<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
REGISTRATION NO. 333-12355
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LEASING SOLUTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
CALIFORNIA 77-0116801
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NO.)
10 ALMADEN BOULEVARD, SUITE 1500
SAN JOSE, CALIFORNIA 95113
(408) 995-6565
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
HAL J KRAUTER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
LEASING SOLUTIONS, INC.
10 ALMADEN BOULEVARD, SUITE 1500
SAN JOSE, CALIFORNIA 95113
(408) 995-6565
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S AGENT FOR SERVICE)
---------------
COPIES TO:
RICHARD M. HARVEY, DOUGLAS CLARK NEILSSON, ESQ. EDWARD M. LEONARD, ESQ.
ESQ. LEASING SOLUTIONS, INC. BROBECK, PHLEGER &
BROWN & BAIN, P.A. 10 ALMADEN BLVD., SUITE 1500 HARRISON LLP
1755 EMBARCADERO PALO ALTO, CALIFORNIA 94303 2200 GENG ROAD
ROAD, SUITE 200 (408) 995-6565 SAN JOSE, CALIFORNIA
PALO ALTO, CALIFORNIA 95113
94306 (415) 424-0160
(415) 856-9411
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
---------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
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, other than securities offered only in connection with dividend or
interest reinvestment plans, 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 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS TO BE OFFERING PRICE AGGREGATE AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Convertible Subordi-
nated Notes............ $71,875,000 100% $71,875,000 $24,784.48(3)
- ---------------------------------------------------------------------------------------------
Common Stock............ (2) -- -- --
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee.
(2) Such indeterminate number of shares of Common Stock as may be issuable
upon conversion of the Notes, including such additional shares as may be
issuable as a result of adjustments to the conversion price. No separate
fee is required.
(3) Previously paid in the amount of $19,827.59.
---------------
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 OCTOBER 3, 1996
PROSPECTUS
- --------------------------------------------------------------------------------
$62,500,000
[LOGO OF LEASING SOLUTIONS, INC.]
LEASING SOLUTIONS, INC.
% Convertible Subordinated Notes Due 2003
- --------------------------------------------------------------------------------
The % Convertible Subordinated Notes Due 2003 (the "Notes") are being
offered by Leasing Solutions, Inc. (the "Company") and will mature on October
, 2003, unless previously redeemed or repurchased. Interest on the Notes is
payable on April and October of each year, commencing April , 1997. The
Notes are convertible into shares of the Common Stock of the Company ("Common
Stock") at any time after the date 60 days following the last date on which the
Notes are issued under the Indenture through maturity, unless previously
redeemed or repurchased, at a conversion price of $ per share, subject to
adjustment in certain events as described herein. See "Description of Notes --
Conversion."
The Notes will constitute unsecured obligations of the Company subordinated in
right of payment to all existing and future Senior Debt (as defined herein) of
the Company. Senior Debt of the Company was approximately $230 million at July
31, 1996. See "Description of Notes -- Subordination." The Notes are
redeemable, in whole or in part, at the option of the Company at any time on or
after October , 1999, at the redemption prices set forth herein, plus accrued
interest. See "Description of Notes -- Optional Redemption." Subject to certain
conditions, following the occurrence of a Change of Control (as defined
herein), each holder has the right to cause the Company to repurchase the Notes
at 100% of the principal amount thereof, plus accrued interest. See
"Description of Notes -- Change of Control."
The Notes will be represented only by Global Securities registered in the name
of a nominee of The Depositary Trust Company, as Depositary (the "Depositary").
Settlement for the Notes will be made in immediately available funds. The Notes
will trade in the Depositary's Same-Day Funds Settlement System until maturity,
and secondary market trading activity in the Notes will therefore settle in
immediately available funds. See "Description of Notes -- Global Securities."
The Common Stock is included in The Nasdaq Stock Market's National Market (the
"Nasdaq National Market"). On September 19, 1996, the last reported sales price
of the Common Stock on the Nasdaq National Market was $27.875 per share. See
"Price Range of Common Stock." Application will be made to include the Notes in
The Nasdaq SmallCap Market under the symbol "LSSIG."
SEE "RISK FACTORS" ON PAGES 6 TO 11 FOR A DISCUSSION OF CERTAIN MATERIAL
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions(2) Company(1)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note.............................. % % %
- --------------------------------------------------------------------------------
Total(4).............................. $ $ $
</TABLE>
================================================================================
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined in
"Underwriting") against certain liabilities, including liabilities under
the Securities Act of 1933, as amended ("Securities Act"). See
"Underwriting."
(3) Before deducting expenses payable by the Company estimated to be $ .
(4) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to an additional $9,375,000 aggregate principal
amount of Notes on the same terms as set forth above. If all such
additional Notes are purchased by the Underwriters, the total Price to
Public will be $ , the total Underwriting Discounts and Commissions
will be $ , and the total Proceeds to Company will be $ . See
"Underwriting."
- --------------------------------------------------------------------------------
The Notes are offered by the several Underwriters, subject to delivery by the
Company and acceptance by the Underwriters, to prior sale and to withdrawal,
cancellation or modification of the offer without notice. Delivery of the Notes
to the Underwriters is expected to be made to Prudential Securities
Incorporated through the facilities of the Depositary on or about October __,
1996.
PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC.
, 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy statements and
other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following Regional Offices of the
Commission: 7 World Trade Center, New York, New York 10048; and Suite 1400,
500 West Madison Street, Chicago, Illinois 60621-2511. Copies of such material
can be obtained from the Public Reference Section of the Commission, Room
1024, Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549, at prescribed
rates. The Commission maintains a World Wide Web site that contains
information which the Company has filed electronically with the Commission.
The address of the Commission's World Wide Web site is http://www.sec.gov. The
Common Stock is quoted on the Nasdaq National Market under the symbol "LSSI."
Reports, proxy and information statements and other information described
above may be inspected and copied at facilities maintained by the Nasdaq Stock
Market at 1735 K Street, N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
are incorporated herein by reference: (i) the Company's Annual Report on Form
10-K for the year ended December 31, 1995; (ii) the Company's Notice of 1995
Annual Meeting of Shareholders and Proxy Statement with respect to such
meeting; and (iii) the Company's Quarterly Reports on Form 10-Q, for the
quarterly periods ended March 31, 1996 and June 30, 1996.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Notes shall be deemed to be
incorporated by reference in this Prospectus and to be part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for all purposes of
this Prospectus and the Registration Statement to the extent that a statement
contained herein, therein or in any subsequently filed document which also is
incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person,
a copy of any and all of the documents incorporated by reference herein (other
than exhibits to such documents, unless exhibits are specifically incorporated
by reference into such documents). Requests for such copies should be directed
to Leasing Solutions, Inc., 10 Almaden Boulevard, Suite 1500, San Jose,
California 95113, Attention: Vice President, Corporate Finance. The Company's
telephone number is (408) 995-6565.
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AND OF THE COMMON STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus or
incorporated herein by reference. Prospective purchasers of the Notes offered
hereby should carefully consider the factors set forth under "Risk Factors."
Unless otherwise noted, the information contained in this Prospectus assumes
that the Underwriters' over-allotment option will not be exercised.
THE COMPANY
Leasing Solutions, Inc. (the "Company") is in the business of leasing
information processing and communications equipment to large, creditworthy
customers, primarily through vendor programs with equipment manufacturers. The
Company's focus is on operating leases because such leases provide the
opportunity for the Company to realize a substantial return through residuals
received upon remarketing the equipment to the original customer at the end of
the initial lease term. To date, the Company has purchased over $750 million of
equipment, representing over 275,000 assets. The Company has recently expanded
its operations to Western Europe.
The majority of the Company's vendor programs involve equipment utilized in
corporate desktop and client/server network environments. The Company estimates
that, during the first six months of 1996, desktop computers represented
approximately 85% of the purchase price of equipment purchased by the Company
for lease to its customers ("Dollar Volume"). The Gartner Group estimates that,
by 1998, more than 35% of desktop and midrange computer equipment in North
America will be leased. In order to better service their corporate customers,
the Company believes that many information processing and communications
equipment vendors are choosing to outsource their lease finance function to
independent leasing companies, such as the Company.
The Company's vendor programs generally involve equipment purchase and
remarketing relationships with manufacturers. The Company has existing vendor
programs for the United States with Apple Computer, Auspex Systems, Dell
Computer, Memorex Telex, NCR, Quickturn Design Systems, and Sybase. The Company
also has a vendor program with Dell Computer for Western Europe, and has
entered into a letter of intent with Cisco Systems for a vendor program in the
United States and Western Europe. In addition, the Company currently has a
significant lease financing relationship with a major systems integrator and
anticipates establishing additional systems integrator programs in the future.
The ten largest customers of the Company, by Dollar Volume, during the 18
months ended June 30, 1996, and listed alphabetically, were Apple Computer,
EDS, Ernst & Young LLP, Honeywell, L.L. Bean, Source Services, the State of
California, Tandy, Western Digital, and Xerox. The Company has over 400 master
lease agreements in place with its corporate customers.
Key factors contributing to the Company's growth in profitability have been
its ability to estimate residual values and maximize realized residual values
in the remarketing process. When estimating residual values, the Company
utilizes, among other sources, residual estimates available from independent
sources, such as the Gartner Group, input from its vendor relationships and the
experience and expertise of its management team. The Company believes that its
focus and management expertise with respect to the information processing and
communications equipment sector of the leasing industry have been important
elements of its successful remarketing efforts.
For equipment purchased through its vendor programs, the Company works
directly with the vendor's sales force in the remarketing process for equipment
manufactured by the vendor. The Company's vendor programs generally involve
residual sharing arrangements which provide financial incentives for vendors to
assist in the remarketing process. The Company believes that the value of its
equipment is greatest to the original customer when it is "embedded" in the
customer's operations, such as equipment used in client/server networks.
Therefore, the Company seeks to maximize the amount of equipment that is
remarketed in place to the original customer in order to realize the
considerably higher residual values that may result from such remarketing, as
compared to equipment sold or leased to a third party. Based on equipment
purchase cost, approximately 70% of the Company's equipment remarketed during
the 18 months ended June 30, 1996, was remarketed in place to the original
customer. See "Risk Factors -- Potential Reduction in Residual Values of Leased
Equipment."
3
<PAGE>
THE OFFERING
Securities Offered........
$62,500,000 ($71,875,000 if the Underwriters' over-
allotment option is exercised in full) aggregate
principal amount of % Convertible Subordinated
Notes due 2003 (the "Notes") to be issued under an
indenture (the "Indenture").
Interest Payment Dates.... April and October of each year at % per annum
commencing April , 1997. See "Description of
Notes."
Maturity.................. October , 2003.
Conversion Rights......... The Notes are convertible into Common Stock of the
Company at the option of the holder at any time
after the date 60 days following the last date on
which the Notes are issued under the Indenture
through maturity, unless previously redeemed or
repaid, at a conversion price of $ per share
(equivalent to a conversion rate of approximately
shares per $1,000 principal amount of Notes),
subject to adjustment in certain events. See
"Description of Notes -- Conversion."
Redemption at the Option
of the Company............ The Notes are redeemable at any time on or after
October , 1999, in whole or in part, at the option
of the Company, at declining redemption prices set
forth herein, plus accrued interest. See
"Description of Notes -- Optional Redemption."
Change of Control......... In the event of a Change in Control (as defined in
"Description of Notes"), each holder of Notes will
have the right to require the Company to repurchase
all or any part of the holder's Notes at a
repurchase price of 100% of the principal amount
thereof, plus accrued interest. See "Description of
Notes -- Change of Control."
Subordination............. The Notes will constitute general unsecured
obligations of the Company and will be subordinated
in right of payment to all existing and future
Senior Debt (as defined in "Description of Notes")
of the Company, and are effectively subordinated to
all existing and future indebtedness and other
liabilities of Subsidiaries (as defined herein) of
the Company. At July 31, 1996, the Company had
approximately $230 million of indebtedness
outstanding that would have constituted Senior Debt
and the subsidiaries of the Company had
approximately $28 million of indebtedness
outstanding and other liabilities (excluding
intercompany liabilities) to which the Notes would
have been structurally subordinated. The Indenture
contains no limitations on the incurrence of
additional indebtedness or other liabilities by the
Company or any of its Subsidiaries. See
"Description of Notes -- Subordination."
Use of Proceeds...........
Principally to fund the Company's equity investment
in equipment it leases to its customers and for
general corporate purposes. Also may be used to
repay a portion of its long-term, non-recourse
debt. See "Use of Proceeds."
Listing................... Application will be made to include the Notes in
The Nasdaq SmallCap Market under the symbol
"LSSIG." The Common Stock is included in the Nasdaq
National Market under the symbol "LSSI."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
----------------------- -----------------
1993 1994 1995 1995 1996
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues....................... $50,818 $60,087 $80,676 $ 36,713 $ 59,864
Costs and expenses (1)............... 37,922 45,141 62,233 28,342 47,489
------- ------- ------- -------- --------
Transaction contribution............. 12,896 14,946 18,443 8,371 12,375
Selling, general and administrative
expenses............................ 7,435 7,294 8,584 4,077 5,419
------- ------- ------- -------- --------
Income before income taxes........... 5,461 7,652 9,859 4,294 6,956
Provision for income taxes........... 2,242 3,060 3,931 1,718 2,846
------- ------- ------- -------- --------
Net income........................... $ 3,219 $ 4,592 $ 5,928 $ 2,576 $ 4,110
======= ======= ======= ======== ========
Net income per share................. $ .66 $ .75 $ .93 $ .41 $ .53
======= ======= ======= ======== ========
Shares used in computing per share
amounts............................. 4,884 6,096 6,373 6,241 7,727
======= ======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Investment in leases.................................... $291,344 $291,344
Total assets............................................ 314,817 316,992
Recourse debt........................................... 118,728 71,364
Nonrecourse debt........................................ 123,264 110,303
% Convertible Subordinated Notes........................ -- 62,500
Retained earnings....................................... 20,361 20,361
Shareholders' equity.................................... 57,723 57,723
</TABLE>
- --------
(1) All expenses other than selling, general and administrative expenses.
(2) Adjusted to reflect the sale of the Notes offered hereby (after deducting
estimated underwriting discounts and commissions and offering expenses) and
the application of the net proceeds therefrom. See "Use of Proceeds."
5
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS,
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, IN CONNECTION WITH AN
INVESTMENT IN THE NOTES OFFERED HEREBY.
This Prospectus includes certain statements that may be deemed to be
"forward-looking statements." All statements, other than statements of
historical facts, included in this Prospectus that address activities, events
or developments that the Company expects, believes or anticipates will or may
occur in the future, including, without limitation, with respect to demand and
competition for the Company's lease financing services and the products to be
leased by the Company, the continued availability to the Company of adequate
financing, risks and uncertainties of doing business in Europe, the ability of
the Company to recover its investment in equipment through remarketing, the
ability of the Company to manage its growth, the Company's business
strategies, and the Company's expansion of its operations, are forward-looking
statements. These statements are based on certain assumptions and, in certain
cases, analyses made by the Company in light of its experience and its
perception of historical trends, current conditions, expected future
developments and other factors it believes are appropriate in the
circumstances. Such statements are subject to a number of assumptions, risks
or uncertainties, including the following risk factors, general economic and
business conditions, the business opportunities (or lack thereof) that may be
presented to and pursued by the Company, changes in laws or regulations and
other factors, many of which are beyond the control of the Company.
Prospective investors are cautioned that any such statements are not
guarantees of future performance and that actual results or developments may
differ materially from those projected in forward-looking statements.
POTENTIAL REDUCTION IN RESIDUAL VALUES OF LEASED EQUIPMENT. The Company has
historically emphasized operating leases with a term of 24 to 36 months,
rather than direct finance leases. In general, under the Company's operating
leases, the present value of the monthly lease payments will pay back 80% to
90% of the purchase price of the equipment, whereas the present value of the
monthly lease payments under its direct finance leases will generally pay back
the Company's entire investment in the equipment. As a result, under its
operating leases, the Company assumes the risk of not recovering its entire
investment in the equipment through the remarketing process.
At the inception of each operating lease, the Company estimates a residual
value for the leased equipment based on guidelines established by the
Company's Investment Committee. However, as is typical of information
processing and communications equipment, the equipment owned and leased by the
Company is subject to rapid technological obsolescence. Furthermore, decreases
in manufacturers' prices of equipment may adversely affect the market value of
such equipment, and thus its residual value. While the Company's experience
generally has resulted in aggregate realized residual values for equipment in
excess of the initial estimated residual values for such equipment, a decrease
in the market value of such equipment at a rate greater than expected by the
Company, whether due to rapid technological obsolescence, price decreases or
other factors, would adversely affect the residual values of such equipment.
In addition, since early 1993, the Company has entered into new vendor
programs and one systems integrator relationship that have produced
substantial lease volume. Approximately 68% of the purchase price of equipment
purchased by the Company for lease to its customers ("Dollar Volume") during
the 18 months ended June 30, 1996 has been purchased pursuant to such new
vendor programs or systems integrator relationship. The Company estimates that
during such 18 month period, desktop computers represented 85%, by its Dollar
Volume. The initial lease terms of most of the leases to which such equipment
is subject have not yet expired and, as a result, the Company does not yet
have remarketing experience with respect to such equipment. Additionally, the
desktop computer equipment purchased as a result of such new vendor programs
or such systems integrator relationship is a different type of information
processing and communications equipment than equipment for which the Company
has significant remarketing experience. Therefore, the Company's historical
experience in estimating residual values may not be applicable to equipment
distributed by such new vendors or systems integrator, and the Company's
historical remarketing experience is not necessarily indicative of future
performance.
6
<PAGE>
Accordingly, there can be no assurances that the Company's estimated
residual values for equipment will be achieved. If the Company's estimated
residual values with respect to any type of equipment are reduced or not
realized in the future, the Company may not recover its investment in such
equipment and, as a result, its operating results, cash flows and financial
condition could be materially adversely affected. As of June 30, 1996, the
total net unrealized residual (book) value of the Company's leased equipment
reflected in the Company's balance sheet was approximately $99 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations (hereinafter, "MD&A") -- Lease Accounting."
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's future
quarterly operating results may fluctuate. The Company's quarterly results of
operations are susceptible to fluctuations for a number of reasons, including,
without limitation, any reduction of expected residual values related to the
equipment the Company leases. Quarterly operating results could also fluctuate
as a result of the sale by the Company of equipment in its lease portfolio, at
the expiration of a lease term or prior to such expiration, to the lessee or
to a third party or the sale of the stream of monthly rental payments under
its leases to a third party. Such sales of equipment or lease receivables may
have the effect of increasing revenues and net income during the quarter in
which the sale occurs, and reducing revenues and net income otherwise expected
in subsequent quarters. See "Potential Reduction in Residual Values of Leased
Equipment" above and "MD&A -- Lease Accounting," "MD&A -- Results of
Operations for the Three Years Ended December 31, 1995" and "MD&A -- Results
of Operations for the Six Months Ended June 30, 1996."
In the event the Company's revenues or earnings for any quarter are less
than the level expected by securities analysts or the market in general, such
shortfall could have an immediate and significant adverse impact on the market
price of the Company's Common Stock. Any adverse impact could be greater if a
shortfall occurs near the time of any material decrease in any widely followed
stock index or in the market price of the stock of one or more public
equipment leasing companies or major vendors or customers of the Company. See
"Possible Volatility of Share Price" below.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations for preceding quarters are not
necessarily meaningful and that such results for one quarter should not be
relied upon as an indication of future performance.
DEPENDENCE ON VENDORS AND SYSTEMS INTEGRATORS. In 1995, approximately 21%,
13% and 10% of the Company's lease volume (by Dollar Volume) resulted from
leases with respect to equipment purchased by the Company through its vendor
programs with Dell Computer, Memorex Telex and Apple Computer, respectively.
During the six months ended June 30, 1996, approximately 60%, 8% and 4%,
respectively, of such lease volume resulted from such vendor programs.
Furthermore, a major systems integrator with which the Company has a lease
financing relationship accounted for 14% of such lease volume during 1995 and
17% of such lease volume during the first six months of 1996. The loss of any
of its major vendors, and particularly Dell, or such systems integrator could
have a material adverse effect on the Company's results of operations and
financial condition. The inability of the Company to develop additional vendor
programs and systems integrator relationships could adversely affect the
Company's ability to continue to grow its lease portfolio. Several of the
Company's other vendor programs have not, to date, produced significant
volumes of leased equipment or revenues. See "Business -- Leasing and Sales
Activities -- Vendor Programs."
As noted, the Company's vendor program with Dell represented approximately
60% of its lease volume for the first six months of 1996. Virtually all of the
equipment purchased for lease under the Dell program is desktop computer
equipment. See "Potential Reduction in Residual Values of Leased Equipment"
above. The vendor program with Dell is non-exclusive and, accordingly, does
not require Dell to involve the Company in the lease financing requests of
Dell's customers. The Dell vendor program agreement presently expires in
January, 1998. In the event the Company's agreement with Dell were to expire
or Dell chose to refer a significant amount of the lease financing requests of
its corporate customers to other lease financing sources, the Company's lease
volume and ultimately its results of operations and financial condition would
be materially adversely affected.
7
<PAGE>
The Company has had a vendor program with Memorex Telex since the Company's
inception in 1986. As of June 30, 1996, the net book value of the Company's
leased equipment acquired from Memorex Telex reflected in the Company's
balance sheet was approximately $56 million. The agreements documenting the
Company's vendor program with, and portfolio acquisitions from, Memorex Telex
(see "Business -- Leasing and Sales Activities -- Vendor Programs") provide
that Memorex Telex will remarket its equipment purchased by the Company, or
assist the Company with respect to its remarketing of such equipment, when the
initial lease term ends. Memorex Telex has reported substantial losses over
the last few years and is having difficulties meeting its obligations. In the
event Memorex Telex does not improve its operating results and obtain
necessary additional capital in the near future, there is a substantial
possibility that it will file for protection under the bankruptcy laws.
However, if such filing occurs, there can be no assurances that Memorex Telex
will be able to successfully reorganize. As a result, Memorex Telex may not be
able to continue in business or may be forced to materially curtail its
business, either of which would adversely affect its ability to meet its
obligations under its agreements with the Company. Accordingly, a continuation
of Memorex Telex's financial difficulties could have a material adverse effect
on the Company's results of operations and financial condition.
The Company has had a vendor program with Apple Computer since mid-1993.
Apple has reported substantial losses from operations over the last year. In
the event Apple's financial difficulties result in it being acquired by a
company with a captive leasing subsidiary or an exclusive relationship with
another leasing company, there is an additional risk that Apple will not renew
its vendor program agreement with the Company when it expires at the end of
1996. Furthermore, if Apple's financial difficulties persisted over a longer
period, Apple may be forced to materially curtail its business, which could
affect its ability to meet its obligations under its agreement with the
Company, including its obligation to assist the Company with respect to
remarketing of Apple equipment purchased by the Company. Accordingly, a
continuation of Apple's financial difficulties could have a material adverse
effect on the Company's results of operations and financial condition.
DEPENDENCE ON AVAILABILITY OF FINANCING. The operating lease business on
which the Company focuses is a capital intensive business. The typical
operating lease transaction requires a cash investment by the Company of 10%
to 20% of the original equipment cost, commonly known in the equipment leasing
industry as an "equity investment." The Company's equity investment is
typically financed with either recourse borrowings, the net proceeds of the
sale of debt or equity securities or internally generated funds. It is
expected that the net proceeds from the sale of Notes in this offering will be
used primarily to provide capital for such equity investments. The balance of
the equipment cost is typically financed with the proceeds of long-term,
nonrecourse debt. In addition, the Company typically finances the acquisition
of equipment for lease through short-term, "warehouse" lines of credit prior
to obtaining long-term, permanent financing for the equipment. Accordingly,
the Company's ability to successfully execute its business strategy and to
sustain its growth is dependent, in part, on its ability to obtain recourse
and nonrecourse debt capital, both short-term and long-term, and to raise
additional debt or equity capital to meet its equity investment requirements
in the future. Although, to date, the Company has been able to obtain the
recourse and nonrecourse borrowing, and raise the other capital, it requires
to finance its business, no assurances can be given that the necessary amount
of such capital will continue to be available to the Company on favorable
terms or at all. In particular, any material failure of the Company to achieve
its residual value estimates through the remarketing of equipment would
adversely affect its ability to finance its equity investments. In addition,
the Company only recently expanded its lease financing activities to Western
Europe and, as yet, has not put into place any lines of credit to support such
activities. If the Company were unable to obtain any portion of its required
financing on favorable terms, the Company would be required to reduce its
leasing activity, which would have a material adverse effect on the Company's
results of operations and financial condition. See "MD&A -- Liquidity and
Capital Resources" and "Business -- Financing."
DEPENDENCE ON CREDITWORTHY CUSTOMERS. The Company has focused its marketing
and sales efforts, through its vendor programs and in general, on leasing
equipment to large, creditworthy customers. To date, the credit quality of the
Company's customers, and the Company's resulting successful delinquency and
default experience, have enabled the Company to raise sufficient amounts of
debt and equity capital to fund its equipment purchases. In the event the
actual or perceived credit quality of the Company's customer base
8
<PAGE>
materially decreases, or the Company has a material increase in its
delinquency and default experience, the Company may find it difficult to
continue to obtain the capital it requires, resulting in a material adverse
effect on its results of operations and financial condition (see "Dependence
on Availability of Financing" above). Furthermore, a material increase in the
Company's delinquency and default experience would, alone, have a material
adverse effect on its results of operations.
INTEREST RATE RISK. The Company's equipment leases are structured on a fixed
monthly rental basis. Prior to obtaining long-term financing for its leases
and the related equipment, the Company typically finances the purchase of
those assets through short-term, "warehouse" lines of credit which bear
interest at variable rates. The Company is exposed to interest rate risk on
leases financed through its warehouse facilities to the extent interest rates
increase between the time the leases are initially financed and the time they
are permanently financed. Increases in interest rates during this period could
narrow or eliminate the spread, or result in a negative spread, between the
effective interest rate the Company realizes under its leases and the interest
rate that the Company pays under its warehouse facilities or, more
importantly, under the borrowings used to provide long-term financing for such
leases. To protect the Company against this risk, the Company's Board of
Directors has approved a hedging strategy and, as appropriate, the Company
will hedge against such interest rate risk. To date, the Company has not
engaged in any such hedges. There can be no assurance, however, that the
Company's hedging strategy or techniques will be effective, that the
profitability of the Company will not be adversely affected during any period
of changes in interest rates or that the costs of hedging will not exceed the
benefits. See "MD&A -- Liquidity and Capital Resources."
DEPENDENCE ON MAJOR CUSTOMERS. The Company has two customers, the State of
California and Xerox Corporation, which accounted for 11.2% and 10.3%,
respectively, of 1995 revenues. During the first six months of 1996, the
Company had three customers, Xerox, the State of California and Ernst & Young
LLP, which accounted for 17.6%, 11.2% and 9.8%, respectively, of revenues for
that period. The Company's lease agreements with these customers presently
expire between now and mid-1999. In the event any of these customers, and
particularly Ernst & Young LLP (which has represented approximately 50% of the
Company's lease volume, by Dollar Volume, in the first six months of 1996), or
any of the Company's other major customers, ceases to lease additional
equipment or materially reduces the amount of equipment it leases from the
Company in the future, the Company's operating results could be materially
adversely affected.
MANAGEMENT OF GROWTH. In the past three and a half years, the Company
financed a significantly greater number of leases than it had in the prior
seven years of its existence. As a result of this rapid growth, the net book
value of the Company's lease portfolio grew from $69 million at December 31,
1992 to $291 million at June 30, 1996. In light of this growth, the historical
performance of the Company's lease portfolio may be of limited relevance in
predicting future lease portfolio performance. Any credit or other problems
associated with the large number of leases financed in recent years will not
become apparent until sometime in the future.
In order to support the anticipated growth of its business, the Company has
added a substantial number of new personnel since the beginning of 1995 and
expects to add a substantial number of additional personnel during the balance
of 1996 and during 1997. The Company is absorbing, and will continue to absorb
in the future, the effects of additional personnel costs and the
implementation of new software systems necessary to manage such growth. The
Company's future operating results will depend on its ability to attract, hire
and retain skilled employees and on the ability of its officers and key
employees to continue to implement and improve its operational and financial
control systems and to train and manage its employees. The Company's inability
to manage growth effectively, should it occur, or to attract and retain the
personnel it requires, could have a material adverse effect on the Company's
results of operations.
EXPANSION TO WESTERN EUROPE. In April 1996, the Company expanded its lease
financing activities to Western Europe by acquiring a small independent
leasing company in the United Kingdom. Although no assurances can be given,
the Company expects that, in addition to its present capabilities in the
United Kingdom, it will be in a position to provide lease financing to its
vendors' customers in Germany in the next few weeks and to their customers in
France, Belgium and the Netherlands by the end of 1996. International
activities pose certain risks not faced by leasing companies that limit
themselves to United States lease financing activities.
9
<PAGE>
Fluctuations in the value of foreign currencies relative to the U.S. dollar,
for example, could adversely impact the Company's results of operations.
International activities also could be adversely affected by factors beyond
the Company's control, including the imposition of or changes in government
controls, export license requirements, or tariffs, duties or taxes and changes
in economic and political conditions. In addition, cross-border leasing
transactions within Western Europe raise the risk that VAT or other taxes that
are not reimbursable by the lessee may be imposed on the transaction.
The principal impetus for the Company expanding its operations to Western
Europe was its vendor program agreement with Dell. The Company is in the
process of negotiating the extension of the term of this agreement with Dell,
which presently expires on October 31, 1996, to October 1997 or later. In the
event the agreement is not extended, the Company may not have the lease volume
in Europe to support its infrastructure and related costs and, as a result,
could experience losses in its European operations. Furthermore, the European
vendor program with Dell does not obligate Dell to participate in the
remarketing of equipment the Company purchases from Dell. Although the Company
recognizes that fact when estimating residuals for purposes of providing
pricing for leases of Dell equipment in Europe, no assurances can be given
that the Company will adequately take into account the impact on the Company's
ability to recover its estimated residuals on such equipment which results
from Dell not participating in such remarketing. See "Potential Reduction in
Residual Values of Leased Equipment" above.
COMPETITION. The information processing and communications equipment leasing
business is characterized by significant competition. The Company competes
with leasing companies, commercial banks and other financial institutions with
respect to opportunities to provide lease financing to end-user customers and
to provide vendor programs to manufacturers of such equipment. A substantial
number of the Company's competitors are significantly larger, and have
substantially greater resources, than the Company. The Company's relatively
limited amount of capital places it at a disadvantage in relation to its
larger competitors, particularly in connection with financing lease
transactions involving large dollar volumes of equipment where the cost of the
equipment substantially exceeds the amount of debt available for such
financing. See "Business -- Competition."
SUBORDINATION OF NOTES. The indebtedness evidenced by the Notes is
subordinate to the prior payment in full of all Senior Debt (as defined in
"Description of Notes"). At July 31, 1996, the Company had approximately $230
million of Senior Debt outstanding. In addition, because a substantial portion
of the Company's operations and financing activities are or will be conducted
through subsidiaries, claims of holders of indebtedness and of other creditors
of such subsidiaries will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes. At July 31, 1996, the Company's subsidiaries
had approximately $28 million of debt outstanding. The Indenture will not
limit the amount of additional indebtedness, including Senior Debt or pari
passu indebtedness, that the Company or any of its subsidiaries can create,
incur, assume or guarantee. During the continuance of any default (beyond any
applicable grace period) in the payment of principal, premium, interest or any
other payment due on the Senior Debt, no payment of principal or interest on
the Notes may be made by the Company. In addition, upon any distribution of
assets of the Company after any dissolution, winding up, liquidation or
reorganization, the payment of the principal and interest on the Notes is
subordinated to the extent provided in the Indenture to the prior payment in
full of all Senior Debt and is structurally subordinated to claims of
creditors of each subsidiary of the Company. By reason of this subordination,
in the event of the Company's dissolution, holders of Senior Debt may receive
more, proportionately, and holders of the Notes may receive less,
proportionately, than the other creditors of the Company. The Company's cash
flow and ability to service debt, including the Notes, are dependent, in part,
upon the earnings of its subsidiaries and the distribution of those earnings
to, or upon payments by those subsidiaries to, the Company. The ability of the
Company's subsidiaries to make such distributions or payments are subject to
contractual or statutory restrictions. See "Description of Notes."
REPURCHASE OF NOTES UPON CHANGE OF CONTROL; AVAILABILITY OF FUNDS. In the
event of a Change of Control (as defined in "Description of Notes"), each
holder of Notes will have the right to require that the Company repurchase the
Notes in whole or in part at a redemption price of 100% of the principal
amount thereof,
10
<PAGE>
plus accrued interest to the date of purchase. If a Change of Control were to
occur, there can be no assurance that the Company would have sufficient funds
to pay such redemption price for all Notes tendered by the holders thereof.
See "Subordination of Notes" above. The Company's ability to pay such
redemption price is, and may in the future be, limited by the terms of its
lines of credit or other agreements relating to indebtedness that constitute
Senior Debt. See "Description of Notes."
POSSIBLE VOLATILITY OF SHARE PRICE. The market price of the shares of the
Company's Common Stock has been highly volatile. In addition, in recent years
the stock market in general and the market for shares of small capitalization
stocks in particular have experienced extreme price fluctuations which have
often been unrelated to the operating performance of affected companies. For
example, the market price may be significantly affected by actual or
anticipated financial results of the Company, the market price of stocks of
other equipment leasing companies, announcements from vendors of the Company's
leased equipment regarding new products or technological innovations,
equipment price changes, a decision by a holder of a significant percentage of
the Company's outstanding shares to liquidate its position in those shares,
changes in government regulations, changes in prevailing interest rates,
accounting principles or tax laws applicable to the Company, the operating
results or financial condition of the Company's vendors or principal
customers, or acquisitions affecting the Company's vendors or principal
customers. See "Price Range of Common Stock." There can be no assurance that
the market price of the Company's Common Stock will not experience significant
fluctuations in the future, including fluctuations that are unrelated to the
Company's performance.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET PRICE OF
COMMON STOCK. As of the expected effective date of this Prospectus,
approximately 6,268,287 shares of Common Stock (excluding the shares of Common
Stock issuable upon the conversion of the Notes) will be outstanding and
freely transferable without restriction. The Company and each of the Company's
directors and officers has agreed with the Underwriters not to sell any shares
of Common Stock within the 90-day period after the date hereof. At the end of
such 90-day period, approximately 1,922,158 shares subject to such lock-up
agreements will become eligible for sale, subject, with respect to
approximately 1,836,950 of those shares, to the provisions of Rule 144. Sales
of any such shares after such period could materially adversely affect the
market price of the Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be $60,325,000 ($69,419,000 if the Underwriters' over-
allotment option is exercised in full), after deducting estimated underwriting
discounts and commissions and expenses of this offering. The Company intends
to use the net proceeds primarily to provide capital for its equity
investments in equipment for lease to its customers, including equipment in
portfolios acquired by the Company, and for general corporate purposes. It
may, as well, use a portion of the net proceeds to pay off a portion of its
long-term debt. A portion of such net proceeds may be used to acquire other
companies or businesses in the same industry as the Company and the lease
portfolios of other companies. The Company does consider such acquisitions in
the normal course of its business, but does not have any present commitments
or agreements with respect to any acquisitions. Although the Company is
presently negotiating the acquisition of a lease portfolio in Germany, it does
not expect to use any of the net proceeds of this offering to finance that
acquisition.
Prior to use of the net proceeds for the purposes described above, it will
be used to repay a portion of the Company's outstanding short-term debt under
its secured, recourse bank lines of credit, which, at June 30, 1996, totaled
$112,200,000. The Company will have the ability to reborrow all or a portion
of any such amount it repays to purchase equipment for lease. The debt under
such lines of credit bears interest at an effective weighted average rate
(based on the outstanding balance of each such line at June 30, 1996) of 8.2%
per annum. The recourse debt outstanding under such lines of credit at June
30, 1996 matures from August, 1996 through 2001. Proceeds of such borrowings
were used to purchase equipment for lease to customers. The Company may use a
portion of the net proceeds to pay off a long-term, nonrecourse loan to
Leasing Solutions Receivables, Inc., a subsidiary of the Company. The loan,
which bears interest at 9.71% per annum and matures in May 1998, had a
principal balance of $12,961,000 at June 30, 1996. If the Company does not use
the entire net proceeds for such purposes, it will invest such available funds
in United States government agency secured investments, or commercial paper
rated Baa3 or better by Moody's Investor Services (or with a substantially
similar rating), with maturities not in excess of three months.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is included on the Nasdaq National Market under
the symbol "LSSI." The following table sets forth, for the periods indicated,
the high and low sales prices of the Common Stock as reported by the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
FISCAL 1994
First Quarter................................................ $12.750 $ 8.000
Second Quarter............................................... $10.750 $ 7.750
Third Quarter................................................ $ 9.750 $ 7.750
Fourth Quarter............................................... $ 9.000 $ 5.625
FISCAL 1995
First Quarter ............................................... $10.375 $ 6.375
Second Quarter............................................... $12.000 $ 9.125
Third Quarter................................................ $15.250 $11.000
Fourth Quarter............................................... $16.250 $12.500
FISCAL 1996
First Quarter................................................ $15.625 $12.500
Second Quarter............................................... $17.250 $12.625
Third Quarter (through September 19, 1996)................... $28.625 $13.500
</TABLE>
On September 19, 1996, the last reported sales price for the Common Stock on
the Nasdaq National Market was $27.875 per share. As of August 31, 1996, there
were approximately 180 shareholders of record of the Company's Common Stock.
12
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996, and as adjusted to reflect the sale of the Notes offered hereby, and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds."
<TABLE>
<CAPTION>
AT JUNE 30, 1996
--------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED
-------- -----------
<S> <C> <C>
Recourse debt (1)......................................... $118,728 $ 71,364
Nonrecourse debt (1)...................................... 123,264 110,303
% Convertible Subordinated Notes (2)...................... -- 62,500
-------- --------
Total debt............................................ $241,992 $244,167
-------- --------
Shareholders' equity:
Preferred Stock, 5,000,000 shares authorized, none
outstanding.......................................... -- --
Common Stock, 10,000,000 shares authorized, 8,099,082
shares outstanding (3)............................... 37,342 37,342
Retained earnings..................................... 20,361 20,361
Accumulated translation adjustment.................... 20 20
-------- --------
Total shareholders' equity.......................... 57,723 57,723
-------- --------
Total capitalization...................................... $299,715 $301,890
======== ========
</TABLE>
- --------
(1) For information with respect to the Company's debt, see Note 7 of Notes to
Consolidated Financial Statements included elsewhere in this Prospectus.
(2) Before deducting estimated underwriting discounts and commissions and
offering expenses.
(3) Does not include an aggregate of 1,382,317 of Common Stock reserved for
issuance under the Company's stock option plans and stock purchase plan,
521,677 shares of which are subject to outstanding options, or 66,667
shares subject to an outstanding warrant of the Company, all as of June
30, 1996.
DIVIDEND POLICY
The Company has never declared or paid a dividend to shareholders and does
not anticipate declaring or paying a dividend in the foreseeable future, as
the Company's Board of Directors intends to retain earnings for use in the
business. Several of the agreements with respect to the Company's secured bank
lines of credit include a covenant which prohibits the Company from paying
dividends in any year in excess of 25% of its net income for that year. Any
future determination concerning the payment of dividends will depend upon the
existence of such restriction, the Company's financial condition, the
Company's results of operations, and such other factors as the Board of
Directors deems relevant.
THE COMPANY
The Company was formed in 1986 and is a California corporation. The
Company's corporate offices are located at 10 Almaden Boulevard, Suite 1500,
San Jose, California 95113, and its telephone number is (408) 995-6565.
13
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data as of December 31, 1994
and 1995 and for each of the three years in the period ended December 31, 1995
has been derived from the consolidated financial statements of the Company
included herein which have been audited. The selected consolidated financial
data as of December 31, 1991, 1992 and 1993 and for the years ended December
31, 1991 and 1992 has been derived from audited consolidated financial
statements not included herein. The selected consolidated financial data
presented below as of and for the six month periods ended June 30, 1995 and
1996 have been derived from unaudited interim consolidated financial
statements and the accounting records of the Company. In the opinion of
management, such unaudited interim consolidated financial statements include
all adjustments necessary to fairly state the information set forth therein.
The following data should be read in conjunction with the consolidated
financial statements, related notes and other financial information included
herein and incorporated herein by reference and MD&A herein. See
"Incorporation of Certain Documents by Reference."
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
---------------------------------------- ----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Operating lease
revenue............... $14,902 $20,779 $41,455 $54,216 $ 77,046 $34,752 $ 58,014
Earned lease income.... 3,538 5,341 6,603 4,256 2,885 1,513 1,146
Gain on sale of leased
equipment............. 1,785 2,951 2,416 1,103 271 206 88
Other revenues......... 3,070 1,032 344 512 474 242 616
------- ------- ------- ------- -------- ------- --------
Total revenues......... 23,295 30,103 50,818 60,087 80,676 36,713 59,864
------- ------- ------- ------- -------- ------- --------
Costs and expenses:
Depreciation-operating
leases................ 10,287 14,209 29,830 37,781 51,164 23,557 39,035
Selling, general and
administrative
expenses.............. 4,569 6,197 7,435 7,294 8,584 4,077 5,419
Interest expense....... 4,804 6,459 7,701 6,523 10,428 4,506 7,738
Other expenses......... 2,499 250 391 837 641 279 716
------- ------- ------- ------- -------- ------- --------
Total costs and
expenses.............. 22,159 27,115 45,357 52,435 70,817 32,419 52,908
------- ------- ------- ------- -------- ------- --------
Income before income
taxes.................. 1,136 2,988 5,461 7,652 9,859 4,294 6,956
Provision for income
taxes.................. 366 1,180 2,242 3,060 3,931 1,718 2,846
------- ------- ------- ------- -------- ------- --------
Net income.............. $ 770 $ 1,808 $ 3,219 $ 4,592 $ 5,928 $ 2,576 $ 4,110
======= ======= ======= ======= ======== ======= ========
Net income per share(1). $ .18 $ .43 $ .66 $ .75 $ .93 $ .41 $ .53
======= ======= ======= ======= ======== ======= ========
Shares used in computing
per share amounts...... 4,234 4,247 4,884 6,096 6,373 6,241 7,727
======= ======= ======= ======= ======== ======= ========
Ratio of earnings to
fixed charges(2)....... 1.23 1.45 1.69 2.14 1.93 1.93 1.87
OPERATING DATA:
Lease originations..... $79,889 $24,006 $87,255 $85,568 $149,382 $45,968 $127,853
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT JUNE 30,
----------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Investment in leases... $87,201 $68,577 $93,891 $124,621 $208,483 $140,879 $291,344
Total assets........... 91,667 74,096 100,715 141,364 224,102 154,217 314,817
Recourse debt.......... 9,682 8,077 7,503 9,897 71,681 34,727 118,728
Nonrecourse debt....... 66,720 58,078 68,878 89,594 93,354 81,918 123,264
Shareholders' equity... 1,929 3,744 11,099 24,438 30,912 27,180 57,723
</TABLE>
- --------
(1) See Note 2 of Notes to Consolidated Financial Statements for a description
of the computation of net income per share.
(2) For the purpose of calculating the ratio of earnings to fixed charges, (i)
earnings consist of income before income taxes plus fixed charges and (ii)
fixed charges consist of interest expense plus that portion of rental
expense deemed by the Company to be representative of the interest factor.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LEASE ACCOUNTING
Since 1990, the Company has principally engaged in two types of lease
transactions which, in accordance with Statement of Financial Accounting
Standards No. 13 ("SFAS 13"), are classified as operating leases or direct
finance leases. The allocation of income among accounting periods within a
lease term will vary depending upon the lease classification, as described
below.
Direct Finance Leases. Direct finance leases transfer substantially all
benefits and risks of equipment ownership to the lessee. A lease is a direct
finance lease if the collectibility of lease payments is reasonably certain
and it meets one of the following criteria: (1) the lease transfers ownership
of the equipment to the lessee by the end of the lease term; (2) the lease
contains a bargain purchase option; (3) the lease term at inception is at
least 75% of the estimated economic life of the leased equipment; or (4) the
present value of the minimum lease payments is at least 90% of the fair value
of the leased equipment at inception of the lease.
Direct finance leases are recorded as "Investment in direct finance leases"
upon acceptance of the equipment by the customer. At the inception of the
lease, unearned lease income represents the amount by which the gross lease
payments receivable plus estimated residual value exceeds the equipment cost.
Unearned lease income is recognized, using the interest method, as earned
lease income over the lease term.
Operating Leases. All lease contracts which do not meet the criteria of
direct finance leases are accounted for as operating leases. Monthly lease
payments are recorded as operating lease revenues. Leased equipment is
recorded, at the Company's cost, as "Investment in operating leases" and
depreciated on a straight-line basis over the lease term to the estimated
residual value at the expiration of the lease term. The residual value of an
item of leased equipment is its estimated fair market value at the expiration
of the lease. Residual values are estimated at the inception of the lease and
reviewed quarterly over the term of the lease. Estimated residual values of
leased equipment may be adjusted downward, if necessary. Decreases in
estimated residual values are made as the change in residual value becomes
apparent, and are reflected over the remaining term of the lease by increased
depreciation expense for operating leases or by decreased earned lease income
for direct finance leases.
When equipment is sold, the net proceeds realized in excess of the estimated
residual value are recorded as a "Gain on sale of leased equipment," or the
amount by which the estimated residual value exceeds the net proceeds is
recorded as a loss. To date, the Company has not had a net loss from aggregate
equipment sales for any quarterly reporting period. When equipment is re-
leased, the Company continues to depreciate the equipment in accordance with
the Company's then current estimate of its residual value, and the monthly
lease payments are recorded as revenue when billed.
Substantially all of the leases which the Company enters into are
noncancelable transactions under which the obligor must make all scheduled
payments, maintain the equipment, accept the risk of loss of such equipment
and pay all equipment related taxes. See "Business -- Leasing and Sales
Activities -- Lease Terms and Conditions."
RESULTS OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 31, 1995
Revenues. Total revenues increased $9,269,000, or 18%, from $50,818,000 in
1993 to $60,087,000 in 1994, and $20,589,000, or 34%, to $80,676,000 in 1995.
Operating lease revenue increased $12,761,000, or 31%, from $41,455,000 in
1993 to $54,216,000 in 1994, and $22,830,000, or 42%, to $77,046,000 in 1995.
The increase in operating lease revenue for both periods reflects a higher
average investment in operating leases, resulting from an increase in
operating leases originated or acquired by the Company over the three year
period. Earned lease income decreased $2,347,000, or 36%, from $6,603,000 in
1993 to $4,256,000 in 1994, and $1,371,000, or 32%, to $2,885,000 in 1995, as
a result of outstanding direct finance leases being paid down and
15
<PAGE>
fewer new direct finance leases being originated, due principally to the
Company's focus on operating leases. Gains on sale of leased equipment
decreased $1,313,000, or 54%, from $2,416,000 in 1993 to $1,103,000 in 1994,
and decreased $832,000, or 75%, to $271,000 in 1995. The decreases in 1994 and
1995 are principally due to several significant transactions being sold at a
gain in 1993 and 1994, with no such significant transactions in 1995.
Depreciation-Operating Leases. Depreciation increased $7,951,000, or 27%,
from $29,830,000 in 1993 to $37,781,000 in 1994, and $13,383,000, or 35%, to
$51,164,000 in 1995. The increase in depreciation for both years is
principally the result of an increase in the operating lease base, resulting
from increases in operating leases originated or acquired by the Company over
the three year period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $141,000, or 2%, from $7,435,000 in 1993 to
$7,294,000 in 1994, and increased $1,290,000, or 18%, to $8,584,000 in 1995.
The decrease from 1993 to 1994 is primarily due to a decrease in discretionary
year end bonuses. The increase from 1994 to 1995 is due to increased personnel
costs and compensation associated with the overall growth in leasing
activities, increase in personnel in areas such as lease contract
administration and information systems to support growth, and an increase in
discretionary year end bonuses from the prior year.
Interest Expense. Interest expense decreased $1,178,000, or 15%, from
$7,701,000 in 1993 to $6,523,000 in 1994, and increased $3,905,000, or 60%, to
$10,428,000 in 1995. The decrease in interest expense from 1993 to 1994 was
due to lower average outstanding debt, combined with lower average interest
rates in 1994. The Company's average effective borrowing rate decreased in
1994 due to (1) use of short-term lines of credit to finance certain leases
prior to permanent financing, (2) use of publicly sold, lease-backed debt
securities to refinance existing leases and to permanently finance new leases,
and (3) maturing higher rate debt. The increase in interest expense in 1995
was due to higher average recourse and nonrecourse debt outstanding, related
to the higher average investment in leases, and an increase in average
interest rates. The increased rates in 1995 resulted principally from the
issuance of $17.5 million of nonrecourse subordinated debt to finance a
portion of the Company's then existing equity investments in leases, thus
providing cash for future equity investments in leases.
Income Taxes. Provisions for income taxes were 41.1%, 40.0% and 39.9% of
income before income taxes for the years 1993, 1994 and 1995, respectively.
Net Income. As a result of the foregoing factors, net income and net income
per share increased in each of the years 1993, 1994 and 1995. Net income
increased $1,373,000, or 43%, from $3,219,000 in 1993 to $4,592,000 in 1994,
and $1,336,000, or 29%, to $5,928,000 in 1995.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1995 AND 1996
Revenues. Total revenues increased 63% to $59,864,000, for the six month
period ended June 30, 1996, compared with the corresponding prior year period.
Operating lease revenue increased 67% to $58,014,000, for the six month period
ended June 30, 1996, compared with the corresponding prior year period. The
increase in operating lease revenue reflects a higher average investment in
operating leases, resulting from an increase in operating leases originated by
the Company over the past year, and a significant increase in interim rents
received, compared to the same period of 1995. Earned lease income decreased
24% to $1,146,000 for the six month period ended June 30, 1996, compared with
the corresponding prior year period. The decrease is a result of outstanding
direct finance leases being paid down and of the Company and its customers
continuing to focus their leasing activity in 1996 on operating leases.
Depreciation-Operating Leases. Depreciation expense for operating leases
increased 66% to $39,035,000 for the six month period ended June 30, 1996,
compared with the corresponding prior year period. The increase is due to the
increase in the operating lease base, resulting from increases in operating
leases originated by the Company over the past year.
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<PAGE>
Selling, General and Administrative Expenses.Selling, general and
administrative expenses increased 33% to $5,419,000, for the six month period
ended June 30, 1996, compared with the corresponding prior year period. The
increase is primarily attributable to increased compensation and benefit costs
as a result of an increase in the number of employees, increases in travel
costs associated with increased leasing activity and the commencement of the
Company's operations in Europe, and increased occupancy costs resulting from
an expansion of the Company's headquarters and the commencement of the
Company's operations in the United Kingdom.
Interest Expense. Interest expense increased 72% to $7,738,000, for the six
month periods ended June 30, 1996, compared with the corresponding prior year
period. The increase is due to higher average recourse and non-recourse debt
outstanding, which resulted from additional borrowings to fund the growth in
the Company's lease portfolio.
Income Taxes. The provision for income taxes was 40% and 41% for the six
month periods ended June 30, 1995 and 1996, respectively.
Net Income. Net income increased 60% to $4,110,000, for the six month period
ended June 30, 1996, compared with the corresponding prior year period, as a
result of the increases in the components of total revenues specifically
described above. Earnings per share increased 29% to $.53 for the six month
period. Net income increased faster than earnings per share principally due to
the effect of the issuance of additional shares of Common Stock in the
Company's public offering in February 1996.
QUARTERLY RESULTS OF OPERATIONS FOR 1994, 1995 AND 1996
The following table sets forth a summary of the Company's operating results
for each quarter in 1994, 1995 and the first two quarters of 1996. The
information for each of these quarters is unaudited but includes all
adjustments which management considers necessary for a fair presentation
thereof.
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995 1996
------------------------------- ------------------------------- ---------------
MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30, SEP 30, DEC 31, MAR 31, JUN 30,
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues.......... $13,084 $15,123 $15,682 $16,198 $17,115 $19,598 $20,841 $23,122 $26,637 $33,227
Total costs and
expenses............... 11,528 13,512 13,679 13,716 15,030 17,389 18,294 20,104 23,675 29,233
Income before income
taxes.................. 1,556 1,611 2,003 2,482 2.085 2,209 2,547 3,018 2,962 3,994
Net income.............. $ 918 $ 982 $ 1,191 $ 1,501 $ 1,251 $ 1,325 $ 1,528 $ 1,824 $ 1,777 $ 2,333
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share.... $ .16 $ .16 $ .19 $ .24 $ .20 $ .21 $ .24 $ .28 $ .25 $ .28
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Shares used in computing
per share amount....... 5,693 6,229 6,232 6,230 6,278 6,328 6,355 6,531 7,214 8,239
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Revenues. Revenues increased in each of the above-referenced quarters
principally due to increased investment in leases, resulting from increases in
operating leases originated or acquired by the Company over those quarters,
which increased operating lease revenue. The increase in revenues from the
first quarter to the second quarter of 1994 of $2,039,000, or 16%, is
principally the result of the purchase of a significant operating lease
portfolio. The increase in revenues from the first quarter to the second
quarter of 1995 of $2,483,000, or 15%, is the result, in part, of increased
investment in leases which resulted in increased operating lease revenue. This
increase in revenues also resulted from the acceleration of the receipt of
remarketing proceeds from two significant transactions. The increase in
revenues from the third quarter to the fourth quarter of 1995 of $2,281,000,
or 11%, is principally due to the origination of leases during the fourth
quarter of 1995. Total revenues increased by $3,515,000, or 15%, and
$6,590,000, or 25%, for the first and second quarters of 1996, respectively,
compared to the immediately preceding quarter. These increases represented
increases in operating lease revenues, reflecting increases in operating
leases originated by the Company in the previous quarter, as well as increases
in interim rents received.
