Common Stock; provided that if there is a change such that the
-------- ----
securities issuable upon conversion of the Class A Preferred or the Class B
Preferred are issued by an entity other than the Corporation or there is a
change in the type or class of securities so issuable, then the term "Conversion
----------
Stock" shall mean one share of the security issuable upon conversion of the
- -----
Class A Preferred or the Class B Preferred, as the case may be, if such security
is issuable in shares, or shall mean the smallest unit in which such security is
issuable if such security is not issuable in shares.
"Convertible Securities" means any stock or securities directly or
----------------------
indirectly convertible into or exchangeable for Common Stock.
"Fundamental Change" means (a) any sale or transfer of more than 50%
------------------
of the assets of the Corporation and its Subsidiaries on a consolidated basis
(measured either by book value in accordance with generally accepted accounting
principles consistently applied or by fair market value determined in the
reasonable good faith judgment of the Corporation's Board of Directors) in any
transaction or series of related transactions (other than any sale or lease of
assets made in the ordinary course of business in connection with any
capitalized leases entered into by the Corporation or any of its Subsidiaries as
lessor in the ordinary course of business and other than any Liens (as defined
in the Purchase Agreement) to lending institutions incurred or granted by the
Corporation or any of its Subsidiaries in the ordinary course of business in
connection therewith) and (b) any merger or consolidation to which the
Corporation is a party, except for a merger in which the Corporation is the
surviving corporation, the terms of the Junior Preferred are not changed and the
Junior Preferred is not exchanged for cash, securities or other property, and
after giving effect to
<PAGE>
such merger, the holders of Common Stock and Junior Preferred as of the date of
the Purchase Agreement shall continue to own the Corporation's outstanding
capital stock possessing the voting power (under ordinary circumstances) to
elect a majority of the Corporation's Board of Directors.
"Junior Preferred" means, collectively, the Class A Preferred and the
----------------
Class B Preferred.
"Junior Preferred Target Return Price" means, with respect to each
------------------------------------
Share of Junior Preferred, an amount equal to (i) the Liquidation Value of such
Share, increased by (ii) thirty-six and one-half percent (36 1/2%) each year,
compounded on an annual basis measured from July 1, 1996 to the date of
calculation, pro rated for any partial years, reduced by (iii) the per share
amount of any dividends or other distributions on account of such Share actually
made and paid prior to the date of such calculation (excluding, however, any
dividends paid (or to be paid) pursuant to Section 2 of this Part D in
connection with a liquidation or deemed liquidation of the Corporation).
"Junior Securities" means any capital stock or other equity securities
-----------------
of the Corporation, except for the Senior Preferred and Junior Preferred.
"Liquidation Value" of any Share as of any particular date shall be
-----------------
equal to $100.
"Market Price" of any security means the average of the closing prices
------------
of such security's sales on all securities exchanges on which such security may
at the time be listed, or, if there has been no sales on any such exchange on
any day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted in the
NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is
not quoted in the NASDAQ System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which "Market Price" is being determined and the 20 consecutive business days
------------
prior to such day. If at any time such security is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
"Market Price" shall be the fair value thereof determined jointly by the
- -------------
Corporation and the holders of a majority of the Junior Preferred. If such
parties are unable to reach agreement within a reasonable period of time, such
fair value shall be determined by an independent appraiser experienced in
valuing securities jointly selected by the Corporation and the holders of a
majority of the Junior Preferred. The determination of such appraiser shall be
final and binding upon the parties, and the fees and expenses of such appraiser
shall be borne one-half by the Corporation and one-half by the holders of the
outstanding Junior Preferred (pro rata among such holders based upon the number
of Shares held by each such holder).
"Options" means any rights, warrants or options to subscribe for or
-------
purchase Common Stock or Convertible Securities.
<PAGE>
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, a limited liability, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"PNC" means PNC Venture Corp, a Delaware corporation.
---
"Public Offering" means any offering by the Corporation of its capital
---------------
stock or equity securities to the public pursuant to an effective registration
statement under the Securities Act of 1933, as then in effect, or any comparable
statement under any similar federal statute then in force; provided that for
-------- ----
purposes of paragraph 6F of this Part D, a Public Offering shall not include an
offering made in connection with a business acquisition or combination or an
employee benefit plan.
"Purchase Agreement" means the Purchase Agreement, dated as of May 30,
------------------
1996, by and among the Corporation and certain investors, as such agreement may
from time to time be amended in accordance with its terms.
"Qualified Public Offering" means a firm commitment underwritten
-------------------------
Public Offering of shares of the Corporation's Class A Common Stock in which (i)
the aggregate price paid by the public for such shares shall be at least
$15,000,000 and (ii) the price per share paid by the public for such shares
shall be at least equal to the greater of (A) 300% of the Conversion Price in
effect immediately prior to the closing of the sale of such shares pursuant to
such Public Offering and (B) the quotient determined by dividing (x) the Junior
Preferred Target Return Price (determined as of the date of such Public
Offering) minus the accrued and unpaid dividends actually paid (or to be paid)
per Share of Junior Preferred upon conversion of such Junior Preferred in
connection with such Public Offering by (y) the number of shares of Conversion
Stock issuable upon conversion of each Share of Junior Preferred as of the date
of such Public Offering.
"Redemption Date" as to any Share means the date specified in the
---------------
notice of any redemption at the Corporation's option or the applicable date
specified in this Part D in the case of any other redemption; provided that no
-------- ----
such date shall be a Redemption Date unless the Liquidation Value of such Share
(plus all accrued and unpaid dividends thereon and all other amounts payable
with respect thereto) is actually paid on such date as provided in Section 4 of
this Part D, and if not so paid, the Redemption Date shall be the date on which
such amount is paid as provided in Section 4 of this Part D, and the Corporation
has issued a warrant to the holder of such Share pursuant to paragraph 3N of the
Purchase Agreement.
"Senior Preferred" means, collectively, the Class C Preferred and the
----------------
Class D Preferred.
"Stockholders Agreement" means the Stockholders Agreement as defined
----------------------
in the Purchase Agreement.
<PAGE>
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that person or a combination thereof. For purposes of this Part
D, a Person or Persons shall be deemed to have a majority ownership interest in
a limited liability company, partnership, association or other business entity
if such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing general partner of such limited liability
company, partnership, association or other business entity.
Section 1 Amendment and Waiver. No amendment, modification or waiver shall
--------------------
be binding or effective with respect to any provision of Sections 1 to 14 of
this Part D without the prior written consent of the holders of a majority of
the Junior Preferred outstanding at the time such action is taken; provided that
-------- ----
no such action shall change (a) the rate at which or the manner in which
dividends on the Junior Preferred accrue or the times at which such dividends
become payable or the amount payable on redemption or liquidation of the Junior
Preferred or the times at which redemption or liquidation of Junior Preferred is
to occur, without the prior written consent of the holders of at least 75% of
the Junior Preferred then outstanding, (b) the Conversion Price of the Junior
Preferred or the number of shares or class of stock into which the Junior
Preferred is convertible, without the prior written consent of the holders of at
least 75% of the Junior Preferred then outstanding or (c) the percentage
required to approve any change described in clauses (a) and (b) above, without
the prior written consent of the holders of at least 75% of the Junior Preferred
then outstanding; and provided further that no change in the terms of this Part
-------- -------
D may be accomplished by merger or consolidation of the Corporation with another
corporation or entity unless the Corporation has obtained the prior written
consent of the holders of the applicable percentage of the Junior Preferred then
outstanding.
Section 1 Notices. Except as otherwise expressly provided under this Part
-------
D, all notices referred to in this Part D shall be in writing and shall be
delivered by registered or certified mail, return receipt requested and postage
prepaid, or by reputable overnight courier service, charges prepaid, and shall
be deemed to have been given when so mailed or sent (i) to the Corporation, at
its principal executive offices and (ii) to any stockholder, at such holder's
address as it appears in the stock records of the Corporation (unless otherwise
indicated by any such holder).
E. CLASS C AND CLASS D CONVERTIBLE PREFERRED STOCK
-----------------------------------------------
Except as otherwise provided in this Part E or as otherwise required
by applicable law, all shares of Class C Preferred and Class D Preferred shall
be identical in all respects and shall
<PAGE>
entitle the holders thereof to the same rights, preferences and privileges,
subject to the same qualifications, limitations and restrictions, as set forth
herein. All defined terms in this Part E shall have the meanings ascribed to
such terms in this Part E, unless otherwise indicated.
Section 1 Dividends.
---------
231. General Obligation. When and as declared by BankVest Capital
------------------
Corp.'s (the "Corporation") Board of Directors and to the extent permitted under
-----------
the Business Corporation Law of Massachusetts, the Corporation shall pay
preferential dividends in cash to the holders of the Senior Preferred as
provided in this Section 1. Except as otherwise provided in this Part E,
dividends on each share of the Senior Preferred (a "Share") shall accrue on a
-----
daily basis at the rate of 5% per annum of the sum of the Liquidation Value
thereof plus all accumulated and unpaid dividends thereon from and including the
date of issuance of such Share to and including the first to occur of (i) the
date on which the Liquidation Value of such Share (plus all accrued and unpaid
dividends thereon and all other amounts payable with respect thereto) is paid to
the holder thereof in connection with the liquidation or deemed liquidation of
the Corporation or the redemption of such Share by the Corporation, (ii) the
date on which such Share is converted into shares of Conversion Stock under this
Part E or (iii) the date on which such Share is otherwise acquired by the
Corporation. Such dividends shall accrue whether or not they have been declared
and whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends, and such dividends shall be
cumulative such that all accrued and unpaid dividends shall be fully paid or
declared with funds irrevocably set apart for payment before any dividends,
distributions, redemptions or other payments may be made with respect to any
Junior Securities. The date on which the Corporation initially issues any Share
shall be deemed to be its "date of issuance" regardless of the number of times
----------------
transfer of such Share is made on the stock records maintained by or for the
Corporation and regardless of the number of certificates which may be issued to
evidence such Share.
232. Dividend Reference Dates. To the extent not paid on December 31
------------------------
of each year, beginning December 31, 1998 (the "Dividend Reference Date"), all
-----------------------
dividends which have accrued on each Share outstanding during the twelve-month
period (or other period in the case of the initial Dividend Reference Date)
ending upon each such Dividend Reference Date shall be accumulated and shall
remain accumulated dividends with respect to such Share until paid to the holder
thereof.
233. Distribution of Partial Dividend Payments. Except as otherwise
-----------------------------------------
provided in this Part E, if at any time the Corporation pays less than the total
amount of dividends then accrued with respect to the Senior Preferred, such
payment shall be distributed pro rata among the holders thereof based upon the
number of Shares held by each such holder.
<PAGE>
234. Participating Dividends. In the event that the Corporation
-----------------------
declares or pays any dividends upon the Common Stock (whether payable in cash,
securities or other property) other than dividends payable solely in shares of
Common Stock, the Corporation shall also declare and pay to the holders of the
Senior Preferred at the same time that it declares and pays such dividends to
the holders of the Common Stock, the dividends which would have been declared
and paid with respect to the Common Stock issuable upon conversion of the Senior
Preferred had all of the outstanding Senior Preferred been converted immediately
prior to the record date for such dividend, or if no record date is fixed, the
date as of which the record holders of Common Stock entitled to such dividends
are to be determined; provided that if any dividend consists of voting
-------- ----
securities, the Corporation shall make available to each holder of Class D
Preferred, at such holder's request, dividends consisting of securities which
are non-voting (except as otherwise required by law), which are otherwise
identical to the dividends consisting of voting securities and which are
convertible into such voting securities on the same terms as Class B Common
Stock is convertible into Class A Common Stock.
Section 1 Liquidation. Upon any liquidation, dissolution or winding up of
-----------
the Corporation (whether voluntary or involuntary), each holder of Senior
Preferred shall be entitled to be paid, before any distribution or payment is
made upon any Junior Securities, an amount in cash equal to the greater of (i)
the aggregate Liquidation Value of all Shares held by such holder (plus all
accrued and unpaid dividends thereon), or (ii) the consideration which would
have been paid with respect to the Common Stock issuable upon conversion of the
Senior Preferred held by such holder upon any such liquidation, dissolution or
winding up of the Corporation (whether voluntary or involuntary) had all of the
outstanding Senior Preferred been converted into shares of Conversion Stock
immediately prior to such liquidation, dissolution, or winding up of the
Corporation and after giving effect to the payment of the Junior Preferred
Liquidation Preference pursuant to Section 2 of Part D hereof (plus an
additional amount equal to all accrued and unpaid dividends on the Senior
Preferred held by such holder immediately prior to such deemed conversion), and
upon the payment of the greater of the amounts determined pursuant to clauses
(i) and (ii) above, the holders of Senior Preferred shall not be entitled to any
further payment. If upon any such liquidation, dissolution or winding up of the
Corporation, the amount payable pursuant to clause (i) above is greater than the
amount payable pursuant to clause (ii) above and the Corporation's assets to be
distributed among the holders of the Senior Preferred are insufficient to permit
payment to such holders of the aggregate amount which they are entitled to paid
pursuant to clause (i) above, then the entire assets available to be distributed
to the Corporation's stockholders shall be distributed pro rata among such
holders of Senior Preferred based upon the aggregate Liquidation Value (plus all
accrued and unpaid dividends) of the Senior Preferred held by each such holder.
Prior to the liquidation, dissolution or winding up of the Corporation, the
Corporation shall declare for payment all accrued and unpaid dividends with
respect to the Class D Preferred, but only to the extent of funds of the
Corporation legally available for the payment of dividends. Not less than 30
days prior to the payment date stated therein, the Corporation shall mail
written notice of any such liquidation, dissolution or winding up (including any
deemed liquidation, dissolution or winding up described in the next sentence) to
each record holder of Senior Preferred by registered or certified mail (return
receipt requested and postage prepaid), setting forth in reasonable detail the
amount of proceeds to be paid under each of clause (i) and clause (ii) above
with respect to each Share and each share of Common
<PAGE>
Stock in connection with such liquidation, dissolution or winding up (or deemed
liquidation, dissolution or winding up described in the next sentence). Upon the
election of the holders of a majority of the outstanding Shares delivered to the
Corporation within 20 days after receipt of the Corporation's notice to the
holders of Senior Preferred under this Section 2, any Fundamental Change or
Change in Ownership shall be deemed to be a liquidation, dissolution and winding
up of the Corporation for purposes of this Section 2, and each holder of the
Senior Preferred shall be entitled to receive payment from the Corporation of an
amount in cash equal to the greater of (i) the aggregate Liquidation Value of
all Shares held by such holder (plus all accrued and unpaid dividends thereon)
or (ii) the consideration which would have been paid with respect to the Common
Stock issuable upon conversion of the Senior Preferred held by such holder upon
any such liquidation, dissolution or winding up of the Corporation (whether
voluntary or involuntary) had all of the outstanding Senior Preferred been
converted into shares of Conversion Stock immediately prior to such liquidation,
dissolution or winding up of the Corporation and after giving effect to the
payment of the Junior Preferred Liquidation Preference pursuant to Section 2 of
Part D hereof (plus an additional amount equal to all accrued and unpaid
dividends on the Senior Preferred held by such holder immediately prior to such
deemed conversion), and upon the payment of the greater of the amounts
determined pursuant to clauses (i) and (ii) above, the holders of Senior
Preferred shall not be entitled to any further payment.
Section 1 Priority of Senior Preferred on Dividends and Redemptions. So
---------------------------------------------------------
long as at least 33 % of the Senior Preferred remains outstanding, without the
__
prior written consent of the holders of a majority of the outstanding shares of
Senior Preferred, the Corporation shall not, nor shall it permit any Subsidiary
to, redeem, purchase or otherwise acquire directly or indirectly any Junior
Securities, nor shall the Corporation directly or indirectly pay or declare any
dividend or make any distribution upon any Junior Securities (other than
dividends payable in shares of Common Stock issued upon the outstanding shares
of Common Stock); provided that the Corporation may repurchase Stockholder
-------- ----
Shares (as defined in the Stockholders Agreement) pursuant to an exercise of the
Put (as defined in the Stockholders Agreement) and the Corporation may redeem
shares of Class B Preferred pursuant to Section 4 of Part D hereof; and provided
--------
further that the Corporation may repurchase shares of Common Stock from former
- -------
employees of the Corporation and its Subsidiaries in accordance with
arrangements approved by the Corporation's Board of Directors for an aggregate
purchase price of no more than $250,000 in any twelve-month period so long as no
Event of Noncompliance is in existence at the time of or immediately after such
repurchase or would be caused by such repurchase.
