<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
<TABLE>
<S> <C>
/ / Preliminary Proxy Statement / / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
FINANCING FOR SCIENCE INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), or 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/X/ Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
5,394,600 shares
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
$6.40
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
$34,525,440.00
----------------------------------------------------------------------
(5) Total fee paid:
$6,905.09
----------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$6,905.09
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A (Commission File No. 0-22740)
----------------------------------------------------------------------
(3) Filing Party:
Financing For Science International, Inc.
----------------------------------------------------------------------
(4) Date Filed:
June 17, 1996
----------------------------------------------------------------------
<PAGE> 2
[FSI LOGO]
FINANCING FOR SCIENCE INTERNATIONAL, INC.
10 WATERSIDE DRIVE
FARMINGTON, CONNECTICUT 06032-3065
August 9, 1996
To the Stockholders of
Financing for Science International, Inc.:
You are cordially invited to attend a special meeting (including any
adjournment or postponement thereof, the "Special Meeting") of the holders of
shares of common stock, par value $.01 per share ("Common Stock"), of Financing
for Science International, Inc. (the "Company"), to be held at The Farmington
Inn, 827 Farmington Avenue, Farmington, Connecticut, on August 29, 1996, at
10:00 a.m., local time.
At the Special Meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of May
19, 1996 (the "Merger Agreement"), by and among the Company, FINOVA Capital
Corporation, a Delaware corporation ("FINOVA"), and FINOVA Business Credit
Corp., a Delaware corporation and a wholly owned subsidiary of FINOVA ("Merger
Sub"), and the transactions contemplated thereby.
If the Merger Agreement is approved and adopted by the stockholders of the
Company, Merger Sub will be merged with and into the Company (the "Merger"),
with the Company being the surviving corporation, and each outstanding share of
Common Stock of the Company (other than shares of Common Stock held by the
Company as treasury stock or held by stockholders, if any, who properly perfect
their dissenters' rights of appraisal under Delaware law) will be cancelled and
converted into the right to receive $6.40 in cash, without interest (the "Merger
Price"). The completion of the Merger is conditioned upon, among other things,
the approval of the Merger Agreement by the holders of a majority of the
outstanding shares of Common Stock.
After careful consideration, the Board of Directors of the Company has
unanimously concluded that the terms of the proposed Merger, as set forth in the
Merger Agreement, are fair to, and in the best interests of, the Company's
stockholders. Accordingly, the Board of Directors has unanimously approved the
Merger Agreement and the transactions contemplated thereby and unanimously
recommends that all stockholders vote "FOR" approval and adoption of the Merger
Agreement and the transactions contemplated thereby.
Details of the proposed Merger and other important information are set
forth in the accompanying Proxy Statement. Please review this material carefully
before voting.
Electra Investment Trust, P.L.C., Barry R. Bronfin, AMEV Venture Associates
III, L.P. and AMEV Venture Associates III - International, L.P. (each a
"Principal Stockholder" and collectively, the "Principal Stockholders") have
each entered into a voting agreement with FINOVA, pursuant to which, among other
things, each such Principal Stockholder has agreed (a) not to sell, pledge,
transfer, assign, encumber or otherwise alienate any shares of Common Stock
owned by him or it of record or beneficially and (b) to vote, or cause to be
voted, all shares of Common Stock owned by him or it of record or beneficially
in favor of the Merger Agreement and the Merger. As of the Record Date (as
defined below), the Principal Stockholders are the beneficial owners of an
aggregate of 2,867,200 shares of Common Stock, or approximately 53.1% of the
outstanding shares of Common Stock of the Company. Under Delaware law, the
affirmative vote of the holders of at least a majority of the shares of Common
Stock outstanding as of the Record Date is required to approve and adopt the
Merger Agreement and the transactions contemplated thereby. Thus, the Principal
Stockholders have sufficient voting power to approve and adopt the Merger
Agreement without the affirmative
<PAGE> 3
vote of any other stockholders. Nevertheless, the Board of Directors believes
that your representation at the Special Meeting is important and urges you to
vote your shares of Common Stock.
As more fully described in the Proxy Statement, if the Merger Agreement is
approved and adopted and the Merger is completed, the Company's stockholders
will cease to have any ownership interest in the Company and will cease to
participate in the Company's future earnings and growth, if any. Instead, upon
completion of the Merger, the Company's stockholders will be entitled to receive
the Merger Price in exchange for their shares of Common Stock.
Kropschot Financial Services ("KFS") has acted as the financial advisor to
the Board of Directors in connection with its consideration and review of the
proposed Merger. The Board of Directors has received the written opinion of KFS
that the Merger Price to be received by the Company's stockholders in the Merger
is fair to such stockholders, from a financial point of view, as of the date of
the rendering of the opinion.
Only holders of record of shares of Common Stock outstanding as of the
close of business on July 22, 1996 (the "Record Date") are entitled to notice
of, and to vote at, the Special Meeting.
Whether or not you plan to attend the Special Meeting, please complete,
sign and date the accompanying proxy card and return it in the enclosed
postage-prepaid envelope as soon as possible so that your shares will be
represented at the Special Meeting. If you attend the Special Meeting, you may
vote in person even if you have previously returned your proxy card.
Sincerely,
/s/ Barry R. Bronfin
-------------------------
Barry R. Bronfin
Chairman
2
<PAGE> 4
[FSI LOGO]
FINANCING FOR SCIENCE INTERNATIONAL, INC.
10 WATERSIDE DRIVE
FARMINGTON, CONNECTICUT 06032-3065
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
------------------------
August 9, 1996
To the Stockholders of
Financing for Science International, Inc.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (including
any adjournment or postponement thereof, the "Special Meeting") of Financing for
Science International, Inc. ("FSI" or the "Company") will be held at The
Farmington Inn, 827 Farmington Avenue, Farmington, Connecticut, on August 29,
1996, commencing at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of May 19, 1996 (the "Merger
Agreement"), by and among the Company, FINOVA Capital Corporation, a
Delaware corporation ("FINOVA"), and FINOVA Business Credit Corp., a
Delaware corporation and a wholly owned subsidiary of FINOVA ("Merger
Sub"), and the transactions contemplated thereby, pursuant to which, among
other things, (i) Merger Sub will be merged with and into the Company (the
"Merger"), with the Company being the surviving corporation and (ii) each
outstanding share of the common stock of the Company, par value $.01 per
share (the "Common Stock") (other than shares of Common Stock held by the
Company as treasury stock or held by stockholders, if any, who properly
perfect their dissenters' rights of appraisal under Delaware law) will be
cancelled and converted into the right to receive $6.40 in cash, without
interest.
