<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
File No. 333-56339
PROSPECTUS
dated February 4, 1999
4,000,000 SHARES
[MICROFINANCIAL LOGO]
COMMON STOCK
Of the 4,000,000 shares of Common Stock, par value $.01 per share (the "Common
Stock"), of MicroFinancial Incorporated (the "Company") being offered hereby
(the "Offering"), 3,400,000 shares are being sold by the Company and 600,000
shares are being sold by the Selling Stockholders (as defined). See "Selling
Stockholders." Because some of the Selling Stockholders are affiliates of the
Company, a substantial portion of the proceeds of the Offering will benefit such
affiliates. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
Prior to the Offering, there has not been a public market for the Common Stock.
The initial public offering price is $15.00 per share. See "Underwriting" for
information relating to the factors considered in determining the initial public
offering price. The Common Stock will be listed on The New York Stock Exchange
("NYSE"), subject to official notice of issuance, under the symbol "MFI."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS(2)
<S> <C> <C> <C> <C>
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Per Share................. $15.00 $1.05 $13.95 $13.95
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Total (3)................. $60,000,000 $4,200,000 $47,430,000 $8,370,000
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</TABLE>
(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $1,230,000 payable by the Company.
(3) The Selling Stockholders have granted the Underwriters a 30-day option to
purchase up to 600,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discount and Proceeds to
Selling Stockholders will be $69,000,000, $4,830,000 and $16,740,000,
respectively.
The shares of Common Stock are offered by the Underwriters subject to prior sale
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the certificates for such shares of Common Stock will be made at the offices
of Piper Jaffray Inc. in Minneapolis, Minnesota on or about February 10, 1999.
PIPER JAFFRAY INC. CIBC OPPENHEIMER
<PAGE> 2
[GRAPHIC -- PICTURE OF PEOPLE BICYCLING ON
BRIDGE OVER COMPUTER TERMINALS WITH THE
COMPANY'S WEBSITE ADDRESS
(WWW.LEASECOMM.COM)
PRINTED ON THE BRIDGE,
AND THE FOLLOWING TEXT:
TECHNOLOGY
With our new secure web site, LeasecommDirect(TM), dealers have the opportunity
to send in new applications, receive approvals and access a remarkable amount of
in-depth information -- instantly, without human involvement.
LeasecommDirect(TM) -- one more example of our constant commitment to
information technology and management.]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 3
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. In
particular, prospective purchasers of shares of Common Stock offered hereby
should carefully consider the factors set forth under "Risk Factors." Unless
otherwise specified, the information in this Prospectus (i) assumes that the
Underwriters do not exercise the over-allotment option described herein under
"Underwriting" and (ii) gives effect to a 10-for-1 stock split (the "1997 Stock
Split") of the Common Stock effected on June 16, 1997 and a 2-for-1 stock split
(the "1999 Stock Split") of the Common Stock to be effective as of the date on
which this Offering is consummated. Unless otherwise indicated or the context
requires otherwise, references in this Prospectus to the "Company" mean
MicroFinancial Incorporated (formerly known as Boyle Leasing Technologies, Inc.)
and its consolidated subsidiaries.
THE COMPANY
The Company, which operates primarily through its wholly-owned subsidiary,
Leasecomm Corporation, is a specialized commercial finance company that leases
and rents "microticket" equipment and provides other financing services in
amounts generally ranging from $900 to $2,500, with an average amount financed
of approximately $1,400 and an average lease term of 45 months. The Company
pioneered the use of proprietary software in developing a sophisticated,
risk-adjusted pricing model and automating its credit approval and collection
systems, including a fully-automated Internet-based application, credit scoring
and approval process. This has enabled the Company to better service its dealer
network, to develop economies of scale in originating and servicing over 200,000
leases, contracts and loans and to operate on a nationwide basis in a
historically fragmented market. The majority of the Company's leases are
currently for authorization systems for point-of-sale card-based payments, by,
for example, debit, credit and charge cards ("POS authorization systems"). The
Company continues to develop other product lines, including leasing other
commercial products and acquiring payment streams from residential security
monitoring contracts ("service contracts").
The Company targets owner-operated or other small commercial enterprises,
with little business credit history and limited or poor personal credit history
at the owner level. The Company provides a convenient source of financing to
these lessees who may have few other sources of credit. The Company primarily
leases and rents low-priced commercial equipment with limited residual value
which is used by these lessees in their daily operations. The Company does not
market its services directly to lessees, but sources leasing transactions
through a nationwide network of over 1,100 independent sales organizations and
other dealer-based origination networks ("Dealers"). The Company's ability to
approve applications quickly for a wide range of credit profiles facilitates
Dealer sales, thereby enhancing the Company's relationships with its Dealers.
The Company commenced operations in 1986 and has been profitable every year
since 1987. At September 30, 1998, the Company's gross investment in leases and
loans (as defined herein) totaled $273.1 million. The Company generated revenues
and net income of $68.2 million and $7.7 million in 1997, increases of 22.7% and
50.6%, respectively, over those amounts in 1996. Revenues and net income for the
nine months ended September 30, 1998 totaled $55.8 million and $9.5 million,
increases of 11.2% and 52.6%, respectively, over the nine months ended September
30, 1997. The Company has completed six private securitizations since 1992,
pursuant to which $67.4 million of securitized receivables remained on the
Company's balance sheet as of December 31, 1998.
The Company capitalizes on its unique understanding of its lessees,
underwriting higher risk credits with a multi-dimensional credit scoring model
that generates risk-adjusted pricing. Additionally, the Company maintains a
disciplined and persistent approach to collections which enables the Company to
collect delinquent amounts that it believes its competitors often would not
pursue due to the perceived high costs of collecting relatively small monthly
payments against equipment with low resale value. In each of these areas, the
Company has focused on the application of technology to execute its operating
strategy by designing proprietary software and systems to operate its business
and achieve economies of scale.
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STRATEGY
The Company's strategy is to significantly expand its business through
internal growth, diversification of product offerings and selective acquisitions
of lease portfolios and leasing companies, while maintaining or improving
current levels of profitability.
The Company has successfully utilized technology to (i) manage the high
volume of information associated with originating and servicing its leases, (ii)
develop a multi-dimensional credit scoring model for assessing credit risk and
pricing its leases and (iii) implement a systematic and efficient collections
policy which enables the Company to collect delinquent amounts owed on its
leases even several years after the original delinquency. The Company believes
its efficiency in these areas will provide it a competitive advantage by
allowing it to provide better service to Dealers, facilitating product sales by
such Dealers. Furthermore, the Company believes that its system has excess
capacity which it believes will decrease the Company's servicing costs per
lease, contract and loan as volumes increase. An example of the Company's
strategic use of technology is LeasecommDirect(TM), the Company's Internet-based
application processing, credit approval and Dealer information tool, use of
which has increased from approximately 3.5% of total applications processed in
the first quarter of 1998 to approximately 33.7% of total applications processed
in the fourth quarter of 1998.
The Company also intends to expand its business by applying its strategy to
other products and markets by pursuing selective acquisitions. The Company
believes that its operating strategy can facilitate Dealers' sales of most
products in the microticket market which are characterized by limited
distribution channels and high selling costs by making them available to
customers for a small monthly lease payment. Accordingly, the Company believes
that it can leverage the competitive advantage it has in its current markets to
products with similar characteristics.
SELLING STOCKHOLDERS
The stockholders listed in the table set forth under "Selling Stockholders"
(the "Selling Stockholders") currently own in the aggregate 7,265,016 shares of
Common Stock of the Company. The Selling Stockholders intend to sell 600,000
shares of Common Stock in the aggregate (1,200,000 shares of Common Stock if the
Underwriters' over-allotment option is exercised in full). See "Selling
Stockholders."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 3,400,000 shares
Common Stock offered by the Selling Stockholders... 600,000 shares(1)
Total Offering..................................... 4,000,000 shares
Common Stock to be outstanding after the
Offering......................................... 13,332,766 shares(1)(2)
Use of Proceeds.................................... The net proceeds of the Offering will be used to
repay portions of the Company's outstanding
subordinated debt ("Subordinated Debt") and
revolving credit and term loan facilities
("Credit Facilities"). See "Use of Proceeds."
Common Stock NYSE symbol........................... "MFI"
</TABLE>
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(1) Does not include up to 600,000 shares of Common Stock which may be sold by
the Selling Stockholders pursuant to the Underwriters' over-allotment
option. See "Underwriting."
(2) Includes 19,600 shares of Common Stock to be issued upon conversion of the
Company's outstanding redeemable convertible preferred stock upon
consummation of the Offering. Excludes an aggregate of 120,380 shares of
Common Stock reserved for issuance upon exercise of stock options at
exercise prices of $0.6375 and $1.95, outstanding as of December 31, 1998,
6,682 shares of which are subject to options which are exercisable within 60
days of the date of this Prospectus. See "Management -- Stock Option Plans"
and "Description of Capital Stock." Also excludes 142,590 shares of Common
Stock held in the Company's treasury as of December 31, 1998.
RISK FACTORS
See "Risk Factors" beginning on page 8 for a discussion of certain factors
that should be considered by prospective purchasers of the Common Stock offered
hereby.
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4
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents summary consolidated financial and operating
data of the Company and its subsidiaries as of and for each of the years in the
five-year period ended December 31, 1997 and as of September 30, 1998 and for
the nine months ended September 30, 1997 and 1998. The summary consolidated
financial and certain other data as of December 31, 1993, 1994, 1995, 1996 and
1997, and for each of the years in the five-year period ended December 31, 1997,
have been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants. The Company's summary
consolidated financial and operating data as of September 30, 1998 and for the
nine months ended September 30, 1997 and 1998, are based on the Company's
unaudited consolidated financial statements which include all adjustments that,
in the opinion of the Company's management, are necessary for a fair
presentation of the results at such dates and for such respective interim
periods. The results of operations for the nine months ended September 30, 1998
are not necessarily indicative of the results expected for fiscal year 1998 or
any interim period. The as adjusted balance sheet data assume that the issuance
and sale of shares of Common Stock offered hereby by the Company at $15.00 per
share and the application of the net proceeds therefrom as described in "Use of
Proceeds" occurred on September 30, 1998. The summary consolidated financial and
operating data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of the Company and related notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
INCOME STATEMENT DATA: ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Income on financing leases and loans............... $10,840 $15,949 $27,011 $38,654 $45,634 $33,900 $35,285
Income on service contracts(1)..................... -- -- -- 6 501 87 1,557
Rental income...................................... 1,329 2,058 3,688 8,250 10,809 8,104 11,153
Fee income(2)...................................... 2,576 3,840 5,446 8,675 11,236 8,104 7,837
------- ------- ------- ------- ------- ------- -------
Total revenues................................... 14,745 21,847 36,145 55,585 68,180 50,195 55,832
------- ------- ------- ------- ------- ------- -------
EXPENSES
Selling, general and administrative................ 2,689 4,975 8,485 14,073 17,252 12,558 14,284
Provision for credit losses........................ 5,753 8,179 13,388 19,822(3) 21,713(3) 15,601 12,568
Depreciation and amortization...................... 602 827 1,503 2,981 3,787 2,701 3,867
Interest........................................... 3,598 5,009 8,560 10,163 11,890 8,891 9,198
------- ------- ------- ------- ------- ------- -------
Total expenses................................... 12,642 18,990 31,936 47,039 54,642 39,751 39,917
------- ------- ------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES............. 2,103 2,857 4,209 8,546 13,538 10,444 15,915
NET INCOME........................................... 1,325(4) 1,643 2,524 5,080 7,652 6,199 9,460
======= ======= ======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic(5)........................................... $ 0.27 $ 0.33 $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96
Diluted(6)......................................... 0.15 0.19 0.27 0.52 0.76 0.62 0.94
DIVIDENDS PER COMMON SHARE........................... -- -- 0.06 0.10 0.12 0.09 0.10
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1998 AS
1993 1994 1995 1996 1997 1998 ADJUSTED
BALANCE SHEET DATA: ---- ---- ---- ---- ---- ---- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Gross investment in leases and loans(7)....... $ 69,561 $115,286 $189,698 $247,633 $258,230 $273,148 $273,148
Unearned income............................... (19,952) (33,807) (60,265) (76,951) (73,060) (73,742) (73,742)
Allowance for credit losses................... (4,778) (7,992) (15,952) (23,826) (26,319) (24,423) (24,423)
Investment in service contracts(1)............ -- -- -- -- 2,145 7,412 7,412
Total assets.............................. 50,810 83,484 126,479 170,192 179,701 208,767 208,767
Notes payable................................. 37,747 57,594 94,900 116,202 116,830 132,104 105,704(8)
Subordinated notes payable.................... 5,394 13,436 13,170 27,006 26,382 25,288 5,488(8)
Total liabilities......................... 45,041 77,652 118,568 158,013 160,935 181,472 135,272
Total stockholders' equity................ 5,687 5,750 7,911 12,179 18,766 27,295 73,495
</TABLE>
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<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
OTHER DATA: ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT STATISTICAL DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Total leases and loans
originated(9).................. $ 43,209 $ 85,627 $134,546 $143,200 $129,064 $ 95,597 $112,158
Total service contracts
acquired(10)................... -- -- 3,635 2,431 2,972 1,660 6,298
Dealer fundings(11).............. $ 26,213 $ 52,745 $ 76,502 $ 73,659 $ 77,590 $ 56,767 $ 76,710
Average yield on leases and
loans(12)...................... 30.0% 29.9% 30.7% 32.4% 33.9% 33.3% 35.4%
Cash flows from (used in):
Operating activities............. $ 17,660 $ 26,288 $ 41,959 $ 60,104 $ 77,393 $ 53,054 $ 69,641
Investing activities............. (26,182) (51,528) (76,353) (86,682) (80,127) (58,533) (78,222)
Financing activities............. 9,502 27,803 36,155 33,711 (1,789) 1,498 12,786
-------- -------- -------- -------- -------- -------- --------
Total.......................... 980 2,563 1,761 7,133 (4,523) (3,981) 4,205
Selected Ratios:
Return on average assets(13)..... 2.96% 2.45% 2.40% 3.42% 4.37% 4.74% 6.49%
Return on average stockholders'
equity(13)..................... 29.82 28.73 36.95 50.57 49.46 55.46 54.77
Operating margin(14)............. 53.28 50.51 48.68 51.04 51.70 51.89 51.02
Credit Quality Statistics:
Net charge-offs.................. $ 4,033 $ 4,961 $ 5,428 $ 11,948(15) $ 19,220(15) $ 17,082 $ 14,464
Net charge-offs as a
percentage of average
gross investment(13)(16)....... 6.46% 5.37% 3.56% 5.46%(15) 7.57%(15) 8.58% 7.13%
Provision for credit losses as
a percentage of average
gross investment(13)(17)....... 9.21 8.85 8.78 9.07 8.55 7.83 6.20
Allowance for credit losses as a
percentage of gross
investment(18)................. 6.87 6.93 8.41 9.62 10.14 8.78 8.94
</TABLE>
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(1) The Company began acquiring fixed-term service contracts in 1995. Until
December 1996, the Company treated these fixed-term contracts as leases for
accounting purposes. Accordingly, income from these service contracts is
included in income on financing leases and loans for all periods prior to
December 1996 and investments in service contracts were recorded as
receivables due in installments on the balance sheet at December 31, 1995
and 1996. Beginning in December 1996, the Company began acquiring
month-to-month service contracts, the income from which is included as a
separate category in the Consolidated Statements of Operations and the
investment in which are recorded separately on the balance sheet.
(2) Includes loss and damage waiver fees and service fees.
(3) The provision for 1996 includes $5.0 million resulting from a reduction in
the time period for charging off the Company's receivables from 360 to 240
days. The provision for 1997 includes a one-time write-off of securitized
receivables of $9.5 million and $5.1 million in write-offs of satellite
television equipment receivables.
(4) 1993 excludes a $1.3 million cumulative increase in net income as a result
of the Company's adoption of Statement of Financial Accounting Standards
No. 109 (Accounting for Income Taxes). Prior to 1993, the Company accounted
for income taxes under the deferred method.
(5) Net income per common share (basic) is calculated based on weighted average
common shares outstanding of 4,994,296, 5,003,880, 7,352,189, 9,682,851,
9,793,140, 9,791,212 and 9,849,602 for the years ended December 31, 1993,
1994, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and
1998, respectively.
(6) Net income per common share (diluted) is calculated based on weighted
average common shares outstanding on a diluted basis of 9,120,355,
8,713,065, 9,448,206, 9,770,613, 9,925,329, 10,005,028 and 10,031,974 for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998, respectively.
(7) Consists of receivables due in installments, estimated residual value, and
loans receivable.
(8) As adjusted reflects (i) the use of approximately $19.8 million of the net
proceeds of the Offering to repay amounts outstanding under the Company's
Subordinated Debt and (ii) the use of $26.4 million of the net proceeds of
the Offering to repay amounts outstanding under the Company's Credit
Facilities.
(9) Represents the amount paid to Dealers upon funding of leases and loans plus
the associated unearned income.
(10) Represents the amount paid to Dealers upon the acquisition of service
contracts, including both non-cancelable service contracts and
month-to-month service contracts.
(11) Represents the amount paid to Dealers upon funding of leases, contracts and
loans.
(12) Represents the aggregate of the implied interest rate on each lease and
loan originated during the period weighted by the amount funded at
origination for each such lease and loan.
(13) Quarterly amounts are annualized.
(14) Represents income before provision for income taxes and provision for
credit losses as a percentage of total revenues.
(15) Charge-offs in 1996 and 1997 were higher due to write-offs related to
satellite television equipment lease receivables and due to a change in the
write-off period from 360 days to 240 days in the third quarter of 1996.
See "Business -- Exposure to Credit Losses."
(16) Represents net charge-offs as a percentage of average gross investment in
leases and loans and investment in service contracts.
(17) Represents provision for credit losses as a percentage of average gross
investment in leases and loans and investment in service contracts.
(18) Represents allowance for credit losses as a percentage of gross investment
in leases and loans and investment in service contracts.
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RECENT RESULTS
The Company recently announced its financial and operating results for the
three months ended December 31, 1998 and fiscal year 1998. The Company generated
$20.7 million in total revenues for the fourth quarter of 1998, compared to
$18.0 million in the fourth quarter of 1997. For the year ended December 31,
1998, the Company generated $76.5 million in total revenues, compared to $68.2
million for the year ended December 31, 1997. The Company earned net income of
$2.5 million, or $0.25 per diluted share, for the fourth quarter of 1998,
compared to $1.5 million, or $0.15 per diluted share, for the fourth quarter of
1997 and net income of $11.9 million, or $1.19 per diluted share for the year
ended December 31, 1998 compared to $7.7 million, or $0.76 per diluted share for
the year ended December 31, 1997.
The Company's provision for credit losses for the fourth quarter of 1998
and the year ended December 31, 1998 were $6.5 million and $19.1 million,
respectively, compared to $6.1 million and $21.7 million for the fourth quarter
of 1997 and the year ended December 31, 1997, respectively. Net charge-offs for
the fourth quarter of 1998 and the year ended December 31, 1998 were $6.1
million and $20.5 million, respectively, compared to $2.1 million and $19.2
million for the fourth quarter of 1997 and the year ended December 31, 1998,
respectively.
Dealer fundings were $28.5 million and $105.2 million for the fourth
quarter of 1998 and the year ended December 31, 1998, respectively, compared to
$20.8 million and $77.6 million for the fourth quarter of 1997 and the year
ended December 31, 1997, respectively. The Company's total leases and loans
originated were $41.7 million and $153.8 million for the fourth quarter of 1998
and the year ended December 31, 1998, respectively, compared to $33.5 million
and $129.1 million for the fourth quarter of 1997 and the year ended December
31, 1997, respectively. The Company acquired service contracts totaling $2.0
million and $8.3 million for the fourth quarter of 1998 and the year ended
December 31, 1998, respectively, compared to $1.3 million and $3.0 million for
the fourth quarter of 1997 and the year ended December 31, 1997.
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7
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RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating
the Company and its business before purchasing shares of the Common Stock
offered hereby. Except for historical information contained herein, this
Prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all related forward-looking statements
wherever they appear in this Prospectus. The Company's actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere herein.
DEPENDENCE ON POS AUTHORIZATION SYSTEMS
Reduced demand for financing of POS authorization systems could adversely
affect the Company's lease volume, which in turn could have a material adverse
effect on the Company's business, financial condition and results of operations.
The leasing of POS authorization systems currently represents the Company's
largest product, at over 65% of its outstanding portfolio and approximately 58%
of new lease originations during the first nine months of 1998. Technological
advances may lead to a decrease in the price of POS authorization systems and a
consequent decline in the need for financing of such equipment. A price decrease
may result in such equipment being sold through conventional retail outlets. In
addition, business and technological changes could change the manner in which
POS authorization is obtained. These changes could reduce the need for outside
financing sources which would reduce the Company's lease financing opportunities
and origination volume in such products. Technological changes and price
decreases have in the past required the Company to exit its principal source of
lease volume. During the late 1980s, the Company provided financing primarily to
lessees of cellular phones, which at the time retailed in excess of $1,000 per
unit. Consumers leased cellular phones through dealers due to the product's
limited availability and high price. As the price of cellular phones decreased,
the demand for financing of cellular phones diminished, and by mid-1991, the
Company originated no new leases for cellular phones.
In the event that demand for financing POS authorization systems declines,
the Company will expand its efforts to provide lease financing for other
products. There can be no assurance, however, that the Company will be able to
do so successfully. The Company currently originates its leases for POS
authorization systems through a network of Dealers who predominantly deal
exclusively in that product. It is unlikely that the Company would be able to
capitalize on these relationships in the event it shifts its business focus to
originating leases of other products. Any failure by the Company to successfully
enter into new relationships with dealers of other products or to extend
existing relationships with such dealers in the event of reduced demand for
financing of POS authorization systems would have a material adverse effect on
the Company.
RISKS OF EXPANSION STRATEGY
The Company's principal growth strategy of expansion into new products and
markets may be adversely affected by (i) its inability to cultivate new sources
of originations and (ii) its inexperience with products with different
characteristics from those currently offered by the Company, including the type
of obligor and the amount financed.
New Sources. The Company currently originates a significant majority of
its leases and contracts through a network of Dealers which deal exclusively in
POS authorization systems. The Company is currently unable to capitalize on
these relationships in originating leases for products other than POS
authorization systems. Any failure by the Company to develop additional
relationships with Dealers of other products which it leases or may seek to
lease would hinder the Company's growth strategy.
New Products. The Company's existing portfolio primarily consists of
leases to owner-operated or other small commercial enterprises with little
business history and limited or poor personal credit history at the owner level.
These leases are characterized by small average monthly payments for equipment
with limited residual value at the end of the lease term. The Company's ability
to successfully underwrite new products with different characteristics is highly
dependent on the Company's ability to (i) successfully analyze the
8
<PAGE> 9
credit risk associated with the user of such new products so as to appropriately
apply its risk-adjusted pricing to such products and (ii) utilize its
proprietary software to efficiently service and collect on its portfolio. The
Company has recently entered into markets in which the ultimate obligor on a
lease or contract is an individual rather than a commercial enterprise. The
results of the Company's most significant venture into financing products for
individuals, the leasing of consumer satellite television equipment, failed to
meet the Company's expectations principally due to difficulty in assessing the
credit risk of lessees and in effectively pricing leases. As a result, the
Company significantly scaled back its origination of new leases in this area
after July 1996 and no longer originates a significant number of leases for
satellite television equipment. There can be no assurance that the Company will
be able to successfully apply its operating strategy to provide financing
services to non-commercial lessees, which could have a material adverse effect
on the Company. The Company also has recently commenced underwriting leases for
small-ticket items or services (having a value between $5,000 and $25,000). The
Company has no significant experience with providing small-ticket leasing or
financing services. Additionally, the larger monthly payments associated with
leases for small-ticket items may result in different repayment patterns for
lessees of small-ticket items. Accordingly, there can be no assurance that the
Company's expertise in analyzing credit risk and applying its collection
strategy in the microticket market will be applicable to the small-ticket
market. Any failure by the Company to successfully enter this market could
materially adversely affect its growth prospects.
Because the successful implementation of the Company's expansion strategy
will require significant time and resources to cultivate new sources and develop
any specialized expertise necessary to enter into new markets, the Company
intends to implement its growth strategy gradually. Rapidly diminishing demand
for financing of POS authorization systems could force the Company to accelerate
its expansion strategy in a less than optimal manner and have a material adverse
effect on the Company's business, financial condition and results of operations.
DEPENDENCE ON EXTERNAL FINANCING
The Company's ability to successfully execute its business strategy and to
sustain its operations is dependent on its ability to raise debt and equity
capital. The Company funds the majority of its leases, contracts and loans
through its Credit Facilities with banks and other institutional lenders,
on-balance sheet securitizations ("Securitizations") and issuances of
Subordinated Debt. The Company's failure to obtain required financing on
favorable terms and on a timely basis would limit its ability to add new
originations, which would have a material adverse effect on the Company's
business, financial condition and results of operations. Any future debt
financings or issuances of preferred stock by the Company will be senior to the
rights of the holders of Common Stock. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
The terms of the Company's Credit Facilities, Securitizations and
Subordinated Debt programs impose operating and financial restrictions on the
Company. In addition, the Credit Facilities contain, and any future
Securitizations may contain, restrictions on the type of product which may be
funded with the proceeds of such financings. The Credit Facilities also contain
a covenant pursuant to which the Company has agreed not to make any material
change in its business. As a result, the ability of the Company to respond to
changing business and economic conditions, to implement its expansion strategy
and to secure additional financing, if needed, may be significantly restricted,
and the Company may be prevented from engaging in transactions that might
further its growth strategy or otherwise be considered beneficial to the
Company. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Description of
Certain Indebtedness."
RISK OF DEFAULTS ON LEASES
The credit characteristics of the Company's lessee base correspond to a
high incidence of delinquencies which in turn may lead to significant levels of
defaults. The Company's receivables (including the entire lease receivable with
the exception of service contracts, as to which only the amount of the invoices
billed but not collected is included) which were contractually past due by 31
days or more at October 2, 1998 represented 25.1% of the sum of the Company's
receivables due in installments plus investment in service contracts plus
9
<PAGE> 10
loans receivable at September 30, 1998. See "Business -- Exposure to Credit
Losses." Under the Company's charge-off policy, cumulative net charge-offs from
the Company's inception to September 30, 1998 have totaled 7.45% of total
cumulative receivables plus total billed fees. The credit profile of the
Company's lessees heightens the importance to the Company of both pricing its
leases, loans and contracts for risk assumed, as well as maintaining adequate
reserves for losses. Significant defaults by lessees in excess of those
anticipated by the Company in setting its prices and reserve levels may
adversely affect the Company's cash flow and earnings. Reduced cash flow and
earnings could limit the Company's ability to repay debt, obtain financing and
effect Securitizations which would have a material adverse effect on the
Company's business, financial condition and results of operations.
Additionally, the Company utilizes its leases, contracts and loans as
collateral under its Credit Facilities and Securitizations. The Company's Credit
Facilities and Securitizations provide for events of default in the event of
delinquencies beyond certain levels. Actual defaults, as well as delinquencies
under leases, contracts and loans above pre-determined thresholds, would reduce
the amount of collateral available for financing under its Credit Facilities and
future Securitizations and would have a material adverse effect on the Company's
business as previously discussed. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Certain Indebtedness."
ADVERSE CONSEQUENCES OF COLLECTION POLICY
The Company's use of litigation as a means of collection of unpaid
receivables exposes it to counterclaims on its suits for collection, to class
action lawsuits and to negative publicity surrounding its leasing and collection
policies. The Company has been a defendant in attempted class action suits as
well as counterclaims filed by individual obligors in attempts to dispute the
enforceability of the lease, contract or loan. The Company believes its
collection policies and use of litigation comply fully with all applicable laws.
Because of the Company's persistent enforcement of its leases, contracts and
loans through the use of litigation, the Company may have created ill will
toward it on the part of certain lessees and other obligors who were defendants
in such lawsuits. The Company's litigation strategy has generated adverse local
publicity in certain circumstances. Adverse publicity at a national level could
negatively impact public perception of the Company and may materially impact the
price of the Common Stock. Any such class action suit, if successful, or any
such adverse publicity, if widespread, could have a material adverse effect on
the Company's business, financial condition or results of operations.
RISK OF INCREASED INTEREST RATES
Since the Company generally funds its leases, contracts and loans through
its Credit Facilities or from working capital, the Company's operating margins
could be adversely affected by an increase in interest rates. The implicit yield
to the Company on all of its leases, contracts and loans is fixed due to the
leases, contracts and loans having scheduled payments that are fixed at the time
of origination. When the Company originates or acquires leases, contracts and
loans, it bases its pricing in part on the "spread" it expects to achieve
between the implicit yield rate to the Company on each lease, contract and loan
and the effective interest cost it will pay when it finances such leases,
contracts and loans. Increases in interest rates during the term of each lease,
contract and loan could narrow or eliminate the spread, or result in a negative
spread, to the extent such lease, contract or loan was financed with
floating-rate funding. The Company may undertake to hedge against the risk of
interest rate increases, based on the size and interest rate profile of its
portfolio. Such hedging activities, however, would limit the Company's ability
to participate in the benefits of lower interest rates with respect to the
hedged portfolio. In addition, the Company's hedging activities may not protect
it from interest rate-related risks in all interest rate environments. Adverse
developments resulting from changes in interest rates or hedging transactions
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
10
<PAGE> 11
RISK OF ECONOMIC DOWNTURN
An economic downturn could result in a decline in the demand for some of
the types of equipment or services which the Company finances, which could lead
to a decline in originations. An economic downturn may slow the development and
continued operation of small commercial businesses, which are the primary market
for POS authorization systems and the other commercial equipment leased by the
Company. Such a downturn could also adversely affect the Company's ability to
obtain capital to fund lease, contract and loan originations or acquisitions or
to complete Securitizations. In addition, such a downturn could result in an
increase in delinquencies and defaults by the Company's lessees and other
obligors beyond the levels forecasted by the Company, which could have an
adverse effect on the Company's cash flow and earnings, as well as on its
ability to securitize leases. These results could have a material adverse effect
on the Company's business, financial condition and results of operations.
Additionally, as of September 30, 1998, approximately 41% of the Company's
portfolio was represented by leases, contracts and loans with lessees and other
obligors operating in California, Florida, Texas and New York. Economic
conditions in these states may affect the level of collections from, as well as
delinquencies and defaults by, these obligors.
INTENSE COMPETITION
The microticket leasing and financing industry is highly competitive. The
Company competes for customers with a number of national, regional and local
banks and finance companies. The Company's competitors also include equipment
manufacturers that lease or finance the sale of their own products. While the
market for microticket financing has traditionally been fragmented, the Company
could also be faced with competition from small- or large-ticket leasing
companies that could use their expertise in those markets to enter and compete
in the microticket financing market. The Company's competitors include larger,
more established companies, some of which may possess substantially greater
financial, marketing and operational resources than the Company, including lower
cost of funds and access to capital markets and to other funding sources which
may be unavailable to the Company. If a competitor were to lower lease rates,
the Company could be forced to follow suit or lose origination volume, either of
which would have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, competitors may seek to
replicate the automated processes used by the Company to monitor dealer
performance, evaluate lessee credit information, appropriately apply
risk-adjusted pricing, and efficiently service a nationwide portfolio. The
development of computer software similar to that developed by the Company by or
for the Company's competitors may jeopardize the Company's strategic position
and allow such companies to operate more efficiently than the Company.