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<PAGE>
Costs and Expenses. Costs and expenses increased in each quarter principally
as a result of increased operating lease depreciation due to a higher
investment in operating leases, resulting from increases in operating leases
originated or acquired by the Company over those quarters, and increased
interest expense due to a higher debt balance and higher average interest
rates. Costs and expenses increased $1,984,000, or 17%, from the first quarter
to the second quarter of 1994 principally as a result of the purchase of the
significant lease portfolio noted above, and the related increase in
depreciation, and a related charge for the prepayment of debt on that
portfolio. Costs and expenses increased $1,314,000, or 10%, from the fourth
quarter of 1994 to the first quarter of 1995 principally as a result of
increased depreciation expense from leases originated in both of those
quarters and an increase in interest expense. Costs and expenses increased
$2,359,000, or 16%, from the first quarter to the second quarter of 1995
principally as a result of increased depreciation related to the increased
investment in leases and remarketing transactions noted above. Costs and
expenses increased $1,810,000, or 10%, from the third quarter to the fourth
quarter of 1995 principally as a result of depreciation from leases originated
in both of those quarters. Costs and expenses increased by $3,571,000, or 18%,
and $5,558,000, or 23%, for the first and second quarters of 1996,
respectively, compared to the immediately preceding quarter. These increases
resulted principally from increases in depreciation expense caused by
increased investment in operating leases and from increases in interest
expense caused by increased borrowings to finance the purchase of equipment
subject to such operating leases.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, any
reduction of expected residual values related to the equipment the Company
leases. Quarterly operating results could also fluctuate as a result of the
sale by the Company of equipment in its lease portfolio, at the expiration of
a lease term or prior to such expiration, to the lessee or to a third party.
Such sales of equipment may have the effect of increasing revenues and net
income during the quarter in which the sale occurs, and reducing revenues and
net income otherwise expected in subsequent quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash flow from operations of $22,658,000 during the
six month period ended June 30, 1996, compared to net income of $4,110,000 for
the same period. Cash flow from operations was higher than net income
primarily as a result of non-cash expenses, such as depreciation and
amortization, of $39,350,000, offset by uses of cash in operations, including
resulting changes in accounts payable, income taxes payable, and other assets
and liabilities, totaling $20,802,000. Investing activities, which are
primarily related to investments in equipment for lease, used $122,424,000
during the six month period. Financing activities in the six month period
generated $99,495,000 from $223,959,000 in new borrowings of recourse and non-
recourse debt and $22,681,000 from the Company's issuance of common stock in
its public offering in February, 1996 and upon exercise of options ,
aggregating $246,640,000, offset by repayment of capital lease obligation and
recourse and non-recourse borrowings, aggregating $147,145,000. The net result
of the above activity for the six month period was a decrease in cash and cash
equivalents of $271,000.
The financing necessary to support the Company's leasing activities has
principally been provided from nonrecourse and recourse borrowings.
Historically, the Company has obtained recourse and nonrecourse borrowings
from money center banks, regional banks, insurance companies, finance
companies and financial intermediaries. Beginning in 1994, the Company,
through its wholly-owned subsidiary, Leasing Solutions Receivables, Inc.,
began obtaining long-term financing for a substantial portion of its leasing
activity through the issuance of secured, nonrecourse debt securities (a
"securitization"). Borrowings under the securitizations are secured by lease
receivables and the underlying equipment financed under such arrangements.
Prior to the permanent financing of its leases, interim financing has been
obtained through short-term, secured, recourse facilities. The Company's
available credit under these short-term, recourse facilities currently totals
$184,000,000. A brief description of each of those facilities presently in
place follows.
(1) $155,000,000 facility syndicated, with ten banks, expiring September
11, 1997. Borrowings under the facility bear an interest rate, at the
Company's option, of the agent bank's prime rate or LIBOR plus 135 basis
points.
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<PAGE>
(2) $15,000,000 facility with one bank, with borrowings available through
January 31, 1997, and repayments due 240 days after borrowing. Borrowings
under the facility bear interest at LIBOR plus 250 basis points.
(3) $3,000,000 revolving facility, expiring November 15, 1996, with one
bank. Borrowings under the facility bear interest at the bank's prime rate
plus 75 basis points. In addition to interim financing of lease
transactions, proceeds borrowed under this facility are available for
general corporate purposes.
(4) $11,000,000 revolving facility, expiring November 15, 1996, with one
bank. Borrowings under the facility bear interest at the bank's prime rate
plus 100 basis points. In addition to interim financing of lease
transactions, proceeds under this facility are available for general
corporate purposes.
In addition, the Company has a $15,000,000 revolving facility, expiring
October 15, 1997, with one bank. Borrowings under the facility bear interest
at the bank's prime rate. The proceeds of borrowings under this line are used
exclusively to fund certain accounts payable to one of the Company's vendors
resulting from the purchase of equipment for lease to one significant customer
of the Company.
The Company also has a $100,000,000 non-recourse lease receivables purchase
facility with an affiliate of Citicorp. This is a revolving facility, expiring
in March 1997, and borrowings under the facility bear interest at a rate of
125 basis points over average life treasuries at the time of borrowing. To
date, the Company has refinanced approximately $46,000,000 of borrowings under
its other short-term facilities through this facility, at interest rates of
6.77% and 7.42%. The Company intends to refinance, from time to time, under
this facility, additional borrowings under its other short-term facilities in
order to fix the interest rate for these borrowings. The Company expects to
refinance, on a long-term basis, leases financed under this existing facility
under a new securitization facility, with another affiliate of Citicorp, at
the same interest rate provided by this existing facility. Although the
Company expects that the new securitization facility will become effective
during the next few weeks, no assurances can be given.
Borrowings under the above-described lines of credit are generally secured
by lease receivables and the underlying equipment financed under the facility.
Payments under the Company's borrowings and the maturities of its long-term
borrowings are typically structured to match the payments due under the leases
securing the borrowings. At June 30, 1996, the aggregate outstanding balance
under these lines of credit was $155,293,000, with a weighted average interest
rate of 7.8% per annum. The agreements for the lines of credit contain
covenants regarding leverage (a recourse liabilities-to-equity ratio of not
more than 4.5 to 1), interest coverage, minimum net worth and profitability
and a limitation on the payment of dividends. At June 30, 1996, the Company
had a recourse liabilities-to-equity ratio of 2.2 to 1.
Occasionally, the Company will obtain long-term, non-recourse financing for
individual significant lease transactions at the time or shortly after it
purchases the related equipment. The Company borrowed an aggregate of
$43,807,000 in 1995, and $33,618,000 in the six month period ended June 30,
1996, under such arrangements. An aggregate of $56,439,000, ($6,496,000 of
which is recourse), with a weighted average interest rate of 8.3% per annum,
remained outstanding under all such arrangements as of June 30, 1996.
The Company's debt financing activities typically provide approximately 80%
to 90% of the purchase price of the equipment purchased by the Company for
lease to its customers. The 10% to 20% balance of the purchase price (the
Company's equity investment in equipment) must generally be financed by cash
flow from its operations, the proceeds of subordinated debt, or its
equivalent, or recourse debt, or common stock or convertible debt sold by the
Company. In February, 1996, the Company closed a public stock offering of
1,800,000 shares of its Common Stock, under which the Company received net
proceeds of $22,493,000. Debt financing for the Company's equity investment is
not readily available in the marketplace and normally requires an interest
rate materially higher than is required by the Company's conventional debt
financing. Although the Company expects that the credit quality of its lessees
and its residual return history will continue to allow it to obtain such
financing, no assurances can be given that such financing will be available,
at acceptable terms or at all.
19
<PAGE>
The arrangements under which the Company expects to finance its leasing
activities in Europe are likely to be substantially similar to the lease
financing arrangements utilized by the Company in the United States. The
Company's European subsidiaries will engage in nonrecourse and recourse
borrowings, with terms comparable to its domestic borrowings, to provide most
of the purchase price of equipment and finance its equity investment in
equipment from one or more of the equity sources described above. The Company
has not yet secured lines of credit to support its European leasing
activities. However, although no assurances can be given, it expects that such
lines will be provided by both United States financial institutions currently
lending to the Company and by European financial institutions.
The Company's current lines of credit, if renewed or replaced, its expected
access to the public and private securities markets, both debt and equity,
anticipated new lines of credit (both short-term and long-term and recourse
and non-recourse), anticipated long-term financing of individual significant
lease transactions, and its estimated cash flow from operations are
anticipated to provide adequate capital to fund the Company's operations,
including acquisitions and financings under its vendor programs, for the next
twelve months. Although no assurances can be given, the Company expects to be
able to renew or timely replace its existing lines of credit, to continue to
have access to the public and private securities markets, both debt and
equity, and to be able to enter into new lines of credit and individual
financing transactions.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's future quarterly operating results and the market price of its
stock may fluctuate. In the event the Company's revenues or earnings for any
quarter are less than the level expected by securities analysts or the market
in general, such shortfall could have an immediate and significant adverse
impact on the market price of the Company's stock. Any such adverse impact
could be greater if any such shortfall occurs near the time of any material
decrease in any widely followed stock index or in the market price of the
stock of one or more public equipment leasing companies or major customers or
vendors of the Company.
The Company's quarterly results of operations are susceptible to
fluctuations for a number of reasons, including, without limitation, as a
result of sales by the Company of equipment it has leased to its customers or
of sales of the lease receivables under the leases with its customers. Such
sales of equipment or lease receivables, which are an ordinary but not
predictable part of the Company's business, will have the effect of increasing
revenues, and, to the extent sales proceeds exceed net book value, net income,
during the quarter in which the sale occurs. Furthermore, any such sale may
result in the reduction of revenue, and net income, otherwise expected in
subsequent quarters, as the Company will not receive lease revenue from the
sold equipment in those quarters.
Given the possibility of such fluctuations, the Company believes that
comparisons of the results of its operations to immediately succeeding
quarters are not necessarily meaningful and that such results for one quarter
should not be relied upon as an indication of future performance.
20
<PAGE>
BUSINESS
Leasing Solutions, Inc. (the "Company") is in the business of leasing
information processing and communications equipment to large, creditworthy
customers, primarily through vendor programs with equipment manufacturers. The
Company's focus is on operating leases because such leases provide the
opportunity for the Company to realize a substantial return through residuals
received upon remarketing the equipment to the original customer at the end of
the initial lease term. To date, the Company has purchased over $750 million
of equipment, representing over 275,000 assets. The Company has recently
expanded its operations to Western Europe.
The Company's vendor programs generally involve equipment purchase and
remarketing relationships with manufacturers. The Company has existing vendor
programs for the United States with Apple Computer, Auspex Systems, Dell
Computer, Memorex Telex, NCR, Quickturn Design Systems, and Sybase. The
Company also has a vendor program with Dell Computer for Western Europe, and
has entered into a letter of intent with Cisco Systems for a vendor program in
the United States and Western Europe. In addition, the Company has a lease
financing relationship with a major systems integrator. The ten largest
lessees of the Company by Dollar Volume during the 18 months ended June 30,
1996, and listed alphabetically, were Apple Computer, EDS, Ernst & Young LLP,
Honeywell, L.L. Bean, Source Services, State of California, Tandy, Western
Digital and Xerox. The Company has over 400 master lease agreements in place
with corporate customers. Although the Company has and will continue to lease
a variety of information processing and communications equipment, it estimates
that, during the first six months of 1996, desktop computers represented
approximately 85% of its Dollar Volume.
The Company works directly with a vendor's sales force in the remarketing
process for equipment distributed by that vendor. The Company's vendor
programs generally involve residual sharing arrangements which provide
financial incentives for vendors to assist in the remarketing process. The
Company believes that the value of its equipment, and particularly equipment
used in client/server network environments, is greatest to the original
customer due to its "embedded" nature in the customer's operations. Therefore,
the Company seeks to maximize the amount of equipment that is remarketed in
place to the original customer in order to realize the considerably higher
residual values that may result from such remarketing, as compared to
equipment sold or leased to a third party. Based on equipment purchase cost,
approximately 70% of the Company's equipment remarketed during the 18 months
ended June 30, 1996, was remarketed in place to the original customer.
INDUSTRY OVERVIEW
The equipment leasing industry in the United States has greatly expanded
during the last decade. According to the Equipment Leasing Association
("ELA"), a leading industry trade association, lease financing continues to
play a significant role in the United States economy, representing 30% of all
business investment in productive assets during 1995. The ELA also estimates
that approximately 80% of all United States companies lease some or all of
their equipment. Thus, the equipment leasing industry has been and continues
to be a major provider of financing for equipment in the United States.
According to the United States Department of Commerce, the annual volume of
new capital equipment, measured by original equipment cost, placed on lease in
the United States in 1995 was approximately $160 billion. According to the
ELA, computers (excluding mainframes) accounted for approximately 15% of the
dollar volume of all 1995 lease activity.
Most large companies are significant users of information processing and
communications equipment, including equipment used in client/server networks.
Since such companies acquire and upgrade information processing and
communications equipment frequently, many use leasing as a primary means of
equipment acquisition. Leasing, particularly through operating leases, also
provides a lessee with greater flexibility than ownership in the event it
outgrows its equipment or requires upgrades of its equipment to higher
performance levels. In addition, operating leases enable a company to obtain
the equipment it needs, while preserving cash flow and receiving favorable
accounting and tax treatment. The Gartner Group, an information technology
21
<PAGE>
market research firm, estimates that by the year 1998, more than 35% of
desktop and midrange computer equipment used in North America will be leased.
Information processing and communications equipment is often used in
client/server network applications. A major trend toward utilizing
client/server networks in corporate applications began in the late-1980s. This
trend was driven by the proliferation of personal computers and the
development of networking applications that distribute computer power to the
desktop. Client/server computing provides an alternative to the highly
centralized, relatively expensive mainframe and mini-computer systems that
connect multiple "dumb" terminals to a central processor and were the mainstay
of the computing world until this decade. A client/server network consists of
multiple desktop client computers with their own microprocessors and memory
and the ability to access files and applications stored on high performance
servers. Network server shipments alone grew from $2.3 billion in sales in
1989 to $7.2 billion in sales in 1994, according to International Data
Corporation, which estimates the market for servers will grow at a compounded
annual rate of 20% from 1994 to 1998. The Company believes that the use of
other network related equipment is likely to grow proportionately.
Over the last few years, there has been a trend toward large manufacturers
of information processing and communications equipment outsourcing their
equipment financing function to independent leasing companies, such as the
Company, as opposed to providing this function through a captive finance
organization. Outsourcing allows the vendor to focus on its core competencies
of designing, manufacturing, marketing and selling equipment, rather than
providing financing for its equipment. Additionally, large users of
information processing and communications equipment often acquire products
from multiple manufacturers to satisfy their network requirements.
Manufacturers, however, are typically unwilling to finance other
manufacturers' products through their own captive finance organization. By
outsourcing their leasing functions to independent leasing companies, vendors
can typically provide more comprehensive leasing services to their customers
and thus often seek the assistance of independent leasing companies to provide
such financing. Moreover, large corporate users of information processing and
communications equipment are increasingly utilizing the services of their
lease financing sources to provide equipment management and asset tracking
functions for their leased equipment.
BUSINESS STRATEGY
The Company's business strategy is to maximize residual values and grow its
lease portfolio by maintaining a highly focused and specialized approach to
its business. Key elements of the Company's business strategy include the
following.
Focus on Information Processing and Communications Equipment. By focusing on
information processing and communications equipment and, in particular,
client/server network products, the Company takes advantage of the background
and expertise of its management, most of whom have extensive sales and
financing experience with manufacturers of information processing and
communications products. A large portion of the market for these products
includes client/server or decentralized computing applications. The Company
has positioned itself to take advantage of the shift away from mainframe
computing toward the client/server network environment, a market which has
grown rapidly. In addition, the Company invests significant resources in
understanding the specific products of each of its vendors with which it has
vendor programs. As a result, the Company is able to make more informed
decisions regarding residual values of such products and the pricing of lease
transactions, thereby maximizing opportunities for residual profits. The
Company believes that the residual value of the equipment it leases to its
customers is enhanced due to the "embedded" nature of client/server networks
and the resulting tendency for such equipment to remain in place after the end
of the original lease term.
Focus on Vendor Programs and Systems Integrator Relationships. The
significant majority of the equipment purchased for lease to end-user
customers by the Company is purchased from manufacturers with which the
Company has a vendor program. In addition, the Company has leased a
significant amount of equipment as a result of a recently developed lease
financing relationship with a major systems integrator. The Company utilizes a
vendor's and systems integrator's sales organization to gain access to a large
and diversified
22
<PAGE>
end-user customer base without incurring the costs of establishing independent
customer relationships. The vendor relationship also typically provides for
the upgrade, refurbishment, re-certification and remarketing of equipment
purchased by the Company. Through the Company's relationship with each of its
vendors and the vendor's involvement in remarketing the equipment, at or near
the expiration of the lease term, the residual risk associated with ownership
of the equipment is reduced and the Company's residual profit opportunity is
enhanced. The Company encourages its vendor's assistance on remarketing
through its practice of sharing with the vendor its residual profits derived
from the vendor's equipment. The Company is continually seeking significant
new vendor programs and systems integrator relationships in an effort to
enhance its growth and its return on investment. See "Leasing and Sales
Activities--Vendor Programs" below.
Focus on Operating Leases. Operating leases provide the Company with the
opportunity to utilize its expertise and relationships to realize a
substantial return through residuals received upon remarketing the equipment
to the original customer at the end of the initial lease term. The Company
believes that large users of information processing and communications
equipment, and particularly client/server networking products, are becoming
increasingly aware of the benefits of financing their equipment requirements
on an operating lease basis. The Company also believes that the principal
benefits of operating lease financing to its customers include preserving cash
flow and receiving favorable accounting and tax treatment.
Focus on Major Corporate Customers. The Company seeks to reduce the
financial risk associated with the lease transactions it originates by
focusing its marketing programs and resources on large, creditworthy end-user
customers, or lessees. This focus has allowed the Company to significantly
reduce the risk of payment default by its customers. Additionally, once the
Company has a master lease agreement with a customer, its ability to lease
other manufacturers' products to that customer is enhanced, which can result
in substantial non-vendor lease volume. As of December 31, 1995, the net book
value of the Company's portfolio of equipment acquired other than through its
vendor programs, as well as non-vendor equipment acquired by the Company
through its vendor programs, was approximately $83 million, or 40% of the net
book value of the Company's total portfolio as of that date.
Focus on Maintaining a Responsive Organizational Structure. The Company
provides custom leasing services and support to its vendors and their
customers through its seven United States regional offices located in the
Atlanta, Boston, Chicago, Dallas, Los Angeles, New York City and San Jose
metropolitan areas and supports its customers and vendors through several
United States field offices. The Company provides such services and support to
customers and vendors in Western Europe through an office near London, and
expects to commence operations in Germany and other significant Western
European countries by late 1996. Through its seven United States regional
leasing offices and United Kingdom office, staffed with experienced leasing
and administrative personnel, the Company seeks to minimize the time required
to respond to customer requests and maximize the economic return from
individual lease transactions through direct contact with both the end-user
customer and the vendor's sales representative. The Company also has invested
substantial resources to develop its proprietary pricing and asset tracking
and management control systems ("PATS"). These systems assist the Company in
quickly providing lease quotes to its customers, generally within one business
day after receipt of a request.
Focus on International Expansion. In April 1996, the Company initiated its
international expansion by acquiring an independent leasing company in the
United Kingdom that leases information processing equipment. The Company is
focusing on international expansion in order to leverage its existing vendor
relationships in the United States to broaden its potential customer base and
to create additional lease financing opportunities with new vendors that have
substantial international activities. The Company is currently negotiating the
acquisition of a portfolio of information processing equipment and related
leases in Germany. It plans to have operations in Germany in the near future,
and expects to have operations in France, Belgium and the Netherlands by the
end of 1996.The Company may participate in additional international markets in
the future as may be necessary to meet the demands of existing and prospective
vendors.
23
<PAGE>
CUSTOMERS
Through its vendor programs, the Company currently services over 400
customers in connection with its direct leasing activities. In addition, the
Company estimates that over an additional 1000 customers are serviced in
connection with its private-label leasing activities. Private-label leasing
involves a vendor leasing equipment to end-users on its own form of lease,
selling the lease and related equipment to the Company, and billing and
collecting the monthly rental payments under the lease on behalf of the
Company. The services and support provided by the Company include custom lease
payment streams and structures, short-term leasing, technology refresh leases,
trial leases, asset swaps and trade-ins, upgrade and add-on financing, renewal
and remarketing, personalized invoicing and asset management and reporting.
The Company's typical customers are large, creditworthy corporations that
require several million dollars of equipment per year and are repeat customers
for one or more of the Company's vendor relationships. Repeat business
generated through existing relationships is an important source of revenue for
the Company. Over 90% of the lessees with whom the Company has a master lease
agreement have more than one lease supplement in place with the Company.
Additionally, once the Company has a master lease agreement with a customer,
its ability to lease other manufacturers' products to that customer is
enhanced.
The ten largest customers of the Company, measured by the Dollar Volume
during the 18 months ended June 30, 1996, are listed alphabetically below. The
total Dollar Volume associated with these customers represented approximately
71% of the Company's total new lease originations for that 18 month period.
<TABLE>
<S> <C>
Apple Computer Source Services
EDS State of California
Ernst & Young LLP Tandy
Honeywell Western Digital
L.L. Bean Xerox
</TABLE>
From January 1, 1993 through June 30, 1996, approximately 68% of the
Company's total lease transactions (based on Dollar Volume) were with
customers whose credit ratings, or the credit ratings of their parent
companies, were Baa or better, as rated by Moody's Investor Services, or with
customers who were not rated but possess a credit profile equivalent to a
Moody's Baa rating. The Company believes that its business is not dependent on
any single customer. However, during 1995, the State of California and Xerox
accounted for 11.2% and 10.3%, respectively, of its revenues, and during the
first six months of 1996, Xerox, the State of California and Ernst & Young LLP
accounted for 17.6%, 11.2% and 9.8%, respectively, of the Company's revenues.
In the event any of those customers, and particularly Ernst & Young LLP (which
represented approximately 50% of the Company's lease volume, by Dollar Volume,
in the first six months of 1996), or any of its future significant customers
ceases to lease additional equipment, or materially reduces the amount of
equipment it leases, from the Company in the future, and such reduction in
lease volume is not replaced by other existing or new customers, the Company's
operating results could be materially adversely affected. The Company does not
anticipate that Ernst & Young LLP will need to lease equipment in 1997 at the
same volumes as it has in 1996. See "Risk Factors--Dependence on Major
Customers."
LEASING AND SALES ACTIVITIES
Vendor Programs
A majority of the Company's Dollar Volume for the twelve months ended
December 31, 1995, and the six months ended June 30, 1996, was generated
through vendor programs. All of the vendor programs presently in place, with
the exception of Memorex Telex and Auspex, have been entered into since 1993.
The programs with equipment vendors generally involve purchasing agreements
and remarketing agreements. These purchase and remarketing agreements
generally have terms of one year. Certain of such agreements are extended
automatically for one year terms, unless they are terminated by either party
upon the expiration of the then existing term with prior written notice
ranging from 90 to 180 days. Customers introduced to the Company through its
vendor programs typically acquire equipment from several manufacturers, which
results in additional lease volume to the Company from "non-vendor"
manufacturers. This non-vendor equipment is typically part of a client/server
network environment and remains in place along with the vendor's equipment.
24
<PAGE>
The table below displays the distribution of the Company's equipment
portfolio by Dollar Volume and percent of aggregate Dollar Volume during the
twelve months ended December 31, 1995, and the six months ended June 30, 1996,
and by percent of net book value at December 31, 1995.
<TABLE>
<CAPTION>
DISTRIBUTION OF PORTFOLIO (1)
-----------------------------------------------------------------
TWELVE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, 1995 JUNE 30, 1996
----------------------- -----------------------
PERCENT OF PERCENT OF
AGGREGATE AGGREGATE
DOLLAR DOLLAR DOLLAR DOLLAR NET BOOK VALUE AT
VOLUME VOLUME VOLUME VOLUME DECEMBER 31, 1995
------------ ---------- ------------ ---------- -----------------
<S> <C> <C> <C> <C> <C>
Dell Computer........... $ 31,290,000 21% $ 76,979,000 60% 12%
Memorex Telex........... 19,389,000 13% 9,800,000 8% 24%
Apple Computer.......... 14,546,000 10% 5,116,000 4% 9%
Storage Technology (2).. 12,858,000 9% 1,410,000 1% 10%
Systems integrator (3).. 21,377,000 14% 21,537,000 17% 11%
Other vendors........... 2,642,000 2% 130,000 -- 3%
Non-vendors............. 47,280,000 31% 12,881,000 10% 31%
------------ ---- ------------ ---- ----
$149,382,000 100% $127,853,000 100% 100%
============ ==== ============ ==== ====
</TABLE>
- --------
(1) The information used to calculate the percentages in this table was
derived from databases that are not part of the Company's accounting
records. However, the data in such databases was derived from the same
sources as data in the Company's accounting records, and the Company
believes such information is accurate.
(2) Storage Technology is not expected to account for any material Dollar
Volume in the future.
(3) The systems integrator with which the Company has a relationship does not
manufacture equipment. The percentages of Dollar Volume and net book value
for such systems integrator may include equipment from a variety of
manufacturers, including equipment manufactured by the Company's vendors.
A description of each of the Company's vendors and the products that the
Company purchases or finances are as follows:
Apple Computer, Inc. Apple designs, manufactures and sells personal
computers and peripheral products. Its principal product line is the Macintosh
series of desktop and portable computers.
Auspex Systems, Inc. Auspex designs, manufactures and sells RISC-based file
servers and a line of systems and board upgrades. Its main product is a
UNIX/NFS-based, high-end file server, designed to be the central disk-storage
resource in large computer networks.
Dell Computer Corporation. Dell is a leading direct manufacturer of computer
systems and one of the largest personal computer manufacturers in the world.
Dell designs and customizes products and services to end-user requirements,
and offers an extensive selection of peripherals and software.
Memorex Telex Corporation. Memorex Telex designs, manufactures and sells
computer peripheral and communications products, such as terminals, printers
and controllers, intelligent systems, and networking products.
NCR Corporation. NCR's Enterprise Computing Division designs, manufactures
and sells mid-range and high-end commercial parallel processing systems. Its
products feature the Teradata parallel relational database system that is
capable of processing large volumes of transactions, as well as store,
correlate and analyze massive amounts of information. The vendor agreement
with NCR was entered into in July 1996.
Quickturn Design Systems, Inc. Quickturn designs, manufacturers, markets and
supports system level verification solutions for the design of integrated
circuits and electronic systems. Quickturn's emulation systems
25
<PAGE>
are intended to improve design quality and to reduce time-to-market and
prototype integrated circuit development costs.
Sybase, Inc. Sybase develops and markets a full line of relational database
management system software products optimized for on-line transaction
processing applications in client/server oriented, networked computing
environments.
In August 1996, the Company entered into a Letter of Intent with Cisco
Systems to provide lease financing for Cisco's enterprise-level
internetworking customers in the United States and Western Europe. The Company
is currently negotiating a definitive agreement with Cisco to provide such
lease financing services, and, although no assurances can be given,
anticipates entering into that agreement by the end of October 1996.
A substantial majority of transactions entered into under a typical vendor
program are direct leases. Under these direct leases, lessees enter into
master lease agreements directly with the Company, rather than with the
vendor. The master lease agreement sets forth the basic terms and conditions
under which the Company will lease equipment to the lessee. The lease of
specific equipment is documented with a simple supplement to the master lease
agreement, thereby avoiding the necessity of negotiating a new master lease
agreement each time the lessee desires to acquire additional equipment. Such a
lease structure also makes it convenient for the lessee to acquire add-ons
and/or upgrades to equipment it has leased from the Company and for the
Company to finance such add-ons and upgrades. In the 18-month period ended
June 30, 1996, these direct lease agreements accounted for approximately 93%
of the Company's lease volume (excluding portfolio purchases), as measured by
Dollar Volume.
Under a typical vendor program, the Company works with the lessee and the
vendor's sales personnel to help structure the initial lease. The Company
finances the lease, purchases the related equipment and administers the lease
(including billing and collecting). At the end of the initial lease term, the
Company and the vendor typically work together to remarket the equipment. See
"Remarketing" below.
Additionally, the Company has established a relationship with a systems
integrator who assists large users of information processing and
communications equipment with their network systems procurement and related
financing requirements. The Company has generated significant lease volume,
and anticipates generating significant lease volume in the future, with this
systems integrator. The equipment acquired by the Company from this systems
integrator is similar to those products provided through its vendor programs.
When estimating residual values and providing lease pricing for the products
leased through system integrators, the fact that the Company has no formal
remarketing agreement with these sources is taken into account.
Development Activities
The Company's objective is to leverage its existing customer relationships,
funding sources, regional leasing and support staff and back office operations
support organization by systematically adding new vendor programs and system
integrator relationships and expanding the scope of its existing programs and
relationships, including by increasing the geographic coverage of its vendor
programs outside the United States. See "Business--Strategy" and
"International Expansion." This objective is accomplished through a dedicated
group responsible for vendor and systems integrator development activity. The
Company believes that one of its major strengths is its ability and
willingness to customize its programs and relationships to meet the other
party's specific marketing and financial objectives. The Company believes that
this ability to customize its programs and its willingness to make a capital
investment in the equipment it acquires makes it an attractive lease financing
source for vendors and systems integrators considering a lease financing
program or relationship.
26
<PAGE>
Once a vendor program agreement is signed or a systems integrator
relationship is established, the Company's implementation process with the
vendor's or systems integrator's organization commences. This extensive
process involves presentations and training sessions at various levels and in
various locations throughout the country in which the program is to be
implemented. These training programs familiarize the Company's sales employees
with the other party's products, customer base and methods of doing business,
and the other party's sales employees with the lease financing opportunities
offered by the Company which they may make available to their existing and
prospective customers. Recognizing that, with the addition of each new vendor
program and systems integrator relationship, the Company incurs significant
incremental costs in the implementation process, the Company intends to
continue to be selective in establishing additional programs and relationships
in the future.
Products Leased
The information processing and communications equipment that the Company
presently purchases for lease include communication controllers, database
machines, desktop computers (which include laptop computers), display
stations, file servers, printers, tape and disk products, and network routers
and automatic switches. The majority of the equipment acquired by the Company
since 1994 is utilized in client/server network environments. The software
licenses financed by the Company, which have to date involved immaterial
volume, are principally with respect to database software. The table below
displays the distribution of equipment purchased by the Company, by product
type and percentage of Dollar Volume of equipment purchased, during 1993, 1994
and 1995.
EQUIPMENT VOLUME BY PRODUCT TYPE
(Percent by Dollar Volume of equipment purchased)
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Desktop Computers.......................................... 6% 32% 58%
Tape and Disk Products..................................... 38% 15% 10%
Printers................................................... 9% 6% 8%
Central Processors......................................... 10% 15% 4%
Communications Devices..................................... 13% 10% 4%
Display Stations........................................... 14% 5% 2%
File Servers............................................... 3% 5% 2%
Software................................................... 3% 4% 1%
Other...................................................... 4% 8% 11%
---- ---- ----
100% 100% 100%
</TABLE>
The Company estimates that, during the first six months of 1996, desktop
computers represented approximately 85% of the equipment purchased by the
Company, as measured by Dollar Volume. Approximately 60% of its Dollar Volume
for that six month period was represented by equipment, principally desktop
computers, purchased under the Company's vendor program with Dell.
Lease Terms and Conditions
Substantially all of the Company's lease transactions are net leases with a
specified non-cancelable lease term. These non-cancelable leases have a "hell-
or-high-water" provision which requires the lessee to make all lease payments
under all circumstances. A net lease requires the lessee to make the full
lease payment and pay any other expenses associated with the use of equipment,
such as maintenance, casualty and liability insurance, sales or use taxes and
personal property taxes. The lessee also has the responsibility of obtaining
the additional items required under a net lease, such as maintenance and
insurance. However, many of the Company's more creditworthy customers are
permitted to self insure against equipment losses.
27
<PAGE>
The vast majority of the leases the Company enters into have a lease term of
from two to four years. These leases are either operating leases or direct
finance leases. Generally leases having a term of three years or less are
classified as operating leases and leases having a term greater than three
years are classified as direct finance leases. Although the Company is
principally engaged in the business of writing operating leases, it has in the
past entered into direct finance leases for material amounts of equipment and
expects to do so again in the future, particularly in its European operations.
See "MD&A -- Lease Accounting" for a further discussion of such leases.
Under several of the Company's vendor programs, the Company offers the
vendor's customers "technology refresh" leases. These leases typically have a
24 or 36 month original term with an option permitting the lessee to exchange
the equipment subject to the lease for new equipment on or after a designated
date. Upon exercising the option, the term of the lease is extended so that
its balance is equal to the 24 to 36 month original term of the lease. The
"technology refresh" option permits the lessee to upgrade its equipment on
specified terms and provides an opportunity for the lease to be extended.
Remarketing
The results of the remarketing process ultimately determine the degree of
profitability of a lease transaction. The Company's remarketing strategy is to
keep its equipment installed in place at the end of the initial lease term.
Typically, remarketing equipment in place produces better residual returns
than equipment sold or leased to a third party. Prior to the expiration of the
original lease term, the Company initiates the remarketing process for the
related equipment. The Company is able to maximize its revenues and residual
return by focusing its efforts on keeping the equipment in place at the end of
the initial lease term by (1) re-leasing it to the initial lessee for a
specified term, (2) renting the equipment to the initial lessee on a month-to-
month basis, or (3) selling the equipment to the initial lessee. If the
Company is unsuccessful in keeping the equipment in place, it will attempt to
sell or lease the equipment to a different customer, or sell the equipment to
equipment brokers or dealers. Based on equipment purchase cost, approximately
70% of the Company's equipment remarketed during the 18 months ended June 30,
1996, was remarketed in place to the initial lessee. Of the Company's leases
which were remarketed in place during that period, approximately 50% have been
remarketed through a lease renewal, 30% have been leased on a month-to-month
basis and 20% have been sold to the original customer. No assurances, however,
can be given that the Company's past successes in remarketing its equipment in
place will be repeated in the future, primarily because the Company has little
history with respect to remarketing desktop computers, which make up a
substantial and growing percentage of the Company's equipment portfolio.
Leases with respect to approximately 34% (by Dollar Volume) of the equipment
purchased by the Company since its inception have been remarketed, and
virtually all of such equipment has been remarketed through one or more of
these remarketing activities. The Company believes that the residual value of
the equipment it leases to its customers that are used in client/server
networks, including desktop computers, is enhanced due to the "embedded"
nature of products in such networks and the resulting tendency for such
equipment to remain in place after the end of the original lease term. See
"Risk Factors--Potential Reduction in Residual Values of Leased Equipment."
Procedures and obligations of the Company and its vendors with respect to
remarketing are defined through the Company's equipment purchase and
remarketing agreements with vendors. The Company has dedicated significant
resources, through both its headquarters and field offices, to support the
remarketing effort. The Company's sales force usually works directly with the
vendor's sales force to remarket Company-owned equipment. The Company's sales
personnel are provided incentives to remarket such equipment. In addition,
through payment of a remarketing fee and a sharing of residual profits, the
Company provides incentives to vendors and their sales personnel, to assist in
the remarketing efforts.
The following table with respect to the Company's remarketing experience
sets forth an economic analysis of remarketing activities from the Company's
25 to 36 month operating leases for the periods from its inception through
each of December 31, 1993, 1994 and 1995 and June 30, 1996. This economic
analysis has been prepared by the Company's management to assist in
determining pricing and internal rates of return on the
28
<PAGE>
Company's equity investment in equipment. Certain of the information used to
prepare such analysis was derived from databases that are not a part of the
Company's accounting records and was compiled based on certain assumptions
made by the Company's management. However, the data in such databases is
derived from the same sources as data in the Company's accounting records, and
the Company believes such information is accurate and the assumptions are
reasonable.
<TABLE>
<CAPTION>
FROM INCEPTION THROUGH
-----------------------------------
DEC. 31, DEC. 31, DEC. 31, JUNE 30,
1993 1994 1995 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity Invested (% of Original Equipment Cost)...................................... 12% 11% 11% 11%
Dollar-Weighted Average Lease Term (Months)......................................... 35 35 35 35
Residual Value Realized (% of Original Equipment Cost).............................. 36% 37% 38% 38%
Return on Equity Invested (Compounded Annually)..................................... 46% 51% 52% 53%
Ratio of Realized Residual Value to Initially Estimated (Booked).................... 117% 123% 126% 129%
</TABLE>
The Company's historical experience in estimating residual values may not be
applicable to certain of the information processing and communications
equipment that the Company has recently purchased for lease. Approximately 68%
(by Dollar Volume) of such equipment purchased in the 18 month period ended
June 30, 1996 was purchased pursuant to vendor programs entered into since
January 1993 and a lease financing relationship with a major systems
integrator. The initial lease terms of the leases to which such equipment is
subject have not yet expired and, as a result, the Company does not yet have
remarketing experience with respect to such equipment. Therefore, the
Company's historical experience in estimating residual values may not be
applicable to such equipment. Accordingly, for that reason and others, the
Company's historical remarketing experience is not necessarily indicative of
future performance and no assurances can be given that the Company will be
able to achieve remarketing results in the future that are comparable to the
historical remarketing results shown above.
Default and Loss Experience
The cumulative default and loss experience of the Company with respect to
lease payments under the leases in its portfolio as of December 31, 1993, 1994
and 1995 and June 30, 1996 is set forth below.
CUMULATIVE DEFAULT AND LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FROM INCEPTION THROUGH
---------------------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995 JUNE 30, 1996
--------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF
TOTAL TOTAL TOTAL TOTAL
AMOUNT ACQUISITIONS AMOUNT ACQUISITIONS AMOUNT ACQUISITIONS AMOUNT ACQUISITIONS
-------- ------------ -------- ------------ -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Acquisitions (1).. $400,608 $486,176 $635,558 $763,411
Cumulative Gross
Defaults (2)(4)........ $ 1,419 0.4% $ 1,430 0.3% $ 1,526 0.2% $ 1,698 0.2%
Cumulative Recoveries
(3).................... 872 0.2 883 0.2 904 0.1 950 0.1
-------- --- -------- --- -------- --- -------- ---
Net Losses.............. $ 547 0.2% $ 547 0.1% $ 622 0.1% $ 748 0.1%
======== === ======== === ======== === ======== ===
</TABLE>
- --------
(1) Total Acquisitions represents the total cost (aggregate purchase price of
the equipment) to the Company since inception in 1986 through and
including the date set forth above.
(2) Cumulative Gross Defaults represents the total defaults of all lessees
experienced by the Company since inception in 1986 through and including
the date set forth above measured as the aggregate of the Company's net
book value in such lease and any recorded receivable on such lease at the
date of default.
(3) Cumulative Recoveries represents the total recoveries with respect to
defaults of all lessees since inception of the Company in 1986 through and
including the date set forth above.
(4) A lessee is deemed to be in default when it fails to meet its obligations
to make monthly rental payments under its lease, and fails to cure such
breach, pursuant to the terms of the lease, and the Company declares the
lessee in "default" by written notice to the lessee.
29
<PAGE>
Purchase of Portfolios
In addition to originating leases for end-user customers, the Company has
purchased portfolios of equipment and related leases from its vendors and
other leasing companies and lease brokers. To date, the vast majority of all
equipment portfolio acquisitions have involved products marketed by vendors
with which the Company has a vendor program. The Company prefers to have a
remarketing program in place with the vendor of products in any portfolio it
purchases, although the existence of such a relationship is not a condition to
the purchase of a portfolio. In circumstances where it does not have such a
relationship, the Company will normally only acquire information processing
and communications equipment with functions similar to those of its then
current vendors' equipment.
From January 1, 1993 through June 30, 1996, the Company made 12 separate
portfolio acquisitions for an aggregate purchase price of approximately $89
million. During 1993, 1994 and 1995, respectively, the Company acquired five,
four and three portfolios, respectively, of equipment for an aggregate
purchase price of $55.3 million, $23.1 million, and $10.5 million,
respectively. The Company made no portfolio purchases in the first six months
of 1996. The vast majority of such equipment is subject to a remarketing
agreement with its manufacturer or is manufactured by one of the Company's
vendors. The largest portfolio purchase, which occurred in January 1993,
involved approximately $33 million of leases and related equipment previously
sold by the Company. In addition, since 1994, the Company has purchased from
Storage Technology or its affiliates, for an aggregate purchase price of $32.8
million, seven portfolios of leases originated by the vendor and the related
equipment.
Process Control and Administrative Systems
The Company has developed an administration system and controls which
feature a series of checks and balances. The Company's system and controls are
designed to protect against entering into lease transactions that may have
undesirable economics or unacceptable levels of risk, without impeding the
flow of business activity or preventing its sales organization from being
creative and responsive to the needs of vendors and customers.
The Company's regional offices are each staffed with a Director of Leasing
and at least one Contract Administrator who work with the vendors' sales
personnel to offer lease financing solutions to the vendors' end-user
customers. Once the Company commits to a lease transaction, its contract
administrators initiate a process of systematically preparing and gathering
relevant lease information and lease documentation. The contract
administrators are also responsible for monitoring the documentation through
the Company's home office documentation and review process. Prior to the
Company entering into any lease agreement, each transaction is evaluated based
on the Company's pre-determined standards regarding residual values, lease
structure, lease documentation and customer credit. The Company approves, and
delivers documentation to its customers, in most instances, in less than two
business days after a request for approval of the transaction has been
submitted to the Company's headquarters by one of its Directors of Leasing.
The Company utilizes an Investment Committee to review the residual values
it will use to price standard transactions. The Investment Committee also must
approve the pricing, including residual values, for all transactions involving
$1 million or more in aggregate purchase price if the pricing parameters are
outside previously approved guidelines. The Investment Committee is composed
of the Chief Executive Officer, Chief Financial Officer, Vice President,
Leasing, Vice President, Contract Administration, Controller, Vice President-
Corporate Finance and Treasurer of the Company. In addition, there is a
separate credit approval process whereby transactions up to $1 million require
the approval of the Supervisor, Credit Administration and the Chief Financial
Officer. All transactions over $1 million require the additional approval of
the President.
The Company's leasing and administrative personnel utilize the Company's
proprietary PATS system to structure lease financing opportunities and provide
the equipment management capabilities necessary to maximize the value of the
leased equipment during and after the initial lease term. Its use of the PATS
system, along with direct contact with customers, permits the Company to
customize the lease transaction to the
30
<PAGE>
customer's specific requirements. The PATS system analyzes and prices
transactions based upon residual values previously set by the Investment
Committee, the debt rate at which the Company expects to obtain financing
according to the lessee's credit rating and administrative costs associated
with the transaction. Because most of the Company's business involves vendor
products with existing creditworthy customers, the documentation, credit and
structure review activities may be completed in a few hours. This expeditious
review process and the preparation of lease documents in the Company's
regional offices allow the Company to approve and document transactions
quickly while adhering to the Company's system and controls.
International Expansion
Commencing in early 1996, the Company embarked on a plan to increase its
geographic coverage for vendor programs by expanding its lease financing
activities outside the Untied States. The first step in this international
expansion was into Western Europe, and was accomplished in April 1996 with the
acquisition of a small independent leasing company in the United Kingdom. This
company focused on leasing information processing equipment. The Company is
currently negotiating to acquire an existing portfolio of information
processing equipment and related leases in Germany. It plans to have
operations in Germany in the near future, and expects to have operations in
France, Belgium and the Netherlands by to the end of 1996.
The Company currently has a vendor program agreement in place with Dell
Computer, and a letter of intent for a vendor program with Cisco Systems,
covering Western Europe. Although no assurances can be given, the Company
anticipates entering into other new vendor relationships covering Western
Europe in the next few months. The Company may participate in additional
international markets in the future as may be necessary to meet the demands of
existing and prospective vendors.
Financing
The Company's financing strategy is to obtain substantially all of its
required long-term borrowings from the proceeds of sales of nonrecourse,
secured debt securities in the public and private debt securities markets
through "securitizations" or by other similar secured financings. From time to
time, the Company will obtain long-term financing for one or more leases with
a single customer. Prior to securitizing its leases, the Company finances its
acquisition of equipment on a short-term basis through secured "warehouse"
lines of credit until such time as its portfolio of equipment is of sufficient
size to permit it to efficiently finance the portfolio on a long-term basis.
Payments under the Company's borrowings and the maturities of its long-term
borrowings are typically structured to match the payments due under the leases
securing the borrowings. Although the Company has not done so to date, it may
engage in hedging transactions, pursuant to the hedging strategy approved by
its Board of Directors, in order to protect itself, when necessary, against
increases in interest rates prior to obtaining fixed rate, long-term financing
for its equipment. The Company recently expanded its operations to Western
Europe, and does not, as yet, have in place lines of credit to finance its
leasing activities in those countries. See "MD&A -- Liquidity and Capital
Resources" and "Risk Factors -- Interest Rate Risk."
Nonrecourse Debt. The credit standing of the Company's customers allows the
Company to obtain long-term financing for most of its leases on a nonrecourse
basis. Under such a nonrecourse loan, the Company typically borrows an amount
equal to the committed lease payments under the financed lease, discounted at
a fixed interest rate. The lender is entitled to receive the monthly lease
payments under the financed lease in repayment of the loan, and takes a
security interest in the related equipment and those lease payments. The
Company retains ownership of such equipment. Interest rates under this type of
financing reflect the financial condition of the lessees, the term of the
leases, the amount of the loan and the nature and manufacturer of the
equipment.
Historically, such nonrecourse loans have provided between 80% and 90% of
the funds necessary to acquire equipment. The Company normally obtains the
balance of the acquisition cost, commonly known in the leasing industry as the
"equity investment" in the equipment, from the proceeds of recourse, and
occasionally nonrecourse, borrowings by the Company, from its internally
generated funds or from the proceeds of sales of
31
<PAGE>
its Common Stock. The Company expects to use substantially all of the net
proceeds from the sale of the Notes to finance such "equity investments" over
time.
The Company is not liable for the repayment of nonrecourse loans unless the
Company breaches certain limited representations and warranties in the loan
agreements. The lender assumes the credit risk of each lease financed with
recourse debt, and its only recourse, upon a default under a lease, is against
the lessee and such equipment. Because the Company's ability to obtain
nonrecourse lease financing from lenders depends on the credit standing of its
lessees, the Company targets large, creditworthy customers. See "Customers"
above.
The Company utilizes the public and private debt securities markets, through
securitizations, to provide a substantial portion of the nonrecourse debt it
requires. The utilization of securitizations has reduced the Company's
effective interest cost for its nonrecourse debt. The Company expects to
obtain most of its long-term debt requirements in the future from the proceeds
of sales of such debt or similar securities in the public and private debt
markets. See "Risk Factors -- Dependence on Availability of Financing" and
"MD&A -- Liquidity and Capital Resources."
In order to manage certain expected tax liabilities in Europe, the Company
may, from time to time, finance leases generated in Europe by selling the
related lease receivable. Under such arrangements, the Company would grant a
security interest in the underlying equipment, rather than sell it, and thus
retain its interest in the anticipated remarketing proceeds from the
equipment.
Recourse Financing. The other significant source of financing for equipment
acquisitions by the Company is recourse borrowings, both long-term and short-
term. This type of financing has been used principally to "warehouse"
portfolios of leases and the related equipment on a short-term basis, until
the Company is in a position to efficiently finance the portfolio on a long-
term, nonrecourse basis. In addition, when the Company finances its equity
investment in leased equipment with lenders, it often does so on a recourse
basis. See "Risk Factors -- Dependence on Availability of Financing" and
"MD&A -- Liquidity and Capital Resources."
The loans available to the Company under recourse arrangements are secured
by the financed equipment and the monthly lease payments due under the related
lease. Upon default by a lessee under a lease covering equipment financed
through recourse borrowings, the financial institution providing the financing
can seek recourse from the Company for the balance due on such financing.
COMPETITION
The Company competes in the information processing and communications
equipment leasing marketplaces with other independent leasing companies,
captive lessors and bank affiliated lessors. The Company's business is highly
competitive, both with respect to obtaining and maintaining vendor program
arrangements and providing lease financing to end-user customers. The Company
competes directly with various independent leasing companies, such as El
Camino Resources, Comdisco, Leasetec and G.E. Capital, and certain captive or
"semi-captive" leasing companies such as IBM Credit Corporation and AT&T
Credit. Many of the Company's competitors have substantially greater resources
and capital and longer operating histories.
A substantial number of the Company's competitors are significantly larger,
and have substantially greater resources, than the Company. The Company's
relatively limited amount of capital places it at a disadvantage in relation
to its larger competitors, particularly in connection with financing lease
transactions involving large dollar volumes of equipment where the cost of the
equipment substantially exceeds the amount of debt available for such
financing. See "Risk Factors -- Competition."
The Company believes it competes on the basis of price, responsiveness to
customer needs, flexibility in structuring lease transactions, relationships
with its vendors and knowledge of its vendors' products. The Company has found
it most effective to compete on the basis of providing a high level of
customer service and by structuring custom vendor programs and lease
transactions that meet the needs of its vendors and customers.
32
<PAGE>
The Company also believes that its cost of capital is comparable to that of
its larger competitors, primarily due to its financing strategy of utilizing
the public and private debt securities markets to finance its lease
receivables. Other important elements that affect the Company's
competitiveness are the high degree of knowledge and competence of its key
employees, specifically relating to information processing and communications
equipment and operating lease financing.
EMPLOYEES
As of June 30, 1996, the Company had 103 employees (five of whom were part-
time), 18 of whom were located in its regional or field offices in the United
States, 13 of whom are located in its European office in the United Kingdom,
and 72 of whom were located in its San Jose, California home office. At that
date, the Company also retained 15 temporary workers, eight of whom were in
San Jose and seven of whom were in the regional or field offices. The Company
intends to hire a substantial number of additional personnel over the next
several months. However, there can be no assurance that the Company will be
able to attract and retain personnel with the experience and expertise
necessary to meet its anticipated operating requirements. See "Risk Factors --
Management of Growth."
PROPERTIES
The Company's home office is located in leased space at 10 Almaden
Boulevard, Suite 1500, San Jose, California 95113. The Company also leases
office space for its regional offices in the Atlanta, Boston, Chicago, Dallas,
Los Angeles and New York City metropolitan areas, as well as for its European
office in the United Kingdom. At June 30, 1996, the aggregate monthly rent
under all of the Company's office leases, with respect to an aggregate of
approximately 27,000 square feet, was approximately $47,000.
LITIGATION
The Company is not involved in any legal proceedings, and is not aware of
any pending or threatened legal proceedings, that would have a material
adverse effect upon its financial condition or results of operations.
33
<PAGE>
MANAGEMENT
DIRECTORS AND OFFICERS
The directors and officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Hal J Krauter (1) 58 Chairman, President, Chief Executive Officer and Director
Robert J. Kearns III 55 Executive Vice President, Finance and Chief Financial Officer
Ronald M. Bannerman 47 Vice President, Vendor Programs
Dorian Jay DiMarco 36 Vice President, Vendor Programs
Glenda B. Allen 53 Vice President, Contract Administration and Secretary
Steven J. Pressler 43 Vice President, Leasing
Steven L. Yeffa 37 Vice President, Finance -- International
Timothy P. Laehy 40 Vice President, Corporate Finance and Treasurer
Ian Harrison (2) 42 Vice President and Managing Director
Terence W. Murphy 36 Controller and Chief Accounting Officer
Louis R. Adimare 48 Director
George L. Bragg
(1)(3)(4) 64 Director
James C. Castle (3)(4) 59 Director
</TABLE>
- --------
(1) Member of Corporate Development Committee. (See "Committees and Meetings"
below.)
(2) Mr. Harrison is Managing Director of Leasing Solutions International,
Ltd., the Company's European subsidiary.
(3) Member of Audit Committee.
(4) Member of Independent Committee under stock based incentive plans.
Hal J Krauter co-founded the Company in 1986. He has been President and
Chief Executive Officer of the Company since its inception, and served as
Chief Financial Officer from March 1994 to January 1995. In April 1996, he
became Chief Operating Officer. Prior to founding the Company, he served as
President of Drivetech, Inc., a manufacturer of disk drives, from 1983 to
1984, and as President of MAD Computer Systems, Inc., a manufacturer of
personal computers, from 1984 until 1986. Earlier, he was the founder and
first President of Memorex Finance Company, the equipment leasing affiliate of
Memorex Corporation, from 1979 to 1983. Prior to founding Memorex Finance
Company, he held various financial and management positions with Memorex
Corporation, a supplier of IBM plug compatible products, and IBM Corporation,
from 1960 through 1979, including Vice President and Chief Financial Officer
of Memorex.
Robert J. Kearns III joined the Company in January 1995 as its Vice
President, Finance and Chief Financial Officer. He became an Executive Vice
President in January 1996. He served as Vice President -- Capital Markets
Group for GECAS, a GE Capital affiliate, in its structured finance and lease
finance operations, from 1989 to June 1994. From 1984 to 1989, he served as a
Senior Vice President of Manufacturers Hanover Leasing International/The CIT
Group, with lease financing responsibilities in the Far East and Europe. From
1980 to 1984, he acted as President of a leasing operation, headquartered in
Bahrain, which provided equipment financing in the Middle East. From 1969 to
1980, he served in a variety of management and lending positions, focusing on
both international and U.S. investment and commercial banking, with Chase
Manhattan Bank, Marine Midland and Citicorp Leasing International, as well as
a private investment banking company.
Ronald M. Bannerman joined the Company in June 1991 as Vice President,
Leasing. In September 1992, he was appointed to the position of Vice
President, Vendor Programs. From 1983 until he joined the Company, he served
as a Vice President of Citicorp North America, Inc., an integrated banking and
finance company, in its Equipment Finance/Leasing Group. While at Citicorp, he
established its West Coast high technology equipment leasing office and
managed the sales force of that office. Prior to joining Citicorp, he managed
the captive finance
34
<PAGE>
company and third party leasing activities of Four-Phase Systems, a
manufacturer of business systems, as Director, Finance Administration, from
1978 until 1983.
Dorian Jay DiMarco joined the Company in October 1992 as Director of Vendor
Programs, and was appointed Vice President, Vendor Programs in January 1995.
Prior to joining the Company, he was with GE Capital Computer Leasing, a
computer leasing company, serving as a Director of Portfolio Acquisition and
Vendor Programs from June 1991 to July 1992, and as the Eastern Regional Sales
Manager from September 1989 to June 1991. From 1986 to 1989, he was the
Western Regional Sales Manager for General Electric Calma Company, a
manufacturer of computer-aided design and manufacturing systems.
Glenda B. Allen joined the Company in 1986 as Director, Contract
Administration. In November 1995, she became the Company's Vice President,
Contract Administration. In January 1996, she became Secretary of the Company.
From 1982 through 1985, she served as an account executive in the receivables
financial group of Westinghouse Credit Corporation, a financial services
company. From 1985 through 1986 and 1979 through 1982, she served as Director,
Contract Administration for Memorex Finance Company. She also served in
various administrative capacities with Memorex Corporation from 1974 through
1979. From 1968 through 1972, she served as a Credit Manager for GE Credit
Corporation.
Steven J. Pressler joined the Company in January 1996 as Vice President,
Leasing. He served as a Vice President and Western Regional Sales Manager for
Heller Financial, Inc., an integrated financial services company, from October
1994 until joining the Company. In that capacity, he managed the lease
financing and vendor program activities for his region. From 1983 to October
1994, he served in various capacities, including, most recently, Senior Vice
President, of Tucker Leasing-Capital Corporation, which was in the lease
financing business on a national basis. From 1974 until he joined Tucker, he
served in a variety of leasing and credit positions with Chemical Bank,
Industrial Credit Corporation (a subsidiary of Litton Industries) and
Equitable Life Insurance.