Section 1 Redemptions of Class D Preferred.
--------------------------------
261. Optional Redemptions. The Corporation may at any time and from
--------------------
time to time (but only under the circumstances and subject to the limitations
described in paragraph 3F of the Purchase Agreement and at no other time and
under no other circumstances) redeem all (but not less than all) of the Shares
of Class D Preferred then outstanding out of funds of the Corporation legally
available therefor or as otherwise specifically provided in this Section 4. The
Corporation shall become obligated to redeem all such Shares of Class D
Preferred at the time of redemption determined pursuant to paragraph 3F of the
Purchase Agreement.
<PAGE>
262. Optional Redemption Payments. For each Share of Class D
----------------------------
Preferred which is to be redeemed under this Part E, the Corporation shall be
obligated on the Redemption Date to pay to the holder thereof (upon surrender by
such holder at the Corporation's principal office of the certificate
representing such Share) an amount in immediately available funds equal to the
Liquidation Value of such Share (plus all accrued and unpaid dividends thereon)
(the "Optional Redemption Payment"); provided that if and to the extent any such
--------------------------- -------- ----
Optional Redemption Payment for cash is prohibited by the provisions of the
Business Corporation Law of Massachusetts or would result in an event of default
under any of the Corporation's material financing agreements or if such purchase
is prohibited by any lending institution under such financing agreements in
accordance with the terms thereof, the amount of the Optional Redemption Payment
which is not able to be paid in cash shall be paid for by the issuance of
subordinated promissory notes in form and substance satisfactory to the holders
of the Class D Preferred with the principal amount payable in five equal annual
installments beginning on the first anniversary of the Redemption Date, bearing
interest (payable quarterly) at a floating rate per annum equal to the interest
rate per annum announced from time to time in the Wall Street Journal as the
-------------------
current prime rate plus 400 basis points. Prior to any redemption of Class D
Preferred, the Corporation shall declare for payment all accrued and unpaid
dividends with respect to the Shares which are to be redeemed, but only to the
extent of funds of the Corporation legally available for the payment of
dividends.
263. Dividends After Redemption Date. No Share shall be entitled to
-------------------------------
any dividends accruing after the date on which the Liquidation Value of such
Share (plus all accrued and unpaid dividends thereon) is paid to the holder of
such Share (whether in cash or the delivery of a subordinated promissory note as
provided in paragraph 4B of this Part E). On such date, all rights of the
holder of such Share shall cease, and such Share shall no longer be deemed to be
issued and outstanding.
264. Redeemed or Otherwise Acquired Shares. Any Shares which are
-------------------------------------
redeemed or otherwise acquired by the Corporation shall return to the status of
authorized but unissued shares of preferred stock.
265. Other Redemptions or Acquisitions. The Corporation shall not,
---------------------------------
nor shall it permit any Subsidiary to, redeem or otherwise acquire any Shares of
Senior Preferred, except as expressly authorized in this Part E.
266. Issuance of Warrants. Upon any redemption of Shares pursuant to
--------------------
paragraph 4A of this Part E, the Corporation shall issue to each holder of
redeemed Shares a warrant or warrants pursuant to the provisions of paragraph 3N
of the Purchase Agreement.
Section 1 Voting Rights. The holders of Class C Preferred shall be
-------------
entitled to notice of all stockholders meetings in accordance with the
Corporation's bylaws, and the holders of Class C Preferred shall be entitled to
vote on all matters submitted to the stockholders for a vote together with the
holders of the Class A Common Stock and Class A Preferred voting together as a
single class with each share of Class A Common Stock entitled to one vote per
share and each
<PAGE>
share of Class A Preferred entitled to the number of votes per share determined
pursuant to Section 5 of Part D hereof and each Share of Class C Preferred
entitled to a number of votes equal to (A) the number of shares of Class A
Common Stock issuable upon conversion of each share of Class C Preferred as of
the record date for such vote or, if no record date is specified, as of the date
of such vote, multiplied by (B) the quotient determined by dividing (i) the
aggregate number of shares of Common Stock issuable upon conversion of the
Senior Preferred as of the record date for such vote or, if no record date is
specified, as of the date of such vote, by (ii) the aggregate number of shares
of Class A Common Stock issuable upon conversion of the Class C Preferred as of
the record date for such vote or, if no record date is specified, as of the date
of such vote. Except as otherwise provided in this Part E and as otherwise
required by applicable law, the Class D Preferred shall have no voting rights;
provided that each holder of Class D Preferred shall be entitled to notice of
- -------- ----
all stockholders meetings at the same time and in the same manner as notice is
given to all stockholders entitled to vote at such meetings.
Section 1 Conversion of Senior Preferred into Common Stock.
------------------------------------------------
281. Conversion Procedure.
--------------------
(i) At any time and from time to time, any holder of Senior Preferred
may convert all or any portion of the Senior Preferred held by such holder into
a number of shares of Conversion Stock computed by multiplying the number of
Shares to be converted by $100 and dividing the result by the Conversion Price
then in effect.
(1) Except as otherwise provided in this Part E, each conversion of Senior
Preferred shall be deemed to have been effected as of the close of business on
the date on which the certificate or certificates representing the Senior
Preferred to be converted have been surrendered for conversion at the principal
office of the Corporation. At the time any such conversion has been effected,
the rights of the holder of the Shares converted as a holder of Senior Preferred
shall cease and the Person or Persons in whose name or names any certificate or
certificates for shares of Conversion Stock are to be issued upon such
conversion shall be deemed to have become the holder or holders of record of the
shares of Conversion Stock represented thereby.
(iii) The conversion rights of any Share subject to redemption under
this Part E shall terminate on the Redemption Date for such Share unless the
Corporation has failed to pay to the holder thereof the Liquidation Value of
such Share (plus all accrued and unpaid dividends thereon) or has failed to
issue the warrant to the holder of such Share pursuant to the provisions of
paragraph 3N of the Purchase Agreement.
(iv) Notwithstanding any other provision of this Part E, if a
conversion of Senior Preferred is to be made in connection with a Public
Offering, a Change in Ownership, a Fundamental Change or other transaction
affecting the Corporation, the conversion of any Shares of Senior Preferred may,
at the election of the holder thereof, be conditioned upon the consummation of
such transaction, in which case such conversion shall not be deemed to be
effective until such transaction has been consummated.
<PAGE>
(2) As soon as possible after a conversion has been effected (but in any
event within five business days in the case of subparagraph (a) below), the
Corporation shall deliver to the converting holder:
(1) a certificate or certificates representing the number of shares
of Conversion Stock issuable by reason of such conversion in such name or
names and such denomination or denominations as the converting holder has
specified;
(2) subject to subparagraph (vi) below, payment in an amount equal to
all accrued dividends with respect to each Share converted which have not
been paid prior thereto, plus the amount payable under subparagraph (x)
below with respect to such conversion; and
(3) a certificate representing any Shares of Senior Preferred which
were represented by the certificate or certificates delivered to the
Corporation in connection with such conversion but which were not
converted.
(3) Except as otherwise provided in this subparagraph (vi), the Corporation
shall declare the payment of all dividends payable under subparagraph (v)(b)
above. If the Corporation is not permitted under applicable law to pay any
portion of the accrued and unpaid dividends on the Senior Preferred being
converted, the Corporation shall pay such dividends to the converting holder as
soon thereafter as funds of the Corporation are legally available for such
payment. At the request of any such converting holder, the Corporation shall
provide such holder with written evidence of its obligation to such holder.
Notwithstanding the foregoing, all (but not less than all) of the accrued and
unpaid dividends on the Senior Preferred may, at the Corporation's option and in
lieu of the declaration and payment thereof, be converted into an additional
number of shares of Conversion Stock determined by dividing the amount of such
accrued and unpaid dividends by the Conversion Price then in effect.
(vii) The issuance of certificates for shares of Conversion Stock
upon conversion of Senior Preferred shall be made without charge to the holders
of such Senior Preferred for any issuance tax in respect thereof or other cost
incurred by the Corporation in connection with such conversion and the related
issuance of shares of Conversion Stock. Upon conversion of each Share of Senior
Preferred, the Corporation shall take all such actions as are necessary in order
to insure that the Conversion Stock issuable with respect to such conversion
shall be validly issued, fully paid and nonassessable, free and clear of all
taxes, liens, charges and encumbrances with respect to the issuance thereof.
(viii) The Corporation shall not close its books against the transfer
of Senior Preferred or of Conversion Stock issued or issuable upon conversion of
Senior Preferred in any manner which interferes with the timely conversion of
Senior Preferred. The Corporation shall assist and cooperate with any holder of
Shares required to make any governmental filings or obtain any governmental
approval prior to or in connection with any conversion of Shares under this Part
E (including, without limitation, making any filings required to be made by the
Corporation).
<PAGE>
(ix) The Corporation shall at all times reserve and keep available out
of its authorized but unissued shares of Conversion Stock, solely for the
purpose of issuance upon the conversion of the Senior Preferred, such number of
shares of Conversion Stock issuable upon the conversion of all outstanding
Senior Preferred. All shares of Conversion Stock which are so issuable shall,
when issued, be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges. The Corporation shall take all such actions
as may be necessary to assure that all such shares of Conversion Stock may be so
issued without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Conversion
Stock may be listed (except for official notice of issuance which shall be
immediately delivered by the Corporation upon each such issuance). The
Corporation shall not take any action which would cause the number of authorized
but unissued shares of Conversion Stock to be less than the number of such
shares required to be reserved under this Part E for issuance upon conversion of
the Senior Preferred.
(x) If any fractional interest in a share of Conversion Stock would,
except for the provisions of this subparagraph, be delivered upon any conversion
of the Senior Preferred, the Corporation, in lieu of delivering the fractional
share therefor, shall pay an amount to the holder thereof equal to the Market
Price of such fractional interest as of the date of conversion.
(xi) If the shares of Conversion Stock issuable by reason of
conversion of Senior Preferred are convertible into or exchangeable for any
other stock or securities of the Corporation, the Corporation shall, at the
converting holder's option, upon surrender of the Shares to be converted by such
holder as provided in this Part E together with any notice, statement or payment
required to effect such conversion or exchange of Conversion Stock, deliver to
such holder or as otherwise specified by such holder a certificate or
certificates representing the stock or securities into which the shares of
Conversion Stock issuable by reason of such conversion are so convertible or
exchangeable, registered in such name or names and in such denomination or
denominations as such holder has specified.
282. Conversion Price.
----------------
(1) The initial Conversion Price shall be $21.49. In order to prevent
dilution of the conversion rights granted under this Section 6, the Conversion
Price shall be subject to adjustment from time to time pursuant to this
paragraph 6B.
(ii) If and whenever the Corporation issues or sells, or in accordance
with paragraph 6C of this Part E is deemed to have issued or sold, any shares of
its Common Stock for a consideration per share less than the Conversion Price in
effect immediately prior to the time of such issue or sale, then immediately
upon such issue or sale or deemed issue or sale the Conversion Price shall be
reduced to the Conversion Price determined by dividing (a) the sum of (1) the
product derived by multiplying the Conversion Price in effect immediately prior
to such issue or sale by the number of shares of Common Stock Deemed Outstanding
immediately prior to such issue or sale, plus (2) the consideration, if any,
received by the Corporation upon such issue or sale and any other issuances or
sales made contemporaneously therewith, by (b) the number of shares of Common
Stock Deemed Outstanding immediately after such issue or sale and any other
issuances or sales made contemporaneously therewith.
<PAGE>
(2) Notwithstanding the foregoing, there shall be no adjustment in the
Conversion Price (A) as a result of any issue or sale (or deemed issue or sale)
of up to an aggregate of 300,000 shares of Common Stock to employees and
directors of the Corporation and its Subsidiaries pursuant to stock option plans
and stock ownership plans approved by the Corporation's Board of Directors (as
such number of shares is proportionately adjusted for subsequent stock splits,
combinations and dividends affecting the Common Stock and as such number
includes all such stock options and purchase rights outstanding at the time of
the issuance of the Senior Preferred or exercised for shares of Common Stock
prior to the time of issuance of the Senior Preferred), (B) upon conversion of
any shares of Junior Preferred or (C) upon the exercise of the Warrants.
283. Effect on Conversion Price of Certain Events. For purposes of
--------------------------------------------
determining the adjusted Conversion Price under paragraph 6B of this Part E, the
following shall be applicable:
(i) Issuance of Rights or Options. If the Corporation in any manner
-----------------------------
grants or sells any Options and the price per share for which Common Stock is
issuable upon the exercise of such Options, or upon conversion or exchange of
any Convertible Securities issuable upon exercise of such Options, is less than
the Conversion Price in effect immediately prior to the time of the granting or
sale of such Options, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange of the
total maximum amount of such Convertible Securities issuable upon the exercise
of such Options shall be deemed to be outstanding and to have been issued and
sold by the Corporation at the time of the granting or sale of such Options for
such price per share. For purposes of this paragraph, the "price per share for
-------------------
which Common Stock is issuable" shall be determined by dividing (A) the total
- ------------------------------
amount, if any, received or receivable by the Corporation as consideration for
the granting or sale of such Options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon exercise of all such
Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
payable to the Corporation upon the issuance or sale of such Convertible
Securities and the conversion or exchange thereof, by (B) the total maximum
number of shares of Common Stock issuable upon the exercise of such Options or
upon the conversion or exchange of all such Convertible Securities issuable upon
the exercise of such Options. No further adjustment of the Conversion Price
shall be made when Convertible Securities are actually issued upon the exercise
of such Options or when Common Stock is actually issued upon the exercise of
such Options or the conversion or exchange of such Convertible Securities.
(ii) Issuance of Convertible Securities. If the Corporation in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share for
which Common Stock is issuable upon conversion or exchange thereof is less than
the Conversion Price in effect immediately prior to the
<PAGE>
time of such issue or sale, then the maximum number of shares of Common Stock
issuable upon conversion or exchange of such Convertible Securities shall be
deemed to be outstanding and to have been issued and sold by the Corporation at
the time of the issuance or sale of such Convertible Securities for such price
per share. For the purposes of this paragraph, the "price per share for which
-------------------------
Common Stock is issuable" shall be determined by dividing (A) the total amount
- ------------------------
received or receivable by the Corporation as consideration for the issue or sale
of such Convertible Securities, plus the minimum aggregate amount of additional
consideration, if any, payable to the Corporation upon the conversion or
exchange thereof, by (B) the total maximum number of shares of Common Stock
issuable upon the conversion or exchange of all such Convertible Securities. No
further adjustment of the Conversion Price shall be made when Common Stock is
actually issued upon the conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustments of the Conversion Price had been
or are to be made pursuant to other provisions of this Section 6, no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
(iii) Change in Option Price or Conversion Rate. If the purchase
-----------------------------------------
price provided for in any Options, the additional consideration, if any, payable
upon the conversion or exchange of any Convertible Securities or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock changes at any time, the Conversion Price in effect at the time of such
change shall be immediately adjusted to the Conversion Price which would have
been in effect at such time had such Options or Convertible Securities still
outstanding provided for such changed purchase price, additional consideration
or conversion rate, as the case may be, at the time initially granted, issued or
sold. For purposes of this paragraph 6C, if the terms of any Option or
Convertible Security which was outstanding as of the date of issuance of the
Senior Preferred are changed in the manner described in the immediately
preceding sentence, then such Option or Convertible Security and the Common
Stock deemed issuable upon exercise, conversion or exchange thereof shall be
deemed to have been issued as of the date of such change; provided that no such
-------- ----
change shall at any time cause the Conversion Price under this Part E to be
increased.
(iv) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. Upon the expiration of any Option or the termination of any right
- ----------
to convert or exchange any Convertible Security without the exercise of any such
Option or right, the Conversion Price then in effect under this Part E shall be
adjusted immediately to the Conversion Price which would have been in effect at
the time of such expiration or termination had such Option or Convertible
Security, to the extent outstanding immediately prior to such expiration or
termination, never been issued. For purposes of this paragraph 6C, the
expiration or termination of any Option or Convertible Security which was
outstanding as of the date of issuance of the Senior Preferred shall not cause
the conversion Price under this Part E to be adjusted unless, and only to the
extent that, a change in the terms of such Option or Convertible Security caused
it to be deemed to have been issued after the date of issuance of the Senior
Preferred.