RISK OF YEAR 2000 NON-COMPLIANCE
Failure by third parties with which the Company interacts to remediate any
Year 2000 issues in a timely or successful manner could have a material adverse
effect on the Company's business. A failure by companies which process POS
transactions to remediate any Year 2000 issues in their software could result in
the Company's lessees' inability to consummate POS transactions. In that event,
lessees of POS authorization systems may become unwilling or unable to comply
with their lease obligations. In addition, the Company does and will continue to
interconnect certain portions of its network and systems with other companies'
networks and systems, certain of which may not be as Year 2000 compliant as
those installed by the Company. While the Company has discussed these matters
with, and/or obtained written certifications from, such other companies as to
their Year 2000 compliance, there can be no assurance that any potential impact
associated with incompatible systems after December 31, 1999 would not have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company believes that any modifications necessary to make its own
computer systems and proprietary software Year 2000 compliant will not result in
material costs to the Company. There can be no assurance, however, that these
cost estimates are accurate, nor can there be any assurance that the Company
will be able to successfully identify all relevant Year 2000 issues in its
systems in a timely manner.
11
<PAGE> 12
GOVERNMENT REGULATION
The Company's leasing business is not currently subject to extensive
federal or state regulation. While the Company is not aware of any proposed
legislation, the enactment of, or a change in the interpretation of, certain
federal or state laws affecting the Company's ability to price, originate or
collect on receivables (such as the application of usury laws to the Company's
leases and contracts) could negatively affect the collection of income on its
leases, contracts and loans, as well as the collection of fee income. Any such
legislation or change in interpretation, particularly in Massachusetts, whose
law governs the majority of the Company's leases, contracts and loans, could
have a material adverse effect on the Company's ability to originate leases,
contracts and loans at current levels of profitability, which in turn could have
a material adverse effect on the Company's business, financial condition or
results of operations.
RISKS OF ACQUIRING OTHER PORTFOLIOS AND COMPANIES
A portion of the Company's growth strategy depends on the consummation of
acquisitions of leasing companies or portfolios. An inability by the Company to
identify suitable acquisition candidates or portfolios, or to complete
acquisitions on favorable terms, could limit the Company's ability to grow its
business. Any major acquisition would require a significant portion of the
Company's resources. The timing, size and success, if at all, of the Company's
acquisition efforts and any associated capital commitments cannot be readily
predicted. The Company may finance future acquisitions by using shares of its
Common Stock, cash or a combination of the two. Any acquisition made by the
Company using Common Stock would result in dilution to existing stockholders of
the Company. If the Common Stock does not maintain a sufficient market value, or
if potential acquisition candidates are otherwise unwilling to accept Common
Stock as part or all of the consideration for the sale of their businesses, the
Company may be required to utilize more of its cash resources, if available, or
to incur additional indebtedness in order to initiate and complete acquisitions.
Additional debt, as well as the potential amortization expense related to
goodwill and other intangible assets incurred as a result of any such
acquisition, could have a material adverse effect on the Company's business,
financial condition or results of operations. In addition, certain of the
Company's Credit Facilities and Subordinated Debt agreements contain financial
covenants that do not permit the issuance of any shares of its capital stock if,
after giving effect to such issuance, certain shareholders of the Company cease
to own or control specified percentages of voting capital stock of the Company.
These provisions could prevent the Company from making an acquisition using
shares of its Common Stock as consideration. See "Use of Proceeds,"
"Management's Discussion and Analysis of Results of Operations -- Liquidity and
Capital Resources" and "Description of Certain Indebtedness."
The Company also may experience difficulties in the assimilation of the
operations, services, products and personnel of acquired companies, an inability
to sustain or improve the historical revenue levels of acquired companies, the
diversion of management's attention from ongoing business operations, and the
potential loss of key employees of such acquired companies. Any of the foregoing
could have a material adverse effect on the Company's business, financial
condition or results of operations.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends to a large extent upon the abilities and
continued efforts of Peter R. Bleyleben, President and Chief Executive Officer
and Richard Latour, Executive Vice President, Chief Operating Officer and Chief
Financial Officer, and its other senior management. The Company has entered into
employment agreements with its two principal executive officers. As required by
the Company's Subordinated Note Agreements (as hereinafter defined), the Company
maintains a key man life insurance policy of $1.5 million on Dr. Bleyleben. The
Company currently intends to continue such policy even if no longer required to
do so under the terms of such agreements. The Company also maintains a $500,000
key man life insurance policy on Mr. Latour. The loss of the services of one or
more of the key members of the Company's senior management before the Company is
able to attract and retain qualified replacement personnel could have a material
adverse effect on the Company's financial condition and results of operations.
In addition, certain of the Company's Credit Facilities and Subordinated Debt
agreements contain financial covenants that do not permit the issuance of any
shares of its capital stock if, after giving effect to such
12
<PAGE> 13
issuance, certain shareholders of the Company, including Dr. Bleyleben, cease to
own or control specified percentages of voting capital stock of the Company. In
addition, under certain of the Company's Subordinated Debt agreements, the
Company has agreed that Dr. Bleyleben and Mr. Latour must remain as Chief
Executive Officer and Chief Financial Officer, respectively, of the Company. The
Company's failure to comply with these covenants could have a material adverse
effect on the Company's business, financial condition or results of operations.
See "Management" and "Description of Certain Indebtedness."
CONTROL BY EXISTING SHAREHOLDERS; CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, Dr. Bleyleben, Brian E. Boyle and Torrence
C. Harder and their respective affiliates will beneficially own approximately
41.0% of the outstanding Common Stock (approximately 38.0% of the outstanding
Common Stock assuming full exercise of the Underwriters' over-allotment option).
As a result, these stockholders, if they act as a group, will likely be able to
control substantially all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions, which
may have the effect of discouraging certain types of transactions involving an
actual or potential change of control of the Company. See "Management,"
"Principal Stockholders" and "Description of Common Stock."
The Company's Restated Articles of Incorporation (the "Articles") and
Bylaws ("Bylaws") contain certain provisions that may have the effect of
discouraging, delaying or preventing a change in control of the Company or
unsolicited acquisition proposals that a stockholder might consider favorable,
including (i) provisions authorizing the issuance of "blank check" preferred
stock, (ii) providing for a Board of Directors with staggered terms, (iii)
requiring super-majority or class voting to effect certain amendments to the
Articles and Bylaws and to approve certain business combinations, (iv) limiting
the persons who may call special stockholders' meetings and (v) establishing
advance notice requirements for nominations for election to the Board of
Directors or for proposing matters that can be acted upon at stockholders'
meetings. In addition, certain provisions of Massachusetts law to which the
Company is subject may have the effect of discouraging, delaying or preventing a
change in control of the Company or unsolicited acquisition proposals. See
"Description of Capital Stock -- Massachusetts Law and Certain Charter
Provisions."
EFFECT OF SALES OF SUBSTANTIAL AMOUNTS OF COMMON STOCK
Sales of a substantial number of shares of Common Stock in the public
market following the Offering, or the perception that such sales could occur,
could adversely affect the market price for the Common Stock. Upon completion of
the Offering, the Company will have 13,332,766 shares of Common Stock
outstanding. The 4,000,000 shares of Common Stock offered hereby will be freely
tradeable without restriction or further registration under the Securities Act,
except for shares sold by persons deemed to be "affiliates" of the Company or
acting as "underwriters," as those terms are defined in the Securities Act.
Beginning 90 days after the date of this Prospectus, all of the remaining shares
of Common Stock that are not subject to the 180-day lock-up period described
below will be freely tradeable by holders thereof. Following the expiration of
the lock-up period, all of the remaining outstanding shares of Common Stock will
be freely tradeable subject to the restrictions on resale imposed upon
"affiliates" by Rule 144 under the Securities Act. See "Shares Eligible for
Future Sale" and "Underwriting."
The Company, the Selling Stockholders and the executive officers and
directors of the Company have agreed that, for a period of 180 days following
the date of this Prospectus, they will neither issue nor sell any shares of
Common Stock or securities convertible into, or exercisable for, such stock,
held by them now or in the future, without the prior written consent of Piper
Jaffray Inc. See "Underwriting."
NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public trading market for the
Common Stock. There can be no assurance that an active market for the Common
Stock will develop upon completion of the Offering or, if developed, that such
market will be sustained. The initial public offering price of the Common Stock
was determined through negotiations between the Company and the Underwriters
based upon several factors and
13
<PAGE> 14
may bear no relationship to the Company's assets, book value, results of
operations or net worth or any other generally accepted criteria of value and
should not be considered as indicative of the actual value of the Company. For
information relating to the factors considered in determining the initial public
offering price, see "Underwriting." The price at which the Common Stock will
trade in the public market after the Offering may be less than the initial
public offering price. In addition, the trading price of the Common Stock may be
influenced by a number of factors, including the liquidity of the market for the
Common Stock, investor perceptions of the Company and the equipment financing
industry in general, variations in the Company's quarterly operating results,
interest rate fluctuations, variations in financial estimates by securities
analysts and general economic and other conditions. Moreover, the stock market
recently has experienced significant price and value fluctuations, which have
not necessarily been related to corporate operating performance. The volatility
of the stock market could adversely affect the market price of the Common Stock
and the ability of the Company to raise equity in the public markets.
SUBSTANTIAL DILUTION INCURRED BY INVESTORS
Investors in the Common Stock offered hereby will experience immediate and
substantial dilution in net tangible book value per share of $9.47. See
"Dilution." If the Company issues additional Common Stock in the future,
including shares which may be issued pursuant to option grants and future
acquisitions, purchasers of Common Stock in the Offering may experience further
dilution in the net tangible book value per share of the Common Stock.
CHANGE IN DIVIDEND POLICY
The Company has paid quarterly cash dividends on the Common Stock since the
second quarter of 1995. However, there can be no assurance as to the amount and
timing of payment of future dividends. The decision as to the amount and timing
of future dividends paid by the Company, if any, will be made at the discretion
of the Company's Board of Directors in light of the financial condition, capital
requirements, earnings and prospects of the Company and any restrictions under
the Company's Credit Facilities and agreements governing the Subordinated Debt,
as well as other factors the Board of Directors may deem relevant. See "Dividend
Policy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995 (the "Reform
Act")). The "safe harbor" protections of the Reform Act are not available to
initial public offerings, including this Offering. Discussions containing such
forward-looking statements may be found in the material set forth under
"Summary," "Risk Factors," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as within the
Prospectus generally. In addition, when used in this Prospectus, the words
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company, or
industry results, to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
risks, uncertainties and other important factors include, among others: the
Company's dependence on POS authorization systems and expansion into new
markets; the Company's significant capital requirements; risks associated with
economic downturns; higher interest rates; intense competition; risks associated
with acquisitions; and other factors included in this Prospectus. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained in this Prospectus to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based. In light of these risks and uncertainties, there can be no assurance that
the forward-looking information contained in this Prospectus will in fact
transpire.
14
<PAGE> 15
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby will be approximately $46.2 million, after deducting the
underwriting discount and offering expenses payable by the Company. The
following table sets forth the approximate amounts to be used by the Company for
each specified purpose:
<TABLE>
<CAPTION>
USE OF PROCEEDS AMOUNT
--------------- ------
(DOLLARS IN MILLIONS)
<S> <C>
Repayment of junior subordinated notes(1)................... $10.3
Repayment of senior subordinated debt(2).................... 9.5
Repayment of Credit Facilities (2)(3)....................... 26.4
-----
Total(4).................................................... $46.2
=====
</TABLE>
- ---------------
(1) The Company's junior subordinated notes (the "Junior Subordinated Notes")
were issued in private placements to a number of individual investors. The
Junior Subordinated Notes have maturities ranging from April 1, 1999 to
December 1, 2003 and bear interest at rates ranging from 8.0% to 12.0% per
annum at December 31, 1998. The Company has borrowed $1.3 million principal
amount of the Junior Subordinated Notes since December 31, 1997, with
proceeds thereof used for general corporate purposes, including the funding
of leases, contracts and loans which were not otherwise eligible for funding
under the Company's Credit Facilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "Description of
Certain Indebtedness" and Note E to the Company's consolidated financial
statements included elsewhere in this Prospectus.
(2) This amount is based on the Company's expectations under current market
conditions. If market conditions at the time of consummation of the Offering
are substantially different than management's expectations, the Company may
choose to use proceeds otherwise earmarked for repayment of senior
subordinated debt to repay amounts outstanding under the Credit Facilities.
As of December 31, 1998, the Company had (a) $4.5 million outstanding under
its subordinated note with Massachusetts Mutual Life Insurance Company, all
of which bears interest at a fixed rate of 12.0% per annum and matures on
July 15, 2001, (b) $4.6 million outstanding under its subordinated note with
Rothschild Inc., all of which bears interest at a fixed rate of 12.25% per
annum and matures on October 1, 2001 and (c) $5.0 million outstanding under
its subordinated note with Aegon Insurance Group, all of which bears
interest at a fixed rate of 12.6% per annum and matures on October 15, 2003.
None of such indebtedness was incurred within one year.
(3) The Company intends to use the remaining net proceeds of the Offering to
repay amounts outstanding under its Credit Facilities (other than $17.5
million principal amount subject to a fixed rate swap agreement which would
not be repaid with proceeds of the Offering). As of December 31, 1998, the
Company had $39.3 million in revolving credit and term loans outstanding
under its facility led by Fleet Bank, N.A. and, excluding the amount subject
to the swap agreement, $5.9 million in revolving credit and term loans
outstanding under its facility led by BankBoston, N.A. Of these amounts,
$3.7 million is a term loan which bears interest at a fixed rate of 7.75%
per annum and matures on August 2, 1999; and $41.5 million is a revolving
credit loan which bears interest at the prime or base rate of each of the
agent banks and which converts to a term loan on July 31, 1999 (the
"Commitment Termination Date") that matures no later than the fourth
anniversary of the Commitment Termination Date as to $35.6 million principal
amount and no later than the second anniversary of the Commitment
Termination Date as to $5.9 million principal amount. See "Description of
Certain Indebtedness" and Note E to the Company's consolidated financial
statements included elsewhere in this Prospectus.
(4) While the Company currently does not intend to use the net proceeds from the
Offering or existing resources to consummate acquisitions, the Company
intends, as part of its business strategy, to evaluate future acquisitions
of leasing companies or lease portfolios, and may use a portion of the net
proceeds from the Offering to make such acquisitions. The Company presently
is not negotiating, nor does it have any agreements or understandings, to
make any such acquisitions. See "Business -- Strategy."
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<PAGE> 16
DIVIDEND POLICY
The Company has paid quarterly cash dividends on the Common Stock since the
second quarter of 1995. The following table sets forth the cash dividends per
share paid by the Company for the periods indicated, all as adjusted to give
effect to the 1997 Stock Split and the 1999 Stock Split:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(AMOUNT PER SHARE)
<S> <C> <C> <C>
First Quarter............................................ $0.020 $0.025 $0.030
Second Quarter........................................... 0.025 0.030 0.035
Third Quarter............................................ 0.025 0.030 0.035
Fourth Quarter........................................... 0.025 0.030 0.035
</TABLE>
The Company currently intends to continue payment of dividends following
consummation of the Offering. Provisions in certain of the Company's Credit
Facilities and agreements governing the Subordinated Debt contain, and the terms
of any indebtedness issued by the Company in the future are likely to contain,
certain restrictions on the payment of dividends on the Common Stock. The
decision as to the amount and timing of future dividends paid by the Company, if
any, will be made at the discretion of the Company's Board of Directors in light
of the financial condition, capital requirements, earnings and prospects of the
Company and any restrictions under the Company's Credit Facilities or
Subordinated Debt agreements, as well as other factors the Board of Directors
may deem relevant, and there can be no assurance as to the amount and timing of
payment of future dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources", "Description of Certain Indebtedness" and "Risk Factors -- Change in
Dividend Policy."
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<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 on an actual basis and as adjusted to give effect to the sale
of the shares of Common Stock offered hereby and the application of the net
proceeds therefrom. The table should be read in conjunction with "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Consolidated Financial Statements of the Company
and related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
------------------------
ACTUAL AS ADJUSTED(1)
(DOLLARS IN THOUSANDS) ------ --------------
<S> <C> <C>
Debt:
Notes payable............................................. $132,104 $105,704
Subordinated notes payable................................ 25,288 5,488
-------- --------
Total debt............................................. 157,392 111,192
-------- --------
Redeemable convertible preferred stock(2)................... -- --
Stockholders' equity:
Common Stock $0.01 par value per share, 25,000,000 shares
authorized; 9,886,516 shares issued and outstanding;
and 13,306,116 shares issued and outstanding, after
giving effect to the Offering(2)(3).................... 99 133
Additional paid-in capital................................ 1,764 47,930
Retained earnings......................................... 25,838 25,838
Treasury stock............................................ (138) (138)
Notes receivable from officers and employees.............. (268) (268)
-------- --------
Total stockholders' equity............................. 27,295 73,495
-------- --------
Total capitalization.............................. $184,687 $184,687
======== ========
</TABLE>
- ---------------
(1) As adjusted reflects (i) the use of approximately $19.8 million of the net
proceeds of the Offering to repay amounts outstanding under the Company's
subordinated indebtedness and (ii) the use of $26.4 million of the net
proceeds of the Offering to repay amounts outstanding under the Company's
Credit Facilities.
(2) Actual amount of redeemable convertible preferred stock is $490.00. This
preferred stock will convert automatically into 19,600 shares of Common
Stock upon consummation of the Offering. "As Adjusted" includes such shares
of Common Stock as if such conversion had occurred on September 30, 1998.
(3) Shares issued and outstanding do not include an aggregate of 147,030 shares
of Common Stock reserved for issuance upon exercise of stock options at
exercise prices of $0.6375 and $1.95, outstanding as of September 30, 1998,
26,650 of which were exercised between October 1, 1998 and December 31, 1998
and 6,682 of which are subject to options which are exercisable within 60
days of the date of this Prospectus. See "Management -- Stock Option Plans"
and "Description of Capital Stock." Common Stock issued and outstanding
excludes 142,590 shares held in the Company's treasury as of September 30,
1998.
17
<PAGE> 18
DILUTION
Dilution per share to new investors represents the difference between the
amount per share paid by purchasers of shares of Common Stock in the Offering
and the net tangible book value per share of Common Stock offered hereby
immediately after completion of the Offering. Net tangible book value per share
represents the amount of the Company's stockholders' equity, less intangible
assets, divided by the 9,886,516 million shares of Common Stock outstanding as
of September 30, 1998 (not including treasury stock).
The net tangible book value of the Company as of September 30, 1998 was
approximately $27.3 million, or $2.76 per share of Common Stock. After giving
effect to the sale of the Common Stock by the Company at the initial public
offering price of $15.00 per share and after deduction of the underwriting
discount and estimated expenses of the Offering payable by the Company and the
application of the net proceeds of the Offering, the adjusted pro forma net
tangible book value, as of September 30, 1998, would have been approximately
$73.5 million, or $5.53 per share of Common Stock. This represents an immediate
increase in net tangible book value of $2.77 per share to existing stockholders
and an immediate dilution of $9.47 per share to new investors purchasing the
Common Stock in the Offering. The following table illustrates the pro forma per
share dilution, as of September 30, 1998:
<TABLE>
<S> <C>
Initial public offering price per share..................... $15.00
Net tangible book value per share at September 30, 1998..... 2.76
Increase per share attributable to new investors............ 2.77
Pro forma net tangible book value per share after the
Offering.................................................. 5.53
Net tangible book value dilution per share to new
investors................................................. 9.47
</TABLE>
The following table sets forth, as of September 30, 1998 after giving
effect to the Offering, the number of shares of Common Stock purchased from the
Company, the total consideration paid therefor and the average price per share
paid by existing stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
---------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........... 9,886,516 74.4% $ 1,905,949 3.6% $ 0.19
New investors(1)................... 3,400,000 25.6 51,000,000 96.4 15.00
---------- ----- ----------- ----- ------
Total.................... 13,286,516 100.0% $52,905,949 100.0% $ 3.98
========== ===== =========== ===== ======
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders will reduce the number of shares of Common
Stock held by existing stockholders to 9,286,516, or 69.9% of the total
number of shares to be outstanding after the Offering, and will increase the
number of shares to be purchased by new investors to 4,000,000, or 30.1% of
the total number of shares of Common Stock to be outstanding after the
Offering. See "Principal Stockholders" and "Selling Stockholders."
The foregoing tables (i) exclude an aggregate of 26,650 shares of Common
Stock issued after September 30, 1998 pursuant to the exercise of stock options
granted under the Company's 1987 Stock Option Plan for an aggregate
consideration of $51,968; and (ii) assume no conversion of the Company's
outstanding Series C Preferred Stock, $1.00 par value (the "Series C Preferred
Stock") into 19,600 shares of Common Stock upon consummation of the Offering.
18
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table presents selected consolidated financial and operating
data of the Company and its subsidiaries as of and for each of the years in the
five-year period ended December 31, 1997 and as of September 30, 1998, and for
the nine months ended September 30, 1997 and 1998. The selected consolidated
financial and certain other data as of December 31, 1993, 1994, 1995, 1996 and
1997, and for each of the years in the five-year period ended December 31, 1997,
have been derived from consolidated financial statements audited by
PricewaterhouseCoopers LLP, independent accountants. The Company's selected
consolidated financial and operating data as of September 30, 1998 and for the
nine months ended September 30, 1997 and 1998, are based on the Company's
unaudited consolidated financial statements which include all adjustments that,
in the opinion of the Company's management, are necessary for a fair
presentation of the results at such dates and for such respective interim
periods. The results of operations for the nine months ended September 30, 1998
are not necessarily indicative of the results expected for fiscal year 1998 or
any interim period. The as adjusted balance sheet data assume that the issuance
and sale of shares of Common Stock offered hereby by the Company at $15.00 per
share and the application of the net proceeds therefrom as described in "Use of
Proceeds" occurred on September 30, 1998. The selected consolidated financial
and operating data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements of the Company and related
notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
INCOME STATEMENT DATA: ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Income on financing leases and loans................ $10,840 $15,949 $27,011 $38,654 $45,634 $33,900 $35,285
Income on service contracts(1)...................... -- -- -- 6 501 87 1,557
Rental income....................................... 1,329 2,058 3,688 8,250 10,809 8,104 11,153
Fee income(2)....................................... 2,576 3,840 5,446 8,675 11,236 8,104 7,837
------- ------- ------- ------- ------- ------- -------
Total revenues.................................... 14,745 21,847 36,145 55,585 68,180 50,195 55,832
------- ------- ------- ------- ------- ------- -------
EXPENSES
Selling, general and administrative................. 2,689 4,975 8,485 14,073 17,252 12,558 14,284
Provision for credit losses......................... 5,753 8,179 13,388 19,822(3) 21,713(3) 15,601 12,568
Depreciation and amortization....................... 602 827 1,503 2,981 3,787 2,701 3,867
Interest............................................ 3,598 5,009 8,560 10,163 11,890 8,891 9,198
------- ------- ------- ------- ------- ------- -------
Total expenses.................................... 12,642 18,990 31,936 47,039 54,642 39,751 39,917
------- ------- ------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.............. 2,103 2,857 4,209 8,546 13,538 10,444 15,915
NET INCOME............................................ 1,325(4) 1,643 2,524 5,080 7,652 6,199 9,460
======= ======= ======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic(5)............................................ $ 0.27 $ 0.33 $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96
Diluted(6).......................................... 0.15 0.19 0.27 0.52 0.76 0.62 0.94
DIVIDENDS PER COMMON SHARE............................ -- -- 0.06 0.10 0.12 0.09 0.10
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------------
1998 AS
1993 1994 1995 1996 1997 1998 ADJUSTED
BALANCE SHEET DATA: ---- ---- ---- ---- ---- ---- --------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Gross investment in leases and loans(7)........ $ 69,561 $115,286 $189,698 $247,633 $258,230 $273,148 $273,148
Unearned income................................ (19,952) (33,807) (60,265) (76,951) (73,060) (73,742) (73,742)
Allowance for credit losses.................... (4,778) (7,992) (15,952) (23,826) (26,319) (24,423) (24,423)
Investment in service contracts(1)............. -- -- -- -- 2,145 7,412 7,412
Total assets............................... 50,810 83,484 126,479 170,192 179,701 208,767 208,767
Notes payable.................................. 37,747 57,594 94,900 116,202 116,830 132,104 105,704(8)
Subordinated notes payable..................... 5,394 13,436 13,170 27,006 26,382 25,288 5,488(8)
Total liabilities.......................... 45,041 77,652 118,568 158,013 160,935 181,472 135,272
Total stockholders' equity................. 5,687 5,750 7,911 12,179 18,766 27,295 73,495
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
OTHER DATA: ---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT STATISTICAL DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Total leases and loans originated(9).... $ 43,209 $ 85,627 $134,546 $143,200 $129,064 $ 95,597 $112,158
Total service contracts acquired(10).... -- -- 3,635 2,431 2,972 1,660 6,298
Dealer fundings(11)..................... $ 26,213 $ 52,745 $ 76,502 $ 73,659 $ 77,590 $ 56,767 $ 76,710
Average yield on leases and loans(12)... 30.0% 29.9% 30.7% 32.4% 33.9% 33.3% 35.4%
Cash flows from (used in):
Operating activities.................... $ 17,660 $ 26,288 $ 41,959 $ 60,104 $ 77,393 $ 53,054 $ 69,641
Investing activities.................... (26,182) (51,528) (76,353) (86,682) (80,127) (58,533) (78,222)
Financing activities.................... 9,502 27,803 36,155 33,711 (1,789) 1,498 12,786
-------- -------- -------- -------- -------- -------- --------
Total................................. 980 2,563 1,761 7,133 (4,523) (3,981) 4,205
Selected Ratios:
Return on average assets(13)............ 2.96% 2.45% 2.40% 3.42% 4.37% 4.74% 6.49%
Return on average
stockholders' equity(13).............. 29.82 28.73 36.95 50.57 49.46 55.46 54.77
Operating margin(14).................... 53.28 50.51 48.68 51.04 51.70 51.89 51.02
Credit Quality Statistics:
Net charge-offs......................... $ 4,033 $ 4,961 $ 5,428 $ 11,948(15) $ 19,220(15) $ 17,082 $ 14,464
Net charge-offs as a percentage of average
gross investment(13)(16).............. 6.46% 5.37% 3.56% 5.46%(15) 7.57%(15) 8.58% 7.13%
Provision for credit losses as a percentage
of average gross investment(13)(17)... 9.21 8.85 8.78 9.07 8.55 7.83 6.20
Allowance for credit losses as a percentage
of gross investment(18)............... 6.87 6.93 8.41 9.62 10.14 8.78 8.94
</TABLE>
- ---------------
(1) The Company began acquiring fixed-term service contracts in 1995. Until
December 1996, the Company treated these fixed-term contracts as leases for
accounting purposes. Accordingly, income from these service contracts is
included in income on financing leases and loans for all periods prior to
December 1996 and investments in service contracts were recorded as
receivables due in installments on the balance sheet at December 31, 1995
and 1996. Beginning in December 1996, the Company began acquiring
month-to-month service contracts, the income from which is included as a
separate category in the Consolidated Statements of Operations and the
investment in which are recorded separately on the balance sheet.
(2) Includes loss and damage waiver fees and service fees.
(3) The provision for 1996 includes $5.0 million resulting from a reduction in
the time period for charging off the Company's receivables from 360 to 240
days. The provision for 1997 includes a one-time write-off of securitized
receivables of $9.5 million and $5.1 million in write-offs of satellite
television equipment receivables.
(4) 1993 excludes a $1.3 million cumulative increase in net income as a result
of the Company's adoption of Statement of Financial Accounting Standards
No. 109 (Accounting for Income Taxes). Prior to 1993, the Company accounted
for income taxes under the deferred method.
(5) Net income per common share (basic) is calculated based on weighted average
common shares outstanding of 4,994,296, 5,003,880, 7,352,189, 9,682,851,
9,793,140, 9,791,212 and 9,849,602 for the years ended December 31, 1993,
1994, 1995, 1996 and 1997 and the nine months ended September 30, 1997 and
1998, respectively.
(6) Net income per common share (diluted) is calculated based on weighted
average common shares outstanding on a diluted basis of 9,120,355,
8,713,065, 9,448,206, 9,770,613, 9,925,329, 10,005,028 and 10,031,974 for
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the nine
months ended September 30, 1997 and 1998, respectively.
(7) Consists of receivables due in installments, estimated residual value, and
loans receivable.
(8) As adjusted reflects (i) the use of approximately $19.8 million of the net
proceeds of the Offering to repay amounts outstanding under the Company's
Subordinated Debt and (ii) the use of $26.4 million of the net proceeds of
the Offering to repay amounts outstanding under the Company's Credit
Facilities.
(9) Represents the amount paid to Dealers upon funding of leases and loans plus
the associated unearned income.
(10) Represents the amount paid to Dealers upon the acquisition of service
contracts, including both non-cancelable service contracts and
month-to-month service contracts.
(11) Represents the amount paid to Dealers upon funding of leases, contracts and
loans.
(12) Represents the aggregate of the implied interest rate on each lease and
loan originated during the period weighted by the amount funded at
origination for each such lease and loan.
(13) Quarterly amounts are annualized.
(14) Represents income before provision for income taxes and provision for
credit losses as a percentage of total revenues.
(15) Charge-offs in 1996 and 1997 were higher due to write-offs related to
satellite television equipment lease receivables and due to a change in the
write-off period from 360 days to 240 days in the third quarter of 1996.
See "Business -- Exposure to Credit Losses."
(16) Represents net charge-offs as a percentage of average gross investment in
leases and loans and investment in service contracts.
(17) Represents provision for credit losses as a percentage of average gross
investment in leases and loans and investment in service contracts.
(18) Represents allowance for credit losses as a percentage of gross investment
in leases and loans and investment in service contracts.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
Certain matters discussed below are forward-looking statements that involve
substantial risks and uncertainties that could cause actual results to differ
materially from targets or projected results. Factors that could cause actual
results to differ materially include, among others, those factors described in
"Risk Factors." Many of these factors are beyond the Company's ability to
predict or control. Prospective investors are cautioned not to put undue
reliance on forward-looking statements, which statements have been made as of
the date of this Prospectus, after which date there may have been changes in the
affairs of the Company that would warrant modification of forward-looking
statements made herein. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained in this Prospectus to reflect any change in the Company's
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based. In light of these risks and
uncertainties, there can be no assurance that the forward-looking information
contained in this Prospectus will in fact transpire.
GENERAL
The Company is a specialized commercial finance company that provides
"microticket" equipment leasing and other financing services in amounts
generally ranging from $900 to $2,500, with an average amount financed of
approximately $1,400. The Company primarily leases POS authorization systems and
other small business equipment to small commercial enterprises. For the nine
months ended September 30, 1998 and the year ended December 31, 1997, the
Company had fundings to Dealers upon origination of leases, contracts and loans
("Dealer Fundings") of $76.7 million and $77.6 million, respectively, and
revenues of $55.8 million and $68.2 million, respectively.
The Company derives the majority of its revenues from leases originated and
held by the Company, payments on service contracts, rental payments from lessees
who continue to rent the equipment beyond the original lease term, and fee
income. The Company funds the majority of leases, contracts and loans through
its Credit Facilities and on-balance sheet Securitizations, and to a lesser
extent, its Subordinated Debt program and internally generated funds.
In a typical lease transaction, the Company originates leases through its
network of independent Dealers. Upon approval of a lease application by the
Company and verification that the lessee has both received the equipment and
signed the lease, the Company pays the Dealer the cost of the equipment plus the
Dealer's profit margin. In a typical transaction for the acquisition of service
contracts, a homeowner purchases a security system and simultaneously signs a
contract with the Dealer for the monitoring of that system for a monthly fee.