Ian Harrison joined the Company in August 1996 as the Managing Director of
Leasing Solutions International, Ltd., the Company's European subsidiary. He
became a Vice President of the Company in September 1996. From January 1992
until joining the Company, he served as Director -- Northern Europe and Sales
and Marketing Director-Europe of AT&T Capital Europe Limited, a financial
services company. From 1985 through December 1991, he acted as the Managing
Director of Wang Equipment Services, the finance company of Wang Laboratories.
Before joining Wang, he served as Special Projects Manager and Sales and
Marketing Director, from 1983 to 1985, of Armco Europe Finance, a financial
services company. Earlier, from 1982 to 1983, Mr. Harrison was a funding
manager for International Brokerage and Leasing, a computer leasing and lease
brokerage company.
Terence W. Murphy joined the Company in August 1995 as its Controller. He
became Chief Accounting Officer in January 1996. From January 1994 until he
joined the Company, he was the principal and sole owner of a firm providing
tax, accounting and financial consulting services to businesses. From December
1989 to December 1993, he was Controller of LB Credit Corporation, an
equipment finance company. Prior to joining LB Credit, he served as an
Assistant Controller of Wells Fargo Leasing from 1987 to December 1989. Wells
Fargo Leasing was acquired by LB Credit in December 1989. Mr. Murphy is a
licensed CPA.
Timothy P. Laehy joined the Company in February 1991 as a Financial Analyst.
In April 1996, he was appointed to the positions of Vice President, Corporate
Finance and Treasurer. From 1990 through 1991, Mr. Laehy served as a Senior
Associate at Recovery Equity Investors, a private investment fund. From 1988
through 1990, he served as an Associate at Guarantee Acceptance Capital
Corporation, an investment bank.
Steven L. Yeffa joined the Company in December 1991 as Director, Funding and
was promoted to Treasurer in January 1995. In April 1996, he was appointed
Vice President, Finance--International. Since July 1996, he has been located
at the Company's European office in the United Kingdom. From 1989 to 1991, he
served as Vice President, Funding at Matsco Financial Corporation, an
equipment leasing company. From 1984 to 1989,
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<PAGE>
he served as Asset Manager at CP National Corporation, a regional public
utility, for which Mr. Yeffa directed the operations of their wholly-owned
leasing company, CPN Leasco.
Louis R. Adimare co-founded the Company in 1986. Since August 1987 until
March 1996, he served as the Company's Executive Vice President, concentrating
on leasing activities and strategic relations. He was the Company's Chief
Operating Officer from September 1992 to March 1996. Prior to founding the
Company, he had been a Regional Leasing Manager, for Memorex Finance Company
from 1984 to 1986, and a District Manager, for Memorex Corporation from 1982
to 1984. From 1969 until 1982, he held sales and sales management positions at
Honeywell Information Systems, which was in the computer systems business.
Mr. Adimare retired as an Officer of the Company in March 1996.
George L. Bragg has been Chairman of Markwood Capital Alliance, which
provides management consulting and financing services to high technology and
special situation companies, since September 1994. From October 1993 to
September 1994, he was President and a Director of Nichols Institute, which
provides clinical testing services to hospitals, laboratories and physicians
on a nationwide basis. From July 1991 to March 1993, he served in various
executive capacities, including Vice Chairman, with Western Digital
Corporation, which manufactures and sells disk drives for the personal
computer market. He was a director of Western Digital from October 1990 until
November 1995. He served as Chairman and President of Boston Street Capital, a
management and investment consulting firm, from September 1990 until December
1991. From 1989 until 1990, he served as Chairman of the Board, Chief
Executive Officer and President of Sooner Federal Savings Association. He
became President and Chief Operating Officer of Telex Corporation, which was
in the computer networking and terminal workstation business, in 1986. When
Telex merged with Memorex Corporation in 1988, he became Managing Director and
Executive Vice President of Memorex Telex N.V., which positions he held until
1989. Mr. Bragg is a director of Old America Stores and Eltron International,
Inc.
James C. Castle, Ph.D., has been, since August 1992, the Chairman and Chief
Executive Officer of U.S. Computer Services, which provides subscriber
management and billing services. Prior to joining U.S. Computer Services, he
served as President and Chief Executive Officer, from August 1991 to April
1992, of Teradata Corporation, a public company purchased by NCR in February
1992, which develops and sells high performance systems and related products
and services for relational database management. He was the President and
Chief Executive Officer of Infotron Systems Corporation, a communications
network systems company, from 1987 to 1991, and President of TBG Information
Systems, Inc., which was engaged in the information systems and services
businesses, from 1984 to 1987. He also served as the Executive Vice President
of Memorex Corporation from 1982 to 1984. Dr. Castle is a director of PAR
Technology Corporation and ADC Telecommunications.
COMMITTEES AND MEETINGS
The audit committee of the Board of Directors of the Company (the "Board")
currently consists of George L. Bragg and James C. Castle, two of the
Company's non-employee directors. The audit committee reviews, and discusses
with management and the Company's independent accountants, the Company's
financial reporting and accounting practices. It also reports to the Board
concerning such reporting and practices.
The Company does not have a compensation committee or any other Board
committee performing equivalent functions. Decisions regarding executive
officer compensation, except as described below, are made by the Board as a
whole, with Mr. Krauter abstaining with respect to decisions regarding his
compensation. The Company does not currently have a standing nominating
committee of the Board.
In connection with the Board's approval of the Company's 1995 Stock Option
and Incentive Plan (the "1995 Plan"), a committee of the Board, composed of
the Company's non-employee directors (the "Independent Committee"), was
appointed to administer and approve grants under that plan. The Independent
Committee also administers the Company's Employee Stock Purchase Plan.
The Board also has a Corporate Development Committee of two Directors. Mr.
Krauter and Mr. Bragg presently serve as its members. The committee's charter
is to assist in the Company's efforts to identify, and consider the purchase
of, businesses and portfolios of leases and equipment that may be suitable for
acquisition by the Company, to screen acquisition candidates and, as
appropriate, to negotiate the principal terms and conditions of any such
acquisition.
36
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
The following table sets forth certain information, as of August 31, 1996,
regarding the beneficial ownership of the Common Stock of the Company, with
respect to (i) each officer and director of the Company, (ii) each person who
is known by the Company to own beneficially 5% or more of the Common Stock,
and (iii) all directors and officers of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
SHARES OF
NAME AND ADDRESS OF BENEFICIALLY OUTSTANDING
BENEFICIAL OWNER(1) OWNED(2)(3) SHARES
------------------- ------------ -----------
<S> <C> <C>
Hal J Krauter (4)...................................... 1,209,750 14.5%
Robert J. Kearns III................................... 19,109 *
Glenda B. Allen........................................ 7,954 *
Ronald M. Bannerman.................................... 10,974 *
Dorian Jay DiMarco..................................... 5,598 *
Steven J. Pressler..................................... -- *
Timothy P. Laehy....................................... 916 *
Steven L. Yeffa........................................ 11,949 *
Ian Harrison (5)....................................... -- *
Terence W. Murphy...................................... 2,500 *
Louis R. Adimare....................................... 804,000 9.6%
George L. Bragg........................................ 64,467 *
James C. Castle........................................ 18,317 *
J.& W. Seligman & Co.(6)............................... 846,872 10.2%
All directors and officers as a group (13 persons)..... 2,155,534 25.9%
</TABLE>
- --------
* Less than 1%.
(1) Except as noted, all addresses are 10 Almaden Boulevard, Suite 1500, San
Jose, California 95113.
(2) The number of shares beneficially owned is deemed to include shares as to
which the persons named have or share either investment or voting power.
Unless otherwise noted, and except for voting powers held jointly with a
person's spouse, each person identified possesses sole voting and
investment power with respect to the shares shown.
(3) Includes an aggregate of 230,876 shares which such persons have a right to
acquire, on or before December 31, 1996, upon exercise of outstanding
stock options granted under the Company's stock option plans. The amount
of such shares for each person named above, other than J.&W. Seligman &
Co., is as follows: Mr. Krauter -- 87,500; Mr. Kearns -- 37,500; Ms.
Allen -- 2,687; Mr. Bannerman -- 3,762; Mr. DiMarco -- 1,406; Mr.
Pressler -- none; Mr. Laehy -- none; Mr. Yeffa -- 1,437; Mr. Adimare --
78,750; Mr. Harrison -- none; Mr. Murphy -- 2,500; Mr. Bragg -- 1,667; and
Mr. Castle -- 13,667.
(4) Includes 78,000 shares held of record by certain members of Mr. Krauter's
family, with respect to which he disclaims beneficial ownership.
(5) Mr. Harrison's address is Continental House, West End, Woking, Surrey,
GU24 9PJ United Kingdom.
(6) From a Schedule 13G filed with the Securities and Exchange Commission by
the shareholder on or about February 2, 1996. The actual number of shares
beneficially owned may have changed since that date. The shareholder's
address is 100 Park Avenue, New York, NY 10017.
37
<PAGE>
DESCRIPTION OF NOTES
The Notes will be issued under an indenture to be dated as of October ,
1996 (the "Indenture") between the Company and Bankers Trust Company, as
trustee (the "Trustee"), a copy of which has been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The terms of the
Notes will include those stated in the Indenture and those made a part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"TIA"), as in effect on the date of the Indenture. The Notes will be subject
to all such terms, and holders of the Notes are referred to the Indenture and
the TIA for a statement of such terms. The following is a summary of important
terms of the Notes and does not purport to be complete. Reference should be
made to all provisions of the Indenture, including the definitions therein of
certain terms and all terms made a part of the Indenture by reference to the
TIA. Certain definitions of terms used in the following summary are set forth
under "Certain Definitions" below. As used in this section, the "Company"
means Leasing Solutions, Inc.
GENERAL
The Notes will be general unsecured, subordinated obligations of the
Company, will mature on October , 2003 (the "Maturity Date"), and will be
limited to an aggregate principal amount of $62,500,000 ($71,875,000 if the
Underwriters' over-allotment option is exercised in full). The Notes are
exchangeable, and transfers thereof will be registrable without charge
therefor, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge in connection therewith.
The Notes will accrue interest at the rate per annum set forth on the cover
page of this Prospectus from October , 1996, or from the most recent
interest payment date to which interest has been paid or duly provided for,
and accrued and unpaid interest will be payable semi-annually in arrears on
April and October of each year, beginning April , 1997. Interest
will be paid to the person in whose name the Note is registered at the close
of business on the March 15th or September 15th immediately preceding the
relevant interest payment date; provided that, with respect to a Note or
portion thereof called for redemption, or repurchased in connection with a
Change of Control, during the period from a record date to (but excluding) the
next succeeding interest payment date, accrued interest shall be payable
(unless such Note is converted) to the holder of the Note redeemed or
repurchased. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable at
the office or agency of the Company maintained for such purpose or, at the
option of the Company, payment of interest may be made by check mailed to the
holders of the Notes at their respective addresses set forth in the register
of holders of Notes. Until otherwise designated by the Company, the Company's
office or agency maintained for such purpose will be the principal corporate
trust office of the Trustee. For interest payments on a Note of U.S.
$5,000,000 or more in principal amount, the holder of such Note may elect at
any time to have payment made by transfer to a United States Dollar account.
The Notes will be issued in the form of a Global Security, which will be
deposited with DTC in New York, New York as custodian (the "Custodian") and as
Depositary (in such capacity, the "Depositary"). Interests in the Global
Security will be shown in, and transfers thereof will be effected only
through, records maintained by DTC and its participants (as hereinafter
defined).
So long as the Custodian holds a Global Security, the Custodian will be
considered the sole owner or Holder of such Global Security for purposes of
the Indenture and such Global Security. Except as provided below, owners of
beneficial interests in the Global Securities will not be entitled to have
Notes registered in their names, will not be entitled to receive physical
delivery of Notes in definitive form and will not be considered the owners or
Holders thereof under the Indenture.
The Indenture does not contain any financial covenants, and does not limit
or contain any restriction on (i) the payment of dividends, (ii) the Company's
ability to incur Senior Debt or (iii) the issuance or repurchase of securities
of the Company. The Indenture contains no covenants or other provisions to
afford protection to
38
<PAGE>
holders of Notes in the event of a highly leveraged transaction or a change in
control of the Company except to the extent described under "Change of
Control" below.
GLOBAL SECURITIES
The following description of the operations and procedures of DTC is
provided solely as a matter of convenience. These operations and procedures
are solely within the control of DTC's Next-Day Settlement System and are
subject to changes by it from time to time. The Company takes no
responsibility for these operations and procedures and urges investors to
contact DTC's systems or their participants directly to discuss these matters.
Upon the issuance of the Global Security, DTC will credit, on its internal
system, the respective principal amounts of the individual beneficial
interests in the Global Securities to the accounts of persons who maintain
accounts with DTC ("participants"). Such accounts initially will be designated
by or on behalf of the initial purchasers. Ownership of beneficial interests
in the Global Securities will be limited to participants or persons who hold
interests through participants. Ownership of beneficial interests in the
Global Securities will be shown on, and the transfer of such interests will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants) and in accordance with the
applicable procedures of DTC (in addition to those under the Indenture
referred to herein).
Unless Notes in definitive registered form are issued, owners of beneficial
interests in a Global Security will not be entitled to have any portions of
such Global Security registered in their names, will not receive or be
entitled to receive physical delivery of Notes in certificated form and will
not be considered the owners or Holders of such Global Security (or any Notes
represented thereby) under the Indenture or the Notes.
In the event of an increase or decrease in the aggregate principal amount of
the Notes represented by any Global Security, whether pursuant to conversion,
exchange for an interest in another Global Security, the issue of additional
Notes to be represented by such Global Security, the issue of definitive notes
or the repurchase and cancellation of the Notes represented by such Global
Security or otherwise, the Holder will present such Global Security to the
Company or its agent for increase or decrease, as the case may be, of the
aggregate principal amount of the Notes represented by such Global Security by
annotation thereon.
Payments of the principal of and interest on Global Securities will be made
to the Holder thereof. Neither the Company, the Trustee nor any of their
respective agents will have any responsibility or liability for any aspect of
the records relating to or payments made on account of beneficial ownership
interests in the Global Securities or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
See""Payments'' below.
Subject to the following considerations, beneficial interests in a Global
Security will trade in DTC's Next Day Funds Settlement System, and secondary
market trading activity in such interests will therefore settle in next-day
funds. The Company expects that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a Global Security held by it or
its nominee, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Security as shown on the records of DTC or its nominee. The
Company also expects that payments by participants to owners of beneficial
interests in such Global Security held through such participants will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers registered in "street
name." Such payments will be the responsibility of such participants.
The laws of some U.S. states require that certain persons take physical
delivery of securities in certificated form. Consequently, the ability to
transfer beneficial interests in a Global Security to such persons may be
limited. Because DTC can act only on behalf of participants, which, in turn,
act on behalf of indirect participants (as hereinafter defined) and certain
banks, the ability of a person having a beneficial interest in a Global
Security
39
<PAGE>
to pledge such interest to persons or entities that do not participate in the
DTC system, or otherwise take actions in respect of such interest, may be
affected by the lack of a physical certificate evidencing such interest.
DTC has advised that it will take any action permitted to be taken by a
Holder of Global Securities (including taking action required by it for
conversion as described below) only at the direction of one or more
participants to whose accounts with DTC interests in the Global Securities are
credited and only in respect of such portion of the aggregate principal amount
of the Global Security as to which such participant or participants has or
have given such direction. However, if payment of principal of the Notes
becomes due following the occurrence of an Event of Default (as defined in
"Events of Default and Remedies" below) under the Notes, DTC reserves the
right to cause the Global Securities to be exchanged for legended definitive
Notes, and to distribute such Notes to its participants.
DTC has also advised as follows: (i) DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and a "Clearing Agency" registered pursuant to
the provisions of Section 17A of the Exchange Act; (ii) DTC was created to
hold securities for its participants and facilitate the clearance and
settlement of securities transactions between participants through electronic
book-entry changes in accounts to its participants, thereby eliminating the
need for the physical transfer and delivery of certificates;
(iii) Participants include securities brokers and dealers, banks, trust
companies and clearing corporations and may include certain other
organizations; and (iv) indirect access to the DTC system is available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
DEFINITIVE NOTES
Definitive Notes in registered form will be issued if (i) DTC notifies the
Company that it is unwilling or unable to continue as Global Security Holder,
or if at any time it ceases to be a clearing agency registered under the
Exchange Act and a successor Global Security Holder is not appointed by the
Company within 90 days, or (ii) payment of principal of the Notes becomes due
following the occurrence of an Event of Default under the Notes and the Holder
requires that definitive Notes be issued.
Any definitive Notes will be issued in denominations of $1,000 or integral
multiples of $1,000 in excess thereof.
Notwithstanding any statement herein, the Company reserves the right to
impose or remove such transfer, certification, substitution or other
requirements and to require such restrictive legends on Notes as it may
determine are necessary to ensure compliance with the securities laws of the
U.S., and the status therein, and any other applicable laws may require.
CONVERSION
The holders of Notes will be entitled at any time after the date 60 days
following the last Issue Date of the Notes and prior to the close of business
on the last trading day prior to the Maturity Date of the Notes, subject to
prior redemption or repurchase, to convert any Notes or portions thereof (in
denominations of $1,000 or multiples thereof) into Common Stock of the
Company, at the conversion price set forth on the cover page of this
Prospectus, subject to adjustment as described below (the "Conversion Price").
Except as described below, no adjustment will be made on conversion of any
Notes for interest accrued thereon or for dividends on any Common Stock
issued. If Notes not called for redemption are converted after a record date
for the payment of interest and prior to the next succeeding interest payment
date, such Notes must be accompanied by funds equal to the interest payable on
such succeeding interest payment date on the principal amount so converted.
The Company is not required to issue fractional shares of Common Stock upon
conversion of Notes and, in lieu thereof, will pay a cash adjustment based
upon the market price of the Common Stock on the last trading day prior to the
date of conversion. In the case of Notes called for redemption by the Company,
conversion rights will expire at the close of business on the trading day
preceding the date fixed for redemption, unless the
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<PAGE>
Company defaults in payment of the redemption price, in which case the
conversion right will terminate at the close of business on the date such
default is cured. In the event any holder exercises its repurchase right upon
a Change of Control, such holder's conversion right will terminate. See
"Change of Control" below.
The right of conversion attaching to any Note may be exercised by the holder
by delivering the Note at the specified office of a conversion agent,
accompanied by a duly signed and completed notice of conversion, together with
any funds that may be required as described in the preceding paragraph. The
conversion date shall be the date on which the Note, the duly signed and
completed notice of conversion, and any funds that may be required as
described in the preceding paragraph shall have been so delivered. A holder
delivering a Note for conversion will not be required to pay any taxes or
duties payable in respect of the issue or delivery of Common Stock on
conversion, but will be required to pay any tax or duty which may be payable
in respect of any transfer involved in the issue or delivery of the Common
Stock in a name other than the holder of the Note. Certificates representing
shares of Common Stock will not be issued or delivered unless all taxes and
duties, if any, payable by the holder have been paid.
The Conversion Price is subject to adjustment (under formula set forth in
the Indenture) in certain events, including: (i) the issuance of Common Stock
as a dividend or distribution on Common Stock of the Company; (ii) certain
subdivisions and combinations of the Common Stock; (iii) the issuance to all
holders of Common Stock of certain rights or warrants to purchase Common
Stock; (iv) the dividend or other distribution to all holders of Common Stock
of shares of capital stock of the Company (other than Common Stock) or
evidences of indebtedness of the Company or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to
above and dividends and distributions in connection with the liquidation,
dissolution or winding up of the Company or paid exclusively in cash); (v)
dividends or other distributions consisting exclusively of cash (excluding any
cash portion of distributions referred to in clause (iv)) to all holders of
Common Stock to the extent such distributions, combined together with (A) all
such all-cash distributions made within the preceding 12 months in respect of
which no adjustment has been made plus (B) any cash and the fair market value
of other consideration payable in respect of any tender offers by the Company
or any of its Subsidiaries for Common Stock concluded within the preceding 12
months in respect of which no adjustment has been made, exceeds 15% of the
Company's market capitalization (being the product of the then current market
price of the Common Stock times the number of shares of Common Stock then
outstanding) on the record date for such distribution; and (vi) the purchase
of Common Stock pursuant to a tender offer made by the Company or any of its
Subsidiaries to the extent that the aggregate consideration, together with (X)
any cash and the fair market value of any other consideration payable in any
other tender offer expiring within 12 months preceding such tender offer in
respect of which no adjustment has been made plus (Y) the aggregate amount of
any such all-cash distributions referred to in clause (v) above to all holders
of Common Stock within the 12 months preceding the expiration of such tender
offer in respect of which no adjustments have been made, exceeds 15% of the
Company's market capitalization on the expiration of such tender offer.
In the case of (i) any reclassification or change of the Common Stock, (ii)
a consolidation, merger or combination involving the Company or (iii) a sale
or conveyance to another corporation of the property and assets of the Company
as an entirety or substantially as an entirety, in each case as a result of
which holders of Common Stock shall be entitled to receive stock, other
securities, or other property or assets (including cash) with respect to or in
exchange for such Common Stock, the holders of the Notes then outstanding will
be entitled thereafter to convert such Notes into the kind and amount of
shares of stock, other securities or other property or assets, which they
would have owned or been entitled to receive upon such reclassification,
change, consolidation, merger, combination, sale or conveyance had such Notes
been converted into Common Stock immediately prior to such reclassification,
change, consolidation, merger, combination, sale or conveyance (assuming, in a
case in which the Company's shareholders may exercise rights of election, that
a holder of Notes would not have exercised any rights of election as to the
stock, other securities or other property or assets receivable in connection
therewith and received per share the kind and amount received per share by a
plurality of non-electing shares). Certain of the foregoing events may also
constitute or result in a Change of Control requiring the Company to offer to
repurchase the Notes. See "Change of Control" below.
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<PAGE>
In the event of a taxable distribution to holders of Common Stock (or other
transaction) that results in any adjustment of the Conversion Price, the
holders of Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States income tax as a dividend; in certain
other circumstances, the absence of such an adjustment may result in a taxable
dividend to the holders of Common Stock. See "Certain Tax Considerations"
below.
No adjustment in the Conversion Price will be required unless such
adjustment would require a change of at least 1% of the Conversion Price then
in effect; provided that any adjustment that would otherwise be required to be
made shall be carried forward and taken into account in any subsequent
adjustment. Except as stated above, the Conversion Price will not be adjusted
for the issuance of Common Stock or any securities convertible into or
exchangeable for Common Stock or carrying the right to purchase any of the
foregoing.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Notes will
be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of all Senior Debt, whether outstanding on the date of
the Indenture or thereafter incurred. Upon any distribution to creditors of
the Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior
Debt will be entitled to receive payment in full of all obligations in respect
of such Senior Debt before the holders of Notes will be entitled to receive
any payment with respect to the Notes.
In the event of any acceleration of the Notes because of an Event of
Default, the holders of any Senior Debt then outstanding would be entitled to
payment in full of all obligations in respect of such Senior Debt before the
holders of the Notes are entitled to receive any payment or distribution in
respect thereof. The Indenture further requires that the Company promptly
notify holders of Senior Debt if payment of the Notes is accelerated because
of an Event of Default.
The Company also may not make any payment upon or in respect of the Notes if
(i) a default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of Senior Debt occurs and is continuing
beyond any applicable period of grace, or (ii) any other default occurs and is
continuing with respect to Designated Senior Debt that permits holders of the
Designated Senior Debt as to which such default relates to accelerate its
maturity and the Trustee receives a notice of such default (a "Payment
Blockage Notice") from the Company or other person permitted to give such
notice under the Indenture. Payments on the Notes may and shall be resumed (i)
in the case of a payment default, upon the date on which such default is cured
or waived, and (ii) in the case of a nonpayment default, the earlier of the
date on which such nonpayment default is cured or waived or 179 days after the
date on which the applicable Payment Blockage Notice is received. No new
period of payment blockage may be commenced unless and until (i) 365 days have
elapsed since the effectiveness of the immediately prior Payment Blockage
Notice, and (ii) all scheduled payments of principal, premium, if any, and
interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice.
By reason of the subordination provisions described above, in the event of
the Company's liquidation or insolvency, holders of Senior Debt may receive
more, ratably, and holders of the Notes may receive less, ratably, than the
other creditors of the Company. Such subordination will not prevent the
occurrence of any Event of Default under the Indenture.
The Notes are obligations exclusively of the Company. Since the operations
of the Company are partially conducted through Subsidiaries, the cash flow and
the consequent ability to service debt, including the Notes, of the Company,
are partially dependent upon the earnings of its Subsidiaries and the
distribution of those earnings to, or upon loans or other payments of funds by
those Subsidiaries to, the Company. The payment of dividends
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and the making of loans and advances to the Company by its Subsidiaries may be
subject to statutory or contractual restrictions, are dependent upon the
earnings of those Subsidiaries and are subject to various business
considerations.
Any right of the Company to receive assets of any of its Subsidiaries upon
their liquidation or reorganization (and the consequent right of the holders
of the Notes to participate in those assets) will be effectively subordinated
to the claims of that Subsidiary's creditors (including trade creditors),
except to the extent that the Company is itself recognized as a creditor of
such Subsidiary, in which case the claims of the Company would still be
subordinate to any security interests in the assets of such Subsidiary and any
indebtedness of such Subsidiary senior to that held by the Company.
At July 31, 1996, the Company had approximately $230 million of indebtedness
outstanding that would have constituted Senior Debt (excluding accrued
interest and Senior Debt constituting liabilities of a type not required to be
reflected as a liability on the balance sheet of the Company in accordance
with GAAP). At July 31, 1996, there was also outstanding approximately $28
million of indebtedness and other obligations of Subsidiaries of the Company
(excluding intercompany liabilities and liabilities of a type not required to
be reflected as a liability on the balance sheet of such Subsidiaries in
accordance with GAAP) as to which the Notes would have been structurally
subordinated. The Indenture will not limit the additional indebtedness,
including Senior Debt, that the Company can create, incur, assume or
guarantee, nor will the Indenture limit the amount of indebtedness and other
liabilities that any Subsidiary can create, incur, assume or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any holder
of Notes receives any payment or distribution of assets of the Company of any
kind in contravention of any of the terms of the Indenture, whether in cash,
property or securities, including, without limitation, by way of set-off or
otherwise, in respect of the Notes before all Senior Debt is paid in full,
then such payment or distribution will be held by the recipient in trust for
the benefit of holders of Senior Debt, and will be immediately paid over or
delivered to the holders of Senior Debt or their representative or
representatives to the extent necessary to make payment in full of all Senior
Debt remaining unpaid, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior Debt.
OPTIONAL REDEMPTION
The Notes may be redeemed at the option of the Company, in whole or from
time to time in part, on and after October , 1999, on not less than 20 nor
more than 60 days prior written notice to the holders thereof by first class
mail, at the following redemption prices (expressed as percentages of
principal amount) if redeemed during the 12-month period beginning October ,
of each year indicated:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1999........................................................... . %
2000........................................................... . %
2001........................................................... . %
2002........................................................... . %
2003........................................................... 100.0000%
</TABLE>
If less than all the Notes are to be redeemed, the Trustee will select Notes
for redemption pro rata or by lot or by any other method that the Trustee
considers fair and appropriate. The Trustee may select for redemption a
portion of the principal of any Note that has a denomination larger than
$1,000. Notes and portions thereof will be redeemed in the amount of $1,000 or
integral multiples of $1,000. The Trustee will make the selection from Notes
outstanding and not previously called for redemption.
Provisions of the Indenture that apply to the Notes called for redemption
also apply to portions of the Notes called for redemption. If any Note is to
be redeemed in part, the notice of redemption will state the portion of the
principal amount to be redeemed. Upon surrender of a Note that is redeemed in
part only, the Company will execute and the Trustee will authenticate and
deliver to the holder a new Note equal in principal amount to the unredeemed
portion of the Note surrendered.
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<PAGE>
On and after the redemption date, unless the Company shall default in the
payment of the redemption price, interest will cease to accrue on the
principal amount of the Notes or portions thereof called for redemption and
for which funds have been set apart for payment. In the case of Notes or
portions thereof redeemed on a redemption date which is also a regularly
scheduled interest payment date, the interest payment due on such date shall
be paid to the person in whose name the Note is registered at the close of
business on the relevant record date.
CHANGE OF CONTROL
In the event of a Change of Control (as defined below), each holder will
have the option, subject to the terms and conditions of the Indenture, to
require the Company to purchase all or any part (provided that the principal
amount must be $1,000 or an integral multiple thereof) of the holder's Notes
on the date that is 30 Business Days after the occurrence of such Change of
Control (the "Change of Control Purchase Date") for a purchase price equal to
100% of the principal amount thereof, plus accrued and unpaid interest up to
but not including the Change of Control Purchase Date, subject to the
Company's ability to make such payments pursuant to the terms of agreements,
whether or not amended after the issuance of such Notes, relating to Senior
Debt, whether or not presently in existence.
Within 20 Business Days after the occurrence of a Change of Control, the
Company shall mail to the Trustee and to each holder and cause to be published
a written notice of the Change of Control, setting forth, among other things,
the terms and conditions of, and the procedures required for exercise of, the
holder's right to require the purchase of such holder's Notes.
To exercise the purchase right upon a Change of Control, a holder must
deliver written notice of such exercise to the Paying Agent at any time prior
to the close of business on the Change of Control Purchase Date, specifying
the Notes with respect to which the purchase right is being exercised. Such
notice of exercise may be withdrawn by the holder by a written notice of
withdrawal delivered to the Paying Agent at any time prior to the close of
business on the Change of Control Purchase Date.
The Company will comply with the provisions of Rule 13e-4 and Rule 14e-1
under the Exchange Act, will file Schedule 13E-4 or any successor or similar
schedule required thereunder, and will otherwise comply with all federal and
state securities laws in connection with any offer by the Company to purchase
Notes at the option of the holders upon a Change of Control.
The Change of Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a takeover of the Company and
the removal of incumbent management. The Company is not aware of any specific
effort to accumulate shares of Common Stock or to obtain control of the
Company by means of a merger, tender offer, solicitation, or otherwise, nor is
the Change of Control purchase feature part of a plan by management to adopt a
series of anti-takeover provisions. Instead, the Change of Control purchase
feature is a result of negotiations between the Company and the Underwriters.
Depending on the terms of the transaction, a future highly leveraged
transaction, reorganization, restructuring, merger, or similar transaction
involving the Company's present management or directors could constitute a
Change of Control. Neither the Company nor its current management has any
present intention to engage in a transaction involving a Change of Control,
although it is possible that the Company or its management may decide to do so
in the future.
Subject to the limitation on mergers and consolidations discussed below, the
Company could, in the future, enter into certain transactions, including
certain recapitalizations, the sale of all or substantially all of its assets,
or the liquidation of the Company, that would not constitute a Change of
Control under the Indenture, but that would increase the amount of Senior Debt
(or any other indebtedness) outstanding at such time or substantially reduce
or eliminate the Company's assets. There are no restrictions in the Indenture
on the creation of additional Senior Debt (or any other indebtedness), and,
under certain circumstances, the incurrence of significant amounts of
additional Indebtedness could have an adverse effect on the Company's ability
to service its Indebtedness, including the Notes.
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<PAGE>
If a Change of Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the Change of Control Purchase
Price for all Notes tendered by the holders thereof. In addition, the right to
require the Company to repurchase Notes as a result of the occurrence of a
Change of Control could create an event of default under future Senior Debt of
the Company, as a result of which any repurchase could, absent a waiver, be
blocked by the subordination provisions of the Notes. See "Subordination"
below. Further, the terms of future Senior Debt or other future Indebtedness
ranking pari passu in right of payment with the Notes could require that such
Indebtedness be repaid upon the occurrence of a Change of Control. Failure by
the Company to repurchase the Notes when required will result in an Event of
Default with respect to the Notes whether or not such repurchase is permitted
by the subordination provisions thereof.
A "Change of Control" will be deemed to have occurred when: (i) any "person"
or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange
Act) (a) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act) of shares representing more than 50% of the
combined voting power of the then outstanding securities entitled to vote
generally in elections of directors of the Company ("Voting Stock"), or (b)
has the right or the ability by voting right, contract or otherwise to elect
or designate for election 50% or more of the directors of the Company, or (ii)
the Company consolidates with or merges into any other corporation, or
conveys, transfers, or leases all or substantially all of its assets to any
person, or any other corporation merges into the Company, and, in the case of
any such transaction, the outstanding Common Stock of the Company is changed
or exchanged as a result, unless the stockholders of the Company immediately
before such transaction own, directly or indirectly immediately following such
transaction, at least a majority of the combined voting power of the
outstanding voting securities of the corporation resulting from such
transaction in substantially the same proportion as their ownership of the
Voting Stock immediately before such transaction.
The definition of Change of Control includes a phrase relating to the lease,
transfer or conveyance of "all or substantially all" of the assets of the
Company. Although there is a developing body of case law interpreting the
phrase "substantially all," there is no precise established definition of the
phrase under applicable law. Accordingly, the ability of a holder of Notes to
require the Company to repurchase such Notes as a result of a lease, transfer
or conveyance of less than all of the assets of the Company to another person
or group may be uncertain.
MERGER AND CONSOLIDATION
The Indenture will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, another corporation, person or entity as an entirety or
substantially as an entirety unless (i) the Company is the surviving
corporation, or the entity or the person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made, is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
person formed by or surviving any such consolidation or merger (if other than
the Company), or the entity or person to which such sale, assignment,
transfer, lease, conveyance or other disposition shall have been made, assumes
all the obligations of the Company under the Notes and the Indenture pursuant
to a supplemental indenture in a form reasonably satisfactory to the Trustee;
(iii) immediately after such transaction, no Default or Event of Default
exists; and (iv) the Company or such person shall have delivered to the
Trustee an officers' certificate and an opinion of counsel, each stating that
such transaction and the supplemental indenture comply with the Indenture and
that all conditions precedent in the Indenture relating to such transaction
have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more subsidiaries of
the Company, the capital stock of which constitutes all or substantially all
of the properties and assets of the Company, shall be deemed to be the
transfer of all or substantially all of the properties and assets of the
Company.
45
<PAGE>
Upon any such consolidation, merger, sale, assignment, conveyance, lease,
transfer or other disposition in accordance with the foregoing, the successor
person formed by such consolidation or into which the Company is merged or to
which such sale, assignment, conveyance, lease, transfer or other disposition
is made will succeed to, and be substituted for, and may exercise every right
and power of, the Company under the Indenture with the same effect as if such
successor had been named as the Company therein, and thereafter (except in the
case of a sale, assignment, transfer, lease, conveyance or other disposition)
the predecessor corporation will be relieved of all further obligations and
covenants under the Indenture and the Notes.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being (i) default in
payment of the principal of, or premium, if any, on the Notes, whether or not
such payment is prohibited by the subordination provisions of the Indenture,
(ii) default for 30 days in payment of any installment of interest on the
Notes, whether or not such payment is prohibited by the subordination
provisions of the Indenture, (iii) default by the Company for 90 days after
notice in the observance or performance of any other covenants in the
Indenture, (iv) failure of the Company to repurchase the Notes when required,
whether or not such payment is prohibited by the subordination provisions of
the Indenture, (v) failure to provide timely notice of a Change of Control or
(vi) certain events involving bankruptcy, insolvency or reorganization of the
Company or any material subsidiary.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) occurs and is continuing, then and in
every such case the Trustee, by written notice to the Company, or the holders
of not less than 25% in aggregate principal amount of the then outstanding
Notes, by written notice to the Company and the Trustee, may declare the
unpaid principal of, premium, if any, and accrued and unpaid interest on all
the Notes then outstanding to be due and payable. Upon such declaration, such
principal amount, premium, if any, and accrued and unpaid interest will become
immediately due and payable, notwithstanding anything contained in the
Indenture or the Notes to the contrary, but subject to the provisions limiting
payment described in "Subordination" above. If any Event of Default specified
in clause (vi) above occurs with respect to the Company, all unpaid principal
of, and premium, if any, and accrued and unpaid interest on the Notes then
outstanding will automatically become due and payable, subject to the
provisions described in "Subordination" above, without any declaration or
other act on the part of the Trustee or any holder of Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to the provisions of the Indenture relating
to the duties of the Trustee, the Trustee is under no obligation to exercise
any of its rights or powers under the Indenture at the request, order or
direction of any of the holders, unless such holders have offered to the
Trustee an indemnity satisfactory to it against any loss, liability or
expense. Subject to all provisions of the Indenture and applicable law, the
holders of a majority in aggregate principal amount of the then outstanding
Notes have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. If a Default or Event of Default occurs and is
continuing and is known to the Trustee, the Indenture requires the Trustee to
mail a notice of Default or Event of Default to each holder within 60 days of
the occurrence of such Default or Event of Default, provided, however, that
the Trustee may withhold from the holders notice of any continuing Default or
Event of Default (except a Default or Event of Default in the payment of
principal of, premium, if any or interest on the Notes) if it determines that
withholding notice is in their interest. The holders of a majority in
aggregate principal amount of the Notes then outstanding, by notice to the
Trustee, may rescind any acceleration of the Notes and its consequences if all
existing Events of Default (other than the nonpayment of principal of,
premium, if any, and interest on the Notes that has become due solely by
virtue of such acceleration) have been cured or waived and if the rescission
would not conflict with any judgment or decree of any court of competent
jurisdiction. No such rescission shall affect any subsequent Default or Event
of Default or impair any right consequent thereto.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption
46
<PAGE>
provisions of the Indenture, an equivalent premium shall also become and be
immediately due and payable to the extent permitted by law upon the
acceleration of the Notes. If an Event of Default occurs prior to any date on
which the Company is prohibited from redeeming the Notes by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding the prohibition on redemption of the
Notes prior to such date, then the premium specified in the Indenture shall
also become immediately due and payable to the extent permitted by law upon
the acceleration of the Notes.
The holders of a majority in aggregate principal amount of the Notes then
outstanding may, on behalf of the holders of all the Notes, waive any past
Default or Event of Default under the Indenture and its consequences, except
Default in the payment of principal of, premium, if any, or interest on the
Notes (other than the non-payment of principal of, premium, if any, and
interest on the Notes that has become due solely by virtue of an acceleration
that has been duly rescinded as provided above) or in respect of a covenant or
provision of the Indenture that cannot be modified or amended without the
consent of all holders of Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and the Company is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the holders of
not less than 66 2/3% in aggregate principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange offer for Notes), and any existing default or compliance with any
provision of the Indenture or the Notes may be waived with the consent of the
holders of 66 2/3% in principal amount of the then outstanding Notes
(including consents obtained in connection with a tender offer or exchange
offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting holder) (i) reduce the
principal amount of Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed
maturity of any Note or, other than as set forth in the next paragraph, alter
the provisions with respect to the redemption of the Notes, (iii) reduce the
rate of or change the time for payment of interest on any Notes, (iv) waive a
Default or Event of Default in the payment of principal of or premium, if any,
or interest on the Notes (except a rescission of acceleration of the Notes by
the holders of at least a majority in aggregate principal amount of the Notes
and a waiver of the payment default that resulted from such acceleration), (v)
make any Note payable in money other than that stated in the Indenture and the
Notes, (vi) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Notes to receive payments
of principal of, premium, if any, or interest on the Notes, (vii) waive a
redemption payment with respect to any Note, (viii) make any change in the
foregoing amendment and waiver provisions or (ix) except as permitted by the
Indenture, increase the Conversion Price or, other than as set forth in the
next paragraph, modify the provisions of the Indenture relating to conversion
of the Notes in a manner adverse to the holders thereof. In addition, any
amendment to the provisions of Article XI of the Indenture (which relate to
subordination) will require the consent of the holders of at least 75% in
aggregate principal amount of the Notes then outstanding if such amendment
would adversely affect the rights of holders of Notes.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to (i) cure any ambiguity, defect or inconsistency, (ii) provide for
uncertificated Notes in addition to or in place of certificated Notes, (iii)
provide for the assumption of the Company's obligations to holders of Notes in
the circumstances required under the Indenture as described under "Merger and
Consolidation" above, (iv) provide for conversion rights of holders of Notes
in certain events, such as a consolidation, merger or sale of all or
substantially all of the assets of the Company, (v) reduce the Conversion
Price, (vi) make any change that would provide any additional rights or
benefits to the holders of Notes or that does not adversely affect the legal
rights under the Indenture of any such holder, or (vii) comply with
requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the TIA.
47
<PAGE>
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture while Notes
remain outstanding if (i) all outstanding Notes will become due and payable at
their scheduled maturity within one year, or (ii) all outstanding Notes are
scheduled for redemption within one year, and, in either case, the Company has
deposited with the Trustee an amount sufficient to pay and discharge all
outstanding Notes on the date of their scheduled maturity or the scheduled
date of redemption.
GOVERNING LAW
The Indenture will provide that the Notes will be governed by, and construed
in accordance with, the laws of the State of New York, without giving effect
to applicable principles of conflicts of law.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption or repurchase. Also, the Company is not required to
transfer or exchange any Note for a period of 15 days before a selection of
Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes.
THE TRUSTEE
The Indenture will provide that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. In case an Event of Default shall occur (and shall not
be cured) and holders of the Notes have notified the Trustee of such event,
the Trustee will be required to exercise its powers with the degree of care
and skill of a prudent person in the conduct of such person's own affairs.
Subject to such provisions, the Trustee is under no obligation to exercise any
of its rights or powers under the Indenture at the request of any of the
holders of Notes, unless they shall have offered to the Trustee security and
indemnity satisfactory to it.
The Indenture and the TIA will contain certain limitations on the rights of
the Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received in respect
of any such claim as security or otherwise. Subject to the TIA, the Trustee
will be permitted to engage in other transactions, provided, however, that if
it acquires any conflicting interest (as described in the TIA), it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Debt" means any particular Senior Debt in which the
instrument creating or evidencing the same or the assumption or guarantee
thereof (or related agreements or documents to which the Company is a party)
expressly provides that such Indebtedness shall be "Designated Senior Debt"
for purposes of the Indenture (provided that such instrument, agreement or
other document may place limitations and conditions on the right of such
Senior Debt to exercise the rights of Designated Senior Debt).
"Event of Default" has the meaning set forth under "Events of Default and
Remedies" above.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, which principles are in effect from time to
time.
48
<PAGE>
"Indebtedness" means, with respect to any person, all obligations and other
liabilities, whether or not contingent, of such person: (i) (a) for borrowed
money (including, but not limited to, any indebtedness secured by a security
interest, mortgage or other lien on the assets of the Company that is (1)
given to secure all or part of the purchase price of property subject thereto,
whether given to the vendor of such property or to another, or (2) existing on
property at the time of acquisition thereof, (b) evidenced by a note,
debenture, bond or other written instrument, (c) under a lease required to be
capitalized on the balance sheet of the lessee under GAAP or under any lease
or related document (including a purchase agreement) that provides that the
Company is contractually obligated to purchase or cause a third party to
purchase and thereby guarantee a minimum residual value of the lease property
to the lessor and the obligations of the Company under such lease or related
document to purchase or to cause a third party to purchase such leased
property, (d) in respect of letters of credit, bank guarantees or bankers'
acceptances (including reimbursement obligations with respect to any of the
foregoing), (e) with respect to Indebtedness secured by a mortgage, pledge,
lien, encumbrance, charge or adverse claim affecting title or resulting in an
encumbrance to which the property or assets of such person are subject,
whether or not the obligation secured thereby shall have been assumed by or
shall otherwise be such person's legal liability, (f) in respect of the
balance of deferred and unpaid purchase price of any property or assets, (g)
under interest rate or currency swap agreements, cap, floor and collar
agreements, spot and forward contracts and similar agreements and
arrangements; (ii) with respect to any obligation of others of the type
described in the preceding clause (i) or under clause (iii) below assumed by
or guaranteed in any manner by such person or in effect guaranteed by such
person through an agreement to purchase (including, without limitation, "take
or pay" and similar arrangements), contingent or otherwise (and the
obligations of such person under any such assumptions, guarantees or other
such arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements
to, any of the foregoing.
"Issue Date" means the date on which the Notes are issued under the
Indenture.
"Material Subsidiary" means, at any date of determination, any Subsidiary of
the Company that, together with its subsidiaries, as of the end of such fiscal
year, was the owner of more than 25% of the consolidated assets of the
Company, after eliminating any inter-company receivables of such Subsidiary,
all as set forth on the most recently available consolidated financial
statements of the Company and its consolidated Subsidiaries for such fiscal
year prepared in conformity with GAAP.
"Maturity Date" means October , 2003.
"Obligations" means any principal, interest, penalties and fees payable
under the documentation governing any Indebtedness.
"Person" means any individual, corporation, partnership, joint venture,
trust, estate, unincorporated organization or government or any agency or
political subdivision thereof.
"Senior Debt" means the principal of, premium, if any, and interest
(including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on
or in connection with Indebtedness of the Company, whether outstanding on the
date of the Indenture or thereafter created, incurred, assumed, guaranteed or
in effect guaranteed by the Company (including all deferrals, renewals,
extensions or refundings of, or amendments, modifications or supplements to
the foregoing); provided, however, that Senior Debt does not include (i)
Indebtedness evidenced by the Notes, (ii) any liability for federal, state,
local or other taxes owed or owing by the Company, (iii) Indebtedness of the
Company to any Subsidiary of the Company except to the extent such
Indebtedness is of a type described in clause (ii) of the definition of
Indebtedness, (iv) trade payables of the Company (other than, to the extent
they may otherwise constitute trade payables, any obligations of the type
described in clause (ii) of the definition of Indebtedness), and (v) any
particular Indebtedness in which the instrument creating or evidencing the
same or the assumption or guarantee thereof (or related agreements or
documents to which the Company is a party) expressly provides that such
Indebtedness shall not be senior in right of payment to, or is pari passu
with, or is subordinated or junior to, the Notes.
49
<PAGE>
"Subsidiary" means, with respect to any person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of capital 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 such person or one or more of the other subsidiaries of that
person (or a combination thereof), and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such person or a
subsidiary of such person or (b) the only general partners of which are such
person or of one or more subsidiaries of such person (or any combination
thereof).
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue 20,000,000 shares of Common Stock and
5,000,000 shares of Preferred Stock. As of August 31, 1996, 8,105,237 shares
of Common Stock were outstanding and the Company had approximately 180
shareholders of record. No shares of Preferred Stock are outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on each matter submitted to a vote of shareholders. In general and
subject to any voting rights applicable to any shares of Preferred Stock then
outstanding, the approval of proposals submitted to a vote of shareholders
requires a favorable vote of either the majority of the voting power of the
holders of Common Stock or the majority of the voting power of the shares
represented and voting at a duly held meeting at which a quorum is present.
Additionally, under California law, certain fundamental matters affecting the
Company may require a favorable vote of a greater percentage. The
shareholders, upon giving the notice required by law, may cumulate votes for
the election of directors. Under cumulative voting, each shareholder may give
one nominee, whose name is placed in nomination prior to the commencement of
voting, a number of votes equal to the number of directors to be elected,
multiplied by the number of votes to which a shareholder's shares are normally
entitled, or distribute such number of votes among as many nominees as the
shareholder sees fit. The effect of cumulative voting is that the holders of a
majority of the outstanding shares of Common Stock may not be able to elect
all of the Company's directors.
Subject to preferences that may be applicable to any shares of Preferred
Stock then outstanding, the holders of the shares of Common Stock will be
entitled to receive ratably such dividends, if any, as may be declared by the
Board out of legally available funds and to share pro rata in any distribution
to the shareholders, including any distribution upon liquidation of the
Company. However, the current policy of the Board is to retain earnings for
the operation of the Company's business, and the Company is currently
contractually limited in the amount of cash dividends it may pay. See
"Dividend Policy."
All outstanding shares of Common Stock are, and the shares of Common Stock
that would be issued upon the conversion of the Notes offered hereby will be,
upon payment therefor, validly issued, fully paid and non-assessable. The
shares of Common Stock are not subject to any conversion or redemption rights,
and have no preemptive rights or other rights to subscribe for additional
securities.
PREFERRED STOCK
The Board may, without further action of the shareholders of the Company,
issue shares of Preferred Stock in one or more series and fix the rights and
preferences thereof, including the dividend rights, dividend rates, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or the designations of such series,
and increase or decrease the number of shares of any such series (but not
below the number of such shares then outstanding). The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the
rights of holders of any Preferred Stock that may be issued in the future.
Issuance of Preferred
50
<PAGE>
Stock provides desirable flexibility in connection with possible acquisitions
and other corporate purposes. However, the Board, without further shareholder
approval, can issue Preferred Stock with voting and conversion rights that
would adversely affect the voting power and other rights of the holders of
Common Stock. In addition, the Board can issue and sell shares of Preferred
Stock to designated persons, the impact of which could make it more difficult
for a holder of a substantial block of Common Stock to remove incumbent
directors or otherwise gain control of the Company. The Company has no present
plans to issue any shares of Preferred Stock.
RIGHTS AS A LISTED CORPORATION
The Company is a "listed corporation," as defined in the California General
Corporation Law. As a listed corporation, it has the right to amend its
Articles of Incorporation to divide its Board into two classes of directors or
eliminate cumulative voting, or both. Such amendment would require the
approval of shareholders of the Company holding a majority of the outstanding
shares of Common Stock. Hal J Krauter and Louis R. Adimare, directors of the
Company, own an aggregate of approximately 22% of the outstanding Common
Stock.
Any such classified board provision in the Company's Articles of
Incorporation might discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company, even though such an
attempt might be beneficial to the Company and its shareholders. In addition,
the classified board provision could delay shareholders from removing a
majority of the Board for two years, unless they can show cause and obtain the
requisite vote. Without cumulative voting, a purchaser of a block of stock of
the Company constituting less than a majority of the outstanding shares will
have no assurance of proportional representation on the Board. Furthermore,
without cumulative voting, a person or group controlling the vote of a
majority of the shares of Common Stock of the Company could elect all of the
directors.
51
<PAGE>
CERTAIN TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
considerations relevant to original purchasers of the Notes. This discussion
is based upon the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury Regulations, Internal Revenue Service ("IRS") rulings and judicial
decisions now in effect, all of which are subject to change (possibly with
retroactive effect). This summary does not purport to discuss all aspects of
federal income taxation that may be relevant to a particular holder in light
of its individual investment circumstances or to certain types of holders
which may be subject to special tax rules (e.g., dealers in securities, banks,
insurance companies, tax-exempt organizations and non-United States persons).
In addition, this summary does not discuss any aspect of state, local or
foreign tax law and assumes that the holders will hold the Notes as "capital
assets" as defined in the Code (generally, property held for investment).
ALL PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AND
CONCERNING ANY RECENTLY PROPOSED CHANGES IN APPLICABLE TAX LAWS.
INTEREST
Interest on the Notes should be taxable to the holders of the Notes as
ordinary interest income in accordance with each holder's method of accounting
for U.S. federal income tax purposes.
CONVERSION OF NOTES INTO COMMON STOCK
In general, no gain or loss will be recognized for federal income tax
purposes on the conversion of a Note into shares of Common Stock. However, a
holder will recognize capital gain (or loss) with respect to cash paid in lieu
of a fractional share of Common Stock to the extent that the amount of such
cash exceeds (or is exceeded by) the portion of the adjusted basis of the Note
allocable to such fractional share. Such gain (or loss) will be long term if
the Note has been held for more than one year. The adjusted tax basis of
shares of Common Stock received on conversion will equal the adjusted tax
basis of the Note converted, reduced by the portion of the adjusted tax basis
allocated to any fractional share of Common Stock exchanged for cash. The
holding period of the shares of the Common Stock received on conversion will
include the holding period of the Note converted.
CONSTRUCTIVE DIVIDEND
The conversion price of the Notes is subject to adjustment under certain
circumstances. Certain adjustments in the conversion price that may occur in
limited circumstances (particularly adjustments to reflect a taxable dividend
to holders of Common Stock) may be deemed to constitute a constructive
distribution if and to the extent that such adjustments increase the
proportionate interest of a holder in the fully diluted Common Stock, whether
or not such holder ever exercises its conversion privilege. Such a
constructive distribution will result in ordinary income to holders (subject
to a possible dividends received deduction in the case of corporate holders)
to the extent of the Company's current and accumulated earnings and profits.
For example, a decrease in the conversion price in the event of distributions
of evidences of indebtedness or assets to holders of Common Stock will
generally result in deemed dividend treatment to holders, whereas a decrease
in the event of stock dividends or the distribution of rights to subscribe for
Common Stock generally will not.
SALE, EXCHANGE OR RETIREMENT OF THE NOTES
In general, a holder will recognize gain or loss upon the sale, exchange,
redemption, retirement or other disposition of a Note measured by the
difference (if any) between (i) the amount of cash and the fair market value
of any property received (except to the extent that such cash or other
property is attributable to the payment of accrued interest not previously
included in income, which amount will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis of the Note. Any such gain or loss would be
long-term capital gain or loss if the
52
<PAGE>
Note has been held for more than one year at the time of the sale or exchange.
A holder's initial tax basis in a Note will be the cash price it paid
therefor.
DIVIDENDS
Dividends paid on shares of Common Stock received upon conversion of a Note
will be taxable to a holder as ordinary income, to the extent paid out of the
Company's current or accumulated earnings and profits. Subject to certain
restrictions, dividends received by a corporate a holder generally should be
eligible for the 70% dividends received deduction.
SALE OF COMMON STOCK
A holder of Common Stock received on conversion of a Note who sells or
otherwise disposes of such stock in a taxable transaction will recognize
capital gain or loss equal to the difference between the cash and the fair
market value of any property received on such sale and the holder's tax basis
in such stock. Such gain or loss will be long-term gain or loss if the holding
period for such Common Stock was more than one year.
BACKUP WITHHOLDING
A holder may be subject to "backup withholding" at a rate of 31% with
respect to certain "reportable payments", including interest payments and,
under certain circumstances, principal payments on the Notes, proceeds of a
sale of the Notes, and dividends on, and proceeds from the sale of, the Common
Stock received on conversion of the Notes. These backup withholding rules
apply if the holder, among other things, (i) fails to furnish a social
security number or other taxpayer identification number ("TIN") within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) fails to report properly interest or dividends, or (iv) under certain
circumstances, fails to provide a certified statement, signed under penalties
of perjury, that the TIN furnished is the correct number and that such holder
is not subject to backup withholding. A holder who does not provide the
Company with its correct TIN also may be subject to penalties imposed by the
IRS. Any amount withheld from a payment to a holder under the backup
withholding rules is refundable or creditable against the holder's federal
income tax liability, provided that the required information is furnished to
the IRS. Backup withholding will not apply, however, with respect to payments
made to certain holders, including corporations, tax-exempt organizations and
certain foreign persons, provided their exemption from backup withholding is
properly established.