2. To transact any other business incidental to the Special Meeting
that may properly come before such meeting or any adjournment or
postponement thereof.
A copy of the Merger Agreement is attached as Annex A to the Proxy
Statement that accompanies this Notice of Special Meeting of Stockholders and is
incorporated herein by reference.
The Board of Directors has unanimously determined that the terms of the
Merger, as set forth in the Merger Agreement, are fair to, and in the best
interests of, the Company's stockholders, has unanimously approved and adopted
the Merger Agreement and the transactions contemplated thereby and unanimously
recommends that the stockholders of the Company vote "FOR" the approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
The Board of Directors of the Company has fixed the close of business on
July 22, 1996 as the record date (the "Record Date") for the determination of
stockholders entitled to notice of, and to vote at, the Special Meeting and any
adjournments or postponements thereof. The affirmative vote of holders of a
majority of the shares of Common Stock outstanding as of the Record Date is
necessary to approve and adopt the Merger Agreement and the transactions
contemplated thereby.
Under Delaware law, holders of shares of Common Stock have the right to
dissent from the Merger and receive payment of the fair value of their shares
upon compliance with Section 262 of the Delaware General Corporation Law (the
"DGCL"). This right is explained more fully in the accompanying Proxy Statement
in the section headed "The Merger -- Appraisal Rights of Dissenting
Stockholders." A copy of Section 262 of the DGCL is set forth in full as Annex C
to the Proxy Statement.
<PAGE> 5
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED POSTAGE PREPAID
ENVELOPE PROMPTLY IN ORDER TO ASSURE THAT YOUR SHARES OF COMMON STOCK WILL BE
REPRESENTED. IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY CARD.
By order of the Board of Directors,
/s/ Richard Schwartz
--------------------------
Richard Schwartz
Senior Vice President,
Secretary and General Counsel
Farmington, Connecticut
August 9, 1996
IMPORTANT
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD. IF THE
MERGER AGREEMENT IS APPROVED, THE COMPANY WILL SEND YOU INSTRUCTIONS REGARDING
THE SURRENDER OF YOUR STOCK CERTIFICATES. THE PROCEDURE FOR THE EXCHANGE OF YOUR
CERTIFICATES AFTER THE MERGER IS SET FORTH IN THE ATTACHED PROXY STATEMENT. YOU
SHOULD NOTIFY THE COMPANY OF ANY CHANGE OF ADDRESS SO THAT YOU MAY RECEIVE THE
INSTRUCTIONS.
2
<PAGE> 6
[FSI LOGO]
FINANCING FOR SCIENCE INTERNATIONAL, INC.
10 WATERSIDE DRIVE
FARMINGTON, CONNECTICUT 06032-3065
------------------------
PROXY STATEMENT
------------------------
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON AUGUST 29, 1996
------------------------
This Proxy Statement is furnished to the stockholders of Financing for
Science International, Inc., a Delaware corporation ("FSI" or the "Company"), in
connection with the solicitation by the Board of Directors of the Company (the
"Board of Directors" or the "Board") of proxies to be used at the Special
Meeting of Stockholders of the Company to be held on August 29, 1996 at 10:00
a.m., local time, at The Farmington Inn, 827 Farmington Avenue, Farmington,
Connecticut, and at any adjournments or postponements thereof (the "Special
Meeting"). The approximate date on which this Proxy Statement and the enclosed
proxy card are being first sent to stockholders is August 9, 1996.
At the Special Meeting, stockholders will be asked to consider and vote
upon a proposal to approve and adopt an Agreement and Plan of Merger, dated as
of May 19, 1996 (the "Merger Agreement"), by and among the Company, FINOVA
Capital Corporation, a Delaware corporation ("FINOVA"), and FINOVA Business
Credit Corp., a Delaware corporation and a wholly owned subsidiary of FINOVA
("Merger Sub"), and the transactions contemplated thereby. A copy of the Merger
Agreement is attached hereto as Annex A to this Proxy Statement and is
incorporated herein by reference. Pursuant to the terms of the Merger Agreement,
among other things, (i) Merger Sub will be merged with and into the Company (the
"Merger"), with the Company being the surviving corporation and (ii) each
outstanding share of common stock, par value $.01 per share, of the Company (the
"Common Stock") (other than shares of Common Stock held by the Company as
treasury stock immediately prior to the Effective Time (as defined herein),
which shares will be automatically cancelled, and other than shares of Common
Stock held by stockholders, if any, who properly perfect their dissenters'
rights of appraisal under Delaware law) will be cancelled and converted into the
right to receive $6.40 in cash, without interest (the "Merger Price"). Upon the
consummation of the Merger, stockholders of the Company will have no further
interest in the Company.
Only stockholders of record at the close of business on July 22, 1996 (the
"Record Date") are entitled to notice of, and to vote at, the Special Meeting
and any adjournments or postponements thereof. At the Record Date, there were
outstanding 5,394,600 shares of Common Stock, each of which will be entitled to
one vote on each matter to be acted upon at the Special Meeting and all
adjournments and postponements thereof.
The By-laws of the Company provide that the holders of thirty-three and
one-third percent (33 1/3%) of the total number of shares of Common Stock issued
and outstanding and entitled to vote, present in person or represented by proxy,
will constitute a quorum for the transaction of business at the Special Meeting.
Any stockholder present in person or by proxy (including broker non-votes) at
the Special Meeting, but who abstains from voting, shall be counted for purposes
of determining whether a quorum exists.
<PAGE> 7
The Merger Agreement is conditioned upon, among other things, the approval
of the Merger Agreement and the transactions contemplated thereby by the holders
of a majority of the issued and outstanding shares of Common Stock. Therefore,
abstentions and broker non-votes will have the same effect as votes against the
Merger Agreement and the transactions contemplated thereby. Electra Investment
Trust, P.L.C., Barry R. Bronfin, AMEV Venture Associates III, L.P. and AMEV
Venture Associates III - International, L.P. (each a "Principal Stockholder" and
collectively, the "Principal Stockholders") have each entered into a voting
agreement (individually, the "Principal Stockholder Voting Agreement" and
collectively, the "Principal Stockholder Voting Agreements") with FINOVA,
pursuant to which, among other things, each Principal Stockholder has agreed (a)
not to sell, pledge, transfer, assign, encumber or otherwise alienate any shares
of Common Stock owned by him or it of record or beneficially and (b) to vote, or
cause to be voted, all shares of Common Stock owned by him or it of record or
beneficially in favor of the Merger Agreement and the Merger. As of the Record
Date, the Principal Stockholders were the beneficial owners of an aggregate of
2,867,200 shares of Common Stock, or approximately 53.1% of the outstanding
shares of Common Stock of the Company.