Upon credit approval of the monitoring application and verification with the
homeowner that the system is installed, the Company purchases from the Dealer
the right to the payment stream under that monitoring contract at a negotiated
multiple of the monthly payments.
Substantially all leases originated or acquired by the Company are
non-cancelable. During the term of the lease, the Company is scheduled to
receive payments sufficient, in the aggregate, to cover the Company's borrowing
costs and the costs of the underlying equipment, and to provide the Company with
an appropriate profit. The Company enhances the profitability of its leases,
contracts and loans by charging late fees, prepayment penalties, loss and damage
waiver fees and other service fees, when applicable. The initial non-cancelable
term of the lease is equal to, or less than, the equipment's estimated economic
life, and often provides the Company with additional revenues based on the
residual value of the equipment financed at the end of the initial term of the
lease. Initial terms of the leases in the Company's portfolio generally range
from 12 to 48 months, with an average initial term of 45 months as of September
30, 1998. Substantially all service and rental contracts are month-to-month
contracts with an expected term of seven years for service contracts and 15
months for rental contracts.
21
<PAGE> 22
CERTAIN ACCOUNTING CONSIDERATIONS
The Company's lease contracts are accounted for as financing leases. At
origination, the Company records the gross lease receivable, the estimated
residual value of the leased equipment, initial direct costs incurred and the
unearned lease income. Unearned lease income is the amount by which the gross
lease receivable plus the estimated residual value exceeds the cost of the
equipment. Unearned lease income and initial direct costs incurred are amortized
over the related lease term using the interest method. Amortization of unearned
lease income and initial direct costs is suspended if, in the opinion of
management, full payment of the contractual amount due under the lease agreement
is doubtful. In conjunction with the origination of leases, the Company may
retain a residual interest in the underlying equipment upon termination of the
lease. The value of such interests is estimated at inception of the lease and
evaluated periodically for impairment. Other revenues such as loss and damage
waiver fees, service fees relating to the leases, contracts and loans and rental
revenues are recognized as they are earned.
The Company's investments in cancelable service contracts are recorded at
cost and amortized over the expected life of the service period. Income on
service contracts from monthly billings is recognized as the related services
are provided. The Company periodically evaluates whether events or circumstances
have occurred that may affect the estimated useful life or recoverability of the
investment in service contracts. Rental equipment is recorded at estimated
residual value and depreciated using the straight-line method over a period of
twelve months. Loans are reported at their outstanding principal balance.
Interest income on loans is recognized as it is earned.
The Company maintains an allowance for credit losses on its investment in
leases, service contracts and loans at an amount that it believes is sufficient
to provide adequate protection against losses in its portfolio. The allowance is
determined principally on the basis of the historical loss experience of the
Company and the level of recourse provided by such lease, service contract or
loan, if any, and reflects management's judgment of additional loss potential
considering future economic conditions and the nature and characteristics of the
underlying lease portfolio. The Company determines the necessary periodic
provision for credit losses taking into account actual and expected losses in
the portfolio as a whole and the relationship of the allowance to the net
investment in leases, service contracts and loans. Such provisions generally
represent a percentage of funded amounts of leases, contracts and loans. The
resulting charge is included in the provision for credit losses.
Leases, service contracts, and loans are charged against the allowance for
credit losses and are put on non-accrual when they are deemed to be
uncollectible. Generally, the Company deems leases, service contracts and loans
to be uncollectible when one of the following occur: (i) the obligor files for
bankruptcy; (ii) the obligor dies and the equipment is returned; or (iii) when
an account has become 360 days delinquent. The typical monthly payment under the
Company's leases is between $30 and $50 per month. As a result of these small
monthly payments, the Company's experience is that lessees will pay past due
amounts later in the process because of the small amount necessary to bring an
account current (at 360 days past due, a lessee will only owe lease payments of
between $360 and $600).
The Company has developed and regularly updates proprietary credit scoring
systems designed to improve its risk based pricing. The Company uses credit
scoring in most, but not all, of its extensions of credit. In addition, the
Company aggressively employs collection procedures and a legal process to
resolve any credit problems.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Total revenues for the nine months ended September 30, 1998 were $55.8
million, an increase of $5.6 million, or 11.2%, from the nine months ended
September 30, 1997, due primarily to increases of $1.4 million, or 4.1%, in
income on financing leases and loans and $4.5 million, or 55.2%, in rental and
service contract income over such amounts in the previous year's period. The
increase in income on financing leases and loans was due to the continued growth
in the Company's lease and loan portfolio. The increase in rental and service
22
<PAGE> 23
contract income was due to an increase in the number of lessees that have
continued renting the equipment beyond the original lease term and the increase
in the number of service contracts in the Company's portfolio.
Selling, general and administrative expenses increased $1.7 million, or
13.7%, for the nine-month period ended September 30, 1998 as compared to the
same period in 1997. Such increase was primarily attributable to an increase in
personnel resulting in a 19.9% increase in employee-related expenses, as the
number of employees needed to maintain and manage the Company's increased
portfolio and the general expansion of the Company's operations increased.
Management expects that salaries and employee-related expenses, marketing
expenses and other selling, general and administrative expenses will continue to
increase as the portfolio grows due to the nature of the maintenance of the
Company's microticket portfolio and the Company's focus on collections.
The Company's provision for credit losses decreased $3.0 million from the
nine months ended September 30, 1997 to $12.6 million for the nine months ended
September 30, 1998, primarily due to an increase in recoveries. This decrease
was the result of the Company's estimate of future losses. See
"Business -- Exposure to Credit Losses."
Depreciation and amortization expense increased by $1.2 million, or 43.2%,
due to the increased number of rental contracts and the amortization of the
investment associated with service contracts.
Interest expense increased by $307,000, or 3.5%, from $8.9 million for the
nine months ended September 30, 1997 to $9.2 million for the nine months ended
September 30, 1998 due to an increase in the average outstanding balance of the
Company's Credit Facilities.
As a result of these factors, net income increased by $3.3 million, or
52.6%, from $6.2 million for the nine months ended September 30, 1997 to $9.5
million for the nine months ended September 30, 1998.
Dealer Fundings were $76.7 million during the nine months ended September
30, 1998, an increase of $19.9 million, or 35.1%, compared to the nine months
ended September 30, 1997. This increase primarily resulted from continued growth
in leases of equipment other than POS authorization systems, acquisitions of
service contracts and loans to commercial businesses. Receivables due in
installments, estimated residual values and loans receivable ("gross investment
in leases and loans") also increased from $254.1 million at September 30, 1997
to $273.1 million at September 30, 1998, representing a 7.5% increase. Cash
collections increased by $17.4 million to $102 million during the first nine
months of 1998, or 20.6%, from the first nine months of 1997 due to the increase
in the size of the Company's overall portfolio as well as the Company's
continued emphasis on collections. Unearned income decreased $300,000, or 0.4%,
from $74.0 million at September 30, 1997 to $73.7 million at September 30, 1998.
This decrease resulted primarily from increased acquisitions of service
contracts and originations of loans which are accounted for on a cost basis and
as a result do not have any unearned income associated with them.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues for the year ended December 31, 1997 were $68.2 million, an
increase of $12.6 million, or 22.7%, from the year ended December 31, 1996, due
to increases of $7.0 million, or 18.1%, in income on financing leases and loans,
$2.6 million, or 31.0%, in rental income and $2.6 million, or 29.5%, in fee
income. The increase in income on leases and loans was primarily the result of
the continued growth in the Company's lease portfolio. The increase in rental
income is due to the increased number of lessees who continued to rent the
equipment beyond the original lease term. The increase in fee income was a
result of the increase in the overall portfolio serviced by the Company.
The Company completed two portfolio acquisitions, one in May 1996 for $1.9
million of rental contracts and a second in December 1996 for $7.9 million of
leases. The income attributable to these acquired leases and rental contracts
represented approximately $2.2 million, or 4.7%, of total income on leases and
loans and rental income for 1996 and approximately $4.4 million, or 7.8%, of
total income on leases and loans and rental income for 1997.
23
<PAGE> 24
Selling, general and administrative expenses increased $3.2 million, or
22.6%, for the year ended December 31, 1997 as compared to the year ended
December 31, 1996. Such increase was primarily attributable to a 20% increase in
the number of employees needed to maintain and manage the Company's increased
portfolio, the general expansion of the Company's operations and the more
competitive employment environment.
The Company's provision for credit losses increased by $1.9 million, or
9.5%, from $19.8 million in 1996 to $21.7 million in 1997. The higher provision
was due to a one-time write-off of securitized receivables of $9.5 million, $5.1
million in one-time write-offs of satellite television equipment receivables and
growth in the overall size of the Company's portfolio. The Company's 1997
provision reflected a cumulative write-off of non-accruing fully reserved
receivables in the Company's securitized portfolio. The Company wrote off the
$5.1 million in satellite television equipment receivables in 1997 sooner than
its normal 360-day policy because it was the Company's experience that certain
characteristics of consumer receivables which were different from commercial
receivables would render such receivables uncollectible under the Company's
normal collection procedures.
Depreciation and amortization expense increased by $806,000, or 27.0%, from
1996 to 1997 due to the increased number of rental contracts and the
amortization of the investment costs associated with service contracts.
Interest expense increased by $1.7 million, from $10.2 million for the year
ended December 31, 1996 to $11.9 million in 1997. This increase was primarily
due to an increase in the average outstanding balances of the Company's Credit
Facilities and Subordinated Debt.
As a result of these factors, net income increased by $2.6 million, or
50.6%, from $5.1 million in the year ended December 31, 1996 to $7.7 million in
the year ended December 31, 1997.
Dealer Fundings were $77.6 million for the fiscal year ended December 31,
1997, an increase of $3.9 million, or 5.3%, compared to $73.7 million for the
fiscal year ended December 31, 1996. The Company decided in July 1996 to scale
back its Dealer Fundings of consumer satellite television equipment leases,
funding to Dealers only $0.8 million of such leases in 1997 compared to $4.7
million in 1996. Excluding this factor, the Company had an increase in Dealer
Fundings of $7.8 million, or 11.3%, over 1996. This increase primarily resulted
from continued growth in leases of equipment other than POS authorization
systems, acquisitions of service contracts and loans to commercial businesses.
Gross investment in leases and loans also increased from $247.6 million in 1996
to $258.2 million at December 31, 1997, representing an increase of $10.6
million, or 4.3%. Cash collections increased by $31.3 million, or 35.9%, from
$87.1 million in 1996 to $118.4 million in 1997 due to the increase in the size
of the Company's overall portfolio, as well as the Company's continued emphasis
on collections. Unearned income decreased $3.9 million, or 5.1%, from $77.0
million at December 31, 1996 to $73.1 million at December 31, 1997. This
decrease resulted primarily from increased acquisitions of service contracts and
originations of loans which are accounted for on a cost basis and as a result do
not have any unearned income associated with them, as well as one-time
write-offs in 1997 of approximately $5.0 million in consumer satellite
television equipment lease receivables and $9.5 million of securitized
receivables and the corresponding unearned income associated with those leases.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Total revenues for fiscal year 1996 were $55.6 million, an increase of
$19.4 million, or 53.8% over fiscal year 1995, due to increases of $11.6
million, or 43.1%, in income on financing leases and loans, $4.6 million, or
123.9%, in rental income and $3.2 million, or 59.3%, in total fee income. The
increase in income on leases and loans was the result of the continued growth in
the Company's lease portfolio in 1996, while the increase in rental income was
due to the increased number of lessees who continue to rent the equipment beyond
the original lease term including as a result of two lease and rental portfolio
acquisitions with fundings of $1.9 million in May 1996 and $7.9 million in
December 1996. The income attributable to these acquired leases and rental
contracts represented approximately $2.2 million, or 4.7%, of total income on
leases and loans and rental income for 1996. Fee income increased as a result of
the continued growth in the overall portfolio serviced by the Company.
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Selling, general and administrative expenses were $14.1 million in 1996,
representing an increase of 65.9% over such expenses in 1995, due primarily to a
34% increase in the number of personnel and the significant growth in the
Company's lease portfolio from 1995 to 1996.
The Company's provision for credit losses increased by $6.4 million from
$13.4 million in 1995 to $19.8 million in 1996. Approximately $5.0 million of
the increase was to replenish the allowance for credit losses due to the change
in the write-off period from 360 days to 240 days in the third quarter of 1996.
See "Business -- Exposure to Credit Losses."
Depreciation and amortization expense increased by $1.5 million from $1.5
million in 1995 to $3.0 million in 1996. This increase was due to the increased
number of rental contracts in the Company's portfolio.
Interest expense increased by $1.6 million, or 18.7%, from $8.6 million in
1995 to $10.2 million in 1996. This increase was primarily due to an increase in
the average outstanding balances of the Company's Credit Facilities and
Subordinated Debt.
As a result of these factors, net income increased by $2.6 million, or
101.3%, from $2.5 million for the year ended December 31, 1995 to $5.1 million
in the year ended December 31, 1996.
Dealer Fundings were $73.7 million in 1996, a decrease of $2.8 million, or
3.7%, over the $76.5 million funded during 1995. The decrease in Dealer Fundings
in 1996, excluding portfolio purchases, was primarily attributable to
management's focus on maintaining higher rates of return on POS authorization
systems, exiting the business of origination of consumer satellite television
equipment leases and performing developmental work to reposition the Company's
efforts in other commercial and residential markets, including the design of
more competitive products, a product-specific sales approach, and a renewed
focus on service contracts. Gross investment in leases and loans also increased
from $189.7 million at December 31, 1995, to $247.6 million at December 31,
1996, representing a 30.5% increase. Cash collected was $87.1 million during
1996, an increase of $26.5 million, or 43.7%, over the $60.6 million collected
in 1995. This increase was due to the increase in the size of the Company's
overall portfolio, as well as the Company's continued emphasis on collections.
Unearned income increased $16.7 million, or 27.7%, from $60.3 million at
December 31, 1995 to $77.0 million at December 31, 1996. This increase resulted
from an increase in the size of the Company's lease portfolio.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's lease and finance business is capital-intensive and requires
access to substantial short-term and long-term credit to fund new leases,
contracts and loans. Since inception, the Company has funded its operations
primarily through borrowings under its Credit Facilities, issuances of
Subordinated Debt and its on-balance sheet Securitizations. The Company will
continue to require significant additional capital to maintain and expand its
volume of leases, contracts and loans funded, as well as to fund any future
acquisitions of leasing companies or portfolios.
The Company's uses of cash include the origination and acquisition of
leases, contracts and loans, payment of interest expenses, repayment of
borrowings under its Credit Facilities, Subordinated Debt and Securitizations,
payment of selling, general and administrative expenses, income taxes and
capital expenditures.
The Company utilizes its Credit Facilities to fund the origination and
acquisition of leases that satisfy the eligibility requirements established
pursuant to each facility. At September 30, 1998, the Company had an aggregate
maximum of $140 million available for borrowing under two Credit Facilities, of
which the Company had borrowed an aggregate of approximately $97.1 million. The
Company also uses its Subordinated Debt program as a source of funding for
potential acquisitions of portfolios and leases which otherwise are not eligible
for funding under the Credit Facilities and for potential portfolio purchases.
See "Description of Certain Indebtedness" for a description of the terms of the
Credit Facilities and the Subordinated Debt. To date, cash flow from its
portfolio and other fees have been sufficient to repay amounts borrowed under
the Credit Facilities and Subordinated Debt.
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The Company believes that cash flow from its operations, the net proceeds
to the Company of the Offering and amounts available under its Credit Facilities
will be sufficient to fund the Company's operations for the foreseeable future.
Although the Company is not currently involved in negotiations and has no
current commitments or agreements with respect to any acquisitions, to the
extent that the Company successfully consummates acquisitions, it may be
necessary to finance such acquisitions through the issuance of additional debt
or equity securities, the incurrence of indebtedness or a combination of both.
See "Risk Factors -- Dependence on External Financing."
Hedging Transactions
The implicit yield to the Company on all of its leases, contracts and loans
is on a fixed interest rate basis due to the leases, contracts and loans having
scheduled payments that are fixed at the time of origination of the lease. When
the Company originates or acquires leases, contracts and loans it bases its
pricing in part on the "spread" it expects to achieve between the implicit yield
rate to the Company on each lease and the effective interest cost it will pay
when it finances such leases, contracts and loans through its Credit Facilities.
Increases in interest rates during the term of each lease, contract or loan
could narrow or eliminate the spread, or result in a negative spread. See "Risk
Factors -- Risk of Increased Interest Rates." The Company has adopted a policy
designed to protect itself against interest rate volatility during the term of
each lease, contract or loan.
Given the relatively short average life of the Company's leases, contracts
and loans, the Company's goal is to maintain a blend of fixed and variable
interest rate obligations. As of September 30, 1998, the Company's outstanding
fixed rate indebtedness, including indebtedness outstanding under the Company's
Securitizations and indebtedness subject to the swap described below,
represented 45% of the Company's outstanding indebtedness. In July 1997, the
Company entered into an interest rate swap arrangement with one of its banks.
This arrangement, which expires in July 2000, has a notional amount of $17.5
million which represented 29.8% of the Company's fixed rate indebtedness
outstanding at September 30, 1998. The interest rate associated with the swap is
capped at 6.6%. During the term of the swap, the Company has agreed to match the
swap amount with 90-day LIBOR loans. If at any time the 90-day LIBOR rate
exceeds the swap cap of 6.6%, the bank would pay the Company the difference.
Through September 30, 1998, the Company had entered into LIBOR loans with
interest rates ranging from 7.54% to 8.19%. This arrangement effectively changes
the Company's floating interest rate exposure on the $17.5 million notional
amount to a fixed rate of 8.45%.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note B of the notes to the consolidated financial statements for a
discussion of the impact of recently issued accounting pronouncements.
YEAR 2000
Many computer programs and microprocessors were designed and developed
without consideration of the impact of the transition to the year 2000. As a
result, these programs and microprocessors may not be able to differentiate
between the year "1900" and "2000"; the year 2000 may be recognized as the
two-digit number "00". If not corrected, this could cause difficulties in
obtaining accurate system data and support.
The Company has designed and purchased numerous computer systems since its
inception. The Company's owned software and hardware is substantially Year 2000
compliant. The costs associated with such compliance will not be material to the
Company's liquidity or results of operations. The Company believes, based on
written and verbal advice from its vendors, that its critical third party
software is generally Year 2000 compliant, with minor issues, and will be
capable of functioning after December 31, 1999. However, the Company does and
will continue to interconnect certain portions of its network and systems with
other companies' networks and systems, certain of which may not be as Year 2000
compliant as those installed by the Company. While the Company has discussed
these matters with, and/or obtained written certifications from, such other
companies as to their Year 2000 compliance, there can be no assurance that any
potential impact associated with incompatible systems after December 31, 1999
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
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BUSINESS
GENERAL
The Company, which operates primarily through its wholly-owned subsidiary,
Leasecomm Corporation, is a specialized commercial finance company that leases
and rents "microticket" equipment and provides other financing services in
amounts generally ranging from $900 to $2,500, with an average amount financed
of approximately $1,400 and an average lease term of 45 months. The Company
pioneered the use of proprietary software in developing a sophisticated,
risk-adjusted pricing model and automating its credit approval and collection
systems, including a fully-automated Internet-based application, credit scoring
and approval process. This has enabled the Company to better service its dealer
network, to develop economies of scale in originating and servicing over 200,000
leases, contracts and loans and to operate on a nationwide basis in a
historically fragmented market. The majority of the Company's leases are
currently for POS authorization systems. The Company continues to develop other
product lines, including leasing other commercial products and acquiring payment
streams from service contracts.
The Company targets owner-operated or other small commercial enterprises,
with little business credit history and limited or poor personal credit history
at the owner level. The Company provides a convenient source of financing to
these lessees who may have few other sources of credit. The Company primarily
leases and rents low-priced commercial equipment with limited residual value
which is used by these lessees in their daily operations. The Company does not
market its services directly to lessees, but sources leasing transactions
through a nationwide network of over 1,100 Dealers. The Company's ability to
approve applications quickly for a wide range of credit profiles facilitates
Dealer sales, thereby enhancing the Company's relationships with its Dealers.
The Company commenced operations in 1986 and has been profitable every year
since 1987. At September 30, 1998, the Company's gross investment in leases and
loans totaled $273.1 million. The Company generated revenues and net income of
$68.2 million and $7.7 million in 1997, increases of 22.7% and 50.6%,
respectively, over those amounts in 1996. Revenues and net income for the first
nine months of 1998 totaled $55.8 million and $9.5 million, increases of 11.2%
and 52.6%, respectively, over the first nine months of 1997.
The Company capitalizes on its unique understanding of its lessees,
underwriting higher risk credits with a multi-dimensional credit scoring model
that generates risk-adjusted pricing. Additionally, the Company maintains a
disciplined and persistent approach to collections which enables the Company to
collect delinquent amounts that it believes its competitors often would not
pursue due to the perceived high costs of collecting relatively small monthly
payments against equipment with low resale value. In each of these areas, the
Company has focused on the application of technology to execute its operating
strategy by designing proprietary software and systems to operate its business
and achieve economies of scale.
STRATEGY
The Company's goal is to continue to significantly expand its business
through internal growth, diversification of product offerings and selective
acquisitions of lease portfolios and leasing companies, while maintaining or
improving current levels of profitability. The principal strategies to achieve
this goal include:
Utilizing and Enhancing its Advanced Technology and Servicing
Capabilities. The Company's business is operationally intensive, due in part to
the small average amount financed. Accordingly, technology and automated
processes are critical in keeping origination and servicing costs to a minimum,
while at the same time providing quality customer service. An example of the
Company's strategic use of technology is LeasecommDirect(TM), the Company's
Internet-based application processing, credit approval and Dealer information
tool, use of which has increased from approximately 3.5% of total applications
processed in the first quarter of 1998 to approximately 33.7% of total
applications processed in the fourth quarter of 1998. Management believes that
its proprietary data processing system efficiently manages the high volume of
information associated with originating and servicing its leases and other
financing products on a nationwide
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basis. The Company believes this system has excess capacity which it believes
will decrease the Company's servicing costs per lease, contract and loan as
volumes increase. The Company intends to continue enhancing its proprietary data
processing system in order to ensure that its systems can be efficiently
utilized for new products as its portfolio grows.
Employing Multi-Dimensional Credit Scoring. The Company has used its
proprietary software to develop a multi-dimensional credit scoring model which
generates pricing of its leases, contracts and loans commensurate with the risk
assumed, enabling it to underwrite a broad range of credit risks. By analyzing
both the quality and amount of credit history available with respect to both
obligors and Dealers, the Company improves its ability to assess credit risk.
Emphasizing Service to Dealers. The Company has developed value-added
services that facilitate the sales of products by its Dealers and differentiate
the Company from its competitors. These value-added services include fast
responses to applications (including a fully automated Internet-based
applications processing system), consistent underwriting, quick and reliable
funding following application approval and identifiable and dedicated support
from the Company's customer service employees.
Efficient Collections. The Company's technology and its disciplined and
persistent approach to collections enable it to collect delinquent amounts, even
several years after the account originally became delinquent. The Company
believes that, as a result of the small payments associated with microticket
transactions, the credit performance of its customers is driven by factors
beyond merely an ability to pay. Therefore, it is the Company's policy to pursue
virtually all delinquent accounts in a lawful, reasonable and timely fashion and
in many instances, to recover amounts due under the Company's leases, contracts
and loans through litigation. The Company maintains a highly structured,
well-defined and automated system that enables a minimum number of personnel to
maximize the collection of delinquent payments.
Seeking to Develop New Products and Markets. The Company continues to seek
new product lines to which it can successfully apply its operating strategy,
both in the microticket market and, more recently, the lower end of the
small-ticket market. The Company originates leases for products that typically
have limited distribution channels and high selling costs. The Company
facilitates sales of such products by making them available to Dealers'
customers for a small monthly lease payment rather than a high initial purchase
price. The Company believes that it can leverage the competitive advantage it
has in its current markets to products with similar characteristics. The Company
intends to intensify its marketing effort, including increasing national
awareness of the Leasecomm brand name, as part of its strategy to develop new
product lines.
Expanding its Business through Selective Acquisitions. The Company intends
to pursue selective acquisitions of microticket and small-ticket leasing
companies and lease portfolios where the Company believes it can gain access to
an expanded Dealer base and successfully apply its operating strategy and where
such companies or portfolios can be acquired on attractive terms. In particular,
the Company seeks to acquire lease portfolios which will expand product lines
and ultimately provide a source of additional lease originations or lease
portfolios. The Company presently is not negotiating, nor does it have any
agreements or understandings to make, any such acquisitions.
INDUSTRY OVERVIEW
Lease Financing Industry. The equipment financing industry in the United
States has grown rapidly during the last decade and includes a wide range of
entities that provide funding for the purchase or lease of equipment or
services. The leasing industry in the United States is a significant factor in
financing capital expenditures of businesses. According to research by the
Equipment Leasing Association of America ("ELA"), using United States Department
of Commerce data, approximately $180 billion of the $582 billion spent on
productive assets in 1997 was financed by means of leasing. The ELA estimates
that 80% of all U.S. businesses lease or finance capital assets.
The Company considers the microticket segment of the lease financing
industry to include lease transactions of less than $5,000. It is served by a
wide range of fragmented financing sources primarily on a
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local and regional level. The segment also includes equipment manufacturers that
finance the sale or lease of their own products.
The Company believes that the microticket segment is one of the most
rapidly growing segments of the financing industry in part due to (i) a
technology-driven trend toward instant approvals at the point of sale; (ii) the
consolidation of the banking industry, which has eliminated many of the smaller
community banks that traditionally provided equipment and service financing for
small businesses; and (iii) the rate of growth and ongoing viability of small
businesses that represent the target market for microticket leasing products.
The Company's market focus includes small businesses with limited business
credit history. According to the Small Business Administration ("SBA"), small
businesses (firms with fewer than 500 employees) contribute 47% of all sales
nationwide, employ 53% of the private non-farm workforce and are responsible for
51% of the private gross domestic product. As of December 31, 1996, small
businesses represented 99% of the 23.3 million non-farm businesses in the United
States. New business formation reached a record level of over 885,000 new
employer firms in 1997, a 5.1% increase over 1996. The number of small
businesses in the U.S., as measured in business tax returns, has increased 57%
since 1982, according to SBA estimates.
Point of Sale Payment Systems. In recent years, consumers demanding fast,
convenient and secure methods of payment have increasingly substituted POS
card-based payments, such as debit, credit and charge cards, for traditional
forms of payment, such as checks and cash. To accommodate consumer preferences
for card-based payments and to facilitate the electronic delivery of such
payments, automated POS authorization systems were introduced in the early
1980s. These new automated capabilities included electronic authorization, data
capture, transaction transmission and settlement. These functions require the
use of a POS terminal capable of reading a cardholder's account information from
the card's magnetic stripe and combining this information with the amount of the
sale entered via a POS terminal keypad. The terminal electronically transmits
this information over a communications network to a computer data center and
then displays the returned authorization or verification response on the POS
terminal. According to published reports, by December 31, 1997, the number of
POS payment terminals worldwide had increased 25.4% from 13.4 million at
December 31, 1996 to 16.8 million, of which approximately 44% were located in
the U.S. The Company believes that card-based verifications will become a part
of an increasing number of commercial transactions in the future, including, for
example, verification of drivers' licenses by alcohol and tobacco merchants and
vendor activations of pre-paid cards. Consequently, the Company believes that as
such verifications become more prevalent, demand for POS authorization systems
will increase.
OVERVIEW OF FINANCING PROGRAMS
The Company primarily leases and rents low-priced commercial equipment with
limited residual value to small merchants. Many such merchants prefer leasing
such equipment for a relatively affordable monthly payment rather than
purchasing such equipment outright with a large initial payment. The Company
utilizes its expertise at credit analysis and collections to purchase or
originate monthly payment streams without regard to the residual value of the
leased product. The Company has applied this expertise to leasing a wide variety
of equipment in addition to POS authorization systems, including advertising and
display equipment, coffee machines, paging systems, water coolers and restaurant
equipment. In addition, the Company also acquires service contracts and
opportunistically seeks to enter various other financing markets.
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The Company has enjoyed a long history of portfolio growth, fueled by
origination growth in both traditional and developing markets that the Company
serves. The Company's commercial originations and financings grew 12% during
1997 compared to 1996, and relate primarily to POS authorization systems used by
small merchants. Although leases for POS authorization systems continued to be
the major source of the Company's revenues in 1997, leases for other commercial
equipment are experiencing significant growth. The following table outlines
historical Dealer Fundings defined as the amount paid to Dealers upon
origination for each type of underlying equipment or service financed:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
(DOLLARS IN THOUSANDS) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
COMMERCIAL
POS authorization systems(a)........... $54,658 $55,938 $55,391 $42,418 $44,478
Service contracts...................... 0 28 283 103 518
Other commercial....................... 9,235 10,437 17,656 11,589 22,627
------- ------- ------- ------- -------
Total commercial.................... $63,893 $66,403 $73,330 $54,110 $67,623
RESIDENTIAL
Service contracts...................... $ 3,635 $ 2,403 $ 2,689 $ 1,557 $ 5,780
Other residential...................... 8,974 4,853 1,571 1,100 3,307
------- ------- ------- ------- -------
Total residential................... $12,609 $ 7,256 $ 4,260 $ 2,657 $ 9,087
Total amount funded................. $76,502 $73,659 $77,590 $56,767 $76,710
</TABLE>
- ---------------
(a) Excludes portfolio acquisitions in 1996 of approximately $9.8 million
representing 16,200 separate contracts.
The Company's residential financings include acquiring service contracts
from Dealers that provide security monitoring services and various other types
of residential finance products. The Company's residential portfolio in past
years primarily included leases of satellite television equipment. Despite
significant origination volume in this market, the Company made a strategic
decision in July 1996 to de-emphasize the satellite television equipment
business and has greatly reduced originations of these leases since that time.
The Company originates and services leases, contracts and loans in all 50
states of the United States and its territories, taking advantage of the
nationwide reach of its Dealer network. As of September 30, 1998, leases in
California, Florida, Texas and New York accounted for approximately 41% of the
Company's portfolio, with none of the remaining states accounting for more than
5% of such total.
TERMS OF EQUIPMENT LEASES
Substantially all equipment leases originated or acquired by the Company
are non-cancelable. During the term of a typical lease, the Company is scheduled
to receive payments sufficient, in the aggregate, to cover the Company's
borrowing costs and the costs of the underlying equipment, and to provide the
Company with an appropriate profit. Throughout the term of the lease, the
Company charges late fees, prepayment penalties, loss and damage waiver fees and
other service fees, when applicable, which enhance the profitability of the
lease. The initial non-cancelable term of the lease is equal to or less than the
equipment's estimated economic life. Initial terms of the leases in the
Company's portfolio generally range from 12 to 48 months, with an average
initial term of 45 months as of September 30, 1998.
The terms and conditions of all of the Company's leases are substantially
similar. In most cases, the contracts require lessees to: (i) maintain, service
and operate the equipment in accordance with the manufacturer's and
government-mandated procedures; (ii) insure the equipment against property and
casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make
all scheduled contract payments regardless of the performance of the equipment.
The Company's standard lease forms provide that in the event of a default by the
lessee, the Company can require payment of liquidated damages and can seize and
remove the equipment for subsequent sale, refinancing or other disposal at its
discretion. Any additions, modifications
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or upgrades to the equipment, regardless of the source of payment, are
automatically incorporated into and deemed a part of the equipment financed.
RESIDUAL INTERESTS IN UNDERLYING EQUIPMENT
The Company typically owns a residual interest in the equipment covered by
a lease. The Company's equipment leases outstanding as of September 30, 1998 had
an aggregate residual value of approximately $17.6 million, representing 7.1% of
the Company's total lease receivables at September 30, 1998.