SHARES ELIGIBLE FOR FUTURE SALE
At the time of the offering, approximately 6,268,287 shares of Common Stock
(excluding the shares of Common Stock issuable upon the conversion of the
Notes) will be outstanding and freely transferable without restriction. The
Company and each of the Company's directors and officers have agreed that, for
a period of 90 days after the date of this Prospectus, they will not directly
or indirectly, offer, sell, offer to or contract to sell, pledge, grant any
option to purchase or otherwise sell or otherwise sell or dispose (or announce
any offer, sale, offer of sale, contract of sale, pledge, grant of any option
to purchase or sell or other sale or disposition) of any Common Stock or any
securities convertible or exchangeable or exercisable therefor, or other
capital stock of the Company or any right or option to acquire Common Stock or
other capital stock of the Company without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters. At the end
of such 90-day period, approximately 1,922,158 shares subject to such lock-up
agreements will become eligible for sale, subject, with respect to
approximately 1,836,950 of those shares, to the provisions of Rule 144.
In general, under Rule 144 a person (or persons whose shares must be
aggregated for purposes of the volume limitation under the rule), including
any affiliate, who has beneficially owned shares for at least two years
53
<PAGE>
would be entitled to sell, within any three-month period, a number of shares
that does not exceed the greater of 1% of the outstanding shares of the Common
Stock (approximately 80,000 shares) or the reported average weekly trading
volume of the Common Stock in the over-the-counter market for the four weeks
preceding the sale. Sales under Rule 144 are also subject to certain manner of
sale restrictions and notice requirements and to the availability of current
public information about the Company. Affiliates are also subject to the
volume and other limitations with respect to all shares held by them
regardless of whether such shares are restricted shares. Persons who have not
been affiliates of the Company for at least three months, or who have held
their shares for more than three years, are entitled to sell such shares
without any volume limitations, in reliance upon paragraph (k) of Rule 144.
No predictions can be made as to the effect, if any, that possible future
sales of the Notes, the issuance of Common Stock upon conversion of the Notes
or possible future sales of shares of Common Stock by present or future
shareholders or by persons who exercise options under either of the Company's
stock option plans will have on the market price of the Common Stock
prevailing from time to time. See "Security Ownership of Management and
Principal Shareholders." Sales of substantial amounts of the Common Stock in
the public market, including any future public offering of such stock, or the
"overhang" of significant numbers of shares that might be sold by affiliates
or other holders of such shares or the Notes, could adversely affect
prevailing market prices and could impair the Company's future ability to
issue capital through an offering of its capital securities.
If the Company proposes to register any of its securities for sale under the
Securities Act, for either its own account or the account of others, pursuant
to a firm commitment underwritten public offering, each of Hal Krauter, Louis
Adimare and George Bragg, directors of the Company, is entitled to notice of
such registration and to include their shares therein. These rights are
subject to certain conditions, including the right of the Company to exclude
or limit the number of shares included in such registration if the
underwriters determine that marketing conditions so require. A total of
approximately 1,836,950 shares of Common Stock are subject to these
registration rights.
54
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Smith Barney Inc. are acting as representatives
(the "Representatives"), have severally agreed, subject to the terms and
conditions contained in the Underwriting Agreement, to purchase from the
Company the aggregate principal amount of Notes set forth opposite their
respective names below.
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
----------- -----------
<S> <C>
Prudential Securities Incorporated.............................. $
Smith Barney Inc................................................
-----------
Total......................................................... $62,500,000
===========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the Notes offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company they
propose to offer the Notes initially at the public offering price set forth on
the cover page of this Prospectus; that the Underwriters may allow to selected
dealers a concession of % of the principal amount of the Notes; and that
such dealers may reallow a concession of % of the principal amount of the
Notes to certain other dealers. After the initial public offering, the
offering price and the concession may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to an additional $9,375,000
in aggregate principal amount of Notes at the initial public offering price,
less underwriting discount and commissions, as set forth on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering over-allotments incurred in the sale of the Notes offered
hereby. To the extent such option to purchase is exercised, each Underwriter
will be obligated, subject to certain conditions, to purchase approximately
the same percentage of such additional Notes as the number set forth next to
such Underwriter's name in the preceding table bears to $62,500,000.
The Company and each of the Company's directors and officers have agreed
that, for a period of 90 days after the date of this Prospectus, they will
not, directly or indirectly, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any Common
Stock or any securities convertible into or exchangeable or exercisable
therefore, or other capital stock of the Company or any right to purchase or
acquire Common Stock or other capital stock of the Company without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters.
The Company has agreed to indemnify the Underwriters or contribute to losses
arising out of certain liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
The legality of the Notes being offered hereby and the Common Stock of the
Company to be issued upon the conversion of the Notes has been passed upon for
the Company by Brown & Bain, P.A., Palo Alto, California. Certain legal
matters will be passed upon for the Underwriters by Brobeck, Phleger &
Harrison LLP, Palo Alto, California. Douglas Clark Neilsson, Esq., who is Of
Counsel with Brown & Bain, P.A. and acts as the General Counsel of the
Company, owns 2,850 shares of the Common Stock and holds options, under the
Company's stock option plans, to acquire an aggregate of 35,750 shares of
Common Stock.
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EXPERTS
The consolidated financial statements as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995 of Leasing
Solutions, Inc. included and incorporated by reference in this Prospectus and
the related financial statement schedule also incorporated by reference in the
Registration Statement have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein and also incorporated by
reference in the Registration Statement, and are included and incorporated in
reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
56
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LEASING SOLUTIONS, INC.
----------------
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants..................................... F-2
Consolidated Balance Sheets for the Years ended December 31, 1994 and
1995 and for the Six Months ended June 30, 1996...................... F-3
Consolidated Income Statements for the Years ended December 31, 1993,
1994 and 1995 and for the Six Months ended June 30, 1995 and 1996.... F-4
Consolidated Statements of Shareholders' Equity for the Years ended
December 31, 1993, 1994 and 1995 and for the Six Months ended June
30, 1996............................................................. F-5
Consolidated Statements of Cash Flows for the Years ended December 31,
1993, 1994 and 1995 and for the Six Months ended June 30, 1995 and
1996................................................................. F-6
Notes to Consolidated Financial Statements............................ F-7
</TABLE>
F-1
<PAGE>
LEASING SOLUTIONS INC. AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Leasing Solutions, Inc.:
We have audited the accompanying consolidated balance sheets of Leasing
Solutions, Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1995. 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 Leasing Solutions, Inc. and
subsidiary at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
January 26, 1996
F-2
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995 AND
JUNE 30, 1996
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------- JUNE 30,
1994 1995 1996
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents............... $ 11,706,000 $ 8,423,000 $ 8,152,000
Accounts receivable..................... 2,413,000 4,068,000 11,589,000
Investment in direct finance leases-net. 22,365,000 18,461,000 19,255,000
Investment in operating leases-net...... 102,256,000 190,022,000 272,089,000
Property and equipment-net.............. 935,000 1,527,000 1,715,000
Other assets............................ 1,689,000 1,601,000 2,017,000
------------ ------------ ------------
TOTAL ASSETS.......................... $141,364,000 $224,102,000 $314,817,000
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable-equipment purchases.... $ 11,877,000 $ 19,376,000 $ 1,846,000
Accrued and other liabilities........... 3,633,000 5,709,000 8,484,000
Income taxes payable.................... 916,000 553,000 75,000
Recourse debt........................... 9,897,000 71,681,000 118,728,000
Nonrecourse debt........................ 89,594,000 93,354,000 123,264,000
Capital lease obligations............... 50,000 143,000 --
Deferred income taxes................... 959,000 2,374,000 4,697,000
------------ ------------ ------------
TOTAL LIABILITIES..................... 116,926,000 193,190,000 257,094,000
------------ ------------ ------------
COMMITMENTS (Note 8) -- -- --
SHAREHOLDERS' EQUITY
Preferred stock, authorized 5,000,000
shares; none outstanding................ -- -- --
Common stock, authorized 20,000,000
shares; shares outstanding: 1994--
6,136,929; 1995--6,263,930; and 1996--
8,099,082.............................. 14,115,000 14,661,000 37,342,000
Retained earnings....................... 10,323,000 16,251,000 20,361,000
Accumulated translation adjustment...... -- -- 20,000
------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY.............. 24,438,000 30,912,000 57,723,000
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY.................................. $141,364,000 $224,102,000 $314,817,000
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED INCOME STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------- -----------------------
1993 1994 1995 1995 1996
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Operating lease
revenue.............. $39,908,000 $53,886,000 $77,046,000 $34,752,000 $58,014,000
Earned lease income... 6,603,000 4,256,000 2,885,000 1,513,000 1,146,000
Operating lease
revenue--related
party................ 1,547,000 330,000 -- -- --
Gain on sale of lease
equipment............ 2,416,000 1,103,000 271,000 206,000 88,000
Interest income....... 239,000 327,000 462,000 237,000 327,000
Other................. 105,000 185,000 12,000 5,000 289,000
----------- ----------- ----------- ----------- -----------
TOTAL REVENUES...... 50,818,000 60,087,000 80,676,000 36,713,000 59,864,000
----------- ----------- ----------- ----------- -----------
COSTS AND EXPENSES
Depreciation--
operating leases..... 29,830,000 37,781,000 51,164,000 23,557,000 39,035,000
Selling, general and
administrative....... 7,435,000 7,294,000 8,584,000 4,077,000 5,419,000
Interest.............. 7,701,000 6,523,000 10,428,000 4,506,000 7,738,000
Other................. 391,000 837,000 641,000 279,000 716,000
----------- ----------- ----------- ----------- -----------
TOTAL COSTS AND
EXPENSES........... 45,357,000 52,435,000 70,817,000 32,419,000 52,908,000
----------- ----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES.................. 5,461,000 7,652,000 9,859,000 4,294,000 6,956,000
PROVISION FOR INCOME
TAXES.................. 2,242,000 3,060,000 3,931,000 1,718,000 2,846,000
----------- ----------- ----------- ----------- -----------
NET INCOME.............. $ 3,219,000 $ 4,592,000 $ 5,928,000 $ 2,576,000 $ 4,110,000
=========== =========== =========== =========== ===========
NET INCOME PER COMMON
AND COMMON EQUIVALENT
SHARE.................. $.66 $.75 $.93 $.41 $.53
=========== =========== =========== =========== ===========
COMMON AND COMMON
EQUIVALENT SHARES...... 8,099,082 6,096,000 6,373,000 6,241,000 7,727,000
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
---------------------- RETAINED TRANSLATION
SHARES AMOUNT EARNINGS ADJUSTMENT TOTAL
--------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCES, January 1,
1993 .................. 3,931,688 $ 1,197,000 $ 2,547,000 $ 3,744,000
Issuance of common
stock................ 1,000,000 3,916,000 -- 3,916,000
Exercise of stock
options.............. 184,638 65,000 -- 65,000
Repurchase of common
stock................ (73,892) (3,000) (35,000) (38,000)
Tax benefit of stock
option transactions.. -- 193,000 -- 193,000
Net income............ -- -- 3,219,000 3,219,000
--------- ----------- ----------- -----------
BALANCES, December 31,
1993................... 5,042,434 5,368,000 5,731,000 11,099,000
Issuance of common
stock................ 1,009,190 8,564,000 -- 8,564,000
Exercise of stock
options.............. 85,305 78,000 -- 78,000
Tax benefit of stock
option transactions.. -- 105,000 -- 105,000
Net income............ -- -- 4,592,000 4,592,000
--------- ----------- ----------- -----------
BALANCES, December 31,
1994................... 6,136,929 14,115,000 10,323,000 24,438,000
Issuance of common
stock................ 10,122 87,000 -- 87,000
Exercise of stock
options.............. 116,879 190,000 -- 190,000
Tax benefit of stock
option transactions.. -- 269,000 -- 269,000
Net income............ -- -- 5,928,000 5,928,000
--------- ----------- ----------- -----------
BALANCES, December 31,
1995................... 6,263,930 14,661,000 16,251,000 30,912,000
Issuance of common
stock*............... 1,804,455 22,556,000 -- 22,556,000
Exercise of stock
options*............. 30,697 125,000 -- 125,000
Foreign currency
translation
adjustment*.......... -- -- $20,000 20,000
Net income*........... 4,110,000 4,110,000
--------- ----------- ----------- ------- -----------
BALANCES, June 30,
1996*.................. 8,099,082 $37,342,000 $20,361,000 $20,000 $57,723,000
========= =========== =========== ======= ===========
</TABLE>
- --------
* Unaudited
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............. $ 3,219,000 $ 4,592,000 $ 5,928,000 $ 2,576,000 $ 4,110,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization.......... 29,897,000 38,136,000 51,655,000 23,765,000 39,350,000
Provision for
uncollectible
amounts............... 60,000 5,000 -- -- 25,000
Deferred income taxes.. (1,021,000) 820,000 1,415,000 (709,000) 2,323,000
Changes in assets and
liabilities:
Accounts receivable.. (601,000) (157,000) (1,655,000) (264,000) (7,521,000)
Other assets......... (285,000) (1,018,000) 88,000 (444,000) (416,000)
Accounts payable -
equipment purchases. 6,187,000 5,334,000 7,499,000 (7,599,000) (17,530,000)
Accrued and other
liabilities......... 1,691,000 (351,000) 2,076,000 1,360,000 2,775,000
Income taxes
receivable and
payable............. 2,225,000 (1,553,000) (94,000) (211,000) (478,000)
Other................ -- -- -- -- 20,000
----------- ----------- ------------ ----------- ------------
Net cash provided by
operating activities... 41,372,000 45,808,000 66,912,000 18,474,000 22,658,000
----------- ----------- ------------ ----------- ------------
INVESTING ACTIVITIES
Property and equipment
purchases.............. (386,000) (636,000) (921,000) (144,000) (503,000)
Cash received over
revenue recognized..... 34,691,000 17,052,000 14,356,000 6,153,000 5,932,000
Cost of equipment
acquired for lease..... (65,777,000) (82,980,000) (149,382,000) (45,968,000) (127,853,000)
Cost of equipment
acquired for lease-
related party.......... (21,478,000) (2,588,000) -- -- --
----------- ----------- ------------ ----------- ------------
Net cash used for
investing activities... (52,950,000) (69,152,000) (135,947,000) (39,959,000) (122,424,000)
----------- ----------- ------------ ----------- ------------
FINANCING ACTIVITIES
Borrowings:
Nonrecourse............ 69,390,000 114,600,000 61,307,000 20,848,000 63,466,000
Recourse............... 24,866,000 76,428,000 105,597,000 42,982,000 160,493,000
Repayments:
Nonrecourse............ (58,590,000) (93,884,000) (57,547,000) (28,524,000) (33,556,000)
Recourse............... (25,440,000) (74,034,000) (43,813,000) (18,152,000) (113,446,000)
Issuance of common stock
- net of repurchases... 4,136,000 8,747,000 277,000 166,000 22,681,000
Repayment of capital
lease obligations...... (44,000) (50,000) (69,000) (46,000) (143,000)
----------- ----------- ------------ ----------- ------------
Net cash provided by
financing activities... 14,318,000 31,807,000 65,752,000 17,274,000 99,495,000
----------- ----------- ------------ ----------- ------------
INCREASE (DECREASE) IN
CASH AND
CASH EQUIVALENTS....... 2,740,000 8,463,000 (3,283,000) (4,211,000) (271,000)
CASH AND CASH
EQUIVALENTS
Beginning of period.... 503,000 3,243,000 11,706,000 11,706,000 8,423,000
----------- ----------- ------------ ----------- ------------
End of period.......... $ 3,243,000 $11,706,000 $ 8,423,000 $ 7,495,000 $ 8,152,000
=========== =========== ============ =========== ============
NON-CASH INVESTING AND
FINANCING ACTIVITIES
Note receivable
converted to
operating lease....... $ 2,132,000
===========
</TABLE>
F-6
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
1. THE BUSINESS
Leasing Solutions, Inc. (the "Company") was incorporated in California and
commenced operations in July 1986. The Company is principally a vendor leasing
company engaged in the business of leasing information processing and
communications equipment, primarily to large, domestic, creditworthy customers
in a variety of industries. In January 1994, the Company formed a wholly-owned
subsidiary, Leasing Solutions Receivables, Inc., as a special purpose
corporation to issue debt securities collateralized by lease receivables and
the underlying leased equipment.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial information as of June 30, 1996, and with respect to the six
months ended June 30, 1995 and 1996, included in these financial statements,
and the related information disclosed in these footnotes, are unaudited. In
the opinion of management, such information contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of such periods. The results of operations for the
six months ended June 30, 1996 are not necessarily indicative of the results
to be expected for the entire year.
Principles of consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary, Leasing Solutions
Receivables, Inc., after elimination of intercompany accounts and
transactions.
Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. Actual results
could differ from those estimates.
Cash and cash equivalents--Cash equivalents are highly liquid debt
instruments with a remaining maturity of three months or less from date of
purchase by the Company. At December 31, 1994, December 31, 1995, and June 30,
1996, $3,832,000, $3,983,000 and $5,060,000, respectively, of such amount was
restricted in connection with certain debt securities issued by the Company
and was not available for other uses (see Note 7).
Investment in direct finance leases--Lease contracts (whether financed with
recourse or nonrecourse debt) which meet the appropriate criteria specified in
Statement of Financial Accounting Standards (SFAS) No. 13 are classified as
direct finance leases. Direct finance leases are recorded upon acceptance of
the equipment by the customer. Original unearned lease income represents the
excess of the gross lease receivable and estimated residual value over the
equipment cost. Unearned lease income is recognized as revenue (earned lease
income) over the lease term at a constant rate of return on the net investment
in the lease.
Investment in operating leases--Leases which do not meet the criteria of
direct finance leases are accounted for as operating leases. Leased equipment
is recorded at cost and depreciated over the lease term, to the estimated
residual value at the expiration of the lease term, generally on a straight-
line basis. Purchased portfolios of certain leases are depreciated on an
accelerated method. The Company reviews estimated net realizable values on a
regular basis and adjustments are made as necessary.
Initial direct costs are capitalized and amortized over the original lease
term.
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over estimated useful lives, which range from three
to five years.
F-7
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
The Company adopted SFAS No. 121, "Accounting for the Impairment of Long-
Lived Assets to be Disposed of" effective January 1, 1995. The adoption of
this statement had no effect on the Company's financial condition or results
of operations.
Income taxes--Deferred income taxes are provided for temporary differences
between financial statement and income tax reporting, in accordance with SFAS
No. 109.
Net income per share--Net income per common and common equivalent share is
computed by dividing net income by the weighted average number of common
shares and dilutive common share equivalents (stock options and warrants)
outstanding during the year. The difference between primary and fully diluted
net income per share is not significant in any year.
Recently Issued Accounting Standard--In October 1995, The Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation." The new standard defines a fair value method of accounting for
stock options and other equity instruments, such as stock purchase plans. The
new standard permits companies to continue to account for equity transactions
with employees under existing accounting rules, but requires disclosure in a
note to the financial statements of the pro-forma net income and earnings per
share as if the Company had applied the new method of accounting. The Company
intends to follow these disclosure requirements for its employee stock plans.
As a result, adoption of the new standard will not impact reported earnings or
earnings per share, and will have no effect on the Company's cash flows.
Reclassifications--Certain items have been reclassified in the prior period
financial statements to conform to the 1995 presentation and had no effect on
net income or shareholders equity.
3. INVESTMENT IN DIRECT FINANCE LEASES
Investment in direct finance leases represents equipment leased for up to
five years. The components of the net investment in direct finance leases, as
of December 31, 1994 and 1995 and June 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------ JUNE 30,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Minimum lease payments receivable.... $24,984,000 $19,832,000 $20,386,000
Estimated unguaranteed residual
value................................ 876,000 1,372,000 1,658,000
Initial direct costs--net............ 59,000 73,000 30,000
Unearned lease income................ (3,554,000) (2,816,000) (2,819,000)
----------- ----------- -----------
Investment in direct finance leases--
net.................................. $22,365,000 $18,461,000 $19,255,000
=========== =========== ===========
</TABLE>
Interest rates implicit in the leases generally range from 5% to 22%.
During 1993, an unaffiliated lessee and the Company mutually agreed to
extend certain leases for a five-month period. As a result of this extension,
the Company has no further residual interest in the equipment. The
unaffiliated lessee referred to above has the right to prepay both the
original lease payments and the extended lease payments of the leases it has
with the Company. In 1993, the lessee prepaid and purchased certain leases
with a net book value of $13,394,000, resulting in a $1,532,000 gain on sale.
In 1994, the lessee prepaid portions of certain leases in the aggregate amount
of $4,000,000, which did not result in any gain or loss on sale. As of
December 31, 1994 and 1995, the net book value of leases subject to this
prepayment arrangement was $13,308,000 and $5,262,000, respectively.
F-8
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
4. INVESTMENT IN OPERATING LEASES
Investment in operating leases primarily represents equipment leased for two
to three years. The components of the net investment in operating leases, as
of December 31, 1994 and 1995 and June 30, 1996, are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- JUNE 30,
1994 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
Equipment under operating
leases......................... $ 175,079,000 $ 301,255,000 $ 417,583,000
Initial direct costs--net...... 674,000 1,664,000 2,324,000
Accumulated depreciation....... (73,310,000) (112,784,000) (147,680,000)
Allowance for doubtful
accounts....................... (187,000) (113,000) (138,000)
------------- ------------- -------------
Investment in operating
leases--net.................... $ 102,256,000 $ 190,022,000 $ 272,089,000
============= ============= =============
</TABLE>
5. FUTURE MINIMUM LEASE PAYMENTS
Future minimum lease payments to be received by the Company on direct
finance leases and noncancelable operating leases, as of December 31, 1995,
are as follows:
<TABLE>
<CAPTION>
DIRECT FINANCE
YEARS ENDED DECEMBER 31 LEASES OPERATING LEASES
----------------------- -------------- ----------------
<S> <C> <C>
1996......................................... $10,854,000 $ 78,842,000
1997......................................... 4,315,000 55,565,000
1998......................................... 3,054,000 25,151,000
1999......................................... 1,504,000 4,092,000
2000......................................... 105,000 591,000
----------- ------------
Total.................................... $19,832,000 $164,241,000
=========== ============
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment, as of December 31, 1994 and 1995, consist of:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Equipment and software ............................ $ 1,530,000 $ 2,399,000
Furniture.......................................... 219,000 245,000
----------- -----------
Total.............................................. 1,749,000 2,644,000
Accumulated depreciation........................... (814,000) (1,117,000)
----------- -----------
Property and equipment--net........................ $ 935,000 $ 1,527,000
=========== ===========
</TABLE>
7. DEBT AND CREDIT FACILITIES
The Company and its wholly-owned subsidiary, Leasing Solutions Receivables,
Inc. (the "Subsidiary") utilize their lease receivables and the underlying
leased equipment as collateral to obtain debt financing on either a recourse
or nonrecourse basis for the acquisition of equipment for lease. Principal and
interest payments on the debt are generally due monthly in amounts that are
approximately equal to the total payments due from the lessee under the leases
that collateralize the debt. Under recourse financing, in the event of a
default by a lessee, the lender has recourse against the lessee, the equipment
serving as collateral, and the borrower. Under nonrecourse financing, in the
event of a default by a lessee, the lender generally only has recourse against
the lessee and the equipment serving as collateral, but not against the
borrower.
F-9
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
Prior to 1994, the Company obtained debt financing for its leasing activity
primarily from banks, insurance and finance companies, and financial
intermediaries. In 1994, the Company, through the Subsidiary, initiated a
program to provide long-term, permanent financing for a substantial portion of
its leasing activity through the issuance of nonrecourse debt securities. Such
financing is generally known as a securitization.
On an interim basis, prior to a portfolio of leases being permanently
financed under a securitization, or other long-term loan agreement, the
Company finances its lease transactions under short-term, secured, recourse
credit facilities. The Company has the following such short-term facilities in
place as of December 31, 1995:
. a $92,500,000 revolving facility ($51,009,000 outstanding at December 31,
1995) syndicated with eight banks, expiring September 13, 1996.
Borrowings under the facility bear an interest rate, at the Company's
option, of the agent bank's prime rate (8.50% at December 31, 1995) or
LIBOR (5.77% at December 31, 1995) plus 150 basis points.
. a $10,000,000 revolving facility ($5,637,000 outstanding at December 31,
1995) with one bank, with borrowing available through June 30, 1996, and
repayments due 240 days after each borrowing. Borrowings under the
facility bear interest at the federal funds rate (5.33% at December 31,
1995) plus 240 basis points.
. a $3,000,000 revolving facility (all outstanding at December 31, 1995)
with one bank expiring July 26, 1996. Borrowings under the facility bear
interest at the bank's prime rate (8.50% at December 31, 1995) plus 75
basis points. In addition to interim financing of lease transactions,
proceeds borrowed under this facility are available for general corporate
purposes.
. an $11,000,000 revolving facility ($7,500,000 outstanding at December 31,
1995) with one bank, expiring September 20, 1996. Borrowings under the
facility bear interest at the bank's prime rate (8.50% at December 31,
1995) plus 100 basis points. In addition to interim financing of lease
transactions, proceeds under this facility are available for general
corporate purposes.
Borrowings under the above facilities are generally secured by lease
receivables and the underlying equipment financed under the respective
facility. The agreements for the facilities contain covenants regarding
leverage, interest coverage, minimum net worth and profitability and a
limitation on the payment of dividends. As of December 31, 1994, the Company
had $9,159,000 outstanding under similar facilities. The Company maintains
relationships with several other banks for additional recourse financing. At
December 31, 1994 and 1995, the Company had $738,000 and $4,535,000 (bearing
interest at rates ranging from 7.3% to 10.5%) outstanding under facilities
from such sources. Operating and direct finance leases and the related
underlying leased equipment serving as collateral for the above secured
borrowings had an aggregate net book value of $70,782,000 at December 31,
1995.
In order to issue nonrecourse, lease-backed debt securities to permanently
finance its lease transactions, the Subsidiary filed a $150,000,000 shelf
registration statement with the Securities and Exchange Commission in January
1994. Securities issued under this registration are collateralized by the
lease receivables financed by such securities and residual proceeds of the
underlying equipment and are backed by credit enhancement provided by a
national bond guarantor. The Subsidiary had two issuances under the shelf
registration in 1994. The first was for $36,685,000, issued in April 1994 at a
coupon rate of 5.575%, and is due through March 1998, with $21,244,000 and
$6,892,000 (including accrued interest) outstanding at December 31, 1994 and
1995, respectively. The second was for $37,499,000, issued in December 1994 at
a coupon rate of 8.075%, and is due through October 1999, with $37,625,000 and
$20,360,000 (including accrued interest) outstanding at
F-10
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
December 31, 1994 and 1995, respectively. Of the April 1994 issuance,
$30,046,000 was used to refinance existing recourse and nonrecourse debt with
various financial institutions. Covenants for the securities include certain
restrictions on the use of cash and restrictions on the sale or transfer of
assets. Cash restrictions include requirements that (a) all rent received by
the Subsidiary from leases collateralizing the securities be held in trust and
used for repayment of the securities, and (b) a reserve account be
established, in a maximum amount of $2,046,000, to be used to repay, in the
event of a default by a lessee, any outstanding balance under the securities
relating to such defaulted lease if proceeds from the sale of the related
underlying equipment was not sufficient to repay such balance. At December 31,
1994, and 1995, $2,526,000 and $1,501,000 of lease receipts were held in trust
and an additional $1,306,000 and $2,482,000, respectively, were held in the
reserve account. These amounts were unavailable for other uses.
In 1995 the Company issued $17,500,000 of nonrecourse subordinated debt at a
coupon rate of 9.71% due through May 1998. Borrowings under this arrangement
are to be repaid from expected residuals from portfolios of equipment subject
to the two public securitizations and are secured by the residual cash flows
from such portfolios. At December 31, 1995, the Company had $16,541,000
outstanding under this arrangement. The residual interests securing this
borrowing had a net book value of $17,683,000 at December 31, 1995.
The Company continues to maintain relationships with banks, insurance and
finance companies, and financial intermediaries as additional nonrecourse,
permanent financing sources. At December 31, 1994 and 1995, the Company had
$30,725,000 and $49,561,000, respectively, outstanding under facilities from
such sources at debt rates ranging from 5% to 13%.
Collateral for nonrecourse debt includes $105,878,000 and $112,790,000 of
net investment in direct finance and operating leases and related underlying
leased equipment at December 31, 1994 and 1995, respectively.
Future maturities of nonrecourse and recourse debt are as follows:
<TABLE>
<CAPTION>
NONRECOURSE RECOURSE
YEARS ENDED DECEMBER 31 DEBT DEBT
----------------------- ----------- -----------
<S> <C> <C>
1996................................................. $50,230,000 $71,681,000
1997................................................. 32,308,000 --
1998................................................. 10,478,000 --
1999................................................. 338,000 --
----------- -----------
Total............................................ $93,354,000 $71,681,000
=========== ===========
</TABLE>
Cash paid for interest in 1993, 1994 and 1995 was $7,417,000, $7,233,000 and
$10,294,000, respectively.
F-11
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
8. COMMITMENTS
The Company leases its facilities under noncancelable operating leases
expiring through 2000. Rent expense for 1993, 1994 and 1995 was $351,000,
$377,000 and $377,000, respectively.
Future minimum annual rental payments for all leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEARS ENDING DECEMBER 31 LEASES LEASES
------------------------ ------- ----------
<S> <C> <C>
1996................................................... $ 57,000 $ 513,000
1997................................................... 57,000 516,000
1998................................................... 51,000 510,000
1999................................................... -- 505,000
2000................................................... -- 506,000
-------- ----------
Total................................................. 165,000 $2,550,000
======== ==========
Amount representing interest........................... (22,000)
--------
Present value of minimum lease payments................ $143,000
========
</TABLE>
9. RELATED PARTY TRANSACTIONS
Prior to February 1994, Memorex Telex Corporation was a significant
shareholder of the Company. In February 1994, Memorex Telex sold its entire
remaining interest in the Company, at which point they were no longer a
related party. The Company has an agreement with Memorex Telex which
designates the Company as a lease financing source for Memorex Telex products.
The Company's sales force works directly with Memorex Telex to provide leases
for Memorex Telex customers and to secure agreements for the extension, re-
lease, or sale of such equipment to initial and/or subsequent customers. The
parties will share the net remarketing proceeds generated after the original
equipment cost and related fees are fully recovered by the Company, at an
agreed upon rate of return.
Transactions between Memorex Telex and the Company included purchases of
equipment for lease by the Company with aggregate purchase prices of
$2,588,000 and $21,478,000 through February 1994 and during 1993.
Memorex Telex, as a lessee, had lease transaction obligations with the
Company at December 31, 1993, with an underlying investment of $1,303,000. All
such obligations were fully paid in 1994. Through February 1994 and during
1993, the Company recognized $330,000 and $1,547,000 in operating lease
revenue from lease transactions with Memorex Telex. In addition, the Company
recognized interest income of $134,000 in 1993 from lease transactions with
Memorex Telex.
F-12
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
10. INCOME TAXES
The provision for income taxes at December 31 consists of:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal.................................. $2,536,000 $1,749,000 $1,984,000
State.................................... 727,000 491,000 532,000
---------- ---------- ----------
Total current.............................. 3,263,000 2,240,000 2,516,000
---------- ---------- ----------
Deferred:
Federal.................................. (763,000) 385,000 1,236,000
State.................................... (258,000) 435,000 179,000
---------- ---------- ----------
Total deferred............................. (1,021,000) 820,000 1,415,000
---------- ---------- ----------
Total provision............................ $2,242,000 $3,060,000 $3,931,000
========== ========== ==========
</TABLE>
The cumulative items giving rise to deferred taxes at December 31 were as
follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Deferred tax liability:
Lease transactions treated differently for tax
and financial reporting........................ $(4,157,000) $(8,896,000)
----------- -----------
Deferred tax assets:
Alternative minimum tax credits................. 2,631,000 5,890,000
State income tax................................ 450,000 471,000
Other........................................... 117,000 161,000
----------- -----------
Total deferred tax asset......................... 3,198,000 6,522,000
----------- -----------
Net deferred tax liability....................... $ (959,000) $(2,374,000)
=========== ===========
</TABLE>
The effective tax rate differs from the federal statutory income tax rate as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate ............................................ 35.0% 35.0% 35.0%
State taxes, net of federal effect......................... 3.8 4.9 4.8
Other...................................................... 2.3 0.1 0.1
---- ---- ----
Total...................................................... 41.1% 40.0% 39.9%
==== ==== ====
</TABLE>
Cash paid for income taxes in 1993, 1994, and 1995 $381,000, $3,666,000, and
$2,687,000, respectively.
11. SHAREHOLDERS' EQUITY
Stock Option Plans--The Company's stock option plans provide that incentive
and nonqualified stock options to purchase up to an aggregate of 1,840,000
shares of the common stock of the Company may be granted to key contributors
to the Company, including officers, directors and employees. Options are
granted at the fair market value of the common stock as of the date of grant,
as determined by the Board of Directors. Options generally become exercisable
ratably over three or four years and expire five or ten years from the grant
date.
F-13
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
At December 31, 1995, the Company had reserved 853,676 shares for issuance
under these plans.
Activity under the stock option plans is as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OPTION PRICE TOTAL
--------- -------------- ----------
<S> <C> <C> <C>
Outstanding, January 1, 1993 .......... 418,355 $ .10 - 2.50 $ 267,000
Granted.............................. 66,900 4.00 - 5.00 309,000
Exercised............................ (184,638) .10 - 2.50 (65,000)
Canceled............................. (11,100) .50 - 1.25 (9,000)
-------- -------------- ----------
Outstanding, December 31, 1993......... 289,517 .50 - 5.00 502,000
Granted.............................. 164,450 6.50 - 10.00 1,329,000
Exercised............................ (85,305) .50 - 4.50 (78,000)
Canceled............................. (15,960) .50 - 10.00 (66,000)
-------- -------------- ----------
Outstanding, December 31, 1994......... 352,702 .50 - 9.75 1,687,000
Granted.............................. 259,725 7.25 - 15.25 2,165,000
Exercised............................ (116,879) .50 - 9.50 (191,000)
Canceled............................. (19,174) 1.00 - 10.13 (128,000)
-------- -------------- ----------
Outstanding, December 31, 1995......... 476,374 $ .50 - 15.25 $3,533,000
======== ============== ==========
</TABLE>
At December 31, 1995, options to purchase 147,241 shares were exercisable
and options for 377,302 shares were available for future grant under the Stock
Option Plans.
At December 31, 1995, warrants to purchase 66,667 shares were exercisable at
$6.00 per share. These warrants expire in April 1998.
Stock Purchase Plans--In 1994, the shareholders of the Company approved the
1994 Employee Stock Purchase Plan (the "ESPP") under which 200,000 shares of
the Company's common stock were reserved for issuance. The ESPP permits
virtually all employees to purchase common stock, through payroll deductions,
at the lower of (a) 85% of the fair market value of the common stock on the
first day of each twelve-month offering period, or (b) 85% of the fair market
value of the common stock on the applicable exercise date. Each offering
period has two six-month exercise periods with the last day of each exercise
period being an exercise date. During 1994 and 1995, employees purchased 9,190
and 10,122 shares, respectively, under the ESPP for a total purchase price of
$87,000 and $64,000, respectively. At December 31, 1995, the Company had
reserved 180,688 shares for issuance under the ESPP.
12. SIGNIFICANT CUSTOMER
One customer accounted for 19% of the Company's revenues in 1993. No
customer accounted for more than 10% of the Company's revenues in 1994. Two
customers accounted for 11% and 10% of the Company's revenues in 1995.
F-14
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
13. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of the Company's
financial instruments is in accordance with the provisions of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The valuation methods
used by the Company are set forth below.
The accuracy and usefulness of the fair value information disclosed herein
is limited by the following factors:
. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
. These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holding of a
particular financial asset.
. SFAS No. 107 excludes from its disclosure requirements lease contracts
and various significant assets and liabilities that are not considered to
be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of the
Company.
The carrying amounts and estimated fair values of the Company's financial
instruments as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------
CARRYING
AMOUNT FAIR VALUE
----------- -----------
<S> <C> <C>
Assets:
Cash............................................... $ 8,423,000 $ 8,423,000
Liabilities:
Recourse debt...................................... $71,681,000 $71,734,000
Non-recourse debt.................................. $93,354,000 $94,127,000
</TABLE>
The following methods and assumptions were used by the Company in computing
the estimated fair value in the above table:
Cash--The carrying amounts of these financial instruments approximated
their fair value.
Debt and Subordinated Notes Payable--The fair value of recourse and
nonrecourse debt is based on the borrowing rates currently available to
the Company for debt with similar terms and average maturities.
F-15
<PAGE>
LEASING SOLUTIONS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
14. SUBSEQUENT EVENTS (UNAUDITED)
In February 1996, the Company closed a public offering of 2,000,000 shares
of its Common Stock, 1,800,000 of which were sold by the Company. It received
net proceeds of $22,493,000 from the offering.
In April 1996, the Company acquired all of the stock of a company, located
in the United Kingdom, in the equipment leasing business. The purchase price
in the acquisition was U.S. $1,100,000, $150,000 of which was held back at
closing as security for the seller's performance of certain of its obligations
and representations and warranties in the purchase agreement. The acquisition
was accounted for as a purchase.
In September 1996, the syndicated revolving credit facility described in
footnote 7 above was amended to increase the aggregate availability thereunder
from $92,500,000 at December 31, 1995 to $155,000,000.
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
ANY SECURITY OTHER THAN THE NOTES OFFERED BY THIS PROSPECTUS, NOR DOES IT CON-
STITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE NOTES BY AN-
YONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHO-
RIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 12
Capitalization............................................................ 13
Dividend Policy........................................................... 13
The Company............................................................... 13
Selected Consolidated Financial Data...................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 21
Management................................................................ 34
Security Ownership of Management and Principal Shareholders............... 37
Description of Notes...................................................... 38
Description of Capital Stock.............................................. 50
Certain Tax Considerations................................................ 52
Shares Eligible for Future Sale........................................... 53
Underwriting.............................................................. 55
Legal Matters............................................................. 55
Experts................................................................... 56
Index to Consolidated Financial Statements................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$62,500,000
[LOGO OF LEASING SOLUTIONS, INC.]
LEASING SOLUTIONS, INC.
% Convertible Subordinated
Notes Due 2003
-------------
PROSPECTUS
-------------
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
issuance and distribution of the securities to be registered, other than
underwriting discounts and commissions. All of the amounts shown are estimates
except the Securities and Exchange Commission registration fee and the NASDAQ
National Market application and filing fees. All of the expenses will be paid
by the Company.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 24,784
Nasdaq National Market application and filing fee................ 21,094
NASD filing fee.................................................. 9,125
Accounting fees and expenses..................................... 50,000
Printing expenses................................................ 60,000
Trustee, registrar and paying agent expenses..................... 9,000
Blue Sky fees and legal expenses................................. 7,500
Other legal fees and legal expenses.............................. 90,000
Miscellaneous expenses........................................... 28,497
--------
Total.......................................................... $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As allowed by the California General Corporation Law, the Company's Articles
of Incorporation provide that the liability of the directors of the Company
for monetary damages shall be eliminated to the fullest extent permissible
under California law. This is intended to eliminate the personal liability of
a director for monetary damages in an action brought by or in the right of the
Company for breach of a director's duties to the Company or its shareholders,
except for liability: (1) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law; (2) for acts or
omissions that a director believes to be contrary to the best interests of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (3) for any transaction from which a director derived an
improper personal benefit; (4) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Company or its shareholders; (5) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Company or its shareholders; (6) with respect to
certain transaction, or the approval of transactions, in which a director has
a material financial interest; and (7) with respect to approval of certain
improper distributions to shareholders or certain loans or guarantees. This
provision does not eliminate or limit the liability of an officer for any act
or omission as an officer, notwithstanding that the officer is also a director
or that his actions, if negligent or improper, have been ratified by the Board
of Directors. Further, the provision has no effect on claims arising under
federal or state securities laws and does not affect the availability of
injunctions and other equitable remedies available to the Company's
shareholders for any violation of a director's fiduciary duty to the Company
or its shareholders. Although the validity and scope of the legislation
underlying the provision have not yet been interpreted to any significant
extent by the California courts, the provision may relieve directors of
monetary liability to the Company for grossly negligent conduct, including
conduct in situations involving attempted takeovers of the Company.
The Company's Bylaws permit it to indemnify its officers and directors to
the fullest extent permitted by law. In addition, the Company's Articles of
Incorporation expressly authorize the use of indemnification agreements, and
the Company has entered into separate indemnification agreements with each of
its directors and its executive officers. These agreements required the
Company to indemnify its officers and directors to the
II-1
<PAGE>
fullest extent permitted by law, including circumstances in which
indemnification would otherwise be discretionary. Among other things, the
agreements require the Company to indemnify directors and officers against
certain liabilities that may arise by reason of their status or service as
directors and officers and to advance their expenses incurred as a result of
any proceeding against them as to which they could be indemnified.
The Company has obtained directors and officers liability and company
reimbursement insurance pursuant to a policy currently in effect (the "D&O
Policy") with several Lloyd's syndicates (collectively, "Lloyds"). Pursuant to
the D&O Policy, Lloyds will pay, on behalf of directors and officers of the
Company, certain losses (a "Loss") incurred as a result of a wrongful act (a
"Wrongful Act") by such persons, for which they are not being indemnified by
the Company. In addition, Lloyds will reimburse the Company for Losses over
$100,000 ($200,000 if the loss is related to a securities law claim) incurred
as a result of the Company's indemnification of all officer or director in
connection with a Wrongful Act. The D&O Policy provides that Lloyds aggregate
liability to the Company with respect to a single policy year shall not exceed
$10,000,000. The D&O Policy is subject to customary exclusions. The Company
also has obtained an excess directors and officers liability and company
reimbursement policy (the "Excess Policy"). The Excess Policy, with RLI
Insurance Company, has essentially the same terms and conditions as the D&O
Policy except that it provides $2,500,000 of coverage in excess of the
$10,000,000 coverage under the D&O Policy.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification of the
Company by the Underwriters for certain liabilities, including liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act").
ITEM 16. EXHIBITS.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 Proposed form of Underwriting Agreement.
4.1.1 Proposed form of Indenture Agreement with respect to the %
Convertible Subordinated Notes Due 2003 between Bankers Trust
Company, as Trustee, and the Company.
4.1.2 Form of Indenture relating to the % Convertible Subordinated Notes
due 2003 between Bankers Trust, as Trustee, and the Company
(included in Exhibit 4.1.1).
5.1 Form of opinion of Brown & Bain, P.A., legal counsel to the Company,
with respect to legality of the securities being registered.
*12.1 Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Brown & Bain, P.A., legal counsel to the Company
(included in Exhibit 5.1).
*24.1 Power of Attorney (included on signature page II-4).
*25.1 Form T-1 Statement of Eligibility under the Trust Indenture Act of
1939, as amended, of Bankers Trust Company, as Trustee.
</TABLE>
- --------
* Previously filed.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, as amended ("Exchange Act") (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to Section 15(d) of the Exchange Act) that is incorporated by reference in the
Registration Statement 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-2
<PAGE>
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent
or given, the latest annual report, to security holders that is incorporated
by reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Exchange Act; and where
interim financial information required to be presented by Article 3 of
Regulation S-X is not set forth in the Prospectus, to deliver, or cause to be
delivered to each person to whom the Prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
Prospectus to provide such interim financial information.
Insofar as indemnification for liabilities arising under the Securities Act
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 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 the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement 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-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE COMPANY
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SAN JOSE, STATE OF CALIFORNIA, ON OCTOBER 2, 1996.
Leasing Solutions, Inc.
By: /s/ Hal J Krauter
-------------------------------
(Hal J Krauter,
President and
Chief Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Hal J Krauter and Robert J. Kearns III, and
each of them, his true and lawful attorney-in-fact and agent, each with full
power of substitution and resubstitution, for him in any and all capacities,
to sign any and all amendments to this Registration Statement and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that either of said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Hal J Krauter Chairman, President, October 2, 1996
- ------------------------------------- Chief Executive
(HAL J KRAUTER) Officer and
Director (Principal
Executive Officer)
/s/ Robert J. Kearns III Executive Vice October 2, 1996
- ------------------------------------- President, Finance
(ROBERT J. KEARNS III) and Chief Financial
Officer (Principal
Financial Officer)
/s/ Terence W. Murphy Controller October 2, 1996
- ------------------------------------- (Principal
(TERENCE W. MURPHY) Accounting Officer)
/s/ Louis R. Adimare Director October 2, 1996
- -------------------------------------
(LOUIS R. ADIMARE)
/s/ George L. Bragg Director October 2, 1996
- -------------------------------------
(GEORGE L. BRAGG)
/s/ James C. Castle Director October 2, 1996
- -------------------------------------
(JAMES C. CASTLE)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 Proposed form of Underwriting Agreement.
4.1.1 Proposed form of Indenture Agreement with respect to the %
Convertible Subordinated Notes Due 2003 between Bankers Trust
Company, as Trustee, and the Company.
4.1.2 Form of Indenture relating to the % Convertible Subordinated
Notes due 2003 between Bankers Trust, as Trustee, and the
Company (included in Exhibit 4.1.1).
5.1 Form of opinion of Brown & Bain, P.A., legal counsel to the
Company, with respect to legality of the securities being
registered.
*12.1 Statement regarding Computation of Ratio of Earnings to Fixed
Charges.
23.1 Consent of Deloitte & Touche LLP, independent auditors.
23.2 Consent of Brown & Bain, P.A., legal counsel to the Company
(included in Exhibit 5.1).
*24.1 Power of Attorney (included on signature page II-4).
*25.1 Form T-1 Statement of Eligibility under the Trust Indenture
Act of 1939, as amended, of Bankers Trust Company, as
Trustee.
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.1
LEASING SOLUTIONS, INC.
$50,000,000/1/
---
__% Convertible Subordinated
Notes due 2003
UNDERWRITING AGREEMENT
----------------------
_____________, 1996
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
As a Representatives of the several Underwriters
c/o Prudential Securities Incorporated
One New York Plaza
New York, New York 10292
Dear Sirs:
Leasing Solutions, Inc., a California corporation (the "Company"),
hereby confirms its agreement with the several underwriters named in Schedule I
hereto (the "Underwriters"), for whom you have been duly authorized to act as
representatives (in such capacities, the "Representatives"), as set forth below.
If you are the only Underwriters, all references herein to the Representatives
shall be deemed to be to the Underwriters.
1. Notes. Subject to the terms and conditions herein contained, the
-----
Company proposes to issue and sell to the several Underwriters $62,500,000
aggregate principal amount of its __% Convertible Subordinated Notes due 2003
(the "Firm Notes") The Company also proposes to issue and sell to the several
Underwriters not more than an additional $9,375,000 aggregate principal amount
of its __% Convertible Subordinated Notes due 2003 if requested by the
Representatives as provided in Section 3 of this Agreement. Any and all notes
to be purchased by the Underwriters pursuant to such option are referred to
herein as the "Option Notes", and the Firm Notes and any Option Notes are
collectively referred to herein as the "Notes". The Notes will be convertible
into shares of Common Stock, par value $.001 per share, of the Company at a
conversion price of $_____ per share. The Notes are to be issued pursuant to an
Indenture (the "Indenture") to be entered into between the Company and
Bankers Trust, as trustee, the form of which has been filed as an exhibit
to the Registration Statement (as defined below). This is to confirm the
agreement concerning the purchase of the Notes from the Company by the
Underwriters.
2. Representations and Warranties of the Company. The Company represents
----------------------------------------------
and warrants to, and agrees with, each of the several Underwriters that:
(a) The Company meets the requirements for use of Form S-3 under the
Securities Act of 1933, as amended (the "Act"). A registration statement on
such Form (File No. 333--) with respect to the Notes, including a prospectus
subject to completion, has been filed by the Company with the Securities and
Exchange Commission (the "Commission") under the Act, and one or more amendments
to such registration statement may have been so filed. After the execution of
this Agreement, the Company will file with the Commission either (i) if such
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, either (A) if the Company relies on
Rule 434 under the Act, a Term Sheet (as hereinafter defined) relating to the
Notes that shall identify the Preliminary Prospectus (as hereinafter defined)
that it supplements and, if reacquired to be filed pursuant to Rules 434(c)(2)
and 424(b), an Integrated prospectus (as hereinafter defined), in either case,
containing such information as is required or permitted by Rule 434, 430A and
424(b) under the Act or (B) if the Company does not rely on Rule 434
- ----------------------
/1/ Plus an option to purchase from Leasing Solutions, Inc. up to $9,375,000
principal amount to cover over-allotments.
<PAGE>
under the Act, a prospectus in the form most recently included in an amendment
to such registration statement (or, if no such amendment shall have been filed,
in such registration statement), with such changes or insertions as are required
by Rule 430A under the Act or permitted by Rule 424(b) under the Act, and in the
case of clause (i)(A) or (i)(B) of this sentence as have been provided to and
approved by the Representatives prior to the execution of this Agreement, or
(ii) if such registration statement, as it may have been amended, has not been
declared by the Commission to be effective under the Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representatives prior to the
execution of this Agreement. The Company may also file a related registration
statement with the Commission pursuant to Rule 462(b) under the Act for the
purpose of registering certain additional Notes, which registration shall be
effective upon filing with the Commission. The Indenture has been qualified
under the Trust Indenture Act of 1939 (the "Trust Indenture Act"). As used in
this Agreement, the term "Original Registration Statement" means the
registration statement initially filed relating to the Notes, as amended at the
time when it was or is declared effective, including (A) all financial schedules
and exhibits thereto, (B) all documents incorporated by reference therein filed
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
(C) any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined) or, if required to be filed
pursuant to Rule 434(c)(2) and 424(b), in the Integrated Prospectus; the term
"Rule 462(b) Registration Statement" means any registration statement filed with
the Commission pursuant to Rule 462(b) under the Act (including the Registration
Statement and any Preliminary Prospectus or Prospectus incorporated therein at
the time such Registration Statement becomes effective); the term "Registration
Statement" includes both the Original Registration Statement and any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with such registration statement or any amendment
thereto (including the prospectus subject to completion, if any, included in the
Registration Statement or any amendment thereto at the time it was or is
declared effective), including all documents incorporated by reference therein
filed under the Exchange Act; the term "Prospectus" means:
(A) if the Company relies on Rule 434 under the Act, the Term Sheet
relating to the Notes that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the preliminary Prospectus identified therein that
such Term Sheet supplements:
(B) if the Company does not rely on Rule 434 under the Act, the prospectus
first filed with the Commission pursuant to Rule 424(b) under the Act; or
(C) if the Company does not rely on Rule 434 under the Act and if no
prospectus is required to be filed pursuant to Rule 424(b) under the Act,
the prospectus included in the Registration Statement, including, in the
case of clauses (A), (B) or (C) of this sentence, all documents
incorporated by reference therein filed under the Exchange Act; the term
"Integrated Prospectus" means a prospectus first filed with the Commission
pursuant to Rules 434(c)(2) and 424(b) under the Act; and the term "Term
Sheet" means any abbreviated term sheet that satisfies the requirements of
Rule 434 under the Act. Any reference in this Agreement to an "amendment or
supplement" to any Preliminary Prospectus, the Prospectus or any Integrated
Prospectus or an "amendment" to any registration statement (including the
Registration Statement) shall be deemed to include any document
incorporated by reference therein that is filed with the Commission under
the Exchange Act after the date of such Preliminary Prospectus, Prospectus,
Integrated Prospectus or registration statement, as the case may be; any
reference herein to the "date" of a Prospectus that includes a Term Sheet
shall mean the date of such Term Sheet. For purposes of the preceding
sentence, any reference to the "effective date" of an amendment to a
registration statement shall, if such amendment is effected by means of the
filing with the Commission under the Exchange Act of a document
incorporated by reference in such registration statement, be deemed to
refer to the date on which such document was so filed with the Commission,
the Prospectus or an "amendment" to any registration statement (including
the Registration Statement) shall be deemed to include any amendment or
supplement to a report to security holders or Form 10-Q being distributed
pursuant to Item 11 of Form S-2. For purposes of the preceding sentence,
any reference to the "effective date" of an amendment to a
2.
<PAGE>
registration statement shall be deemed to refer to the date of any such
amendment or supplement to a report to security holders or Form 10-Q being
distributed pursuant to Item 11 of Form S-2.
(b) The Commission has not issued any order preventing or suspending the
use of any Preliminary Prospectus. When any Preliminary Prospectus and any
amendment or supplement thereto was filed with the Commission, it (i) contained
all statements required to be stated therein in accordance with, and complied in
all material respects with the requirements of, the Act, the Exchange Act and
the respective rules and regulations of the Commission thereunder, and (ii) did
not include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. When the
Registration Statement or any amendment thereto was or is declared effective, it
(i) contained or will contain all statements required to be stated therein in
accordance with, and complied or will comply in all material respects with the
requirements of, the Act, the Exchange Act and the respective rules and
regulations of the Commission thereunder and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein not misleading. When the Prospectus or
any Term Sheet that is a part thereof or any Integrated Prospectus or any
amendment or supplement to the Prospectus is filed with the Commission pursuant
to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or
supplement is not required to be so filed, when the Registration Statement or
the amendment thereto containing such amendment or supplement to the Prospectus
was or is declared effective), on the date when the Prospectus is otherwise
amended or supplemented and on the Firm Closing Date and any Option Closing Date
(both as hereinafter defined), each of the Prospectus, and, if required to be
filed pursuant to Rules 434(c)(2) and 424(b) under the Act, the Integrated
Prospectus as amended or supplemented at any such time, (i) contained or will
contain all statements required to be stated therein in accordance with, and
complied or will comply in all material respects with the requirements of, the
Act, the Exchange Act and the respective rules and regulations of the Commission
thereunder and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus or any
amendment or supplement thereto, the Registration Statement or any amendment
thereto, the Prospectus or, if required to be filed pursuant to Rules 434(c)(2)
and 424(b) and the Act, the Integrated Prospectus or any amendment or supplement
thereto in reliance upon and in conformity with written information furnished to
the Company by any Underwriter through the Representatives specifically for use
therein or as to the Statement of Eligibility of the Trustee on Form T-1 filed
with the Commission as part of the Registration Statement.
(c) If the Company has elected to rely on Rule 462(b) and the Rule 462(b)
Registration has not been declared effective (i) the Company has filed a Rule
462(b) Registration Statement in compliance with and that is effective upon
filing pursuant to Rule 462(b) and has received confirmation of its receipt and
(ii) the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.