If the enclosed form of proxy is properly executed and returned to the
Company in time to be voted at the Special Meeting, the shares of Common Stock
represented thereby will be voted in accordance with the instructions marked
thereon. Executed but unmarked proxies will be voted "FOR" the approval and
adoption of the Merger Agreement and the transactions contemplated thereby.
The presence of a stockholder at the Special Meeting will not automatically
revoke such stockholder's proxy. However, a stockholder may revoke a proxy at
any time prior to its exercise by filing with the Secretary of the Company (10
Waterside Drive, Farmington, Connecticut, 06032-3065) a written notice of
revocation, by delivering to the Company a duly executed proxy representing such
stockholder's shares of Common Stock and bearing a later date, or by voting in
person at the Special Meeting.
The cost of the solicitation of proxies will be borne by the Company. In
addition to the solicitation of proxies by mail, the Company, through its
directors, officers and regular employees (who will receive no remuneration
therefor in addition to their regular compensation), may also solicit proxies
personally, by telephone, by facsimile or by other means of communication. The
Company has not retained, and does not expect to retain, any outside assistance
with respect to the solicitation of proxies. However, the Company will request
brokers, custodians and other nominees or fiduciaries to send proxy materials
to, and to obtain proxies from, beneficial owners of Common Stock and will
reimburse such parties for their reasonable expenses in doing so.
PLEASE DO NOT SEND IN YOUR STOCK CERTIFICATES WITH YOUR PROXY CARD. IF THE
MERGER AGREEMENT IS APPROVED, THE COMPANY WILL SEND YOU SEPARATELY INSTRUCTIONS
REGARDING THE SURRENDER OF YOUR STOCK CERTIFICATES. THE PROCEDURE FOR THE
EXCHANGE OF YOUR CERTIFICATES AFTER THE MERGER IS SET FORTH BELOW. SEE "THE
MERGER -- SURRENDER OF CERTIFICATES; PAYMENT." PLEASE NOTIFY THE COMPANY
PROMPTLY OF ANY ADDRESS CHANGE SO THAT YOU MAY RECEIVE THE INSTRUCTIONS.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY OTHER PERSON.
THIS PROXY STATEMENT CONTAINS CERTAIN STATEMENTS WITH RESPECT TO, AMONG
OTHER THINGS, THE FINANCIAL CONDITION, RESULTS OF OPERATIONS, BUSINESS AND
PROSPECTS OF THE COMPANY THAT MIGHT BE CONSIDERED TO BE FORWARD LOOKING IN
NATURE, INCLUDING STATEMENTS RELATING TO THE COMPANY'S CURRENT EXPECTATIONS WITH
RESPECT TO THE PER SHARE AMOUNT, EARNINGS DURING 1996 UNTIL THE CLOSING DATE,
FUTURE LEVELS OF GENERAL UNALLOCATED RESERVES AND OTHER ALLOWANCES FOR LOSSES
INCLUDING SPECIFIC RESERVES, THE
<PAGE> 8
AVAILABILITY OF BANK LINES AFTER THE SEPTEMBER 30, 1996 EXPIRATION OF THE
COMPANY'S CURRENT BANK LINES, THE ABILITY OF THE COMPANY TO OBTAIN DEBT,
SUBORDINATED DEBT AND EQUITY CAPITAL AS AND WHEN NEEDED, AND THE ABILITY OF THE
COMPANY TO BOOK NEW BUSINESS. EACH SUCH STATEMENT IS BASED ON THE CURRENT
EXPECTATIONS OF THE COMPANY AND IS SUBJECT TO A NUMBER OF RISKS AND
UNCERTAINTIES. THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
INCLUDE WITHOUT LIMITATION THE FOLLOWING: GENERAL ECONOMIC CONDITIONS AND GROWTH
RATES IN THE EQUIPMENT LEASING AND RELATED INDUSTRIES AND THE BUSINESSES IN
WHICH THE COMPANY'S LESSEES ARE ENGAGED; FLUCTUATIONS IN PREVAILING INTEREST
RATES; COMPETITIVE FACTORS AND PRICING PRESSURES; TECHNOLOGICAL AND ECONOMIC
OBSOLESCENCE OF EQUIPMENT UNDER LEASE; AND INCREASED GOVERNMENT REGULATION.
------------------------
The date of this Proxy Statement is August 9, 1996.
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
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PAGE
----
<S> <C>
SUMMARY............................................................................... 1
THE SPECIAL MEETING................................................................... 9
Date, Place and Time................................................................ 9
Matters to be Considered at the Meeting............................................. 9
Record Date; Voting at the Meeting.................................................. 9
Vote Required....................................................................... 9
Solicitation, Revocation and Use of Proxies......................................... 10
THE PARTIES........................................................................... 11
The Company......................................................................... 11
FINOVA.............................................................................. 11
Merger Sub.......................................................................... 11
SPECIAL FACTORS....................................................................... 12
Background; Reasons for the Merger.................................................. 12
Structure of the Transaction........................................................ 17
Recommendation of the Board of Directors............................................ 17
Opinion of Financial Advisor........................................................ 19
Interests of Certain Persons in the Merger.......................................... 26
Certain Federal Income Tax Consequences............................................. 31
THE MERGER............................................................................ 32
General............................................................................. 32
Stockholder Meeting; Closing; Effective Time........................................ 32
Conversion and Cancellation of Securities; Merger Price............................. 32
Dissenting Shares................................................................... 32
Surrender of Certificates; Payment.................................................. 33
Options and Warrants................................................................ 33
Representations and Warranties...................................................... 34
Additional Agreements............................................................... 35
Conditions to Closing............................................................... 37
Per Share Amount.................................................................... 39
Termination, Amendment and Waiver................................................... 41
Source and Amount of Funds.......................................................... 44
Accounting Treatment................................................................ 44
Regulatory Approval................................................................. 44
Appraisal Rights of Dissenting Stockholders......................................... 44
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT........................... 47
BUSINESS OF THE COMPANY............................................................... 49
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF
THE COMPANY......................................................................... 53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.......................................................................... 54
INDEPENDENT ACCOUNTANTS............................................................... 61
STOCKHOLDER PROPOSALS FOR THE 1997 MEETING............................................ 61
OTHER MATTERS......................................................................... 61
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1
ANNEX A -- Agreement and Plan of Merger............................................... A-1
ANNEX B -- Fairness Opinion of Kropschot Financial Services........................... B-1
ANNEX C -- Section 262 of the Delaware General Corporation Law........................ C-1
</TABLE>
i
<PAGE> 10
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and the documents incorporated herein by reference. This
summary does not contain a complete statement of all material information
relating to the Merger and the transactions related thereto. Reference is made
to, and this summary is qualified in its entirety by, the more detailed
information appearing in this Proxy Statement and the Annexes hereto. Unless
otherwise defined herein, capitalized terms used in this summary have the
respective meanings set forth elsewhere in this Proxy Statement. Stockholders
are urged to read this Proxy Statement and the Annexes hereto in their entirety.