(1) Calculation of Consideration Received. If any Common Stock, Option or
-------------------------------------
Convertible Security is issued or sold or deemed to have been issued or sold for
cash, the consideration received therefor shall be deemed to be the amount
received by the Corporation
<PAGE>
therefor (net of discounts, commissions and related expenses). If any Common
Stock, Option or Convertible Security is issued or sold for a consideration
other than cash, the amount of the consideration other than cash received by the
Corporation shall be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of consideration
received by the Corporation shall be the Market Price thereof as of the date of
receipt. If any Common Stock, Option or Convertible Security is issued to the
owners of the non-surviving entity in connection with any merger in which the
Corporation is the surviving corporation, the amount of consideration therefor
shall be deemed to be the fair value of such portion of the net assets and
business of the non-surviving entity as is attributable to such Common Stock,
Option or Convertible Security, as the case may be. The fair value of any
consideration other than cash and securities shall be determined jointly by the
Corporation and the holders of a majority of the outstanding Senior Preferred.
If such parties are unable to reach agreement within a reasonable period of
time, the fair value of such consideration shall be determined by an independent
appraiser experienced in valuing such type of consideration jointly selected by
the Corporation and the holders of a majority of the outstanding Senior
Preferred. The determination of such appraiser shall be final and binding upon
the parties, and the fees and expenses of such appraiser shall be borne one-half
by the Corporation and one-half by the holders of the outstanding Senior
Preferred (pro rata among such holders based upon the number of Shares held by
each such holder).
(vi) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Corporation,
together comprising one integrated transaction in which no specific
consideration is allocated to such Option by the parties thereto, the Option
shall be deemed to have been issued for a consideration of $.01.
(vii) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time shall not include shares owned or held by or for
the account of the Corporation or any Subsidiary, and the disposition of any
shares so owned or held shall be considered an issue or sale of Common Stock.
(viii) Record Date. If the Corporation takes a record of the holders
-----------
of Common Stock for the purpose of entitling them (a) to receive a dividend or
other distribution payable in Common Stock, Options or in Convertible Securities
or (b) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date shall be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or upon the making of such other distribution or
the date of the granting of such right of subscription or purchase, as the case
may be.
284. Subdivision or Combination of Common Stock. If the Corporation
------------------------------------------
at any time subdivides (by any stock split, stock dividend, recapitalization or
otherwise) one or more classes of its outstanding shares of Common Stock into a
greater number of shares, the Conversion Price in effect immediately prior to
such subdivision shall be proportionately reduced, and if the Corporation at any
time combines (by reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the
Conversion Price in effect immediately prior to such combination shall be
proportionately increased.
<PAGE>
285. Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Corporation's assets or other
transaction, in each case which is effected in such a manner that the holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock, is referred to in this Part E as an "Organic Change." Prior to
--------------
the consummation of any Organic Change, the Corporation shall make appropriate
provisions (in form and substance reasonably satisfactory to the holders of a
majority of the Senior Preferred then outstanding) to insure that each of the
holders of Senior Preferred shall thereafter have the right to acquire and
receive, in lieu of or in addition to (as the case may be) the shares of
Conversion Stock immediately theretofore acquirable and receivable upon the
conversion of such holder's Senior Preferred, such shares of stock, securities
or assets as such holder would have received in connection with such Organic
Change if such holder had converted its Senior Preferred immediately prior to
such Organic Change. In each such case, the Corporation shall also make
appropriate provisions (in form and substance satisfactory to the holders of a
majority of the Senior Preferred then outstanding) to insure that the provisions
of this Section 6 and Sections 8 and 9 of this Part E shall thereafter be
applicable to the Senior Preferred (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is other than the Corporation, an immediate adjustment of the Conversion Price
to the value for the Common Stock reflected by the terms of such consolidation,
merger or sale, and a corresponding immediate adjustment in the number of shares
of Conversion Stock acquirable and receivable upon conversion of Senior
Preferred, if the value so reflected is less than the Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Corporation shall
not effect any such consolidation, merger or sale, unless prior to the
consummation thereof, the successor entity (if other than the Corporation)
resulting from consolidation or merger or the entity purchasing such assets
assumes by written instrument (in form and substance reasonably satisfactory to
the holders of a majority of the Senior Preferred then outstanding), the
obligation to deliver to each such holder such shares of stock, securities or
assets as, in accordance with the foregoing provisions, such holder may be
entitled to acquire. The provisions of Section 2 of this Part E shall apply in
lieu of the provisions of this paragraph 6E in the event that any such Organic
Change also constitutes a Fundamental Change or a Change in Ownership.
286. Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 6 but not expressly provided for by such
provisions (including, without limitation, the granting of stock appreciation
rights, phantom stock rights or other rights with equity features), then the
Corporation's Board of Directors shall make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of Senior Preferred;
provided that no such adjustment shall increase the Conversion Price as
- -------- ----
otherwise determined pursuant to this Section 6 or decrease the number of shares
of Conversion Stock issuable upon conversion of each Share of Senior Preferred.
287. Notices.
-------
<PAGE>
(i) Immediately upon any adjustment of the Conversion Price, the
Corporation shall give written notice thereof to all holders of Senior
Preferred, setting forth in reasonable detail and certifying the calculation of
such adjustment.
(ii) The Corporation shall give written notice to all holders of
Senior Preferred at least 20 days prior to the date on which the Corporation
closes its books or takes a record (a) with respect to any dividend or
distribution upon Common Stock, (b) with respect to any pro rata subscription
offer to holders of Common Stock or (c) for determining rights to vote with
respect to any Organic Change, dissolution or liquidation.
(iii) The Corporation shall also give written notice to the holders
of Senior Preferred at least 20 days prior to the date on which any Organic
Change shall take place.
288. Mandatory Conversion. The Corporation may at any time require
--------------------
the conversion of all of the outstanding Senior Preferred if the Corporation is
at such time effecting a Qualified Public Offering. Any such mandatory
conversion shall only be effected at the time of and subject to the closing of
the sale of such shares pursuant to such Qualified Public Offering and upon
written notice of such mandatory conversion delivered to all holders of Senior
Preferred at least seven days prior to such closing.
Section 1 Conversion of Class D Preferred into Class C Preferred.
------------------------------------------------------
291. Conversion.
----------
(i) In connection with the occurrence (or the expected occurrence as
described in subparagraph 7A(iii) of this Part E) of any Conversion Event, each
holder of Class D Preferred shall be entitled to convert into an equal number of
shares of Class C Preferred any or all of the shares of such holder's Class D
Preferred being (or expected to be) distributed, disposed of or sold in
connection with such Conversion Event. In addition, PNC shall be entitled to
convert into an equal number of Shares of Class C Preferred any or all of the
Shares of such holder's Class D Preferred at any time following approval from
the Federal Reserve Board permitting PNC to hold voting securities of the
Corporation.
(ii) For purposes of this paragraph 7A, a "Conversion Event" shall
----------------
mean (a) any public offering or public sale of securities of the Corporation
(including a public offering registered under the Securities Act of 1933 and a
public sale pursuant to Rule 144 of the Securities and Exchange Commission or
any similar rule then in force), (b) any sale of securities of the Corporation
to a Person or group of Persons (within the meaning of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) if, after such sale, such Person or
--------
group of Persons in the aggregate would own or control securities which possess
in the aggregate the ordinary voting power to elect a majority of the
Corporation's directors (provided that such sale has been approved by the
Corporation's Board of Directors or a committee thereof), (c) any sale of
securities of the Corporation to a Person or group of Persons (within the
meaning of the 1934 Act) if, after such sale, such Person or group of Persons in
the aggregate would own or control securities of the Corporation
<PAGE>
(excluding any Class D Preferred being converted and disposed of in connection
with such Conversion Event) which possess in the aggregate the ordinary voting
power to elect a majority of the Corporation's directors, (d) any sale of
securities of the Corporation to a Person or group of Persons (within the
meaning of the 1934 Act) if, after such sale, such Person or group of Persons
would not, in the aggregate, own, control or have the right to acquire more than
two percent (2%) of the outstanding securities of any class of voting securities
of the Corporation, and (e) a merger, consolidation or similar transaction
involving the Corporation if, after such transaction, a Person or group of
Persons (within the meaning of the 1934 Act) in the aggregate would own or
control securities which possess in the aggregate the ordinary voting power to
elect a majority of the surviving corporation's directors (provided that the
transaction has been approved by the Corporation's Board of Directors or a
committee thereof).
(iii) Each holder of Class D Preferred shall be entitled to convert
shares of Class D Preferred in connection with any Conversion Event if such
holder reasonably believes that such Conversion Event shall be consummated, and
a written request for conversion from any holder of Class D Preferred to the
Corporation stating such holder's reasonable belief that a Conversion Event
shall occur shall be conclusive and shall obligate the Corporation to effect
such conversion in a timely manner so as to enable each such holder to
participate in such Conversion Event. The Corporation shall not cancel the
shares of Class D Preferred so converted before the tenth day following such
Conversion Event and shall reserve such shares until such tenth day for
reissuance in compliance with the next sentence. If any shares of Class D
Preferred are converted into shares of Class C Preferred in connection with a
Conversion Event and such shares of Class C Preferred are not actually
distributed, disposed of or sold pursuant to such Conversion Event, such shares
of Class C Preferred shall be promptly converted back into the same number of
shares of Class D Preferred.
292. Conversion Procedure.
--------------------
(i) Unless otherwise provided in connection with a Conversion Event,
each conversion of Shares of Class D Preferred shall be effected by the
surrender of the certificate or certificates representing the Shares of Class D
Preferred to be converted at the principal office of the Corporation at any time
during normal business hours, together with a written notice by the holder of
such Class D Preferred stating that (a) such holder desires to convert the
Shares, or a stated number of the Shares, of such Class D Preferred represented
by such certificate or certificates into Shares of Class C Preferred and (b) in
the case of a conversion pursuant to the last sentence of subparagraph 7A(i) of
this Part E, such holder has received the requisite approval referred to therein
(and such statement shall obligate the Corporation to issue such shares of Class
C Preferred). Unless otherwise provided in connection with a Conversion Event,
each conversion shall be deemed to have been effected as of the close of
business on the date on which such certificate or certificates have been
surrendered and such notice has been received, and at such time the rights of
the holder of the converted Class D Preferred as such holder shall cease and the
Person or Persons in whose name or names the certificate or certificates for
Shares of Class C Preferred are to be issued upon such conversion shall be
deemed to have become the holder or holders of record of the Shares of Class D
Preferred represented thereby.
<PAGE>
(ii) Promptly (and in any event within three business days) after the
surrender of certificates and the receipt of written notice, the Corporation
shall issue and deliver in accordance with the surrendering holder's
instructions (a) the certificate or certificates for the Shares of Class C
Preferred issuable upon such conversion and (b) a certificate representing any
Class D Preferred which was represented by the certificate or certificates
delivered to the Corporation in connection with such conversion but which was
not converted.
(iii) The issuance of certificates for Class C Preferred upon
conversion of Class D Preferred shall be made without charge to the holders of
such shares for any issuance tax in respect thereof or other cost incurred by
the Corporation in connection with such conversion and the related issuance of
Class C Preferred.
(iv) The Corporation shall at all times reserve and keep available out
of its authorized but unissued Shares of Class C Preferred, solely for the
purpose of issuance upon the conversion of the Class D Preferred, such number of
Shares of Class C Preferred as are issuable upon the conversion of all
outstanding Class D Preferred. All shares of Class C Preferred which are so
issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be necessary to assure that all such Shares of
Class C Preferred may be so issued without violation of any applicable law or
governmental regulation.
(v) The Corporation shall not close its books against the transfer of
Shares of Class C Preferred in any manner which would interfere with the timely
conversion of any shares of Class D Preferred. The Corporation shall assist and
cooperate with any holder of Class D Preferred required to make any governmental
filings or obtain any governmental approval prior to or in connection with any
conversion of Class D Preferred under this Part E (including, without
limitation, making any filings required to be made by the Corporation) and the
Corporation shall pay all filing fees and other expenses incurred by any such
holder in connection with any required filings or other actions under any
applicable laws and regulations (including the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and related laws and regulations, as amended).
293. Stock Splits. If the Corporation in any manner subdivides or
------------
combines the outstanding shares of one class of Senior Preferred, the
outstanding shares of the other class of Senior Preferred shall be
proportionately subdivided or combined in a similar manner.
Section 1 Purchase Rights. If at any time the Corporation grants, issues
---------------
or sells any Options, Convertible Securities or rights to purchase stock,
warrants, securities or other property pro rata to the record holders of any
class of Common Stock (the "Purchase Rights"), then each holder of Senior
---------------
Preferred shall be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Conversion Stock
acquirable upon conversion of such holder's Senior Preferred immediately before
the date on which a record is taken for the grant, issuance or sale of such
Purchase Rights, or if no such record is taken, the date as of which the record
holders of
<PAGE>
Common Stock are to be determined for the grant, issue or sale of such Purchase
Rights; provided that if the Purchase Rights involve voting securities, the
-------- ----
Corporation shall make available to each holder of Class D Preferred, at such
holder's request, Purchase Rights involving securities which are non-voting
(except as otherwise required by law), which are otherwise identical to the
Purchase Rights involving voting securities and which are convertible into such
voting securities on the same terms as Class B Common Stock is convertible into
Class A Common Stock.
Section 1 Events of Noncompliance.
-----------------------
311. Definition. An Event of Noncompliance shall have occurred if:
----------
(i) the Corporation fails to pay the full amount of the Put Price (as
defined in the Stockholders Agreement) in cash at the Put Closing (as defined in
the Stockholders Agreement) in accordance with the terms of the Stockholders
Agreement at a time it is prevented from doing so under the provisions of its
material financing agreements with financial institutions or other institutional
lenders;
(ii) the Corporation fails to pay the full amount of the Put Price (as
defined in the Stockholders Agreement) in cash at the Put Closing (as defined in
the Stockholders Agreement) in accordance with the terms of the Stockholders
Agreement to the extent it is permitted to do so under the provisions of its
material financing agreements with financial institutions or other institutional
lenders;
(iii) the Corporation breaches or otherwise fails to perform or
observe any covenant set forth in paragraphs 3D, 3F, 3J or 3N of the Purchase
Agreement;
(iv) the Corporation breaches or otherwise fails to perform or observe
any other covenant set forth in this Part E or in the Purchase Agreement;
(v) any representation or warranty contained in the Purchase Agreement
or required to be furnished to any holder of Senior Preferred pursuant to the
Purchase Agreement, or any information contained in writing required to be
furnished by the Corporation or any Subsidiary to any holder of Senior
Preferred, is false or misleading in any material respect on the date made or
furnished;
(vi) the Corporation or any material Subsidiary makes an assignment
for the benefit of creditors or admits in writing its inability to pay its debts
generally as they become due; or an order, judgment or decree is entered
adjudicating the Corporation or any material Subsidiary bankrupt or insolvent;
or any order for relief with respect to the Corporation or any material
Subsidiary is entered under the Federal Bankruptcy Code; or the Corporation or
any material Subsidiary petitions or applies to any tribunal for the appointment
of a custodian, trustee, receiver or liquidator of the Corporation or any
material Subsidiary or of any substantial part of the assets of the Corporation
or any material Subsidiary, or commences any proceeding (other than a proceeding
for the voluntary liquidation and dissolution of a Subsidiary) relating to the
Corporation or any
<PAGE>
material Subsidiary under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation law of any
jurisdiction; or any such petition or application is filed, or any such
proceeding is commenced, against the Corporation or any material Subsidiary and
either (a) the Corporation or any such Subsidiary by any act indicates its
approval thereof, consent thereto or acquiescence therein or (b) such petition,
application or proceeding is not dismissed within 60 days;
(vii) a judgment in excess of $250,000 is rendered against the
Corporation or any material Subsidiary and, within 60 days after entry thereof,
such judgment is not discharged or execution thereof stayed pending appeal, or
within 60 days after the expiration of any such stay, such judgment is not
discharged;
(viii) the Corporation or any Subsidiary defaults in the performance
of any obligation or agreement if the effect of such default is to cause an
amount exceeding $250,000 to become due prior to its stated maturity; or
(ix) there shall have occurred an Event of Noncompliance (as defined
in Part D hereof).
312. Consequences of Events of Noncompliance.
---------------------------------------
(i) If an Event of Noncompliance of the type described in subparagraph
9A(iv) of this Part E has occurred and continues for a period of 30 days or any
other Event of Noncompliance has occurred, the dividend rate on the Senior
Preferred shall increase immediately by an increment of two (2) percentage
points. Thereafter, until such time as no Event of Noncompliance exists, the
dividend rate shall increase automatically at the end of each succeeding 90-day
period by an additional increment of two (2) percentage points (but in no event
shall the dividend rate exceed 13%). Any increase of the dividend rate
resulting from the operation of this subparagraph shall terminate as of the
close of business on the date on which no Event of Noncompliance exists, subject
to subsequent increases pursuant to this paragraph.