(d) The Company has filed all forms, reports and documents required to be
filed with the Commission since March 30, 1993 (the "LSI SEC Reports"). The LSI
SEC Reports heretofore filed, when they were filed (or, if any amendment with
respect to any such document was filed, when such amendment was filed),
conformed in all material respects with the requirements of the Exchange Act and
the rules and regulations thereunder; no such document when it was filed (or, if
an amendment with respect to any such document was filed, when such amendment
was filed), contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary in order to make the
statements therein not misleading.
(e) The Company and each of its subsidiaries (as defined in Rule 405 of
the Act) (collectively, the "Subsidiaries") have been duly organized and are
validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation and are duly qualified to transact
business as foreign corporations and are in good standing under the laws of all
other jurisdictions where the ownership or leasing
3.
<PAGE>
of their respective properties or the conduct of their respective businesses
requires such qualification, except where the failure to be so qualified does
not amount to a material liability or disability to the Company and its
Subsidiaries, taken as a whole.
(f) The Company and each of its Subsidiaries have full power (corporate
and other) to own or lease their respective properties and conduct their
respective businesses as described in the Registration Statement, each of the
Prospectus and any Integrated Prospectus or, if the Prospectus and any required
Integrated Prospectus are not in existence, the most recent Preliminary
Prospectus; and the Company has full power (corporate and other) to enter into
this Agreement and to carry out all the terms and provisions hereof to be
carried out by it.
(g) The issued shares of capital stock of each of the Company's
Subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and as otherwise set forth in each of the Prospectus and any
Integrated Prospectus or, if the Prospectus and any required Integrated
Prospectus are not in existence, the most recent Preliminary Prospectus, are
owned beneficially by the Company free and clear of any security interests,
liens, encumbrances, equities or claims.
(h) The Company has an authorized, issued and outstanding capitalization
as set forth in each of the Prospectus and any Integrated Prospectus or, if the
Prospectus and any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus. All of the issued shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid and
nonassessable.
(i) The capital stock of the Company conforms to the description thereof
contained in each of the Prospectus and any Integrated Prospectus or, if the
Prospectus and any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus.
(j) Except as disclosed in each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus), there are not outstanding
(A) securities or obligations of the Company or any of its Subsidiaries
convertible into or exchangeable for any capital stock of the Company or any
such Subsidiary, (B) warrants, rights or options to subscribe for or purchase
from the Company or any such Subsidiary any such capital stock or any such
convertible or exchangeable securities or obligations, or (C) obligations of the
Company or any such Subsidiary to issue any shares of capital stock, any such
convertible or exchangeable securities or obligations, or any such warrants,
rights or options.
(k) Except for the shares of capital stock of each of the Subsidiaries
owned by the Company and such Subsidiaries, neither the Company nor any such
Subsidiary owns any shares of stock or any other equity securities of any
corporation or has any equity interest in any firm, partnership, association or
other entity, except as described in or contemplated by the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus not in existence, the most recent Preliminary Prospectus).
(l) The consolidated financial statements and schedules of the Company and
its consolidated Subsidiaries included or incorporated by reference in the
Registration Statement and each of the Prospectus and any Integrated Prospectus
(or, if the Prospectus and any required Integrated Prospectus are not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company and its consolidated Subsidiaries and the results of
operations and changes in financial condition as of the dates and periods
therein specified. Such financial statements and schedules have been prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods involved (except as otherwise noted therein). The
selected financial data set forth under the caption "Selected Financial
Information" in each of the Prospectus and any Integrated Prospectus (or, if the
Prospectus and any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus) and in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1995, fairly present, on the basis stated
in each of the Prospectus and any Integrated Prospectus (or such Preliminary
Prospectus) and such Annual Report, the information included therein.
4.
<PAGE>
(m) Deloitte & Touche LLP, who have certified certain financial statements
of the Company and its consolidated subsidiaries and delivered their report with
respect to the audited consolidated financial statements and schedules included
in the Registration Statement of each the Prospectus and Integrated Prospectus
(or, if the Prospectus and any required Integrated Prospectus are not in
existence, the most recent Preliminary Prospectus), are independent public
accountants as required by the Act, the Exchange Act and the related published
rules and regulations thereunder.
(n) The Notes have been duly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and delivered
and paid for as provided herein, will be duly and validly issued and
outstanding, and will constitute valid and binding obligations of the Company
entitled to the benefits of the Indenture and enforceable in accordance with
their terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) or an implied covenant of good
faith and fair dealing; and the Notes, when issued and delivered, will conform
to the description thereof contained in the Prospectus.
(o) All of the shares of Common Stock issuable upon conversion of the
Notes have been duly and validly authorized and reserved for issuance upon such
conversion and, when issued and delivered in accordance with the terms of the
Indenture, will be duly and validly issued, fully paid and non-assessable and
will not be subject to any preemptive rights or similar rights to subscribe for
or to purchase pursuant to the Company's Certificate of Incorporation or bylaws
or any agreement to which the Company or any of its subsidiaries is a party or
by which it is bound.
(p) The Indenture has been duly authorized, and when duly executed by the
proper officers of the Company (assuming due execution and delivery by the
Trustee) and delivered by the Company will constitute a valid and binding
agreement of the Company enforceable against the Company in accordance with its
terms, subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether considered in
a proceeding in equity or at law) or an implied covenant of good faith and fair
dealing.
(q) The execution and delivery of, and the performance by the Company of
its obligations under, this Agreement have been duly and validly authorized by
the Company, and this Agreement has been duly executed and delivered by the
Company, and is the valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except as rights
to indemnity and contribution hereunder may be limited by federal or state
securities laws.
(r) No legal or governmental proceedings are pending to which the Company
or any of its Subsidiaries is a party or to which the property of the Company or
any of its Subsidiaries is subject that are required to be described in the
Registration Statement or each of the Prospectus and any required Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus are not
in existence, the most recent Preliminary Prospectus), and no such proceedings
have been threatened against the Company or any of its Subsidiaries or with
respect to any of their respective properties; and no contract, or other
document is required to be described in the Registration Statement, the
Prospectus or any Integrated Prospectus or to be filed as an exhibit to the
Registration Statement that is not described therein (or, if the Prospectus and
any required Integrated Prospectus are not in existence, the most recent
Preliminary Prospectus) or filed as required.
(s) Neither the Company nor any of the Subsidiaries is in violation of its
certificate or articles of incorporation or bylaws, or other organizational
documents, or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any decree
of any court or governmental agency or body having jurisdiction over the Company
or any of the Subsidiaries, or in default in any material respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any material
agreement, indenture, lease
5.
<PAGE>
or other instrument to which the Company or any of the Subsidiaries is a party
or by which any of them or any of their respective properties may be bound.
(t) The issuance, offering and sale of the Notes to the Underwriters by
the Company pursuant to this Agreement and the Indenture, the issuance and
delivery of the Common Stock issuable upon conversion of the Notes, the
compliance by the Company with the other provisions of this Agreement and the
Indenture and the consummation of the other transactions herein and therein
contemplated do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except such
as have been obtained, such as may be required under state securities or blue
sky laws and, if the registration statement filed with respect to the Notes and
the Common Stock issuable upon conversion of the Notes (as amended) is not
effective under the Act as of the time of execution hereof, such as may be
required (and shall be obtained as provided in this Agreement) under the Act, or
(ii) conflict with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any indenture, mortgage, deed of
trust, lease or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
any of their respective properties are bound, or the charter documents or by-
laws of the Company or any of its Subsidiaries, or any statute or any judgment,
decree, order, rule or regulation of any court or other governmental authority
or any arbitrator applicable to the Company or any of its Subsidiaries, or will
result in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of the Subsidiaries pursuant to the
terms of any agreement or instrument to which any of them is a party or by which
any of them may be bound or to which any of the property or assets of any of
them is subject.
(u) Subsequent to the respective dates as of which information is given in
the Registration Statement, the Prospectus or any Integrated Prospectus or, if
the Prospectus and any required Integrated Prospectus are not in existence, the
most recent Preliminary Prospectus, neither the Company nor any of its
Subsidiaries has incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction not in the ordinary course
of business, or has sustained any material loss or interference with their
respective businesses or properties from fire, flood, hurricane, accident or
other calamity, whether or not covered by insurance, or from any labor dispute
or any legal or governmental proceeding or declared or paid any dividend on its
capital stock and there has not been any material change in the capital stock,
short-term debt or long-term debt of the Company and its consolidated
Subsidiaries, or material adverse change, or any development involving a
prospective material adverse change, in the condition (financial or otherwise),
management, business prospects, net worth, or results of operations of the
Company or any of its Subsidiaries, except in each case as described in or
contemplated by each of the Prospectus and any Integrated Prospectus or, if the
Prospectus and any required Integrated Prospectus are not in existence, the most
recent Preliminary Prospectus.
(v) The Company and each of its Subsidiaries have good and marketable
title in fee simple to all items of real property and marketable title to all
personal property owned by each of them, in each case free and clear of any
security interests, liens, encumbrances, equities, claims and other defects,
except such as do not materially and adversely affect the value of such property
and do not interfere with the use made or proposed to be made of such property
by the Company or such Subsidiary, and any real property and buildings held
under lease by the Company or any such Subsidiary are held under valid,
subsisting and enforceable leases, with such exceptions as are not material and
do not interfere with the use made or proposed to be made of such property and
buildings by the Company or such Subsidiary, in each case except as described in
or contemplated in each of the Prospectus and any Integrated Prospectus (or, if
the Prospectus and any required Integrated Prospectus are not in existence, the
most recent Preliminary Prospectus).
(w) The Company has not, directly or indirectly, (i) taken any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Notes or (ii) since the filing of the Registration Statement (A) sold, bid for,
purchased, or paid anyone any compensation for
6.
<PAGE>
soliciting purchases of, the Notes or (B) paid or agreed to pay to any person
any compensation for soliciting another to purchase any other securities of the
Company.
(x) The Company has not distributed and, prior to the later of (i) the
Closing Date and (ii) the completion of the distribution of the Notes, will not
distribute any offering material in connection with the offering and sale of the
Notes other than the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or other materials, if any permitted by the Act.
(y) The Company and its Subsidiaries own or possess, or can acquire on
reasonable terms, all material patents, patent applications, trademarks, service
marks, trade names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their respective
businesses, and neither the Company nor any such Subsidiary has received any
notice of infringement of or conflict with asserted rights of any third party
with respect to any of the foregoing which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
Subsidiaries, except as described in or contemplated by each of the Prospectus
and any Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus is not in existence, the most recent Preliminary Prospectus).
(z) The Company and its Subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or foreign
regulatory authorities necessary to conduct their respective businesses, and
neither the Company nor any such Subsidiary has received any notice of
proceedings relating to the revocation or modification of any such certificate,
authorization or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material adverse
change in the condition (financial or otherwise), business prospects, net worth
or results of operations of the Company and its Subsidiaries, except as
described in or contemplated by each of the Prospectus and any Integrated
Prospectus (or, if the Prospectus and any required Integrated Prospectus is not
in existence, the most recent Preliminary Prospectus).
(aa) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof
(except in any case in which the failure so to file would not have a material
adverse effect on the Company and its Subsidiaries) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty levied
against it, to the extent that any of the foregoing is due and payable, except
for any such assessment, fine or penalty that is currently being contested in
good faith or as described in or contemplated by each of the Prospectus and any
Integrated Prospectus (or, if the Prospectus and any required Integrated
Prospectus is not in existence, the most recent Preliminary Prospectus).
(bb) There are no holders of securities of the Company, who, by reason of
the filing of the Registration Statement, have the right (and have not waived
such right) to request the Company to register under the Act, or to include in
the Registration Statement, securities held by them.
(cc) The Company and each of its Subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurance that (1)
transactions are executed in accordance with management's general or specific
authorizations; (2) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (3) access to assets is
permitted only in accordance with management's general or specific
authorization; and (4) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(dd) The Company and each of its Subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires
7.
<PAGE>
or to obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not materially and adversely affect
the condition (financial or otherwise), business prospectus, net worth or
results of operations of the Company and its subsidiaries, except as described
in or contemplated by the Prospectus) or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(ee) No labor dispute with the employees of the Company or any of its
Subsidiaries exists or to the knowledge of the Company, is threatened or
imminent that could result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its Subsidiaries, except as described in or contemplated by
the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ff) The Company has not distributed and, prior to the later of (i) the
Firm Closing Date and (ii) the completion of the distribution of the Notes, will
not distribute any offering material in connection with the offering and sale of
the Notes other than the Registration Statement or any amendment thereto, any
Preliminary Prospectus or the Prospectus or any amendment or supplement thereto,
or other materials, if any, permitted by the Act.
(gg) The Company has complied with all provisions of Florida Statutes,
(S)517.075, relating to issuers doing business with Cuba, to the extent, if any,
that such provisions are applicable to the Company.
3. Purchase, Sale and Delivery of the Notes. (a) On the basis of the
----------------------------------------
representations, warranties, agreements and covenants herein contained and
subject to the terms and conditions herein set forth, the Company agrees to sell
$62,500,000 aggregate principal amount of the Firm Notes to the several
Underwriters, and each of the Underwriters, severally and not jointly, agrees to
purchase from the Company, the principal amount of Firm Notes set forth opposite
the name of such Underwriter in Schedule 1 hereto. The Firm Notes that the
several Underwriters have agreed to purchase hereunder, in such denomination or
denominations and registered in such name or names as the Representatives
request upon notice to the Company at least 48 hours prior to the Firm Closing
Date, shall be delivered by or on behalf of the Company to the Representatives
for the respective accounts of the Underwriters, against payment by or on behalf
of the Underwriters of the purchase price therefor by wire transfer in same-day
funds (the "Wired Funds") to the account of the Company. Such delivery of and
payment for the Firm Notes shall be made at the offices of Brobeck, Phleger &
Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California, at
9:30 A.M., New York time, on October, 1996, or at such other place, time or
date as the Representatives and the Company may agree upon or as the
Representatives may determine pursuant to Section 9 hereof, such time and date
of delivery against payment being herein referred to as the "Firm Closing Date".
The Company will make such Firm Notes available for checking and packaging by
the Representatives at the offices in New York, New York of the Company's
transfer agent or registrar or of Prudential Securities Incorporated at least 24
hours prior to the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Notes as contemplated by the Prospectus, the
Company hereby grants to the several Underwriters an option to purchase,
severally and not jointly, up to $9,375,000 aggregate principal amount of the
Option Notes. The price of the Option Notes shall be 100% of the principal
amount thereof, plus accrued interest, if any, from ____________________. The
option granted hereby may be exercised as to all or any part of the Option Notes
from time to time within thirty days after the date of the Prospectus (or, if
such 30th day shall be a Saturday or Sunday or a holiday, on the next business
day thereafter when the New York Stock Exchange is open for trading). The
Underwriters shall not be under any obligation to purchase any of the Option
Notes prior to the exercise of such option. The Representatives may from time
to time exercise the option granted hereby by giving notice in writing or by
telephone (confirmed in writing) to the Company setting forth the aggregate
principal amount of Option Notes as to which the several Underwriters are then
exercising the option and the date and time for delivery of and payment for such
Option Notes. Any such date of delivery shall be determined by the
Representatives but shall not be earlier than two business days or later than
five business days after such exercise of the option and, in any event, shall
not be earlier than the Firm Closing Date. The time and date set forth in such
notice, or such other time on such other date as the
8.
<PAGE>
Representatives and the Company may agree upon or as the Representatives may
determine pursuant to Section 9 hereof, is herein called the "Option Closing
Date" with respect to such Option Notes. Upon exercise of the option as provided
herein, the Company shall become obligated to sell to each of the several
Underwriters, and, subject to the terms and conditions herein set forth, each of
the Underwriters (severally and not jointly) shall become obligated to purchase
from the Company, the same percentage of Option Notes as to which the several
Underwriters are then exercising the option as such Underwriter is obligated to
purchase of the aggregate principal amount of Firm Notes, as adjusted by the
Representatives in such manner as they deem advisable to avoid fractional
purchases. If the option is exercised as to all or any portion of the Option
Notes, such Option Notes, and payment therefor, shall be delivered on the
related Option Closing Date in the manner, and upon the terms and conditions,
set forth in paragraph (a) of this Section 3, except that reference therein to
the Firm Notes and the Firm Closing Date shall be deemed, for purposes of this
paragraph (b), to refer to such Option Notes and Option Closing Date,
respectively.
(c) The Company hereby acknowledges that the wire transfer by or on behalf
of the Underwriters of the purchase price for any Notes does not constitute
closing of a purchase and sale of the Notes. Only execution and delivery of a
receipt for Notes by the Underwriters indicates completion of the closing of a
purchase of the Notes from the Company. Furthermore, in the event that the
Underwriters wire funds to the Company prior to the completion of the closing of
a purchase of Notes, the Company hereby acknowledges that until the Underwriters
execute and deliver a receipt for the Notes, by facsimile or otherwise, the
Company will not be entitled to the wired funds and shall return the wired funds
to the Underwriters as soon as practicable (by wire transfer of same-day funds)
upon demand. In the event that the closing of a purchase of Notes is not
completed and the wire funds are not returned by the Company to the Underwriters
on the same day the wired funds were received by the Company, the Company agrees
to pay to the Underwriters in respect of each day the wire funds are not
returned by it, in same-day funds, interest on the amount of such wire funds in
an amount representing the Underwriters' cost of financing as reasonably
determined by Prudential Securities Incorporated.
(d) It is understood that either of you, individually and not as one of
the Representatives, may (but shall not be obligated to) make payment on behalf
of any Underwriter or Underwriters for any of the Notes to be purchased by such
Underwriter or Underwriters. No such payment shall relieve such Underwriter or
Underwriters from any of its or their obligations hereunder.
4. Offering by the Underwriters. Upon your authorization of the release
----------------------------
of the Firm Notes, the several Underwriters propose to offer the Firm Notes for
sale to the public upon the terms set forth in the Prospectus.
5. Covenants of the Company. The Company covenants and agrees with each
------------------------
of the Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, and any
amendments thereto to become effective as promptly as possible. If required,
the Company will file the Prospectus or any Term Sheet that constitutes a part
thereof or, each of the Prospectus and any amendment or supplement thereto with
the Commission in the manner and within the time period required by Rule 434 and
424(b) under the Act. During any time when a prospectus relating to the Notes
is required to be delivered under the Act, the Company (i) will comply with all
requirements imposed upon it by the Act, the Exchange Act and the Trust
Indenture Act and the respective rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Notes in accordance with the provisions hereof and of each of
the Prospectus and any Integrated Prospectus, as then amended or supplemented,
and (ii) will not file with the Commission the prospectus or the amendment
referred to in the third sentence of Section 2(a) hereof, any amendment or
supplement to such prospectus or any amendment to the Registration Statement or
any Rule 462(b) Registration Statement of which the Representatives shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Representatives
shall not have given their consent. The Company will prepare and file with the
Commission,
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in accordance with the rules and regulations of the Commission, promptly upon
request by the Representatives or counsel for the Underwriters, any amendments
to the Registration Statement or amendments or supplements to the Prospectus and
any Integrated Prospectus that may be necessary or advisable in connection with
the distribution of the Notes by the several Underwriters, and will use its best
efforts to cause any such amendment to the Registration Statement to be declared
effective by the Commission as promptly as possible. The Company will advise the
Representatives, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus and any Integrated Prospectus or any amendment or
supplement thereto has been filed and will provide evidence satisfactory to the
Representatives of each such filing or effectiveness.
(b) The Company will advise the Representatives, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Original Registration
Statement or any Rule 462(b) Registration Statement or any post-effective
amendment thereto or any order directed at any document incorporated by
reference in the Registration Statement or the Prospectus and any required
Integrated Prospectus or any amendment or supplement thereto or any order
preventing or suspending the use of any Preliminary Prospectus, the Prospectus
and any Integrated Prospectus or any amendment or supplement thereto, (ii) the
suspension of the qualification of the Notes for offering or sale in any
jurisdiction, (iii) the institution, threatening or contemplation of any
proceeding for any such purpose or (iv) any request made by the Commission for
amending the Original Registration Statement or any Rule 462(b) Registration
Statement, for amending or supplementing any Preliminary Prospectus, the
Prospectus and any Integrated Prospectus or for additional information. The
Company will use its best efforts to prevent the issuance of any such stop order
and, if any such stop order is issued, to obtain the withdrawal thereof as
promptly as possible.
(c) The Company will arrange for the qualification of the Notes and the
Common Stock issuable upon conversion of the Notes for offering and sale under
the securities or blue sky laws of such jurisdictions as the Representatives may
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Notes, provided, however, that in
-----------------
connection therewith the Company shall not be required to qualify as a foreign
corporation or to execute a general consent to service of process in any
jurisdiction.
(d) If, at any time prior to the later of (i) the final date when a
prospectus relating to the Notes is required to be delivered under the Act or
(ii) the Option Closing Date, any event occurs as a result of which each of the
Prospectus and any Integrated Prospectus, as then amended or supplemented, would
include any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if for any other
reason it is necessary at any time to amend or supplement each of the Prospectus
and any Integrated Prospectus to comply with the Act, the Exchange Act or the
respective rules or regulations of the Commission thereunder, the Company will
promptly notify the Representatives thereof and, subject to Section 5(a) hereof,
will prepare and file with the Commission, at the Company's expense, an
amendment to the Registration Statement or an amendment or supplement to the
Prospectus or any Integrated Prospectus that corrects such statement or omission
or effects such compliance.
(e) The Company will, without charge, provide (i) to the Representatives
and to counsel for the Underwriters a signed copy of the registration statement
originally filed with respect to the Notes and each amendment thereto (in each
case including exhibits thereto) and such number of conformed copies of the
registration statement originally filed with respect to the Notes and each
amendment thereto (in each case without exhibits) or any Rule 462(b)
Registration Statement, certified by the Secretary or an Assistant Secretary of
the Company to be true and complete copies thereof as filed with the Commission
by electronic transmission, as the Representatives may reasonably request, (ii)
to each other Underwriter, a conformed copy of such registration statement or
any Rule 462(b) Registration Statement and each amendment thereto (in each case
without exhibits thereto) (iii) to the Representations, any document
incorporated by reference in the Prospectus (excluding exhibits thereto) and
(iv) so long as a prospectus relating to the Notes is required
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to be delivered under the Act, as many copies of each Preliminary Prospectus,
the Prospectus or any Integrated Prospectus or any amendment or supplement
thereto as the Representatives may reasonably request; without limiting the
application of clause (iii) of this sentence, the Company, not later than (A)
6:00 PM, New York City time, on the date of determination of the public offering
price, if such determination occurred at or prior to 10:00 AM, New York City
time on such date of (B) 2:00 PM, New York City time, on the business day
following the date of determination of the public offering price, if such
determination occurred after 10:00 AM, New York City time, on such date, will
deliver to the Underwriters, without charge, as many copies of the Prospectus
and any amendment or supplement thereto as the Representatives may reasonably
request for purposes of confirming orders that are expected to settle on the
Firm Closing Date.
(f) The Company, as soon as practicable, will make generally available to
its securityholders and to the Representatives a consolidated earnings statement
of the Company and its subsidiaries that satisfies the provisions of Section
11(a) of the Act and Rule 158 thereunder.
(g) For a period of five years hereafter, to furnish to the Representative
copies of all materials furnished by the Company to its shareholders and all
public reports and all reports and financial statements furnished by the Company
to the principal national securities exchange upon which the Notes may be listed
or national quotation system on which the Notes may be quoted pursuant to
requirements of or agreements with such exchange or to the Commission pursuant
to the Exchange Act or any rule or regulation of the Commission thereunder.
(h) The Company will apply the net proceeds from the sale of the Notes as
set forth under "Use of Proceeds" in the Prospectus or any Integrated
Prospectus.
(i) The Company will not, directly or indirectly, without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, offer, sell, offer to sell, contract to sell, pledge, grant any
option to purchase or otherwise sell or dispose (or announce any offer, sale,
offer of sale, contract of sale, pledge, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock or any securities
convertible into, or exchangeable or exercisable for, shares of Common Stock for
a period of 90 days after the date hereof, except pursuant to this Agreement and
except for shares granted, options granted or share issuances pursuant to the
exercise of employee stock options outstanding on the date hereof, pursuant to
the Company's 1986 Stock Option Plan, 1995 Stock Option and Incentive Plan
and/or 1994 Employee Stock Purchase Plan or pursuant to the terms of convertible
securities of the Company outstanding on the date hereof.
(j) The Company has furnished or will furnish to you "lock-up" letters, in
form and substance satisfactory to you, signed by each of its current officers
and directors and each of its shareholders designated by you.
(k) The Company will not, directly or indirectly, (i) take any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Notes or (ii) Notes (A) sell, bid for, purchase, or pay anyone any compensation
for soliciting purchases of, the Notes or (B) pay or agree to pay to any person
any compensation for soliciting another to purchase any other securities of the
Company.
(l) The Company will obtain the agreements described in Section 7(f)
hereof prior to the Firm Closing Date.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective or the period prior to the Option Closing Date, any
rumor, publication or event relating to or affecting the Company shall occur as
a result of which in your opinion the market price of the Common Stock has been
or is likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the Prospectus
and any Integrated Prospectus), the Company will, after
11.
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notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding to
or commenting on such rumor, publication or event.
(n) If the Company elects to rely on Rule 462(b), the Company shall both
file a Rule 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) and pay the applicable fees in accordance with Rule 111 promulgated
under the Act by the earlier of (i) 10:00 P.M. Eastern time on the date of this
Agreement and (ii) the time confirmations are sent or given, as specified by
Rule 462(b)(2).
(o) The Company will use its best efforts to include the shares of Common
Stock issuable upon conversion of the Notes for quotation on the Nasdaq Stock
Market's National Market (the "Nasdaq National Market") prior to the initial
issuance of such Common Stock.
(p) To take such steps as shall be necessary to ensure that neither the
Company nor any subsidiary shall become an "investment company" within the
meaning of such term under the United States Investment Company Act of 1940 and
the rules and regulations of the Commission thereunder.
6. Expenses. The Company will pay all costs and expenses incident to the
--------
performance of its obligations under this Agreement, whether or not the
transactions contemplated herein are consummated or this Agreement is terminated
pursuant to Section 11 hereof, including all costs and expenses incident to (i)
the printing or other production of documents with respect to the transactions,
including any costs of printing the registration statement originally filed with
respect to the Notes and any amendment thereto, any Rule 462(b) Registration
Statement, any Preliminary Prospectus, the Prospectus and any Integrated
Prospectus and any amendment or supplement thereto or any document incorporated
by reference therein, this Agreement and any blue sky memoranda, (ii) all
arrangements relating to the delivery to the Underwriters of copies of the
foregoing documents, (iii) the fees and disbursements of the counsel,
accountants and any other experts or advisors retained by the Company, (iv)
preparation, issuance and delivery to the Underwriters of the Notes, including
transfer agent's and registrar's fees, (v) the qualification of the Notes under
state securities and blue sky laws, including filing fees and fees and
disbursements of counsel for the Underwriters relating thereto, (vi) the filing
fees of the Commission (and the National Association of Notes Dealers, Inc.)
relating to the Notes, (vii) any applicable listing or other fees and (viii)
meetings with prospective investors in the Notes (other than shall have been
specifically approved by the Representatives to be paid for by the
Underwriters). If the sale of the Notes provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 7 hereof is not satisfied, because this Agreement is terminated pursuant
to Section 11 hereof or because of any failure, refusal or inability on the part
of the Company to perform all obligations and satisfy all conditions on its part
to be performed or satisfied hereunder other than by reason of a default by any
of the Underwriters, the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including fees and disbursements of
counsel) that shall have been incurred by them in connection with the proposed
purchase and sale of the Notes. The Company shall not in any event be liable to
any of the Underwriters for the loss of anticipated profits from the
transactions covered by this Agreement.
7. Conditions of the Underwriters' Obligations. The obligations of the
-------------------------------------------
several Underwriters to purchase and pay for the Firm Notes shall be subject, in
the Representatives' sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date, as if made on and as of the Firm Closing Date, to the
accuracy of the statements of the Company's officers made pursuant to the
provisions hereof, to the performance by the Company of its covenants and
agreements hereunder and to the following additional conditions:
(a) If the Original Registration Statement or any amendment thereto filed
prior to the Firm Closing Date has not been declared effective as of the time of
execution hereof, Original Registration Statement or such amendment and, if the
Company has elected to rely upon Rule 462(b), the Rule 462(b) Registration
Statement shall have been declared effective not later than the earlier of (i)
11:00 A.M., New York time, on the date on which the amendment to the
registration statement originally filed with respect to the Notes or to
12.
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the Registration Statement, as the case may be, containing information regarding
the initial public offering price of the Notes has been filed with the
Commission and (ii) the time confirmations are sent or given as specified by
Rule 462(b)(2), or with respect to the Original Registration Statement, or such
later time and date as shall have been consented to by the Representatives; if
required, the Prospectus or any Term Sheet that constitutes a part thereof and
any Integrated Prospectus and any amendment or supplement thereto shall have
been filed with the Commission in the manner and within the time period required
by Rule 434 and 424(b) under the Act; no stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereto and no
order directed at any document incorporated by reference in the Registration
Statement or the Prospectus or any Integrated Prospectus or any amendment or
supplement thereto shall have been issued and no proceedings for that purpose
shall have been instituted or threatened or, to the knowledge of the Company or
the Representatives, shall be contemplated by the Commission; and the Company
shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement, the Prospectus or any
Integrated Prospectus or otherwise).
(b) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Brown & Bain, P.A., counsel for the Company, to the effect
that:
(i) the Company and each of its subsidiaries listed in Exhibit 21
to the Registration Statement (the "Subsidiaries") have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation and are
duly qualified to transact business as foreign corporations and are in good
standing under the laws of all other jurisdictions where the ownership or
leasing of their respective properties or the conduct of their respective
businesses requires such qualification, except where the failure to be so
qualified does not amount to a material liability or disability to the
Company and the Subsidiaries, taken as a whole;
(ii) the Company and each of the Subsidiaries have corporate power
to own or lease their respective properties and conduct their respective
businesses as described in the Registration Statement and the Prospectus or
any Integrated Prospectus, and the Company has corporate power to enter
into this Agreement and to carry out all the terms and provisions hereof
and thereof to be carried out by it;
(iii) the issued shares of capital stock of each of the Subsidiaries
have been duly authorized and validly issued, are fully paid and
nonassessable and are owned beneficially by the Company free and clear of
any perfected security interests or, to the best knowledge of such counsel,
any other security interests, liens, encumbrances, equities or claims;
(iv) the Company has an authorized, issued and outstanding
capitalization as set forth in under the caption "Capitalization" in each
of the Prospectus or any Integrated Prospectus; all of the issued shares of
capital stock of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, have been issued in compliance with
all applicable federal and state securities laws and were not issued in
violation of or subject to any preemptive rights or other rights to
subscribe for or purchase securities; all of the shares of Common Stock
issuable upon conversion of the Notes have been duly authorized by all
necessary corporate action of the Company and, when issued and delivered to
and paid for by the Underwriters pursuant to this Agreement, will be
validly issued, fully paid and nonassessable; no holders of outstanding
shares of capital stock of the Company are entitled as such to any
preemptive or other rights to subscribe for any of the Notes; and no
holders of securities of the Company are entitled to have such securities
registered under the Registration Statement;
(v) the Indenture and the Notes conform in all material respects
to the descriptions thereof continued in the Prospectus;
13.
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(vi) the statements set forth under the heading "Description of
Capital Stock" in each of the Prospectus and any Integrated Prospectus,
insofar as such statements purport to summarize certain provisions of the
capital stock of the Company, provide a fair summary of such provisions;
and the statements set forth under the heading "Certain Federal Income Tax
Considerations," in each of the Prospectus and any Integrated Prospectus
insofar as they describe federal statutes, rules and regulations,
constitute a fair summary thereof;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of
the Company enforceable against the Company in accordance with its terms,
subject to the effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) or an implied covenant of
good faith and fair dealing;
(viii) the Indenture has been duly authorized, and when duly executed
by the proper officers of the Company (assuming due execution and delivery
by the Trustee) and delivered by the Company will constitute a valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms, subject to the effects of bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally, general
equitable principles (whether considered in a proceeding in equity or at
law) or an implied covenant of good faith and fair dealing;
(ix) neither the Company nor any of the Subsidiaries is in
violation of its respective certificate or articles of incorporation or
bylaws, or other organizational documents, or to the best knowledge of such
counsel after reasonable inquiry, is in default in the performance of any
material obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness, except as may be
disclosed in the Prospectus;
(x) no legal or governmental proceedings are pending to which the
Company or any of the Subsidiaries is a party or to which the property of
the Company or any of the Subsidiaries is subject that are required to be
described in the Registration Statement, the Prospectus and any Integrated
Prospectus and are not described therein, and, to the best knowledge of
such counsel, no such proceedings have been threatened against the Company
or any of the Subsidiaries or with respect to any of their respective
properties; and no contract or other document is required to be described
in the Registration Statement, the Prospectus and any Integrated Prospectus
or to be filed as an exhibit to the Registration Statement that is not
described therein or filed as required;
(xi) to the best knowledge of such counsel after reasonable
inquiry, neither the Company nor any of the Subsidiaries is in violation of
any law, ordinance, administrative or governmental rule or regulation
applicable to the Company or any of the Subsidiaries or of any decree of
any court or governmental agency or body having jurisdiction over the
Company or any of the Subsidiaries, a violation of which would result in a
material adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
Subsidiaries, except as described in or contemplated by each of the
Prospectus and any Integrated Prospectus (or, if the Prospectus and any
required Integrated Prospectus is not in existence, the most recent
Preliminary Prospectus);
(xii) the issuance, offering and sale of the Notes to the
Underwriters by the Company pursuant to this Agreement, the compliance by
the Company with the other provisions of this Agreement and the Indenture
and the consummation of the other transactions herein and therein
contemplated and the issuance and delivery of the Common Stock issuable
upon conversion of the Notes do not (A) require the consent, approval,
authorization, registration or qualification of or with any governmental
authority, except such as have been obtained and such
14.
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as may be required under state securities or blue sky laws and, except for
the registration of the Notes and the Common Stock issuable upon conversion
of the Notes under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be required under
the Exchange Act, the Securities Act or the Trust Indenture Act and
applicable state securities laws in connection with the purchase and
distribution of the Notes by the Underwriters, or (B) conflict with or
result in a breach or violation of any of the terms and provisions of, or
constitute a default under, any indenture, mortgage, deed of trust, lease
or other agreement or instrument, known to such counsel, to which the
Company or any of the Subsidiaries is a party or by which the Company or
any of the Subsidiaries or any of their respective properties are bound, or
the charter documents or by-laws of the Company or any of the Subsidiaries,
or any statute or any judgment, decree, order, rule or regulation of any
court or other governmental authority or any arbitrator known to such
counsel and applicable to the Company or any of the Subsidiaries;
(xiii) the Registration Statement is effective under the Act and the
Indenture was qualified under the Trust Indenture Act as of the date and
time specified in such opinion; any required filing of the Prospectus, or
any Term Sheet that constitutes a part thereof, and any Integrated
Prospectus pursuant to Rules 434 and 424(b) has been made in the manner and
within the time period required by Rules 434 and 424(b); and no stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto and no order directed at any document
incorporated by reference in the Registration Statement or the Prospectus
and any Integrated Prospectus or any amendment or supplement thereto has
been issued, and no proceedings for that purpose have been instituted or
threatened or, to the best knowledge of such counsel, are contemplated by
the Commission;
(xiv) the Registration Statement originally filed with respect to
the Notes and each amendment thereto and any Rule 462(b) Registration
Statement, the Prospectus and any Integrated Prospectus (in each case,
including the documents incorporated by reference therein but not including
the financial statements and other financial information contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act, the Exchange
Act and the respective rules and regulations of the Commission thereunder;
and the Indenture conforms in all material respects to the requirements of
the Trust Indenture Act and the applicable rules and regulations
thereunder;
(xv) if the Company elects to rely on Rule 434, the Prospectus is
not "materially different", as such term is used in Rule 434, from the
prospectus included in the Registration Statement at the time of its
effectiveness or any effective post-effective amendment thereto (including
such information that is permitted to be omitted pursuant to Rule 430A);
(xvi) upon delivery of the Notes and the Common Stock issuable upon
conversion of the Notes pursuant to this Agreement and payment therefor as
contemplated herein the Underwriters will acquire good and marketable title
to the Notes and the Common Stock issuable upon conversion of the Notes
free and clear of any lien, claim, security interest, or other encumbrance,
restriction on transfer or other defect in title; and
(xvii) to such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company (a) to file a registration
statement under the Securities Act with respect to any securities of the
Company owned or to be owned by such person or to require the Company to
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include such securities in any securities being registered pursuant to any
registration statement (other than the Registration Statement) filed by the
Company under the Securities Act, or (b) to include any securities of the
Company owned or to be owned by such person in the securities being
registered pursuant to the Registration Statement other than rights that
have been waived or satisfied.
Such counsel shall also state that they have no reason to believe that (i) the
Registration Statement, as of its effective date, contained any untrue statement
of a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, (ii) that
the Prospectus and any Integrated Prospectus (other than the financial
statement, including notes and supporting schedules and other financial and
statistical information derived therefrom, included or incorporated by reference
in the Registration Statement or Prospectus or the Form T-1 filed as an exhibit
tot he Registration Statement, as to which such counsel need express no
comment), as of its date or the date of such opinion, included or includes any
untrue statement of a material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or (iii) any document
incorporated by reference in the Prospectus or any further amendment or
supplement to any such incorporated document made by the Company prior to such
Delivery Date, as modified or superseded by the Prospectus, contained an untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. With respect to such statement, such counsel
may state that their belief is based upon the procedures and matters set forth
in the opinion but is without independent check or verification.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials and, as to matters involving the
application of laws of any jurisdiction other than the State of California, the
United States and, solely with respect to the opinion as to the enforceability
of the Indenture set forth in paragraph (___), the laws of the State of New
York, to the extent satisfactory in form and scope to counsel for the
Underwriters, upon the opinion of counsel retained by them or the Company,
provided that (1) each such local counsel is acceptable to the Representatives,
(2) such reliance is expressly authorized by each opinion so relied upon and a
copy of each such opinion is delivered to the Representatives and is, in form
and substance satisfactory to them and their counsel, and (3) counsel shall
state in their opinion that they believe that they and the Underwriters are
justified in relying thereon.
References to the Registration Statement and the Prospectus and any
Integrated Prospectus in this paragraph (b) shall include any amendment or
supplement thereto at the date of such opinion.
(c) You shall have received on the Closing Date, an opinion of Douglas
Neilsson, special counsel to the Company, dated the Closing Date and addressed
to you, as Representatives of the several Underwriters, to the effect that:
(i) The Company and each of the Subsidiaries has full corporate
power and authority, and all necessary governmental authorizations,
approvals, orders, licenses, certificates, franchises and permits of and
from all governmental regulatory officials and bodies (except where the
failure so to have any such authorizations, approvals, orders, licenses,
certificates, franchises or permits, individually or in the aggregate,
would not have a material adverse effect on the business, properties,
operations or financial condition of the Company and the Subsidiaries taken
as a whole), to own their respective properties and to conduct their
respective businesses as now being conducted, as described in the
Prospectus;
(ii) Except as disclosed in the Prospectus, the Company owns of
record, directly or indirectly, all the outstanding shares of capital stock
of each of the Subsidiaries free and clear of any lien, adverse claim,
security interest, equity, or other encumbrance;
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(iii) Other than as described or contemplated in the Prospectus (or
any supplement thereto), there are no legal or governmental proceedings
pending or threatened against the Company or any of the Subsidiaries, or to
which the Company or any of the Subsidiaries, or any of their property, is
subject, which are required to be described in the Registration Statement
or Prospectus (or any amendment or supplement thereto);
(iv) There are no agreements, contracts, indentures, leases or
other instruments, that are required to be described in the Registration
Statement or the Prospectus (or any amendment or supplement thereto) or to
be filed as an exhibit to the Registration Statement that are not described
or filed as required, as the case may be;
(v) The Company and the Subsidiaries own all patents, trademarks,
trademark registrations, service marks, service mark registrations, trade
names, copyrights, licenses, inventions, trade secrets and rights described
in the Prospectus as being owned by them or any of them or necessary for
the conduct of their respective businesses, and Douglas Neilsson is not
aware of any claim to the contrary or any challenge by any other person to
the rights of the Company and the Subsidiaries with respect to the
foregoing;
(vi) Neither the Company nor any of the Subsidiaries is in
violation of any law, ordinance, administrative or governmental rule or
regulation applicable to the Company or any of the Subsidiaries or of any
decree of any court or governmental agency or body having jurisdiction over
the Company or any of the Subsidiaries;
(vii) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights calling for the issuance of,
and such counsel does not know of any commitment, plan or arrangement to
issue, any shares of capital stock of the Company or any security
convertible into or exchangeable or exercisable for capital stock of the
Company; and
(viii) Except as described in the Prospectus, there is no holder of
any security of the Company or any other person who has the right,
contractual or otherwise, to cause the Company to sell or otherwise issue
to them, or to permit them to underwrite the sale of, the Notes of the
Common Stock issuable upon conversion of the Notes, or the right to have
any Common Stock or other securities of the Company included in the
registration statement or the right, as a result of the filing of the
registration statement, to require registration under the Act of any shares
of Common Stock or other securities of the Company.
(d) The Representatives shall have received an opinion, dated the Firm
Closing Date, of Brobeck, Phleger & Harrison LLP, counsel for the Underwriters,
with respect to the issuance and sale of the Firm Notes, the Registration
Statement, the Prospectus or any Integrated Prospectus, and such other related
matters as the Representatives may reasonably require, and the Company shall
have furnished to such counsel such documents as they may reasonably request for
the purpose of enabling them to pass upon such matters.
(e) The Representatives shall have received from Deloitte & Touche LLP,
independent Certified Public Accountants, a letter or letters dated,
respectively, the date hereof and the Firm Closing Date, in form and substance
satisfactory to the Representatives, to the effect that:
(i) they are independent accountants with respect to the Company
and its consolidated subsidiaries within the meaning of the Act, the
Exchange Act and the applicable rules and regulations thereunder;
(ii) in their opinion, the audited consolidated financial
statements and schedules examined by them and included in the Registration
Statement, the Prospectus and any Integrated Prospectus comply in form in
all material respects with the applicable accounting
17.
<PAGE>
requirements of the Act, the Exchange Act and the related published rules
and regulations thereunder;
(iii) on the basis of their limited review in accordance with
standards established by the American Institute of Certified Public
Accountants of any interim unaudited consolidated financial statements of
the Company and its consolidated subsidiaries as indicated in their reports
incorporated in the Registration Statement, the Prospectus and any
Integrated Prospectus, carrying out certain specified procedures (which do
not constitute an examination made in accordance with generally accepted
auditing standards) that would not necessarily reveal matters of
significance with respect to the comments set forth in this paragraph
(iii), a reading of the minute books of the shareholders, the board of
directors and any committees thereof of the Company and each of its
consolidated subsidiaries, and inquiries of certain officials of the
Company and its consolidated subsidiaries who have responsibility for
financial and accounting matters, nothing came to their attention that
caused them to believe that:
(A) the unaudited consolidated condensed financial statements of the
Company and its consolidated subsidiaries included in the Registration
Statement, the Prospectus and any Integrated Prospectus do not comply
in form in all material respects with the applicable accounting
requirements of the Act, the Exchange Act and the related published
rules and regulations thereunder, or are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement, the
Prospectus and any Integrated Prospectus; and
(B) at a specific date not more than five business days prior to the
date of such letter, there were any changes in the capital stock or
long-term debt of the Company and its consolidated subsidiaries or any
decreases in net current assets or stockholders' equity of the Company
and its consolidated subsidiaries, in each case compared with amounts
shown on [August 31, 1996] unaudited consolidated balance sheet
included in the Registration Statement, the Prospectus and any
Integrated Prospectus, or for the period from [September 1, 1996] to
such specified date there were any decreases, as compared with the
period from _______ to ________, in sales, net revenues, net income
before income taxes or total or per share amounts of net income of the
Company and its consolidated subsidiaries except in all instances for
changes, decreases or increases set forth in such letter; and
(iv) they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information that are derived from the general accounting records
of the Company and its consolidated subsidiaries and are included in the
Registration Statement, the Prospectus and any Integrated Prospectus under
the captions __________, in Exhibit II to the Registration Statement or
under ___________ incorporated by reference in the Registration Statement,
the Prospectus and any Integrated Prospectus, and have compared such
amounts, percentages and financial information with such records of the
Company and its consolidated subsidiaries and with information derived from
such records and have found them to be in agreement, excluding any
questions of legal interpretation.
In the event that the letters referred to above set forth any such changes,
decreases or increases, it shall be a further condition to the obligations of
the Underwriters that (A) such letters shall be accompanied by a written
explanation of the Company as to the significance thereof, unless the
Representatives deem such explanation unnecessary, and (B) such changes,
decreases or increases do not, in the sole judgment of the Representatives, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Notes as contemplated by the Registration Statement, as amended as of the date
hereof.
18.
<PAGE>
References to the Registration Statement, the Prospectus and any Integrated
Prospectus in this paragraph (g) with respect to either letter referred to
above shall include any amendment or supplement thereto at the date of such
letter.
(f) The Representatives shall have received a certificate, dated the Firm
Closing Date, of the principal executive officer and the principal financial or
accounting officer of the Company to the effect that:
(i) the representations and warranties of the Company in this
Agreement are true and correct as if made on and as of the Firm Closing
Date; the Registration Statement, as amended as of the Firm Closing Date,
does not include any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein not misleading,
the Prospectus and any Integrated Prospectus, as amended or supplemented as
of the Firm Closing Date, does not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; and the Company has performed all covenants and
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Firm Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto and no order directed at
any document incorporated by reference in the Registration Statement or the
Prospectus or any amendment or supplement thereto has been issued, and no
proceedings for that purpose have been instituted or threatened or, to the
best of the Company's knowledge, are contemplated by the Commission; and
(iii) subsequent to the respective dates as of which information is
given in the Registration Statement, the Prospectus and any Integrated
Prospectus, neither the Company nor any of its Subsidiaries has sustained
any material loss or interference with their respective businesses or
properties from fire, flood, hurricane, accident or other calamity, whether
or not covered by insurance, or from any labor dispute or any legal or
governmental proceeding, and there has not been any material adverse
change, or any development involving a prospective material adverse change,
in the condition (financial or otherwise), management, business prospects,
net worth or results of operations of the Company or any of its
subsidiaries, except in each case as described in or contemplated by the
Prospectus and any Integrated Prospectus.
(g) The Representatives shall have received from each person who is a
director or officer of the Company or a 5% or greater shareholder an
agreement to the effect that such person will not, directly or indirectly,
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters, offer, sell, offer to sell, contract to sell,
pledge, grant any option to purchase or otherwise sell or dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of
an option to purchase or other sale or disposition) of any shares of Common
Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock for a period of 90 days after the date of this
Agreement.
(h) On or before the Firm Closing Date, the Representatives and
counsel for the Underwriters shall have received such further certificates,
documents or other information as they may have reasonably requested from
the Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Representatives and
counsel for the Underwriters. The Company shall furnish to the Representatives
such conformed copies of such opinions, certificates, letters and documents in
such quantities as the Representatives and counsel for the Underwriters shall
reasonably request.
19.
<PAGE>
The respective obligations of the several Underwriters to purchase and pay
for any Option Notes shall be subject, in their discretion, to each of the
foregoing conditions to purchase the Firm Notes, except that all references to
the Firm Notes and the Firm Closing Date shall be deemed to refer to such Option
Notes and the related Option Closing Date, respectively.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the Act or Section 20 of the Exchange Act against any losses, claims,
damages or liabilities, joint or several, to which such Underwriter or such
controlling person may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement made by the
Company in Section 2 of this Agreement,
(ii) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus, the Prospectus and any Integrated
Prospectus or any amendment or supplement thereto or (B) any application or
other document, or any amendment or supplement thereto, executed by the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify the Notes under the
securities or blue sky laws thereof or filed with the Commission or any
securities association or securities exchange (each an "Application")
(iii) the omission or alleged omission to state in the Registration
Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus and any Integrated Prospectus or any amendment or supplement
thereto, or any Application a material fact required to be stated therein
or necessary to make the statements therein not misleading or
(iv) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials used in connection
with the marketing of the Notes, including without limitation, slides,
videos, films, tape recordings
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that the Company will not be
-------- -------
liable in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in such registration statement or
any amendment thereto, any Preliminary Prospectus, the Prospectus or any
Integrated Prospectus or any amendment or supplement thereto, or any Application
in reliance upon and in conformity with written information furnished to the
Company by such Underwriter through the Representatives specifically for use
therein; and provided, further, that the Company will not be liable to any
-------- -------
Underwriter or any person controlling such Underwriter with respect to any such
untrue statement or omission made in any Preliminary Prospectus that is
corrected in the Prospectus (or any amendment or supplement thereto) if the
person asserting any such loss, claim, damage or liability purchased Notes from
such Underwriter but was not sent or given a copy of the Prospectus (as amended
or supplemented), other than the documents incorporated by reference therein, at
or prior to the written confirmation of the sale of such Notes to such person in
any case where such delivery of the Prospectus (as amended or supplemented) is
required by the Act, unless such failure to deliver the Prospectus (as amended
or supplemented) was a result of noncompliance by the Company with Section 5(d)
and (a) of this Agreement. This indemnity agreement will be in addition to any
liability which the Company may otherwise have. The Company will not, without
the prior written consent of the Underwriter or Underwriters purchasing, in the
aggregate, more than fifty percent (50%) of the Notes, settle or compromise
20.
<PAGE>
or consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be sought
hereunder (whether or not any such Underwriter or any person who controls any
such Underwriter within the meaning of Section 15 of the Act or Section 20 of
the Exchange Act is a party to such claim, action, suit or proceeding), unless
such settlement, compromise or consent includes an unconditional release of all
of the Underwriters and such controlling persons from all liability arising out
of such claim, action, suit or proceeding.
(b) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors, each of its officers who signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act against
any losses, claims, damages or liabilities to which the Company or any such
director, officer or controlling person may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon (i)
any untrue statement or alleged untrue statement of any material fact contained
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus, the Prospectus or any Integrated Prospectus or any amendment or
supplement thereto, or any Application or (ii) the omission or the alleged
omission to state therein a material fact required to be stated in the
Registration Statement or any amendment thereto, any Preliminary Prospectus, the
Prospectus or any Integrated Prospectus or any amendment or supplement thereto,
or any Application or necessary to make the statements therein not misleading,
in each case to the extent, but only to the extent, that such untrue statement
or alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by such
Underwriter through the Representatives specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by the
Company or any such director, officer or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or any action
in respect thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 8. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
- -------- -------
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 8 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Representatives in the case of
paragraph (a) of this Section 8, representing the indemnified parties under such
paragraph (a) who are parties to such action or actions) or (ii) the
indemnifying party does not promptly retain counsel satisfactory to the
indemnified party or (iii) the indemnifying party has authorized the employment
of counsel for the indemnified party at the expense of the indemnifying party.
After such notice from the indemnifying party to such indemnified party,
21.
<PAGE>
the indemnifying party will not be liable for the costs and expenses of any
settlement of such action effected by such indemnified party without the consent
of the indemnifying party.
(d) In circumstances in which the indemnity agreement provided for in the
preceding paragraphs of this Section 8 is unavailable or insufficient, for any
reason, to hold harmless an indemnified party in respect of any losses, claims,
damages or liabilities (or actions in respect thereof), each indemnifying party,
in order to provide for just and equitable contribution, shall contribute to the
amount paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (i) the relative benefits received by
the indemnifying party or parties on the one hand and the indemnified party on
the other from the offering of the Notes or (ii) if the allocation provided by
the foregoing clause (i) is not permitted by applicable law, not only such
relative benefits but also the relative fault of the indemnifying party or
parties on the one hand and the indemnified party on the other in connection
with the statements or omissions or alleged statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof), as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (before deducting expenses) received by the Company bear to the
total underwriting discounts and commissions received by the Underwriters. The
relative fault of the parties shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters, the parties' relative intents,
knowledge, access to information and opportunity to correct or prevent such
statement or omission, and any other equitable considerations appropriate in the
circumstances. The Company and the Underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro rate or per
capita allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take into account
the equitable considerations referred to above in this paragraph (d).
Notwithstanding any other provision of this paragraph (d), no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed the
total public offering price of the Notes purchased by such Underwriter under
this Agreement, less the aggregate amount of any damages that such Underwriter
has otherwise been required to pay in respect of the same or any substantially
similar claim, and no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute hereunder are several in proportion to
their respective underwriting obligations and not joint, and contributions among
Underwriters shall be governed by the provisions of the Prudential Securities
Incorporated Master Agreement Among Underwriters. For purposes of this
paragraph (d), each person, if any, who controls an Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, shall have the same rights to
contribution as the Company.
9. Default of Underwriters. If one or more Underwriters default in their
-----------------------
obligations to purchase Firm Notes or Option Notes hereunder and the aggregate
number of such Notes that such defaulting Underwriter or Underwriters agreed but
failed to purchase is ten percent or less of the aggregate number of Firm Notes
or Option Notes to be purchased by all of the Underwriters at such time
hereunder, the other Underwriters may make arrangements satisfactory to the
Representatives for the purchase of such Notes by other persons (who may include
one or more of the non-defaulting Underwriters, including the
22.
<PAGE>
Representatives), but if no such arrangements are made by the Firm Closing Date
or the related Option Closing Date, as the case may be, the other Underwriters
shall be obligated severally in proportion to their respective commitments
hereunder to purchase the Firm Notes or Option Notes that such defaulting
Underwriter or Underwriters agreed but failed to purchase. If one or more
Underwriters so default with respect to an aggregate number of Notes that is
more than ten percent of the aggregate number of Firm Notes or Option Notes, as
the case may be, to be purchased by all of the Underwriters at such time
hereunder, and if arrangements satisfactory to the Representatives are not made
within 36 hours after such default for the purchase by other persons (who may
include one or more of the non-defaulting Underwriters, including the
Representatives) of the Notes with respect to which such default occurs, this
Agreement will terminate without liability on the part of any non-defaulting
Underwriter or the Company other than as provided in Section 10 hereof. In the
event of any default by one or more Underwriters as described in this Section 9,
the Representatives shall have the right to postpone the Firm Closing Date or
the Option Closing Date, as the case may be, established as provided in Section
3 hereof for not more than seven business days in order that any necessary
changes may be made in the arrangements or documents for the purchase and
delivery of the Firm Notes or Option Notes, as the case may be. As used in this
Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 9. Nothing herein shall relieve any defaulting
Underwriter from liability for its default.
10. Survival. The respective representations, warranties, agreements,
--------
covenants, indemnities and other statements of the Company, its officers and the
several Underwriters set forth in this Agreement or made by or on behalf of
them, respectively, pursuant to this Agreement shall remain in full force and
effect, regardless of (i) any investigation made by or on behalf of the Company,
any of its officers or directors, any Underwriter or any controlling person
referred to in Section 8 hereof and (ii) delivery of and payment for the Notes.