THE PARTIES
The Company. The Company is engaged in the business of leasing essential
equipment to customers in its specialized markets which include technology based
corporations, research facilities and health care providers. The Company's lease
portfolio consists of equipment leased to customers engaged in electronics, life
sciences, healthcare, and industrial and commercial businesses.
The Company leases equipment, much of it advanced technology, generally
ranging from $100,000 to $2 million in cost. As of June 30, 1996, the Company's
lessees had on lease an aggregate of $283 million of equipment (based on
original acquisition cost), over an average initial lease term of 53 months. The
Company has approximately 374 different lessees, of which no one lessee
represented more than 10% of the Company's total revenues in 1995.
The Company was incorporated under the laws of the State of Delaware on
August 29, 1986 as Financing for Science and Industry, Inc. and changed its name
in April 1993 to Financing for Science International, Inc. Its principal
executive offices are located at 10 Waterside Drive, Farmington, Connecticut,
06032-3065, telephone number (860) 676-1818. See "Business of the Company."
FINOVA. FINOVA was incorporated under the laws of the State of Delaware in
1965 and is the successor to a California corporation that commenced operations
in 1954. FINOVA is a wholly owned subsidiary of The FINOVA Group Inc. FINOVA is
a financial services company primarily engaged in providing collateralized
financing and leasing products to commercial enterprises in focused market
niches with its business principally in the United States. The principal
executive offices of FINOVA are located at 1850 North Central Avenue, P.O. Box
2209, Phoenix, Arizona 85002-2209, telephone number (602) 207-4900.
Merger Sub. FINOVA Business Credit Corp. is an inactive subsidiary of
FINOVA which was incorporated under the laws of the State of Delaware in 1992.
Merger Sub will be used for the purpose of effecting the Merger, pursuant to
which Merger Sub will be merged with and into the Company. It has no material
assets and has not engaged in any activities except in connection with the
Merger. Merger Sub's principal executive offices are located at 1850 North
Central Avenue, P.O. Box 2209, Phoenix, Arizona 85002-2209, telephone number
(602) 207-4900.
THE SPECIAL MEETING
Date, Place and Time. The Special Meeting will be held on August 29, 1996
at 10:00 a.m., local time, at The Farmington Inn, 827 Farmington Avenue,
Farmington, Connecticut 06032.
Purpose of the Special Meeting. The purpose of the Special Meeting is to
consider and vote upon a proposal to approve and adopt the Merger Agreement by
and among the Company, FINOVA and Merger Sub, a copy of which is attached to
this Proxy Statement as Annex A, and the transactions contemplated thereby. See
"The Special Meeting -- Matters to be Considered at the Meeting."
Record Date; Quorum. The close of business on July 22, 1996 has been fixed
as the Record Date for determining the holders of shares of Common Stock
entitled to notice of, and to vote at, the Special Meeting. As of the Record
Date, 5,394,600 shares of Common Stock were issued and outstanding and entitled
to vote. The presence, in person or by proxy, of the holders of 33 1/3 percent
of the total number of shares of Common
1
<PAGE> 11
Stock issued and outstanding and entitled to vote at the Special Meeting is
necessary to constitute a quorum for the transaction of business at the Special
Meeting. See "The Special Meeting -- Record Date; Voting at the Meeting."
Proxies. Shares of Common Stock represented by properly executed proxies
received at or prior to the Special Meeting and which have not been revoked will
be voted in accordance with the instructions indicated therein. If no
instructions are indicated on a properly executed proxy, such proxy will be
voted "FOR" approval of the Merger Agreement and the transactions contemplated
thereby. See "The Special Meeting -- Record Date; Voting at the Meeting."
Required Vote. Approval of the Merger Agreement and the transactions
contemplated thereby will require the affirmative vote of the holders of the
majority of the outstanding shares of Common Stock. The Principal Stockholders
have each entered into a Principal Stockholder Voting Agreement with FINOVA,
pursuant to which each Principal Stockholder has agreed to vote, or cause to be
voted, all shares of Common Stock owned by him or it of record or beneficially
in favor of the Merger Agreement and the Merger. As of the Record Date, the
Principal Stockholders are the beneficial owners of an aggregate of 2,867,200
shares of Common Stock, or approximately 53.1% of the outstanding shares of the
Common Stock of the Company. Thus, the Principal Stockholders have sufficient
voting power to approve and adopt the Merger Agreement without the affirmative
vote of any other stockholders. See "The Special Meeting -- Vote Required" and
"Special Factors -- Interests of Certain Persons in the Merger -- Principal
Stockholder Voting Agreements."
SPECIAL FACTORS
Background of the Merger. The terms of the Merger Agreement resulted from
arms-length negotiations between representatives of FINOVA and the Company. See
"Special Factors -- Background; Reasons for the Merger."
Purpose and Structure of the Transaction. FINOVA's purpose for the
transaction is to acquire beneficial ownership of 100% of the equity of the
Company. The transaction has been structured as a merger in part because it
ensures that FINOVA, through Merger Sub, will acquire beneficial ownership of
100% of the equity of the Company in a single transaction pursuant to which the
stockholders of the Company will receive cash consideration in exchange for
their shares of Common Stock. See "Special Factors -- Structure of the
Transaction."
Recommendation of the Board of Directors. The Board of Directors of the
Company has unanimously determined that the terms of the Merger, as set forth in
the Merger Agreement, are fair to, and in the best interests of, the Company's
stockholders. Accordingly, the Board of Directors has unanimously approved the
Merger Agreement and the transactions contemplated thereby. The Board of
Directors unanimously recommends that the stockholders of the Company vote "FOR"
the approval and adoption of the Merger Agreement and the transactions
contemplated thereby. For a discussion of the factors considered by the Board of
Directors in making its determination, see "Special Factors -- Recommendation of
the Board of Directors."