At the end of the lease term, the lease typically converts into a
month-to-month rental contract. If the lease does not convert, the lessee either
buys the equipment at a price quoted by the Company or returns the equipment. If
the equipment is returned, the Company may place the equipment into its used
equipment rental and leasing program. The Company may also sell the used
equipment through equipment brokers and remarketers in order to maximize the net
proceeds from such sale.
ORIGINATION AND UNDERWRITING
Sales and Marketing. The Company provides financing to obligors under
microticket leases, contracts and loans through its Dealers. Since the Company
relies primarily on its network of Dealers for its origination volume, the
Company considers them its customers. The Company's nationwide Dealer network is
the key to the Company's origination volume, with over 1,100 different Dealers
originating 56,002 Company leases, contracts and loans in 1997. Cardservice
Laguna accounted for approximately 14% of all originations in 1997. No other
Dealer accounted for more than 10% of the Company's origination volume during
such year.
The Company seeks to maintain relationships with its Dealers in order to
establish the Company as the provider of financing recommended by such Dealers
to their customers. The Company does not sign exclusive agreements with its
Dealers, but expects Dealers to conduct a significant portion of their business
with the Company in order to ensure a productive, cost-effective relationship.
Thousands of Dealers nationwide provide a wide variety of services to small
merchants. Dealers interact with merchants directly, and, for example, typically
market not only POS authorization systems, but also their financing through the
Company and ancillary POS processing services. As such, the Dealers' sales
approach appeals to the multiple needs of a small merchant and allows for sales
that are driven as much by convenience as by price. The Company believes that
lease financing represents a compelling alternative for any product critical to
a merchant's ongoing operation whose initial cost exceeds a particular price
threshold for small merchants.
The Company's marketing strategy is to increase its volume of funding by
(i) maintaining, expanding and supporting its network of Dealers, (ii)
developing programs for specific vendor or customer groups, (iii) developing and
introducing complementary lease finance products that can be marketed and sold
through its existing network of Dealers and (iv) increasing national awareness
of the Leasecomm brand name. The Company receives on average 7,000 to 10,000
applications per month (approximately 10,800 in September 1998) through its
network of Dealers. Because of this volume, and in order to continue to expand,
cultivate and nurture these relationships, the Company's 45 customer service
employees in its two locations work directly with this Dealer network.
Management believes that a focused marketing effort with dedicated personnel by
product type will ensure the continuation of significant origination growth and
profitability in the future. The Company also employs 11 individuals who are
dedicated to marketing to Dealers in specific product segments to ensure that
the Company adequately addresses the unique characteristics of the product.
These employees are responsible for implementing marketing plans and
coordinating marketing activities with the Company's Dealers, as well as
attending industry conventions and trade shows on behalf of the Company. As new
product initiatives are developed, the Company intends to continue to dedicate
personnel in this manner.
The Company provides a variety of value-added services to its Dealers,
including fast responses to applications, consistent underwriting, quick and
reliable funding following application approval and identifiable and dedicated
support nationwide. In addition, as a further convenience to its Dealers, the
Company has developed LeasecommDirect(TM), an Internet-based application
processing, credit approval and Dealer information tool. Using
LeasecommDirect(TM), a Dealer can input an application directly to the Company
via the
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Internet and obtain almost instantaneous approval automatically over the
Internet through the Company's computer system, all without any contact with any
employee of the Company. Use of this system by Dealers has increased from
approximately 3.5% of total applications processed in the first quarter of 1998
to approximately 33.8% of total applications processed in the fourth quarter of
1998. The Company also offers Instalease(R), a program that allows a Dealer to
submit applications by telephone, telecopy or e-mail to a Company
representative, receive approval, and complete a sale from a lessee's location.
By assisting the Dealers in providing timely, convenient and competitive
financing for their equipment or service contracts and offering Dealers a
variety of value-added services, the Company simultaneously promotes equipment
and service contract sales and the utilization of the Company as the finance
provider, thus differentiating the Company from its competitors.
Originations. In a typical lease transaction, the Company originates
leases referred to it by the Dealer and buys the underlying equipment from the
referring Dealer upon funding of an approved application. Leases are structured
with limited recourse to the Dealer, with risk of loss in the event of default
by the lessee residing with the Company in most cases. The Company owns the
underlying equipment covered by a lease and, in substantially all cases, retains
a residual interest in such underlying equipment. The Company performs all
processing, billing and collection functions under its leases.
In a typical transaction for the acquisition of service contracts, a
homeowner will purchase a security system and simultaneously sign a contract
with the Dealer for the monitoring of that system for a monthly fee. The Dealer
will then sell the right to payment under that contract to the Company for a
multiple of the monthly payments. The Company performs all processing, billing
and collection functions under these contracts.
Underwriting. The Company has developed credit underwriting policies and
procedures that management believes have been effective in determining pricing
which is commensurate with the creditworthiness of its obligors. The nature of
the Company's business requires two levels of review, the first focused on the
ultimate end-user of the equipment or service and the second focused on the
Dealer. The Company's variable pricing approach, which compensates for differing
risk profiles through risk-adjusted pricing, allows the Company to underwrite
obligors with a broad band of credit quality and provide financing in situations
where its competitors may be unwilling to provide such financing.
The Company utilizes a proprietary automated computer scoring model to
assess the credit of both the lessee and the Dealer along several dimensions.
This software does not produce a binary, "yes or no" decision, but rather
determines the price at which the lease, contract or loan can be profitably
underwritten. The Company has developed its credit-scoring model internally over
the past twelve years based on its specific experiences with its portfolio of
leases, contracts and loans and its extensive experience with its lessees and
Dealers. The Company believes that no general commercially available
credit-scoring model is as effective as the Company's model in predicting the
payment behavior of the Company's lessee base. The Company reviews its
underwriting policies and the computer scoring model on a regular basis and
makes adjustments when necessary.
The approval process begins with the submission by telephone, facsimile or
electronic transmission of a credit application by the Dealer. Upon submission,
the Company, either manually or through LeasecommDirect(TM) over the Internet,
conducts its own independent credit investigation of the lessee through its own
proprietary data base and recognized commercial credit reporting agencies such
as Dun & Bradstreet, TRW, Equifax and TransUnion. The Company's software
evaluates this information on a two-dimensional scale, examining both credit
depth (how much information exists on an applicant) and credit quality (past
payment history). The credit scoring model is complex and automatically adjusts
for different transactions. For instance, depending on the size of the credit,
different weight is placed on individual pieces of credit information. In
situations where the amount financed is over $3,000, the Company may go beyond
its own data base and recognized commercial credit reporting agencies and obtain
information from less readily available sources such as banks. In certain
instances, the Company will require the lessee to provide verification of
employment and salary.
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<PAGE> 33
The second aspect of the credit decision involves an assessment of the
originating Dealer. This assessment reflects the Company's experience that the
likelihood of lessee compliance is commensurate with Dealer quality. Dealers
undergo both an initial screening process and ongoing evaluation, including an
examination of Dealer portfolio performance, lessee complaints, cases of fraud
or misrepresentation, aging studies, number of applications and conversion rates
for applications. This ongoing assessment enables the Company to manage its
Dealer relationships, including ending relationships with poor-performing
Dealers.
Upon credit approval, the Company requires receipt of signed lease
documentation on the Company's standard or other pre-approved lease form before
funding. Once the equipment is shipped and installed, the Dealer invoices the
Company, and thereafter the Company verifies that the lessee has received and
accepted the equipment. Upon the lessee authorizing payment to the Dealer, the
lease is forwarded to the Company's funding and documentation department for
funding, transaction accounting and billing procedures.
Bulk and Portfolio Acquisitions. In addition to originating leases through
its Dealer relationships, the Company from time to time has purchased lease
portfolios from Dealers in order to grow its portfolio and diversify the
underlying equipment financed. The Company purchases leases from Dealers on an
ongoing basis in packages ranging from $20,000 to $200,000. While certain of
these leases initially do not meet the Company's underwriting standards, the
Company will often purchase the leases once the lessee demonstrates a payment
history. The Company will only acquire these smaller lease portfolios in
situations where the company selling the portfolio will continue to act as a
Dealer following the acquisition. The Company also completed the acquisition of
three large POS authorization system lease and rental portfolios, two in 1996
and one in 1998, all of which have contributed to lease yield, fee income and
extended rental profits. The first acquisition, completed in May 1996, consisted
of over 8,000 rental contracts with total fundings of $1.9 million. The second
acquisition was for approximately 8,200 leases in December 1996 with fundings of
$7.9 million. The Company acquired 4,841 rental contracts in July 1998 with
fundings of $2.8 million. The Company considers portfolio acquisitions to be a
lucrative source of immediate lease yield and fee income as well as future
rental income, and accordingly, will continue to pursue such acquisitions.
SERVICING AND COLLECTIONS
The Company performs all servicing functions on its leases, contracts and
loans, including its securitized leases, through its automated servicing and
collection system. Servicing responsibilities generally include billing,
processing payments, remitting payments to Dealers and investors in
Securitizations, preparing investor reports, paying taxes and insurance and
performing collection and liquidation functions.
The Company's business is operationally intensive, due in part to the small
average amount financed. Accordingly, technology and automated processes are
critical in keeping servicing costs to a minimum while providing quality
customer service. The Company's automated lease administration system handles
application tracking, invoicing, payment processing, automated collection
queuing, portfolio evaluation and report writing. The system is linked with bank
accounts for payment processing and provides for direct withdrawal of lease,
contract and loan payments.
The Company combines its collection efforts with its general relations with
obligors. A Lessee Relations Representative ("LRR") is assigned to each lease,
contract or loan at the time of funding, giving each lessee or other obligor a
specific customer relations contact throughout the term of the lease, contract
or loan, including during delinquent collection efforts. The lessee relations
department is organized under the Director of Lessee Relations, who manages 2
senior managers, 11 supervisors and 61 LRRs. LRRs are broadly classified as
either "front-end" (43 LRRs) or "back-end" (18 LRRs), with the "back-end" LRRs
servicing only very delinquent accounts. The "back-end" LRRs generally have
several years of experience with delinquent accounts and are entirely dedicated
to collections.
The Company's collection effort is a key component of its success. The
Company believes that its competitors have not energetically pursued collection
of microticket delinquent accounts due to the perceived high costs of collecting
relatively small monthly payments against equipment with low resale value. In
contrast, the Company can cost-effectively pursue such delinquencies due to its
highly automated collection process. In addition to writing collection letters,
making collection calls and reporting delinquent accounts to
33
<PAGE> 34
the credit reporting agencies, the Company litigates essentially all delinquent
accounts where necessary and obtains and enforces judgments through a network of
over 100 law firms nationwide. The Company uses several computerized processes
in its collection efforts, including the generation of daily priority call lists
and scrolling for daily delinquent account servicing, generation and mailing of
delinquency letters, routing of incoming calls to appropriate LRRs with instant
computerized access to account details, generation of delinquent account lists
eligible for litigation, generation of pleadings and litigation monitoring.
Collection efforts commence immediately, with repeated reminder letters and
telephone calls upon payments becoming 10 days past due, with a lawsuit
generally filed if an account is more than 85 days past due.
The Company takes a team-oriented approach to collections, with supervisors
directly overseeing a team of five to six LRRs. Compensation at all levels of
the collection effort is linked to the success of the entire collection team.
LRRs are assigned daily productivity targets based on dollars collected, phone
calls placed and phone calls fielded, with scrolling call lists reprioritized
nightly. If these targets are exceeded, LRRs receive a higher percentage of the
amounts collected based on a tiered compensation scale. In order to be eligible
for the highest scale of commissions, each team member must meet his collection
target, providing an incentive to team members to assist in the servicing of
each team member's accounts.
EXPOSURE TO CREDIT LOSSES
The Company's risk-adjusted approach to underwriting allows it to
profitably originate and acquire leases, contracts and loans with a high risk of
default. The Company's risk-adjusted pricing model and credit analyses are
designed to take into account estimated defaults. The Company attempts to
maximize the ultimate cash collected through its disciplined and persistent
collection procedures. Management evaluates the collectibility of leases,
contracts and loans acquired or originated based on the lessee's or other
obligor's and Dealer's respective credit profiles, delinquency statistics,
historical loss experience, current economic conditions and other relevant
factors.
The Company maintains an allowance for credit losses on its investment in
leases, service contracts and loans at an amount that it believes is sufficient
to provide adequate protection against losses in its portfolio. The allowance is
determined principally on the basis of the historical loss experience of the
Company and the level of recourse provided by such lease, service contract or
loan, if any, and reflects management's judgment of additional loss potential
considering future economic conditions and the nature and characteristics of the
underlying lease portfolio. The Company determines the necessary periodic
provision for credit losses taking into account actual and expected losses in
the portfolio as a whole and the relationship of the allowance to the net
investment in leases, service contracts and loans. Such provisions generally
represent a percentage of funded amounts of leases, contracts and loans. The
resulting charge is included in the provision for credit losses.
Leases, service contracts, and loans are charged against the allowance for
credit losses and are put on non-accrual when they are deemed to be
uncollectible. Generally, the Company deems leases, service contracts and loans
to be uncollectible when one of the following occur: (i) the obligor files for
bankruptcy; (ii) the obligor dies and the equipment is returned; or (iii) when
an account has become 360 days delinquent. The typical monthly payment under the
Company's leases is between $30 and $50 per month. As a result of these small
monthly payments, the Company's experience is that lessees will pay past due
amounts later in the process because of the small amount necessary to bring an
account current (at 360 days past due, a lessee will only owe lease payments of
between $360 and $600).
The Company has developed and regularly updates proprietary credit scoring
systems designed to improve its risk based pricing. The Company uses credit
scoring in most, but not all, of its extensions of credit. In addition, the
Company aggressively employs collection procedures and a legal process to
resolve any credit problems.
The Company seeks to protect itself from credit exposure relating to poor
quality Dealers by entering into recourse agreements with its Dealers, under
which the Dealer agrees to reimburse the Company for payment of defaulted
amounts under certain circumstances, primarily defaults within the first month
following origination and upon evidence of Dealer errors or misrepresentations
in originating a lease or contract. In case
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<PAGE> 35
of Dealer error or misrepresentation, the Company will charge-back the Dealer
for both the lessee's delinquent amounts and attorney and court fees.
The following table sets forth certain information as of December 29, 1995,
December 31, 1996 and 1997 and as of October 2, 1998, with respect to delinquent
leases, contracts and loans. These dates represent the dates on the Company's
regular schedule for calculating delinquencies which are nearest to the final
day of the corresponding fiscal year and quarter. The percentages in the table
below represent the aggregate on such date of actual amounts not paid on each
invoice by the number of days past due (rather than the entire balance of a
delinquent receivable) over the cumulative amount billed at such date from the
date of origination on all leases, contracts and loans in the Company's
portfolio. For example, if a receivable is over 90 days past due, the portion of
the receivable which is over 30 days past due will be placed in the 31-60 days
past due category, the portion of the receivable which is over 60 days past due
will be placed in the 61-90 days past due category and the portion of the
receivable which is over 90 days past due will be placed in the over 90 days
past due category. The Company historically has used this methodology of
calculating its delinquencies because of its experience that lessees who miss a
payment do not necessarily default on the entire lease. Accordingly, the Company
includes only the amount past due rather than the entire lease receivable in
each category.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 29, DECEMBER 31, AS OF
------------ ------------------- OCTOBER 2,
1995 1996 1997 1998
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Cumulative amount billed (in thousands)........ $122,065 $189,798 $260,958 $301,244
31-60 days past due............................ 1.0% 1.6% 1.6% 1.4%
61-90 days past due............................ 0.8 1.2 1.1 1.1
Over 90 days past due.......................... 5.7 6.6 7.0 8.0
-------- -------- -------- --------
Total past due............................ 7.5% 9.4% 9.7% 10.5%
</TABLE>
The following table sets forth, as of December 31, 1997 and October 2, 1998
(the dates on the Company's regular reporting schedule for calculating
delinquencies which are nearest to the final day of the corresponding fiscal
year and quarter), contractual delinquencies (including the entire lease
receivable with the exception of service contracts, as to which only the amount
of the invoices billed but not collected is included) in each category as a
percentage of the sum of receivables due in installments plus investment in
service contracts plus loans receivable on the Company's most recent balance
sheet.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, OCTOBER 2,
1997 1998
------------ -------------
<S> <C> <C>
Receivables due in installments plus investment in service
contracts plus loans receivable (in thousands)(1)......... $243,591 $262,987
31-60 days past due......................................... 3.2% 3.4%
61-90 days past due......................................... 2.4 2.5
Over 90 days past due....................................... 19.9 19.2
-------- --------
Total past due......................................... 25.5% 25.1%
</TABLE>
(1) As reported on the Company's balance sheet at December 31, 1997 and
September 30, 1998, respectively.
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<PAGE> 36
The following table sets forth the Company's allowance for credit losses as
of December 31, 1994, 1995, 1996 and 1997 and as of September 30, 1998 and the
related provisions, charge-offs and recoveries for the years ended December 31,
1995, 1996 and 1997 and for the nine months ended September 30, 1998 (in
thousands):
<TABLE>
<S> <C> <C>
Balance at December 31, 1994................................ $ 7,992
Provision for credit losses................................. 13,388
Charge-offs................................................. 5,964
Recoveries.................................................. 536
-------
Charge-offs, net of recoveries.............................. 5,428
-------
Balance at December 31, 1995................................ $15,952
Provision for credit losses................................. 19,822
Charge-offs................................................. 15,675
Recoveries.................................................. 3,727
-------
Charge-offs, net of recoveries.............................. 11,948
-------
Balance at December 31, 1996................................ $23,826
Provision for credit losses................................. 21,713
Charge-offs................................................. 24,290
Recoveries.................................................. 5,070
-------
Charge-offs, net of recoveries.............................. 19,220
-------
Balance at December 31, 1997................................ $26,319
Provision for credit losses................................. 12,568
Charge-offs................................................. 20,644
Recoveries.................................................. 6,180
-------
Charge-offs, net of recoveries.............................. 14,464
-------
Balance at September 30, 1998............................... $24,423
</TABLE>
The following table sets forth (i) for the indicated period the Company's
charge-offs and provision for credit losses as percentages of the sum of average
gross investment in leases and loans plus investment in service contracts and
(ii) at the end of the given period, the Company's allowance for credit losses
as a percentage of gross investment in leases and loans plus investment in
service contracts:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------- SEPTEMBER 30,
1995 1996 1997 1998(1)
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Average gross investment in leases and
loans and investment in service
contracts (in thousands)(2)............. $152,492 $218,666 $254,004 $270,468
Net charge-offs........................... 3.56% 5.46% 7.57% 7.13%
Provision for credit losses............... 8.78% 9.07% 8.55% 6.20%
Allowance for credit losses............... 8.41% 9.62% 10.19% 8.94%
</TABLE>
- ---------------
(1) Quarterly amounts are annualized.
(2) Consists of receivables due in installments, estimated residual value, loans
receivable and investment in service contracts.
Charge-offs in 1996 and 1997 were higher due to (i) an increase in
charge-offs by a total of approximately $5.0 million to replenish the allowance
for credit losses due to the change in the write-off period from 360 to 240
days, as more fully described below; (ii) $5.1 million in write-offs related to
satellite television equipment receivables in 1997; and (iii) a one-time
write-off of securitized receivables of $9.5 million in 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations." Cumulative net charge-offs after
recoveries from the Company's inception through December 31, 1997 were 6.78% of
total cumulative originations plus total billed fees over such period.
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<PAGE> 37
The Company historically took charge-offs against its receivables when such
receivables were 360 days past due. During this period, cumulative net
charge-offs from the Company's inception to September 30, 1998 were 7.45% of
total cumulative receivables plus total billed fees over such period. In
September and October 1996, the Company reduced the time period for charging off
its receivables from 360 to 240 days and, as a result, increased its charge-offs
by a total of approximately $5.0 million. As a result of this change, recoveries
increased significantly indicating that a 240-day charge-off period was too
early in the collection process to determine ultimate collectibility. As such,
during 1997, net charge-offs after recoveries were not significantly different
than the Company's historical net charge-off experience. For this reason, in
January 1998, the Company changed its charge-off policy for its receivables back
to 360 days to better reflect the Company's collection experience.
FUNDING SOURCES
The Company maintains a diverse mix of funding sources which include its
Credit Facilities, Subordinated Debt, and Securitizations. Historically, the
Company has fulfilled its liquidity needs by utilizing each of these three
sources. See "Description of Certain Indebtedness."
COMPETITION
The microticket leasing and financing industry is highly competitive. The
Company competes for customers with a number of national, regional and local
banks and finance companies. The Company's competitors also include equipment
manufacturers that lease or finance the sale of their own products. While the
market for microticket financing has traditionally been fragmented, the Company
could also be faced with competition from small- or large-ticket leasing
companies that could use their expertise in those markets to enter and compete
in the microticket financing market. The Company's competitors include larger,
more established companies, some of which may possess substantially greater
financial, marketing and operational resources than the Company, including a
lower cost of funds and access to capital markets and to other funding sources
which may be unavailable to the Company.
FACILITIES
The Company's corporate headquarters and operations center are located in
leased space of 34,851 square feet at 950 Winter Street, Waltham, Massachusetts
02151. The Company's telephone number is (781) 890-0177. The lease for this
space expires on June 30, 1999. The Company also leases 2,933 square feet of
office space for its West Coast office in Newark, California under a lease which
expires on August 31, 2001. As of September 30, 1998, the aggregate monthly rent
under these leases was approximately $76,964. The Company recently signed a
lease for 44,659 square feet of office space in Woburn, Massachusetts which
commenced on December 15, 1998 and expires on December 14, 2003. The monthly
rent under this lease is $57,099.
EMPLOYEES
As of September 30, 1998, the Company had 230 full-time employees, of which
45 were engaged in credit activities and Dealer service, 116 were engaged in
servicing and collection activities, 10 were engaged in marketing activities,
and 59 were engaged in general administrative activities. Management believes
that its relationship with its employees is good. No employees of the Company
are members of a collective bargaining unit in connection with their employment
by the Company.
LEGAL PROCEEDINGS
The Company and its subsidiaries are frequently parties to various claims,
lawsuits and administrative proceedings arising in the ordinary course of
business. Although the outcome of these lawsuits cannot be predicted with
certainty, the Company does not expect such matters to have a material adverse
effect on the financial condition or results of operations of the Company.
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<PAGE> 38
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of each of the directors and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Peter R. Bleyleben(1)........................... 45 President, Chief Executive Officer and
Director
Brian E. Boyle(1)(2)............................ 50 Director
Torrence C. Harder(1)(2)........................ 55 Director
Jeffrey P. Parker(2)............................ 55 Director
Alan J. Zakon(1)(2)............................. 63 Director
Richard F. Latour............................... 45 Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Treasurer,
Clerk and Secretary
J. Gregory Hines................................ 38 Vice President, Funding
John Plumlee.................................... 47 Vice President, MIS
Carol A. Salvo.................................. 32 Vice President, Legal
</TABLE>
- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
Set forth below is a brief description of the business experience of the
directors and executive officers of the Company.
PETER R. BLEYLEBEN has served as President, Chief Executive Officer and
Director of the Company or its predecessor since June 1987. Before joining the
Company, Dr. Bleyleben was Vice President and Director of the Boston Consulting
Group, Inc. ("BCG") in Boston. During his more than eight years with BCG, Dr.
Bleyleben focused his professional strategic consulting practice on the
financial services and telecommunications industries. Prior to joining BCG, Dr.
Bleyleben earned an M.B.A. with distinction and honors from the Harvard Business
School, an M.B.A. and a Ph.D. in Business Administration and Economics,
respectively, from the Vienna Business School in Vienna, Austria and a B.S. in
Computer Science from the Vienna Institute of Technology.
BRIAN E. BOYLE, the Chief Executive Officer of the Company from 1985 to
1987 and Chairman of the Board of Directors from 1985 to 1995, has served as a
Director of the Company or its predecessor since 1985. He is currently the Vice
Chairman and a Director of Boston Communications Group, Inc. ("Communications"),
a Boston-based provider of switch-based call processing to the global wireless
industry. Prior to joining Communications, Dr. Boyle was the Chairman and Chief
Executive Officer of Credit Technologies, Inc., a Massachusetts-based provider
of credit decision and customer acquisition software, from 1989 to 1993. He is
also a Director of Saville Systems, a global telecommunications billing software
company, with its United States headquarters in Burlington, Massachusetts, as
well as of several private companies. Dr. Boyle earned his A.B. in Mathematics
and Economics from Amherst College and a B.S. in Electrical Engineering and
Computer Science, an M.S. in Operations Research, an E.E. in Electrical
Engineering and Computer Science and a Ph.D. in Operations Research, all from
the Massachusetts Institute of Technology.
TORRENCE C. HARDER has served as a Director of the Company since 1986. He
has been the President and Director of Harder Management Company, Inc., a
registered investment advisory firm, since its establishment in 1971. He has
also been the President and Director of Entrepreneurial Ventures, Inc., a
venture capital investment firm, since its founding in 1986. Mr. Harder is a
Director of Lightbridge, Inc., a wireless industry software services provider,
Dent-A-Med, Inc., RentGrow, Inc., GWA Information Systems, Inc., Trade Credit
Corporation and UpToDate in Medicine, Inc. Mr. Harder earned an M.B.A. from the
Wharton School of the University of Pennsylvania, and a B.A. with honors in the
Philosophy of Economic Thought from Cornell University.
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<PAGE> 39
JEFFREY P. PARKER has served as a Director of the Company since 1992. He is
the founder and has served since 1997 as the Chief Executive Officer of
CCBN.COM, a world wide web information services company based in Boston. He is
also the founder and has served since 1991 as the managing director of Private
Equity Investments, a venture capital firm focusing on start-up and early stage
companies. Mr. Parker is a Director of Boston Treasury Systems, FaxNet
Corporation, Pacific Sun Industries, Vintage Partners and XcelleNet, Inc. Mr.
Parker earned a B.A., an M.A. in Engineering and an M.B.A. from Cornell
University.
ALAN J. ZAKON has served as a Director of the Company since 1988. Since
1995, he has been the Vice Chairman and a Director, and since November 1997,
Chairman of the Executive Committee, of Autotote Corporation, a New York-based
global gaming and simulcasting company. He served as Managing Director of
Bankers Trust Corporation from 1989 to 1995 where he was Chairman of the
Strategic Policy Committee. Dr. Zakon is a Director of Arkansas-Best Freight
Corporation, a nationwide commercial transportation and trucking company. Dr.
Zakon holds a B.A. from Harvard University, an M.S. in Industrial Management
from the Sloane School at the Massachusetts Institute of Technology and a Ph.D.
in Economics and Finance from the University of California at Los Angeles.
RICHARD F. LATOUR has served as Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Treasurer, Clerk and Secretary of the Company
since 1995. From 1986 to 1995, Mr. Latour was Vice President of Finance and
Chief Financial Officer of the Company. Prior to joining the Company, Mr. Latour
was Vice President, Finance for TRAK, Incorporated, an international
manufacturer and distributor of consumer products, where he was responsible for
all financial and related administrative functions.
J. GREGORY HINES has served as Vice President, Funding since 1993. From the
time he joined the Company in 1992 until 1993, Mr. Hines served as funds manager
of the Company. Prior to joining the Company, Mr. Hines was an assistant vice
president in the Equipment Finance Division at the Bank of New England, N.A. and
Fleet National Bank.
JOHN PLUMLEE has served as Vice President, MIS, of the Company since 1990.
Prior to joining the Company, Mr. Plumlee was Vice President of M.M.C., Inc., a
firm focusing on the delivery of software services to local governments.
CAROL SALVO has served as Vice President, Legal, of the Company since 1996.
From 1992 to 1995, Ms. Salvo served as Litigation Supervisor of the Company.
From 1995 to 1996, Ms. Salvo served as Director of Legal Collection Services of
the Company. Prior to joining the Company, Ms. Salvo was a junior accountant
with InfoPlus Inc.
The directors of the Company have been divided, with respect to the time
for which they severally hold office, into three classes, as nearly equal in
number as possible, with the term of office of the first class to expire at the
1999 annual meeting of the stockholders of the Company, the term of office of
the second class to expire at the 2000 annual meeting of the stockholders of the
Company and the term of office of the third class to expire at the 2001 annual
meeting of the stockholders of the Company, with each director to hold office
until his or her successor shall have been duly elected and qualified or until
his or her earlier removal or resignation. At each annual meeting of
stockholders of the Company, commencing with the 1999 annual meeting, directors
elected to succeed those directors whose terms then expire shall be elected for
a term of office to expire at the third succeeding annual meeting of the
stockholders of the Company after their election. In accordance with the
foregoing, Peter Bleyleben's term as a director of the Company expires at the
2001 annual meeting of the stockholders of the Company, Brian Boyle and Alan
Zakon's respective terms as directors of the Company expire at the 2000 annual
meeting of the stockholders of the Company and Torrence Harder and Jeffrey
Parker's respective terms as directors of the Company expire at the 1999 annual
meeting of the stockholders of the Company.
COMPENSATION OF DIRECTORS
The Board of Directors of the Company is comprised of five Directors, one
of whom, Peter Bleyleben, is a salaried employee of the Company who receives no
additional compensation for services rendered as a Director. The members of the
Company's Board of Directors who are not employees of the Company ("Non-
39
<PAGE> 40
Employee Directors") receive compensation under the Company's Board of Directors
Stock Unit Compensation Plan (the "Stock Unit Plan") for their service on the
Board of Directors. Directors also are reimbursed for out-of-state travel
expenses incurred in connection with attendance at meetings of the Board of
Directors and committees thereof.
The Company adopted the Stock Unit Plan in February 1997. Under the Stock
Unit Plan, Non-Employee Directors who do not serve as committee chairpersons
receive up to $30,000 per year, payable $3,750 per meeting in cash and $3,750
per meeting in stock units (the "Stock Units"). Committee chairpersons receive
up to $35,000 per year, payable $4,375 per meeting in cash and $4,375 per
meeting in Stock Units. In addition, the Company pays for health care insurance
for each Non-Employee Director. Under the Stock Unit Plan, the Company pays the
participant the cash amount currently and credits Stock Units in the appropriate
amounts to a deferred fee account on the date of the Board of Directors or
Committee meeting. Each Stock Unit in the deferred fee account is valued at the
time each such credit is made at the then-current value of the Common Stock, as
that value is determined from time to time by the Board of Directors. The number
of Stock Units credited to each Non-Employee Director's deferred fee account and
the value placed on each Stock Unit is appropriately adjusted in the event of a
stock dividend, stock split or other similar change affecting the Common Stock.
If any person or group acquires the right to obtain beneficial ownership of
51% or more of the outstanding Common Stock, each Non-Employee Director may
elect to convert his or her Stock Units into cash at the per share price to be
paid by such person or group if such price is higher than the value at which the
Stock Unit was granted. A participant is not entitled to payment for any Stock
Unit with a value less than such per share price. If a Director dies prior to
the receipt of the distribution under the Stock Unit Plan, the distributable
balance thereunder shall be distributed to the Non-Employee Director's
designated beneficiary. The Board of Directors may terminate the Stock Unit Plan
at any time in its discretion. The Stock Unit Plan is automatically terminated
upon completion of all distributions required thereunder.
As of September 30, 1998, Dr. Boyle, Mr. Harder, Mr. Parker and Dr. Zakon
had 2,978.12, 3,474.48, 2,978.12 and 3,474.48 Stock Units in their respective
accounts.
The Board of Directors has voted to terminate the Stock Unit Plan effective
upon the closing of the Offering. Each Non-Employee Director will receive a cash
payment in an amount equal to the number of Stock Units in their respective
accounts multiplied by the price to public on the cover of this Prospectus.