The respective agreements, covenants, indemnities and other statements set forth
in Sections 6 and 8 hereof shall remain in full force and effect, regardless of
any termination or cancellation of this Agreement.
11. Termination. (a) This Agreement may be terminated with respect to the
-----------
Firm Notes or any Option Notes in the sole discretion of the Representatives by
notice to the Company given prior to the Firm Closing Date or the related Option
Closing Date, respectively, in the event that the Company shall have failed,
refused or been unable to perform all obligations and satisfy all conditions on
its part to be performed or satisfied hereunder at or prior thereto or, if at or
prior to the Firm Closing Date or such Option Closing Date, respectively,
(i) the Company or any of its subsidiaries shall have, in the sole
judgment of the Representatives, sustained any material loss or
interference with their respective businesses or properties from fire,
flood, hurricane, accident or other calamity, whether or not covered by
insurance, or from any labor dispute or any legal or governmental
proceeding or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Company), in
the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except in each
case as described in or contemplated by the Prospectus (exclusive of any
amendment or supplement thereto);
(ii) trading in the Common Stock and in the Notes shall have been
suspended by the Commission or the Nasdaq National Market or trading in
securities generally on the New York Stock Exchange or the Nasdaq National
Market shall have been suspended or minimum or maximum prices shall have
been established on either any such exchange or (market) system,
(iii) a banking moratorium shall have been declared by New York or
United States authorities; or
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or (C) any other calamity or crisis or material
adverse change in general economic, political or financial conditions
having an effect on the U. S. financial markets that, in the sole judgment
of the Representatives, makes it impractical or inadvisable to proceed with
the public offering or the delivery of the Notes as contemplated by the
Registration Statement, as amended as of the date hereof.
(a) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
23.
<PAGE>
12. Information Supplied by Underwriters. The statements set forth in the
------------------------------------
last paragraph on the front cover page and under the heading "Underwriting" in
any Preliminary Prospectus, or the Prospectus or any Integrated Prospectus (to
the extent such statements relate to the Underwriters) constitute the only
information furnished by any Underwriter through the Representatives to the
Company for the purposes of Sections 2(b) and 8 hereof. The Underwriters
confirm that such statements (to such extent) are correct.
13. Notices. All communications hereunder shall be in writing and, if sent
-------
to any of the Underwriters, shall be delivered or sent by mail, telex or
facsimile transmission and confirmed in writing to Prudential Securities
Incorporated, One New York Plaza, New York, New York 10292, Attention: Equity
Transactions Group; and if sent to the Company, shall be delivered or sent by
mail, telex or facsimile transmission and confirmed in writing to the Company at
Leasing Solutions, Inc., 10 Almaden Boulevard, Suite 1500, San Jose, California
95113-2238.
14. Successors. This Agreement shall inure to the benefit of and shall be
----------
binding upon the several Underwriters, the Company and their respective
successors and legal representatives, and nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person any legal
or equitable right, remedy or claim under or in respect of this Agreement, or
any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company contained in Section 8 of this Agreement shall
also be for the benefit of any person or persons who control any Underwriter
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act
and (ii) the indemnities of the Underwriters contained in Section 8 of this
Agreement shall also be for the benefit of the directors of the Company, the
officers of the Company who have signed the Registration Statement and any
person or persons who control the Company within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act. No purchaser of Notes from any
Underwriter shall be deemed a successor because of such purchase.
15. Applicable Law. The validity and interpretation of this Agreement, and
--------------
the terms and conditions set forth herein, shall be governed by and construed in
accordance with the laws of the State of New York, without giving effect to any
provisions relating to conflicts of laws.
16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
24.
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company and each of the
several Underwriters.
Very truly yours,
LEASING SOLUTIONS, INC.
By ____________________________
[Title]
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY, INC.
BY PRUDENTIAL SECURITIES INCORPORATED
By ______________________________________
Jean-Claude Canfin
Director
For itself and on behalf of the Representatives.
25.
<PAGE>
SCHEDULE 1
UNDERWRITERS
<TABLE>
<CAPTION>
Principal Amount of
Underwriter Firm Notes to be Purchased
- ----------- --------------------------
<S> <C>
Prudential Securities Incorporated.................................. $__________
Smith Barney Inc.................................................... $__________
Total............................................................... $62,500,000
</TABLE>
26.
<PAGE>
EXHIBIT 4.1.1
================================================================================
LEASING SOLUTIONS, INC.
AND
BANKERS TRUST COMPANY,
AS TRUSTEE
Convertible Subordinated Notes due 2003
INDENTURE
Dated as of [ ] 1996
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS...................................................................... 1
Section 1.1 Definitions................................................................. 1
Affiliate........................................................................ 1
Agent............................................................................ 1
Board of Directors............................................................... 1
Change of Control................................................................ 1
Commission....................................................................... 2
Common Stock..................................................................... 2
Company.......................................................................... 2
consolidated subsidiary.......................................................... 2
Convertible Subordinated Notes................................................... 2
Conversion Price................................................................. 2
Default.......................................................................... 3
Designated Senior Debt........................................................... 3
Exchange Act..................................................................... 3
GAAP............................................................................. 3
Indebtedness..................................................................... 3
Indenture........................................................................ 4
Interest Payment Date............................................................ 4
Issue Date....................................................................... 4
Material Subsidiary.............................................................. 4
Maturity Date.................................................................... 4
Obligations...................................................................... 4
Officer.......................................................................... 4
Officers' Certificate............................................................ 4
Opinion of Counsel............................................................... 5
person........................................................................... 5
Redemption Date.................................................................. 5
Redemption Price................................................................. 5
Regular Record Date.............................................................. 5
Representative................................................................... 5
Securities Act................................................................... 5
Senior Debt...................................................................... 5
subsidiary....................................................................... 6
TIA.............................................................................. 6
Trustee.......................................................................... 6
Trust Officer.................................................................... 6
U.S. Government Obligations...................................................... 6
Section 1.2 Other Definitions........................................................... 6
Section 1.3 Incorporation by Reference of Trust Indenture Act........................... 7
Section 1.4 Rules of Construction....................................................... 7
</TABLE>
i.
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE II THE CONVERTIBLE SUBORDINATED NOTES............................................... 8
Section 2.1 Form and Dating............................................................. 8
Section 2.2 Execution and Authentication................................................ 8
Section 2.3 Registrar, Paying Agent and Conversion Agent................................ 9
Section 2.4 Paying Agent to Hold Money in Trust......................................... 9
Section 2.5 Holder Lists................................................................ 10
Section 2.6 Transfer and Exchange....................................................... 10
Section 2.7 Replacement Convertible Subordinated Notes.................................. 11
Section 2.8 Outstanding Convertible Subordinated Notes.................................. 11
Section 2.9 When Treasury Convertible Subordinated Notes
Disregarded................................................................. 12
Section 2.10 Temporary Convertible Subordinated Notes.................................... 12
Section 2.11 Cancellation................................................................ 12
Section 2.12 Defaulted Interest.......................................................... 13
Section 2.13 Cusip Number................................................................ 13
ARTICLE III REDEMPTION....................................................................... 13
Section 3.1 Notices to Trustee.......................................................... 13
Section 3.2 Selection of Convertible Subordinated Notes to be
Redeemed.................................................................... 13
Section 3.3 Notice of Redemption........................................................ 14
Section 3.4 Effect of Notice of Redemption.............................................. 15
Section 3.5 Deposit of Redemption Price................................................. 15
Section 3.6 Convertible Subordinated Notes Redeemed in Part............................. 15
Section 3.7 Conversion Arrangement On Call For Redemption............................... 16
ARTICLE IV COVENANTS........................................................................ 16
Section 4.1 Payment of Convertible Subordinated Notes................................... 16
Section 4.2 Commission Reports.......................................................... 17
Section 4.3 Compliance Certificate...................................................... 17
Section 4.4 Maintenance of Office or Agency............................................. 17
Section 4.5 Continued Existence......................................................... 18
Section 4.6 Repurchase Upon a Change of Control......................................... 18
Section 4.7 Appointments to Fill Vacancies in Trustee's Office.......................... 19
Section 4.8 Stay, Extension and Usury Laws.............................................. 19
ARTICLE V SUCCESSORS....................................................................... 20
Section 5.1 When the Company May Merge, Etc............................................. 20
Section 5.2 Successor Corporation Substituted........................................... 21
Section 5.3 Purchase Option on Change of Control........................................ 21
ARTICLE VI DEFAULTS AND REMEDIES............................................................ 21
Section 6.1 Events of Default........................................................... 21
Section 6.2 Acceleration................................................................ 23
</TABLE>
ii.
<PAGE>
<TABLE>
<S> <C> <C>
Section 6.3 Other Remedies.............................................................. 23
Section 6.4 Waiver of Past Defaults..................................................... 24
Section 6.5 Control by Majority......................................................... 24
Section 6.6 Limitation on Suits......................................................... 24
Section 6.7 Rights of Holders to Receive Payment........................................ 25
Section 6.8 Collection Suit by Trustee.................................................. 25
Section 6.9 Trustee May File Proofs of Claim............................................ 25
Section 6.10 Priorities.................................................................. 25
Section 6.11 Undertaking for Costs....................................................... 26
ARTICLE VII THE TRUSTEE...................................................................... 26
Section 7.1 Duties of the Trustee....................................................... 26
Section 7.2 Rights of the Trustee....................................................... 27
Section 7.3 Individual Rights of the Trustee............................................ 29
Section 7.4 Trustee's Disclaimer........................................................ 29
Section 7.5 Notice of Defaults.......................................................... 30
Section 7.6 Reports by the Trustee to Holders........................................... 30
Section 7.7 Compensation and Indemnity.................................................. 30
Section 7.8 Replacement of the Trustee.................................................. 31
Section 7.9 Successor Trustee by Merger, Etc............................................ 32
Section 7.10 Eligibility, Disqualification............................................... 32
Section 7.11 Preferential Collection of Claims Against Company........................... 33
ARTICLE VIII SATISFACTION AND DISCHARGE OF INDENTURE.......................................... 33
Section 8.1 Discharge of Indenture...................................................... 33
Section 8.2 Deposited Monies to be Held in Trust by Trustee............................. 33
Section 8.3 Paying Agent to Repay Monies Held........................................... 34
Section 8.4 Return of Unclaimed Monies.................................................. 34
Section 8.5 Reinstatement............................................................... 34
ARTICLE IX AMENDMENTS....................................................................... 34
Section 9.1 Without the Consent of Holders.............................................. 34
Section 9.2 With the Consent of Holders................................................. 35
Section 9.3 Compliance With The Trust Indenture Act..................................... 37
Section 9.4 Revocation and Effect of Consents........................................... 37
Section 9.5 Notation On Or Exchange Of Convertible Subordinated
Notes....................................................................... 37
Section 9.6 Trustee Protected........................................................... 38
ARTICLE X GENERAL PROVISIONS............................................................... 38
Section 10.1 Trust Indenture Act Controls................................................ 38
Section 10.2 Notices..................................................................... 38
Section 10.3 Communication by Holders With Other Holders................................. 39
Section 10.4 Certificate and Opinion as to Conditions Precedent.......................... 39
</TABLE>
iii.
<PAGE>
<TABLE>
<S> <C> <C>
Section 10.5 Statements Required in Certificate or Opinion............................... 39
Section 10.6 Rules by Trustee and Agents................................................. 40
Section 10.7 Legal Holidays.............................................................. 40
Section 10.8 No Recourse Against Others.................................................. 40
Section 10.9 Counterparts................................................................ 40
Section 10.10 Other Provisions............................................................ 41
Section 10.11 Governing Law............................................................... 41
Section 10.12 No Adverse Interpretation of Other Agreements............................... 41
Section 10.13 Successors.................................................................. 41
Section 10.14 Severability................................................................ 41
Section 10.15 Table of Contents, Headings, Etc............................................ 41
ARTICLE XI SUBORDINATION.................................................................... 42
Section 11.1 Agreement to Subordinate.................................................... 42
Section 11.2 Liquidation; Dissolution; Bankruptcy........................................ 42
Section 11.3 Default on Senior Debt and/or Designated Senior Debt........................ 42
Section 11.4 Acceleration of Convertible Subordinated Notes.............................. 43
Section 11.5 When Distribution Must Be Paid Over......................................... 44
Section 11.6 Notice by Company........................................................... 44
Section 11.7 Subrogation................................................................. 44
Section 11.8 Relative Rights............................................................. 45
Section 11.9 Subordination May Not Be Impaired By Company................................ 45
Section 11.10 Distribution or Notice to Representative.................................... 45
Section 11.11 Rights of Trustee and Paying Agent.......................................... 46
Section 11.12 Authorization to Effect Subordination....................................... 46
Section 11.13 Article Applicable to Paying Agents......................................... 46
Section 11.14 Senior Debt Entitled to Rely................................................ 46
ARTICLE XII CONVERSION OF CONVERTIBLE SUBORDINATED
NOTES............................................................................ 47
Section 12.1 Right to Convert............................................................ 47
Section 12.2 Exercise of Conversion Privilege; Issuance of Common Stock
on Conversion; No Adjustment for Interest or Dividends...................... 47
Section 12.3 Cash Payments in Lieu of Fractional Shares.................................. 49
Section 12.4 Conversion Price............................................................ 49
Section 12.5 Adjustment of Conversion Price.............................................. 49
Section 12.6 Effect of Reclassification, Consolidation, Merger or Sale................... 58
Section 12.7 Taxes on Shares Issued...................................................... 59
Section 12.8 Reservation of Shares; Shares To Be Fully Paid; Listing of
Common Stock................................................................ 59
Section 12.9 Responsibility of Trustee................................................... 60
Section 12.10 Notice to Holders Prior to Certain Actions.................................. 60
</TABLE>
iv.
<PAGE>
THIS INDENTURE, dated as of __________, 1996 is between Leasing
Solutions, Inc., a California corporation (the "Company"), and Bankers Trust, as
trustee (the "Trustee"). The Company has duly authorized the creation of its
[ ]% Convertible Subordinated Notes due 2003 (the "Convertible Subordinated
Notes") and to provide therefor the Company and the Trustee have duly authorized
the execution and delivery of this Indenture. Each party agrees as follows for
the benefit of the other party and for the equal and ratable benefit of the
holders from time to time of the Convertible Subordinated Notes.
ARTICLE I
DEFINITIONS
Section 1.1 Definitions.
-----------
"Affiliate" means, when used with reference to any person, any
other person directly or indirectly controlling, controlled by, or under direct
or indirect common control with, the referent person, as the case may be. For
the purposes of this definition, "control" when used with respect to any
specified person means the power to direct or cause the direction of management
or policies of the referent person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative of the foregoing.
"Agent" means any Registrar, Paying Agent, Conversion Agent or
coregistrar.
"Board of Directors" means the Board of Directors of the Company
or any authorized committee of the Board of Directors.
"Change of Control" means the occurrence of any of the following
events:
(i) the acquisition by any "person" or "group" (as such terms are used
in Sections 13(d) and 14(d) of the Exchange Act) of beneficial ownership,
directly or indirectly, through a purchase, merger or other acquisition
transaction or series of transactions, of shares of capital stock of the Company
entitling such person to exercise 50% or more of the total voting power of all
shares of capital stock of the Company entitled to vote generally in the
elections of directors (any shares of voting stock of which such person or group
is the beneficial owner that are not then outstanding being deemed outstanding
for purposes of calculating such percentage); or
(ii) any consolidation of the Company with, or merger of the Company
into, any other person, any merger of another person into the Company, or any
sales or transfer of all or substantially all of the assets of the Company to
another Person (other than a merger (x) which does not result in a material
reclassification, conversion, exchange or cancellation of outstanding shares of
Capital Stock, (y) which is effected solely to change the jurisdiction
1.
<PAGE>
of incorporation of the Company and results in a reclassification, conversion or
exchange of outstanding shares of Common Stock into solely shares of common
stock, or (z) does not result in a substantial (i.e., over 50%) change in the
beneficial ownership of the Company);
(iii) the term "Capital Stock" shall mean capital stock of the Company
that does not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, to shares of capital stock of any
other class of the Company; and
(iv) the term "beneficial owner" shall be determined in accordance with
Rule 13d-3, as in effect on the date of the original execution of this
Indenture, promulgated by the Commission pursuant to the Exchange Act.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means any stock of any class of the Company which
has no preference in respect of dividends or of amounts payable in the event of
any voluntary or involuntary liquidation, dissolution or winding up of the
Company and which is not subject to redemption by the Company. Subject to the
provisions of Section 12.6, however, shares issuable on conversion of
Convertible Subordinated Notes shall include only shares of the class designated
as Common Stock of the Company at the date of this Indenture or shares of any
class or classes resulting from any reclassification or reclassifications
thereof and which have no preference in respect of dividends or of amounts
payable in the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company and which are not subject to redemption by the
Company; provided that if at any time there shall be more than one such
resulting class, the shares of each such class then so issuable shall be
substantially in the proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number of shares of
all such classes resulting from all such reclassifications.
"Company" means the party named as such above until a successor
replaces it in accordance with Article 5 and thereafter means the successor.
A "consolidated subsidiary" of any person means a subsidiary
which for financial reporting purposes is or, in accordance with GAAP, should
be, accounted for by such person as a consolidated subsidiary.
"Convertible Subordinated Notes" means the Convertible
Subordinated Notes due 2003 issued under this Indenture.
"Conversion Price" means the initial conversion price specified
in the form of Note in Section 17 of such form, as adjusted in accordance with
the provisions of Article 12.
2.
<PAGE>
"Corporate Trust Office" means the corporate trust office of the
Trustee at which at any particular time its corporate business shall principally
be administered; as of the date hereof, the office of the Corporate Trust Office
is located at [ ].
"Default" means any event that is, or after notice or passage of
time or both would be, an Event of Default.
"Designated Senior Debt" means any particular Senior Debt with
respect to which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which the
Company is a party) expressly provides that such Indebtedness shall be
"Designated Senior Debt" for purposes of the Indenture (provided that such
instrument, agreement or other document may place limitations and conditions on
the right of such Senior Debt to exercise the rights of Designated Senior Debt.)
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder
"GAAP" means generally accepted accounting principles set forth
in the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the United States, which are in effect from time to
time.
"Indebtedness" means, with respect to any person, all
obligations, whether or not contingent, of such person (i) (a) for borrowed
money (including, but not limited to, any indebtedness secured by a security
interest, mortgage or other lien on the assets of the Company which is (1) given
to secure all or part of the purchase price of property subject thereto, whether
given to the vendor of such property or to another, or (2) existing on property
at the time of acquisition thereof), (b) evidenced by a note, debenture, bond or
other written instrument, (c) under a lease required to be capitalized on the
balance sheet of the lessee under GAAP or under any lease or related document
(including a purchase agreement) which provides that the Company is
contractually obligated to purchase or cause a third party to purchase and
thereby guarantee a minimum residual value of the lease property to the lessor
and the obligations of the Company under such lease or related document to
purchase or to cause a third party to purchase such leased property, (d) in
respect of letters of credit, bank guarantees or bankers' acceptances (including
reimbursement obligations with respect to any of the foregoing), (e) with
respect to Indebtedness secured by a mortgage, pledge, lien, encumbrance, charge
or adverse claim affecting title or resulting in an encumbrance to which the
property or assets of such person are subject, whether or not the obligation
secured thereby shall have been assumed by or shall otherwise be such person's
legal liability, (f) in respect of the balance of deferred and unpaid purchase
price of any property or assets, (g) under interest rate or currency swap
3.
<PAGE>
agreements, cap, floor and collar agreements, spot and forward contracts and
similar agreements and arrangements; (ii) with respect to any obligation of
others of the type described in the preceding clause (i) or under clause (iii)
below assumed by or guaranteed in any manner by such person or in effect
guaranteed by such person through an agreement to purchase (including, without
limitation, "take or pay" and similar arrangements), contingent or otherwise
(and the obligations of such person under any such assumptions, guarantees or
other such arrangements); and (iii) any and all deferrals, renewals, extensions,
refinancings and refundings of, or amendments, modifications or supplements to,
any of the foregoing.
"Indenture" means this Indenture as amended or supplemented from
time to time.
"Interest Payment Date" means [ ] 1 and [ ] 1 of each year.
"Issue Date" means the date on which the Convertible
Subordinated Notes are originally issued under this Indenture.
"Material Subsidiary" means, at any date of determination, any
subsidiary of the Company that, together with its subsidiaries, as of the end of
such fiscal year, was the owner of more than 25% of the consolidated assets of
the Company, after eliminating any inter-company receivables of such subsidiary,
all as set forth on the most recently available consolidated financial
statements of the Company and its consolidated subsidiaries for such fiscal year
prepared in conformity with GAAP.
"Maturity Date" means _________, 2003.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means the Chairman of the Board, the Chief Executive
Officer, the President, the Chief Financial Officer, the Chief Accounting
Officer, any Executive Vice President, Senior Vice President or Vice President
(whether or not designated by a number or numbers or word or words before or
after the title "Vice President"), the Treasurer, any other executive officer,
the Secretary and any Assistant Treasurer or any Assistant Secretary of the
Company.
"Officers' Certificate" means a certificate signed by two
Officers, one of whom must be the principal executive officer, principal
financial officer or principal accounting officer of the Company.
4.
<PAGE>
"Opinion of Counsel" means a written opinion from legal counsel
who may be an employee of or counsel to the Company or the Trustee except to the
extent otherwise indicated in this Indenture.
A "person" means any individual, corporation, partnership, joint
venture, trust, estate, unincorporated organization or government or any agency
or political subdivision thereof.
"Redemption Date" when used with respect to any of the
Convertible Subordinated Notes to be redeemed, means the date fixed by the
Company for such redemption pursuant to Article 3 of this Indenture and the
Convertible Subordinated Notes.
"Redemption Price" when used with respect to any of the
Convertible Subordinated Notes to be redeemed, means the price fixed for such
redemption pursuant to Article 3 of this Indenture and the Convertible
Subordinated Notes.
"Regular Record Date" means the [ ] 15 or [ ] 15 immediately
preceding each Interest Payment Date.
"Representative" means the (a) Indenture trustee or other
trustee, agent or representative for any Senior Debt or (b) with respect to any
Senior Debt that does not have any such trustee, agent or other representative,
(i) in the case of such Senior Debt issued pursuant to an agreement providing
for voting arrangements as among the holders or owners of such Senior Debt, any
holder or owner of such Senior Debt acting with the consent of the required
persons necessary to bind such holders or owners of such Senior Debt and (ii) in
the case of all other such Senior Debt, the holder or owner of such Senior Debt.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
"Senior Debt" means the principal of, premium, if any, and
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on or
in connection with Indebtedness of the Company, whether outstanding on the date
of this Indenture or thereafter created, incurred, assumed, guaranteed or in
effect guaranteed by the Company (including all deferrals, renewals, extensions
or refundings of, or amendments, modifications or supplements to the foregoing);
provided, however, that Senior Debt does not include (v) Indebtedness evidenced
by the holders of Convertible Subordinated Notes, (w) any liability for federal,
state, local or other taxes owed or owing by the Company, (x) Indebtedness of
the Company to any subsidiary of the Company except to the extent such
Indebtedness is of a type described in clause (ii) of the definition of
Indebtedness, (y) trade payables of the Company (other than, to the extent they
may otherwise constitute trade payables, any obligations of the type described
5.
<PAGE>
in clause (ii) of the definition of Indebtedness), and (z) any particular
Indebtedness in which the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which the
Company is a party) expressly provides that such Indebtedness shall not be
senior in right of payment to, or is pari passu with, or is subordinated or
junior to, the Convertible Subordinated Notes.
A "subsidiary" means with respect to any person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of capital 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
such person or one or more of the other subsidiaries of that person (or a
combination thereof) and (ii) any partnership (a) the sole general partners of
which are such person or of one or more subsidiaries of such person or (b) the
only general partners of which are such person or of one or more subsidiaries of
such person (or any combination thereof).
"TIA" means the Trust Indenture Act of 1939 (IS U.S. Code
Sections 77aaa 77bbbb) as in effect on the date of execution of this Indenture,
except as provided in Sections 9.3 and 12.6.
"Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporation trust matters.
"U.S. Government Obligations" means direct obligation of the
United States of America for the payment of which the full faith and credit of
the United States of America is pledged. In order to have money available on a
payment date to pay principal or interest on the Convertible Subordinated Notes,
the U.S. Government Obligations shall be payable as to principal or interest on
or before such payment date in such amounts as will provide the necessary money.
U.S. Government Obligations shall not be callable at the issuer's option.
Section 1.2 Other Definitions.
-----------------
<TABLE>
<CAPTION>
Term Defined in Section
- ---- ------------------
<S> <C>
"Bankruptcy Law".................................................... 6.1
"business day"...................................................... 10.7
"Current Market Price".............................................. 12.5
"closing price"..................................................... 12.5
</TABLE>
6.
<PAGE>
<TABLE>
<S> <C>
"Conversion Agent".................................................. 2.3
"Custodian"......................................................... 6.1
"Event of Default".................................................. 6.1
"Expiration Time"................................................... 12.5
"fair market value"................................................. 12.5
"Legal Holiday".................................................... 10.7
"non electing share"............................................... 12.6
"Paying Agent"..................................................... 2.3
"Payment Blockage Notice".......................................... 10.4
"Purchased Shares"................................................. 12.5
"Record Date"...................................................... 12.5
"Registrar"........................................................ 2.3
"Rights"........................................................... 12.5
"Securities"....................................................... 12.5
"trading day"...................................................... 12.5
</TABLE>
Section 1.3 Incorporation by Reference of Trust Indenture Act.
-------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"Commission means the Commission;
"indenture securities" means the Convertible Subordinated Notes;
"indenture security holder" means a holder of a Convertible
Subordinated Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the Convertible Subordinated Notes means the
Company or any other obligor on the Convertible Subordinated Notes.
All other terms in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by Commission rule under the TIA
have the meanings so assigned to them.
Section 1.4 Rules of Construction. Unless the context
---------------------
otherwise requires:
(1) a term has the meaning assigned to it;
7.
<PAGE>
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the
plural include the singular; and
(5) the male, female and neuter genders include one
another.
ARTICLE II
THE CONVERTIBLE SUBORDINATED NOTES
Section 2.1 Form and Dating. The Convertible Subordinated Notes and
---------------
the Trustee's certificate of authentication relating thereto shall be
substantially in the form set forth in Exhibit A, which is part of this
---------
Indenture, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture. The Convertible
Subordinated Notes may have notations, legends or endorsements required by law,
stock exchange rule or usage. The Company shall approve the form of the
Convertible Subordinated Notes and any notation, legend or endorsement on them.
Each Convertible Subordinated Note shall be dated the date of its
authentication.
The terms and provisions contained in the Convertible Subordinated Notes
shall constitute, and are hereby expressly made, a part of this Indenture and,
to the extent applicable, the Company and the Trustee, by their execution and
delivery of this Indenture, expressly agree to such terms and provisions and to
be bound thereby.
Section 2.2 Execution and Authentication. Two Officers shall sign
----------------------------
the Convertible Subordinated Notes for the Company by manual or facsimile
signature. The Company's seal shall be reproduced on the Convertible
Subordinated Notes.
If an Officer whose signature is on a Convertible Subordinated Note no
longer holds that office at the time the Convertible Subordinated Note is
authenticated, the Convertible Subordinated Note shall nevertheless be valid.
A Convertible Subordinated Note shall not be valid until authenticated
by the manual signature of the Trustee. The signature shall be conclusive
evidence that the Convertible Subordinated Note has been authenticated under
this Indenture.
Upon a written order of the Company signed by an Officer of the Company,
the Trustee shall authenticate Convertible Subordinated Notes for original issue
up to an aggregate principal amount of $62,500,000 (plus up to $9,375,000
aggregate principal amount
8.
<PAGE>
of Convertible Subordinated Notes that may be sold by the Company pursuant to
the over allotment option granted pursuant to the Underwriting Agreement, dated
as of [ ], 1996, among the Company and Prudential Securities Incorporated).
The aggregate principal amount of Convertible Subordinated Notes outstanding at
any time may not exceed that amount except as provided in Section 2.7.
The Convertible Subordinated Notes shall be issuable only in registered
form, without coupons, and only in denominations of $1,000 or any integral
multiple thereof.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate Convertible Subordinated Notes. An authenticating agent
may authenticate Convertible Subordinated Notes whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same right as an
Agent to deal with the Company or an Affiliate of the Company.
Section 2.3 Registrar, Paying Agent and Conversion Agent. The
--------------------------------------------
Company shall maintain or cause to be maintained in such locations as it shall
determine, which may be the Corporate Trust Office, an office or agency: (i)
where securities may be presented for registration of transfer or for exchange
("Registrar"); (ii) where Convertible Subordinated Notes may be presented for
payment ("Paying Agent"); (iii) an office or agency where Convertible
Subordinated Notes may be presented for conversion (the "Conversion Agent"); and
(iv) where notices and demands to or upon the Company in respect of Convertible
Subordinated Notes and this Indenture may be served by the holders of the
Convertible Subordinated Notes. The Registrar shall keep a register of the
Convertible Subordinated Notes and of their transfer and exchange. The Company
may appoint one or more coregistrars, one or more additional paying agents and
one or more additional conversion agents. The term "Paying Agent" includes any
additional paying agent and the term "Conversion Agent" includes any additional
Conversion Agent. The Company may change any Paying Agent, Registrar, Conversion
Agent or coregistrar without prior notice. The Company shall notify the Trustee
of the name and address of any Agent not a party to this Indenture and shall
enter into an appropriate agency agreement with any Registrar, Paying Agent,
Conversion Agent or coregistrar not a party to this Indenture. The agreement
shall implement the provisions of this Indenture that relate to such Agent. The
Company or any of its subsidiaries may act as Paying Agent, Registrar,
Conversion Agent or coregistrar, except that for purposes of Articles 3 and 8
and Section 4.6, neither the Company nor any of its subsidiaries shall act as
Paying Agent. If the Company fails to appoint or maintain another entity as
Registrar, or Paying Agent or Conversion Agent, the Trustee shall act as such,
and the Trustee shall initially act as such.
Section 2.4 Paying Agent to Hold Money in Trust. The Company shall
-----------------------------------
require each Paying Agent (other than the Trustee, who hereby so agrees), to
agree in writing that the paying Agent will hold in trust for the benefit of
holders of the Convertible Subordinated Notes or the Trustee all money held by
the Paying Agent for the payment of
9.
<PAGE>
principal or interest on the Convertible Subordinated Notes, and will notify the
Trustee of any default by the Company in respect of making any such payment.
While any such default continues, the Trustee may require a Paying Agent to pay
all money held by it to the Trustee. The Company at any time may require a
Paying Agent to pay all money held by it to the Trustee. Upon payment over to
the Trustee, the Paying Agent (if other than the Company or a subsidiary of the
Company) shall have no further liability for the money. If the Company or a
subsidiary of the Company acts as Paying Agent, it shall segregate and hold in a
separate trust fund for the benefit of the holders of the Convertible
Subordinated Notes all money held by it as Paying Agent.
Section 2.5 Holder Lists. The Trustee shall preserve in as current
------------
a form as is reasonably practicable the most recent list available to it of the
names and addresses of holders of Convertible Subordinated Notes and shall
otherwise comply with TIA Section 312(a). If the Trustee is Registrar, the
Company shall furnish to the Trustee at least seven business days before each
Interest Payment Date and as the Trustee may request in writing within fifteen
(15) days after receipt by the Company of any such request (or such lesser time
as the Trustee may reasonably request in order to enable it to timely provide
any notice to be provided by it hereunder) a list in such form and as of such
date as the Trustee may reasonably require of the names and addresses of holders
of Convertible Subordinated Notes.
Section 2.6 Transfer and Exchange. When Convertible Subordinated
---------------------
Notes are presented to the Registrar or a coregistrar with a request to register
a transfer or to exchange them for an equal principal amount of Convertible
Subordinated Notes for other denominations, the Registrar shall register the
transfer or make the exchange if its requirements for such transactions are met.
To permit registrations of transfers and exchanges, the Company shall issue and
the Trustee shall authenticate Convertible Subordinated Notes at the Registrar's
request, bearing registration numbers not contemporaneously outstanding. No
service charge shall be made for any registration of transfer or exchange
(except as otherwise expressly permitted herein), but the Company may require
payment of a sum sufficient to cover any transfer tax or similar governmental
charge payable upon exchanges pursuant to Sections 2.10, 3.6, 9.5 or 12.2.
The Company shall not be required (i) to issue, register the transfer of
or exchange Convertible Subordinated Notes during a period beginning at the
opening of business 15 days before the day of any selection of Convertible
Subordinated Notes for redemption under Section 3.2 and ending at the close of
business on the day of selection, (ii) to register the transfer or exchange of
any Convertible Subordinated Note so selected for redemption in whole or in
part, except the unredeemed portion of any Convertible Subordinated Note being
redeemed in part or (iii) to register the transfer of any Convertible
Subordinated Notes surrendered for repurchase pursuant to Section 4.6.
All Convertible Subordinated Notes issued upon any transfer or exchange
of Convertible Subordinated Notes in accordance with this Indenture shall be the
valid
10.
<PAGE>
obligations of the Company, evidencing the same debt, and entitled to the same
benefits under this Indenture as the Convertible Subordinated Notes surrendered
upon such registration of transfer or exchange.
Section 2.7 Replacement Convertible Subordinated Notes. If the
------------------------------------------
holder of a Convertible Subordinated Note claims that the Convertible
Subordinated Note has been lost, destroyed or wrongfully taken, the Company
shall issue and the Trustee shall authenticate a replacement Convertible
Subordinated Note if the Trustee's requirements are met. If required by the
Trustee or the Company as a condition of receiving a replacement Convertible
Subordinated Note, the holder of a Convertible Subordinated Note must provide a
certificate of loss and an indemnity and/or an indemnity bond sufficient, in the
judgment of both the Company and the Trustee, to fully protect the Company, the
Trustee, any Agent and any authenticating agent from any loss, liability, cost
or expense which any of them may suffer or incur if the Convertible Subordinated
Note is replaced. The Company and the Trustee may charge the relevant holder for
their expenses in replacing any Convertible Subordinated Note.
The Trustee or any authenticating agent may authenticate any such
substituted Convertible Subordinated Note, and deliver the same upon the receipt
of such security or indemnity as the Trustee, the Company and, if applicable,
such authenticating agent may require. Upon the issuance of any substituted
Convertible Subordinated Note, the Company may require the payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
relation thereto and any other expenses connected therewith. In case any
Convertible Subordinated Note which has matured or is about to mature, or has
been called for redemption pursuant to Section 4.6 or is about to be converted
into Common Stock shall become mutilated, lost or stolen, the Company may,
instead of issuing a substitute Convertible Subordinated Note, pay or authorize
the payment of or convert or authorize the conversion of the same (without
surrender thereof except in the case of a mutilated Convertible Subordinated
Note), as the case may be, if the applicant for such payment or conversion shall
furnish to the Company, to the Trustee and, if applicable, to the authenticating
agent such security or indemnity as may be required by them to save each of them
harmless for any loss, liability, cost or expense caused by or connected with
such substitution, and, in case of destruction, loss or theft, evidence
satisfactory to the Company, the Trustee and, if applicable, any paying agent or
conversion agent of the destruction, loss or theft of such Convertible
Subordinated Note and of the ownership thereof.
Every replacement Convertible Subordinated Note is an additional
obligation of the Company.
Section 2.8 Outstanding Convertible Subordinated Notes. The
------------------------------------------
Convertible Subordinated Notes outstanding at any time are all the Convertible
Subordinated Notes properly authenticated by the Trustee except for those
cancelled by the Trustee, those delivered to it for cancellation, and those
described in this Section as not outstanding.
11.
<PAGE>
If a Convertible Subordinated Note is replaced pursuant to Section 2.7,
it ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Convertible Subordinated Note is held by a bona fide
purchaser.
If Convertible Subordinated Notes are considered paid under Section 4.1
or converted under Article 12, they cease to be outstanding and interest on them
ceases to accrue.
Subject to Section 2.9 hereof, a Convertible Subordinated Note does not
cease to be outstanding because the Company or an Affiliate of the Company holds
the Convertible Subordinated Note.
Section 2.9 When Treasury Convertible Subordinated Notes
--------------------------------------------
Disregarded. In determining whether the holders of the required principal amount
- -----------
of Convertible Subordinated Notes have concurred in any direction, waiver or
consent, Convertible Subordinated Notes owned by the Company or an Affiliate of
the Company shall be considered as though they are not outstanding except that
for the purposes of determining whether the Trustee shall be protected in
relying on any such direction, waiver or consent, only Convertible Subordinated
Notes which the Trustee knows are so owned shall be so disregarded.
Section 2.10 Temporary Convertible Subordinated Notes. Until
----------------------------------------
definitive Convertible Subordinated Notes are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Convertible
Subordinated Notes. Temporary Convertible Subordinated Notes shall be
substantially in the form of definitive Convertible Subordinated Notes but may
have variations that the Company considers appropriate for temporary Convertible
Subordinated Notes. If temporary Convertible Subordinated Notes are issued, the
Company will cause definitive Convertible Subordinated Notes to be prepared
without unreasonable delay. After the preparation of definitive Convertible
Subordinated Notes, the temporary Convertible Subordinated Notes shall be
exchangeable for definitive Convertible Subordinated Notes upon surrender of the
temporary Convertible Subordinated Notes at any office or agency of the Company
designated pursuant to Section 2.3 without charge to the holder of the
Convertible Subordinated Note. Upon surrender for cancellation of any one or
more temporary Convertible Subordinated Notes the Company shall execute and the
Trustee shall authenticate and deliver in exchange therefor a like principal
amount of definitive Convertible Subordinated Notes of authorized denominations.
Until so exchanged, the temporary Convertible Subordinated Notes shall in all
respects be entitled to the same benefits under this Indenture as definitive
Convertible Subordinated Notes.
Section 2.11 Cancellation. The Company at any time may deliver
------------
Convertible Subordinated Notes to the Trustee for cancellation. The Registrar
and Paying Agent shall forward to the Trustee any Convertible Subordinated Notes
surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel
12.
<PAGE>
Convertible Subordinated Notes surrendered for registration of transfer,
exchange, payment, replacement, conversion, redemption, repurchase or
cancellation and shall dispose of cancelled Convertible Subordinated Notes as
the Company directs, provided that the Trustee shall not be required to destroy
such Convertible Subordinated Notes. The Company may not issue new Convertible
Subordinated Notes to replace Convertible Subordinated Notes that it has paid,
or that have been delivered to the Trustee for cancellation or that any holder
has converted pursuant to Article 12 hereof, redeemed pursuant to Article 3 or
repurchased pursuant to Section 4.6.
Section 2.12 Defaulted Interest. If the Company fails to make a
------------------
payment of interest on the Convertible Subordinated Notes, it shall pay such
defaulted interest plus, to the extent lawful, any interest payable on the
defaulted interest. It may pay such defaulted interest, plus any such interest
payable on it, to the persons who are holders of Convertible Subordinated Notes
on a subsequent special record date. The Company shall fix any such record date
and payment date. At least 15 days before any such record date, the Company
shall mail to holders of the Convertible Subordinated Notes a notice that states
the record date, payment date and amount of such interest to be paid.
Section 2.13 Cusip Number. The Company in issuing the Convertible
------------
Subordinated Notes may use a "CUSIP" number, and if so, such CUSIP number shall
be included in notices of redemption or exchange as a convenience to holders of
Convertible Subordinated Notes; provided, however, that any such notice may
state that no representation is made as to the correctness or accuracy of the
CUSIP number printed in the notice or on the Convertible Subordinated Notes and
that reliance may be placed only on the other identification numbers printed on
the Convertible Subordinated Notes. The Company will promptly notify the Trustee
of any change in the CUSIP number.
ARTICLE III
REDEMPTION
Section 3.1 Notices to Trustee. If the Company elects to redeem
------------------
Convertible Subordinated Notes pursuant to the optional redemption provisions of
paragraph 5 of the Convertible Subordinated Notes, it shall furnish to the
Trustee, at least 20 but not more than 60 days before a redemption date (unless
a shorter period shall be satisfactory to the Trustee), an Officers' Certificate
setting forth (i) the Section of this Indenture pursuant to which the redemption
shall occur, (ii) the redemption date, (iii) the principal amount of Convertible
Subordinated Notes to be redeemed (if less than all) and (iv) the redemption
price.
Section 3.2 Selection of Convertible Subordinated Notes to be
-------------------------------------------------
Redeemed. If less than all the Convertible Subordinated Notes are to be
- --------
redeemed, the Trustee shall select the Convertible Subordinated Notes to be
redeemed by lot or pro rata or by a method that
13.
<PAGE>
complies with the requirements of any exchange on which the Convertible
Subordinated Notes are listed or quoted that the Trustee considers fair and
appropriate. The Trustee shall make the selection not more than 60 days and not
less than 15 days before the redemption date from Convertible Subordinated Notes
outstanding not previously called for redemption. The Trustee may select for
redemption portions of the principal of Convertible Subordinated Notes that have
a denomination larger than $1,000 or integral multiple thereof. Convertible
Subordinated Notes and portions thereof will be redeemed in the amount of $1,000
or integral multiples of $1,000. Provisions of this Indenture that apply to
Convertible Subordinated Notes called for redemption also apply to portions of
Convertible Subordinated Notes called for redemption. The Trustee shall notify
the Company promptly of the Convertible Subordinated Notes or portions of
Convertible Subordinated Notes to be called for redemption.
Section 3.3 Notice of Redemption. At least 20 days but not more
--------------------
than 60 days before a redemption date, the Company shall mail a notice of
redemption to each holder whose Convertible Subordinated Notes are to be
redeemed.
The notice shall identify the Convertible Subordinated Notes to be
redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) if any Convertible Subordinated Note is being redeemed
in part, the portion of the principal amount of such
Convertible Subordinated Note to be redeemed and that,
after the redemption date, upon surrender of such
Convertible Subordinated Note, a new Convertible
Subordinated Note or Convertible Subordinated Notes in
principal amount equal to the unredeemed portion will
be issued;
(4) that Convertible Subordinated Notes called for
redemption must be surrendered to the Paying Agent to
collect the redemption price;
(5) that interest on Convertible Subordinated Notes called
for redemption and for which funds have been set apart
for payment, ceases to accrue on and after the
redemption date (unless the Company defaults in the
payment of the redemption price);
(6) the Paragraph of the Convertible Subordinated Notes
pursuant to which the Convertible Subordinated Notes
are being redeemed;
(7) the aggregate principal amount of Convertible
Subordinated Notes (if less than all) that are being
redeemed;
14.
<PAGE>
(8) the CUSIP number of the Convertible Subordinated Notes
(provided that the disclaimer permitted by Section 2.13
may be made);
(9) the name and address of the Paying Agent;
(10) that Convertible Subordinated Notes called for
redemption may be converted at any time prior to the
close of business on the last trading day immediately
preceding the redemption date and if not converted
prior to the close of business on such date, the right
of conversion will be lost; and
(11) that in the case of Convertible Subordinated Notes or
portions thereof called for redemption on a date that
is also an Interest Payment Date, the interest payment
due on such date shall be paid to the person in whose
name the Convertible Subordinated Note is registered at
the close of business on the relevant Regular Record
Date.
At the Company's request, the Trustee shall give notice of redemption in
the Company's name and at its expense.
Section 3.4 Effect of Notice of Redemption. Once notice of
------------------------------
redemption is mailed, Convertible Subordinated Notes called for redemption
become due and payable on the redemption date at the redemption price set forth
in the Convertible Subordinated Note.
Section 3.5 Deposit of Redemption Price. On or before the
---------------------------
redemption date, the Company shall deposit with the Trustee or with the Paying
Agent money in immediately available funds sufficient to pay the redemption
price of and accrued interest on all Convertible Subordinated Notes to be
redeemed on that date. The Trustee or the Paying Agent shall return to the
Company any money not required for that purpose.
On and after the redemption date, unless the Company shall default in
the payment of the redemption price, interest will cease to accrue on the
principal amount of the Convertible Subordinated Notes or portions thereof
called for redemption and for which funds have been set apart for payment. In
the case of Convertible Subordinated Notes or portions thereof redeemed on a
redemption date which is also an Interest Payment Date, the interest payment due
on such date shall be paid to the person in whose name the Convertible
Subordinated Note is registered at the close of business on the relevant Regular
Record Date.
Section 3.6 Convertible Subordinated Notes Redeemed in Part. Upon
-----------------------------------------------
surrender of a Convertible Subordinated Note that is redeemed in part, the
Company shall issue and the Trustee shall authenticate for the holder of a
Convertible Subordinated Note at the
15.
<PAGE>
expense of the Company a new Convertible Subordinated Note equal in principal
amount to the unredeemed portion of the Convertible Subordinated Note
surrendered.
Section 3.7 Conversion Arrangement On Call For Redemption. In
---------------------------------------------
connection with any redemption of Convertible Subordinated Notes, the Company
may arrange for the purchase and conversion of any Convertible Subordinated
Notes by an arrangement with one or more investment bankers or other purchasers
to purchase such Convertible Subordinated Notes by paying to the Trustee in
trust for the holders, on or before the date fixed for redemption, an amount not
less than the applicable redemption price, together with interest accrued to the
date fixed for redemption, of such Convertible Subordinated Notes.
Notwithstanding anything to the contrary contained in this Article 3, the
obligation of the Company to pay the redemption price of such Convertible
Subordinated Notes, together with interest accrued to the date fixed for
redemption, shall be deemed to be satisfied and discharged to the extent such
amount is so paid by the purchasers. If such an agreement is entered into, a
copy of which will be filed with the Trustee prior to the date fixed for
redemption, any Convertible Subordinated Notes not duly surrendered for
conversion by the holders thereof may, at the option of the Company, be deemed,
to the fullest extent permitted by law, acquired by such purchasers from such
holders and (notwithstanding anything to the contrary contained in Article 12)
surrendered by such purchasers for conversion, all as of immediately prior to
the close of business on the date fixed for redemption (and the right to convert
any such Convertible Subordinated Notes shall be deemed to have been extended
through such time), subject to payment of the above amount as aforesaid. At the
direction of the Company, the Trustee shall hold and dispose of any such amount
paid to it in the same manner as it would monies deposited with it by the
Company for the redemption of Convertible Subordinated Notes. Without the
Trustee's prior written consent, no arrangement between the Company and such
purchasers for the purchase and conversion of any Convertible Subordinated Notes
shall increase or otherwise affect any of the powers, duties, responsibilities
or obligations of the Trustee as set forth in this Indenture, and the Company
agrees to indemnify the Trustee from, and hold it harmless against, any loss,
liability or expense arising out of or in conversion of any Convertible
Subordinated Notes between the Company and such purchasers to which the Trustee
has not consented in writing, including the costs and expenses incurred by the
Trustee in the defense of any claim or liability arising out of or in connection
with the exercise or performance of any of its powers, duties, responsibilities
or obligations under this Indenture.
ARTICLE IV
COVENANTS
Section 4.1 Payment of Convertible Subordinated Notes. The Company
-----------------------------------------
shall pay the principal of and premium, if any, and interest on the Convertible
Subordinated Notes on the dates and in the manner provided in the Convertible
Subordinated Notes. All payments so due shall be considered paid on the date due
if the Trustee or Paying Agent
16.
<PAGE>
(other than the Company or a subsidiary of the Company) holds as of 10:00 a.m.
New York City time on that date immediately available funds designated for and
sufficient to pay all such payments. If at any time the Company shall fail to
maintain any such required office or agency or shall fail to furnish the Trustee
with the address thereof, presentations, surrenders, notices and demands with
respect to the Convertible Subordinated Notes may be made or served at the
Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Convertible Subordinated Notes may be presented or
surrendered for any or all such purposes and may from time to time rescind such
designation.
Section 4.2 Commission Reports. The Company shall comply with
------------------
Section 314(a) of the TIA.
Section 4.3 Compliance Certificate. The Company shall deliver to
----------------------
the Trustee within 120 days after the end of each fiscal year of the Company, an
Officers' Certificate stating that a review of the activities of the Company and
its subsidiaries during the preceding fiscal year has been made under the
supervision of the signing Officers with a view to determining whether the
Company has fully performed its obligations under this Indenture and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge, the Company is not in default in the performance or
observance of any of the terms and conditions hereof (or, if any Default or
Event of Default shall have occurred, describing all such Defaults or Events of
Default of which he or she may have knowledge) and, that to the best of his or
her knowledge, no event has occurred and remains in existence by reason of which
payments on account of the principal of or interest on the Convertible
Subordinated Notes are prohibited.
The Company shall, so long as any of the Convertible Subordinated Notes
are outstanding, deliver to the Trustee, forthwith upon becoming aware of any
Default or Event of Default, an Officers' Certificate specifying such Default or
Event of Default.
Section 4.4 Maintenance of Office or Agency. The Company shall
-------------------------------
maintain or cause to be maintained the office or agency required under Section
2.3. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or to
furnish the Trustee with the address thereof, all presentations, surrenders,
notices and demands may be made or served at the address of the Trustee set
forth in this Indenture.
The Company may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency pursuant to Section
2.3 The Company will give prompt written
17.
<PAGE>
notice to the Trustee of any such designation or rescission and of any change in
the location of any such other office or agency.
Section 4.5 Continued Existence. Subject to Article 5, the Company
-------------------
shall do or cause to be done all things necessary to preserve and keep in full
force and effect its corporate existence.
Section 4.6 Repurchase Upon a Change of Control. In the event of a
-----------------------------------
Change of Control, the Company shall make an offer to purchase (the "Change of
Control Offer") the Notes then outstanding at a purchase price equal to one
hundred percent (100%) of the principal amount (excluding any premium) thereof
plus accrued and unpaid interest up to but not including the Change of Control
Purchase Date (as defined below) on the terms set forth in this Section. The
date on which the Company shall purchase the Securities pursuant to this Section
(the "Change of Control Purchase Date") shall be no earlier than 30 days, nor
later than 60 days, after the notice referred to below is mailed, unless a
longer period shall be required by law. The Company shall notify the Trustee in
writing promptly after the occurrence of any Change of Control of the Company's
obligation to offer to purchase all of the Securities.
Notice of a Change of Control Offer shall be mailed by the
Company to the holders of the Notes at their last registered address (with a
copy to the Trustee) within twenty (20) business days after a Change of Control
has occurred. The Change of Control Offer shall remain open from the time of
mailing until a date not more than five (5) Business Days before the Change of
Control Purchase Date. The notice shall contain all instructions and materials
necessary to enable such holders to tender Convertible Subordinated Notes (in
whole or in part) pursuant to the Change of Control Offer. The notice, which
shall govern the terms of the Change of Control Offer, shall state:
a. that the Change of Control Offer is being made pursuant
to this Section;
b. the purchase price and the Change of Control Purchase
Date;
c. that any Convertible Subordinated Note not surrendered
or accepted for payment will continue to accrue interest;
d. that any Convertible Subordinated Note accepted for
payment pursuant to the Change of Control Offer shall cease to accrue
interest after the Change of Control Purchase Date;
e. that any holder electing to have a Convertible
Subordinated Note purchased (in whole or in part) pursuant to a Change
of Control Offer will be required to surrender the Convertible
Subordinated Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Convertible
18.
<PAGE>
Subordinated Note completed, to the Paying Agent at the address
specified in the notice (or otherwise make effective delivery of the
Convertible Subordinated Note pursuant to book-entry procedures and the
related rules of the applicable depositories) at least five (5) Business
Days before the Change of Control Purchase Date; and
f. that any holder will be entitled to withdraw his or her
election if the Paying Agent receives, not later than three (3) Business
Days prior to the Change of Control Purchase Date, a telegram, telex,
facsimile transmission or letter setting forth the name of the holder,
the principal amount of the Convertible Subordinated Note the holder
delivered for purchase and a statement that such holder is withdrawing
his or her election to have the Convertible Subordinated Note purchased.
On the Change of Control Purchase Date, the Company shall (i)
accept for payment Convertible Subordinated Notes or portions thereof
surrendered and properly tendered, and not withdrawn, pursuant to the Change of
Control Offer, (ii) deposit with the Paying Agent, no later than 11:00 a.m.
eastern standard time, money, in immediately available funds, sufficient to pay
the purchase price of all Convertible Subordinated Notes or portions thereof so
accepted and (iii) deliver to the Trustee, no later than 11:00 a.m. eastern
standard time, Convertible Subordinated Notes so accepted together with an
Officers' Certificate stating that such Convertible Subordinated Notes have been
accepted for payment by the Company. The Paying Agent shall promptly, and in any
event within one (1) Business Day following the deposit and delivery specified
in clauses (ii) and (iii) of the immediately preceding sentence, mail or deliver
to holders of Convertible Subordinated Notes so accepted payment in an amount
equal to the purchase price. Holders whose Convertible Subordinated Notes are
purchased only in part will be issued new Convertible Subordinated Notes equal
in principal amount to the unpurchased portion of the Convertible Subordinated
Notes surrendered.
The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Convertible Subordinated
Notes pursuant to this Section. To the extent that the provisions of any
securities laws or regulations conflict with provisions of this Section, the
Company shall comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations under this Section by
virtue thereof.
Section 4.7 Appointments to Fill Vacancies in Trustee's Office. The
--------------------------------------------------
Company, whenever necessary to avoid or fill a vacancy in the office of Trustee,
will appoint, in the manner provided in Section 7.8, a Trustee, so that there
shall at all times be a Trustee hereunder.
Section 4.8 Stay, Extension and Usury Laws. The Company covenants
------------------------------
(to the extent that it may lawfully do so) that it shall not at any time insist
upon, plead or in any
19.
<PAGE>
manner whatsoever claim or take the benefit or advantage of, any stay, extension
or usury law wherever enacted, now or at any time hereafter enforced, that may
affect the Company's obligation to pay the Convertible Subordinated Notes; and
the Company (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law insofar as such law applies to the
Convertible Subordinated Notes, and covenants that it shall not, by resort to
any such law, hinder, delay or impede the execution of any power herein granted
to the Trustee, but will suffer and permit the execution of every such power as
though no such law has been enacted.
ARTICLE V
SUCCESSORS
Section 5.1 When the Company May Merge, Etc. The Company will not,
-------------------------------
in a single transaction or series of related transactions, consolidate or merge
with or into, or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its properties or assets to, any person as an
entirety or substantially as an entirety unless:
(a) either (i) the Company shall be the surviving or
continuing corporation or (ii) the person (if other than the Company)
formed by or surviving any such consolidation or into which the Company
is merged or the person which acquires by sale, assignment, transfer,
lease, conveyance or other disposition the properties and assets of the
Company substantially as an entirety (1) shall be a corporation
organized and validly existing under the laws of the United States or
any State thereof or the District of Columbia and (2) shall expressly
assume, by supplemental indenture in form reasonably satisfactory to the
Trustee, executed and delivered to the Trustee, the due and punctual
payment of the principal of, and premium, if any, and interest on all of
the Convertible Subordinated Notes and the performance of every covenant
of the Convertible Subordinated Notes and this Indenture on the part of
the Company to be performed or observed;
(b) immediately after giving effect to such transaction no
Default and no Event of Default shall have occurred and be continuing;
and the Company or such person shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture, comply with this provision of this
Indenture and that all conditions precedent in this Indenture relating
to such transaction have been satisfied.