Opinion of Financial Advisor. The Board of Directors of the Company has
retained Kropschot Financial Services to act as its financial advisor. On May 3
and May 17, 1996, KFS orally advised the Board of Directors, and issued written
opinions dated May 3 and May 10, to the effect that the consideration to be paid
by FINOVA to the stockholders of the Company pursuant to the Merger Agreement is
fair to the stockholders of the Company from a financial point of view. At the
request of the Board of Directors, KFS rendered an updated written opinion,
dated as of June 17, 1996, to the same effect. Attached to this Proxy Statement
as Annex B is a copy of the opinion of KFS, updated as of the date of this Proxy
Statement, setting forth the assumptions made, the matters considered, the scope
and limitations of the review undertaken and the procedures followed by KFS in
rendering such opinion. The Company's stockholders are urged to read such
opinion in its entirety. See "Special Factors -- Opinion of Financial Advisor."
Interests of Certain Persons in the Merger. In considering the
recommendation of the Board of Directors with respect to the Merger, the
Company's stockholders should be aware that certain members of
2
<PAGE> 12
the Company's management and its Board of Directors have certain interests
summarized below that are in addition to or different from the interests of
stockholders generally and that may present them with potential conflicts of
interest in connection with the Merger. For a more detailed discussion of such
interests, see "Special Factors -- Interests of Certain Persons in the Merger."
In making its recommendation in favor of the Merger, the Board of Directors of
the Company recognized such interests and determined that such interests neither
supported nor detracted from the fairness of the Merger to the Company's
stockholders.
Consulting Agreement. Barry R. Bronfin, Sc.D., Chairman of the Company,
and FINOVA have entered into a Consulting Agreement, dated May 19, 1996,
pursuant to which Dr. Bronfin has agreed to act as a consultant to FINOVA and
its affiliates for a period commencing on the Closing Date and ending on
December 31, 1997. Dr. Bronfin will be compensated at the rate of $100,000 per
annum from the period from the Closing Date through December 31, 1996 and at the
rate of $40,000 per annum for the remainder of the Consulting Period. The
Consulting Agreement prohibits Dr. Bronfin from competing directly or indirectly
with FINOVA or its affiliates or from having a substantial direct or indirect
interest in any business competing with the business being conducted by FINOVA
or its affiliates. See "Special Factors -- Interests of Certain Persons in the
Merger -- Consulting Agreement Between FINOVA and Dr. Bronfin; Employment
Termination Agreement."
Change of Control Agreement. Robert W. Maxwell and the Company have
entered into a Change of Control Agreement, dated May 19, 1996. Mr. Maxwell is
the President and a Director of the Company. The Change of Control Agreement
generally provides that Mr. Maxwell may continue to serve as an executive of the
Company for a specified period following a "Change of Control" of the Company,
which would include the Merger if consummated as described in the Merger
Agreement. Under the Change of Control Agreement, Mr. Maxwell is to serve in
such capacity for a term commencing on the first date on which a Change of
Control occurs and expiring on the first anniversary of such date. During the
employment term, Mr. Maxwell will have the right to be employed as the President
of the Company or in some other executive capacity and his salary will be equal
to his salary in effect immediately prior to the Change of Control. See "Special
Factors -- Interests of Certain Persons in the Merger -- Change of Control
Agreement Between the Company and Mr. Maxwell."
Principal Stockholder Voting Agreements. As an inducement to FINOVA and
Merger Sub to enter into the Merger Agreement, the Principal Stockholders have
each entered into a Principal Stockholder Voting Agreement with FINOVA, pursuant
to which each Principal Stockholder has agreed, among other things, to vote, or
cause to be voted, all shares of Common Stock owned by him or it of record or
beneficially in favor of the Merger Agreement and the Merger so long as the
Merger Agreement is not amended adversely to such Principal Stockholder. As of
the Record Date, the Principal Stockholders are the beneficial owners of an
aggregate of 2,867,200 shares of Common Stock, or approximately 53.1% of the
outstanding shares of Common Stock of the Company.
The Principal Stockholders consist of Electra Investment Trust, P.L.C.,
Barry R. Bronfin, AMEV Venture Associates III, L.P and AMEV Venture
Associates - III International, L.P. Dr. Bronfin is the Chairman of the Company.
Ms. Diane M. Smith is a Senior Vice President of Electra, Inc., an affiliate of
Electra Investment Trust, P.L.C. Mr. Martin S. Orland is the President and Chief
Executive Officer of Fortis Private Capital, Inc., an affiliate of both of the
aforementioned AMEV partnerships. Ms. Smith and Mr. Orland also serve as members
of the Board of Directors of the Company. The Principal Stockholders'
obligations pursuant to each Principal Stockholder Voting Agreement terminate
upon the earlier of the Effective Time of the Merger or the termination of the
Merger Agreement, but in no event later than October 31, 1996. See "Special
Factors -- Interests of Certain Persons in the Merger -- Principal Stockholder
Voting Agreements."
Subsidy Payment Agreement. The Merger Agreement provides that FINOVA and
Merger Sub are not obligated to proceed with and consummate the Merger if, among
other things, the Per Share Amount is less than $6.35. See "The
Merger -- Conditions to Closing -- Conditions to the Obligations of the Company"
and "-- Per Share Amount." As an inducement for the Company to enter into the
Merger Agreement, Dr. Bronfin and the Company have entered into the Subsidy
Payment Agreement, pursuant to which Dr. Bronfin has
3
<PAGE> 13
agreed to make a Subsidy Payment to the Company in an amount up to $250,000 in
the event that the Per Share Amount is less than $6.35, such that the Per Share
Amount following the Subsidy Payment shall be not less than $6.35. However,
there can be no assurance that the Subsidy Payment will be sufficient to close
any shortfall in the Per Share Amount from $6.35. The Merger Agreement expressly
provides that any Subsidy Payment made under the Subsidy Payment Agreement shall
be counted in the calculation of the Per Share Amount. See "Special
Factors -- Interests of Certain Persons in the Merger -- Subsidy Payment
Agreement Between the Company and Dr. Bronfin."