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<PAGE> 41
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the compensation payable by the Company to its Chief Executive
Officer and its other four most highly compensated executive officers for the
years ended December 31, 1998, 1997 and 1996 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND -------------------- ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION
------------------ ---- ------ -------- ------------
<S> <C> <C> <C> <C>
Peter R. Bleyleben............................... 1998 $250,888 $364,000 $65,245(3)
President, Chief Executive 1997 218,798 276,730 71,072
Officer and Director 1996 187,837 214,073 73,674
Richard F. Latour................................ 1998 198,446 244,568 45,690(4)
Executive Vice President, 1997 169,495 153,755(5) 49,680
Chief Operating Officer, 1996 134,535 43,000 44,381
Chief Financial Officer, Treasurer, Clerk and
Secretary
J. Gregory Hines................................. 1998 106,951 42,095 4,281(6)
Vice President, Funding 1997 87,348 26,950 3,206
1996 79,853 10,320 2,256
John Plumlee..................................... 1998 141,351 44,533 21,191(7)
Vice President, MIS 1997 124,624 29,769 20,687
1996 108,657 14,346 18,603
Carol Salvo...................................... 1998 84,677 34,734 4,022(8)
Vice President, Legal 1997 66,368 15,781 2,170
1996 47,190 3,817 1,502
</TABLE>
- ---------------
(1) Columns required by the Rules and regulations of the Securities and Exchange
Commission that contain no entries have been omitted.
(2) Bonuses are paid over a three-year period, with one-third payable each year.
The remaining two-thirds is subject to discretionary review by the Company
and, therefore, does not vest to the employee. The bonus amount set forth
for each fiscal year thus represents the amount actually paid for such
fiscal year, plus amounts relating to the prior two fiscal years.
(3) Amounts for Dr. Bleyleben include: (a) contributions by the Company under
the Company's 401(k) retirement/profit sharing plan in 1998 ($4,000), 1997
($4,470) and 1996 ($4,500); (b) split dollar life insurance premiums paid by
the Company in 1998 ($54,156), 1997 ($62,461) and 1996 ($60,515) (in the
event of the death of Dr. Bleyleben, the Company is entitled to the cash
value under such plan with the beneficiary receiving the life insurance
portion thereof); (c) executive disability insurance policy premiums paid by
the Company in 1998 ($7,089), 1997 ($3,546) and 1996($3,546); and (d) the
benefit to the executive of interest-free loans from the Company based on
the applicable federal rate in effect on the date of issuance of each such
loan, in 1997 ($595) and 1996 ($5,113).
(4) Amounts for Mr. Latour include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($4,000), 1997
($4,500) and 1996 ($4,435); (b) split dollar life insurance premiums paid by
the Company in 1998 ($34,917), 1997 ($40,501) and 1996 ($35,067) (in the
event of the death of Mr. Latour, the Company is entitled to the cash value
under such plan with the beneficiary receiving the life insurance portion
thereof); (c) executive disability insurance policy premiums paid by the
Company in 1998 ($3,028), 1997 ($1,586) and 1996 ($2,460); and (d) the
benefit to the executive of interest-free loans from the Company based on
the applicable federal rate in effect on the date of issuance of each such
loan, in 1998 ($3,745), 1997 ($3,093) and 1996 ($2,419).
(5) Does not include $179,745 which related to bonuses awarded in prior years
and deferred until 1997 at Mr. Latour's option.
(6) Amounts for Mr. Hines include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($2,738), 1997
($2,273) and 1996 ($1,963); (b) term life insurance premiums paid by the
Company in 1998 ($84), 1997 ($84) and 1996 ($76); (c) executive disability
insurance policy premiums paid by the Company in 1998 ($602), 1997 ($434)
and 1996 ($217); and (d) the benefit to the executive of interest-free loans
from the Company based on the applicable federal rate in effect on the date
of issuance of each such loan, in 1998 ($857) and 1997 ($415).
(7) Amounts for Mr. Plumlee include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($3,870), 1997
($3,722) and 1996 ($2,991); (b) split dollar life insurance premiums paid by
the Company in 1998 ($15,000), 1997 ($15,113) and 1996 ($15,104) (in the
event of the death of Mr. Plumlee, the Company is entitled to the cash value
under such plan with the beneficiary receiving the life insurance portion
thereof); (c) executive disability insurance policy premiums paid by the
Company in 1998 ($1,016), 1997 ($1,016) and 1996 ($508); and (d) the benefit
to the executive of interest-free loans from the Company based on the
applicable federal rate in effect on the date of issuance of each such loan,
in 1998 ($1,305) and 1997 ($836).
(8) Amounts for Ms. Salvo include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($2,597), 1997
($1,686) and 1996 ($1,447); (b) term life insurance premiums paid by the
Company in 1998 ($84), 1997 ($69) and 1996 ($55); (c) executive disability
insurance policy premiums paid by the Company in 1998 ($485); and (d) the
benefit to the executive of interest-free loans from the Company based on
the applicable federal rate in effect on the date of issuance of each such
loan, in 1998 ($857) and 1997 ($415).
41
<PAGE> 42
STOCK OPTION PLANS
1998 Equity Incentive Plan
The Company has adopted the 1998 Equity Incentive Plan (the "1998 Plan")
effective July 9, 1998 to attract and retain the best available talent and
encourage the highest level of performance by directors, employees and other
persons who perform services for the Company. The 1998 Plan permits the
Compensation Committee of the Board of Directors (or such other committee
designated by the Board) to make various long-term incentive awards as described
below ("Awards"), generally equity-based, to eligible persons. The Board of
Directors believes that by including various kinds of Awards in the 1998 Plan,
the Compensation Committee will have maximum flexibility in determining what
vehicle is best suited at any particular time to act as a long-term incentive.
The Company intends to reserve 2,000,000 shares of Common Stock for issuance
pursuant to the 1998 Plan.
The 1998 Plan is administered by the Compensation Committee. So long as it
acts consistently with the express provisions of the 1998 Plan, the Compensation
Committee has the authority to (a) grant Awards; (b) determine the persons to
whom Awards shall be granted; (c) determine the size of Awards; (d) determine
the terms and conditions applicable to Awards; (e) determine the terms and
provisions of Award agreements; (f) interpret the 1998 Plan; and (g) prescribe,
amend and rescind rules and regulations relating to the 1998 Plan.
The 1998 Plan provides for grants of Awards including, but not limited to
(a) options to purchase shares of Common Stock consisting of (i) incentive stock
options at not less than the fair market value on the date of grant (except in
the case of a shareholder possessing more than 10% of the total combined voting
power of all classes of Common Stock, in which case the exercise price shall be
not less than 110% of the fair market value on the date of grant); (ii)
non-qualified stock options at an exercise price determined by the Compensation
Committee; (b) stock appreciation rights (either tandem or freestanding) which
are rights to receive an amount equal to the increase, between the date of grant
and the date of exercise, in the fair market value of the number of shares of
Common Stock subject to the stock appreciation right; (c) shares of restricted
stock which are shares of Common Stock granted to an eligible person but which
have certain conditions attached to them which must be satisfied in order for
the holder to have unencumbered rights to the restricted stock; and (d)
performance Awards which are awards in shares of Common Stock or cash and which
may be awarded based on the extent to which the person achieves selected
performance objectives over a specified period of time. All material terms of
such Awards shall be determined by the Compensation Committee. At the discretion
of the Compensation Committee, in the event of a Change in Control (as
hereinafter defined), certain Awards may vest immediately.
"Change in Control" means (i) the acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 50% or more of either the then outstanding shares of Common
Stock or the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors; (ii)
individuals who, as of the date of the 1998 Plan constitute the Board of
Directors, cease for any reason to constitute at least a majority of the Board
of Directors except with respect to any director who was approved by a vote of
at least a majority of the directors then comprising the Board of Directors;
(iii) approval by the shareholders of the Company of a reorganization, merger or
consolidation, in each case, unless, following such reorganization, merger or
consolidation, more than 60% of the then outstanding shares of Common Stock
continues to be owned by the shareholders who were the beneficial holders of
such stock prior to such transaction; or (iv) approval by the shareholders of
the Company of a complete liquidation or dissolution of the Company or the sale
or other disposition of all or substantially all of the assets of the Company.
The Board of Directors may suspend, terminate, modify or amend the 1998
Plan at any time without shareholder approval except to the extent that
shareholder approval is required by law or by the rules of the principal stock
exchange on which the Common Stock is listed. The Board of Directors may not,
however, without the consent of the person to whom an Award was previously
granted, adversely affect the rights of that person under the Award.
42
<PAGE> 43
1987 Stock Option Plan
The Company adopted the 1987 Stock Option Plan (the "1987 Stock Option
Plan" and together with the 1998 Plan, the "Stock Option Plans") effective July
1, 1987 to align the interests of the officers, employees, directors,
consultants and agents of the Company with those of its stockholders and to
encourage participants therein to acquire an ownership interest in the Company
through the granting of options. The 1987 Stock Option Plan provides that
options may be granted thereunder up to July 1, 1997. The Company reserved
1,220,000 shares of Common Stock for issuance pursuant to options granted under
the 1987 Stock Option Plan. Options for 508,000 shares of Common Stock were
granted under the 1987 Stock Option Plan, 371,166 of which have been exercised.
The 1987 Stock Option Plan is administered by the Board of Directors of the
Company. Pursuant to the terms and conditions of the 1987 Stock Option Plan, the
Board of Directors (or a committee designated by the Board of Directors)
effected the grant of options under the 1987 Stock Option Plan, determined the
form of options to be granted in each case, and has the right to make any other
determinations under, and interpretation of, any provision of the 1987 Stock
Option Plan. The Board of Directors may amend and make such changes in and to
the 1987 Stock Option Plan as it may deem proper and in the best interests of
the Company.
The 1987 Stock Option Plan provided for two separate forms of options to be
granted: incentive stock options pursuant to Section 422A of the Internal
Revenue Code of 1954, as amended (the "Code"), and non-qualified stock options.
Incentive stock options could only be granted to employees of the Company. Non-
qualified stock options could be granted to any officer, employee, director
(except a disinterested director, as defined in the 1987 Stock Option Plan),
consultant or agent of the Company. The Board of Directors of the Company,
acting by a majority of its disinterested directors, determined the persons to
be granted options, the number of shares subject to each option, whether the
options would be incentive stock options or non-qualified stock options, and the
terms of the options, consistent with the provisions of the 1987 Stock Option
Plan. The Board of Directors had the right to appoint from its disinterested
directors a committee of three or more persons who had the right to exercise the
powers of the Board of Directors in granting options under the 1987 Stock Option
Plan. A disinterested director is defined as a director who is not currently
eligible, and has not been eligible at any time within one year prior to the
granting of the options in question, to receive any option granted under the
1987 Stock Option Plan, or any stock, stock option or stock appreciation rights
under any other plan of the Company or its affiliates.
The exercise price for the shares of Common Stock which may be purchased
under each incentive stock option is at least equal to the fair market value per
share of the outstanding Common Stock of the Company at the time the option was
granted as determined by the Board of Directors in its discretion. The aggregate
fair market value (determined as of the time the option was granted) of the
Common Stock for which an individual could have been granted incentive stock
options in any calendar year was subject to the maximum permitted by the Code.
The exercise price for the shares of Common Stock which may be purchased under
each incentive stock option issued to a person who, immediately prior to the
grant of such option, owned (directly or indirectly) Common Stock possessing
more than ten percent (10%) of the total combined voting power of all classes of
stock of the Company or of its parent or subsidiaries (a "Restricted
Individual"), is at least equal to one hundred and ten percent (110%) of the
fair market value of the Common Stock subject to the option. The exercise price
for the shares of Common Stock which may be purchased under each non-qualified
stock option is at least equal to fifty percent (50%) of the fair market value
of the Common Stock subject to the option.
Each incentive stock option is exercisable at such time or times as are set
forth in the option agreement with respect to such option, but in no event after
the expiration of ten years from the date such option was granted. An incentive
stock option granted to a Restricted Individual is not exercisable after the
expiration of five years from the date such option was granted. A non-qualified
stock option is exercisable for such consideration, in such manner and at such
time or times as set forth in an option agreement containing such provisions as
the Board of Directors determined in granting such an option, and is exercisable
for a period of ten years and one day from the date such option was granted, but
in no event after such period.
43
<PAGE> 44
Each option granted under the 1987 Stock Option Plan is not transferable by
the optionee. The terms of the options and the number of shares of Common Stock
subject to the 1987 Stock Option Plan shall be equitably adjusted in such a
manner as to prevent dilution or enlargement of option rights in the event of a
declaration of a dividend payable to the holders of Common Stock in stock of the
same class; a split or a reverse split of the Common Stock; or a
recapitalization of the Company under which shares of one or more different
classes are distributed in exchange for or upon the Common Stock without payment
of any valuable consideration by the holders thereof. The Board of Directors
shall conclusively determine the terms of any such adjustment.
There were no stock options awarded in 1998 under the 1987 Stock Option
Plan. The following table indicates the aggregate option exercises in 1998 by
the Named Executive Officers and fiscal year-end option values:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998 AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT FISCAL
SHARES AT FISCAL YEAR-END YEAR-END(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter R. Bleyleben.......... 0 $ 0 0 0 $ 0 $ 0
Richard F. Latour........... 40,262 354,244 0 38,778 0 395,835
J. Gregory Hines............ 13,420 116,842 0 14,920 0 153,719
John Plumlee................ 11,940 96,982 0 12,000 0 120,552
Carol Salvo................. 11,940 96,982 0 12,000 0 120,552
</TABLE>
- ---------------
(1) The amounts in these columns are calculated using the difference between the
fair market value of the Company's Common Stock at exercise or at the end of
the Company's 1998 fiscal year, as the case may be, and the option exercise
prices. The Board of Directors determines the fair market value of the
Company's Common Stock in connection with the Stock Unit Plan based on a
formula which values the Company at a multiple (determined by reference to
an index of publicly traded companies) of the Company's most recent four
quarters net income, multiplied by a discount factor to take into account
the illiquidity of the Common Stock. The most recent value as so determined
by the Board of Directors was used in such calculations.
PROFIT SHARING PLAN AND DISCRETIONARY BOARD OF DIRECTOR BONUS PROGRAMS
The Company pays annual bonuses and makes profit sharing payments as
determined by the Compensation Committee of the Board of Directors. These
payments are made under informal arrangements and are based on an employee's
performance during the prior fiscal year. Historically, the Board of Directors
has determined annual bonus and profit sharing payments for Dr. Bleyleben and
Mr. Latour. The Board of Directors also establishes a pool to be allocated by
Dr. Bleyleben and Mr. Latour on an annual basis among senior executives of the
Company. Each employee is paid one-third of his or her bonus and profit sharing
at the time such amount is determined. The remaining two-thirds is paid over the
next two years in the discretion of the Board of Directors or Dr. Bleyleben and
Mr. Latour based on Company and employee performance.
EMPLOYMENT AGREEMENTS
The Company has entered into Employment Agreements with Dr. Bleyleben and
Mr. Latour for a three-year period commencing June 12, 1998, subject to
automatic successive one-year renewals unless terminated pursuant to the terms
thereof. In the event of a termination of the Employment Agreements by the
Company without cause, or by Dr. Bleyleben or Mr. Latour for specified good
reason, the Employment Agreements provide for three years of severance payments
to Dr. Bleyleben and Mr. Latour, respectively, on the basis of their highest
base salary during the employment period. In addition, Dr. Bleyleben and Mr.
Latour would also be entitled to a prorated payment of base salary and bonus to
the date of termination, and the acceleration of deferred compensation and
accrued but unpaid amounts under the Company's bonus and/or profit sharing
44
<PAGE> 45
plans. Dr. Bleyleben's and Mr. Latour's current base salaries, respectively, are
$260,000 and $210,000. The bonus for the current fiscal year will be determined
by the Board of Directors. If, in connection with a payment under their
Employment Agreement, either Dr. Bleyleben or Mr. Latour shall incur any excise
tax liability on the receipt of "excess parachute payments" as defined in
Section 280G of the Internal Revenue Code of 1986, as amended, the Employment
Agreements provide for gross-up payments to return them to the after-tax
position they would have been in if no excise tax had been imposed. As used in
each Employment Agreement, "for good reason" means the assignment to the
executive of duties inconsistent with the executive's position, authority,
duties or responsibilities; the failure by the Company to pay the agreed base
salary and provide the executive with benefits; moving the executive to a
location outside of the metropolitan Boston, Massachusetts area; and the failure
by the Company to require a successor to assume all obligations under the
Employment Agreement.
The Company has also entered into separate employment agreements with each
of the remaining Named Executive Officers which are designed to provide an
incentive to each executive to remain with the Company pending and following a
Change in Control (as defined above). Each employment agreement has an initial
term of one year following a Change in Control, with automatic extensions upon
the expiration of the initial one-year term for successive one-month periods.
Pursuant to each employment agreement, the executive will be entitled to receive
an annual base salary of not less than twelve times the highest monthly base
salary paid or payable to the executive within the twelve months preceding the
Change in Control. If the employment agreement is terminated by the Board other
than for cause, death or disability, or is terminated by the executive for
specified good reason, the Company shall pay to the executive in a cash lump sum
within 30 days after the date of termination, the aggregate of the following
amounts: (i) the executive's annual base salary through the date of termination;
(ii) a special bonus in the amount of $575,000, $600,000 and $585,000 for
Messrs. Hines and Plumlee and Ms. Salvo, respectively; (iii) any other
compensation previously deferred by the executive, together with any accrued
interest or earnings thereon; and (iv) any accrued vacation pay.
45
<PAGE> 46
CERTAIN TRANSACTIONS
During 1995, 1997 and 1998, Richard F. Latour, Executive Vice President,
Chief Operating Officer and Chief Financial Officer of the Company, borrowed an
aggregate of $152,776 from the Company to exercise vested options to purchase
Common Stock (the "Exercised Options"). The loans are non-interest bearing
unless the principal amount thereof is not paid in full when due, at which time
interest accrues and is payable at a rate per annum equal to the prime rate
published by The Wall Street Journal plus 4.0%. The outstanding principal
balance of these loans is reduced by any dividends payable upon the stock
underlying the Exercised Options. All principal amounts outstanding under such
loans are due on the earlier of the end of employment or December 27, 2005. Mr.
Latour has agreed to repay all outstanding indebtedness to the Company upon the
closing of the Offering with the proceeds of shares of Common Stock sold by him.
During the fiscal year ended December 31, 1997, the largest aggregate amount
outstanding under this loan was $86,297, with $85,168 remaining outstanding at
September 30, 1998.
The Parker Family Limited Partnership, controlled by Jeffrey Parker, a
director of the Company, loaned the Company an aggregate of $2.4 million in the
form of Junior Subordinated Notes, $2.2 million of which was outstanding as of
December 31, 1998, as follows: $200,000 on September 1, 1994 at an interest rate
per annum equal to the higher of 12% or a bank prime rate plus 3% maturing
September 1, 1999; $200,000 on May 1, 1995 at an interest rate per annum equal
to 12% or a bank prime rate plus 4% maturing May 1, 2000; $500,000 on June 1,
1996 at an interest rate per annum equal to the higher of 12% or a bank prime
rate plus 3% maturing June 1, 2000; $250,000 on December 1, 1996 at an interest
rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing
December 1, 1999; $500,000 on December 1, 1996 at an interest rate per annum
equal to the higher of 12% or a bank prime rate plus 3% maturing December 1,
2002; $250,000 on December 1, 1996 at an interest rate per annum equal to the
higher of 12% or a bank prime rate plus 3% maturing December 1, 2001; $125,000
on September 1, 1997 at an interest rate per annum equal to 11% maturing
September 1, 2001; and $125,000 on September 1, 1997 at an interest rate per
annum equal to 11% maturing September 1, 2003.
Peter R. Bleyleben, the President and Chief Executive Officer and a
Director of the Company, loaned the Company an aggregate of $125,000 in the form
of Junior Subordinated Notes as follows: $100,000 on December 1, 1996 at 12%
interest per annum maturing December 1, 2001; and $25,000 on June 1, 1998 at
10.5% interest per annum maturing June 1, 2003. Mr. Bleyleben also loaned the
Company an aggregate of $200,000 in the form of demand notes as follows:
$100,000 on October 17, 1997 at an interest rate per annum equal to a bank prime
rate minus 1%; and $100,000 on December 1, 1998 at an interest rate per annum
equal to a bank prime rate minus 1%.
Alan J. Zakon, a director of the Company, loaned the Company an aggregate
of $200,000 in the form of Junior Subordinated Notes as follows: $100,000 on
February 1, 1995 at 12% interest per annum maturing February 1, 2000; and
$100,000 on March 18, 1998 at 10.5% interest per annum through his IRA maturing
April 1, 1999.
Ingrid R. Bleyleben, the mother of Peter R. Bleyleben, the President and
Chief Executive Officer and a Director of the Company, loaned the Company the
following amounts in the form of Junior Subordinated Notes: $120,000 on February
16, 1996 at an interest rate per annum equal to 11.5% maturing March 1, 2001;
$25,000 on December 17, 1996 at an interest rate per annum equal to 11.5%
maturing January 1, 2002; $20,000 on June 4, 1997 at an interest rate per annum
equal to 11.5% maturing May 1, 2002; and $25,000 on June 1, 1998 at an interest
rate per annum equal to 10% maturing June 1, 2003.
All of the foregoing transactions, with the exception of the loan to Mr.
Latour, are on terms similar to those that would have been obtained through
arms-length negotiations.
46
<PAGE> 47
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of December 31, 1998 with
respect to the beneficial ownership of Common Stock of each person known by the
Company to be the beneficial owner of more than 5% of the 9,913,166 outstanding
shares of Common Stock, each director and executive officer of the Company and
all directors and executive officers of the Company (not including treasury
stock) as a group. Each person named has sole voting and investment power with
respect to the shares indicated, except as otherwise stated in the notes to the
table.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK
- ------------------------------------ --------------------- -------------------------
<S> <C> <C>
Peter R. Bleyleben(2)............................... 1,684,960 17.00%
Brian E. Boyle(3)................................... 2,240,000 22.60%
Torrence C. Harder(4)............................... 2,083,452 21.02%
Jeffrey P. Parker(5)................................ 340,840 3.44%
Alan J. Zakon....................................... 40,000 *
Richard F. Latour................................... 342,222 3.45%
J. Gregory Hines.................................... 25,080 *
John Plumlee........................................ 34,000 *
Carol Salvo......................................... 18,000 *
All directors and executive officers as a
group (9 persons)................................. 6,808,554 68.68%
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated in the footnotes, each of the stockholders named
in this table has sole voting and investment power with respect to the
shares of Common Stock shown as beneficially owned by such stockholder,
except to the extent that authority is shared by spouses under applicable
law.
(2) Includes 19,600 shares of Common Stock owned by Dr. Bleyleben's mother for
which Dr. Bleyleben disclaims beneficial ownership.
(3) Includes 716,800 shares of Common Stock owned by Dr. Boyle's former spouse
over which Dr. Boyle retains voting control, for which Dr. Boyle disclaims
beneficial ownership.
(4) Includes 100,000 shares of Common Stock held in trust for Mr. Harder's
daughter, Lauren E. Harder, over which Mr. Harder retains sole voting and
investment power as the sole trustee and for which Mr. Harder disclaims
beneficial ownership; 100,000 shares of Common Stock held in trust for Mr.
Harder's daughter, Ashley J. Harder, over which Mr. Harder maintains voting
and investment power as the sole trustee and for which Mr. Harder disclaims
beneficial ownership; 375,572 shares of Common Stock owned by
Entrepreneurial Ventures, Inc. over which Mr. Harder retains shared voting
and investment power through his ownership in, and positions as President
and Director of, Entrepreneurial Ventures, Inc.; and 34,046 shares of Common
Stock owned by Lightbridge, Inc. over which Mr. Harder retains shared voting
and investment power through his ownership in, and position as Director of,
Lightbridge, Inc., for which Mr. Harder disclaims beneficial ownership.
(5) Owned by The Parker Family Limited Partnership over which Mr. Parker retains
shared voting and investment power through his ownership in, and position as
Director of, the general partner of the Parker Family Limited Partnership.
47
<PAGE> 48
SELLING STOCKHOLDERS
Set forth below is information as to each Selling Stockholder, the number
of shares of Common Stock of the Company beneficially owned prior to the
Offering, the number of shares of Common Stock which may be offered as set forth
on the cover of this Prospectus and the number and percentage (if one percent or
more) of shares of Common Stock to be beneficially owned after the Offering by
such Selling Stockholder assuming all offered shares are sold and assuming that
in each case that the Underwriters do not exercise their over-allotment option.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES TO BE
OWNED PRIOR TO BENEFICIALLY OWNED
THE OFFERING(1) SHARES AFTER THE OFFERING(1)
-------------------- BEING ----------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------- --------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C>
Peter R. Bleyleben(2).................... 1,665,360 16.80% 129,550 1,535,810 11.52%
Torrence C. Harder(3).................... 1,673,834 16.88 130,250 1,543,584 11.58
Brian E. Boyle(4)........................ 1,523,200 15.37 118,500 1,404,700 10.54
Rosemary Boyle(5)........................ 716,800 7.23 80,050 636,750 4.78
Entrepreneurial Ventures, Inc............ 375,572 3.79 29,200 346,372 2.60
Spindle Limited Partnership.............. 368,688 3.72 30,000 338,688 2.54
Richard F. Latour(6)..................... 342,222 3.45 35,450 306,772 2.30
Rock Creek Partnership................... 241,660 2.44 18,125 223,535 1.68
Arthur J. Epstein........................ 227,680 2.30 15,000 212,680 1.60
Maureen Curran(7)........................ 78,000 * 8,200 69,800 *
John Plumlee(8).......................... 34,000 * 3,725 30,275 *
Stephen Obana(9)......................... 18,000 * 1,950 16,050 *
</TABLE>
- ---------------
* Less than 1%.
(1) Unless otherwise indicated in the footnotes, each of the stockholders named
in this table has sole voting and investment power with respect to the
shares of Common Stock shown as beneficially owned by such stockholder,
except to the extent that authority is shared by spouses under applicable
law.
(2) Excludes 19,600 shares of Common Stock owned by Dr. Bleyleben's mother for
which Dr. Bleyleben disclaims beneficial ownership. Dr. Bleyleben has
served as President, Chief Executive Officer and Director of the Company or
its predecessor since June 1987.
(3) Includes 100,000 shares of Common Stock held in trust for Mr. Harder's
daughter, Lauren E. Harder over which Mr. Harder retains sole voting and
investment power as the sole trustee and for which Mr. Harder disclaims
beneficial ownership; and 100,000 shares of Common Stock held in trust for
Mr. Harder's daughter, Ashley J. Harder over which Mr. Harder maintains
voting and investment power as the sole trustee and for which Mr. Harder
disclaims beneficial ownership. Excludes 34,046 shares of Common Stock
owned by Lightbridge, Inc. over which Mr. Harder retains shared voting and
investment power through his ownership in, and position as Director of,
Lightbridge, Inc., for which Mr. Harder disclaims beneficial ownership, and
375,572 shares of Common Stock owned by Entrepreneurial Ventures, Inc. over
which Mr. Harder retains shared voting and investment power through his
ownership in, and position as President and Director of, Entrepreneurial
Ventures, Inc. Mr. Harder has served as a Director of the Company since
1986.
(4) Includes 1,523,200 shares held in Dr. Boyle's individual retirement account
("IRA"). Excludes 716,800 shares of Common Stock owned by Rosemary Boyle,
Dr. Boyle's former spouse, over which Dr. Boyle retains voting control, for
which Dr. Boyle disclaims beneficial ownership. Dr. Boyle, Chairman of the
Board of Directors from 1985 to 1995, has served as a Director of the
Company or its predecessor since 1985.
(5) Held in Ms. Boyle's IRA.
(6) Mr. Latour has served as Executive Vice President, Chief Operating Officer,
Chief Financial Officer, Treasurer, Clerk and Secretary of the Company
since 1995.
(7) Includes 4,454 shares of Common Stock issuable under options granted to Ms.
Curran pursuant to the 1987 Stock Option Plan.
(8) John Plumlee has served as Vice President, MIS, of the Company since 1990.
(9) Stephen Obana has served as Vice President, Marketing--West Coast of
Leasecomm since January 1995.
48
<PAGE> 49
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company maintains a diverse mix of funding sources which include its
Credit Facilities, Subordinated Debt, and an asset securitization program.
Historically, the Company has used each of these three sources to fulfill its
liquidity needs.
Credit Facilities. Leasecomm Corporation is the borrower (the "Borrower")
under agreements with two separate bank groups which provide revolving credit
and term loan facilities. The Borrower draws on its facilities regularly, using
them as principal sources of funds for its operations. The first facility, led
by Fleet Bank, N.A., is a $55 million revolving credit and term loan facility,
of which $39.3 million in revolving credit and term loans was outstanding as of
December 31, 1998 (the "Fleet Facility"). The second facility, led by
BankBoston, N.A., is a $55 million revolving credit and term loan facility, of
which $23.4 million in revolving credit and term loans was outstanding as of
December 31, 1998 (the "BankBoston Facility"). The Borrower and the lenders
under these facilities have entered into an intercreditor agreement which
governs the relationship among the lenders under each facility as secured
creditors of the Company.
The terms of the two facilities are substantially similar. Both are
two-year facilities, with the Borrower retaining the option to renew for one
year. All balances under the revolving lines of credit will be automatically
converted to term loans ("Conversion Term Loans") on September 30, 2000 in the
case of the BankBoston Facility and July 31, 2000 in the case of the Fleet
Facility (the "Commitment Termination Date"), provided the line of credit is not
renewed and no event of default exists at that date. All amounts outstanding
under the Conversion Term Loans under the Fleet Facility are payable in monthly
installments over the weighted average life of the underlying leases and
contracts relating to such loans, but in any case no later than the fourth
anniversary of the Commitment Termination Date. Amounts outstanding under the
Conversion Term Loan under the BankBoston Facility are payable in monthly
installments over the three-year period following the Commitment Termination
Date. Both facilities provide for a maximum borrowing amount equal to specified
percentages of the present value of the remaining scheduled payments due on the
leases and contracts funded with advances under such facilities or, in the case
of certain eligible contracts, the lesser of such specified percentage or 100%
of the adjusted cost basis of the equipment underlying such contract. Prior to
the Commitment Termination Date, amounts may be borrowed under the Fleet
Facility as revolving credit loans or term loans ("Fleet Credit Period Term
Loans"). Fleet Credit Period Term Loans are repaid in monthly installments over
the weighted average life of the underlying leases or contracts funded with such
loans, but in any event, no later than the fourth anniversary of the Commitment
Termination Date. Under the Fleet Facility, $3.7 million remains outstanding as
of December 31, 1998 as a term loan which is due and payable on August 2, 1999
and which bears interest at 7.75% per annum. Outstanding borrowings with respect
to the revolving lines of credit bear interest at LIBOR plus 1.75% or the
applicable agent's prime or base rate. Outstanding Fleet Credit Period Term
Loans and Conversion Term Loans bear interest at LIBOR plus 2.50% or the
applicable agent's prime or base rate plus 0.50%. Amounts outstanding under the
Fleet Facility also may bear interest at the federal funds rate plus 1.75%. All
loans may be prepaid at any time in whole or in part, subject to breakage fees
for termination of a LIBOR loan prior to the last day of the interest period for
such LIBOR loan. Borrowings are collateralized by pledged leases and service
contracts and are guaranteed by the Company.