(ii) If an Event of Noncompliance of the type described in
subparagraph 9A(ii) or (viii) of this Part E has occurred, the holder or holders
of a majority of the Senior Preferred then outstanding may demand (by written
notice delivered to the Corporation) immediate redemption of all or any portion
of the Senior Preferred owned by such holder or holders at a price per Share
equal to the Liquidation Value thereof (plus all accrued and unpaid dividends
thereon) plus an amount equal to the number of shares of Conversion Stock then
issuable upon conversion of such Share multiplied by the Market Price per share
of Conversion Stock as of such date. The Corporation shall give prompt written
notice of such election to the other holders of Senior Preferred (but in any
event within five days after receipt of the initial demand for redemption), and
each such other holder may demand immediate redemption of all or any portion of
such holder's Senior Preferred by giving written notice thereof to the
Corporation within seven days after receipt of the Corporation's notice. The
Corporation shall redeem all Senior Preferred as to which rights under this
paragraph have been exercised within 15 days after receipt of the initial demand
for redemption.
<PAGE>
(iii) If an Event of Noncompliance of the type described in
subparagraph 9A(vi) of this Part E has occurred, all of the Senior Preferred
then outstanding shall be subject to immediate redemption by the Corporation
(without any action on the part of the holders of the Senior Preferred) at a
price per Share equal to the Liquidation Value thereof (plus all accrued and
unpaid dividends thereon) plus an amount equal to the number of shares of
Conversion Stock then issuable upon conversion of such Share multiplied by the
Market Price per share of Conversion Stock as of such date. The Corporation
shall immediately redeem all Senior Preferred upon the occurrence of such Event
of Noncompliance.
(iv) If any Event of Noncompliance exists, each holder of Senior
Preferred shall also have any other rights which such holder is entitled to
under any contract or agreement at any time and any other rights which such
holder may have pursuant to applicable law.
Section 1 Registration of Transfer. The Corporation shall keep at its
------------------------
principal office a register for the registration of Senior Preferred. Upon the
surrender of any certificate representing Senior Preferred at such place, the
Corporation shall, at the request of the record holder of such certificate,
execute and deliver (at the Corporation's expense) a new certificate or
certificates in exchange therefor representing in the aggregate the number of
Shares represented by the surrendered certificate. Each such new certificate
shall be registered in such name and shall represent such number of Shares as is
requested by the holder of the surrendered certificate and shall be
substantially identical in form to the surrendered certificate, and dividends
shall accrue on the Senior Preferred represented by such new certificate from
the date to which dividends have been fully paid on such Preferred Stock
represented by the surrendered certificate.
Section 1 Replacement. Upon receipt of evidence reasonably satisfactory to
-----------
the Corporation (an affidavit of the registered holder shall be satisfactory) of
the ownership and the loss, theft, destruction or mutilation of any certificate
evidencing Shares of Senior Preferred, and in the case of any such loss, theft
or destruction, upon receipt of indemnity reasonably satisfactory to the
Corporation (provided that if the holder is a financial institution or other
institutional investor its own agreement shall be satisfactory), or, in the case
of any such mutilation upon surrender of such certificate, the Corporation shall
(at its expense) execute and deliver in lieu of such certificate a new
certificate of like kind representing the number of Shares of such class
represented by such lost, stolen, destroyed or mutilated certificate and dated
the date of such lost, stolen, destroyed or mutilated certificate, and dividends
shall accrue on the Senior Preferred represented by such new certificate from
the date to which dividends have been fully paid on such lost, stolen, destroyed
or mutilated certificate.
Section 1 Definitions.
-----------
"1996 Purchase Agreement" means that certain Purchase Agreement, dated
-----------------------
as of May 30, 1996, by and among the Corporation, Primus and PNC.
"Change in Ownership" means any sale, transfer or issuance or series
-------------------
of sales, transfers and/or issuances of Common Stock (and/or securities
convertible directly or indirectly into,
<PAGE>
or exercisable or exchangeable directly or indirectly for, Common Stock) by the
Corporation or any holders thereof which results in any Person or group of
Persons (as the term "group" is used under the 1934 Act), other than the holders
of Common Stock and Senior Preferred as of the date of the Purchase Agreement,
owning more than 50% of the Common Stock outstanding at the time of such sale,
transfer or issuance or series of sales, transfers and/or issuances (including
for this purpose securities held by such Person or Persons that are convertible
directly or indirectly into, or exercisable or exchangeable directly or
indirectly for, Common Stock).
"Class A Common Stock" means the Corporation's Class A Common Stock,
--------------------
par value $1.00 per share.
"Class A Preferred" means the Corporation's Class A Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Class B Common Stock" means the Corporation's Class B Common Stock,
--------------------
par value $1.00 per share.
"Class B Preferred" means the Corporation's Class B Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Class C Preferred" means the Corporation's Class C Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Class D Preferred" means the Corporation's Class D Convertible
-----------------
Preferred Stock, par value $1.00 per share.
"Common Stock" means, collectively, the Class A Common Stock, the
------------
Class B Common Stock and any capital stock of any class of the Corporation
hereafter authorized which is not limited to a fixed sum or percentage of par or
stated value in respect to the rights of the holders thereof to participate in
dividends or in the distribution of assets upon any liquidation, dissolution or
winding up of the Corporation.
"Common Stock Deemed Outstanding" means, at any given time, the number
-------------------------------
of shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to subparagraphs 6C(i)
and 6C(ii) of this Part E whether or not the Options or Convertible Securities
are actually exercisable at such time.
"Conversion Stock" means, with respect to the Class C Preferred,
----------------
shares of Class A Common Stock and, with respect to the Class D Preferred,
shares of Class B Common Stock; provided that if there is a change such that the
-------- ----
securities issuable upon conversion of the Class C Preferred or the Class D
Preferred are issued by an entity other than the Corporation or there is a
change in the type or class of securities so issuable, then the term "Conversion
----------
Stock" shall mean one share of the security issuable upon conversion of the
- -----
Class C Preferred or the Class D Preferred,
<PAGE>
as the case may be, if such security is issuable in shares, or shall mean the
smallest unit in which such security is issuable if such security is not
issuable in shares.
"Convertible Securities" means any stock or securities directly or
----------------------
indirectly convertible into or exchangeable for Common Stock.
"Fundamental Change" means (a) any sale or transfer of more than 50%
------------------
of the assets of the Corporation and its Subsidiaries on a consolidated basis
(measured either by book value in accordance with generally accepted accounting
principles consistently applied or by fair market value determined in the
reasonable good faith judgment of the Corporation's Board of Directors) in any
transaction or series of related transactions (other than any sale or lease of
assets made in the ordinary course of business in connection with any
capitalized leases entered into by the Corporation or any of its Subsidiaries as
lessor in the ordinary course of business and other than any Liens (as defined
in the Purchase Agreement) to lending institutions incurred or granted by the
Corporation or any of its Subsidiaries in the ordinary course of business in
connection therewith) and (b) any merger or consolidation to which the
Corporation is a party, except for a merger in which the Corporation is the
surviving corporation, the terms of the Senior Preferred are not changed and the
Senior Preferred is not exchanged for cash, securities or other property, and
after giving effect to such merger, the holders of Common Stock and Senior
Preferred as of the date of the Purchase Agreement shall continue to own the
Corporation's outstanding capital stock possessing the voting power (under
ordinary circumstances) to elect a majority of the Corporation's Board of
Directors.
"Junior Preferred" means, collectively, the Class A Preferred and the
----------------
Class B Preferred.
"Junior Securities" means any capital stock or other equity securities
-----------------
of the Corporation, including the Junior Preferred but excluding the Senior
Preferred.
"Liquidation Value" of any Share as of any particular date shall be
-----------------
equal to $100.
"Market Price" of any security means the average of the closing prices
------------
of such security's sales on all securities exchanges on which such security may
at the time be listed, or, if there has been no sales on any such exchange on
any day, the average of the highest bid and lowest asked prices on all such
exchanges at the end of such day, or, if on any day such security is not so
listed, the average of the representative bid and asked prices quoted in the
NASDAQ System as of 4:00 P.M., New York time, or, if on any day such security is
not quoted in the NASDAQ System, the average of the highest bid and lowest asked
prices on such day in the domestic over-the-counter market as reported by the
National Quotation Bureau, Incorporated, or any similar successor organization,
in each such case averaged over a period of 21 days consisting of the day as of
which "Market Price" is being determined and the 20 consecutive business days
------------
prior to such day. If at any time such security is not listed on any securities
exchange or quoted in the NASDAQ System or the over-the-counter market, the
"Market Price" shall be the fair value thereof determined jointly by the
- -------------
Corporation and the holders of a majority of the Senior Preferred. If such
parties are unable to reach agreement within a reasonable period of time, such
fair value shall be determined by an independent
<PAGE>
appraiser experienced in valuing securities jointly selected by the Corporation
and the holders of a majority of the Senior Preferred. The determination of such
appraiser shall be final and binding upon the parties, and the fees and expenses
of such appraiser shall be borne one-half by the Corporation and one-half by the
holders of the outstanding Senior Preferred (pro rata among such holders based
upon the number of Shares held by each such holder).
"Options" means any rights, warrants or options to subscribe for or
-------
purchase Common Stock or Convertible Securities.
"Person" means an individual, a partnership, a corporation, a limited
------
liability company, a limited liability, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a governmental entity
or any department, agency or political subdivision thereof.
"PNC" means PNC Venture Corp, a Delaware corporation.
---
"Primus" means Primus Capital Fund III Limited Partnership, an Ohio
------
limited partnership.
"Public Offering Price" means (for any Public Offering) the price per
---------------------
share of Class A Common Stock paid by the public in connection with such Public
Offering.
"Public Offering" means any offering by the Corporation of its capital
---------------
stock or equity securities to the public pursuant to an effective registration
statement under the Securities Act of 1933, as then in effect, or any comparable
statement under any similar federal statute then in force; provided that for
-------- ----
purposes of paragraph 6F of this Part E, a Public Offering shall not include an
offering made in connection with a business acquisition or combination or an
employee benefit plan.
"Purchase Agreement" means the Purchase Agreement, dated on or about
------------------
May 20, 1998, by and among the Corporation and certain investors, as such
agreement may from time to time be amended in accordance with its terms.
"Qualified Public Offering" means a firm commitment underwritten
-------------------------
Public Offering of shares of the Corporation's Class A Common Stock in which (i)
the aggregate price paid by the public for such shares shall be at least
$15,000,000 and (ii) the price per share paid by the public for such shares
shall be at least equal to 150% of the Conversion Price in effect immediately
prior to the closing of the sale of such shares pursuant to such Public Offering
if such Public Offering is consummated on or before the first anniversary of the
Closing (as defined in the Purchase Agreement) and (iii) the price per share
paid by the public for such shares shall be at least equal to 200% of the
Conversion Price in effect immediately prior to the closing of the sale of such
shares pursuant to such Public Offering if such Public Offering is consummated
after the first anniversary of the Closing.
<PAGE>
"Redemption Date" as to any Share means the date specified in the
---------------
notice of any redemption at the Corporation's option or the applicable date
specified in this Part E in the case of any other redemption; provided that no
-------- ----
such date shall be a Redemption Date unless the Liquidation Value of such Share
(plus all accrued and unpaid dividends thereon and all other amounts payable
with respect thereto) is actually paid on such date as provided in Section 4 of
this Part E, and if not so paid, the Redemption Date shall be the date on which
such amount is paid as provided in Section 4 of this Part E, and the Corporation
has issued a warrant to the holder of such Share pursuant to paragraph 3N of the
Purchase Agreement.
"Senior Preferred" means, collectively, the Class C Preferred and the
----------------
Class D Preferred.
"Stockholders Agreement" means the Stockholders Agreement as defined
----------------------
in the Purchase Agreement.
"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority of the total voting power of shares of
stock entitled (without regard to the occurrence of any contingency) to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a limited
liability company, partnership, association or other business entity, a majority
of the partnership or other similar ownership interest thereof is at the time
owned or controlled, directly or indirectly, by any Person or one or more
Subsidiaries of that person or a combination thereof. For purposes of this Part
E, a Person or Persons shall be deemed to have a majority ownership interest in
a limited liability company, partnership, association or other business entity
if such Person or Persons shall be allocated a majority of limited liability
company, partnership, association or other business entity gains or losses or
shall be or control the managing general partner of such limited liability
company, partnership, association or other business entity.
"Warrants" means, collectively, (i) the Contingent Warrants (as
--------
defined in the Purchase Agreement and the 1996 Purchase Agreement), (ii) the
Warrants (as defined in the Purchase Agreement), (iii) that certain warrant to
purchase 118,038 shares of Class A Common Stock issued to WSDF pursuant to the
WSDF Purchase Agreement, (iv) that certain warrant to purchase up to an
additional 53,654 share of Class A Common Stock issued to WSDF pursuant to the
WSDF Purchase Agreement and (v) warrants to purchase an aggregate of 15,800
shares of Common Stock issued to employees of the Corporation.
"WSDF" means Whitney Subordinated Debt Fund, L.P.
----
"WSDF Purchase Agreement" means that certain Securities Purchase
-----------------------
Agreement by and between the Corporation and WSDF dated as of February 28, 1998.
<PAGE>
Section 1 Amendment and Waiver. No amendment, modification or waiver shall
--------------------
be binding or effective with respect to any provision of Sections 1 to 14 of
this Part E without the prior written consent of the holders of at least 75% of
the Senior Preferred outstanding at the time such action is taken; provided that
-------- ----
no change in the terms of this Part E may be accomplished by merger or
consolidation of the Corporation with another corporation or entity unless the
Corporation has obtained the prior written consent of the holders of at least
75% of the Senior Preferred then outstanding.
Section 1 Notices. Except as otherwise expressly provided under this Part
-------
E, all notices referred to in this Part E shall be in writing and shall be
delivered by registered or certified mail, return receipt requested and postage
prepaid, or by reputable overnight courier service, charges prepaid, and shall
be deemed to have been given when so mailed or sent (i) to the Corporation, at
its principal executive offices and (ii) to any stockholder, at such holder's
address as it appears in the stock records of the Corporation (unless otherwise
indicated by any such holder).
<PAGE>
FEDERAL IDENTIFICATION
NO. 04-3124117
----------
THE COMMONWEALTH OF MASSACHUSETTS
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
One Ashburton Place, Boston, Massachusetts 02108-1512
- --------
EXAMINER
ARTICLES OF AMENDMENT
(General Laws, Chapter 156B, Section 72)
<TABLE>
<CAPTION>
<S> <C> <C>
- --------
Name Paul S. Gass
We, ------------------------------------------------------, President,
Approved
Charles W. Cross
and-------------------------------------------------------, *Clerk,
BankVest Capital Corp.
of--------------------------------------------------------,
(Exact name of corporation)
200 Nickerson Road, Marlboro, MA 01752
located at------------------------------------------------,
(Street address of corporation in Massachusetts)
certify that these Articles of Amendment affecting articles numbered:
3 and 4
----------------------------------------------------------------------
(Number those articles 1, 2, 3, 4, 5 and/or 6 being amended)
of the Articles of Organization were duly adopted at a meeting held
on________, 19_______, by vote of:
______shares of Class A Common Stock of 1,844,146 shares
------------------------ ------------
outstanding,
(type, class & series, if any)
30,000 shares of Class A Convertible Preferred Stock of 30,000
------ --------------------------------------------- -----------
shares outstanding, and
(type, class & series, if any)
C ___ 30,000 shares of Class B Convertible Preferred Stock of 30,000
------ --------------------------------------------- ----------
shares outstanding,
___ (type, class & series, if any)
P ___ See Attachment 1 for additional classes of stock.
___
___
M ___
___
R.A. ___
/1/**being at least a majority of type, class or series outstanding
and entitled to vote thereon:/or /2/**being at least two-thirds of
each type, class or series outstanding and entitled to vote thereon
and of each type, class or series of stock whose rights are adversely
affected thereby:
</TABLE>
________
P.C.
*Delete the inappllicable words. **Delete the inapplicable clause.
/1/ For amendments adopted pursuant to Chapter 156B, Section 70.
/2/ For amendments adopted pursuant to Chapter 165B, Section 71.
NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS FORM IS
INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON ONE SIDE ONLY OF SEPARTE
8E1/2EX 11 SHEETS OF PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH.