Modification and Release Agreements. As a condition precedent to the
consummation of the Merger and in contemplation of entering into the Merger
Agreement, the Company has entered into separate Modification and Release
Agreements with Sands Brothers & Co., Ltd. and RAS Securities Corp., pursuant to
which Sands and RAS have each agreed, from and after the Effective Time of the
Merger, to release the Company from certain rights each may have under or by
virtue of various investment banking agreements entered into in connection with
the Initial Public Offering of the Company's securities in May 1994. The
consideration to be received by Sands and RAS is $300,000 and $50,000,
respectively, payable at the closing held in connection with the Merger. The
Co-Chairman and Chief Executive Officer of Sands is Steven B. Sands, who is also
a member of the Board of Directors of the Company. See "Special
Factors -- Interests of Certain Persons in the Merger -- Modification and
Release Agreements with Underwriters."
Stock Options. The Merger Agreement provides that, immediately prior to
the Effective Time, each option granted under an Employee Plan (as defined in
the Merger Agreement) by the Company to purchase shares of Common Stock, which
is then outstanding, whether or not vested or exercisable, shall become vested
and exercisable in accordance with its terms, shall be cancelled and the holder
thereof shall be entitled to receive from the Company immediately prior to the
Effective Time, an amount in cash equal to the excess, if any, of (a) the Merger
Price multiplied by the number of shares of Common Stock subject to such option,
over (b) the exercise price of such option multiplied by the number of shares of
Common Stock subject thereto. The following table sets forth the number of in
the money stock options held by each officer and director of the Company as of
the Record Date, the average exercise prices of such options and the amount of
cash which each such officer and director will be entitled to receive by virtue
of the Merger:
<TABLE>
<CAPTION>
CASH PAYABLE
NUMBER OF AVERAGE UPON CONSUMMATION
NAME AND TITLE OPTIONS EXERCISE PRICE OF THE MERGER
- ------------------------------------------------------ --------- -------------- -----------------
<S> <C> <C> <C>
Joseph A. Gilbertie................................... 48,000 $ 3.88 $120,918.75
Vice President and Controller
Kevin P. Kickery...................................... 92,500 $ 2.07 $373,949.38
Vice President -- National Sales and Managing
Director -- Healthcare
Robert S. Lees, M.D................................... 2,000 $ 3.91 $ 4,987.50
Director and Chairman of the Company's Scientific
Advisory Board
Christopher M. Mathieu................................ 25,000 $ 3.03 $ 84,375.00
Vice President -- Director of Finance
Robert W. Maxwell..................................... 164,000 $ 2.49 $603,475.00
President and Chief Operating Officer, Chief
Financial Officer, Chief Accounting Officer and
Director
Gerald A. Michaud..................................... 11,000 $ 2.91 $ 38,384.38
Vice President -- Sales and Marketing and Managing
Director -- Biotechnology
Robert D. Pomeroy, Jr. ............................... 109,000 $ 2.56 $395,211.25
Senior Vice President -- Director of Marketing
Richard Schwartz...................................... 111,000 $ 2.49 $410,490.63
Senior Vice President, Secretary and General Counsel
Duane E. Starr........................................ 7,500 $ 3.19 $ 24,093.75
Senior Vice President -- Asset Management and Credit
</TABLE>
4
<PAGE> 14
Certain Federal Income Tax Consequences. If the Merger is completed, each
stockholder of the Company of record at the Effective Time will recognize gain
or loss for federal income tax purposes equal to the difference, if any, between
(a) such stockholder's adjusted basis in such stockholder's Common Stock and (b)
the cash payable to such stockholder as a result of the Merger. EACH STOCKHOLDER
SHOULD CONSULT HIS OR HER OWN TAX ADVISORS REGARDING THE FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE OR OTHER JURISDICTION. SEE "SPECIAL FACTORS -- CERTAIN FEDERAL
INCOME TAX CONSEQUENCES."
Certain Other Effects of the Merger. If the Merger is consummated, the
Company's stockholders will not have the opportunity to continue in their equity
interest in the Company as an independent entity and therefore will not share in
any future earnings and growth of the Company. Moreover, if the Merger is
consummated, public trading of the Common Stock will cease, the Common Stock
will not be listed on the Nasdaq Stock Market, and the registration of the
Common Stock under the Securities Exchange Act of 1934, as amended, will be
terminated.
THE MERGER
General. Upon completion of the Merger, Merger Sub will be merged with and
into the Company, the separate existence of Merger Sub will cease, and FINOVA
will own 100% of the issued and outstanding capital stock of the Company. The
Company, as the surviving corporation, will succeed to all rights and
obligations of Merger Sub. See "The Merger -- General."
Effective Time of the Merger. The Merger will become effective upon the
filing of a Certificate of Merger with the Office of the Secretary of State of
the State of Delaware. The Certificate of Merger will be filed as soon as
practicable after the requisite approval of the stockholders of the Company at
the Special Meeting is obtained and all other conditions precedent to the
completion of the Merger have been satisfied or, if permissible, waived. See
"The Merger -- Stockholder Meeting; Closing; Effective Time," "-- Conditions to
Closing" and "-- Termination, Amendment and Waiver."
Treatment of Securities in the Merger; Merger Price. At the Effective
Time, each share of Common Stock issued and outstanding immediately prior to the
Effective Time (other than shares of Common Stock held by the Company as
treasury stock immediately prior to the Effective Time and shares of Common
Stock held by stockholders, if any, who properly perfect their dissenters'
rights of appraisal under Section 262 of the DGCL) shall, by virtue of the
Merger and without any action on the part of the stockholder, be converted into
the right to receive $6.40 in cash, without interest. See "The
Merger -- Conversion and Cancellation of Securities; Merger Price."
Surrender of Certificates; Payment. As soon as reasonably practicable
after the Effective Time, the Paying Agent will send a transmittal form to each
record holder of Common Stock as of the Effective Time, together with
instructions setting forth the procedures for exchanging such holder's
certificates for the cash consideration payable to such holder pursuant to the
Merger Agreement. Upon the proper delivery and surrender of such certificates,
together with a duly completed and executed transmittal form, to the Paying
Agent, such holder will promptly receive the Merger Price for each share of
Common Stock previously represented by the certificates so surrendered. See "The
Merger -- Surrender of Certificates; Payment."