Each of the facilities limits the payment of dividends in any fiscal year
to no more than 50% of Consolidated Net Income (as hereinafter defined) of the
Company and its subsidiaries for the immediately preceding fiscal year,
determined in accordance with generally accepted accounting principles ("GAAP").
Each of the facilities is also subject to covenants, events of default and
other standard terms and conditions usual in facilities of this nature,
including: the Company and its subsidiaries may not (i) permit the existence of
certain liens; (ii) guarantee certain obligations of other persons; (iii) merge
or consolidate with any other person, acquire all or substantially all of the
assets or stock of any other person or sell all or any substantial part of its
assets or create new subsidiaries; (iv) make any material change in its
business; (v) prepay any other indebtedness for borrowed money, including the
Subordinated Debt, except for prepayments made from the net proceeds of this
Offering so long as Consolidated Tangible Capital Funds (as hereinafter defined)
and Consolidated Tangible Net Worth (as hereinafter defined) are in excess of
the
49
<PAGE> 50
respective amounts thereof immediately prior to consummation of this Offering;
(vi) make capital expenditures in any year in excess of 20% of Consolidated
Tangible Net Worth (as hereinafter defined) as of the end of the immediately
preceding fiscal year; and (vii) enter into certain transactions with
affiliates. Further, the Company may not incur additional indebtedness, other
than (i) indebtedness under each Credit Facility; (ii) purchase money
indebtedness; (iii) unsecured indebtedness; (iv) certain existing indebtedness,
including Subordinated Debt; and (v) indebtedness under lender hedge agreements.
In addition, under the Fleet Facility, at any such time as the Company shall not
be subject to the reporting requirements of the Securities Exchange Act of 1934,
as amended, the Company may not issue any shares of its capital stock or any
security convertible into capital stock, if, after giving effect to such
issuance, Peter R. Bleyleben, Brian E. Boyle and Torrence C. Harder (the
"Principal Stockholders") own less than 45%, or own and/or control in the
aggregate less than 60%, of the issued and outstanding shares of capital stock
of the Company on a fully diluted basis (assuming the exercise of all
outstanding stock options), having ordinary voting rights for the election of
directors. Under the BankBoston Facility, both Peter R. Bleyleben and Richard F.
Latour must remain officers of the Company unless replacements acceptable to
BankBoston N.A. are named. Additionally, under the BankBoston Facility, not more
than one-third of the Company's directors may be replaced during the same year
without the consent of BankBoston N.A.
The Company is also required to maintain certain financial covenants,
including, among others, (i) to maintain at all times a ratio of Consolidated
Indebtedness (as hereinafter defined) to Consolidated Tangible Capital Funds of
not more than 6.5:1.0; (ii) to maintain at all times a Consolidated Tangible Net
Worth of not less than the sum of (a) 85% of Tangible Net Worth as of December
31, 1997 in the case of the Fleet Facility and $23,500,000 in the case of the
BankBoston Facility, plus (b) 50% of the aggregate amount of Consolidated Net
Income of the Company and its subsidiaries for each of the fiscal quarters
ending after March 31, 1998 in the case of the Fleet Facility and September 30,
1998 in the case of the BankBoston Facility, in each case without deducting
therefrom any amount of Consolidated Net Deficit (as hereinafter defined) for
any of such fiscal quarters; (iii) to maintain at all times an allowance for bad
debt of the Company and its subsidiaries of at least 7% of Gross Lease
Installments (as hereinafter defined); and (iv) to achieve as of the end of each
fiscal quarter a Fixed Charge Ratio (as hereinafter defined) of the Company and
its subsidiaries of not less than 1.25:1.00. As of September 30, 1998, the
Company was in compliance with all covenants under these facilities.
As used in each Credit Facility, the term "Consolidated Indebtedness" means
the consolidated Indebtedness (excluding Subordinated Debt but including
non-recourse indebtedness) of the Company and its subsidiaries determined in
accordance with GAAP; "Consolidated Net Income" and "Consolidated Net Deficit"
mean the consolidated net income (or deficit) of the Company and its
subsidiaries, determined in accordance with GAAP; provided, however, that
Consolidated Net Income and Consolidated Net Deficit shall not include amounts
added to such net income (or deficit) in respect of the write-up of any asset;
the term "Consolidated Tangible Capital Funds" means the sum, with respect to
the Company and its subsidiaries, on a consolidated basis, of (a) capital stock,
(b) additional paid-in capital, (c) retained earnings and (d) Subordinated Debt
less (x) organizational costs and good will, (y) treasury stock and (z) 25% of
debt issue costs determined in accordance with GAAP; the term "Consolidated
Tangible Net Worth" means the sum, with respect to the Company and its
subsidiaries on a consolidated basis, of (a) capital stock, (b) additional
paid-in capital and (c) retained earnings, less the sum of (x) organizational
costs and goodwill, (y) treasury stock and (z) 25% of debt issue costs
determined in accordance with GAAP; the term "Fixed Charge Ratio" means the
ratio of Consolidated Earnings, during any fixed period consisting of the
preceding four consecutive fiscal quarters, to Fixed Charges, payable during
such period; and the term "Gross Lease Installments" means the aggregate
receivables due to the Borrower from all leases of equipment. In addition,
"Consolidated Earnings" means the sum of Consolidated Net Income plus, on a
consolidated basis for the Company and its subsidiaries, (a) all provisions for
any deferred federal, state or other taxes plus (b) interest on indebtedness
(including payments on capitalized lease obligations in the nature of interest),
all as determined in accordance with GAAP; and "Fixed Charges" means on a
consolidated basis for the Company and its subsidiaries, the payments of
interest on all indebtedness (including payments on capitalized lease
obligations in the nature of interest).
50
<PAGE> 51
As of September 30, 1998, on a pro forma basis after giving effect to the
consummation of the Offering and the anticipated use of $10.3 million of the net
proceeds thereof to repay Junior Subordinated Notes, $9.5 million of the net
proceeds to repay indebtedness outstanding under the senior Subordinated Debt
and $26.4 million of the net proceeds to repay indebtedness outstanding under
the Credit Facilities, (i) the Company's ratio of Consolidated Indebtedness to
Consolidated Tangible Capital Funds would have been 1.85:1.0; and (ii)
Consolidated Tangible Net Worth would have been $73.5 million, which was $53.4
million in excess of the sum of the amount required under the Fleet Facility and
$50.0 million in excess of the amount required under the BankBoston Facility. As
of such date, the Company's allowance for bad debt was 9.3% of the Company's
Gross Lease Installments as of such date. On a pro forma basis, assuming that
the Offering and the repayment of indebtedness occurred on April 1, 1997, the
Company's Fixed Charge Ratio would have been 3.68:1.0.
Set forth below is a summary of the material terms of the Company's notes
payable under these facilities as of December 31, 1998.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
BANK OUTSTANDING FIXED/FLOATING RATE
- ---- ---------------- -------------- ----
<S> <C> <C> <C>
(dollars in millions)
Fleet Bank, N.A........................... $15.0 Floating 7.4068%(a)
Fleet Bank, N.A........................... 20.0 Floating 7.3939(a)
Fleet Bank, N.A........................... 3.7 Fixed 7.75
BankBoston, N.A........................... 10.0 Floating 7.1938(a)
BankBoston, N.A........................... 7.5 Floating 7.4103(a)
Fleet Bank, N.A./BankBoston............... 6.5 Floating Prime
-----
$62.7
=====
</TABLE>
- ---------------
(a) Based on LIBOR as of December 31, 1998 plus 1.85%. The Company periodically
enters into interest rate swaps to hedge its floating rate exposure. Rate
shown represents swapped fixed rate. LIBOR loans not renewed at maturity
automatically convert to prime rate loans.
SUBORDINATED DEBT
Since the Company's founding in 1986, Subordinated Debt has been an
important component of its funding program for two reasons. First, the Company's
Subordinated Debt is treated as equity in calculating the financial covenants
under the Company's Credit Facilities, allowing the Company to leverage its
common equity to a greater extent. Second, the Company uses its Subordinated
Debt program as a source of funding for leases, contracts and loans of certain
products which otherwise are not eligible for funding under the Credit
Facilities and for potential portfolio purchases. Over the last decade, the
Company has expanded its Subordinated Debt program by extending maturities,
increasing issuance frequency, and expanding its investor universe to include
banks, insurance companies, and individual investors. The table below sets forth
selected information as of December 31, 1998 with respect to the Company's
current outstanding issuances:
<TABLE>
<CAPTION>
DATE OF
PRINCIPAL AMOUNT ------------------------------------
OUTSTANDING RATE ISSUE MATURITY
(dollars in millions) ---------------- ---- --------- -----------
<S> <C> <C> <C> <C>
Massachusetts Mutual Life Insurance
Co.................................. $ 4.5 12.0% August 1, 1994 July 15, 2001(a)
Rothschild Inc........................ 4.6 12.25 October 17, 1996 October 1, 2001(b)
Aegon Insurance Group................. 5.0 12.6 October 15, 1996 October 15, 2003(c)
-----
14.1
Others(d)............................. 10.3
-----
$24.4
=====
</TABLE>
- ---------------
(a) Repayment schedule requires annual principal payments of $1.5 million,
commencing July 15, 1997, until the note matures.
(b) Repayment schedule requires monthly principal payments of $125,000 for the
period from November 1, 1998 through October 1, 2000, after which time
principal payments increase to $167,000 per month from
51
<PAGE> 52
November 1, 2000 until maturity. The Company made a principal payment of
$125,000 under the Rothschild Inc. subordinated note on January 1, 1999.
(c) Repayment schedule requires quarterly payments of $250,000 commencing March
15, 1999 until maturity.
(d) Issued in private placements to various individual investors at interest
rates ranging from 8.0% to 12.0% at December 31, 1998, with maturities
ranging from April 1, 1999 to December 1, 2003.
Other than as set forth above, the terms of the Note Agreements covering
the Massachusetts Mutual Life Insurance Co. subordinated notes (the "MassMutual
Agreement"), the Rothschild Inc. subordinated notes (the "Rothschild Agreement")
and the Aegon Insurance Group subordinated notes (the "Aegon Agreement", and
together with the MassMutual Agreement and the Rothschild Agreement,
collectively, the "Subordinated Note Agreements") are substantially similar. All
amounts outstanding under the Subordinated Note Agreements may be prepaid,
subject to the payment of a "Make-Whole Amount" equal to the excess of (i) the
present value of the remaining principal payments due and owing under each
agreement plus the amount of interest that would have been payable in respect of
such dollar amount, determined by discounting amounts at the Reinvestment Rate
from the respective dates on which they would have been payable over (ii) 100%
of the principal amount of the outstanding notes being prepaid. The
"Reinvestment Rate" is 2.00% plus the arithmetic mean of the treasury constant
maturity yields corresponding to the weighted average life to maturity of the
principal being repaid. In the case of the Aegon Note Agreement and the
MassMutual Agreement, if the Reinvestment Rate is equal to or higher than the
interest rate on the applicable note, the Make-Whole Amount would be zero.
Each Subordinated Note Agreement permits the payment of dividends on the
Common Stock so long as the aggregate amount paid during the period from January
1, 1994 (January 1, 1996 in the case of the Aegon Agreement) to and including
the date of the dividend payment would not exceed the sum of (A) 35% of
consolidated net income for such period, computed on a cumulative basis for the
entire period (or if such consolidated net income is a deficit figure, then
minus 100% of such deficit) plus (B) the net cash proceeds from the sale after
January 1, 1994 (January 1, 1996 in the case of the Aegon Agreement) of capital
stock of the Company plus (C) the aggregate principal amount of any debt of the
Company which has been converted after January 1, 1994 (January 1, 1996 in the
case of the Aegon Agreement) into capital stock of the Company minus (D) since
January 1, 1994 (January 1, 1996 in the case of the Aegon Agreement), the
aggregate amount of dividends paid on the Preferred Stock, prepayments of
principal under the subordinated notes listed under "Others" in the above table
("Junior Subordinated Notes") and amounts paid to purchase, redeem or retire any
shares of its capital stock. In addition, the Company is required to make an
offer of prepayment to holders of the notes outstanding under the Subordinated
Note Agreements upon a change of control, defined as any issue, sale or other
disposition of shares of capital stock of the Company which results in any
person or group of persons acting in concert (other than Dr. Bleyleben, Dr.
Boyle and Mr. Harder and their affiliates) owning more than 50% of the voting
stock of the Company.
Each of the Subordinated Note Agreements is also subject to covenants,
events of default and other standard terms and conditions usual in agreements of
this nature, including the following: the Company and its subsidiaries may not
(i) permit the existence of certain liens; (ii) guarantee certain obligations of
other persons; (iii) merge or consolidate with any other person, acquire all or
substantially all of the assets or stock of any other person or sell all or any
substantial part of its assets or create new subsidiaries; (iv) make any
material change in its business; (v) prepay the Junior Subordinated Notes,
except for limited principal amounts in any 12-month period; (vi) enter into
certain transactions with affiliates; and (vii) incur additional indebtedness,
other than certain permitted indebtedness. In addition, at all time while the
notes are outstanding under the Subordinated Note Agreements, the Company must
maintain a $1,500,000 key man life insurance policy on Dr. Bleyleben, and under
the Rothschild Agreement, Dr. Bleyleben must continue to serve as Chief
Executive Officer and hold at least 12.0% of the voting stock of the Company on
a diluted basis. The Company has obtained a permanent waiver of the prohibition
on prepayment of the Junior Subordinated Notes and the requirement that Dr.
Bleyleben hold at least 12.0% of the Common Stock.
52
<PAGE> 53
The Company is also required under the Subordinated Note Agreements to
maintain certain financial covenants, including, among others, (i) to maintain
at all times an allowance for bad debts reserve in an amount not less than 100%
of Delinquent Billed Lease Receivables (as hereinafter defined) (150% in the
Aegon Agreement for any period during which the Adjusted Interest Coverage Ratio
(as hereinafter defined) is less than 1.10 to 1.00); (ii) maintain at all times
consolidated net worth at least equal to the greater of (a) $9.0 million or (b)
the sum of stockholders' equity as of January 1, 1994 plus an amount equal to
65% of consolidated net income for the period from January 1, 1994 to the date
of any determination thereof, computed on a consolidated basis for the entire
period; and (iii) maintain for each period of four consecutive quarters a ratio
of Net Income Available for Interest Charges (as hereinafter defined) to
interest charges of 1.25 to 1.00. In addition, the Rothschild Agreement requires
the Company to maintain the following financial covenants, (i) to ensure at all
times that consolidated senior debt does not exceed 700% of Adjusted
Consolidated Net Worth (as hereinafter defined); (ii) to ensure at all times
that consolidated Subordinated Debt other than Junior Subordinated Notes does
not exceed 150% of Consolidated Net Worth (as hereinafter defined); and (iii) to
maintain at all time a ratio of senior debt plus consolidated Subordinated Debt
other than Junior Subordinated Notes to stockholders' equity of not more than
18.0:1.0.
As used herein, "Adjusted Consolidated Net Worth" means an amount equal to
the sum of (i) Consolidated Net Worth plus (ii) Senior Subordinated Debt;
"Adjusted Interest Coverage Ratio" means the ratio of Adjusted Net Income
Available for Interest Charges to interest charges; "Adjusted Net Income
Available for Interest Charges" means Net Income Available for Interest Charges
less the Bad Debts Reserve Deficiency; "Bad Debts Reserve Deficiency" means 150%
of Delinquent Billed Lease Receivables less the bad debts reserve; "Consolidated
Net Worth" means, as of the date of any determination thereof, the sum of (a)
stockholders' equity plus (b) the aggregate principal amount of the Junior
Subordinated Notes outstanding; "Delinquent Billed Lease Receivables" shall mean
receivables due in respect of leases of equipment which remain unpaid 90 or more
days after the due date thereof; and "Net Income Available for Interest Charges"
means, for any period, the sum of (i) consolidated net income during such period
plus (to the extent deducted in determining consolidated net income), (ii) all
provisions for any Federal, state or other income taxes made by the Company and
its subsidiaries during such period and (iii) interest charges of the Company
and its subsidiaries during such period.
As of September 30, 1998, on a pro forma basis after giving effect to the
consummation of the Offering and the anticipated use of $10.3 million of the net
proceeds thereof to repay Junior Subordinated Notes, $9.5 million of the net
proceeds to repay indebtedness outstanding under the senior Subordinated Debt
and $26.4 million of the net proceeds to repay indebtedness outstanding under
the Credit Facilities, (i) the Company's consolidated net worth would have been
$73.5 million, which was $50.6 million in excess of the greater of (a) $9.0
million and (b) the sum of stockholders' equity as of January 1, 1994 plus an
amount equal to 65% of consolidated net income for the period from January 1,
1994 to September 30, 1998 (assuming that the Offering and the repayment of
indebtedness occurred on January 1, 1994); (ii) consolidated senior debt would
have been 129% of Adjusted Consolidated Net Worth; (iii) consolidated
Subordinated Debt other than Junior Subordinated Notes would have been 6.8% of
Consolidated Net Worth; and (iv) the ratio of senior debt plus consolidated
Subordinated Debt other than Junior Subordinated Notes to stockholders' equity
would have been 1.61:1.0. As of September 30, 1998, the Company's allowance for
bad debts reserve was 101% of Delinquent Billed Lease Receivables. On a pro
forma basis, assuming that the Offering and the repayment of indebtedness
occurred on October 1, 1997, the ratio of Net Income Available for Interest
Charges to interest charges would have been 3.68:1.0.
SECURITIZATION PROGRAM
The Company has completed six private Securitizations since its inception
for an aggregate amount of $141.9 million. The securitized receivables remain on
the Company's balance sheet. As a result, the Company does not use gain-on-sale
accounting. MBIA, Inc. has provided credit enhancement for all Securitizations
except the first offering. Each Securitization except the first offering was
rated 'AAA' by Standard and Poor's and 'Aaa' by Moody's Investor Services, Inc.
The first securitization was rated 'AA' by Duff & Phelps.
53
<PAGE> 54
The table below sets forth selected information as of December 31, 1998
with respect to the Company's six Securitizations:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
--------------------- STATED
SERIES ORIGINAL REMAINING COUPON(a) MATURITY
- ------ -------- --------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1992-1............................. $ 7.9 -- 7.23% (b)
1993-1............................. 6.1 -- 5.17 (b)
1994-A............................. 18.9 -- 7.33 (b)
1996-A............................. 23.4 $ 5.3 6.69 May 16, 2000
1997-A............................. 44.8 23.4 6.42 January 16, 2003
1998-A............................. 40.8 38.7 6.03 May 17, 2004
------ -----
$141.9 $67.4
====== =====
</TABLE>
- ---------------
(a) Monthly equivalent.
(b) Repaid.
Each of the Indentures pursuant to which each of the Series 1996-A, 1997-A
and 1998-A Lease-Backed Term Notes were issued (the "1996-A Indenture", the
"1997-A Indenture" and the "1998-A Indenture," respectively) requires the
Company to repurchase leases from the respective trusts if the status of such
leases result in the Company breaching the representations and warranties made
by the Company at the time of the Securitization.
Each Indenture also contains "Trigger Events" which would have the effect
of increasing the amount of principal distributable to holder of each series of
notes on each payment date thereafter and which may cause the removal of the
Company as servicer under each pool of leases. A "Trigger Event" is defined as
the occurrence of any one of the following: (i) for any three consecutive due
periods, the average of the Annualized Default Rates (as hereinafter defined)
for such consecutive due periods shall be equal to or greater than the Maximum
Default Rate (as hereinafter defined); (ii) in any due period, the Annualized
Default Rate is equal to or greater than three times the Maximum Default Rate;
(iii) in any two consecutive due periods, the sum of the Annualized Default
Rates for such due periods is equal to or greater than three times the Maximum
Default Rate; (iv) for any three consecutive due periods, the average of the
Delinquency Rates (as hereinafter defined) is equal to or greater than the
Maximum Delinquency Rate (as hereinafter defined); (v) the Net Worth Requirement
(as hereinafter defined) is not met; (vi) both of Peter Bleyleben and Richard
Latour cease working for the Reported Companies (as hereinafter defined) or
become deceased or unable to work for six months or more; (vii) either (a) any
person or group of persons (within the meaning of Section 13(d) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) other than
Peter Bleyleben, Brian Boyle and Torrence Harder (the "Key Shareholders") shall
own, beneficially or of record, or control by contract or otherwise, more than
50% of the issued and outstanding shares of capital stock, on a fully diluted
basis, of the Company having ordinary voting rights for the election of
directors, (b) the Key Shareholders shall own, beneficially or of record, in the
aggregate less than 45%, or own, beneficially or of record, or control, by
contract or otherwise, in the aggregate less than 60% of the issued and
outstanding shares of capital stock, on a fully diluted basis, of the Company
having ordinary voting rights for the election of directors; provided, that this
clause (b) shall not apply if and for so long as the Company shall be subject to
the reporting requirements of the Exchange Act, or (c) the Company shall own,
beneficially or of record, or control, by contract or otherwise, in the
aggregate less than 100% of the issued and outstanding shares of capital stock
of Leasecomm; (viii) the issuer or the trust estate is required to register as
an "investment company" under the Investment Company Act of 1940, as amended;
(ix) an event of default occurs under the Indenture or certain events of
bankruptcy or insolvency occur with respect to the Company as servicer; (x) any
Reported Company shall be in default under the Fleet Facility or the BankBoston
Facility; or (xi) the Available Cash Requirement (as hereinafter defined) is not
met. Each of the Indentures permits the Company to repurchase leases that are
being prepaid, that are terminated early or that have defaulted or gone
delinquent and to deliver a substitute lease under certain circumstances in
order to prevent such Trigger Event from occurring.
54
<PAGE> 55
As used herein, (i) "Annualized Default Rate" means, for any due period,
the sum of the Implicit Principal Balances (as hereinafter defined) as of the
calculation date occurring in such due period of leases that became defaulted
leases during such due period (including any leases that have been purchased or
substituted) minus the sum of recoveries, residual proceeds, and servicing
charges received during such due period, divided by the Aggregate IPB (as
hereinafter defined) on the calculation date immediately preceding such due
period, multiplied by twelve; (ii) "Available Cash Requirement" means that, as
of each calculation date and as reflected on each monthly report of the Company,
the sum of (a) unrestricted cash and (b) amounts available for borrowing by the
Reported Companies under their credit facilities is not less than $14,000,000;
(iii) "Delinquency Rate" means, for any due period, the sum of the Implicit
Principal Balances as of the calculation date occurring in such due period of
leases that are more than 30 days delinquent, as of such calculation date
(including any leases that have been purchased or substituted), divided by the
Aggregate IPB on such calculation date (including any leases that have been
purchased or substituted); (iv) "Implicit Principal Balance" of a lease
receivable is equal to, as of any date of determination, the present value of
the remaining stream of scheduled payments due with respect to such lease
receivable after the applicable calculation date at a specified formula; (v)
"Aggregate Implicit Principal Balance" as of any time is equal to the sum of the
Implicit Principal Balances for each series of notes outstanding at that time;
(vi) "Maximum Default Rate" equals 7%; (vii) "Maximum Delinquency Rate" equals
14.5%; (viii) "Minimum Net Worth Amount" means an amount equal to $24,950,000,
provided, however, that if the Company becomes subject to the reporting
requirements of the Exchange Act, such amount shall be reset to ninety percent
(90%) of the Tangible Net Worth (as hereinafter defined) of the Reported
Companies as of the close of the month in which such event occurs; (ix) "Net
Worth Requirement" means that the Tangible Net Worth of the Company, Leasecomm
and their affiliates (the "Reported Companies"), determined as of the close of
each fiscal quarter, is equal to at least the Minimum Net Worth Amount plus 60%
of the aggregate amount of consolidated net income of the Reported Companies for
each of the fiscal quarters ending after the last determination of the Minimum
Net Worth Amount, but without deducting therefrom any amount of consolidated net
losses for any of such fiscal quarters; provided however that all such amounts
shall be calculated in accordance with generally accepted accounting principles
as in effect on December 31, 1997; and (x) "Tangible Net Worth" means as of the
applicable date of determination, the sum, with respect to the Reported
Companies on a consolidated basis, of (a) capital stock, (b) additional paid-in
capital and (c) retained earnings, less the sum of (x) organizational costs and
good will, (y) treasury stock and (z) 25% of debt issuance costs.
The Company intends to use securitizations and other similar structured
finance transactions as vehicles for minimizing the Company's cost of funds
associated with financing its leases. While the Company currently intends to
keep its Securitizations on its balance sheet, the Company may in the future
securitize receivables which will not remain on its balance sheet.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 25,000,000 shares
of common stock, par value $.01 per share ("Common Stock"), and 5,000,000 shares
of Preferred Stock, par value $0.01 per share (the "Preferred Stock").
The following summary does not purport to be complete and is subject to the
detailed provisions of, and qualified in its entirety by reference to, the
Company's Restated Articles of Organization, as amended (the "Articles") and
By-Laws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part, and to the applicable provisions
of the Massachusetts Business Corporations Act.
COMMON STOCK
As of December 31, 1998, 9,913,166 shares of Common Stock were outstanding
and held of record by 87 persons. Upon completion of the Offering and the
conversion of the Company's outstanding redeemable convertible preferred stock,
13,332,766 shares of Common Stock will be outstanding, excluding 120,380 shares
of Common Stock issuable upon exercise of options granted under the 1987 Stock
Option Plan and 142,590 shares held in the Company's treasury as of December 31,
1998.
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The holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of holders of Common Stock. The Common Stock
does not have cumulative voting rights, which means that the holders of a
majority of the voting power of shares of Common Stock outstanding are able to
elect all the directors and the holders of the remaining shares are not able to
elect any directors. Each share of Common Stock is entitled to participate
equally in dividends, if, as and when declared by the Company's Board of
Directors, and in the distribution of assets in the event of liquidation,
subject in all cases to any prior rights of outstanding shares of Preferred
Stock. The Company has paid cash dividends quarterly on its Common Stock since
August 1995. See "Risk Factors -- Change in Dividend Policy" and "Dividend
Policy." The shares of Common Stock have no preemptive rights, redemption
rights, or sinking fund provisions. The outstanding shares of Common Stock are,
and the shares of Common Stock offered hereby upon issuance and sale will be,
duly authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's authorized Preferred Stock consisted of 5,000,000 shares of
Preferred Stock, none of which is outstanding. Shares of Preferred Stock may be
issued from time to time in one or more series as may be determined by the Board
of Directors of the Company with such designations, voting powers, preferences
and relative participating optional or other special rights, and qualifications,
limitations and restrictions on such rights, as the Board of Directors of the
Company may authorize, including, but not limited to: (i) the number of shares
that will constitute such series; (ii) the voting rights, if any, of shares of
such series and whether the shares of any such series having voting rights shall
have multiple votes per share; (iii) the dividend rate on the shares of such
series, any restriction, limitation or condition upon the payment of such
dividends, whether dividends shall be cumulative and the dates on which
dividends are payable; (iv) the prices at which, and the terms and conditions on
which, the shares of such series may be redeemed, if such shares are redeemable;
(v) the purchase or sinking fund provisions, if any, for the purchase or
redemption of shares of such series; (vi) any preferential amount payable upon
shares of such series in the event of the liquidation, dissolution or winding-up
of the Company or the distribution of its assets; and (vii) the prices or rates
of conversion of which, and the terms and conditions on which, the shares are
convertible.
MASSACHUSETTS LAW AND CERTAIN CHARTER PROVISIONS
Following the Offering, the Company expects that it will have more than 200
stockholders, thus making it subject to Chapter 110F of the Massachusetts
General Laws, an anti-takeover law. This statute generally prohibits a
publicly-held Massachusetts corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person becomes an interested
stockholder, unless (i) the interested stockholder obtains the approval of the
Board of Directors prior to becoming an interested stockholder, (ii) the
interested stockholder acquires 90% of the outstanding voting stock of the
corporation (excluding shares held by certain affiliates of the corporation) at
the time it becomes an interested stockholder, or (iii) the business combination
is approved by both the Board of Directors and the holders of two-thirds of the
outstanding voting stock of the corporation (excluding shares held by the
interested stockholder). An "interested stockholder" is a person who, together
with affiliates and associates, owns (or at any time within the prior three
years did own) 5% or more of the outstanding voting stock of the corporation. A
"business combination" includes a merger, a stock or asset sale, and certain
other transactions resulting in a financial benefit to the interested
stockholder. By a vote of a majority of its stockholders, the Company may elect
not to be governed by Chapter 110F, but such an amendment would not be effective
for 12 months and would not apply to a business combination with any person who
became an interested stockholder prior to the adoption of the amendment. The
Company has not elected to opt out of this coverage.
Chapter 156B, Section 50A of the Massachusetts General Laws generally
requires that publicly-held Massachusetts corporations have a classified board
of directors consisting of three classes as nearly equal in size as possible,
unless the corporation elects to opt out of the statute's coverage. The
Company's Restated Articles of Organization provide for a classified board in
compliance with such statute and the Board of
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Directors of the Company has established a classified board consisting of three
classes as nearly equal in size as possible.
The Company is subject to Chapter 110D of the Massachusetts General Laws
which governs "control share acquisitions," which are certain acquisitions of
beneficial ownership of shares which raise the voting power of the acquiring
person (which can be a group of persons or entities sharing beneficial
ownership) above any one of three thresholds: one-fifth, one-third or one-half
of the total voting power. All shares acquired by the person making the control
share acquisition within the period beginning 90 days before and ending 90 days
after each threshold is crossed ("Affected Shares") obtain voting rights only
(i) upon authorization by a majority of the stockholders other than the holder
of the Affected Shares, officers of the Company and directors of the Company who
also are employees of the Company or (ii) when disposed of in non-control share
acquisitions. The Company's stockholders, at a duly constituted meeting, may, by
amendment to the By-Laws or the Articles of Incorporation, provide that the
provisions of Chapter 110D shall not apply to future control share acquisitions
of the Company. Management currently has no plans to propose such an amendment.
Chapter 110D may have the effect of delaying or preventing a change of control
of the Company at a premium price. In addition, because the number of shares of
Common Stock entitled to vote is substantially less than the total number of
outstanding shares of Common Stock, holders of shares of Common Stock purchased
in transactions which are not control share acquisitions, and which occur at a
time when there are Affected Shares outstanding, will obtain voting rights which
are disproportionate to the number of shares held as a percentage of all
outstanding shares (including Affected Shares), which may facilitate the
acquisition of shareholdings which may permit the exercise of a controlling
influence on the management or policies of the Company.
In certain circumstances in connection with a control share acquisition,
stockholders of the Company will be entitled to appraisal of their shares in
accordance with the provisions of Section 86 to 98, inclusive, of Chapter 156B
of the Massachusetts General Laws.