ADDITIONS TO MORE THAN ONE ARTICLE MAY BE MADE ON A SINGLE SHEET SO
LONG AS EACH ARTICLE REQUIRING EACH ADDITION IS CLEARLY INDICATED.
<PAGE>
To change the number of shares and the par value (if any) of any type, class or
series of stock which the corporatoin is authorized to issue, fill in the
following:
The total presently authorized is:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 5,000,000 Class A Common $1.00
Stock
- ------------------------------------------------------------------------------------------------------------------
1,000,000 Class B Common $1.00
Stock
- ------------------------------------------------------------------------------------------------------------------
Preferred: Preferred: 500,000 (of which shares) $1.00
60,000 Class A Convertible
Preferred
- ------------------------------------------------------------------------------------------------------------------
30,000 Class B Convertible $1.00
Preferred
- ------------------------------------------------------------------------------------------------------------------
75,000 Class C Convertible $1.00
Preferred
- ------------------------------------------------------------------------------------------------------------------
37,500 Class D Convertible $1.00
Preferred
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Change the total authorized to:
<TABLE>
<CAPTION>
WITHOUT PAR VALUE STOCKS WITH PAR VALUE STOCKS
- ------------------------------------------------------------------------------------------------------------------
TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common: Common: 25,000,000 $1.00
- ------------------------------------------------------------------------------------------------------------------
Non-Voting 2,000,000 $1.00
Common
- ------------------------------------------------------------------------------------------------------------------
Preferred: Preferred:
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Article IV
Article IV is hereby amended to read in its entirety as follows:
Please see Continuation Sheet 4A
<PAGE>
The foregoing amendment(s) will become effective when these Articles of
Amendment are filed in accordance with General Laws, Chapter 156B, Section 6
unless these articles specify, in accordance with the vote adopting the
amendment, a later effective date not more than thirty days after such filing,
in which event the amendment will become effective on such later date.
Later effective date:________________________.
SIGNED UNDER THE PENALTIES OF PERJURY, this__________day of ___________, 19__,
___________________________________________________________________, *President,
President,
___________________________________________________________________, *Clerk.
*Delete the inapplicable words.
<PAGE>
ATTACHMENT 1
37,500 shares of Class C Convertible Preferred Stock of 37,500 shares
outstanding, and
37,500 shares of Class D Convertible Preferred Stock of 37,500 shares
outstanding.
<PAGE>
CONTINUATION SHEET
4A (Con't)
CONTINUATION SHEET 4A
Amended Articles of Organization
ARTICLE IV
STOCK RIGHTS
------------
Except as otherwise provided in this Article IV or as otherwise required by
applicable law, all shares of Common Stock and Non-Voting Common Stock ("Stock")
shall be identical in all respects and shall entitle the holders thereof to the
same rights, preferences and privileges, subject to the same qualifications,
limitations and restrictions, as set forth herein.
Section 1. Voting Rights. Except as otherwise provided in this Article IV
-------------
or as otherwise required by applicable law, the holders of Common Stock shall be
entitled to one vote per share on all matters to be voted on by the stockholders
of the Corporation, and the holders of Non-Voting Common Stock shall have no
right to vote on any matters to be voted on by the stockholders of the
Corporation; provided that the holders of Non-Voting Common Stock shall have the
-------- ----
right to one vote per share together with the Common Stock as one class on (i)
any merger or consolidation of the Corporation with or into another entity or
entities and (ii) any sale of all or substantially all of the Corporation's
assets; and provided further that the holders of Non-Voting Common Stock shall
-------- -------
have the right to vote as a separate class on any merger or consolidation of the
Corporation with or into another entity or entities, or any recapitalization or
reorganization, in which shares of Non-Voting Common Stock would receive or be
exchanged for consideration different on a per share basis from consideration
received with respect to or in exchange for the shares of Common Stock, or would
otherwise be treated differently from shares of Common Stock in connection with
such transaction.
Section 2. Dividends. As and when dividends are declared or paid with
---------
respect to shares of Stock, whether in cash, property or securities of the
Corporation, the holders of Common Stock and the holders of Non-Voting Common
Stock shall be entitled to receive such dividends pro rata at the same rate per
share of each class of Stock; provided that (i) if dividends are declared or
-------- ----
paid in shares of Stock, the dividends payable to holders of Common Stock shall
be payable in shares of Common Stock and the dividends payable to the holders of
Non-Voting Common Stock shall be payable in shares of Non-Voting Common Stock
and (ii) if the dividends consist of other voting securities of the Corporation,
the Corporation shall make available to each holder of Non-Voting Common Stock,
at such holder's request, dividends consisting of non-voting securities (except
as otherwise required by law) of the Corporation which are otherwise identical
to the voting securities and which are convertible into such voting securities
on the same terms as the Non-Voting Common Stock is convertible into the Common
Stock.
Section 3. Liquidation. The holders of the Common Stock and the holders
-----------
of the Non-Voting Common Stock shall be entitled to participate pro rata at the
same
<PAGE>
CONTINUATION SHEET
4A (Con't)
rate per share of each class of Stock in all distributions to the holders of
Stock in any liquidations, dissolution, or winding up of the Corporation.
Section 4. Conversion of Non-Voting Common Stock.
--------------------------------------
(a) Generally.
---------
(i) Upon the occurrence or the expected occurrence, as described in
clause (iii) below, of any Conversion Event, each holder of Non-Voting Common
Stock shall be entitled to convert into an equal number of shares of Common
Stock any or all of the shares of such holder's Non-Voting Common Stock being
(or expected to be) distributed, disposed of or sold in connection with such
Conversion Event.
(ii) For purposes of this paragraph 4(a), a "Conversion Event" shall
----------------
mean (a) any public offering or public sale of securities of the Corporation
(including a public offering registered under the Securities Act of 1933 and a
public sale pursuant to Rule 144 of the Securities and Exchange Commission or
any similar rule then in force), (b) any sale of securities of the Corporation
to a person or group of persons (within the meaning of the Securities Exchange
Act of 1934, as amended (the "1934 Act")) if, after such sale, such person or
--------
group of persons in the aggregate would own or control securities which possess
in the aggregate the ordinary voting power to elect a majority of the
Corporation's directors (provided that such sale has been approved by the
Corporation's Board of Directors or a committee thereof), (c) any sale of
securities of the Corporation to a person or group of persons (within the
meaning of the 1934 Act) if, after such sale, such person or group of persons in
the aggregate would own or control securities of the Corporation (excluding any
Non-Voting Common Stock being converted and disposed of in connection with such
Conversion Event) which possess in the aggregate the ordinary voting power to
elect a majority of the Corporation's directors, (d) any sale of securities of
the Corporation to a person or group of persons (within the meaning of the 1934
Act) if, after such sale, such person or group of persons would not, in the
aggregate, own, control or have the right to acquire more than two percent (2%)
of the outstanding securities of any class of voting securities of the
Corporation, and (e) a merger, consolidation or similar transaction involving
the Corporation if, after such transaction, a person or group of persons (within
the meaning of the 1934 Act) in the aggregate would own or control securities
which possess in the aggregate the ordinary voting power to elect a majority of
the surviving corporation's directors (provided that the transaction has been
approved by the Corporation's Board of Directors or a committee there). For
purposes of this paragraph 4(a), "person" shall include any natural person and
------
any corporation, partnership, joint venture, trust, limited liability company,
unincorporated organization and any other entity or organization.
(iii) Each holder of Non-Voting Common Stock shall be entitled to
convert shares of Non-Voting Common Stock in connection with any Conversion
Event if such holder reasonably believes that such Conversion Event shall be
consummated, and a written request for conversion from any holder of Non-Voting
Common Stock to the Corporation stating such holder's reasonable belief that a
Conversion Event shall occur shall be conclusive and shall obligate the
Corporation to
<PAGE>
CONTINUATION SHEET
4A (Con't)
effect such conversion in a timely manner so as to enable each such holder to
participate in such Conversion Event. The Corporation shall not cancel the
shares of Non-Voting Common Stock to be converted before the tenth day following
such Conversion Event and shall reserve such shares until such tenth day for
reissuance in compliance with the next sentence. If any shares of Non-Voting
Common Stock are converted into shares of Common Stock in connection with a
Conversion Event and such shares of Common Stock are not actually distributed,
disposed of or sold pursuant to such Conversion Event, such shares of Common
Stock shall be promptly converted back into the same number of shares of Non-
Voting Common Stock.
(b) Conversion Procedure.
--------------------
(i) Unless otherwise provided in connection with a Conversion
Event, each conversion of shares of Non-Voting Common Stock into shares of
Common Stock shall be effected by the surrender of the certificate or
certificates representing the shares to be converted at the principal office of
the Corporation at any time during normal business hours together with a written
notice by the holder of such Non-Voting Common Stock stating that such holder
desires to convert the shares, or a stated number of the shares, of such Non-
Voting Common Stock represented by such certificate or certificates into shares
of Common Stock. Each conversation shall be deemed to have been effected as of
the close of business on the date on which such certificate or certificates have
been surrounded and such notice has been received, and at such time the rights
of the holder of the converted Non-Voting Common Stock shall be deemed to have
become the holder or holders of record of the shares of Common Stock represented
thereby (subject to the last sentence of paragraph 4(a) above).
(ii) Promptly after the surrender of certificates and the receipt of
written notice, the Corporation shall issue and deliver in accordance with the
surrendering holder's instructions (a) the certificate or certificates for the
Common Stock issuable upon such conversion and (b) a certificate representing
any Non-Voting Common Stock which was represented by the certificate or
certificates delivered to the Corporation in connection with such conversion but
which was not converted.
(iii) The issuance of certificates for Common Stock upon conversion
of Non-Voting Common Stock shall be made without charge to the holders of such
shares for any issuance tax in respect thereof or other cost incurred by the
Corporation in connection with such conversion and the related issuance of
Common Stock.
(iv) The Corporation shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of issuance upon the conversion of the Non-Voting Common Stock , such
number of shares of Non-Voting Common Stock issuable upon the conversion of all
outstanding Non-Voting Common Stock. All shares of Common Stock which are so
issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation shall
take all such actions as may be
<PAGE>
CONTINUATION SHEET
4A (Con't)
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of Common
Stock may be listed (except for official notice of issuance which shall be
immediately transmitted by the Corporation upon issuance).
(v) The Corporation shall not close its books against the transfer
of shares of Stock in any manner which would interfere with the timely
conversion of any shares of Stock. The Corporation shall assist and cooperate
with any holder of Stock required to make any governmental filings or obtain any
governmental approval prior to or in connection with any conversion of Stock
hereunder (including, without limitation, making any filings required to be made
by the Corporation).
(c) Stock Splits. If the Corporation in any manner subdivides or
------------
combines the outstanding shares of one class of Stock, the outstanding shares of
the other class of Stock shall be proportionately subdivided or combined in a
similar manner.
Section 5. Registration of Transfer. The Corporation shall keep at its
------------------------
principal office (or such other place as the Corporation reasonably designates)
a register for the registration of shares of Stock. Upon the surrender of any
certificate representing shares of any class of Stock at such place, the
Corporation shall, at the request of the registered holder of such certificate,
execute and deliver a new certificate or certificates in exchange therefor
representing in the aggregate the number of shares of such class represented by
the surrendered certificate, and the Corporation forthwith shall cancel such
surrendered certificate. Each such new certificate shall be registered in such
name and shall represent such number of shares of such class as is requested by
the holder of the surrendered certificate and shall be substantially identical
in form to the surrendered certificate. The issuance of new certificates shall
be made without charge to the holders of the surrendered certificates for any
issuance tax in respect thereof or other cost incurred by the Corporation in
connection with such issuance.
Section 6. Replacement. Upon receipt of evidence reasonably satisfactory
-----------
to the Corporation (an affidavit of the registered holder shall be satisfactory)
of the ownership and the loss, theft, destruction or mutilation of any
certificate evidencing one or more shares of any class of Stock, and in the case
of any such loss, theft or destruction, upon receipt of indemnity reasonably
satisfactory to the Corporation (provided that if the holder is a financial
institution or other institutional investor its own agreement shall be
satisfactory), or, in the case of any such mutilation upon surrender of such
certificate, the Corporation shall (at its expense) execute and deliver in lieu
of such certificate a new certificate of like kind representing the number of
shares of such class represented by such lost, stolen, destroyed or mutilated
certificate and dated the date of such lost, stolen, destroyed or mutilated
certificate.
Section 7. Notices. All notices referred to herein shall be in writing,
-------
shall be delivered personally or by first-class mail, postage prepaid, and shall
be deemed to have been given when so delivered or mailed to the Corporation at
its principal
<PAGE>
CONTINUATION SHEET
4A (Con't)
executive offices and to any stockholder at such holder's address as it appears
in the stock records of the Corporation (unless otherwise specified in a written
notice to the Corporation by such holder).
Section 8. Amendment and Waiver. No amendment or waiver of any provision
--------------------
of this Article IV shall be effective without the prior approval of the holders
of a majority of the then outstanding Non-Voting Common Stock voting as a
separate class.
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
ARTICLES OF AMENDMENT
(GENERAL LAWS, CHAPTER 156B, SECTION 72)
=================================================================
I hereby approve the within Articles of Amendment and, the filing
fee in the amount of $____________ having been paid, said articles
are deemed to have been filed with me this day_________ of 19___.
Effective date:__________________________________________________
WILLIAM FRANCIS GALVIN
Secretary of the Commonwealth
TO BE FILLED IN BY CORPORATION
PHOTOCOPY OF DOCUMENT TO BE SENT TO:
____________________________________________________________
____________________________________________________________
____________________________________________________________
<PAGE>
EXHIBIT 3.2
BANKVEST CAPITAL CORP.
RESTATED BY-LAWS
ARTICLE I
STOCKHOLDERS
------------
1. ANNUAL MEETING. The annual meeting of stockholders shall be held on
the date and at the time fixed, from time to time, by the directors, provided
that the date so fixed is within six months of the end of the fiscal year of the
corporation. The purposes for which the annual meeting is to be held, in
addition to those prescribed by law, by the Articles of Organization or by these
By-Laws, may be specified by the Directors or the President. In the event an
annual meeting has not been held on the date fixed in these By-Laws, a special
meeting in lieu of the annual meeting may be held with all the force and effect
of an annual meeting.
2. SPECIAL MEETINGS. Special meetings of stockholders may be called by
the President or by the Directors. Additionally, upon written application of
one or more stockholders who hold at least 40% in interest of the capital stock
entitled to vote at a meeting, a special meeting shall be called by the Clerk,
or in case of the death, absence, incapacity or refusal of the Clerk, by any
other officer.
3. PLACE OF MEETINGS. All meetings of stockholders shall be held at the
principal office of the corporation unless a different place (within or without
Massachusetts, but within the United States) is fixed by the Directors or the
President and stated in the notice of the meeting.
4. NOTICE OF MEETINGS. A written notice of the place, date and hour of
all meetings of stockholders stating the purpose of the meeting shall be given
by the Clerk or an Assistant Clerk or by the person calling the meeting at least
seven days before the meeting unless such longer period is required by law to
each stockholder entitled to vote thereat and to each stockholder who under the
law, under the Articles of Organization or under these By-Laws, is entitled to
such notice, by leaving such notice with him or at his residence or usual place
of business, or by mailing it, postage prepaid, and addressed to such
stockholder at his address as it appears in the records of the corporation.
Whenever notice of a meeting is required to be given a stockholder under any
provision of the Massachusetts Business Corporation Law or of the Articles of
Organization or these By-Laws, a written waiver thereof, executed before or
after the meeting by such stockholder or his attorney thereunto authorized and
filed with the records of the meeting, shall be deemed equivalent to such
notice.
5. NOTICE OF STOCKHOLDER BUSINESS. The following provisions of this
Section 5 shall apply to the conduct of business at any meeting of the
stockholders (as used in this Section 5, the term annual meeting shall include a
special meeting in lieu of annual meeting).
<PAGE>
(a) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) pursuant to the
corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the corporation who is a stockholder of
record at the time of giving of the notice provided for in paragraph (b) of this
Section 5, who shall be entitled to vote at such meeting and who complies with
the notice procedures set forth in paragraph (b) of this Section 5.