Warrants. In connection with the Merger, the Board of Directors of the
Company has taken action to reduce the exercise price of all of the Company's
outstanding Redeemable Warrants issued in the Initial Public Offering from $8.25
to $6.30 per share, subject to consummation of the Merger. If the Merger is
consummated, holders of any Redeemable Warrants will be permitted to exercise
such warrants in accordance with their terms, at an exercise price equal to
$6.30 per share, after the Effective Time of the Merger and will be entitled to
receive the Merger Price in return therefor. The Company promptly after the
Effective Time will provide notice of the reduction of the exercise price to
each registered holder of Redeemable Warrants at his, her or its last address on
the record books of the warrant agent, State Street Bank and Trust Company, by
ordinary first class mail. The Company and its advisors are investigating
potential ways in which to streamline and facilitate the exercise of the
Redeemable Warrants. As of the Record Date, an aggregate of 2,687,500 Redeemable
Warrants were issued and outstanding, 41,500 of which were held by Company
officers and
5
<PAGE> 15
directors and none of which were held of record by the Underwriters of the
Company's Initial Public Offering. See "The Merger -- Options and Warrants" and
"Special Factors -- Interests of Certain Persons in the Merger -- Options and
Warrants."
Conditions to Closing; Per Share Amount. The obligations of the parties to
consummate the Merger are subject to the satisfaction of a number of conditions
precedent, including without limitation, the approval of the Merger Agreement by
the holders of a majority of the outstanding shares of Common Stock. In
addition, FINOVA and Merger Sub are not obligated to proceed with and consummate
the Merger if, among other things, the number of Dissenting Shares is greater
than 10% of the number of issued and outstanding shares of Common Stock or
delinquencies in lease payments due and owing to the Company exceed 4.25% of
total lease contracts receivable as of the Closing Date. See "The
Merger -- Conditions to Closing" and "-- Appraisal Rights of Dissenting
Stockholders."
FINOVA and Merger Sub also are not obligated to proceed with and consummate
the Merger if, among other things, the Per Share Amount is less than $6.35. See
"The Merger -- Per Share Amount." As an inducement for the Company to enter into
the Merger Agreement, Dr. Bronfin and the Company have entered into the Subsidy
Payment Agreement, pursuant to which Dr. Bronfin has agreed to make a payment to
the Company in an amount up to $250,000 in the event that the Per Share Amount
is less than $6.35, such that the Per Share Amount shall not be less than $6.35.
However, there can be no assurance that the Subsidy Payment will be sufficient
to close any shortfall in the Per Share Amount from $6.35. See "Special
Factors -- Interests of Certain Persons in the Merger -- Subsidy Payment
Agreement Between the Company and Dr. Bronfin." The Merger Agreement expressly
provides that, in the event that such a Subsidy Payment is made, it shall be
counted in the calculation of the Per Share Amount. See "The
Merger -- Conditions to Closing" and "-- Per Share Amount."
The Per Share Amount is intended to function as an objective means by which
(a) the Company's stockholders could receive payment for the projected increase
in value of the Company from December 31, 1995 (which was the date of the most
recent financial information utilized by FINOVA in connection with its internal
financial investigation and valuation of the Company prior to the execution of
the Merger Agreement) to the Closing Date and (b) FINOVA could assure itself
that the projected increase in value upon which FINOVA relied in part in
agreeing to the Merger Price would actually take place. The calculation reflects
the premise that FINOVA valued the Company at $6.00 per share as of December 31,
1995. The calculation then adds to that amount the Company's pre-tax earnings
generated during the period commencing on January 1, 1996 and ending on the
Closing Date plus the amount, if any, by which the Company's general unallocated
reserves exceed $1,500,000 on the Closing Date. In calculating the Company's
earnings during this period, the Merger Agreement provides for certain
adjustments, which are intended, to the extent possible, to ensure that such
adjusted pre-tax earnings create additional value in the Company. Based on the
Company's then-current projections, FINOVA agreed to fix the Merger Price at
$6.40 per share. The Per Share Amount attempts to ensure that the value of the
Company, in fact, increases by at least $.35 per share, as calculated in
accordance with the Merger Agreement. If the Per Share Amount does not equal or
exceed $6.35 (after giving effect to the Subsidy Payment), FINOVA and Merger Sub
are not obligated to proceed with and consummate the Merger. See "The
Merger -- Conditions to Closing" and "-- Per Share Amount."
Termination; Fees and Arbitration. The Merger Agreement may be terminated
prior to the closing of the transactions contemplated thereby under certain
circumstances. If the Merger Agreement is terminated under certain
circumstances, the Company will be required to pay FINOVA various termination
fees up to $1.5 million. See "The Merger -- Termination, Amendment and
Waiver -- Termination Fees." The Merger Agreement also provides that any claims
or disputes arising out of the Merger Agreement, with limited exceptions, shall
be resolved through binding arbitration wherein the parties expressly waive
their rights to a trial by jury. See "The Merger -- Termination, Amendment and
Waiver -- Arbitration."
Source of Funds. FINOVA expects to pay the Merger Price to the holders of
all shares of Common Stock and Common Stock equivalents from its available cash
balances and borrowing from available sources. FINOVA's available cash balances
and unused borrowing capacity substantially exceed the aggregate Merger Price.
See "The Merger -- Source and Amount of Funds."
6
<PAGE> 16
Accounting Treatment. The Merger will be accounted for as a "purchase" as
such term is used under generally accepted accounting principles for accounting
and financial reporting purposes. See "The Merger -- Accounting Treatment."
Regulatory Approvals. Under the Hart-Scott-Rodino Anti-Trust Improvements
Act of 1976, as amended, the Merger may not be consummated until notifications
have been given and certain information provided to the Federal Trade Commission
and the Anti-Trust Division of the United States Department of Justice and
specified waiting periods have been satisfied. The Company and FINOVA have
provided such notifications and information, and the waiting period under the
HSR Act expired on July 7, 1996. See "The Merger -- Regulatory Approvals."
Appraisal Rights. Each holder of shares of Common Stock who does not vote
in favor of the Merger Agreement and who complies with certain statutory
procedures set forth in Section 262 of the DGCL, a copy of which is attached
hereto as Annex C, will be entitled to receive the "fair value" of such shares
of Common Stock, exclusive of any element of value arising from the
accomplishment or expectation of the Merger, together with a fair rate of
interest, if any, as determined by the Delaware Court of Chancery. A VOTE IN
FAVOR OF ADOPTION OF THE MERGER AGREEMENT WILL CONSTITUTE A WAIVER OF A
STOCKHOLDER'S RIGHT TO DEMAND APPRAISAL OF SUCH STOCKHOLDER'S SHARES OF COMMON
STOCK. HOLDERS OF THE REDEEMABLE WARRANTS DO NOT HAVE APPRAISAL RIGHTS UNDER THE
DGCL.