The Company's Articles and Bylaws contain certain provisions that may have
the effect of discouraging, delaying or preventing a change in control of the
Company or unsolicited acquisition proposals that a stockholder might consider
favorable, including provisions authorizing the issuance of "blank check"
preferred stock, providing for a Board of Directors with staggered terms,
requiring super-majority or class voting to effect certain amendments to the
Articles and Bylaws and to approve certain business combinations, limiting the
persons who may call special stockholders' meetings, and establishing advance
notice requirements for nominations for election to the Board of Directors or
for proposing matters that can be acted upon at stockholders' meetings.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is State Street Bank
and Trust Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 13,332,766 shares of
Common Stock outstanding without taking into account any outstanding options or
options which may be granted following consummation of the Offering. All of the
shares of Common Stock offered hereby will be freely tradeable without
restriction or further registration under the Securities Act, except for shares
sold by persons deemed to be "affiliates" of the Company ("Affiliates") or
acting as "underwriters," as those terms are defined in the Securities Act. All
of the Common Stock held by existing stockholders of the Company were issued and
sold by the Company in reliance on exemptions from the registration requirements
of the Securities Act ("Restricted Shares"). These shares may be sold in the
public market only if registered or pursuant to an exemption from registration
such as those afforded by Rules 144 and 701 under the Securities Act. Subject to
the lock-up period described below (See "Underwriting"), all of the remaining
outstanding shares of Common Stock and the shares of Common Stock issuable upon
conversion of the Series C Preferred Stock will be freely tradeable at the end
of the 90-day period after the date of this Prospectus under Rules 144 and 701,
subject to the restrictions on resale imposed upon Affiliates by Rule 144 under
the Securities Act.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, an Affiliate of the Company or other person (or
persons whose shares are aggregated) who has beneficially owned Restricted
Shares for at least one year, will be entitled to sell in any three-month period
a number of shares that does not exceed the greater of (i) 1% of the then
outstanding Common Stock or (ii) the average weekly trading volume of the Common
Stock on the NYSE during the four calendar weeks immediately preceding such
sale. Sales pursuant to Rule 144 are also subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the Company. A person (or persons whose shares are aggregated)
who is not deemed to have been an Affiliate of the Company at any time during
the 90 days immediately preceding the sale and who has beneficially owned
Restricted Shares for at least two years is entitled to sell such shares
pursuant to Rule 144(k) without regard to the limitations described above.
Under Rule 701, an employee of the Company who purchased shares of Common
Stock or was awarded options to purchase shares pursuant to a written
compensation plan or contract meeting the requirements of Rule 701 under the
Securities Act is entitled to rely on the resale provisions of Rule 701, which
permits Affiliates and non-Affiliates to sell their Rule 701 shares without
having to comply with the holding period restrictions of Rule 144, in each case
commencing 90 days after the date of this Prospectus. In addition, non-
Affiliates may sell Rule 701 shares without complying with the public
information, volume and notice provisions of Rule 144.
Subject to the lock-up period described below under "Underwriting" and the
restrictions imposed on Affiliates of the Company under Rule 144, all of the
Restricted Shares will be eligible for sale at the end of the 90-day period
after the date of this Prospectus pursuant to Rules 144 and 701 under the
Securities Act, without any restrictions imposed under those Rules.
An aggregate of 2,120,380 shares of Common Stock are reserved for issuance
to directors, executives, consultants and employees of the Company pursuant to
the Stock Option Plans. The Company intends to file a registration statement on
Form S-8 covering the issuance of shares of Common Stock pursuant to the Stock
Option Plans. Accordingly, shares issued pursuant to the Stock Option Plans will
be freely tradeable, subject to the restrictions on resale imposed on Affiliates
by Rule 144 under the Securities Act.
Prior to the Offering, there has been no public market for the Common
Stock. Trading of the Common Stock is expected to commence following the
completion of the Offering. There can be no assurance that an active trading
market will develop or continue after the completion of the Offering or that the
market price of the Common Stock will not decline below the initial public
offering price. No predictions can be made as to the effect, if any, that future
sales of shares of Common Stock, or the availability of such shares for sale,
will have on the market price prevailing from time to time. Sales of substantial
amounts of Common Stock in the public market, or the perception that such sales
could occur, could adversely affect the prevailing market price of the Common
Stock, or the ability of the Company to raise capital through the issuance of
additional equity securities.
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CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
A general discussion of certain United States federal income and estate tax
consequences of the acquisition, ownership and disposition of Common Stock
applicable to Non-U.S. Holders (as defined) of Common Stock is set forth below.
In general, a "Non U.S. Holder" is a person other than: (i) a citizen or
resident (as defined for United States federal income or estate tax purposes, as
the case may be) of the United States; (ii) a corporation or partnership
organized in or under the laws of the United States or a political subdivision
thereof; (iii) an estate the income of which is subject to United States federal
income taxation regardless of its source, or (iv) a trust if and only if (A) a
court within the United States is able to exercise primary supervision over the
administration of the trust and (B) one or more United States trustees have the
authority to control all substantial decisions of the trust. The discussion is
based on current law and is provided for general information only. The
discussion does not address aspects of United States federal taxation other than
income and estate taxation and does not address all aspects of federal income
and estate taxation. The discussion does not consider any specific facts or
circumstances that may apply to a particular Non-U.S. Holder and does not
address all aspects of United States federal income and estate tax laws that may
be relevant to Non-U.S. Holders that may be subject to special treatment under
such laws (for example, insurance companies, tax-exempt organizations, financial
institutions or broker-dealers). This discussion is based on the Internal
Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder
and administrative and judicial interpretations thereof, all of which are
subject to change, possibly with retroactive effect. ACCORDINGLY, PROSPECTIVE
INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES
FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF
ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK.
DIVIDENDS
In general, the gross amount of dividends paid to a Non-U.S. Holder will be
subject to United States withholding tax at a 30% rate (or any lower rate
prescribed by an applicable tax treaty) unless the dividends are (i) effectively
connected with a trade or business carried on by the Non-U.S. Holder within the
United States and a Form 4224 is filed with the withholding agent or (ii) if a
tax treaty applies, are attributable to a United States permanent establishment
of the Non-U.S. Holder. If either exception applies, the dividend will be taxed
at ordinary U.S. federal income tax rates. A Non-U.S. Holder may be required to
satisfy certain certification requirements in order to claim the benefit of an
applicable treaty rate or otherwise claim a reduction of, or exemption from, the
withholding obligation pursuant to the above described rules. In the case of a
Non-U.S. Holder that is a corporation, effectively connected income may also be
subject to the branch profits tax, except to the extent that an applicable tax
treaty provides otherwise.
SALE OF COMMON STOCK
Generally, a Non-U.S. Holder will not be subject to United States federal
income tax on any gain realized upon the disposition of his Common Stock unless:
(i) the Company has been, is, or becomes a "U.S. real property holding
corporation" for federal income tax purposes and certain other requirements are
met; (ii) the gain is effectively connected with a trade or business carried on
by the Non-U.S. Holder within the United States; (iii) the Common Stock is
disposed of by an individual Non-U.S. Holder who holds the Common Stock as a
capital asset and is present in the United States for 183 days or more in the
taxable year of the disposition or (iv) the Non-U.S. Holder is an individual who
lost his U.S. citizenship within the last 10 years and such loss had, as one of
its principle purposes, the avoidance of taxes, and the gains are considered
derived from sources within the United States. The Company believes that it has
not been, is not currently and, based upon its current business plans, is not
likely to become a U.S. real property holding corporation. Non-U.S. Holders
should consult applicable treaties, which may exempt from United States taxation
gains realized upon the disposition of Common Stock in certain cases.
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ESTATE TAX
Common Stock owned or treated as owned by an individual Non-U.S. Holder at
the time of his death will be includible in the individual's gross estate for
United States federal estate tax purposes, unless an applicable treaty provides
otherwise, and may be subject to United States federal estate tax.
BACKUP WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS
On October 14, 1997, the IRS issued final regulations relating to
withholding, information reporting and backup withholding that unify current
certification procedures and forms and clarify reliance standards (the "Final
Regulations"). The Final Regulations were intended to be effective with respect
to payments made after December 31, 1998. The IRS has, however, recently issued
a notice stating that such Final Regulations will not be effective until January
1, 2000.
Except as provided below, this section describes rules applicable to
payments made on or before the Final Regulations take effect. Backup withholding
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish the information required under the
United States information reporting and backup withholding rules) generally will
not apply to (i) dividends paid to Non-U.S. Holders that are subject to the 30%
withholding discussed above (or that are not so subject because a tax treaty
applies that reduces or eliminates such 30% withholding) or (ii) dividends paid
on the Common Stock to a Non-U.S. Holder at an address outside the United
States. The Company will be required to report annually to the IRS and to each
Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, such holder, regardless of whether any tax was actually withheld.
This information may also be made available to the tax authorities in the
Non-U.S. Holder's country of residence.
In the case of a Non-U.S. Holder that sells Common Stock to or though a
United States office of a broker, the broker must backup withhold at a rate of
31% and report the sale to the IRS, unless the holder certifies its Non-U.S.
status under penalties of perjury or otherwise establishes an exemption. In the
case of a Non-U.S. Holder that sells Common Stock to or though the foreign
office of a United States broker, or a foreign broker with certain types of
relationships to the United States, the broker must report the sale to the IRS
(but not backup withhold) unless the broker has documentary evidence in its
files that the seller is a Non-U.S. Holder or certain other conditions are met,
or the holder otherwise establishes an exemption. A Non-U.S. Holder will
generally not be subject to information reporting or backup withholding if such
Non-U.S. Holder sells the Common Stock to or through a foreign office of a
non-United States broker.
Any amount withheld under the backup withholding rules from a payment to a
Non-U.S. Holder is allowable as a credit against the holder's U.S. federal
income tax, which may entitle the Non-U.S. Holder to a refund, provided that the
holder furnishes the required information to the IRS. In addition, certain
penalties may be imposed by the IRS on a Non-U.S. Holder who is required to
supply information but does not do so in the proper manner.
The Final Regulations eliminate the general current law presumption that
dividends paid to an address in a foreign country are paid to a resident of that
country. In addition, the Final Regulations impose certain certification and
documentation requirements on Non-U.S. Holders claiming the benefit of a reduced
withholding rate with respect to dividends under a tax treaty.
Prospective purchasers of Common Stock are urged to consult their tax
advisors as to the application of the current rules regarding backup withholding
and information reporting and as to the effect, if any, of the Final Regulations
on their purchase, ownership and disposition of the Common Stock.
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UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated February 4, 1999, each of the Underwriters named below, for whom
Piper Jaffray Inc. and CIBC Oppenheimer Corp. are acting as representatives (the
"Representatives"), has severally agreed to purchase, and the Company and the
Selling Stockholders have agreed to sell to each of the Underwriters, the number
of shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Piper Jaffray Inc........................................... 1,760,000
CIBC Oppenheimer Corp....................................... 1,172,000
BancBoston Robertson Stephens Inc........................... 130,000
Hambrecht & Quist LLC....................................... 130,000
Lehman Brothers Inc......................................... 130,000
NationsBanc Montgomery Securities, Inc...................... 130,000
PaineWebber Incorporated.................................... 130,000
SG Cowen Securities Corporation............................. 130,000
Friedman, Billings, Ramsey & Co., Inc....................... 72,000
McDonald Investments Inc., a KeyCorp Company................ 72,000
Rothschild Inc.............................................. 72,000
Southeast Research Partners, Inc............................ 72,000
---------
Total.................................................. 4,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters have advised the Company and the Selling Stockholders that
they propose to offer the shares directly to the public at the Price to Public
set forth on the cover page of this Prospectus and to selected dealers at such
price less a concession not in excess of $0.58 per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $0.10 per
share to certain other brokers and dealers. After the Offering, the initial
public offering price and other selling terms may be changed by the
Underwriters.
The Selling Stockholders have granted to the Underwriters an option,
exercisable within the 30-day period after the date of this Prospectus, under
which the Underwriters may purchase up to an additional 600,000 shares of Common
Stock from the Company at the Price to Public less the Underwriting Discount set
forth on the cover page of this Prospectus. The Underwriters may exercise the
option solely for the purpose of covering over-allotments, if any, made in
connection with the distribution of the Common Stock offered hereby. To the
extent such option is exercised, each Underwriter will become obligated, subject
to certain conditions, to purchase approximately the same percentage of such
additional shares as it was obligated to purchase under the Underwriting
Agreement.
At the request of the Company, the Underwriters have reserved up to 200,000
shares of Common Stock to be issued by the Company and offered hereby for sale,
at the Price to Public, to directors, officers, employees, business associates
and other individuals and entities related to the Company. The number of shares
of Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which are
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the Offering without notice. The Underwriters reserve the right
to reject any order for the purchase of shares in whole or in part.
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In connection with the Offering, the Company, the Selling Stockholders and
the executive officers and directors of the Company have agreed that they will
not sell any shares of Common Stock other than the shares to be sold in the
Offering without the prior consent of Piper Jaffray Inc., acting on behalf of
the Underwriters, for a period of 180 days after the date of this Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price for the Common Stock will
be determined by negotiations between the Company, the Selling Stockholders and
the Underwriters. Among the factors to be considered in determining the initial
public offering price will be the Company's record of operations, the Company's
current financial position and future prospects, the experience of its
management, the economics of the equipment leasing industry in general, the
general condition of the securities markets and the price-earnings ratios,
market prices of securities and certain financial and operating information of
companies engaged in activities similar to those of the Company. The estimated
public offering price range set forth on the cover page of this Prospectus is
subject to change as a result of market conditions and other factors. See "Risk
Factors -- No Prior Market for Common Stock; Possible Volatility of Stock
Price."
In order to facilitate the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may over-allot or otherwise create
a short position in the Common Stock for their own account by selling more
shares of Common Stock than have been sold to them by the Company and the
Selling Stockholders. The Underwriters may elect to cover any such short
position by purchasing shares of Common Stock in the open market or by
exercising the over-allotment option granted to the Underwriters. In connection
therewith, the Representatives may stabilize or maintain the price of the Common
Stock by imposing penalty bids on certain Underwriters, under which selling
commissions allowed to Underwriters or dealers participating in the Offering are
retained if shares of Common Stock previously distributed in the Offering are
repurchased in connection with stabilization transactions or otherwise. The
effect of these transactions may be to stabilize or maintain the market price of
the Common Stock at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the Common
Stock to the extent that it discourages resales thereof. No representations are
made as to the magnitude or effect of any such stabilization or other
transactions. Such transactions may be effected on the New York Stock Exchange
or otherwise and, if commenced, may be discontinued at any time.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Edwards & Angell, LLP, Boston,
Massachusetts. The Underwriters have been represented by Cravath, Swaine &
Moore, New York, New York.
EXPERTS
The consolidated balance sheets as of December 31, 1996 and 1997 and the
related consolidated statements of operations, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 1997,
included in this Prospectus and elsewhere in the registration statement, have
been included herein in reliance upon the report of PricewaterhouseCoopers LLP,
independent accountants, given upon the authority of said firm as experts in
accounting and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Securities and Exchange Commission (the
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"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information pertaining to the Company and the
Common Stock offered by this Prospectus, reference is made to the Registration
Statement and to the exhibits filed as a part thereof. Statements contained in
this Prospectus concerning the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement are summaries of the
terms of such contracts, agreements or documents and are not necessarily
complete. Reference is made to each such exhibit for a more complete description
of the matters involved and such statements shall be deemed qualified in their
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto may be inspected, without charge, and copies may be obtained
at prescribed rates, at the public reference facility maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at the regional offices of the Commission located at 7 World Trade Center,
Suite 300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1300, Chicago, Illinois 60661-2511. The Registration Statement and
other information filed by the Company with the Commission are also available at
the web site maintained by the Commission on the World Wide Web at
http://www.sec.gov.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
63
<PAGE> 64
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 65
MICROFINANCIAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and
1997, and September 30, 1998 (unaudited).................. F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997, and for the nine months
ended September 30, 1997 (unaudited) and September 30,
1998 (unaudited).......................................... F-4
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1995, 1996 and 1997, and the nine
months ended September 30, 1998 (unaudited)............... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997, and for the nine months
ended September 30, 1997 (unaudited) and September 30,
1998 (unaudited).......................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 66
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MicroFinancial Incorporated:
We have audited the accompanying consolidated balance sheets of
MicroFinancial Incorporated as of December 31, 1996 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1995, 1996 and 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MicroFinancial
Incorporated as of December 31, 1996 and 1997, and the consolidated results of
its operations and its cash flows for the years ended December 31, 1995, 1996
and 1997, in conformity with generally accepted accounting principles.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 27, 1998
F-2
<PAGE> 67
MICROFINANCIAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Assets:
Net investment in financing leases and loans:
Receivables due in installments........................ $232,693 $238,979 $246,846
Estimated residual value............................... 14,702 16,784 17,573
Initial direct costs................................... 2,692 2,777 3,883
Loans receivable....................................... 238 2,467 8,729
Less:
Advance lease payments and deposits.................. (186) (334) (804)
Unearned income...................................... (76,951) (73,060) (73,742)
Allowance for credit losses.......................... (23,826) (26,319) (24,423)
-------- -------- --------
Net investment in financing leases and loans.............. 149,362 161,294 178,062
Investment in service contracts........................... -- 2,145 7,412
Cash and cash equivalents................................. 13,775 9,252 13,457
Property and equipment, net............................... 5,143 4,265 7,340
Other assets.............................................. 1,912 2,745 2,496
-------- -------- --------
Total assets...................................... $170,192 $179,701 $208,767
======== ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Notes payable............................................... $116,202 $116,830 $132,104
Subordinated notes payable.................................. 27,006 26,382 25,288
Capitalized lease obligations............................... 1,523 1,071 943
Accounts payable............................................ 561 89 35
Dividends payable........................................... 242 294 346
Other liabilities........................................... 5,801 5,300 6,040
Income taxes payable........................................ 606 -- --
Deferred income taxes....................................... 6,072 10,969 16,716
-------- -------- --------
Total liabilities................................. 158,013 160,935 181,472
-------- -------- --------
Commitments and contingencies (Note J)...................... -- -- --
Redeemable convertible preferred stock (liquidation
preference $12, at December 31, 1996 and 1997, and
September 30, 1998)....................................... -- -- --
Stockholders' equity:
Common stock.............................................. 97 98 99
Additional paid-in capital................................ 1,442 1,604 1,764
Retained earnings......................................... 10,841 17,366 25,838
Treasury stock, at cost................................... (100) (138) (138)
Notes receivable from officers and employees.............. (101) (164) (268)
-------- -------- --------
Total stockholders' equity........................ 12,179 18,766 27,295
-------- -------- --------
Total liabilities and stockholders' equity........ $170,192 $179,701 $208,767
======== ======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE> 68
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEARS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Income on financing leases and loans... $27,011 $38,654 $45,634 $33,900 $35,285
Income on service contracts............ -- 6 501 87 1,557
Rental income.......................... 3,688 8,250 10,809 8,104 11,153
Loss and damage waiver fees............ 2,648 4,188 5,448 3,983 4,067
Service fees........................... 2,798 4,487 5,788 4,121 3,770
------- ------- ------- ------- -------
Total revenues................. 36,145 55,585 68,180 50,195 55,832
------- ------- ------- ------- -------
Expenses:
Selling, general and administrative.... 8,485 14,073 17,252 12,558 14,284
Provision for credit losses............ 13,388 19,822 21,713 15,601 12,568
Depreciation and amortization.......... 1,503 2,981 3,787 2,701 3,867
Interest............................... 8,560 10,163 11,890 8,891 9,198
------- ------- ------- ------- -------
Total expenses................. 31,936 47,039 54,642 39,751 39,917
Income before provision for income
taxes.................................. 4,209 8,546 13,538 10,444 15,915
Provision for income taxes............... 1,685 3,466 5,886 4,245 6,455
------- ------- ------- ------- -------
Net income............................... $ 2,524 $ 5,080 $ 7,652 $ 6,199 $ 9,460
======= ======= ======= ======= =======
Net income per common share -- basic..... $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96
======= ======= ======= ======= =======
Net income per common share -- diluted... $ 0.27 $ 0.52 $ 0.76 $ 0.62 $ 0.94
======= ======= ======= ======= =======
Dividends per common share............... $ 0.06 $ 0.10 $ 0.12 $ 0.09 $ 0.10
======= ======= ======= ======= =======
</TABLE>
F-4
<PAGE> 69
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1995, 1996 and 1997, and the nine months ended
September 30, 1998 (unaudited)
(in thousands, except share data)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL RECEIVABLE TOTAL
------------------ PAID-IN RETAINED TREASURY FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK OFFICERS EQUITY
--------- ------ ---------- -------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994...... 5,003,880 $50 $1,063 $ 4,737 $(100) $ 5,750
Exercise of stock options......... 1,399,400 14 326 340
Common stock dividends............ (580) (580)
Conversion of preferred stock to
common stock.................... 3,274,440 33 49 82
Notes receivable from officers.... $(205) (205)
Net income........................ 2,524 2,524
--------- --- ------ ------- ----- ----- -------
Balance at December 31, 1995...... 9,677,720 97 1,438 6,681 (100) (205) 7,911
Exercise of options............... 5,620 4 4
Common stock dividends............ (920) (920)
Notes receivable from officers.... 104 104
Net income........................ 5,080 5,080
--------- --- ------ ------- ----- ----- -------
Balance at December 31, 1996...... 9,683,340 97 1,442 10,841 (100) (101) 12,179
Exercise of stock options......... 120,910 1 162 163
Common stock dividends............ (1,127) (1,127)
Purchase of treasury stock........ (5,250) (38) (38)
Notes receivable from officers and
employees....................... (63) (63)
Net income........................ 7,652 7,652
--------- --- ------ ------- ----- ----- -------
Balance at December 31, 1997...... 9,799,000 98 1,604 17,366 (138) (164) 18,766
Exercise of options............... 87,516 1 160 161
Common stock dividends............ (988) (988)
Notes receivable from officers and
employees....................... (104) (104)
Net income........................ -- 9,460 9,460
--------- --- ------ ------- ----- ----- -------
Balance at September 30, 1998
(unaudited)..................... 9,886,516 $99 $1,764 $25,838 $(138) $(268) $27,295
========= === ====== ======= ===== ===== =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE> 70
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
-------- ---------- --------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers.............................. $60,632 $ 87,130 $118,444 $ 84,604 $ 102,020
Cash paid to suppliers and employees...................... (10,710) (16,708) (29,113) (22,305) (24,435)
Interest paid............................................. (8,248) (10,724) (12,334) (9,516) (9,004)
Interest received......................................... 285 406 396 271 1,060
------- --------- -------- ---------- ---------
Net cash provided by operating activities........... 41,959 60,104 77,393 53,054 69,641
------- --------- -------- ---------- ---------
Cash flows from investing activities:
Investment in leased equipment............................ (70,498) (81,303) (71,943) (53,147) (62,218)
Investment in direct costs................................ (1,992) (2,186) (2,354) (1,666) (2,959)
Investment in service contracts........................... (3,635) (2,431) (2,972) (1,660) (6,298)
Investment in loans....................................... -- -- (2,538) (1,904) (7,657)
Purchase of property and equipment........................ (274) (628) (288) (216) (381)
Increase in notes receivable from officers and
employees............................................... -- -- (150) (150) (144)
Decrease in notes receivable from officers and
employees............................................... 46 104 87 79 40
Investment in notes receivable............................ -- (349) (160) -- --
Repayment of notes receivable............................. -- 111 191 131 1,395
------- --------- -------- ---------- ---------
Net cash used in investing activities............... (76,353) (86,682) (80,127) (58,533) (78,222)
------- --------- -------- ---------- ---------
Cash flows from financing activities:
Proceeds from secured debt................................ 87,881 181,006 56,639 47,254 70,485
Repayment of secured debt................................. (17,023) (29,946) (56,194) (44,370) (55,162)
Proceeds from refinancing of secured debt................. -- -- 203,580 115,000 185,000
Prepayment of secured debt................................ (33,390) (129,049) (203,580) (115,000) (185,000)
Proceeds from short-term demand notes payable............. 548 123 497 110 180
Repayment of short-term demand notes payable.............. (710) (833) (315) (116) (227)
Proceeds from issuance of subordinated debt............... 187 15,410 2,123 2,373 1,200
Repayment of subordinated debt............................ (619) (1,740) (2,891) (2,616) (2,374)
Proceeds from exercise of common stock options............ 90 4 162 152 160
Repayment of capital leases............................... (159) (393) (697) (511) (540)
Purchase of treasury stock................................ -- -- (38) -- --
Payment of dividends...................................... (650) (871) (1,075) (778) (936)
------- --------- -------- ---------- ---------
Net cash provided by (used in) financing
activities........................................ 36,155 33,711 (1,789) 1,498 12,786
------- --------- -------- ---------- ---------
Net increase (decrease) in cash and cash equivalents........ 1,761 7,133 (4,523) (3,981) 4,205
Cash and cash equivalents, beginning of period.............. 4,881 6,642 13,775 13,775 9,252
------- --------- -------- ---------- ---------
Cash and cash equivalents, end of period.................... $ 6,642 $ 13,775 $ 9,252 $ 9,794 $ 13,457
======= ========= ======== ========== =========
Reconciliation of net income to net cash provided by
operating activities:
Net income................................................ $ 2,524 $ 5,080 $ 7,652 $ 6,199 $ 9,460
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,503 2,981 3,787 2,701 3,867
Provision for credit losses............................. 13,388 19,822 21,713 15,601 12,568
Recovery of equipment cost and residual value, net of
revenue recognized.................................... 20,972 29,378 41,334 28,564 37,532
Increase (decrease) in current taxes.................... 985 (379) (1,266) (601) --
Increase in deferred income taxes....................... 701 1,892 4,897 2,601 6,407
Change in assets and liabilities:
Decrease (increase) in other assets..................... 317 (603) (173) (1,133) (414)
(Decrease) increase in accounts payable................. (11) 711 65 13 (55)
Increase (decrease) in accrued liabilities.............. 1,580 1,222 (616) (891) 276
------- --------- -------- ---------- ---------
Net cash provided by operating activities........... $41,959 $ 60,104 $ 77,393 $ 53,054 $ 69,641
======= ========= ======== ========== =========
Cash paid for income taxes.................................. $ 34 $ 1,954 $ 2,254 $ 2,282 $ 90
======= ========= ======== ========== =========
Supplemental disclosure of noncash activities:
Property acquired under capital leases.................... $ 849 $ 985 $ 246 $ 302 $ 412
Accrual of common stock dividends......................... $ 194 $ 242 $ 294 $ 559 $ 691
Conversion of preferred stock to common stock............. $ 82 -- -- -- --
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE> 71
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
A. NATURE OF BUSINESS:
MicroFinancial Incorporated (the "Company") which operates primarily
through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized
commercial finance company that leases and rents "microticket" equipment and
provides other financing services in amounts generally ranging from $900 to
$2,500, with an average amount financed of approximately $1,400 and an average
lease term of 45 months. The Company does not market its services directly to
lessees but sources leasing transactions through a network of independent sales
organizations and other dealer-based origination networks nationwide. The
Company funds its operations primarily through borrowings under its credit
facilities, issuances of subordinated debt and securitizations. One dealer
accounted for 14% of originations in the year ended December 31, 1997. In July
1998, the Company changed its name from Boyle Leasing Technologies, Inc. to
MicroFinancial Incorporated.
In December 1992, May 1993 and November 1994, Leasecomm Corporation created
wholly-owned subsidiaries, BLT Finance Corporation I ("BLT I"), BLT Finance
Corporation II ("BLT II") and BLT Finance Corporation III ("BLT III"),
respectively, which are special purpose corporations for the securitization and
financing of lease receivables.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). SFAS
No. 125 is effective for transactions entered into after December 31, 1996.
Under SFAS No. 125, an entity will recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered and derecognize liabilities when extinguished.
Effective January 1997, the Company adopted SFAS No. 125.
While the Company generally does not sell its interests in leases, service
contracts or loans to third parties after origination, the Company does,
however, from time to time, contribute certain leases to special purpose
corporations for purposes of obtaining financing in connection with its lease
receivables. As these transfers do not result in a change in control over the
lease receivables, sale treatment and related gain recognition under SFAS No.
125 does not occur. Accordingly, the lease receivable and related liability
remain on the balance sheet.
If SFAS No. 125 were effective for transactions prior to 1997, there would
have been no change in the accounting for these financing transactions.
During 1997 and 1996, the credit facilities related to the securitization
on BLT I and BLT II were paid off, respectively. Both of these subsidiaries were
dissolved on December 31, 1997.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Unaudited Interim Financial Statements
The interim financial data as of September 30, 1998, and for the nine
months ended September 30, 1997 and 1998, is unaudited; however, in the opinion
of the Company, all adjustments necessary for a fair presentation of interim
results of operations (consisting only of normal recurring accruals and
adjustments) have been made to the interim consolidated financial statements.
The consolidated results of operations for interim periods are not necessarily
indicative of results of operations for the respective full year.
F-7
<PAGE> 72
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with initial
maturities of less than three months to be cash equivalents. Cash equivalents
consist principally of overnight investments.
Leases and Loans
The Company's lease contracts are accounted for as financing leases. At
origination, the Company records the gross lease receivable, the estimated
residual value of the leased equipment, initial direct costs incurred and the
unearned lease income. Unearned lease income is the amount by which the gross
lease receivable plus the estimated residual value exceeds the cost of the
equipment. Unearned lease income and initial direct costs incurred are amortized
over the related lease term using the interest method which results in a level
rate of return on the net investment in leases. Amortization of unearned lease
income and initial direct costs is suspended if, in the opinion of management,
the lease agreement is determined to be impaired. It is management's opinion
given the nature of its business and the large number of small balance lease
receivables that a lease is impaired when one of the following occur: (i) the
obligor files for bankruptcy; (ii) the obligor dies and the equipment is
returned; or (iii) when an account has become 360 days past due. It is also
management's policy to maintain an allowance for credit losses that will be
sufficient to provide adequate protection against losses in its portfolio.
Management regularly reviews the collectibility of its lease receivables based
upon all of its communications with the individual lessees through its extensive
collection efforts and through further review of the creditworthiness of the
lessee.
In conjunction with the origination of leases, the Company may retain a
residual interest in the underlying equipment upon termination of the lease. The
value of such interests is estimated at inception of the lease and evaluated
periodically for impairment. An impairment is recognized when expected cash
flows to be realized subsequent to the end of the lease are expected to be less
than the residual value recorded. Other revenues such as loss and damage waiver
and service fees relating to the leases, contracts and loans and rental revenues
are recognized as they are earned.
Loans are reported at their outstanding principal balance. Interest income
on loans is recognized as it is earned.
Allowance for Credit Losses
The Company maintains an allowance for credit losses on its investment in
leases, service contracts and loans at an amount that it believes is sufficient
to provide adequate protection against losses in its portfolio. The allowance is
determined principally on the basis of the historical loss experience of the
Company and the level of recourse provided by such lease, service contract or
loan, if any, and reflects management's judgment of additional loss potential
considering future economic conditions and the nature and characteristics of the
underlying lease portfolio. The Company determines the necessary periodic
provision for credit losses taking into account actual and expected losses in
the portfolio as a whole and the relationship of the allowance to the net
investment in leases, service contracts and loans.
F-8
<PAGE> 73
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
Investment in Service Contracts
The Company's investments in cancelable service contracts are recorded at
cost and amortized over the expected life of the service period. Income on
service contracts from monthly billings is recognized as the related services
are provided. The Company periodically evaluates whether events or circumstances
have occurred that may affect the estimated useful life or recoverability of the
investment in service contracts.
Property and Equipment
Rental equipment is recorded at estimated residual value and depreciated
using the straight-line method over a period of twelve months.
Office furniture, equipment and capital leases are recorded at cost and
depreciated using the straight-line method over a period of three to five years.
Leasehold improvements are amortized over the shorter of the life of the lease
or the asset. Upon retirement or other disposition, the cost and related
accumulated depreciation of the assets are removed from the accounts and the
resulting gain or loss is reflected in income.
Fair Value of Financial Instruments
For financial instruments including cash and cash equivalents, investments
in financing leases and loans, accounts payable, and accrued expenses, it is
assumed that the carrying amount approximates fair value due to their short
maturity.
Interest-Rate Hedging Agreements
The Company enters into interest-rate hedging agreements to hedge against
potential increases in interest rates on the Company's outstanding borrowings.
The Company's policy is to accrue amounts receivable or payable under such
agreements as reductions or increases in interest expense, respectively.
Debt Issuance Costs
Debt issuance costs incurred in securing credit facility financing are
capitalized and subsequently amortized over the term of the credit facility.