(b) For business to be properly brought before any meeting of the
stockholders by a stockholder pursuant to clause (iii) of paragraph (a) of this
By-law, the stockholder must have given timely notice thereof in writing to the
Clerk of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation: (i) in the case of any annual meeting, not less than 60 days nor
more than 90 days prior to the date specified in Section 1 above for such annual
meeting, regardless of any postponements, deferrals or adjournments of that
meeting to a later date; provided, however, that if a special meeting in lieu of
annual meeting of stockholders is to be held on a date prior to the date
specified in Section 1 above, and if less than seventy days' notice or prior
public disclosure of the date of such special meeting in lieu of annual meeting
is given or made, notice by the stockholder to be timely must be so delivered or
received not later than the close of business on the tenth day following the
earlier of the date on which notice of the date of such special meeting in lieu
of annual meeting was mailed or the day on which public disclosure was made of
the date of such special meeting in lieu of annual meeting; and (ii) in the case
of a special meeting (other than a special meeting in lieu of an annual
meeting), not later than the tenth day following the day on which notice of the
date of the scheduled meeting was mailed. A stockholder's notice to the Clerk
shall set forth as to each matter the stockholder proposes to bring before the
meeting, (i) a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting, (ii)
the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, the name and address of the beneficial
owner, if any, on whose behalf the proposal is made, and the name and address of
any other stockholders or beneficial owners known by such stockholder to be
supporting such proposal, (iii) the class and number of shares of the
corporation which are owned beneficially and of record by such stockholder of
record, by the beneficial owner, if any, on whose behalf the proposal is made
and by any other stockholders or beneficial owners known by such stockholder of
record and/or of the beneficial owner, if any, on whose behalf the proposal is
made, in such proposed business and any material interest of any other
stockholders or beneficial owners known by such stockholder to be supporting
such proposal in such proposed business, to the extent known by such
stockholder.
(c) Notwithstanding anything in these By-Laws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in these By-Laws. The person presiding at the meeting shall, if the facts
warrant, determine that business was not properly brought before the meeting and
in accordance with the procedures prescribed by these
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<PAGE>
By-laws, and if he should so determine, he shall so declare at the meeting and
any such business not properly brought before the meeting shall not be
considered or transacted.
(d) This provision shall not prevent the consideration and approval or
disapproval at the meeting of reports of officers, Directors and committees of
the Board of Directors, but, in connection with such reports, no new business
shall be acted upon at such meeting unless properly brought before the meeting
as herein provided.
(e) In addition to the foregoing provisions of this Section 5, a
stockholder shall comply with all applicable requirements of the Securities
Exchange Act of 1934, as amended (or any successor provision), and the rules and
regulations thereunder with respect to the matters set forth in this Section 5,
but in the event of conflict, those rules and regulations shall prevail.
6. QUORUM. The holders of a majority in interest of all stock issued,
outstanding and entitled to vote at a meeting shall constitute a quorum, but a
lesser number may adjourn any meeting from time to time without further notice;
except that if two or more classes of stock are outstanding and entitled to vote
as separate classes, then a quorum shall consist of the holders of a majority in
interest of each class of stock issued, outstanding and entitled to vote.
7. VOTING AND PROXIES. Each stockholder shall have one vote for each
share of stock entitled to vote owned by him and a proportionate vote for a
fractional share, unless otherwise provided by the Articles of Organization.
Capital stock shall not be voted if any installment of the subscription therefor
has been duly demanded in accordance with the law of the Commonwealth of
Massachusetts and is overdue and unpaid. Stockholders may vote either in person
or by written proxy dated not more than six months before the meeting named
therein. Proxies shall be filed with the clerk of the meeting, or of any
adjournment thereof, before being voted. Except as otherwise limited therein,
proxies shall entitle the persons named therein to vote at any adjournment of
such meeting but shall not be valid after final adjournment of such meeting. A
proxy with respect to stock held in the name of two or more persons shall be
valid if executed by any one of them unless at or prior to exercise of the proxy
the corporation receives a specific written notice to the contrary from any one
of them. A proxy purporting to be executed by or on behalf of a stockholder
shall be deemed valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger.
8. ACTION AT MEETING. When a quorum is present, the holders of a majority
of the stock present or represented and voting on a matter (or if there are two
or more classes of stock entitled to vote as separate classes, then in the case
of each such class, the holders of a majority of the stock of that class present
or represented and voting on a matter), except where a larger vote is required
by law, the Articles of Organization or these By-Laws,
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<PAGE>
shall decide any matter to be voted on by the stockholders. Any election of
directors or officers by the stockholders shall be determined by a plurality of
the votes cast by stockholders entitled to vote at the election. Any such
elections shall be by ballot if so requested by any stockholder entitled to vote
thereon. The corporation shall not directly or indirectly vote any share of its
own stock.
9. ACTION WITHOUT MEETING. Any action required or permitted to be taken
at any meeting of the stockholders may be taken without a meeting if all
stockholders entitled to vote on the matter consent to the action in writing and
the written consents are filed with the records of the meetings of stockholders.
Such consent shall be treated for all purposes as a vote at a meeting.
ARTICLE II
DIRECTORS
---------
1. POWERS. The business of the corporation shall be managed by a Board of
Directors who may exercise all the powers of the corporation except as otherwise
provided by law, by the Articles of Organization or by these By-Laws. In the
event of vacancy in the Board of Directors, the remaining Directors, except as
otherwise provided by law, may exercise the powers of the full Board until the
vacancy is filled.
2. NUMBER; ELECTION AND QUALIFICATION; TENURE; REMOVAL. The number of
Directors, the provisions governing their election and qualification, their
tenure and removal shall be as provided by law and as set forth in the Articles
of Organization.
3. MEETINGS. Regular meetings of the Directors may be held without call
or notice at such places and at such times as the Directors may from time to
time determine, provided that any Director who is absent when such determination
is made shall be given notice of the determination. A regular meeting of the
Directors may be held without a call or notice at the same place as the annual
meeting of stockholders. Special meetings of the Directors may be held at any
time and place designated in a call by the President or two or more Directors.
4. TELEPHONE CONFERENCE MEETINGS. Members of the Board of Directors may
participate in a meeting of the board by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other at the same time and participation by such means
shall constitute presence in person at a meeting.
5. NOTICE OF MEETINGS. Notice of all special meetings of the Directors
shall be given to each Director by the Secretary, or Assistant Secretary, or if
there be no Secretary or Assistant Secretary, by the Clerk, or Assistant Clerk,
or in case of the death, absence, incapacity or refusal of such
-4-
<PAGE>
persons, by the officer or one of the Directors calling the meeting. Notice
shall be given to each Director in person or by telephone or by telegram sent to
his business or home address at least twenty-four hours in advance of the
meeting, or by written notice mailed to his business or home address at least
forty-eight hours in advance of the meeting. Notice of a meeting need not be
given to any Director if a written waiver of notice, executed by him before or
after the meeting, is filed with the records of the meeting, or to any Director
who attends the meeting without protesting prior thereto or at its commencement
the lack of notice to him. A notice or waiver of notice of a Directors' meeting
need not specify the purposes of the meeting.
6. QUORUM. At any meeting of the Directors, a majority of the Directors
then in office shall constitute a quorum. Less than a quorum may adjourn any
meeting from time to time without further notice.
7. ACTION AT MEETING. At any meeting of the Directors at which a quorum
is present, a majority of the Directors present may take any action on behalf of
the Board except to the extent that a larger number is required by law or the
Articles of Organization or these By-Laws.
8. ACTION BY CONSENT. Any action required or permitted to be taken at any
meeting of the Directors may be taken without a meeting, if all the Directors
consent to the action in writing and the written consents are filed with the
records of the meetings of Directors. Such consents shall be treated for all
purposes as a vote at a meeting.
9. COMMITTEES. The Directors may, by vote of a majority of the Directors
then in office, elect from their number an executive or other committees and may
by like vote delegate thereto some or all of their powers except those which by
law, the Articles of Organization or these By-Laws they are prohibited from
delegating to such committee. Except as the Directors may otherwise determine,
any such committee may make rules for the conduct of its business, but UNLESS
otherwise provided by the Directors or in such rules, its business shall be
conducted as nearly as may be in the same manner as is provided by these By-Laws
for the Directors.
ARTICLE III
OFFICERS
--------
1. ENUMERATION. The officers of the corporation shall consist of a
President, a Treasurer, a Clerk, and such other officers, including a Chairman
of the Board of Directors, one or more Vice Presidents, Assistant Treasurers,
Assistant Clerks, Secretary and Assistant Secretaries as the Directors may
determine.
2. ELECTION. The President, Treasurer and Clerk shall be elected annually
by the Directors at their first meeting following the annual meeting of
stockholders. Other officers may be chosen by the Directors at such meeting or
at any other meeting.
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<PAGE>
3. QUALIFICATION. The President may, but need not be, a Director. No
officer need be a stockholder. Any two or more offices may be held by the same
person, provided that the President and Clerk shall not be the same person. The
Clerk shall be a resident of Massachusetts unless the corporation has a resident
agent appointed for the purpose of service of process. Any officer may be
required by the Directors to give bond for the faithful performance of his
duties to the corporation in such amount and with such sureties as the Directors
may determine.
4. TENURE. Except as otherwise provided by law, by the Articles of
Organization or by these By-Laws, the President, Treasurer and Clerk shall hold
office until the first meeting of the Directors following the next annual
meeting of stockholders and until their successors are chosen and qualified; and
all other officers shall hold office until the first meeting of the Directors
following the next annual meeting of stockholders and until their successors are
chosen and qualified, unless a shorter term is specified in the vote choosing or
appointing them. Any officer may resign by delivering his written resignation
to the corporation at its principal office or to the President, Clerk or
Secretary, and such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
5. REMOVAL. The Directors may remove any officer with or without cause by
vote of a majority of the Directors then in office; provided, that an officer
may be removed for cause only after a reasonable notice and opportunity to be
heard before the Board of Directors.
6. PRESIDENT, CHAIRMAN OF THE BOARD, AND VICE-PRESIDENT. The President
shall, unless otherwise provided by the Directors, be the chief executive
officer of the corporation and shall, subject to the direction of the Directors,
have general supervision and control of its business. Unless otherwise provided
by the Directors he shall preside, when present, at all meetings of stockholders
and, unless a Chairman of the Board has been elected and is present, of the
Directors. If a Chairman of the Board of Directors is elected he shall preside
at all meetings of the Board of Directors at which he is present. The Chairman
shall have such other powers as the Directors may from time to time designate.
Any Vice-President shall have such powers as the Directors may from time to time
designate.
7. TREASURER AND ASSISTANT TREASURER. The Treasurer shall, subject to the
direction of the Directors, have general charge of the financial affairs of the
corporation and shall cause accurate books of account to be kept. He shall have
custody of all funds, securities, and valuable documents of the corporation,
except as the Directors may otherwise provide. Any Assistant Treasurer shall
have such powers as the Directors may from time to time designate.
8. CLERK AND ASSISTANT CLERKS. The Clerk shall record all proceedings of
the stockholders in a book to be kept therefor. Unless a transfer
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<PAGE>
agent is appointed, the Clerk shall keep or cause to be kept in Massachusetts,
at the principal office of the corporation or at his office, the stock and
transfer records of the corporation, in which are contained the names of all
stockholders and the record address and the amount of stock held by each. In
case a Secretary is not elected, the Clerk shall record all proceedings of the
Directors in a book to be kept therefor. In the absence of the Clerk from any
meeting of the stockholders, an Assistant Clerk, if one be elected, otherwise a
Temporary Clerk designated by the person presiding at the meeting, shall perform
the duties of the Clerk. Any Assistant Clerk shall have such additional powers
as the Directors may from time to time designate.
9. SECRETARY AND ASSISTANT SECRETARIES. If a Secretary is elected, he
shall keep a record of the meetings of the Directors and in his absence, an
Assistant Secretary, if one be elected, otherwise a Temporary Secretary
designated by the person presiding at the meeting, shall keep a record of the
meetings of the Directors. Any Assistant Secretary shall have such additional
powers as the Directors may from time to time designate.
10. OTHER POWERS AND DUTIES. Each officer shall, subject to these By-
Laws, have in addition to the duties and powers specifically set forth in these
By-Laws, such duties and powers as are customarily incident to his office, and
such duties and powers as the Directors may from time to time designate.
ARTICLE IV
CAPITAL STOCK
-------------
1. CERTIFICATES OF STOCK. Subject to the provisions of Section 2 below,
each stockholder shall be entitled to a certificate of the capital stock of the
corporation in such form as may be prescribed from time to time by the
Directors. The certificate shall be signed by the President or a Vice-President,
and by the Treasurer or an Assistant Treasurer; provided, however, such
signatures may be facsimiles if the certificate is signed by a transfer agent,
or by a registrar, other than a Director, officer or employee of the
corporation. In case any officer who has signed or whose facsimile signature has
been placed on such certificate shall have ceased to be such officer before such
certificate is issued, it may be issued by the corporation with the same effect
as if he were such officer at the time of its issue.
Every certificate issued for shares of stock at a time when such shares are
subject to any restriction on transfer pursuant to the Articles of Organization,
these By-Laws or any agreement to which the corporation is a party shall have
the restriction noted conspicuously on the certificate and shall also set forth
on the face or back of the certificate either the full text of the restriction
or a statement of the existence of such restriction and a statement that the
corporation will furnish a copy thereof to the holder of such certificate upon
written request and without charge. Every stock certificate issued by the
corporation at a time when it is authorized to issue more than one class or
series of stock shall set forth upon the face or back of the certificate either
the
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<PAGE>
full text of the preferences, voting powers, qualifications and special and
relative rights of the shares of each class and series, if any, authorized to be
issued, as set forth in the Articles of Organization, or a statement of the
existence of such preferences, powers, qualifications, and rights, and a
statement that the corporation will furnish a copy thereof to the holder of such
certificate upon written request and without charge.
2. STOCKHOLDER OPEN ACCOUNTS. The corporation may maintain or cause to
be maintained stockholder open accounts in which may be recorded all
stockholders' ownership of stock and all changes therein. Certificates need not
be issued for shares so recorded in a stockholder open account unless requested
by the stockholder.
3. TRANSFERS. Subject to the restrictions, if any, stated or noted on
the stock certificates, shares of stock may be transferred in the records of the
corporation by the surrender to the corporation or its transfer agent of the
certificate therefor, properly endorsed or accompanied by a written assignment
and power of attorney properly executed, with necessary transfer stamps affixed,
and with such proof of the authenticity of signature as the corporation or its
transfer agent may reasonably require. When such stock certificates are thus
properly surrendered to the corporation or its transfer agent, the corporation
or transfer agent shall cause the records of the corporation to reflect the
transfer of the shares of stock. Except as may be otherwise required by law, by
the Articles of Organization or by these By-Laws, the corporation shall be
entitled to treat the record holder of stock as shown in its records as the
owner of such stock for all purposes, including the payment of dividends and the
right to vote with respect thereof, regardless of any transfer, pledge or other
disposition of such stock, until the shares have been transferred on the books
of the corporation in accordance with the requirements of these By-Laws. It
shall be the duty of each stockholder to notify the corporation of his post
office address.
4. RECORD DATE. The Directors may fix in advance a time which shall be
not more than sixty (60) days before the date of any meeting of stockholders or
the date for the payment of any dividend or the making of any distribution to
stockholders or the last day on which the consent or dissent of stockholders may
be effectively expressed for any purpose, as the record date for determining the
stockholders having the right to notice of and to vote at such meeting and any
adjournment thereof or the right to receive such dividend or distribution or the
right to give such consent or dissent. In such case only stockholders of record
on such record date shall have such right, notwithstanding any transfer of stock
on the books of the corporation after the record date. Without fixing such
record date the Directors may for any of such purposes close the transfer books
for all or any part of such period. If no record date is fixed and the
transfer books are not closed, the record date for determining stockholders
having the right to notice of or to vote at a meeting of stockholders shall be
at the close of business on the day next preceding the day on which notice is
given, and the record date for determining stockholders for
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<PAGE>
any other purpose shall be at the close of business on the day on which the
Board of Directors acts with respect thereto.
5. REPLACEMENT OF CERTIFICATES. In case of the alleged loss, mutilation
or destruction of a certificate of stock, a duplicate certificate may be issued
in place thereof, upon such terms and conditions as the Directors may prescribe.
6. ISSUE OF CAPITAL STOCK. The whole or any part of the then authorized
but unissued shares of each class of stock may be issued at any time or from
time to time by the Board of Directors without action by the stockholders.
7. REACQUISITION OF STOCK. Shares of stock previously issued which have
been reacquired by the corporation, may be restored to the status of authorized
but unissued shares by vote of the Board of Directors, without amendment of the
Articles of Organization.