For purposes of this Section 5.1, the transfer (by lease, assignment,
sale or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more subsidiaries of the
Company, the capital stock of which constitutes
20.
<PAGE>
all or substantially all of the properties and assets of the Company, shall be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company.
Section 5.2 Successor Corporation Substituted. Upon any such
---------------------------------
consolidation, merger, sale, assignment or other disposition in accordance with
Section 5.1, the successor person formed by such consolidation or into which the
Company is merged or to which such sale, conveyance, lease or transfer or other
disposition is made will succeed to, and be substituted for, and may exercise
every right and power of, the Company under this Indenture with the same effect
as if such successor had been named as the Company therein, and thereafter
(except in the case of a sale, assignment, transfer, lease, conveyance or other
disposition) the predecessor corporation will be relieved of all further
obligations and covenants under this Indenture and the Convertible Subordinated
Notes.
Section 5.3 Purchase Option on Change of Control. This Article 5
------------------------------------
does not affect the obligations of the Company (including without limitation any
successor to the Company) under Section 4.6.
ARTICLE VI
DEFAULTS AND REMEDIES
Section 6.1 Events of Default. An "Event of Default" with respect
-----------------
to any Convertible Subordinated Notes occurs if:
(a) the Company defaults in the payment (whether or not
such payment is prohibited by the subordination provisions of Article 11
of this Indenture) of principal of, or premium, if any, on the
Convertible Subordinated Notes when due at maturity, upon repurchase,
upon acceleration or otherwise, including, without limitation, failure
of the Company to repurchase the Convertible Subordinated Notes on the
date required pursuant to Section 4.6 or of the Company to make any
optional redemption payment when required pursuant to Article 3; or
(b) the Company defaults in the payment (whether or not
such payment is prohibited by the subordination provisions of Article 11
of this Indenture) of any installment of interest on the Convertible
Subordinated Notes when due (including any interest payable in
connection with a repurchase pursuant to Section 4.6 or in connection
with any optional redemption payment pursuant to Article 3) and
continuance of such default for more than 30 days; or
(c) the Company defaults (other than a default set forth in
clauses (a) and (b) above) in the performance of, or breach of, any
other covenant or warranty of the Company set forth in this Indenture or
the Convertible Subordinated Notes and fails to remedy such default or
breach within a period of 90 days after the receipt of
21.
<PAGE>
written notice from the Trustee or the holders of at least 25% in aggregate
principal amount of the then outstanding Convertible Subordinated Notes; or
(d) the Company fails to provide notice of any Change of Control in
accordance with Section 4.6; or
(e) the Company or any Material Subsidiary, pursuant to or within the
meaning of any Bankruptcy Law:
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief against it in
an involuntary case;
(iii) consents to the appointment of a Custodian of it or for
all or substantially all of its property; or
(iv) makes a general assignment for the benefit of its
creditors; or
(f) a court of competent jurisdiction enters a judgment, order or
decree under any Bankruptcy Law that:
(i) is for relief against the Company or any Material
Subsidiary in an involuntary case,
(ii) appoints a Custodian of the Company or any Material
Subsidiary, and the order or decree remains unstayed and in effect for
90 days.
(iii) orders the liquidation of the Company or any Material
Subsidiary, and the order or decree remains unstayed and in effect for
90 days.
The term "Bankruptcy Law" means title 11, U.S. Code or any similar Federal
or state law for the relief of debtors. The term "Custodian" means any receiver,
trustee, assignee, liquidator or similar official under any Bankruptcy Law.
In the case of any Event of Default pursuant to the provisions of this
Section 6.1 occurring by reason of any willful action (or inaction) taken (or
not taken) by or on behalf of the Company with the intention of avoiding payment
of the premium which the Company would have had to pay if the Company then had
elected to redeem the Convertible Subordinated Notes pursuant to Paragraph 5 of
the Convertible Subordinated Notes of this Indenture, an equivalent premium
shall also become and be immediately due and payable
22.
<PAGE>
to the extent permitted by law, anything in this Indenture or in the Convertible
Subordinated Notes contained to the contrary notwithstanding.
If an Event of Default occurs prior to any date on which the Company is
prohibited from redeeming the Convertible Subordinated Notes pursuant to the
optional redemption provisions of Article 3 of this Indenture by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the Company
with the intention of avoiding the prohibition on redemption of the Convertible
Subordinated Notes prior to such date, then the premium specified in this
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of the Convertible Subordinated Notes.
Section 6.2 Acceleration. If an Event of Default (other than an Event of
------------
Default specified in clauses (e) and (f) of Section 6.1) occurs and is
continuing, then and in every such case the Trustee, by written notice to the
Company, or the holders of at least 25% in aggregate principal amount of the
then outstanding Convertible Subordinated Notes, by written notice to the
Company and the Trustee, may declare the unpaid principal of and accrued
interest on all the Convertible Subordinated Notes to be due and payable. Upon
such declaration such principal amount, premium, if any, and accrued and unpaid
interest shall become immediately due and payable, notwithstanding anything
contained in this Indenture or the Convertible Subordinated Notes to the
contrary but subject to the provisions of Article 11 hereof. If any Event of
Default with respect to the Company specified in clauses (g) or (h) of Section
6.1 occurs, all unpaid principal of and premium, if any, and accrued and unpaid
interest on the Convertible Subordinated Notes then outstanding shall become
automatically due and payable subject to the provisions of Article 11 hereof,
without any declaration or other act on the part of the Trustee or any holder of
Convertible Subordinated Notes.
The holders of a majority in aggregate principal amount of the then
outstanding Convertible Subordinated Notes by notice to the Trustee may rescind
an acceleration of the Convertible Subordinated Notes and its consequences if
all existing Events of Default (other than nonpayment of principal of or
premium, if any, and interest on the Convertible Subordinated Notes which has
become due solely by virtue of such acceleration) have been cured or waived and
if the rescission would not conflict with any judgment or decree of any court of
competent jurisdiction. No such rescission shall affect any subsequent Default
or Event of Default or impair any right consequent thereto.
Section 6.3 Other Remedies. If an Event of Default occurs and is
--------------
continuing, the Trustee may pursue any available remedy by proceeding at law or
in equity to collect the payment of principal of or interest on the Convertible
Subordinated Notes or to enforce the performance of any provision of the
Convertible Subordinated Notes or this Indenture. The Trustee may maintain a
proceeding even if it does not possess any of the Convertible Subordinated Notes
or does not produce any of them in the proceeding. A delay or omission by the
Trustee or any holder of a Convertible Subordinated Note in exercising any right
or remedy occurring upon an Event of Default shall not impair the right or
remedy or
23.
<PAGE>
constitute a waiver of or acquiescence in the Event of Default. All remedies are
cumulative to the extent permitted by law.
Section 6.4 Waiver of Past Defaults. The holders of a majority in
-----------------------
aggregate principal amount of the Convertible Subordinated Notes then
outstanding may, on behalf of the holders of all the Convertible Subordinated
Notes waive an existing Default or Event of Default and its consequences, except
a Default or Event of Default in the payment of the principal of or interest on
the Convertible Subordinated Notes (other than the non payment of principal of
and premium, if any, and interest on the Convertible Subordinated Notes which
has become due solely by virtue of an acceleration which has been duly rescinded
as provided above), or in respect of a covenant or provision of this Indenture
which cannot be modified or amended without the consent of all holders of
Convertible Subordinated Notes. When a Default is waived, it is cured and stops
continuing. No waiver shall extend to any subsequent or other Default or impair
any right consequent thereon.
Section 6.5 Control by Majority. The holders of a majority in aggregate
-------------------
principal amount of the then outstanding Convertible Subordinated Notes may
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on it.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture that the Trustee determines may be unduly prejudicial to the
rights of other holders of Convertible Subordinated Notes or that may involve
the Trustee in personal liability; provided, that the Trustee shall have no duty
or obligation (subject to Section 7.1) to ascertain whether or not such actions
of forbearances are unduly prejudicial to such holders; provided, further, that
the Trustee may take any other action the Trustee deems proper that is not
inconsistent with such directions.
Section 6.6 Limitation on Suits. A holder of a Convertible Subordinated
-------------------
Note may not pursue any remedy with respect to this Indenture or the Convertible
Subordinated Notes unless:
(1) the holder gives to the Trustee notice of a continuing Event of
Default;
(2) the holders of at least 25% in aggregate principal amount of the
then outstanding Convertible Subordinated Notes make a request to the
Trustee to pursue the remedy;
(3) such holder or holders offer and, if requested, provide to the
Trustee indemnity satisfactory to the Trustee against any loss, liability
or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
24.
<PAGE>
(5) during such 60 day period the holders of a majority in principal
amount of the then outstanding Convertible Subordinated Notes do not give
the Trustee a direction inconsistent with the request.
A holder of a Convertible Subordinated Note may not use this Indenture to
prejudice the rights of another holder or to obtain a preference or priority
over another holder.
Section 6.7 Rights of Holders to Receive Payment. Subject to the
------------------------------------
provisions of Article 11 hereof, notwithstanding any other provision of this
Indenture, the right of any holder of a Convertible Subordinated Note to receive
payment of principal, premium, if any, and interest on the Convertible
Subordinated Note, on or after the respective due dates expressed in the
Convertible Subordinated Note, or to bring suit for the enforcement of any such
payment on or after such respective dates, or to bring suit for the enforcement
of the right to convert the Convertible Subordinated Note shall not be impaired
or affected without the consent of the holder of a Convertible Subordinated
Note.
Section 6.8 Collection Suit by Trustee. If an Event of Default specified
--------------------------
in Section 6.1(a) or (b) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company
for the whole amount of principal and interest remaining unpaid on the
Convertible Subordinated Notes and interest on overdue principal and interest
and such further amount as shall be sufficient to cover the costs and, to the
extent lawful, expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
Section 6.9 Trustee May File Proofs of Claim. The Trustee may file such
--------------------------------
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee and the holders of Convertible
Subordinated Notes allowed in any judicial proceedings relative to the Company,
its creditors or its property. Nothing contained herein shall be deemed to
authorize the Trustee to authorize or consent to or accept or adopt on behalf of
any holder of a Convertible Subordinated Note any plan of reorganization,
arrangement, adjustment or composition affecting the Convertible Subordinated
Notes or the rights of any holder thereof, or to authorize the Trustee to vote
in respect of the claim of any holder in any such proceeding.
Section 6.10 Priorities. If the Trustee collects any money pursuant to
----------
this Article, it shall pay out the money in the following order:
First: to the Trustee for amounts due under Section 7.7, including
payment of all compensation, expenses and liabilities incurred, and all
advances made, by the Trustee, and the costs and expenses of collection;
Second: to holders of Senior Debt to the extent required by Article
11;
25.
<PAGE>
Third: to holders of Convertible Subordinated Notes for amounts due
and unpaid on the Convertible Subordinated Notes for principal, premium, if
any, and interest, ratably, without preference or priority of any kind,
according to the amounts due and payable on the Convertible Subordinated
Notes for principal, premium, if any, and interest, respectively; and
Fourth: to the Company.
Except as otherwise provided in Section 2.12, the Trustee may fix a record
date and payment date for any payment to holders of Convertible Subordinated
Notes.
Section 6.11 Undertaking for Costs. In any suit for the enforcement of any
---------------------
right or remedy under this Indenture or in any suit against the Trustee for any
action taken or omitted by it as a Trustee, a court in its discretion may
require the filing by any party litigant in the suit, other than the Trustee, of
an undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys fees, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section does not apply to a
suit by the Trustee, a suit by a holder pursuant to Section 6.7 or a suit by
holders of more than 10% in principal amount of the then outstanding Convertible
Subordinated Notes.
ARTICLE VII
THE TRUSTEE
The Trustee hereby accepts the trust imposed upon it by this Indenture and
covenants and agrees to perform the same, as herein expressed. Whether or not
herein expressly so provided, every provision of this Indenture relating to the
conduct or affecting the liability of or affording protection to the Trustee
shall be subject to the provisions of this Article 7.
Section 7.1 Duties of the Trustee.
---------------------
(a) If an Event of Default known to the Trustee has occurred and
is continuing, the Trustee shall exercise such of the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent person would exercise or use under the
circumstances in the conduct of his or her own affairs.
(b) Except during the continuance of an Event of Default known to
the Trustee:
26.
<PAGE>
(1) The duties of the Trustee shall be determined solely by the
express provisions of this Indenture and the Trustee need perform only
those duties that are specifically set forth in this Indenture and no
others and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon any statements, certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the form required by
this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:
(1) This paragraph does not limit the effect of paragraph (b) of this
Section;
(2) The Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.5.
(d) whether or not therein expressly so provided, every provision of this
Indenture that is in any way related to the Trustee is subject to paragraphs
(a), (b) and (c) of this Section 7.1.
(e) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or incur any liability in the performance of any of its
duties or the exercise of any of its rights and powers hereunder.
(f) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree with the Company. Money held in trust by the
Trustee need not be segregated from other funds except to the extent required by
law.
Section 7.2 Rights of the Trustee.
---------------------
27.
<PAGE>
(a) The Trustee may rely on and shall be protected in acting or
refraining from acting upon any resolution, Officers' Certificate, or any
other certificate, statement, instrument, opinion, report, notice, request,
consent, order, security or other document believed by it to be genuine and
to have been signed or presented by the proper person. The Trustee need not
investigate any fact or matter contained therein.
(b) Any request, direction, order or demand of the Company mentioned
herein shall be sufficiently evidenced by an Officers' Certificate (unless
other evidence in respect thereof is herein specifically prescribed). In
addition, before the Trustee acts or refrains from acting, it may require
an Officers' Certificate, an Opinion of Counsel or both. The Trustee shall
not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee
may consult with counsel and the written advice of such counsel or any
Opinion of Counsel shall be full and complete authorization and protection
from liability in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(c) The Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through its attorneys
and agents and other persons not regularly in its employ and shall not be
responsible for the misconduct or negligence of any attorney or agent
appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it believes to be authorized or within its
discretion, rights or powers.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient
if signed by Officers of the Company.
(f) The Trustee shall not be required to give any bond or surety in
respect of the performance of its powers and duties hereunder.
(g) The Trustee shall be under no obligation to exercise any of the
trusts or powers vested in it by this Indenture at the request, order or
discretion of any of the holders of Convertible Subordinated Notes pursuant
to the provisions of this Indenture, unless such holders have offered to
the Trustee reasonable security or indemnity against the costs, expenses
and liabilities which might be incurred therein or thereby.
(h) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, security or
other document unless requested
28.
<PAGE>
in writing to do so by the holders of not less than a majority in aggregate
principal amount of the Convertible Subordinated Notes then outstanding,
provided that if the Trustee determines in its sole and absolute discretion
to make any such investigation, then it shall be entitled, upon reasonable
prior notice and during normal business hours, to examine the books and
records and the premises of the Company, personally or by agent or
attorney, and the reasonable expenses of every such examination shall be
paid by the Company or, if paid by the Trustee or any predecessor Trustee,
shall be reimbursed by the Company upon demand.
(i) The permissive rights of the Trustee to do things enumerated in
this Indenture shall not be construed as a duty and the Trustee shall not
be answerable for other than its negligence or willful misconduct.
(j) Except for (i) a default under Sections 5.1(a) or (b) hereof, or
(ii) any other event of which the Trustee has "actual knowledge" and which
event, with the giving of notice or the passage of time or both, would
constitute an Event of Default under this Indenture, the Trustee shall not
be deemed to have notice of an default or event unless specifically
notified in writing of such event by the Company or the holders of not less
than 25% in aggregate principal amount of the Convertible Subordinated
Notes then outstanding; as used herein, the term "actual knowledge" means
the actual fact or statement of knowing, without any duty to make any
investigation with regard thereto.
(k) The Trustee shall not be responsible for the computation of any
adjustment to the Conversion Price or for any determination as to whether
an adjustment is required.
Section 7.3 Individual Rights of the Trustee. Subject to Sections 7.10
--------------------------------
and 7.11, the Trustee in its individual or any other capacity may become the
owner or pledgee of Convertible Subordinated Notes with the same rights it would
have if it were not the Trustee and may otherwise deal with the Company or an
Affiliate and receive, collect, hold and retain collections from the Company
with the same rights it would have if it were not Trustee. Any Agent may do the
same with like rights.
Section 7.4 Trustee's Disclaimer. The Trustee shall not be responsible
--------------------
for and makes no representation as to the validity or adequacy of this Indenture
or the Convertible Subordinated Notes. It shall not be accountable for the
Company's use of the proceeds from the Convertible Subordinated Notes or any
money paid to the Company or upon the Company's direction under any provision of
this Indenture. It shall not be responsible for the use or application of any
money received by any Paying Agent other than the Trustee, and it shall not be
responsible for any statement or recital herein or any statement in the
Convertible Subordinated Notes or any other document in connection with the sale
of the Convertible Subordinated Notes or pursuant to this Indenture other than
its certificate of authentication.
29.
<PAGE>
Section 7.5 Notice of Defaults. If a Default or Event of Default
------------------
occurs and is continuing and if it is known to the Trustee, the Trustee shall
mail to each holder of a Convertible Subordinated Note a notice of the Default
or Event of Default within 60 days after it occurs. A Default or an Event of
Default shall not be considered known to the Trustee unless it is a Default or
Event of Default in the payment of principal or interest when due under Section
6.1(a) or (b) or the Trustee shall have received notice thereof, in accordance
with this Indenture, from the Company or from the holders of a majority in
principal amount of the outstanding Convertible Subordinated Notes. Except in
the case of a Default or Event of Default in payment of principal of, premium,
if any, or interest on any Convertible Subordinated Note, the Trustee may
withhold the notice if and so long as a committee of its Trust Officers in good
faith determines that withholding the notice is in the interest of the holders
of the Convertible Subordinated Notes.
Section 7.6 Reports by the Trustee to Holders. Within 60 days after
---------------------------------
the reporting date stated in Section 10.10, the Trustee shall mail to holders of
Convertible Subordinated Notes a brief report not the dated as of such reporting
date that complies with TIA Section 313(a) described in TIA Section 313(a) has
occurred within twelve months preceding the reporting date, no report need be
transmitted). The Trustee also shall comply (but if no event with TIA Section
313 (b) (2). The Trustee shall also transmit by required by TIA Section 313(c).
A copy of each report at the time of its mailing to holders of
Convertible Subordinated Notes shall be filed, at the expense of the Company, by
the Trustee with the Commission and each stock exchange or securities market, if
any, on which the Convertible Subordinated Notes are listed. The Company shall
timely notify the Trustee when the Convertible Subordinated Notes are listed or
quoted on any stock exchange or securities market.
Section 7.7 Compensation and Indemnity. The Company shall pay to the
--------------------------
Trustee from time to time and the Trustee shall be entitled to reasonable
compensation for its acceptance of this Indenture and its services hereunder.
The Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee promptly
upon request for all reasonable disbursements, advances and expenses incurred or
made by or on behalf of it in addition to the compensation for its services.
Such expenses may include the reasonable compensation, disbursements and
expenses of the Trustee's agents, counsel and other persons not regularly in its
employ.
The Company shall indemnify the Trustee against any loss, liability or
expense incurred by it arising out of or in connection with the acceptance or
administration of its duties under this Indenture and the trusts hereunder,
including the costs and expenses of defending itself against or investigating
any claim of liability in the premises, except as set forth in the next
paragraph. The Trustee shall notify the Company promptly of any claim for which
it may seek indemnity. Failure by the Trustee to so notify the Company shall not
30.
<PAGE>
relieve the Company of its obligations hereunder. The Company shall defend the
claim with counsel designated by the Company, who may be outside counsel to the
Company but shall in all events be reasonably satisfactory to the Trustee, and
the Trustee shall cooperate in the defense. In addition, the Trustee may retain
one separate counsel and, if deemed advisable by such counsel, local counsel,
and the Company shall pay the reasonable fees and expenses of such separate
counsel and local counsel. The indemnification herein extends to any settlement,
provided that the Company will not be liable for any settlement made without its
consent, provided, further, that such consent will not be unreasonably withheld.
The Company need not reimburse any expense or indemnify against any loss
or liability incurred by the Trustee through its own negligence or willful
misconduct.
To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a Lien prior to the Convertible Subordinated Notes on all
money or property held or collected by the Trustee, except that held in trust to
pay principal and interest on Convertible Subordinated Notes. Such Liens and the
Company's obligations under this Section 7.7 shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1 (g) or (h) occurs, the expenses and the
compensation for the services (including the fees and expenses of its agents and
counsel) are intended to constitute expenses of administration under any
Bankruptcy Law.
Section 7.8 Replacement of the Trustee. A resignation or removal of
--------------------------
the Trustee and appointment of a successor Trustee shall become effective only
upon the successor Trustee's acceptance of appointment as provided in this
Section 7.8.
The Trustee may resign at any time and be discharged from the trust
hereby created by so notifying the Company. The holders of a majority in
principal amount of the then outstanding Convertible Subordinated Notes may
remove the Trustee by so notifying the Trustee and the Company in writing and
may appoint a successor Trustee. The Company may remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged a bankrupt or an insolvent or an
order for relief is entered with respect to the Trustee under any
Bankruptcy Law;
(3) a Custodian or public officer takes charge of the Trustee
or its property; or
(4) the Trustee becomes incapable of acting.
31.
<PAGE>
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the holders
of a majority in principal amount of the then outstanding Convertible
Subordinated Notes may appoint a successor Trustee to replace the successor
Trustee appointed by the Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
holders of at least 10% in principal amount of the then outstanding Convertible
Subordinated Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee after written request by any holder of a Convertible
Subordinated Note who has been a holder for at least six months fails to comply
with Section 7.10, such holder may petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to holders of Convertible Subordinated Notes. The retiring Trustee
shall promptly transfer all property held by it as Trustee to the successor
Trustee, provided that all sums owing to the retiring Trustee hereunder have
been paid and subject to the lien provided for in Section 7.7. Notwithstanding
the replacement of the Trustee pursuant to this Section 7.8, the Company's
obligations under Section 7.7 shall continue for the benefit of the retiring
Trustee.
Upon request of any such successor Trustee, the Company shall execute
any and all instruments for more fully and certainly vesting in and confirming
to such successor Trustee all such rights, powers and trusts referred to in the
preceding paragraph.
Section 7.9 Successor Trustee by Merger, Etc. If the Trustee
---------------------------------
consolidates with, merges or converts into, or transfers all or substantially
all of its corporate trust business to, another corporation or national banking
association, the resulting, surviving or transferee corporation or national
banking association without any further act shall be the successor Trustee with
the same effect as if the successor Trustee had been named as the Trustee
herein.
Section 7.10 Eligibility, Disqualification. This Indenture shall always
-----------------------------
have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The
Trustee shall always have a combined capital and surplus as stated in Section
10.10. The Trustee is subject to TIA Section 310 (b) regarding the
disqualification of a trustee upon acquiring a conflicting interest.
32.
<PAGE>
Section 7.11 Preferential Collection of Claims Against Company. The
-------------------------------------------------
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship set forth in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE VIII
SATISFACTION AND DISCHARGE OF INDENTURE
Section 8.1 Discharge of Indenture. When (a) the Company delivers to
----------------------
the Trustee for cancellation all Convertible Subordinated Notes theretofore
authenticated (other than any other Convertible Subordinated Notes which have
been destroyed, lost or stolen and in lieu of or in substitution for which other
Convertible Subordinated Notes have been authenticated and delivered) and not
theretofore canceled, or (b) all the Convertible Subordinated Notes not
theretofore canceled or delivered to the Trustee for cancellation have become
due and payable, or are by their terms to become due and payable within one year
or are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption, and the
Company deposits with the Trustee, in trust, cash and/or U.S. Government
Obligations sufficient to pay at maturity or upon redemption of all of the
Convertible Subordinated Notes (other than any Convertible Subordinated Notes
which have been mutilated, destroyed, lost or stolen and in lieu of or in
substitution for which other Convertible Subordinated Notes have been
authenticated and delivered) not theretofore canceled or delivered to the
Trustee for cancellation, including principal and premium, if any, and interest
due or to become due to such date of maturity or redemption date, as the case
may be, and if in either case the Company also pays, or causes to be paid, all
other sums payable hereunder by the Company, than this Indenture shall cease to
be of further effect (except as to (i) rights of registration of transfer,
substitution, replacement and exchange and conversion of Convertible
Subordinated Notes, (ii) rights hereunder of holders of Convertible Subordinated
Notes to receive payments of principal of and premium, if any, and interest on,
the Convertible Subordinated Notes (iii) the obligations under Sections 2.3 and
8.5 hereof and (iv) the rights, obligations and immunities of the Trustee
hereunder), and the Trustee, on demand of the Company accompanied by an
Officers' Certificate and an Opinion of Counsel as required by Section 10.4 and
at the Company's cost and expense, shall execute proper instruments
acknowledging satisfaction of and discharging this Indenture; the Company,
however, hereby agrees to reimburse the Trustee for any costs or expenses
thereafter reasonably and properly incurred by the Trustee and to compensate the
Trustee for any services thereafter reasonably and properly rendered by the
Trustee in connection with this Indenture or the Convertible Subordinated Notes.
Section 8.2 Deposited Monies to be Held in Trust by Trustee. Subject
-----------------------------------------------
to Section 8.4, all monies deposited with the Trustee pursuant to Section 8.1
shall be held in trust and applied by it to the payment, notwithstanding the
provisions of Article 11, either
33.
<PAGE>
directly or through the Paying Agent, to the holders of the particular
Convertible Subordinated Notes for the payment or redemption of which such
monies have been deposited with the Trustee, of all sums due and to become due
thereon for principal and interest and premium, if any.
Section 8.3 Paying Agent to Repay Monies Held. Upon the satisfaction
---------------------------------
and discharge of this Indenture, all monies then held by any Paying Agent (other
than the Trustee) shall, upon the Company's demand, be repaid to it or paid to
the Trustee, and thereupon such Paying Agent shall be released from all further
liability with respect to such monies.
Section 8.4 Return of Unclaimed Monies. Subject to the requirements of
--------------------------
applicable law, any monies deposited with or paid to the Trustee for payment of
the principal of premium, if any, or interest on Convertible Subordinated Notes
and not applied but remaining unclaimed by the holders thereof for two years
after the date upon which the principal of, premium, if any, or interest on such
Convertible Subordinated Notes as the case may be, have become due and payable,
shall be repaid to the Company by the Trustee on demand and all liability of the
Trustee shall thereupon cease with respect to such monies; and the holder of any
of the Convertible Subordinated Notes shall thereafter look only to the Company
for any payment which such holder may be entitled to collect unless an
applicable abandoned property law designates another person.
Section 8.5 Reinstatement. If the Trustee or the Paying Agent is
-------------
unable to apply any money in accordance with Section 8.2 by reason of any order
or judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Convertible Subordinated Notes shall be revived and reinstated
as though no deposit had occurred pursuant to Section 8.1 until such time as the
Trustee or the Paying Agent is permitted to apply all such money in accordance
with Section 8.2; provided, however, that if the Company makes any payment of
interest on or principal of any Convertible Subordinated Note following the
reinstatement of its obligations, the Company shall be subrogated to the rights
of the holders thereof to receive such payment from the money held by the
Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS
Section 9.1 Without the Consent of Holders. The Company and the
------------------------------
Trustee may amend this Indenture or the Convertible Subordinated Notes without
notice to or the consent of any holder of a Convertible Subordinated Note for
the purposes of:
(a) curing any ambiguity or correcting or supplementing any
defective or inconsistent provision contained in this Indenture, or
making any other changes in
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the provisions of this Indenture which the Company and the Trustee may
deem necessary or desirable and which will not adversely affect the
legal rights under the Indenture of the holders of Convertible
Subordinated Notes.
(b) providing for uncertificated Convertible Subordinated
Notes in addition to or in place of certificated Convertible
Subordinated Notes;
(c) evidencing the succession of another person to the Company
and the assumption by such successor of the covenants and obligations of
the Company thereunder and in the Convertible Subordinated Notes as
permitted by Section 5.1;
(d) providing for conversion rights of holders of Convertible
Subordinated Notes in the event of consolidation, merger or sale of all
or substantially all of the assets of the Company and to otherwise
comply with Section 5.1;
(e) reducing the Conversion Price;
(f) making any changes or adding to the covenants of the
Company for the benefit of the holders of Convertible Subordinated
Notes;
(g) complying with the requirements of the Commission in order
to effect or maintain the qualification of the Indenture under the TIA;
or
(h) evidencing and providing for the acceptance of appointment
here-under by a successor Trustee with respect to the Convertible
Subordinated Notes.
Section 9.2 With the Consent of Holders. Subject to Section 6.7, the
---------------------------
Company and the Trustee may amend this Indenture or the Convertible Subordinated
Notes with the written consent of the holders of the holders of 66 2/3% in
aggregate principal amount of the then outstanding Convertible Subordinated
Notes (including consents obtained in connection with a tender offer or exchange
offer for Convertible Subordinated Notes).
Subject to Sections 6.4 and 6.7, the holders of 66 2/3% in aggregate
principal amount of the Convertible Subordinated Notes then outstanding may also
waive compliance in a particular instance by the Company with any provision of
this Indenture or the Convertible Subordinated Notes.
However, without the consent of each holder of a Convertible
Subordinated Note affected, an amendment or waiver under this Section may not:
(a) reduce the principal amount of Convertible Subordinated
Notes whose holders must consent to an amendment, supplement or waiver;
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(b) reduce the principal of or premium on or change the fixed
maturity of any Convertible Subordinated Note or except as permitted
pursuant to Section 9.1, alter the redemption provisions with respect
thereto;
(c) reduce the rate of, or extend the time for payment of,
interest, including defaulted interest, on any Convertible Subordinated
Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Convertible
Subordinated Notes (except a rescission of acceleration of the
Convertible Subordinated Notes by the holders of at least a majority in
aggregate principal amount of the Convertible Subordinated Notes then
outstanding and a waiver of the payment default that resulted from such
acceleration);
(e) make the principal of, or premium, if any, or interest on,
any Convertible Subordinated Note payable in money other than as
provided for herein and in the Convertible Subordinated Notes;
(f) waive a redemption payment with respect to any Convertible
Subordinated
(g) except as permitted herein, increase the Conversion Price
or except as permitted pursuant to Section 9.1, modify the provisions
contained herein relating to conversion of the Convertible Subordinated
Notes in a manner adverse to the holders thereof; or
(h) make any change in provisions relating to waivers of
defaults, or the rights of holders of Convertible Subordinated Notes to
receive payments of principal of, premium, if any, or interest on the
Convertible Subordinated Notes or the abilities of holders of
Convertible Subordinated Notes to enforce their rights hereunder or the
provisions of clauses (a) through (h) of this Section 9.2.
To secure a consent of the holders of Convertible Subordinated Notes
under this Section, it shall not be necessary for such holders to approve the
particular form of any proposed amendment or waiver, but it shall be sufficient
if such consent approves the substance thereof.
After an amendment or waiver under this Section becomes effective, the
Company shall mail to holders of Convertible Subordinated Notes a notice briefly
describing the amendment or waiver.
In order to amend any provisions of Article 11, holders of at least 75
principal amount of Convertible Subordinated Notes then outstanding must consent
to such
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amendment if such amendment would adversely the rights of holders of Convertible
Subordinated Notes.
Section 9.3 Compliance With The Trust Indenture Act. Every amendment
---------------------------------------
to this Indenture or the Convertible Subordinated Notes shall be set forth in a
supplemental indenture that complies with the TIA as then in effect.
Section 9.4 Revocation and Effect of Consents. Until an amendment or
---------------------------------
waiver becomes effective, a consent to it by a holder of a Convertible
Subordinated Note is a continuing consent by the holder and every subsequent
holder of a Convertible Subordinated Note or portion of a Convertible
Subordinated Note that evidences the same debt as the consenting holder's
Convertible Subordinated Note, even if notation of the consent is not made on
any Convertible Subordinated Note. However, any such holder or subsequent holder
may revoke the consent as to his or her Convertible Subordinated Note or portion
of a Convertible Subordinated Note if the Trustee receives the notice of
revocation before the date on which the Trustee receives an Officers'
Certificate certifying that the holders of the requisite principal amount of
Convertible Subordinated Notes have consented to the amendment or waiver.
The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the holders of Convertible Subordinated Notes
entitled to consent to any amendment or waiver. If a record date is fixed, then
notwithstanding the provisions of the immediately preceding paragraph, those
persons who were holders of Convertible Subordinated Notes at such record date
(or their duly designated proxies), and only those persons, shall be entitled to
consent to such amendment or waiver or to revoke any consent previously given,
whether or not such persons continue to be holders after such record date. No
consent shall be valid or effective for more than 90 days after such record date
unless consents from holders of the principal amount of Convertible Subordinated
Notes required here under for such amendment or waiver to be effective shall
have also been given and not revoked within such 90 day period.
After an amendment or waiver becomes effective it shall bind every
holder of a Convertible Subordinated Note, unless it is of the type described in
clauses (a)-(h) of Section 9.2. In such case, the amendment or waiver shall bind
each holder of a Convertible Subordinated Note who has consented to it.
Section 9.5 Notation On Or Exchange Of Convertible Subordinated Notes.
---------------------------------------------------------
Con-vertible Subordinated Notes authenticated and delivered after the execution
of any supplemental indenture pursuant to this Article 9 may, and shall if
required by the Trustee, bear a notation in the form approved by the Trustee as
to any matter provided for in such supplemental indenture. If the Company shall
so determine, new Convertible Subordinated Notes so modified as to conform, in
the opinion of the Company and the Trustee, to any such supplemental indenture
may be prepared and executed by the Company and
37.
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authenticated and delivered by the Trustee in exchange for outstanding
Convertible Subordinated Notes.
Section 9.6 Trustee Protected. The Trustee shall sign any amendment or
-----------------
supplemental indenture authorized pursuant to this Article 9 if such amendment
or supplemental indenture does not adversely affect the rights, duties,
liabilities or immunities of the Trustee. If it does, the Trustee may, but need
not, sign it. In signing such amendment or supplemental indenture, the Trustee
shall be entitled to receive, and shall be fully protected in relying upon, an
Officers' Certificate and an Opinion of Counsel as conclusive evidence that such
amendment or supplemental indenture is authorized or permitted by this
Indenture, that it is not inconsistent herewith, and that it will be valid and
binding upon the Company in accordance with its terms.
ARTICLE X
GENERAL PROVISIONS
Section 10.1 Trust Indenture Act Controls. If any provision of this
----------------------------
Indenture limits, qualifies or conflicts with the duties imposed by TIA Section
318(c), such imposed duties shall control. If any provision of this Indenture
expressly modifies or excludes any provision of the TIA that may be so modified
or excluded, the latter provision shall be deemed to apply to this Indenture as
so modified or to be excluded, as the case may be.
Section 10.2 Notices. Any notice or communication by the Company or the
-------
Trustee to the other is duly given if in writing and delivered in person or
mailed by first class mail, with postage prepaid (registered or certified,
return receipt requested), facsimile or overnight air couriers guaranteeing next
day delivery, to the other's address stated in Section 10.10. The Company or the
Trustee by notice to the other may designate additional or different addresses
for subsequent notices or communications.
All notices and communications (other than those sent to holders of
Convertible Subordinated Notes) shall be deemed to have been duly given at the
time delivered by hand, if personally delivered; five business days after being
deposited in the mail, postage prepaid, if mailed; when transmission confirmed,
if transmitted by facsimile; and the next business day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a holder of a Convertible Subordinated
Note shall be mailed by first class mail, with postage prepaid, to his or her
address shown on the register kept by the Registrar. Failure to mail a notice or
communication to a holder or any defect in it shall not affect its sufficiency
with respect to other holders.
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If a notice or communication is sent in the manner provided above within
the time prescribed, it is duly given, whether or not the addressee receives it.
If the Company sends a notice or communication to holders of Convertible
Subordinated Notes, it shall send a copy to the Trustee and each Agent at the
same time.
All other notices or communications shall be in writing.
Section 10.3 Communication by Holders With Other Holders. Holders may
-------------------------------------------
communicate pursuant to TIA Section 312(b) respect to their rights under this
Indenture or the Convertible Subordinated Notes. The Company, the Trustee, the
Registrar and anyone else shall have the protection of TIA Section 312(c).
Section 10.4 Certificate and Opinion as to Conditions Precedent. Upon
--------------------------------------------------
any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 10.5) stating that, in the opinion of such person, all
conditions precedent and covenants, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set
forth in Section 10.5) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been complied with.
Section 10.5 Statements Required in Certificate or Opinion. Each
---------------------------------------------
certificate or opinion with respect to compliance with a condition or covenant
provided for in this Indenture (other than a certificate provided pursuant to
TIA Section 314 (a)(4)) shall include:
(1) a statement that the person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he or she
has made such examination or investigation as is necessary to enable him
or her to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
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(4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
Any Officers' Certificate may be based, insofar as it relates to legal
matters, upon an Opinion of Counsel, unless such Officer knows that the opinion
with respect to the matters upon which his or her certificate may be based as
aforesaid is erroneous. Any Opinion of Counsel may be based, insofar as it
relates to factual matters, upon certificates, statements or opinions of, or
representations by an officer or officers of the Company, or other persons or
firms deemed appropriate by such counsel, unless such counsel knows that the
certificates, statements or opinions or representations with respect to the
matters upon which his or her certificate, statement or opinion may be based as
aforesaid are erroneous.
Any Officers' Certificate, statement or Opinion of Counsel may be based,
insofar as it relates to accounting matters, upon a certificate or opinion of or
representation by an accountant (who may be an employee of the Company), or firm
of accountants, unless such Officer or counsel, as the case may be, knows that
the certificate or opinion or representation with respect to the accounting
matters upon which his certificate, statement or opinion may be based as
aforesaid is erroneous.
Section 10.6 Rules by Trustee and Agents. The Trustee may make
---------------------------
reasonable rules for action by or a meeting of holders of Convertible
Subordinated Notes. The Registrar or Paying Agent may make reasonable rules and
set reasonable requirements for its functions.
Section 10.7 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday
--------------
or a day on which banking institutions in the City of New York or the City of
San Jose, California are not required to be open, and a "business day" is any
day that is not a Legal Holiday. If a payment date is a Legal Holiday at a place
of payment, payment may be made at that place on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue for the intervening period. If
any date specified in this Indenture, including, without limitation, a
redemption date under Paragraph 5 of Convertible Subordinated Notes, is a Legal
Holiday, then such date shall be the next succeeding business day.
Section 10.8 No Recourse Against Others. No director, officer, employee
--------------------------
or stockholder, as such, of the Company from time to time shall have any
liability for any obligations of the Company under the Convertible Subordinated
Notes or this Indenture or for any claim based on, in respect of, or by reason
of such obligations or their creation. Each holder by accepting a Convertible
Subordinated Note waives and releases all such liability. This waiver and
release are part of the consideration for the Convertible Subordinated Notes.
Each of such directors, officers, employees and stockholders is a third party
beneficiary of this Section 10.8.
Section 10.9 Counterparts. This Indenture may be executed in any number
------------
of counterparts and by the parties hereto in separate counterparts, each of
which when so
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executed shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement.
Section 10.10 Other Provisions. The Company initially appoints the
----------------
Trustee as Paying Agent, Registrar and authenticating agent.
The reporting date for Section 7.6 is [ ] 15 of each year. The first
reporting date is the first [ ] 15 following the issuance of Convertible
Subordinated Notes hereunder.
The Trustee shall always have, or shall be a subsidiary of a bank or
bank holding company which has, a combined capital and surplus of at least
$50,000,000 as set forth in its most recent published annual report of
condition.
The Company's address is: Leasing Solutions, Inc., 10 Almaden Boulevard,
Suite 1500, San Jose, CA 95113-2238, Attention: Corporate Counsel, Facsimile:
(408) 995-0696, Telephone: (408) 995-6565.
The Trustee's address is:[ ], Attention: , Facsimile: , Telephone: .
Section 10.11 Governing Law. The internal laws of the State of New York
-------------
shall govern this Indenture and the Convertible Subordinated Notes, without
regard to the conflict of laws provisions thereof.
Section 10.12 No Adverse Interpretation of Other Agreements. This
---------------------------------------------
Indenture may not be used to interpret another indenture, loan or debt agreement
of the Company or a subsidiary. Any such other indenture, loan or debt agreement
may not be used to interpret this Indenture.
Section 10.13 Successors. All agreements of the Company in this
----------
Indenture and the Convertible Subordinated Notes shall bind its successor. All
agreements of the Trustee in this Indenture shall bind its successor.
Section 10.14 Severability. In case any provision in this Indenture or
------------
in the Convertible Subordinated Notes shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
Section 10.15 Table of Contents, Headings, Etc. The Table of Contents,
---------------------------------
Cross Reference Table and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not to be
considered a part hereof and shall in no way modify or restrict any of the terms
or provisions hereof.
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ARTICLE XI
SUBORDINATION
Section 11.1 Agreement to Subordinate. The Company agrees, and each
------------------------
holder of Convertible Subordinated Notes by accepting a Convertible Subordinated
Note agrees, that the indebtedness evidenced by the Convertible Subordinated
Note is subordinated in right of payment, to the extent and in the manner
provided in this Article 11, to the prior payment in full of all Senior Debt
(whether outstanding on the date hereof or hereafter created, incurred, assumed
or guaranteed), and that the subordination is for the benefit of the holders of
Senior Debt.
Section 11.2 Liquidation; Dissolution; Bankruptcy. Upon any
------------------------------------
distribution to creditors of the Company in a liquidation or dissolution of the
Company or in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property, in an assignment for the
benefit of creditors or any marshalling of the Company's assets and liabilities:
(1) holders of Senior Debt shall be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt
(including interest after the commencement of any such proceeding at the
rate specified in the applicable Senior Debt) in cash or U.S. Government
Obligations or other payment satisfactory to the holders of the Senior
Debt before holders of Convertible Subordinated Notes shall be entitled
to receive any payment with respect to the Convertible Subordinated
Notes (except that the holders of Convertible Subordinated Notes may
receive (i) securities that are subordinated to at least the same extent
as the Convertible Subordinated Notes to (a) Senior Debt and (b) any
securities issued in exchange for Senior Debt and (ii) payments and
other distributions made from any trust created pursuant to Section 8.1
hereof); and
(2) until all Senior Debt is paid in full in cash or U.S.
Government Obligations or other payment satisfactory to the holders of
the Senior Debt, any distribution to which holders of Convertible
Subordinated Notes would be entitled but for this Article 11 shall be
made to holders of Senior Debt (except that holders of Convertible
Subordinated Notes may receive securities that are subordinated to at
least the same extent as the Convertible Subordinated Notes to (a)
Senior Debt and (b) any securities issued in exchange for Senior Debt),
as their interests may appear.
Section 11.3 Default on Senior Debt and/or Designated Senior Debt. The
----------------------------------------------------
Company may not make any payment or distribution to the Trustee or any holder of
Convertible Subordinated Notes in respect of Obligations with respect to the
Convertible Subordinated Notes and may not acquire from the Trustee or any
holder of Convertible Subordinated Notes any Convertible Subordinated Notes
(other than, in each case, (i)
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securities that are subordinated to at least the same extent as the Convertible
Subordinated Notes to (a) Senior Debt and (b) any securities issued in exchange
for Senior Debt and (ii) payments and other distributions made from any trust
created pursuant to Section 8.1 hereof) until all Senior Debt has been paid in
full in cash or U.S. Government Obligations or other payment satisfactory to the
holders of Senior Debt if:
(i) a default in the payment of any principal of, premium, if
any, interest, rent or other Obligations in respect of Senior Debt
occurs and is continuing beyond any applicable grace period in the
agreement, indenture or other document governing such Senior Debt; or
(ii) a default, other than a payment default, on Designated
Senior Debt occurs and is continuing that then permits holders of such
Designated Senior Debt to accelerate its maturity and the Trustee
receives a notice of the default (a "Payment Blockage Notice") from a
person who may give it pursuant to Section 11.11 hereof.
If the Trustee receives any Payment Blockage Notice pursuant to Section
11.3 (ii) hereof, no subsequent Payment Blockage Notice shall be effective for
purposes of such Section unless and until (i) at least 365 days shall have
elapsed since the effectiveness of the immediately prior Payment Blockage Notice
and (ii) all scheduled payments of principal, premium, if any, and interest on
the Convertible Subordinated Notes that have come due have been paid in full in
cash. No nonpayment default that existed or was continuing on the date of
delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the
basis for a subsequent Payment Blockage Notice.
The Company may and shall resume payments on and distributions in
respect of the Convertible Subordinated Notes and may acquire them upon the
earlier of:
(1) the date upon which the default is cured or waived, or
(2) in the case of a default referred to in Section 11.3 (ii)
hereof, the earlier of the date on which such nonpayment default is
cured or waived or 179 days pass after notice is received if the
maturity of such Senior Debt has not been accelerated, if this Article
otherwise permits the payment, distribution or acquisition at the time
of such payment or acquisition.
Section 11.4 Acceleration of Convertible Subordinated Notes. In the
----------------------------------------------
event of the acceleration of the Convertible Subordinated Notes because of an
Event of Default, the Company may not make any payment or distribution to the
Trustee or any holder of Convertible Subordinated Notes in respect of
Obligations with respect to Convertible Subordinated Notes and may not acquire
or purchase from the Trustee or any holder of any Convertible Subordinated Notes
(other than, in each case, (i) securities that are subordinated to at least the
same extent as the Convertible Subordinated Notes to (a)
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Senior Debt and (b) any securities issued in exchange for Senior Debt, and (ii)
payments and other distributions made from any trust created pursuant to Section
8.1 until all Senior Debt has been paid in full in cash or U.S. Government
Obligations or other payment satisfactory to the holders of the Senior Debt or
such acceleration is rescinded in accordance with the terms of this Indenture.
If payment of the Convertible Subordinated Notes is accelerated because of an
Event of Default, the Company shall promptly notify holders of Senior Debt of
the acceleration.
Section 11.5 When Distribution Must Be Paid Over. In the event that
-----------------------------------
the Trustee or any holder of Convertible Subordinated Notes receives any payment
or any distributions of assets of the Company of any kind with respect to the
Convertible Subordinated Notes, whether in cash, property or securities,
including without limitation by way of set off or otherwise, at a time when
payment or distribution is prohibited by this Indenture, such payment shall be
held by the Trustee or such holder, in trust for the benefit of, and shall be
paid forthwith over and delivered, to the extent necessary to make payment in
full of any Senior Debt remaining unpaid, after giving effect to any concurrent
payment or distribution to or for the holders of Senior Debt; provided that the
foregoing shall apply to the Trustee only if the Trustee has actual knowledge
(as determined in accordance with Section 11.11) that such payment or
distribution is prohibited by this Indenture.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth in this Article 11, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of holders of Convertible
Subordinated Notes or the Company or any other person money or assets to which
any holders of Senior Debt shall be entitled by virtue of this Article 11,
except if such payment is made as a result of the willful misconduct or gross
negligence of the Trustee.
Section 11.6 Notice by Company. The Company shall promptly notify the
-----------------
Trustee of any facts known to the Company that would cause a payment of any
Obligations with respect to the Convertible Subordinated Notes or to the
purchase of any Convertible Subordinated Notes by the Company to violate this
Article, but failure to give such notice shall not affect the subordination of
the Convertible Subordinated Notes to the Senior Debt as provided in this
Article.
Section 11.7 Subrogation. After all Senior Debt is paid in full and
-----------
until the Convertible Subordinated Notes are paid in full, holders of
Convertible Subordinated Notes shall be subrogated (equally and ratably with all
other indebtedness pari passu with the Convertible Subordinated Notes) to the
rights of holders of Senior Debt to receive distributions applicable to Senior
Debt to the extent that distributions otherwise payable to the holders of
Convertible Subordinated Notes have been applied to the payment of Senior Debt.
A distribution made under this Article to holders of Senior Debt that otherwise
44.
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would have been made to holders of Convertible Subordinated Notes is not, as
between the Company and holders of Convertible Subordinated Notes, a payment by
the Company on the Convertible Subordinated Notes.
Section 11.8 Relative Rights. This Article defines the relative rights
---------------
of holders of Convertible Subordinated Notes and holders of Senior Debt. Nothing
in this Indenture shall:
(1) impair, as between the Company and holders of Convertible
Subordinated Notes, the obligation of the Company, which is absolute and
unconditional, to pay principal of and interest on the Convertible
Subordinated Notes in accordance with their terms;
(2) affect the relative rights of holders of Convertible
Subordinated Notes and creditors (other than with respect to Senior
Debt) of the Company other than their rights in relation to holders of
Senior Debt; or
(3) prevent the Trustee or any holder of Convertible
Subordinated Notes from exercising its available remedies upon a Default
or Event of Default, subject to the rights of holders and owners of
Senior Debt to receive distributions and payments otherwise payable to
holders of Convertible Subordinated Notes.
If the Company fails because of this Article to pay principal of or
interest on a Convertible Subordinated Note on the due date, the failure is
still a Default or Event of Default.
Section 11.9 Subordination May Not Be Impaired By Company. No right of
--------------------------------------------
any holder of Senior Debt to enforce the subordination of the indebtedness
evidenced by the Convertible Subordinated Notes shall be impaired by any act or
failure to act by the Company or any holder of Convertible Subordinated Notes or
by the failure of the Company or any such holder to comply with this Indenture.
Section 11.10 Distribution or Notice to Representative. Whenever a
----------------------------------------
distribution is to be made or a notice given to holders of Senior Debt, the
distribution may be made and the notice given to their Representative.
Upon any payment or distribution of assets of the Company referred to in
this Article 11, the Trustee and the holders of Convertible Subordinated Notes
shall be entitled to rely upon any order or decree made by any court of
competent jurisdiction or upon any certificate of such Representative or of the
liquidating trustee or agent or other person making any distribution to the
Trustee or to the holders of Convertible Subordinated Notes for the purpose of
ascertaining the persons entitled to participate in such distribution, the
holders of the Senior Debt and other indebtedness of the Company, the amount
thereof or
45.
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payable thereon, the amount or amounts paid or distributed thereon and all other
facts pertinent thereto or to this Article 11.
Section 11.11 Rights of Trustee and Paying Agent. Notwithstanding the
----------------------------------
provisions of this Article 11 or any other provision of this Indenture, the
Trustee shall not be charged with knowledge of the existence of any facts that
would prohibit the making of any payment or distribution by the Trustee (other
than pursuant to Section 11.4), and the Trustee may continue to make payments on
the Convertible Subordinated Notes, unless the Trustee shall have received at
least two business days prior to the date of such payment or distribution
written notice of facts that would cause such payment or distribution with
respect to the Convertible Subordinated Notes to violate this Article. Only the
Company or a Representative may give the notice.
Nothing in this Article 11 shall impair the claims of, or payments to,
the Trustee under or pursuant to Section 7.7 hereof.
The Trustee in its individual or any other capacity may hold Senior Debt
with the same rights it would have if it were not Trustee. Any Agent may do the
same with like rights.
Section 11.12 Authorization to Effect Subordination. Each holder of a
-------------------------------------
Convertible Subordinated Note by the holder's acceptance thereof authorizes and
directs the Trustee on the holder's behalf to take such action as may be
necessary or appropriate to effectuate the subordination as provided in this
Article 11, and appoints the Trustee to act as the holder's attorney in fact for
any and all such purposes. If the Trustee does not file a proper proof of claim
or proof of debt in the form required in any proceeding referred to in Section
6.9 hereof at least 30 days before the expiration of the time to file such
claim, the holders of any Senior Debt or their Representatives are hereby
authorized to file an appropriate claim for and on behalf of the holders of the
Convertible Subordinated Notes.
Section 11.13 Article Applicable to Paying Agents. In case at any time
-----------------------------------
any Paying Agent other than the Trustee shall have been appointed by the Company
and be then acting hereunder, the term "Trustee" as used in this Article shall
in such case (unless the context otherwise requires) be construed as extending
to and including such Paying Agent within its meaning as fully for all intents
and purposes as if such Paying Agent were named in this Article in addition to
or in place of the Trustee; provided, however, that the second and third
paragraphs of Section 11.11 shall not apply to the Company or any Affiliate of
the Company if it or such Affiliate acts as Paying Agent.
Section 11.14 Senior Debt Entitled to Rely. The holders of Senior Debt
----------------------------
shall have the right to rely upon this Article 11, and no amendment or
modification of the provisions contained herein shall diminish the rights of
such holders unless such holders shall have agreed in writing thereto.
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ARTICLE XII
CONVERSION OF CONVERTIBLE SUBORDINATED NOTES
Section 12.1 Right to Convert. Subject to and upon compliance with the
----------------
provisions of this Indenture, each holder of Convertible Subordinated Notes
shall have the right, at his or her option, at any time after the date 60 days
following the last Issue Date of the Notes and prior to the close of business on
the last trading day prior to the Maturity Date (except that, with respect to
any Convertible Subordinated Note or portion of a Convertible Subordinated Note
which is called for redemption, such right shall terminate, except as provided
in the fourth paragraph of Section 12.2, at the close of business on the last
trading day prior to the date fixed for redemption of such Convertible
Subordinated Note or portion of a Convertible Subordinated Note unless the
Company defaults in the payment due upon redemption thereof and such right shall
terminate with respect to any Convertible Subordinated Note or portion thereof
subject to a duly completed election for repurchase unless the Company defaults
in the payment due upon repurchase or such holder elects to withdraw the
submission of such election to repurchase on or prior to the close of business
on the Change of Control Purchase Date) to convert the principal amount of any
Convertible Subordinated Note held by such holder, or any portion of such
principal amount which is $1,000 or an integral multiple thereof, into that
number of fully paid and non assessable shares of Common Stock (as such shares
shall then be constituted) obtained by dividing the principal amount of the
Convertible Subordinated Note or portion thereof surrendered for conversion by
the Conversion Price in effect at such time, by surrender of the Convertible
Subordinated Note so to be converted in whole or in part in the manner provided
in Section 12.2. A holder of Convertible Subordinated Notes is not entitled to
any rights of a holder of Common Stock until such holder of Convertible
Subordinated Notes has converted his or her Convertible Subordinated Notes to
Common Stock, and only to the extent such Convertible Subordinated Notes are
deemed to have been converted to Common Stock under this Article 12.