Income Taxes
Deferred income taxes are determined under the liability method.
Differences between the financial statement and tax bases of assets and
liabilities are measured using the currently enacted tax rates expected to be in
effect when these differences reverse. Deferred tax expense is the result of
changes in the liability for deferred taxes. The principal differences between
assets and liabilities for financial statement and tax return purposes are the
treatment of leased assets, accumulated depreciation and provisions for doubtful
accounts. The deferred tax liability is reduced by loss carryforwards and
alternative minimum tax credits available to reduce future income taxes.
F-9
<PAGE> 74
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
Net Income Per Common Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," ("SFAS No. 128") which specifies the computation,
presentation and disclosure requirements for net income per common share. Basic
net income per common share is computed based on the weighted average number of
common shares outstanding during the period, adjusted for a 10-to-1 stock split
effected in 1997 and a 2-to-1 stock split to be effective in 1999, each as
described in Note H. Diluted net income per common share gives effect to all
dilutive potential common shares outstanding during the period. Under SFAS No.
128, the computation of diluted earnings per share does not assume the issuance
of common shares that have an antidilutive effect on net income per common
share.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income........................... $ 2,524 $ 5,080 $ 7,652 $ 6,199 $ 9,460
Shares used in computation:
Weighted average common shares
outstanding used in
computation of net income per
common share.................. 7,352,189 9,682,851 9,793,140 9,791,212 9,849,602
Dilutive effect of redeemable
convertible preferred stock... 1,676,420 39,200 19,600 19,600 19,600
Dilutive effect of common stock
options....................... 419,597 48,562 112,589 194,216 162,772
---------- ---------- ---------- ---------- ----------
Shares used in computation of net
income per common share -- assuming
dilution........................... 9,448,206 9,770,613 9,925,329 10,005,028 10,031,974
========== ========== ========== ========== ==========
Net income per common share.......... $ 0.34 $ 0.52 $ 0.78 $ 0.63 $ 0.96
========== ========== ========== ========== ==========
Net income per common share --
assuming dilution.................. $ 0.27 $ 0.52 $ 0.76 $ 0.62 $ 0.94
========== ========== ========== ========== ==========
</TABLE>
Options to purchase 4,246 shares of common stock were outstanding during
the year ended December 31, 1995, but were not included in the calculation of
diluted net income per common share because the option price was greater than
the average market price of the common shares during the period.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The statement is effective for fiscal years beginning after December
15, 1997 and the Company has adopted its provisions in 1998. The Company has
evaluated the impact this statement will have on its financial statements and
determined that no additional disclosure is required.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Internal Use Software," ("SOP 98-1") which
provides guidance on the accounting for the costs of software developed or
obtained for internal use. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. The Company does not expect the statement to have a
material impact on its financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133").
F-10
<PAGE> 75
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and requires that an entity recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at fair
value. SFAS No. 133 is effective for companies with fiscal years beginning after
June 15, 1999 and the Company will adopt its provisions in 2000. The Company has
not yet evaluated the impact this statement will have on its financial position
or results of operations.
Reclassification of Prior Year Balances
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current presentation.
C. LEASES AND LOANS:
At December 31, 1997, future minimum payments on the Company's lease
receivables are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
- ------------------------------------------------------------
<S> <C>
1998................................................... $110,801
1999................................................... 73,752
2000................................................... 42,500
2001................................................... 11,105
2002................................................... 669
Thereafter............................................. 152
--------
Total.................................................. $238,979
========
</TABLE>
At December 31, 1997, the weighted average remaining life of leases in the
Company's lease portfolio is approximately 28 months and the implicit rate of
interest is approximately 35%.
The Company's business is characterized by a high incidence of
delinquencies which in turn may lead to significant levels of defaults. The
Company evaluates the collectibility of leases originated and loans based on the
level of recourse provided, if any, delinquency statistics, historical lease
experience, current economic conditions and other relevant factors. The Company
provides an allowance for credit losses for leases which are considered
impaired.
The Company historically took charge-offs against its receivables when such
receivables were 360 days past due. During this period, cumulative net
charge-offs after recoveries from the Company's inception to September 30, 1998
have totaled 7.45% of total cumulative receivables plus total billed fees over
such period. In September and October 1996, the Company reduced the time period
for charging off its non-securitized receivables from 360 to 240 days and, as a
result, increased its charge-offs by a total of approximately $5.0 million. As a
result of this change, recoveries increased significantly, indicating that a
240-day charge-off period was too early in the collection process to determine
ultimate collectibility. As such, during 1997 net charge-offs after recoveries
were not significantly different than the Company's historical net charge-off
experience. For this reason, in January 1998, the Company changed its charge-off
policy for its receivables back to 360 days to better reflect the Company's
collection experience.
F-11
<PAGE> 76
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
The following table sets forth the Company's allowance for credit losses as
of December 31, 1994, 1995, 1996 and 1997 and as of September 30, 1998 and the
related provisions, charge-offs and recoveries for the years ended December 31,
1995, 1996 and 1997 and for the nine months ended September 30, 1998 (unaudited)
(in thousands):
<TABLE>
<S> <C> <C>
Balance at December 31, 1994................................ $ 7,992
Provision for credit losses................................. 13,388
Charge-offs................................................. 5,964
Recoveries.................................................. 536
-------
Charge-offs, net of recoveries.............................. 5,428
-------
Balance at December 31, 1995................................ $15,952
Provision for credit losses................................. 19,822
Charge-offs................................................. 15,675
Recoveries.................................................. 3,727
-------
Charge-offs, net of recoveries.............................. 11,948
-------
Balance at December 31, 1996................................ $23,826
Provision for credit losses................................. 21,713
Charge-offs................................................. 24,290
Recoveries.................................................. 5,070
-------
Charge-offs, net of recoveries.............................. 19,220
-------
Balance at December 31, 1997................................ $26,319
Provision for credit losses................................. 12,568
Charge-offs................................................. 20,644
Recoveries.................................................. 6,180
-------
Charge-offs, net of recoveries.............................. 14,464
-------
Balance at September 30, 1998 (unaudited)................... $24,423
=======
</TABLE>
F-12
<PAGE> 77
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
In conjunction with the origination of leases, the Company may retain a
residual interest in the underlying equipment upon termination of the lease. The
value of such interests is estimated at inception of the lease and evaluated
periodically for impairment. The following table sets forth the Company's
estimated residual value as of December 31, 1994, 1995, 1996 and 1997 and as of
September 30, 1998 (unaudited) and changes in the Company's estimated residual
value as a result of new originations and lease terminations for the years ended
December 31, 1995, 1996 and 1997 and for the nine months ended September 30,
1998 (unaudited) (in thousands):
<TABLE>
<S> <C> <C>
Balance of Estimated Residual Value at December 31, 1994.... $ 7,971
New Originations............................................ 5,338
Lease Terminations.......................................... 2,342
Balance of Estimated Residual Value at December 31, 1995.... $10,967
New Originations............................................ 6,335
Lease Terminations.......................................... 2,600
Balance of Estimated Residual Value at December 31, 1996.... $14,702
New Originations............................................ 6,056
Lease Terminations.......................................... 3,974
Balance of Estimated Residual Value at December 31, 1997.... $16,784
New Originations............................................ 4,992
Lease Terminations.......................................... 4,203
Balance of Estimated Residual Value at September 30, 1998
(unaudited)............................................... $17,573
</TABLE>
- ---------------
* New originations represent the residual value added to the Company's estimated
residual value upon origination of new leases. Lease terminations represent the
residual value deducted from the Company's estimated residual value upon the
termination of a lease (i) that is bought out during or at the end of the lease
term; (ii) upon expiration of the original lease term when the lease converts to
an extended rental contract and (iii) that has been charged off by the Company.
D. PROPERTY AND EQUIPMENT:
At December 31, 1996 and 1997, property and equipment consisted of the
following:
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 31, ENDED
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Rental equipment................................... $4,845 $5,588 $9,706
Computer equipment................................. 2,628 2,998 3,083
Office equipment................................... 571 634 628
Leasehold improvements............................. 224 224 219
------ ------ ------
8,268 9,444 13,636
Less accumulated depreciation and amortization..... 3,125 5,179 6,296
------ ------ ------
Total.............................................. $5,143 $4,265 $7,340
====== ====== ======
</TABLE>
Depreciation and amortization expense totaled $1,503,000, $2,981,000,
$3,787,000 and $3,867,000 for the years ended December 31, 1995, 1996 and 1997
and for the nine months ended September 30, 1998, respectively.
F-13
<PAGE> 78
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
At December 31, 1996 and 1997 and at September 30, 1998, computer equipment
includes $2,092,287, $2,339,000 and $2,141,000, respectively, under capital
leases. Accumulated amortization related to capital leases amounted to $611,000,
$1,306,000 and $1,226,000 at December 31, 1996 and 1997 and at September 30,
1998, respectively.
At December 31, 1997 and September 30, 1998, accumulated depreciation
related to rental equipment amounted to $3,060,000 and $4,040,937, respectively.
E. NOTES PAYABLE:
The Company has a revolving line of credit and term loan facility with a
group of financial institutions whereby it may borrow a maximum of $105,000,000
based upon qualified lease receivables. Outstanding borrowings with respect to
the revolving line of credit bear interest based either at prime for prime rate
loans or London Interbank Offered Rate (LIBOR) plus 1.85% for LIBOR loans. If
the LIBOR loans are not renewed upon their maturity then they automatically
convert into prime rate loans. The prime rates at September 30, 1998 and
December 31, 1997 and 1996 were 8.25%, 8.5% and 8.25%, respectively. The 90-day
LIBOR at September 30, 1998 and December 31, 1997 and 1996 was 5.31%, 5.91% and
5.78%, respectively.
At September 30, 1998, the Company had borrowings outstanding under the
agreement with the following terms (unaudited):
<TABLE>
<CAPTION>
TYPE RATE AMOUNT
---- ------ -----------
(UNAUDITED)
<S> <C> <C>
Prime................................................. 8.2500% $11,910
LIBOR................................................. 7.5375% 29,000
LIBOR................................................. 7.5375% 20,000
Fixed................................................. 8.3000% 1,449
Fixed................................................. 7.7500% 5,100
-------
Total $67,459
=======
</TABLE>
At December 31, 1997, the Company had borrowings outstanding under the
agreement with the following terms:
<TABLE>
<CAPTION>
TYPE RATE AMOUNT
---- ------ -------
<S> <C> <C>
Prime................................................... 8.5000% $ 6,634
LIBOR................................................... 7.7250% 12,000
Fixed................................................... 8.3000% 5,798
Fixed/99 7.7500% 9,273
-------
Total $33,705
=======
</TABLE>
At December 31, 1996, the Company had borrowings outstanding under the
agreement with the following terms:
<TABLE>
<CAPTION>
TYPE RATE AMOUNT
---- ------ -------
<S> <C> <C>
Prime................................................... 8.2500% $ 6,966
LIBOR................................................... 8.0976% 5,000
LIBOR................................................... 8.0000% 25,000
Fixed................................................... 8.0000% 5
Fixed................................................... 8.3000% 12,030
Fixed................................................... 7.7500% 15,054
-------
Total $64,055
=======
</TABLE>
F-14
<PAGE> 79
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
Outstanding borrowings are collateralized by leases and service contracts
pledged specifically to the financial institutions. All balances under the
revolving line of credit will be automatically converted to a term loan on July
31, 1999 provided the line of credit is not renewed and no event of default
exists at that date. All converted term loans are repayable over the term of the
underlying leases, but not in any event to exceed 48 monthly installments. The
most restrictive covenants of the agreement have minimum net worth and income
requirements and limit payment of dividends to no more than 50% of consolidated
net income, as defined, for the immediately preceding fiscal year.
The Company has an additional revolving credit agreement and term loan with
a group of financial institutions whereby it may borrow up to a maximum of
$35,000,000 based on qualified lease receivables. Outstanding borrowings with
respect to the revolving line of credit bear interest based either at prime for
prime rate loans or LIBOR plus 1.85% for LIBOR loans. If the LIBOR loans are not
renewed upon their maturity then they automatically convert into prime rate
loans.
At September 30, 1998, the Company had borrowings outstanding under the
agreement with the following terms (unaudited):
<TABLE>
<CAPTION>
TYPE RATE AMOUNT
---- ------ -----------
(UNAUDITED)
<S> <C> <C>
LIBOR................................................. 7.5375% $21,500
LIBOR................................................. 8.1875% 6,000
Prime................................................. 8.5000% 2,155
-------
Total $29,655
=======
</TABLE>
At December 31, 1997, the Company had borrowings outstanding under the
agreement with the following terms:
<TABLE>
<CAPTION>
TYPE RATE AMOUNT
---- ------ -------
<S> <C> <C>
Variable................................................ 8.5000% $ 2,816
LIBOR................................................... 7.5688% 17,500
LIBOR................................................... 8.4375% 5,000
LIBOR................................................... 7.6273% 3,000
Fixed................................................... 8.3000% 68
Fixed................................................... 7.7500% 797
-------
Total $29,181
=======
</TABLE>
At December 31, 1996, the Company had borrowings outstanding under the
agreement with the following terms:
<TABLE>
<CAPTION>
TYPE RATE AMOUNT
---- ------ -------
<S> <C> <C>
Prime................................................... 8.2500% $ 3,123
LIBOR................................................... 8.9770% 5,000
LIBOR................................................... 8.0313% 10,000
Fixed................................................... 8.3000% 605
Fixed................................................... 7.7500% 1,091
-------
Total $19,819
=======
</TABLE>
Outstanding borrowings are collateralized by leases and service contracts
pledged specifically to the financial institutions. All balances under the
revolving line of credit will be automatically converted to a term loan on July
31, 1999 provided the line of credit is not renewed and no event of default
exists at that date. All converted term loans are repayable over the term of the
underlying leases, but not in any event to exceed 24
F-15
<PAGE> 80
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
monthly installments. The most restrictive covenants of the agreement have
minimum net worth and income requirements and limit payment of dividends to no
more than 50% of consolidated net income, as defined, for the immediately
preceding fiscal year.
BLT I has one term facility with a group of financial institutions whereby
it borrowed $7,870,000 based upon qualified lease receivables. At December 31,
1996, the outstanding balance on this term facility was $614,000. The
outstanding borrowings bear interest at a fixed rate of 7.23%. At December 31,
1997, no amounts were outstanding on this term facility.
BLT III has four series of notes, the 1994-A Notes, the 1996-A Notes, the
1997-A Notes and the Warehouse Notes. In November 1994, BLT III issued the
1994-A Notes in aggregate principal amount of $18,885,000. In May 1996, BLT III
issued the 1996-A Notes in aggregate principal amount of $23,407,000, and in
August 1997, BLT III issued the 1997-A Notes in aggregate principal amount of
$44,763,000.
Pursuant to a Master Financing Indenture, the Company may issue one
additional series of Term Notes, the warehouse notes, with a maximum principal
amount of $20,000,000. At December 31, 1996, the Company had an outstanding
balance on the warehouse notes of $5,809,000. The warehouse notes expired in
August of 1997, at which time they were converted to BLT III 1997-A Notes.
At December 31, 1996 and 1997, BLT III had borrowings outstanding under the
three series of notes with the following terms:
<TABLE>
<CAPTION>
NOTE SERIES EXPIRATION RATE 1996 1997
----------- ---------- ----------- ------- -------
<S> <C> <C> <C> <C>
1994-A Notes....................... 12/16/98 7.3300% $ 6,619 $ 721
1996-A Notes....................... 5/16/00 6.6900% 19,081 13,214
1997-A Notes....................... 1/16/03 6.4200% -- 39,620
Warehouse Notes.................... LIBOR + .45% 5,809 --
------- -------
Total $31,509 $53,555
======= =======
</TABLE>
Outstanding borrowings are collateralized by a specific pool of lease
receivables.
At December 31, 1996 and 1997, the Company also has other notes payable
which totaled $205,000 and $389,000, respectively. The notes are due on demand
and bear interest at a rate of prime less 1.00%. Other notes payable include
amounts due to stockholders of the Company at December 31, 1996 and 1997, of
$197,000 and $337,000, respectively. Interest paid to stockholders under such
notes was not material for the years ended December 31, 1995, 1996 and 1997.
Subordinated Notes Payable
At December 31, 1996 and 1997, the Company also has senior subordinated and
subordinated debt outstanding amounting to $27,006,000 and $26,382,000
respectively, net of unamortized discounts of $357,000 and $213,000,
respectively. This debt is subordinated in the rights to the Company's notes
payable to the primary lenders as described above. Outstanding borrowings bear
interest ranging from 9.5% to 14% for fixed rate financing and prime plus 3% to
4% for variable rate financing. These notes have maturity dates ranging from
January 1998 to October 2003. The Company has three senior subordinated notes.
The first was issued in August 1994 at 12% to a financial institution with an
aggregate principal amount of $7,500,000. Cash proceeds from this note were
$6,743,000 net of a discount of $757,000 which is being amortized over the life
of the note. This senior note requires annual payments of $1,500,000 commencing
on July 15, 1997 until the note matures in July 2001. The second senior
subordinated note was issued in October 1996 at 12.25% to a financial
institution with an aggregate principal amount of $5,000,000. This senior note
requires monthly payments of (i) $125,000 for the period November 1, 1998
through October 1, 2000 and (ii) $166,667 for the period November 1, 2000 until
the note matures in October 1, 2001. The third senior subordinated note was
issued in
F-16
<PAGE> 81
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
October 1996 at 12.60% to a financial institution with an aggregate principal
amount of $5,000,000. This senior note requires quarterly payments of $250,000
commencing on March 15, 1999 until the note matures in October 2003. The most
restrictive covenants of the senior subordinated note agreements consist of
minimum net worth and interest coverage ratio requirements and restrictions on
payment of dividends. Subordinated notes payable include $2,712,000 due to
stockholders. Interest paid to stockholders under such notes, at rates ranging
between 8% and 14%, amounted to $207,000, $183,000 and $472,000 for the years
ended December 31, 1995, 1996, and 1997, respectively.
At December 31, 1997, the repayment schedule, assuming conversion of the
revolving line of credit to a term loan, for outstanding notes and subordinated
notes is as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
------------------
<S> <C>
1998........................................................ $ 62,512
1999........................................................ 52,576
2000........................................................ 17,269
2001........................................................ 7,372
2002........................................................ 2,345
Thereafter.................................................. 1,351
--------
143,425
Unamortized discount on senior subordinated debt............ (213)
--------
Total....................................................... $143,212
========
</TABLE>
It is estimated that the carrying amounts of the Company's borrowings under
its variable rate revolving credit agreements approximate their fair value. The
fair value of the Company's short-term and long-term fixed rate borrowings is
estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. At
December 31, 1996 and 1997, the aggregate carrying value of the Company's fixed
rate borrowings was approximately $82,500,000 and $96,900,000, respectively,
with an estimated fair value of approximately $75,700,000 and $92,900,000,
respectively.
F. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES:
During 1995 and 1997, the Company issued notes to certain officers and
employees in connection with the exercise of common stock options amounting to
$251,000 and $63,000, respectively, in exchange for recourse loans with fixed
maturity dates prior to the expiration date of the original grant. The notes are
non-interest bearing unless the principal amount thereof is not paid in full
when due, at which time interest accrues and is payable at a rate per annum
equal to the prime rate plus 4.0%. The notes can be repaid from the application
of dividends paid on the common stock but in all cases are to be paid in full at
the maturity date or upon the employee leaving the Company. At December 31, 1996
and 1997, notes receivable outstanding from officers and employees were $101,000
and $164,000, respectively.
G. REDEEMABLE PREFERRED STOCK:
At December 31, 1996 and 1997, the Company had authorized 88,231 shares of
convertible preferred stock ("preferred stock") with a par value of $1.00, of
which 490 shares of the Series C Convertible Preferred Stock were issued and
outstanding, respectively, at December 31, 1996 and 1997.
Shares of preferred stock are convertible into shares of common stock at
the option of the holder according to a conversion formula (which would
currently result in a one-for-forty exchange) with mandatory conversion upon the
completion of a public offering meeting certain minimum proceeds, as defined.
Holders of
F-17
<PAGE> 82
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
the preferred stock are entitled to an annual cumulative dividend of $.765 per
share, if and when declared. The holder of the preferred stock has a liquidation
preference of $25.50 for preferred stock, plus earned and unpaid dividends. In
addition, the preferred shareholder is entitled to vote as a class, proportional
to the number of common shares into which his preferred shares are convertible.
H. STOCKHOLDERS' EQUITY:
Common Stock
The Company had 1,200,000 and 10,000,000 authorized shares of common stock
with a par value of $.01 per share of which 9,683,340 and 9,799,000 shares
(giving effect to the two stock splits referred to below) were issued and
outstanding at December 31, 1996 and 1997, respectively.
Treasury Stock
The Company had 137,340 and 142,590 shares of common stock in treasury at
December 31, 1996 and 1997, respectively, and 490 shares of preferred stock in
treasury at December 31, 1996 and 1997.
Stock Split
On June 16, 1997, the Company's Board of Directors authorized a ten-for-one
stock split. This resulted in the issuance of 4,471,353 additional shares of
common stock. On June 12, 1998, the Company's Board of Directors authorized a
two-for-one stock split to be effective with the Company's initial public
offering. This will result in the issuance of 5,007,813 additional shares of
common stock. All share and per share amounts have been restated to reflect
these stock splits.
Stock Options
In 1987, the Company adopted its 1987 Stock Option Plan (the "Plan") which
provides for the issuance of qualified or nonqualified options to purchase
shares of the Company's common stock. In 1997, the Company's Board of Directors
approved an amendment to the Plan, as a result of the stock split. The aggregate
number of shares issued shall not exceed 1,220,000 and the exercise price of any
outstanding options issued pursuant to the Plan shall be reduced by a factor of
ten and the number of outstanding options issued pursuant to the Plan shall be
increased by a factor of ten. Qualified stock options, which are intended to
qualify as "incentive stock options" under the Internal Revenue Code, may be
issued to employees at an exercise price per share not less than the fair value
of the common stock at the date granted as determined by the Board of Directors.
Nonqualified stock options may be issued to officers, employees and directors of
the Company as well as consultants and agents of the Company at an exercise
price per share not less than fifty percent of the fair value of the common
stock at the date of grant as determined by the Board. The vesting periods and
expiration dates of the grants are determined by the Board of Directors. The
option period may not exceed ten years.
F-18
<PAGE> 83
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
The following summarizes the stock option activity:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
------ --------------- --------------
<S> <C> <C> <C>
Outstanding at December 31, 1994......... 1,466,680 $0.10625 to $0.6375 $ 0.275
Exercised................................ (1,399,400) $0.10625 to $0.6375 $ 0.260
Granted.................................. 320,000 $0.6375 to $1.95 $ 1.910
-----------
Outstanding at December 31, 1995......... 387,280 $0.6375 to $1.95 $ 1.690
Exercised................................ (5,620) $0.6375 $0.6375
-----------
Outstanding at December 31, 1996......... 381,660 $0.6375 to $1.95 $ 1.705
Exercised................................ (120,910) $0.6375 to $1.95 $ 0.975
Canceled................................. (9,750) $1.95 $ 1.950
-----------
Outstanding at December 31, 1997......... 251,000 $0.6375 to $1.95 $ 1.870
===========
</TABLE>
The options vest over five years and are exercisable only after they become
fully vested. At December 31, 1996 and 1997, 114,220 and 65,988 of the
outstanding options were fully vested.
At December 31, 1996 and 1997, 401,260 and 270,600 shares of common stock
were reserved for conversion of redeemable convertible preferred stock and
common stock option exercises.
Information relating to stock options at December 31, 1997, summarized by
exercise price is as follows:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- -------------------------
WEIGHTED
AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE SHARES LIFE (YEARS) EXERCISE PRICE SHARES
---------------- ------- ------------ ---------------- ------
<S> <C> <C> <C> <C>
$0.6375 15,620 3.6 $0.6375 5,144
$1.95 235,380 5.0 $ 1.95 60,844
------- ------
$0.6375 to $1.95 251,000 4.9 $ 1.87 65,988
======= ======
</TABLE>
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant. In
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Effective for fiscal 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("SFAS No. 123"). SFAS No. 123 requires that
compensation under a fair value method be determined using a Black-Scholes
option pricing model and disclosed in a pro forma effect on earnings and
earnings per share. Had compensation cost for stock based compensation been
determined based on the fair value at the grant dates consistent with the method
of SFAS No. 123, the Company's pro forma net income applicable to common stock
for the years ended December 31, 1995, 1996 and 1997 would have been $2,516,000,
$5,072,000 and $7,644,000, respectively. Pro forma net income per common share
would not have been different than net income per common share as reported.
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1995: an expected life of the options of seven years,
a risk-free interest rate of approximately 5.5%, a dividend yield of 4%, and no
volatility. The weighted average fair value at date of grant for options granted
during 1995 approximated $.27 per option. There were no options granted in 1996
or 1997.
F-19
<PAGE> 84
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
I. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Current:
Federal............................................... $ 985 $1,556 $ 898
State................................................. -- 18 91
------ ------ ------
985 1,574 989
------ ------ ------
Deferred:
Federal............................................... 299 1,100 3,703
State................................................. 401 792 1,194
------ ------ ------
700 1,892 4,897
------ ------ ------
Total............................................ $1,685 $3,466 $5,886
====== ====== ======
</TABLE>
At December 31, 1996 and 1997, the components of the net deferred tax
liability were as follows:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Investment in leases, other than allowance.................. $ 61,832 $ 64,405
Allowance for credit losses................................. (9,478) (108)
Operating lease depreciation................................ (44,892) (45,001)
Debt issue costs............................................ 648 455
Other....................................................... 1,257 1,947
Alternative minimum tax..................................... (2,536) (3,983)
Loss carryforwards.......................................... (759) (6,746)
--------- --------
Total............................................. $ 6,072 $ 10,969
========= ========
</TABLE>
The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 34.0% 34.0%
State income taxes, net of federal benefit.................. 6.3 6.3 6.7
Nondeductible expenses and other............................ 1.0 0.3 2.8
---- ---- ----
Effective income tax rate................................... 41.3% 40.6% 43.5%
==== ==== ====
</TABLE>
At December 31, 1997, the Company had passive loss carryforwards of
approximately $16,752,000 which may be used to offset future passive income.
These loss carryforwards are available indefinitely for use against future
passive income.
J. COMMITMENTS AND CONTINGENCIES:
The Company's lease for its facility in Waltham, Massachusetts expires in
1999. This lease contains one five-year renewal option with escalation clauses
for increases in the lessor's operating costs. The Company's lease for its
facilities in Newark, California expires in 2001.
F-20
<PAGE> 85
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
The Company has entered into various operating lease agreements ranging
from three to four years for additional office equipment. At December 31, 1997,
future minimum lease payments under noncancelable operating leases with
remaining terms in excess of one year are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31:
-------------------------------
<S> <C>
1998........................................................ $ 930
1999........................................................ 570
2000........................................................ 55
2001........................................................ 38
------
Total............................................. $1,593
======
</TABLE>
Rental expense under operating leases totaled $793,000, $788,000 and
$991,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company has entered into various capital lease agreements ranging from
three to four years for office equipment, computer equipment and
telecommunication systems. At December 31, 1997, future minimum lease payments
under capital leases were as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31:
-------------------------------
<S> <C>
1998........................................................ $ 682
1999........................................................ 383
2000........................................................ 42
------
Total minimum lease payments................................ 1,107
Less amounts representing interest.......................... (36)
------
Total....................................................... $1,071
======
</TABLE>
The Company and its subsidiaries are frequently parties to various claims,
lawsuits and administrative proceedings arising in the ordinary course of
business. Although the outcome of these lawsuits cannot be predicted with
certainty, the Company does not expect such matters to have a material adverse
effect on the financial condition or results of operations of the Company.
K. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code to provide retirement and profit sharing benefits covering
substantially all full-time employees. Employees are eligible to contribute up
to 15% of their gross salary. The Company will contribute $.50 for every $1.00
contributed by an employee up to 3% of the employee's salary. Vesting in the
Company contributions is over a five-year period based upon 20% per year. The
Company's contribution to the defined contribution plan were $52,000, $72,000
and $106,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
L. INTEREST RATE SWAP:
Interest rate swap contracts involve the exchange by the Company with
another party of their respective commitments to pay or receive interest, e.g.,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. The Company has entered into this contract to
reduce the impact of changes in interest rates on its floating rate debt.
The Company has entered into this interest rate swap agreement only on a
net basis, which means that the two payment streams are netted out, with the
Company receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount
F-21
<PAGE> 86
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(tables in thousands, except per share data)
of payments that the Company is contractually entitled to receive, if any.
Interest rate swaps entered into by the Company may not be readily marketable.
At December 31, 1997, the Company had outstanding one interest rate swap
agreement with one of its banks, having a total notional principal amount of
$17,500,000. The agreement effectively changes the Company's interest rate
exposure on $17,500,000 of its floating rate $35,000,000 revolving line of
credit due July 31, 1999 to a fixed 8.45%. The interest rate swap matures on
July 10, 2000. The interest differential paid or received on the swap agreement
is recognized as an adjustment to interest expense. Interest expense related to
the swap was $78,000 for the year ended December 31, 1997. At December 31, 1997,
the fair value of this interest rate swap, which represents the amount the
Company would receive or pay to terminate the agreement, is a net payable of
$333,000, based on dealer quotes.
The market risk exposure from the interest rate swap is assessed in light
of the underlying interest rate exposures. Credit risk exposure from the swap is
minimized as the agreement is with a major financial institution. The Company
monitors the creditworthiness of this financial institution and full performance
is anticipated.
M. CONCENTRATION OF CREDIT RISK:
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of lease and loan receivables and cash and cash
equivalent balances. To reduce the risk to the Company, stringent credit
policies are followed in approving leases and loans, and lease pools are closely
monitored by management. In addition, the cash and cash equivalents are
maintained with several high quality financial institutions.
N. SUBSEQUENT EVENTS (UNAUDITED):
Series 1998-A Notes
In November 1998, BLT III issued its 6.03% Lease-Backed Notes, Series
1998-A (the "1998-A Notes") in aggregate principal amount of $40,768,557. The
1998-A Notes mature on May 17, 2004.
Lease
The Company recently signed a lease for 44,659 square feet of office space
in Woburn, Massachusetts which lease commenced on December 15, 1998 and expires
on December 14, 2003. The monthly rent under this lease is $57,099.
1998 Plan
The Company has adopted the 1998 Equity Incentive Plan (the "1998 Plan")
effective July 9, 1998. The 1998 Plan permits the Compensation Committee of the
Company's Board of Directors to make various long-term incentive awards,
generally equity-based, to eligible persons. The Company intends to reserve
2,000,000 shares of the Company's common stock for issuance pursuant to the 1998
Plan.
F-22
<PAGE> 87
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT
RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER
IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary............................... 3
Risk Factors.......................... 8
Use of Proceeds....................... 15
Dividend Policy....................... 16
Capitalization........................ 17
Dilution.............................. 18
Selected Consolidated Financial and
Operating Data...................... 19
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 21
Business.............................. 27
Management............................ 38
Certain Transactions.................. 46
Principal Stockholders................ 47
Selling Stockholders.................. 48
Description of Certain Indebtedness... 49
Description of Capital Stock.......... 55
Shares Eligible for Future Sale....... 58
Certain United States Tax Consequences
to Non-United States Holders........ 59
Underwriting.......................... 61
Legal Matters......................... 62
Experts............................... 62
Available Information................. 62
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL MARCH 1, 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4,000,000 SHARES
[MICROFINANCIAL LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
PIPER JAFFRAY INC.
CIBC OPPENHEIMER
FEBRUARY 4, 1999