ARTICLE V
PROVISIONS RELATIVE TO DIRECTORS, OFFICERS,
--------------------------------------------
STOCKHOLDERS AND EMPLOYEES
--------------------------
1. CERTAIN CONTRACTS AND TRANSACTIONS. In the absence of fraud or bad
faith, no contract or transaction by this corporation shall be void, voidable or
in any way affected by reason of the fact that the contract or transaction is
(a) with one or more of its officers, Directors, stockholders or employees, (b)
with a person who is in any way interested in this corporation, or (c) with a
corporation, organization or other concern in which an officer, Director,
stockholder or employee of this corporation is an officer, director,
stockholder, employee or in any way interested. The provisions of this section
shall apply notwithstanding the fact that the presence of a Director or
stockholder, with whom a contract or transaction is made or entered into or who
is an officer, director, stockholder or employee of a corporation, organization
or other concern with which a contract or transaction is made or entered into or
who is in any way interested in such contract or transaction, was necessary to
constitute a quorum at the meeting of the Directors (or any authorized committee
thereof) or stockholders at which such contract or transaction was authorized
and/or that the vote of such Director or stockholder was necessary for the
adoption of such contract or transaction, provided that if said interest was
material, it shall have been known or disclosed to the Directors or stockholders
voting at said meeting on said contract or transaction. A general notice to any
person voting on said contract or transaction that an officer, Director,
stockholder or employee has a material interest in any corporation, organization
or other concern shall be sufficient disclosure as to such officer, Director,
stockholder or employee with respect to all contracts and transactions with such
corporation, organization or other concern. This section shall be subject to
amendment or repeal only by action of the stockholders.
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<PAGE>
2. INDEMNIFICATION. Each Director, officer, employee and other agent of
the corporation, and any person who, at the request of the corporation, serves
as a director, officer, employee or other agent of another organization in which
the corporation directly or indirectly owns shares or of which it is a creditor
shall be indemnified by the corporation against any cost, expense (including
attorneys' fees), judgment, liability and/or amount paid in settlement
reasonably incurred by or imposed upon him in connection with any action, suit
or proceeding (including any proceeding before any administrative or legislative
body or agency), to which he may be made a party or otherwise involved or with
which he shall be threatened, by reason of his being, or related to his status
as a director, officer, employee or other agent of the corporation or of any
other organization in which the corporation directly or indirectly owns shares
or of which the corporation is a creditor, which other organization he serves or
has served as director, officer, employee or other agent at the request of the
corporation (whether or not he continues to be an officer, Director, employee or
other agent of the corporation or such other organization at the time such
action, suit or proceeding is brought or threatened), unless such
indemnification is prohibited by the Business Corporation Law of the
Commonwealth of Massachusetts. The foregoing right of indemnification shall be
in addition to any rights to which any such person may otherwise be entitled and
shall inure to the benefit of the executors or administrators of each such
person. The corporation may pay the expenses incurred by any such person in
defending a civil or criminal action, suit or proceeding in advance of the final
disposition of such action, suit, or proceeding, upon receipt of an undertaking
by such person to repay such payment if it is determined that such person is not
entitled to indemnification hereunder. This section shall be subject to
amendment or repeal only by action of the stockholders, and any such amendment
or repeal shall not affect the rights arising hereunder prior to the effective
date of the amendment or repeal.
ARTICLE VI
MISCELLANEOUS PROVISIONS
------------------------
1. FISCAL YEAR. Except as from time to time otherwise determined by the
Directors, the fiscal year of the corporation shall end each year on June 30.
Following any change in the fiscal year previously adopted, a certificate of
such change, signed under the penalties of perjury by the Clerk or an Assistant
Clerk, shall be filed forthwith with the state secretary.
2. SEAL. The seal of this corporation shall, subject to alteration by
the Directors, bear its name, the word "Massachusetts," and the year of its
incorporation.
3. EXECUTION OF INSTRUMENTS. All deeds, leases, transfers, contracts,
bonds, notes and other obligations authorized to be executed by an officer of
the corporation in its behalf shall be signed by the President or the Treasurer
except as the Directors may generally or in particular cases otherwise
determine.
-10-
<PAGE>
4. VOTING OF SECURITIES. Except as the Directors may otherwise
designate, the President or Treasurer may waive notice of, and appoint any
person or persons to act as proxy or attorney-in-fact for this corporation (with
or without power of substitution) at any meeting of stockholders or shareholders
of any other corporation or organization, the securities of which may be held by
this corporation.
5. CORPORATE RECORDS. The original, or attested copies, of the Articles
of Organization, By-Laws and records of all meetings of incorporators and
stockholders, and the stock and transfer records, which shall contain the names
of all stockholders and the record address and the amount of stock held by each,
shall be kept in Massachusetts at the principal office of the corporation or at
an office of its transfer agent or of the Clerk or of its resident agent. Said
copies and records need not all be kept in the same office. They shall be
available at all reasonable times to the inspection of any stockholder for any
proper purpose but not to secure a list of stockholders or other information for
the purpose of selling said list or information or copies thereof or of using
the same for a purpose other than in the interest of the applicant, as a
stockholder, relative to the affairs of the corporation.
6. ARTICLES OF ORGANIZATION. All references in these By-Laws to the
Articles of Organization shall be deemed to refer to the Articles of
Organization of the corporation, as amended and in effect from time to time.
7. AMENDMENTS. These By-Laws, to the extent provided in these By-Laws,
may be amended or repealed, in whole or in part, and new By-Laws adopted either
(a) by the stockholders at any meeting of the stockholders by the affirmative
vote of the holders of at least a majority in interest of the capital stock
present and entitled to vote, provided that notice of the proposed amendment or
repeal or of the proposed making of new By-Laws shall have been given in the
notice of such meeting, or (b) if so authorized by the Articles of Organization,
by the Board of Directors at any meeting of the Board by the affirmative vote of
a majority of the Directors then in office, but no amendment or repeal of a By-
law shall be voted by the Board of Directors and no new By-law shall be made by
the Board of Directors which alters the provisions of these By-Laws with respect
to removal of Directors, or the election of committees by Directors and the
delegation of powers thereto, nor shall the Board of Directors make, amend or
repeal any provision of the By-Laws which by law, the Articles of Organization
or the By-Laws requires action by the stockholders. Not later than the time of
giving notice of the meeting of stockholders next following the making,
amending, or repealing by the Directors of any By-law, notice thereof stating
the substance of such change shall be given to all stockholders entitled to vote
on amending the By-Laws. Any By-law or amendment of a By-law made by the Board
of Directors may be amended or repealed by the stockholders by affirmative vote
as above provided in this Section 7.
-11-
<PAGE>
EXHIBIT 4.2
RECAPITALIZATION AGREEMENT
An agreement made as of this _____ day of __________, 1998 by and among
BankVest Capital Corp., a Massachusetts corporation (the "Company"), Primus
Capital Fund III Limited Partnership, an Ohio limited partnership ("Primus"),
PNC Venture Corp., a Delaware corporation ("PNC"), Whitney Subordinated Debt
Fund, L.P. ("WSDF") and those stockholders of the Company listed on Exhibit A
---------
hereto (the "Stockholders").
WHEREAS, the signatories hereto are parties to, subject to, or enjoy the
benefits of, certain agreements, securities, and instruments more particularly
set forth on Exhibit B hereto (collectively, the "Related Agreements"); and
---------
WHEREAS, the parties propose to effect a certain "Plan of Recapitalization
and Reclassification" by filing of a certain amendment (the "Articles
Amendment") to the Amended and Restated Articles of Organization of the Company
(the "Restated Articles") which Articles Amendment is attached as Exhibit C, and
---------
by the taking of certain additional corporate action more particularly described
in the votes of the Board of Directors of the Company contained in the Unanimous
Written Consent to Action annexed hereto as Exhibit D; and
---------
WHEREAS, the parties wish to evidence and record their various agreements
in furtherance of the Plan of Recapitalization and Reclassification;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which is hereby mutually acknowledged, IT IS AGREED:
1. Recitations.
-----------
1.1. Initial Public Offering. The parties acknowledge that the
-----------------------
Company presently is preparing for its initial public offering of its
securities, an underwritten offering registered on Form S-1 covering up to that
number of shares of its Common Stock (as hereinafter defined) equal in amount to
the maximum aggregate offering price of $___________ (the "Maximum Aggregate
Offering Price") (the "Initial Public Offering").
1.2. Articles Amendment. The parties acknowledge that pursuant to the
------------------
Articles Amendment, as of a date immediately before the date upon which the
Company anticipates that its Initial Public Offering shall be declared effective
by the Securities and Exchange Commission (which shall be a date at least one
business day prior to the date on which the Company effects the Registration of
its Common Stock, as hereinafter defined, pursuant to Section 12 of the
Securities Exchange Act of 1934), the following recapitalization and
reclassification of the securities of the Company shall occur in the following
sequence:
1.2.1. There shall be authorized 25,000,000 shares of a newly
reclassified and redesignated class of common stock, par value $1.00 per share,
of the Company ("Common Stock"). The Company shall reclassify and redesignate
its authorized shares of Class A Common Stock, par value $1.00 per share, into
shares of
<PAGE>
Common Stock. Each issued and outstanding share of Class A Common Stock
thereupon shall be automatically reclassified and redesignated into one share of
Common Stock.
1.2.2. There shall be authorized 2,000,000 shares of a newly
reclassified and redesignated class of non-voting common stock, par value $1.00
per share, of the Company ("Non-Voting Common Stock"). The Company shall
reclassify and redesignate its authorized shares of Class B Common Stock, par
value $1.00 per share, into shares of Non-Voting Common Stock. Each issued and
outstanding share of Class B Common Stock, if any, thereupon shall be
automatically reclassified and redesignated into one share of Non-Voting Common
Stock.
1.2.3. All 30,000 issued and outstanding shares of Class A
Preferred Stock of the Company shall be converted automatically and without
necessity of further action into 480,000 shares/*/ of newly-constituted Common
Stock, and the Class A Preferred Stock shall be eliminated as an authorized
class of shares of the Company.
1.2.4. All 30,000 issued and outstanding shares of Class B
Preferred Stock of the Company shall be converted automatically and without
necessity of further action into 480,000 shares* of newly-constituted Non-Voting
Common Stock, and the Class B Preferred Stock shall be eliminated as an
authorized class of shares of the Company.
1.2.5. All 37,500 issued and outstanding shares of Class C
Preferred Stock of the Company shall be converted automatically and without
necessity of further action into 348,837 shares* of newly-constituted Common
Stock, and the Class C Preferred Stock shall be eliminated as an authorized
class of shares of the Company.
1.2.6. All 37,500 issued and outstanding shares of Class D
Preferred Stock of the Company shall be converted automatically and without
necessity of further action into 348,837 shares* of newly-constituted Non-Voting
Common Stock, and the Class D Preferred Stock shall be eliminated as an
authorized class of shares of the Company.
1.2.7. Without limiting the generality of the effect of the
Articles Amendment, the parties further acknowledge that the Plan of
Recapitalization and Reclassification shall render null and void the Certificate
of Designation (as defined in Exhibit B).
---------
1.2.8. Notwithstanding anything herein to the contrary, all
certificates representing shares of Class A Common Stock, which are issued and
outstanding subsequent to the effectiveness of the recapitalization and
reclassification, shall be deemed to be certificates representing the applicable
number of shares of Common Stock subject to the recapitalization and
reclassification, and such original certificates may be surrendered and
exchanged at the closing of the Initial Public Offering or any time thereafter
for such new certificates of Common Stock. Likewise, all certificates
representing shares of Class A Preferred Stock, Class B Preferred Stock, Class C
Preferred Stock and Class D Preferred Stock which are issued and outstanding
subsequent to
___________________________
/*/ Prior to giving effect to the stock split described in Section 1.3 hereof.
2
<PAGE>
the effectiveness of the recapitalization and reclassification, shall be deemed
to be certificates representing the applicable number of shares of Common Stock
and Non-Voting Common Stock as designated in Sections 1.2.3 through 1.2.6
hereof, subject to the recapitalization and reclassification, and such original
certificates may be surrendered and exchanged at the closing of the Initial
Public Offering or any time thereafter for such new certificates of Common Stock
and Non-Voting Common Stock, as applicable.
1.3. Split. The parties further acknowledge that pursuant to the
-----
resolutions of the Board of Directors of the Company annexed hereto as
Exhibit D, inter alia on the same date specified in Section 1.2 above and
- --------- ---- ----
immediately after the transactions therein specified, the Company shall effect a
3 for 2 stock split of each share of the Common Stock and the Non-Voting Common
Stock of the Company, in the form of a stock dividend.
2. Consent.
-------
2.1 Recapitalization. Primus, PNC, WSDF and the Stockholders: Consent
----------------
to the Plan of Recapitalization and Reclassification as more particularly
described in Sections 1.2 and 1.3 above; and waive any violation by the Company
of, or non-compliance on the part of the Company under each and all of the
Related Agreements which might arise by reason of the effectuation of the Plan
of Recapitalization and Reclassification.
2.2 Underwriters. Primus, PNC, WSDF and the Stockholders consent to
------------
the engagement by the Company of Piper Jaffray Inc., CIBC Oppenheimer Corp. and
Friedman, Billings, Ramsey & Co., Inc., as underwriters for the Initial Public
Offering.
2.3 Use of Name of WSDF. WSDF consents to the use of its name in the
-------------------
Registration Statement on Form S-1, in the Prospectus and in any other related
document or instrument prepared in connection with the Initial Public Offering.
3. Related Transactions.
--------------------
In addition to the transactions contemplated in Section 1 above, upon
the "Closing Date" (hereinafter defined) of the Initial Public Offering the
following transactions shall occur.
3.1 Dividend. The Company shall pay to each holder of Class A
--------
Preferred Stock, Class B Preferred Stock, Class C Preferred Stock and Class D
Preferred Stock of the Company, who is a record holder of such shares prior to
the effectiveness of the recapitalization and reclassification, as of the date
of the first closing under the Underwriting Agreement for the Initial Public
Offering ("Closing Date"), a sum in cash, or by certified or bank cashier's
check, equal to the dividend that would have been payable thereon, to the extent
cumulated and theretofore unpaid, as of the Closing Date (and as if the said
shares of preferred stock had continued to be authorized and issued, and had
been held by such holder until such Closing Date).
3.2. Note Repaid. The Company shall pay the Subordinated Note (as
-----------
defined in Exhibit B), together with interest in full, in cash or by certified
---------
or bank cashier's
3
<PAGE>
check or by wire transfer, and WSDF shall contemporaneously return the original
Subordinated Note to the Company so that same may be marked "paid and canceled."
4. Additional Agreements.
---------------------
In addition to undertaking the actions and performing the agreements above
set forth, the parties agree:
4.1. Lock-Up. Pursuant to lock-up agreements, each substantially in
-------
the form of Exhibit G annexed hereto, Primus, PNC and WSDF severally agree,
---------
among other things, for a period of 180 days after the date of the final
Prospectus for the Initial Public Offering, not to sell any securities of the
Company owned by them, unless same have been included for registration in the
Initial Public Offering, and each hereby agrees to sign such other and further
documentation, including without implied limitation any so-called lock-up
letter, as shall be reasonably requested by the underwriters of the Company in
order to further evidence such agreement.
4.2. Purchase Agreement. The Company, Primus and PNC agree that the
------------------
Primus PNC Purchase Agreement (as defined in Exhibit B) shall terminate on the
---------
effective date of the Initial Public Offering, provided however that the
warranties and representations and covenants of the parties thereto as set forth
in Paragraph 3H, all of Section 5 and Paragraphs 7A and 7C thereof shall
survive such termination to the extent expressly provided therein and, to the
extent not expressly so provided therein, to the extent provided by law. Each of
the parties to the said agreement acknowledges and agrees that each of the
others has fully and completely performed all of its obligations thereunder or,
to the extent any such obligations have not been so fully performed, that any
such obligations are waived.
4.3 Second Purchase Agreement. The Company, Primus and PNC agree
-------------------------
that the Second Primus PNC Purchase Agreement (as defined in Exhibit B) shall
---------
terminate on the effective date of the Initial Public Offering, provided however
that the warranties and representations and covenants of the parties thereto as
set forth in Paragraph 3H, all of Section 5 and Paragraphs 7A and 7C thereof
shall survive such termination to the extent expressly provided therein and, to
the extent provided by law. Each of the parties to the said agreement
acknowledges and agrees that each of the others has fully and completely
performed all of its obligations thereunder or, to the extent any such
obligations have not been so fully performed, that any such obligations are
waived.