Section 12.2 Exercise of Conversion Privilege; Issuance of Common
----------------------------------------------------
Stock on Conversion; No Adjustment for Interest or Dividends. To exercise, in
- ------------------------------------------------------------
whole or in part, the conversion privilege with respect to any Convertible
Subordinated Note, the holder of such Convertible Subordinated Note shall
surrender such Convertible Subordinated Note, duly endorsed, at an office or
agency maintained by the Company pursuant to Section 4.4, accompanied by the
funds, if any, required by the penultimate paragraph of this Section 12.2, and
shall give written notice of conversion in the form provided on the Convertible
Subordinated Notes (or such other notice which is acceptable to the Company) to
the office or agency that the holder of Convertible Subordinated Notes elects to
convert such Convertible Subordinated Note or such portion thereof specified in
said notice. Such notice shall also state the name or names (with address or
addresses) in which the certificate or certificates for shares of Common Stock
which are issuable on such conversion shall be issued, and shall be accompanied
by transfer taxes, if required pursuant to Section 12.7. Each such Convertible
Subordinated Note surrendered for conversion shall, unless the
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shares issuable on conversion are to be issued in the same name as the
registration of such Convertible Subordinated Note, be duly endorsed by, or be
accompanied by instruments of transfer in form satisfactory to the Company duly
executed by, the holder of Convertible Subordinated Notes or his or her duly
authorized attorney.
As promptly as practicable after satisfaction of the requirements for
conversion set forth above the Company shall issue and shall deliver to such
holder at the office or agency maintained by the Company for such purpose
pursuant to Section 4.4, a certificate or certificates for the number of full
shares of Common Stock issuable upon the conversion of such Convertible
Subordinated Note or portion thereof in accordance with the provisions of this
Article 12 and a check or cash in respect of any fractional interest in respect
of a share of Common Stock arising upon such conversion, as provided in Section
12.3 (which payment, if any, shall be paid no later than five business days
after satisfaction of the requirements for conversion set forth above). In case
any Convertible Subordinated Note of a denomination of an integral multiple
greater than $1,000 is surrendered for partial conversion, and subject to
Section 2.2, the Company shall execute, and the Trustee shall authenticate and
deliver to the holder of the Convertible Subordinated Note so surrendered,
without charge to him or her, a new Convertible Subordinated Note or Convertible
Subordinated Notes in authorized denominations in an aggregate principal amount
equal to the unconverted portion of the surrendered Convertible Subordinated
Note.
Each conversion shall be deemed to have been effected as to any such
Convertible Subordinated Note (or portion thereof) on the date on which the
requirements set forth above in this Section 12.2 have been satisfied as to such
Convertible Subordinated Note (or portion thereof), and the person in whose name
any certificate or certificates for shares of Common Stock are issuable upon
such conversion shall be deemed to have become on said date the holder of record
of the shares represented thereby; provided, however, that any such surrender on
any date when the Company's stock transfer books are closed shall constitute the
person in whose name the certificates are to be issued as the record holder
thereof for all purposes on the next succeeding day on which such stock transfer
books are open, but such conversion shall be at the Conversion Price in effect
on the date upon which such Convertible Subordinated Note is surrendered.
Any Convertible Subordinated Note or portion thereof surrendered for
conversion during the period from the close of business on the record date for
any interest payment through the close of business on the trading day next
preceding such interest payment date shall (unless such Convertible Subordinated
Note or portion thereof being converted has been called for redemption on a date
after such record date and on or before the succeeding interest payment date) be
accompanied by payment, in funds acceptable to the Company, of an amount equal
to the interest otherwise payable on such interest payment date on the principal
amount being converted; provided, however, that no such payment need be made if
there exists at the time of conversion a default in the payment of interest on
the Convertible Subordinated Notes. An amount equal to such payment shall be
paid by the Company on such interest payment date to the holder of such
Convertible
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Subordinated Note at the close of business on such record date; provided,
however, that if the Company defaults in the payment of interest on such
interest payment date, such amount shall be paid to the person who made such
required payment. Except as provided above in this Section 12.2, no adjustment
shall be made for interest accrued on any Convertible Subordinated Note
converted or for dividends on any shares issued upon the conversion of such
Convertible Subordinated Note as provided in this Article 12.
Section 12.3 Cash Payments in Lieu of Fractional Shares. No
------------------------------------------
fractional shares of Common Stock or scrip representing fractional shares shall
be issued upon conversion of Convertible Subordinated Notes. If more than one
Convertible Subordinated Note shall be surrendered for conversion at one time by
the same holder, the number of full shares which shall be issuable upon
conversion shall be computed on the basis of the aggregate principal amount of
the Convertible Subordinated Notes (or specified portions thereof to the extent
permitted hereby) so surrendered for conversion. If any fractional share of
stock otherwise would be issuable upon the conversion of any Convertible
Subordinated Note or Convertible Subordinated Notes, the Company shall make an
adjustment therefor in cash based upon the Current Market Price of the Common
Stock on the last trading day of conversion.
Section 12.4 Conversion Price. The conversion price shall be as
----------------
specified in the form of Convertible Subordinated Note attached as Exhibit A
---------
hereto, subject to adjustment as provided in this Article 12.
Section 12.5 Adjustment of Conversion Price. The Conversion Price
------------------------------
shall be adjusted from time to time by the Company as follows:
(a) If the Company shall hereafter pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of
Common Stock, the Conversion Price in effect at the opening of business
on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution
shall be reduced by multiplying such Conversion Price by a fraction of
which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the Record Date (as defined in
Section 12.5(g)) fixed for such determination and the denominator shall
be the sum of such number of shares and the total number of shares
constituting such dividend or other distribution, such reduction to
become effective immediately after the opening of business on the day
following the Record Date. If any dividend or distribution of the type
described in this Section 12.5(a) is declared but not so paid or made,
the Conversion Price shall again be adjusted to the Conversion Price
which would then be in effect if such dividend or distribution had not
been declared.
(b) If the Company shall issue rights or warrants to all
holders of its outstanding shares of Common Stock entitling them to
subscribe for or purchase shares of Common Stock at a price per share
less than the Current Market Price (as defined in Section 12.5(g)) on
the Record Date fixed for the determination of
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stockholders entitled to receive such rights or warrants, the Conversion
Price shall be adjusted so that the same shall equal the price
determined by multiplying the Conversion Price in effect at the opening
of business on the date after such Record Date plus the number of shares
which the aggregate offering price of the total number of shares so
offered would purchase at such Current Market Price, and of which the
denominator shall be the number of shares of Common Stock outstanding on
the close of business on the Record Date by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding at
the close of business on the Record Date plus the total number of
additional shares of Common Stock so offered for subscription or
purchase. Such adjustment shall become effective immediately after the
opening of business on the day following the Record Date fixed for
determination of stockholders entitled to receive such rights or
warrants. To the extent that shares of Common Stock are not delivered
pursuant to such rights or warrants, upon the expiration or termination
of such rights or warrants the Conversion Price shall be readjusted to
the Conversion Price shall again be adjusted to be the Conversion Price
which would then be in effect had the adjustments made upon the issuance
of such rights or warrants been made on the basis of delivery of only
the number of shares of Common Stock actually delivered. If such rights
or warrants are not so issued, the Conversion Price shall again be
adjusted to be the Conversion Price which would then be in effect if
such date fixed for the determination of stockholders entitled to
receive such rights or warrants had not been fixed. In determining
whether any rights or warrants entitle the holders to subscribe for or
purchase shares of Common Stock at less than such Current Market Price,
and in determining the aggregate offering price of such shares of Common
Stock, there shall be taken into account any consideration received for
such rights or warrants, with the value of such consideration, if other
than cash, to be determined by the Board of Directors.
(c) If the outstanding shares of Common Stock shall be
subdivided into a greater number of shares of Common Stock, the
Conversion Price in effect at the opening of business on the day
following the day upon which such subdivision becomes effective shall be
proportionately reduced, and, conversely, if the outstanding shares of
Common Stock shall be combined into a smaller number of shares of Common
Stock, the Conversion Price in effect at the opening of business on the
day following the day upon which such combination becomes effective
shall be proportionately increased, such reduction or increase, as the
case may be, to become effective immediately after the opening of
business on the day following the day upon which such subdivision or
combination becomes effective.
(d) If the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock shares of any class of
capital stock of the Company (other than any dividends or distributions
to which Section 12.5(a) applies) or evidences of its indebtedness, cash
or other assets (including securities, but excluding any rights or
warrants of a type referred to in Section 12.5(b) and dividends and
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distributions paid exclusively in cash and excluding any capital stock,
evidences of indebtedness, cash or assets distributed upon a merger or
consolidation to which Section 12.6 applies) (the foregoing hereinafter
in this Section 12.5(d) called the "Securities")), then, in each such
case, the Conversion Price shall be reduced so that the same shall be
equal to the price determined by multiplying the Conversion Price in
effect immediately prior to the close of business on the Record Date (as
defined in Section 12.5(g)) with respect to such distribution by a
fraction of which the numerator shall be the Current Market Price
(determined as provided in Section 12.5(g)) on such date less the fair
market value (as determined by the Board of Directors, whose
determination shall be conclusive and described in a resolution of the
Board of Directors) on such date of the portion of the Securities so
distributed applicable to one share of Common Stock and the denominator
shall be such Current Market Price, such reduction to become effective
immediately prior to the opening of business on the day following the
Record Date; provided, however, that in the event the then fair market
value (as so determined) of the portion of the Securities so distributed
applicable to one share of Common Stock is equal to or greater than the
Current Market Price on the Record Date, in lieu of the foregoing
adjustment, adequate provision shall be made so that each holder of
Convertible Subordinated Notes shall have the right to receive upon
conversion of a Convertible Subordinated Note (or any portion thereof)
the amount of Securities such holder would have received had such holder
converted such Convertible Subordinated Note (or portion thereof)
immediately prior to such Record Date. If such dividend or distribution
is not so paid or made, the Conversion Price shall again be adjusted to
be the Conversion Price which would then be in effect if such dividend
or distribution had not been declared. If the Board of Directors
determines the fair market value of any distribution for purposes of
this Section 12.5(d) by reference to the actual or when issued trading
market for any securities comprising all or part of such distribution,
it must in doing so consider the prices in such market over the same
period used in computing the Current Market Price pursuant to Section
12.5(g) to the extent possible.
Rights or warrants distributed by the Company to all holders of
Common Stock entitling the holders thereof to subscribe for or purchase
shares of the Company's capital stock (either initially or under certain
circumstances), which rights or warrants, until the occurrence of a
specified event or events ("Trigger Event"): (i) are deemed to be
transferred with such shares of Common Stock; (ii) are not exercisable;
and (iii) are also issued in respect of future issuances of Common
Stock, shall be deemed not to have been distributed for purposes of this
Section 12.5 (d) (and no adjustment to the Conversion Price under this
Section 12.5(d) shall be required) until the occurrence of the earliest
Trigger Event, whereupon such rights and warrants shall be deemed to
have been distributed and an appropriate adjustment to the Conversion
Price under this Section 12.5(d) shall be made. If any such rights
(including the Rights), or warrants, including any such existing rights
or warrants distributed prior to the date of this Indenture (including
the Rights), are
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subject to subsequent events, upon the occurrence of each of which such
rights or warrants shall become exercisable to purchase different
securities, evidences of indebtedness or other assets, then the
occurrence of each such event shall be deemed to be such date of
issuance and record date with respect to new rights or warrants (and a
termination or expiration of the existing rights or warrants without
exercise by the holder thereof). In addition, in the event of any
distribution (or deemed distribution) of rights or warrants (including
the Rights), or any Trigger Event with respect thereto, that was counted
for purposes of calculating a distribution amount for which an
adjustment to the Conversion Price under this Section 12.5 was made, (1)
in the case of any such rights (including the Rights) or warrants which
shall all have been redeemed or repurchased without exercise by any
holders thereof, the Conversion Price shall be readjusted upon such
final redemption or repurchase to give effect to such distribution or
Trigger Event, as the case may be, as though it were a cash
distribution, equal to the per share redemption or repurchase price
received by a holder or holders of Common Stock with respect to such
rights or warrants (assuming such holder had retained such rights or
warrants), made to all holders of Common Stock as of the date of such
redemption or repurchase, and (2) in the case of such rights or warrants
(including the Rights) which shall have expired or been terminated
without exercise by any holders thereof, the Conversion Price shall be
readjusted as if such rights and warrants had not been issued.
Notwithstanding any other provision of this Section 12.5(d) to
the contrary, rights, warrants, evidences of indebtedness, other
securities, cash or other assets (including, without limitation, any
rights distributed pursuant to any stockholder rights plan) shall be
deemed not to have been distributed for purposes of this Section 12.5(d)
if the Company makes proper provision so that each holder of Convertible
Subordinated Notes who converts a Convertible Subordinated Note or any
portion thereof) after the date fixed for determination of stockholders
entitled to receive such distribution shall be entitled to receive upon
such conversion, in addition to the shares of Common Stock issuable upon
such conversion, the amount and kind of such distributions that such
holder would have been entitled to receive if such holder had,
immediately prior to such determination date, converted such Convertible
Subordinated Note into Common Stock.
For purposes of this Section 12.5(d) and Sections 12.5(a) and
(b), any dividend or distribution to which this Section 12.5(d) is
applicable that also includes shares of Common Stock, or rights or
warrants to subscribe for or purchase shares of Common Stock to which
Section 12.5(b) applies (or both), shall be deemed instead to be (1) a
dividend or distribution of the evidences of indebtedness, assets,
shares of capital stock, rights or warrants other than such shares of
Common Stock or rights or warrants to which Section 12.5(b) applies (and
any Conversion Price
52.
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reduction required by this Section 12.5(d) with respect to such dividend
or distribution shall then be made) immediately followed by (2) a
dividend or distribution of such shares of Common Stock or such rights
or warrants (and any further Conversion Price reduction required by
Sections 12.5(a) and (b) with respect to such dividend or distribution
shall then be made, except that (a) the Record Date of such dividend or
distribution shall be substituted as "the date fixed for the
determination of stockholders entitled to receive such dividend or other
distribution", "Record Date fixed for such determination" and "Record
Date" within the meaning of Section 12.5(a) and as "the date fixed for
the determination of stockholders entitled to receive such rights or
warrants", "the Record Date fixed for the determination of the
stockholders entitled to receive such rights or warrants" and "such
Record Date" within the meaning of Section 12.5(b) and (b) any shares of
Common Stock included in such dividend or distribution shall not be
deemed "outstanding at the close of business on the date fixed for such
determination" within the meaning of Section 12.5(a).
(e) If the Company shall, by dividend or otherwise,
distribute to all holders of its Common Stock cash (excluding any cash
that is distributed upon a merger or consolidation to which Section 12.6
applies or as part of a distribution referred to in Section 12.5(d)) in
an aggregate amount that, combined together with (1) the aggregate
amount of any other such distributions to all holders of its Common
Stock made exclusively in cash within the 12 months preceding the date
of payment of such distribution, and in respect of which no adjustment
pursuant to this Section 12.5(e) has been made, and (2) the aggregate of
any cash plus the fair market value as determined by the Board of
Directors, whose determination shall be conclusive and described in a
resolution of the Board of Directors) of consideration payable in
respect of any tender offer by the Company or any of its subsidiaries
for all or any portion of the Common Stock concluded within the 12
months preceding the date of payment of such distribution, and in
respect of which no adjustment pursuant to Section 12.5(f) has ben made,
exceeds [15%] of the product of the Current Market Price (determined as
provided in Section 12.5(g)) on the Record Date with respect to such
distribution times the number of shares of Common Stock outstanding on
such date, then, and in each such case, immediately after the close of
business on such date, the Conversion Price shall be reduced so that the
same shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to the close of business on such
Record Date by a fraction (i) the numerator of which shall be equal to
the Current Market Price on the Record Date less an amount equal to the
quotient of (x) the excess of such combined amount over such [15%] and
(y) the number of shares of Common Stock outstanding on the Record Date
and (ii) the denominator of which shall be equal to the Current Market
Price on such Record Date; provided, however, that if the portion of the
cash so distributed applicable to one share of Common Stock is equal to
or greater than the Current Market Price of the Common Stock on the
Record Date, in lieu of the foregoing adjustment, adequate provision
shall be made so that each holder of Convertible Subordinated Notes
shall have the right to receive upon conversion of a Convertible
Subordinated Note (or any portion thereof) the amount of cash such
holder would have received had such holder converted such Convertible
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Subordinated Note (or portion thereof) immediately prior to such Record
Date. If such dividend or distribution is not so paid or made, the
Conversion Price shall again be adjusted to be the Conversion Price
which would then be in effect if such dividend or distribution had not
been declared. Any cash distribution to all holders of Common Stock as
to which the Company makes the election permitted by Section 12.5(m) and
as to which the Company has complied with the requirements of such
Section shall be treated as not having been made for all purposes of
this Section 12.5(e).
(f) For purposes of this Section 12.5, the following terms
shall have the meaning indicated :
(1) "closing price" with respect to any securities
on any day means the closing price on such day or, if no such
sale takes place on such day, or, if no such sale takes place on
such day, the average of the reported high and low prices on
such day, in each case on The Nasdaq Stock Market or New York
Stock Exchange, as applicable, or, if such security is not
listed or admitted to trading on such national market or
exchange, on the principal national securities exchange or
quotation system on which such security is quoted or listed or
admitted to trading, or, if not quoted or listed or admitted to
trading on any national securities exchange or quotation system,
the average of the high and low prices of such security on the
over the counter market on the day in question as reported by
the National Quotation Bureau Incorporated, or a similar
generally accepted reporting service, or, if not so available,
in such manner as furnished by any New York Stock Exchange
member firm selected from time to time by the Board of Directors
for that purpose, or a price determined in good faith by the
Board of Directors, whose determination shall be conclusive and
described in a resolution of the Board of Directors.
(2) "Current Market Price" means the average of
the daily closing prices per share of Common Stock for the 10
consecutive trading days immediately prior to the date in
question; provided, however, that (1) if the "ex" date (as
hereinafter defined) for any event (other than the issuance or
distribution requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Sections 12.5(a),
(b), (c), (d) or (e) occurs during such 10 consecutive trading
days, the closing price for each trading day prior to the "ex"
date for such other event shall be adjusted by multiplying such
closing price by the same fraction by which the Conversion Price
is so required to be adjusted as a result of such other event,
(2) if the "ex" date for any event (other than the issuance or
distribution requiring such computation) that requires an
adjustment to the Conversion Price pursuant to Section 12.5(a),
(b), (c), (d) or (e) occurs on or after the "ex" date for the
issuance or distribution requiring such computation and prior to
the day in question, the closing price for each trading day on
and after the "ex" date for such other event shall be adjusted
by multiplying such closing price by the reciprocal of the
fraction by which the Conversion Price is so required to be
adjusted as a result of such other event, and (3) if the "ex"
date for the issuance or distribution requiring such computation
is prior to the day in
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question, after taking into account any adjustment required
pursuant to clause (1) or (2) of this proviso, the closing price
for each trading day on or after such "ex" date shall be
adjusted by adding thereto the amount of any cash and the fair
market value (as determined by the Board of Directors in a
manner consistent with any determination of such value for
purposes of Section 12.5(d), whose determination shall be
conclusive and described in a resolution of the Board of
Directors) of the evidences of indebtedness, shares of capital
stock or assets being distributed applicable to one share of
Common Stock as of the close of business on the day before such
"ex" date. For purposes of this paragraph, the term "ex" date,
(1) when used with respect to any issuance or distribution,
means the first date on which the Common Stock trades regular
way on the relevant exchange or in the relevant market from
which the closing price was obtained without the right to
receive such issuance or distribution, (2) when used with
respect to any subdivision or combination of shares of Common
Stock, means the first date on which the Common Stock trades
regular way on such exchange or in such market after the time at
which such subdivision or combination becomes effective, and (3)
when used with respect to any tender or exchange offer means the
first date on which the Common Stock trades regular way on such
exchange or in such market after the Expiration Time of such
offer. Notwithstanding the foregoing, whenever successive
adjustments to the Conversion Price are called for pursuant to
this Section 12.5, such adjustments shall be made to the Current
Market Price as may be necessary or appropriate to effectuate
the intent of this Section 12.5 and to avoid unjust or
inequitable results as determined in good faith by the Board of
Directors.
(3) "fair market value" shall mean the amount
which a willing buyer would pay a willing seller in an arm's
length transaction.
(4) "Record Date" shall mean, with respect to any
dividend, distribution or other transaction or event in which
the holders of Common Stock have the right to receive any cash,
securities or other property or in which the Common Stock (or
other applicable security) is exchanged for or converted into
any combination of cash, securities or other property, the date
fixed for determination of stockholders entitled to receive such
cash, securities or other property (whether such date is fixed
by the Board of Directors or by statute, contract or otherwise).
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(5) "trading day" shall mean (x) if the applicable
security is listed or admitted for trading on the New York Stock
Exchange or another national securities exchange, a day on which
the New York Stock Exchange or another national securities
exchange is open for business or (y) if the applicable security
is quoted on The Nasdaq Stock Market, a day on which trades may
be made thereon or (z) if the applicable security is not so
listed, admitted for trading or quoted, any day other than a
Saturday or Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or
executive order to close.
(g) The Company may make such reductions in the Conversion
Price, in addition to those required by Sections 12.5(a), (b), (c), (d)
and (e), as the Board of Directors considers to be advisable to avoid or
diminish any income tax to holders of Common Stock or rights to purchase
Common Stock resulting from any dividend or distribution of stock (or
rights to acquire stock) or from any event treated as such for income
tax purposes.
To the extent permitted by applicable law, the Company from time
to time may reduce the Conversion Price by any amount for any period of
time if the period is at least 20 days, the reduction is irrevocable
during the period and the Board of Directors has made a determination
that such reduction would be in the Company's best interests, which
determination shall be conclusive and described in a resolution of the
Board of Directors. whenever the Conversion Price is reduced pursuant to
the preceding sentence, the Company shall mail to the holders of
Convertible Subordinated Note at his or her last address appearing on
the register of holders maintained for that purpose a notice of the
reduction at least 15 days prior to the date the reduced Conversion
Price takes effect, and such notice shall state the reduced Conversion
Price and the period during which it will be in effect.
(h) No adjustment in the Conversion Price shall be required
unless such adjustment would require an increase or decrease of at least
1% in such price; provided, however, that any adjustments which by
reason of this Section 12.5(h) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment. All
calculations under this Article 12 shall be made by the Company and
shall be made to the nearest cent or to the nearest one hundredth of a
share, as the case may be.
No adjustment need be made for a change in the par value or no
par value of the Common Stock.
(i) whenever the Conversion Price is adjusted as herein
provided, the Company shall promptly file with the Trustee and any
Conversion Agent other than the Trustee an Officers' Certificate setting
forth the Conversion Price after such adjustment and setting forth a
brief statement of the facts requiring such adjustment.
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Promptly after delivery of such certificate, the Company shall prepare a
notice of such adjustment of the Conversion Price setting forth the
adjusted Conversion Price and the date on which each adjustment becomes
effective and shall mail such notice of such adjustment of the
Conversion Price to each holder of Convertible Subordinated Notes at his
or her last address appearing on the register of holders maintained for
that purpose within 20 days of the effective date of such adjustment.
Failure to deliver such notice shall not affect the legality or validity
of any such adjustment.
(j) In any case in which this Section 12.5 provides that an
adjustment shall become effective immediately after a Record Date for an
event, the Company may defer until the occurrence of such event issuing
to the holder of any Convertible Subordinated Note converted after such
Record Date and before the occurrence of such event the additional
shares of Common Stock issuable upon such conversion by reason of the
adjustment required by such event over and above the Common Stock
issuable upon such conversion before giving effect to such adjustment.
(k) For purposes of this Section 12.5, the number of shares
of Common Stock at any time outstanding shall not include shares held in
the treasury of the Company but shall include shares issuable in respect
of scrip certificates issued in lieu of fractions of shares of Common
Stock. The Company shall not pay any dividend or make any distribution
on shares of Common Stock held in the treasury of the Company.
(l) In lieu of making any adjustment to the Conversion
Price pursuant to Section 12.5(e), the Company may elect to reserve an
amount of cash for distribution to the holders of Convertible
Subordinated Notes upon the conversion of the Convertible Subordinated
Notes so that any such holder converting Convertible Subordinated Notes
will receive upon such conversion, in addition to the shares of Common
Stock and other items to which such holder is entitled, the full amount
of cash which such holder would have received if such holder had,
immediately prior to the Record Date for such distribution of cash,
converted its Convertible Subordinated Notes into Common Stock, together
with any interest accrued with respect to such amount, in accordance
with this Section 12.5(l). The Company may make such election by
providing an Officers' Certificate to the Trustee to such effect on or
prior to the payment date for any such distribution and depositing with
the Trustee on or prior to such date an amount of cash equal to the
aggregate amount that the holders of Convertible Subordinated Notes
would have received if such holders had, immediately prior to the Record
Date for such distribution, converted all of the Convertible
Subordinated Notes into Common Stock. Any such funds so deposited by the
Company with the Trustee shall be invested by the Trustee in U.S.
Government Obligations with a maturity not more than three (3) months
from the date of issuance. Upon conversion of Convertible Subordinated
Notes by a holder thereof, such holder shall be entitled to receive, in
addition to the Common Stock
57.
<PAGE>
issuable upon conversion, an amount of cash equal to the amount such
holder would have received if such holder had, immediately prior to the
Record Date for such distribution, converted its Convertible
Subordinated Note into Common Stock, along with such holder's pro rata
share of any accrued interest earned as a consequence of the investment
of such funds. Promptly after making an election pursuant to this
Section 12.5(l), the Company shall give or shall cause to be given
notice to all holders of Convertible Subordinated Notes of such
election, which notice shall state the amount of cash per $1,000
principal amount of Convertible Subordinated Notes such holders shall be
entitled to receive (excluding interest) upon conversion of the
Convertible Subordinated Notes as a consequence of the Company having
made such election.
Section 12.6 Effect of Reclassification, Consolidation, Merger or
----------------------------------------------------
Sale. If any of the following events occur: (i) any reclassification or change
- ----
of the outstanding shares of Common Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation, merger or
combination of the Company with another corporation as a result of which holders
of Common Stock shall be entitled to receive stock, securities or other property
or assets (including cash) with respect to or in exchange for such Common Stock,
or (iii) any sale or conveyance of the properties and assets of the Company as,
or substantially as, an entirety to any other corporation as a result of which
holders of Common Stock shall be entitled to receive stock, securities or other
property or assets (including cash) with respect to or in exchange for such
Common Stock, then the Company or the successor or purchasing corporation, as
the case may be, shall execute with the Trustee a supplemental indenture (which
shall comply with the TIA as in force at the date of execution of such
supplemental indenture if such supplemental indenture is then required to so
comply) providing that the Convertible Subordinated Notes shall be convertible
into the kind and amount of shares of stock and other securities or property or
assets (including cash) receivable upon such reclassification, change,
consolidation, merger, combination, sale or conveyance by a holder of a number
of shares of Common Stock issuable upon conversion of the Convertible
Subordinated Notes (assuming, for such purposes, a sufficient number of
authorized shares of Common Stock available to convert all such Convertible
Subordinated Notes) immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance assuming such holder of
Common Stock did not exercise his or her rights of election, if any, as to the
kind or amount of securities, cash or other property receivable upon such
consolidation, merger, Statutory exchange, sale or conveyance (provided that, if
the kind or amount of securities, cash or other property receivable upon such
consolidation, merger, statutory exchange, sale or conveyance is not the same
for each share of Common Stock in respect of which such rights of election have
not been exercised ("non electing share"), then, for the purposes of this
Section 12.6, the kind and amount of securities, cash or other property
receivable upon such consolidation, merger, statutory exchange, sale or
conveyance for each non electing share shall be deemed to be the kind and amount
so receivable per share by a plurality of the non electing shares). Such
supplemental indenture shall provide for adjustments which shall be as nearly
equivalent as
58.
<PAGE>
may be practicable to the adjustments provided for in this Article 12. If, in
the case of any such reclassification, change, consolidation, merger,
combination, sale or conveyance, the stock or other securities and assets
receivable thereupon by a holder of shares of Common Stock includes shares of
stock or other securities and assets of a corporation other than the successor
or purchasing corporation, as the case may be, in such reclassification, change,
consolidation, merger, combination, sale or conveyance, then such supplemental
indenture shall also be executed by such other corporation and shall contain
such additional provisions to protect the interests of the holders of the
Convertible Subordinated Notes as the Board of Directors shall reasonably
consider necessary by reason of the foregoing.
The Company shall cause notice of the execution of such supplemental
indenture to be mailed to each holder of Convertible Subordinated Notes at his
or her address appearing on the register of holders for that purpose within 20
days after execution thereof. Failure to deliver such notice shall not affect
the legality or validity of such supplemental indenture.
The above provisions of this Section 12.6 shall similarly apply to
successive reclassifications, changes, consolidations, mergers, combinations,
sales and conveyances.
If this Section 12.6 applies to any event or occurrence, Section 12.5
shall not apply.
Section 12.7 Taxes on Shares Issued. The issue of stock certificates
----------------------
on conversions of Convertible Subordinated Notes shall be made without charge to
the converting holder for any tax in respect of the issue thereof. The Company
shall not, however, be required to pay any tax which may be payable in respect
of any transfer involved in the issue and delivery of stock in any name other
than that of the holder of any Convertible Subordinated Note converted, and the
Company shall not be required to issue or deliver any such stock certificate
unless and until the person or persons requesting the issue thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
Section 12.8 Reservation of Shares; Shares To Be Fully Paid; Listing
-------------------------------------------------------
of Common Stock. The Company shall provide, free from preemptive rights, out of
- ---------------
its authorized by unissued shares or sharers held in treasury, sufficient shares
to provide for the conversion of the Convertible Subordinated Notes from time to
time as such Convertible Subordinated Notes are presented for conversion.
Before taking any action which would cause an adjustment reducing the
Conversion Price below the then par value, if any, of the shares of Common Stock
issuable upon conversion of the Convertible Subordinated Notes, the Company
shall take all corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue shares of such
Common Stock at such adjusted Conversion Price.
59.
<PAGE>
The Company covenants that all shares of Common Stock issued upon
conversion of Convertible Subordinated Notes will be fully paid and non
assessable by the Company and free from all taxes, liens and charges with
respect to the issue thereof.
The Company further covenants that as long as the Common Stock is quoted
on the Nasdaq National market, or its successor, or all Common Stock issuable
upon conversion of the Convertible Subordinated Notes shall be eligible for such
quotation and if at any time the Common Stock is listed on the New York Stock
Exchange or any other national securities exchange, list and keep listed, all
Common Stock issuable upon conversion of the Convertible Subordinated Notes.
Section 12.9 Responsibility of Trustee. The Trustee shall not at any
-------------------------
time be under any duty of responsibility to any holders of Convertible
Subordinated Notes to determine whether any facts exist which may require any
adjustment of the Conversion Price, or with respect to the nature or extent or
calculation of any such adjustment when made, or with respect to the method
employed, or herein or in any supplemental indenture provided to be employed, in
making the same. The Trustee shall not be accountable with respect to the
validity or value (or the kind or amount) of any shares of Common Stock, or of
any securities or property, which may at any time be issued or delivered upon
the conversion of any Convertible Subordinated Note; and the Trustee makes no
representations with respect thereto. Subject to the provisions of Section 7.1,
the Trustee shall not be responsible for any failure of the Company to issue,
transfer or deliver any shares of Common Stock or stock certificates or other
securities or property or cash upon the surrender of any Convertible
Subordinated Note for the purpose of conversion or to comply with any of the
duties, responsibilities or covenants of the Company contained in this Article
12. Without limiting the generality of the foregoing, the Trustee shall not have
any responsibility to determine the correctness of any provisions contained in
any supplemental indenture entered into pursuant to Section 12.6 relating either
to the kind or amount of shares of stock or securities or property (including
cash) receivable by holders of Convertible Subordinated Notes upon the
conversion of their Convertible Subordinated Notes after any event referred to
in such Section 12.6 or to any adjustment to be made with respect thereto, but,
subject to the provisions of Section 7.1, may accept as conclusive evidence of
the correctness of any such provisions, and shall be protected in relying upon,
the Officers' Certificate (which the Company shall be obligated to file with the
Trustee prior to the execution of any such supplemental indenture) with respect
thereto.
Section 12.10 Notice to Holders Prior to Certain Actions. If (a) the
------------------------------------------
Company declares a dividend (or any other distribution) on its Common Stock
(other than in cash out of retained earnings or other than a dividend that
results in an adjustment in the Conversion Price pursuant to Section 12.5 as to
which the Company has made an election in accordance with Section 12.5(l)); or
60.
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(b) the Company authorizes the granting to the holders of
its Common Stock of rights or warrants to subscribe for or purchase any
share of any class of Common Stock or any other rights or warrants; or
(c) there is any reclassification of the Common Stock
(other than a subdivision or combination of outstanding Common Stock, or
a change in par value, or from par value to no par value, or from no par
value to par value), or of any consolidation or merger to which the
Company is a party and for which approval of any stockholders of the
Company is required, or of the sale or transfer of all or substantially
all of the assets of the Company; or
(d) there is any voluntary or involuntary dissolution,
liquidation or winding up of the Company ;
then the Company shall cause to be filed with the Trustee and to be mailed to
each holder of Convertible Subordinated Notes at his or her address appearing on
the register maintained for that purpose as promptly as possible but in any
event at least 15 days prior to the applicable date hereinafter specified, a
notice stating (x) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights or warrants, or, if a record is not to be
taken, the date as of which the holders of Common Stock of record to be entitled
to such dividend, distribution or rights are to be determined, or (y) the date
on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective or occur,
and the date as of which it is expected that holders of Common Stock of record
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation &r winding up. Failure to give such notice,
or any defect therein, shall not affect the legality or validity of such
dividend, distribution, reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up.
61.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed
and attested, all as of the date first above written, signifying their
agreements contained in this Indenture.
LEASING SOLUTIONS, INC.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
BANKERS TRUST, as Trustee
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
62.
<PAGE>
EXHIBIT A
(Face of Security)
[If Global Security insert - UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE
OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH
AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]
LEASING SOLUTIONS, INC.
% CONVERTIBLE SUBORDINATED NOTE DUE 2003
No. $ CUSIP ________
Leasing Solutions, Inc., a California corporation, promises to pay to
[ ] or registered assigns, the principal sum of [ ] Dollars on [_________,]
2003.
Interest Payment Dates: [ ] 1 and [ ] 1
Regular Record Dates: [ ] 15 and [ ] 15
Date: ___________________ LEASING SOLUTIONS, INC.
By_____________________________________
President and Chief Executive Officer
By_____________________________________
Secretary
(SEAL)
63.
<PAGE>
Certificate of Authentication
This is one of the Convertible Subordinated Notes described in the within
mentioned Indenture.
[ ]
as Trustee
By:
----------------------------
Authorized Signatory
64.
<PAGE>
(Back of Security)
LEASING SOLUTIONS, INC.
[ ]% CONVERTIBLE SUBORDINATED NOTE DUE 2003
1. INTEREST. Leasing Solutions, Inc., a California corporation (the
"Company"), promises to pay interest on the principal amount of this Convertible
Subordinated Note at the rate per annum shown above. The Company will pay
interest semiannually on [ ] 1 and [ ] 1 of each year. Interest on the
Convertible Subordinated Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from [ ], 1996.
Interest will be computed on the basis of a 360 day year composed of twelve 30
day months.
2. METHOD OF PAYMENT. The Company will pay interest on the
Convertible Subordinated Notes (except defaulted interest) to the person in
whose name each Convertible Subordinated Note is registered at the close of
business on the [ ] 15 or [ ] 15 immediately preceding the relevant
interest payment date (each a "Regular Record Date") (other than with respect to
a Convertible Subordinated Note or portion thereof called for redemption on a
redemption date, or repurchased in connection with a Change of Control Purchase
Date, during the period from the close of business on a Regular Record Date to
(but excluding) the next succeeding interest payment date (in which case accrued
interest shall be payable (unless such Convertible Subordinated Note is
converted) to the holder of the Convertible Subordinated Note or portion thereof
redeemed or repurchased in accordance with the applicable redemption or
repurchase provisions of the Indenture). Holder must surrender Convertible
Subordinated Notes to a Paying Agent to collect principal payments. The Company
will pay principal and interest in money of the United States that at the time
of payment is legal tender for payment of public and private debts. However, the
Company may pay principal and interest by check payable in such money, and may
mail such check to the holder's registered address. For interest payments on a
Note of U.S. $5,000,000 dollars or more in principal amount, the holder of such
Note may elect at any time to have payment made by transfer to a United States
Dollar account.
3. PAYING AGENT AND REGISTRAR. Bankers Trust (together with any
successor Trustee under the Indenture referred to below, the "Trustee"), will
act as Paying Agent and Registrar. The Company may change the Paying Agent,
Registrar or coregistrar without prior notice. Subject to certain limitations in
the Indenture, the Company or any of its subsidiaries may act in any such
capacity.
4. INDENTURE. The Company issued the Convertible Subordinated Notes
under an Indenture dated as of [ ], 1996 (the "Indenture") between the
Company and
65.
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the Trustee. The terms of the Convertible Subordinated Notes include those
stated in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939 (15 U.S. Code Sections 77aaa 77bbbb as in effect on
the date of the Indenture (the "TIA"). The Convertible Subordinated Notes are
subject to, and qualified by, all such terms, certain of which are summarized
here on , and holders are referred to the Indenture and the TIA for a statement
of such terms. The Convertible Subordinated Notes are unsecured general
obligations of the Company limited to (except as otherwise provided in the
Indenture) up to $62,500,000 in aggregate principal amount, unless an election
has been made as set forth in Article 2 of the Indenture to increase such
aggregate principal amount by an amount not to exceed $71,875,000. Capitalized
terms not defined below have the same meaning as is given to them in the
Indenture.
5. OPTIONAL REDEMPTION The Company shall not have the option to
redeem the Convertible Subordinated Notes prior to [ ], 1999. Thereafter,
the Company shall have the option to redeem the Convertible Subordinated Notes,
in whole or from time to time in part, at the following redemption prices
(expressed as percentages of principal amount), plus accrued and unpaid interest
to, but excluding, the date fixed for redemption if redeemed during the 12 month
period beginning [ ] of each year indicated:
<TABLE>
<CAPTION>
Redemption Year Price
<S> <C>
1999 %
2000 %
2001 %
2002 %
2003 100%
</TABLE>
6. NOTICE OF REDEMPTION. Notice of redemption will be mailed at
least 20 days but not more than 60 days before the date fixed for redemption to
each holder of Convertible Subordinated Notes to be redeemed at his or her
registered address. Convertible Subordinated Notes in denominations larger than
$1,000 may be redeemed in part but only in integral multiples of $1,000. In the
event of a redemption of less than all of the Convertible Subordinated Notes,
the Convertible Subordinated Notes will be chosen for redemption by the Trustee
by lot or pro rata or, if required, in compliance with the requirements of the
principal national securities exchange, if any, on which the Convertible
Subordinated Notes are listed. On and after the redemption date interest ceases
to accrue on Convertible Subordinated Notes or portions of them called for
redemption (unless the Company defaults in the payment of the redemption price).
If this Convertible
66.
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Subordinated Note is redeemed on a date which is also an Interest Payment Date,
the interest payment due on such date will be paid to the person in whose name
this Convertible Subordinated Note is registered at the close of business on
such record date.
7. CHANGE OF CONTROL. Upon a Change of Control, any holder of Notes
will have the right to cause the Company to repurchase all or any part of the
Notes of such holder at a repurchase price equal to 100% of the principal amount
of the Notes to be repurchased plus accrued interest to the date of repurchase
as provided in, and subject to the terms of, the Indenture.
8. SUBORDINATION. The Company's payment of the principal of,
premium, if any, and interest on the Convertible Subordinated Notes (including,
without limitation, any amounts paid by the Company to purchase or repurchase
any Convertible Subordinated Notes) is subordinated to the prior payment in full
of the Company's Senior Debt as set forth in the Indenture. Each holder of
Convertible Subordinated Notes by his or her acceptance hereof covenants and
agrees that all payments of the principal of, premium, if any, and interest on
the Convertible Subordinated Notes (including, without limitation, any amounts
paid by the Company to purchase or repurchase any Convertible Subordinated
Notes) by the Company shall be subordinated in accordance with the provisions of
Article 11 of the Indenture, and each holder of Convertible Subordinated Notes
accepts and agrees to be bound by such provisions.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Convertible Subordinated
Notes are in registered form without coupons in denominations of $1,000 and
integral multiples of $1,000. The transfer of Convertible Subordinated Notes may
be registered and Convertible Subordinated Notes may be exchanged as provided in
the Indenture. As a condition of transfer, the Registrar may require a holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a holder to pay any taxes and fees required by law
or permitted by the Indenture. The Registrar need not exchange or register the
transfer of any Convertible Subordinated Note or portion of a Convertible
Subordinated Note selected for redemption or submitted for repurchase. Also, it
need not exchange or register the transfer of any Convertible Subordinated Note
for a period of 15 days before a selection of Convertible Subordinated Notes to
be redeemed.
10. PERSONS DEEMED OWNERS. The registered holder of a Convertible
Subordinated Note may be treated as its owner for all purposes.
11. AMENDMENTS AND WAIVERS. Subject to certain exceptions, the
Indenture or the Convertible Subordinated Notes may be amended with the consent
of the holders of at least a majority in principal amount of the then
outstanding Convertible Subordinated Notes and any existing default may be
waived with the consent of the holders of a majority in principal amount of the
then outstanding Convertible Subordinated Notes.
67.
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Without the consent of any holder, the Indenture or the Convertible
Subordinated Notes may be amended to: (a) cure any ambiguity, defect or
inconsistency; (b) provide for uncertificated Convertible Subordinated Notes in
addition to or in place of certificated Convertible Subordinated Notes; (c)
provide for the assumption of the Company's obligations to holders of
Convertible Subordinated Notes in the event of consolidation, merger or sale of
all or substantially all of the assets of the Company; (d) provide for
conversion rights of holders of Notes in certain events such as a consolidation,
merger or sale of all or substantially all of the assets of the Company; (e)
reduce the Conversion Price; (f) make any change or add to the covenants of the
Company for the benefit of the holders of Convertible Subordinated Notes; or (g)
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the TIA.
Without the consent of each holder affected, amendment or waiver may not
(with respect to any Convertible Subordinated Notes held by a non consenting
holder): (a) reduce the principal amount of Convertible Subordinated Notes whose
holders must consent to an amendment, supplement or waiver; (b) reduce the
principal or change the fixed maturity of any Convertible Subordinated Note or
except as permitted pursuant to the immediately preceding paragraph alter the
provisions with respect to the redemption of the Convertible Subordinated Notes;
(c) reduce the rate of or change the time for payment of interest on any
Convertible Subordinated Notes; (d) waive a Default or Event of Default in the
payment of principal or premium, if any, or interest on the Convertible
Subordinated Notes (except a rescission of acceleration of the Convertible
Subordinated Notes by the holders of at least a majority in aggregate principal
amount of the Convertible Subordinated Notes and a waiver of the payment default
that resulted from such acceleration); (e) make any Convertible Subordinated
Note payable in money other than that stated in the Convertible Subordinated
Notes; (f) make any change in the provisions of the Indenture relating to
waivers of past Defaults or the rights of holders of Convertible Subordinated
Notes to receive payments of principal of, premium, if any, or interest on the
Convertible Subordinated Notes; (g) waive a redemption payment with respect to
any Convertible Subordinated Note; (h) make any change in the foregoing
amendment and waiver provisions or; (i) except as permitted by the Indenture,
increase the Conversion Price or except as permitted pursuant to the immediately
preceding paragraph modify the provisions of the Indenture relating to the
conversion of the Convertible Subordinated Notes in a manner adverse to the
holders thereof. In addition, any amendment to the provisions of Article 11 of
the Indenture (which relate to subordination) will require the consent of the
holders of at least 75 in aggregate principal amount of the Convertible
Subordinated Notes then outstanding if such amendment would adversely affect the
rights of holders of Convertible Subordinated Notes.
12. DEFAULTS AND REMEDIES. An Event of Default is: (a) default in
payment of the principal of, or premium, if any, on the Convertible Subordinated
Notes, whether or not such payment is prohibited by the subordination
68.
<PAGE>
provisions of the Indenture; (b) default for 30 days in payment of any
installment of interest on the Convertible Subordinated Notes, whether or not
such payment is prohibited by the subordination provisions of the Indenture; (c)
default by to the Company for 90 days after notice in the observance or
performance of any other covenants in the Indenture; (d) default in the payment
of the Change of Control purchase price in respect of the Convertible
Subordinated Note on the date therefor, whether or not such payment is
prohibited by the subordination provisions of the Indenture; (e) failure to
provide timely notice of a Change of Control; or (f) certain events involving
bankruptcy, insolvency or reorganization of the Company or any Material
Subsidiary. If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the then outstanding Convertible
Subordinated Notes may declare all the Convertible Subordinated Notes to be due
and payable immediately, except that in the case of an Event of Default arising
from certain events of bankruptcy or insolvency, all outstanding Convertible
Subordinated Notes become due and payable without further action or notice.
Holders of Convertible Subordinated Notes may not enforce the Indenture or the
Convertible Subordinated Notes except as provided in the Indenture. The Trustee
may require an indemnity satisfactory to it before it enforces the Indenture or
the Convertible Subordinated Notes. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding Convertible Subordinated
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from holders notice of any continuing default (except a default in
payment of principal or interest) if it determines that withholding notice is in
their interests. The Company must furnish annual compliance certificates to the
Trustee.
13. TRUSTEE DEALINGS WITH THE COMPANY. The Trustee or any of its
Affiliates, in their individual or any other capacities, may make or continue
loans to or guaranteed by, accept deposits from and perform services for the
Company or its Affiliates and may otherwise deal with the Company or its
Affiliates as if it were not Trustee.
14. NO RECOURSE AGAINST OTHERS. No director, officer, employee or
stockholder, as such, of the Company shall have any liability for any
obligations of the Company under the Convertible Subordinated Notes or the
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. Each holder by accepting a Convertible
Subordinated Note waives and releases all such liability. The waiver and release
are part of the consideration for the Convertible Subordinated Notes.
15. AUTHENTICATION. This Convertible Subordinated Note shall not be
valid until authenticated by the manual signature of the Trustee or an
authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the name
of a holder or an assignee, such as: TEN CO = tenants in common, TENANT =
tenants by the entireties, JT TEN = joint tenants with right of survivorship and
not as tenants in common, CUST = Custodian and U/G/M/A = Uniform Gifts to Minors
Act.
17. CONVERSIONS. Subject to and upon compliance with the provisions
of the Indenture, the registered holder of this Convertible Subordinated Note
has the right at any time prior to the close of business on the last trading day
prior to _________, 2003 (or in
69.
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case this Convertible Subordinated Note or any portion hereof shall be called
for redemption prior to such date, then on or prior to the close of business on
the last trading day preceding the date fixed for redemption), to convert the
principal amount hereof, or any portion of such principal amount which is $1,000
or an integral multiple thereof, into that number of fully paid and
nonassessable whole shares of common stock of the Company ("Common Stock")
obtained by dividing the principal amount of the Convertible Subordinated Note
or portion thereof to be converted by the conversion price of $[ ] per share, as
adjusted from time to time as provided in the Indenture (the "Conversion
Price"), upon surrender of this Convertible Subordinated Note to the Company at
the office or agency maintained for such purpose (and at such other offices or
agencies designated for such purpose by the Company), accompanied by written
notice of conversion duly executed (and if the shares of Common Stock to be
issued on conversion are to be issued in any name other than that of the
registered holder of this Convertible Subordinated Note) by instruments of
transfer, in form satisfactory to the Company, duly executed by the registered
holder or its duly authorized attorney) and, in case such surrender shall be
made during the period starting after the close of business on the Regular
Record Date immediately preceding any Interest Payment Date through the close of
business on the last trading day preceding such Interest Payment Date (unless
this Convertible Subordinated Note or the portion thereof being converted is
subject to redemption on a redemption date in that period), also accompanied by
payment in funds acceptable to the Company of an amount equal to the interest
otherwise payable on such Interest Payment Date on the principal amount of this
Convertible Subordinated Note then being converted. Subject to the aforesaid
requirement for a payment in the event of conversion after the close of business
on a Regular Record Date immediately preceding an Interest Payment Date, no
payment or adjustment shall be made on conversion for interest accrued hereon or
for dividends on Common Stock delivered on conversion. The right to convert this
Convertible Subordinated Note is subject to the provisions of the Indenture
relating to conversion rights in the case of certain consolidations, mergers, or
sales or transfers of substantially all the Company's assets.
The Company shall not issue fractional shares or scrip representing
fractions of shares of Common Stock upon any such conversion, but shall make an
adjustment therefor in cash on the basis of the then current market value of
such fractional interest as provided in the Indenture.
The Company will furnish to any holder upon written request and without
charge a copy of the Indenture. Requests may be made to: General Counsel,
Leasing Solutions, Inc., 10 Almaden Boulevard, Suite 1500, San Jose, CA 95113-
2238.
70.
<PAGE>
FORM OF CONVERSION NOTICE
To: LEASING SOLUTIONS, INC.
The undersigned registered owner of the Convertible Subordinated Note hereby
irrevocably exercises the option to convert this Convertible Subordinated Note,
or portion hereof (which is $1,000 or an integral multiple thereof) below
designated, into shares of Common Stock of Leasing Solutions, Inc. in accordance
with the terms of the Indenture referred to in this Convertible Subordinated
Note, and directs that the shares issuable and deliverable upon the conversion,
together with any check in payment for fractional shares and Convertible
Subordinated Notes representing any unconverted principal amount hereof, be
issued and delivered to the registered holder hereof unless a different name has
been indicated below. If shares or any portion of this Convertible subordinated
Note not converted are to be issued in the name of person other than the
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto. Any amount required to be paid by the undersigned on account of
interest and taxes accompanies this Convertible subordinated Note.
Dated:
------------------------- -------------------------------------
Signature (s)
Fill in for registration of shares
if to be delivered, and Convertible
Subordinated Notes if to be issued, Principal amount to be converted
other than to and in the name of the (if less than all): U.S.$_________
registered holder
(Please Print):
- -----------------------------------
(Name)
- -----------------------------------
(Street address)
- -----------------------------------
(City, State and zip code)
Social Security or other Taxpayer Identification Number:
----------------------
Signature Guarantee:
-----------------------
71.
<PAGE>
ASSIGNMENT FORM
If you the holder want to assign this Convertible subordinated Note, fill in the
form below and have your Signature guaranteed:
I or we assign and transfer this Convertible subordinated Note to
- --------------------------------------------------------------------------------
(Insert assignees social security or tax ID number)
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
and irrevocably appoint
--------------------------------------------------------
agent to transfer this Convertible Subordinated Note on the books of the
Company. The agent may substitute another to act for him.
Date: Your Signature:
------------------- ----------------------------------
(Sign exactly as your name appears
on the other side of this
Convertible Subordinated Note)
Signature Guarantee:
--------------------------------------------
72.
<PAGE>
OPTION OF HOLDER TO ELECT REPURCHASE
If you wish to have this Convertible Subordinated Note repurchased by the
Company pursuant to Section 4.6 of the Indenture, check the Box: [_]
If you wish to have a portion of this Convertible Subordinated Note purchased by
the Company pursuant to Section 4.6 of the Indenture, state the amount (in
multiples of $1,000): $ _______________
Date: Your Signature:
------------------ -------------------------
(Sign exactly as your name appears on the
other side of this Convertible Subordinated Note)
Signature Guarantee:
-------------------------
73.
<PAGE>
EXHIBIT 5.1
October 2, 1996
Leasing Solution, Inc.
10 Almaden Boulevard, Suite 1500
San Jose, California 95113
Leasing Solutions, Inc.
-----------------------
Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Leasing Solutions, Inc. (the "Company") in
connection with the registration under the Securities Act of 1933, as amended
(the "Securities Act"), of the proposed public offering by the Company of
$62,500,000 principal amount of Convertible Subordinated Notes Due 2003 (the
"Notes") ($71,875,000 if the over-allotment option granted by the Company to the
Underwriters is exercised in full) and the shares of Common Stock of the Company
(the "Common Stock") into which the Notes are convertible. The Notes and Common
Stock are to be registered pursuant to a registration statement on Form S-3, as
amended by pre-effective Amendment No. 1, (the "Registration Statement") filed
with the Securities and Exchange Commission (the "Commission"). Capitalized
terms used herein without definition shall have the meaning set forth in the
Registration Statement.
In arriving at the opinion expressed below, we have examined the
Registration Statement, the form of Indenture between the Company and Bankers
Trust Company, as trustee (the "Indenture") and such other documents, including
the Articles of Incorporation and Bylaws of the Company, each as amended to
date, as we have deemed necessary to enable us to express the opinion set forth
herein. In addition, we have examined and relied, to the extent we deem proper,
on certificates of officers of the Company as to certain factual matters
relevant to this opinion and other written and oral representations made to us
by the officers of the Company, and on the originals or copies, certified or
otherwise identified to our satisfaction as conforming to the originals
thereof, of such other documents and corporate records of the Company and such
other instruments and certificates of public officials and other persons as we
have deemed appropriate. In our examination, we have assumed the authenticity of
all documents submitted to us as originals, the conformity to the original
<PAGE>
Leasing Solutions, Inc. -2- October 2, 1996
submitted to us as copies, and the genuineness of all signatures (other than
that of the Company) on all documents reviewed by us.
Based on the foregoing and subject to the limitations and qualifications
set forth herein, we are of the opinion that:
(1) Upon the sale and issuance of the Notes pursuant to the terms and
conditions set forth in the Registration Statement and the Indenture and upon
the full payment therefor in accordance with the terms of Underwriting Agreement
and Indenture, the Notes will be legally issued and will constitute valid and
binding obligations of the Company.
(2) The shares of Common Stock into which the Notes are convertible, when
issued upon conversion of the Notes in accordance with the terms of the
Indenture, will be validly issued, fully paid and nonassessable.
This opinion is limited to the present laws of the State of California and
the present federal laws of the United States and to the facts as they presently
exist. We hereby consent to references to our firm under the caption "Legal
Matters" in the Registration Statement and to the use of this opinion as an
exhibit to the Registration Statement. In giving this consent, we do not hereby
admit that we come within the category of persons whose consent is required
under Section 7 of the Securities Act, or the rules and regulations of
the Commission thereunder.
Very truly yours,
/s/ Brown & Bain, P.A.
----------------------
Brown & Bain, P.A.
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-12301 of Leasing Solutions, Inc. on Form S-3 of our reports dated January
26, 1996, included in the Annual Report on Form 10-K of Leasing Solutions,
Inc. for the year ended December 31, 1995, and to the use of our report dated
January 26, 1996, appearing in the Prospectus, which is a part of this
Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
San Jose, California
October 2, 1996