4.4. Stockholders Agreement. Except for Paragraph 5 thereof, relating
----------------------
to certain lock-up arrangements among certain stockholders who are parties to
the Stockholders Agreement, the Company, Primus, PNC, WSDF and the Stockholders
agree that the Stockholders Agreement (as defined in Exhibit B) shall terminate
---------
on the effective date of the Initial Public Offering. Such Paragraph 5 shall
survive in accordance with the original terms of the Stockholders Agreement.
Each of the parties to the said agreement acknowledges and agrees that each of
the others has fully and completely performed all of its obligations thereunder
or, to the extent any such obligations have not been so fully performed, that
any such obligations are waived.
4
<PAGE>
4.5. Registration Rights Agreement. The Company, Primus, PNC and WSDF
-----------------------------
agree that the Registration Rights Agreement (as defined in Exhibit B) shall
---------
remain in full force and effect in accordance with its terms, provided: such
agreement shall not be deemed violated by the Plan of Recapitalization and
Reclassification or any of the actions of the Company contemplated hereunder;
each of Primus, PNC and WSDF hereby waives any registration rights it may have
with respect to a registration on Form S-8 of shares issued under the 1995
Company Stock Option Plan, as amended by the Board of Directors to date. In
addition, the Company, Primus, PNC and WSDF hereby agree that paragraph 3(a) of
the Registration Rights Agreement is hereby deleted and the following is
inserted in lieu thereof:
"(a) Each holder of Registrable Securities shall not effect any public
sale or distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days
prior to and the 180-day period beginning on the effective date of the
Company's initial public offering of Common Stock (except as part of
such underwritten registration), unless the underwriters managing the
registered public offering otherwise agree."
4.6. Primus Warrant; PNC Warrant. The Company and Primus agree that
---------------------------
the Primus Warrant (as defined in Exhibit B) shall remain in full force and
---------
effect in accordance with its terms, except that same shall be exercisable in
shares of the Company's newly constituted Common Stock, and shall be adjusted in
accordance with its terms, including with respect of the stock split described
in Section 2 above. The Company and PNC agree that the PNC Warrant (as defined
in Exhibit B) shall remain in full force and effect in accordance with its
---------
terms, except that it shall be exercisable in shares of the Company's newly
constituted Non-Voting Common Stock, and shall be adjusted in respect of the
stock split described in Section 2 above. Whenever any reference is made in
either of such Warrants to a definition contained in an instrument which is
being terminated herein, each provision of each such instrument as so referred
shall be (unless contrary to the intent and purposes hereof) deemed incorporated
by reference into such Warrant and shall thereby survive as a provision of such
Warrant.
4.7. WSDF Purchase Agreement. The Company and WSDF agree that the
-----------------------
Securities Purchase Agreement (as defined in Exhibit B) be and the same is
---------
terminated effective on the effective date of the Initial Public Offering,
provided however that the warranties and representations of the parties thereto
as set forth in Articles 5 and 6 thereof shall survive such termination to the
extent expressly set forth therein and, to the extent not so expressly provided
therein, to the extent provided by law. Each of the parties to the said
agreement acknowledges and agrees that the other has fully and completely
performed all of its obligations thereunder, or that to the extent any such
obligations have not been so performed, any obligation to perform the same is
waived.
4.8. Vested Warrant. The Company and WSDF agree that the Vested
--------------
Warrant (as defined in Exhibit B) shall remain in full force and effect in
---------
accordance with its terms, except that same shall be exercisable in shares of
the Company's newly constituted Common Stock, and shall be adjusted in
accordance with its terms, including with respect to the stock split described
in Section 2 above. Whenever any reference is
5
<PAGE>
made in such Vested Warrant to a definition contained in an instrument which is
being terminated herein, each provision of each such instrument as so referenced
shall be (unless contrary to the intent and purpose hereof) deemed incorporated
by reference into the Vested Warrant and shall thereby survive as a provision of
such Vested Warrant.
4.9. Vesting Warrant. The Company and WSDF agree that the Vesting
---------------
Warrant (as defined in Exhibit B) be and the same hereby is terminated effective
---------
on the effective date of the Initial Public Offering, and WSDF hereby
acknowledges that all obligations of the Company to it thereunder will have been
satisfied.
4.10. Put Agreement. The Company and WSDF agree that the Put Agreement
-------------
(as defined in Exhibit B) be and the same hereby is terminated effective on the
---------
effective date of the Initial Public Offering, provided however that the
warranties and representations of the parties thereto as set forth therein shall
survive such termination to the extent expressly provided therein and, to the
extent not so expressly provided therein, to the extent provided by law. Each of
the parties to the said agreement acknowledges and agrees that the other has
fully and completely performed its obligations thereunder, or that to the extent
any such obligations have not been so performed, such obligation to perform the
same is waived.
4.11 Consent and Waiver. Primus, PNC and WSDF hereby consent to the
------------------
increase in the number of shares subject to issuance under the 1995 Stock Option
Pool from 600,000 shares currently to 1,100,000 (post-split) as provided in
Exhibit D hereto.
- ---------
5. Unified Agreement.
-----------------
The parties express their intention that the provisions hereof
constitute a unified agreement, and that although certain events shall occur on
different dates it is the intention of the parties that none of the transactions
be given permanent effect unless all of the transactions herein specified shall
become effective. Consequently, in the event that there is no closing of the
Initial Public Offering on or before June 30, 1999, then the parties (unless
they otherwise unanimously agree) intend that this Agreement shall become null
and void, and of no further force or effect (except that such nullification
shall not limit any right of enforcement of, or for damages in connection with
any breach of this agreement on the part of any party). In the event that this
Agreement shall terminate as herein specified and certain partial performances
hereunder shall have been completed by the parties hereto (by way of example
only, if there shall have been an effective date but not a closing date under
the Initial Public Offering, such that the transactions contemplated by the
Articles Amendment shall have been effected), the parties severally covenant and
agree to take any and all action, including without implied limitation any and
all necessary votes of stockholders, and to file any and all instruments and
documents, including without implied limitation such amendments to or
restatements of the Articles of Organization of the Company as on file with the
Secretary of The Commonwealth of Massachusetts, as shall be necessary,
appropriate or, upon the reasonable request of any party hereto, desirable in
order to restore all parties to their respective rights and obligations
immediately prior to the effectiveness of the Recapitalization. Without implied
limitation, such action may include the re-establishment of the capital
structure of the Company as in effect prior to the Articles Amendment, the
rescission of the
6
<PAGE>
exchange of any Company securities in connection with the Plan of Reorganization
and Recapitalization, and the repayment of any dividends theretofore paid.
6. Voting Agreement; Proxy.
-----------------------
Each of Primus, PNC, WSDF and the Stockholders severally agrees that, in
the event and to the extent it holds securities of the Company which entitle it,
pursuant to the present Articles of Organization of the Company or pursuant to
applicable Massachusetts law, to vote upon the authorization of the Articles
Amendment or to vote upon any other matter relative to the Plan of
Reorganization and Reclassification, for and in consideration of the like
covenants and undertakings herein contained, each and all of said parties shall
vote affirmatively for the authorization of the Restated Articles, and for the
authorization of all other transactions on the part of the Company herein
contemplated, at any meeting of stockholders or securities holders of the
Company, or any class thereof, or pursuant to any written consent to any action
in lieu of any such meeting. Each and any such parties further acknowledge that
any notice of any meeting at which the Plan of Recapitalization and
Reclassification would or might be considered by securities holders of the
Company shall provide a notice of the rights of dissenting stock holders for an
appraisal of their shares pursuant to Sections 76 and 86-98 of Chapter 156B of
the General Laws of The Commonwealth of Massachusetts, substantially in the form
annexed as Exhibit E. Each of the parties hereto irrevocably agrees to and does
---------
hereby waive its rights of appraisal, if any, whether arising under said
statutory sections or otherwise, and agrees to execute any and all documents
requested by the Company further to evidence such waiver or their respective
consents to the Plan of Recapitalization and Reclassification. In furtherance
of the within voting agreement of security holders of the Company, each of
Primus, PNC and WSDF agrees to and does hereby constitute Paul S. Gass and
Charles W. Cross or either of them as their duly designated proxy and attorney
in fact, in order to effectuate the provisions of this Section 6, and has
executed and does hereby deliver the several proxies annexed hereto as Exhibits
--------
F-1 through F-3. Each of Primus, PNC and WSDF does hereby further declare that
- --- ---
its respective proxy is coupled with an interest and is irrevocable.
Notwithstanding anything herein to the contrary, nothing herein shall be
interpreted to mean that Primus, PNC and WSDF are acting in concert as a group
in connection with the voting arrangement described hereunder.
7. Miscellaneous.
-------------
7.1. Binding. This Agreement shall be binding upon the parties hereto
-------
and their respective successors, assigns, heirs and legal representatives.
7.2. Applicable Law. This Agreement shall be subject to the laws of
--------------
The Commonwealth of Massachusetts without regard to principles of conflict of
law.
7.3. Further Action. The parties agree from time to time upon
--------------
reasonable request to restate such of the Related Agreements as shall survive
the execution and performance hereof, so as to include requisite cross-
references and so as to eliminate references to terminated or superseded
agreements and instruments, and further to take such other action as may be
reasonably requested by any party hereto further to evidence the provisions
hereof.
7
<PAGE>
7.4. Headings. Headings are included herein for convenience, do not
--------
form a part of this Agreement, and are not admissible as to construction.
7.5. Entire. This instrument is the entire expression of the
------
agreement of the parties with respect to its subject matter, and supersedes all
prior understandings, agreements or representations in such regard.
7.6. Specific Enforcement. The parties acknowledge the unique nature
--------------------
of the provisions hereof, and agree that damages in event of breach would be
both difficult to calculate and an inadequate remedy. Consequently, in the event
of breach, and in addition to recovering any provable damages and reimbursement
of any legal fees, the injured party shall be entitled to equitable relief,
including specific performance.
7.7 No Third Party Rights. No person or entity not signatory shall
---------------------
have any rights as a third party beneficiary under this Agreement, or to enforce
the provisions hereof on behalf of any signatory hereto.
[The Remainder of this Page is Intentionally Left Blank.]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as a
contract under seal as of the date first above written.
BANKVEST CAPITAL CORP. WHITNEY SUBORDINATED DEBT FUND, L.P.
By:____________________________ By:_________________________________________
Its:___________________________ Its:________________________________________
PRIMUS CAPITAL FUND III
LIMITED PARTNERSHIP
By: Primus Venture Partners III
Limited Partnership, its general partner
By: Primus Venture Partners, Inc.
its general partner
By:_________________________________________
Its:________________________________________
PNC VENTURE CORP.
By:_________________________________________
Its:________________________________________
EXISTING STOCKHOLDERS
____________________________________________
Paul S. Gass
____________________________________________
John P. Colton
____________________________________________
James D. Gerson
____________________________________________
Kellie D. Jacques
____________________________________________
Michael P. Karman
____________________________________________
Cathy F. Sutton
9
<PAGE>
EXHIBIT A
---------
PAUL S. GASS
JOHN P. COLTON
JAMES D. GERSON
KELLIE D. JACQUES
MICHAEL P. KARMAN
CATHY F. SUTTON
10
<PAGE>
EXHIBIT B
---------
1. Purchase Agreement by and among BankVest Capital Corp., Primus Capital Fund
III Limited Partnership and PNC Venture Corp. dated as of May 30, 1996, as
amended by First Amendment to and Waiver of Certain Provisions to Purchase
Agreement, dated as of February 28, 1997 and the Second Amendment to and
Waiver of Certain Provisions to Purchase Agreement, dated as of May 28,
1998 (collectively, "Primus PNC Purchase Agreement");
2. Amended and Restated Stockholders Agreement by and among the Company,
Primus, PNC, and the Stockholders dated as of May 28, 1998 (the
"Stockholders Agreement");
3. BankVest Capital Corp. Amended and Restated Registration Rights Agreement
by and among the Company, Primus, PNC and WSDF dated as of February 28,
1997, as amended by the First Amendment to Amended and Restated
Registration Rights Agreement, dated as of May 28, 1998 (collectively, the
"Registration Rights Agreement");
4. BankVest Capital Corp. Stock Purchase Warrant dated as of May 30, 1996,
Certificate No. WA-1, granted by the Company to Primus as amended by Stock
Purchase Warrant dated as of May 22, 1997, Certificate No. WA-1(AR)
("Primus Warrant");
5. BankVest Capital Corp. Stock Purchase Warrant dated as of May 30, 1996,
Certificate No. WB-1, granted by the Company to PNC as amended by Stock
Purchase Warrant dated as of May 22, 1997, Certificate No. WB-1(AR) ("PNC
Warrant").
6. Certificate of Vote of Directors Establishing a Series of Class of Stock
dated May 29, 1996 and filed with the Secretary of the Commonwealth of
Massachusetts ("Certificate of Designation").
7. Securities Purchase Agreement by and between the Company and WSDF dated as
of February 28, 1997 (the "Securities Purchase Agreement");
8. BankVest Capital Corp. 10.101% Subordinated Promissory Note issued by the
Company to WSDF due February 27, 2005 dated February 28, 1997 (the
"Subordinated Note");
9. BankVest Capital Corp. Common Stock Purchase Warrant granted to WSDF, dated
February 28, 1997, No. VDW-1 (the "Vested Warrant");
10. BankVest Capital Corp. Common Stock Purchase Warrant granted to WSDF, dated
February 28, 1997, No. VGW-1 (the "Vesting Warrant"); and
11. Put and Call Agreement by and between the Company and WSDF dated as of
February 28, 1997 (the "Put Agreement").
11
<PAGE>
12. Purchase Agreement by and among BankVest Capital Corp., Primus Capital
Funds III Limited Partnership and PNC Venture Corp. dated May 28, 1998
("Second Primus PNC Purchase Agreement").
12
<PAGE>
EXHIBIT 11.1
BANKVEST CAPITAL CORP.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic net income (loss) per common share:
Net income (loss) available for common
stockholders.......................... $ (18) $ (129) $ 419
Weighted average common shares
outstanding........................... 2,227,191 2,607,113 2,729,693
----------- ----------- -----------
Basic net income (loss) per common
share................................... $ (0.01) $ (0.05) $ 0.15
=========== =========== ===========
Diluted net income (loss) per share:
Net income (loss) available for common
stockholders.......................... $ (18) $ (129) $ 419
----------- ----------- -----------
Denominator:
Weighted average common shares
outstanding........................... 2,227,191 2,607,113 2,729,693
Stock option and common stock warrant
shares................................ -- -- 442,035
----------- ----------- -----------
2,227,191 2,607,113 3,171,728
----------- ----------- -----------
Diluted net income (loss) per common
share................................... $ (0.01) $ (0.05) $ 0.13
=========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of BankVest Capital
Corp. on Form S-1 of our report dated August 21, 1998 ( , 1998 as to Note
14), appearing in the Prospectus, which is part of this Registration
Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial and Other Data", "Change in Accountants" and "Experts"
in such Prospectus.
Boston Massachusetts
August 21, 1998 ( , 1998 as to Note 14)
- -------------------------------------------------------------------------------
The foregoing consent is in the form that will be signed upon completion of
the reclassification of Class A and Class B common stock into Common Stock and
Non-Voting Common Stock, respectively, and the 3 for 2 stock split as
described in Note 14 of the Notes to the Consolidated Financial Statements.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
September 29, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> JUN-30-1996 JUN-30-1997 JUN-30-1998
<PERIOD-START> JUL-01-1995 JUL-01-1996 JUL-01-1997
<PERIOD-END> JUN-30-1996 JUN-30-1997 JUN-30-1998
<CASH> 0 4,203 17,364
<SECURITIES> 0 0 0
<RECEIVABLES> 0 44,887 60,631
<ALLOWANCES> 0 1,868 5,090
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 0 1,784 3,852
<DEPRECIATION> 0 294 712
<TOTAL-ASSETS> 0 60,356 95,834
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 0 33,156 38,415
0 6,188 13,542
0 0 0
<COMMON> 0 2,716 2,816
<OTHER-SE> 0 (237) 754
<TOTAL-LIABILITY-AND-EQUITY> 0 60,356 95,834
<SALES> 0 0 0
<TOTAL-REVENUES> 2,654 9,055 22,451
<CGS> 0 0 0
<TOTAL-COSTS> 1,550 4,550 11,123
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 528 2,529 5,902
<INTEREST-EXPENSE> 551 1,541 3,384
<INCOME-PRETAX> 25 435 2,042
<INCOME-TAX> 0 35 1,015
<INCOME-CONTINUING> 25 400 1,027
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (18) (129) 419
<EPS-PRIMARY> (0.01) (0.05) 0.15
<EPS-DILUTED> (0.01) (0.05) 0.13
</TABLE>