Stockholders desiring to exercise appraisal rights must (i) not vote in
favor of adoption of the Merger Agreement and (ii) deliver to the Company at 10
Waterside Drive, Farmington, Connecticut 06302-3065, prior to the vote upon the
Merger Agreement, a written demand for appraisal. Any such holder must be the
record holder on the date the written demand is made, and must continue to hold
such shares through the Effective Time. Within 10 days after the Effective Time,
the Company, as the surviving corporation, will be required to notify each
stockholder who has complied with the provisions of Section 262 of the DGCL and
who has not voted in favor of the Merger Agreement as of the Effective Time.
Within 120 days after the Effective Time, any stockholder who has complied with
the requirements for the exercise of appraisal rights will be entitled to
receive, upon written request, a statement from the Company setting forth the
number of shares of Common Stock not voted in favor of the Merger Agreement as
to which demands for appraisal have been received, along with the number of
holders of such shares of Common Stock.
Within 120 days of the Effective Time if the Merger is consummated, but not
thereafter, the Company or any stockholder who has complied with the
requirements for the exercise of appraisal rights may file a petition in the
Delaware Court of Chancery demanding a determination of the fair value of the
Common Stock. The Company is under no obligation to, and has no present
intention to, file an appraisal petition. If a petition for appraisal is timely
filed by a stockholder entitled to do so, the Delaware Court of Chancery will
hold a hearing to determine which stockholders are entitled to appraisal rights
and will also determine the "fair value" of the Company's Common Stock,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with interest, if any, to be paid thereon. Any such
value may be more than, less than or equal to the Merger Price to be received by
stockholders in the Merger.
A stockholder may withdraw a demand for appraisal by delivering a written
withdrawal to the Company, however, any attempt to withdraw an appraisal demand
more than 60 days after the Effective Time will require the written approval of
the Company. Any stockholder who properly demands appraisal rights and
thereafter fails to perfect such rights will be entitled to receive the Merger
Price specified in the Merger Agreement. See "The Merger -- Appraisal Rights of
Dissenting Stockholders."
MARKET PRICES OF AND DIVIDENDS ON COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market section of
the Nasdaq Stock Market under the symbol FFSI. The Company's Redeemable Warrants
trade on the Nasdaq National Market section of the Nasdaq Stock Market under the
symbol FFSIW. The following table sets forth for the periods
7
<PAGE> 17
indicated the high and low sales prices of the Common Stock and the Redeemable
Warrants as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON STOCK REDEEMABLE WARRANTS
------------------- -------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
<S> <C> <C> <C> <C>
First Quarter 1996.......................... $6.375 $5.125 $.625 $.09375
Second Quarter 1996......................... $5.750 $3.875 $.75 $.375
Third Quarter 1996 (through August 2,
1996)..................................... $6.3125 $6.0625 $.1250 $.09375
Year Ended December 31, 1995................ $5.6875 $2.50 $.71875 $.1875
First Quarter............................... $4.00 $2.75 $.4375 $.1875
Second Quarter.............................. $4.6875 $2.50 $.625 $.21875
Third Quarter............................... $5.6875 $3.875 $.71875 $.375
Fourth Quarter.............................. $5.625 $4.00 $.71875 $.375
Year Ended December 31, 1994................ $6.75 $2.875 $.75 $.1215
Second Quarter (from May 20, 1994).......... $6.75 $5.375 $.75 $.25
Third Quarter............................... $5.625 $3.50 $.5625 $.3125
Fourth Quarter.............................. $3.75 $2.875 $.4375 $.1215
</TABLE>
As of the Record Date, there were 36 holders of record and approximately
1,100 beneficial owners of the Common Stock, and 28 holders of record of the
Redeemable Warrants.
The Company has never paid a cash dividend to stockholders and does not
anticipate paying such dividends in the foreseeable future. The Company's
revolving credit facility for short-term financing restricts the Company from
paying cash dividends.
On May 17, 1996, the last full trading day prior to the public announcement
by the Company and FINOVA that they had entered into the Merger Agreement, both
the high and low sales prices for the Common Stock as reported on the Nasdaq
National Market each were $6.125 and both the high and low sales prices for the
Redeemable Warrants as reported on the Nasdaq National Market each were $.594.
8
<PAGE> 18
THE SPECIAL MEETING
DATE, PLACE AND TIME
The Special Meeting will be held at 10:00 a.m., local time, on August 29,
1996, at The Farmington Inn, 827 Farmington Avenue, Farmington, Connecticut.
MATTERS TO BE CONSIDERED AT THE MEETING
At the Special Meeting, holders of Common Stock as of the Record Date will
be asked to consider and vote upon a proposal to approve and adopt the Merger
Agreement and the transactions contemplated thereby.
The Board of Directors has unanimously approved the Merger Agreement and
the transactions contemplated thereby and unanimously recommends that
stockholders vote "FOR" approval and adoption of the Merger Agreement and the
transactions contemplated thereby.
RECORD DATE; VOTING AT THE MEETING
The Board of Directors has fixed the close of business on July 22, 1996 as
the Record Date for the determination of the stockholders of the Company
entitled to notice of, and to vote at, the Special Meeting and any adjournments
or postponements thereof. On the Record Date, 5,394,600 shares of Common Stock
were issued and outstanding, which shares were held by approximately 36 holders
of record. Shares of Common Stock are the only outstanding voting securities of
the Company.
Each holder of record of Common Stock on the Record Date is entitled to
cast one vote per share, exercisable in person or by properly executed proxy,
upon each matter properly submitted for the vote of the stockholders at the
Special Meeting. The presence, in person or by properly executed proxy, of the
holders of thirty-three and one-third percent (33 1/3%) of the total number of
shares of Common Stock issued and outstanding and entitled to vote, is necessary
to constitute a quorum for the transaction of business at the Special Meeting.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE TERMS OF THE MERGER,
AS SET FORTH IN THE MERGER AGREEMENT, ARE FAIR TO, AND IN THE BEST INTERESTS OF,
THE COMPANY'S STOCKHOLDERS, HAS UNANIMOUSLY APPROVED AND ADOPTED THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY AND UNANIMOUSLY RECOMMENDS
THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR" THE APPROVAL AND ADOPTION OF THE
MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
HOLDERS OF COMMON STOCK ON THE RECORD DATE WILL BE ENTITLED TO DISSENTERS'
RIGHTS OF APPRAISAL UNDER THE DELAWARE GENERAL CORPORATION LAW (THE "DGCL") IN
CONNECTION WITH THE MERGER. STOCKHOLDERS OF THE COMPANY WHO VOTE IN FAVOR OF THE
MERGER AGREEMENT, HOWEVER, WILL WAIVE THEIR DISSENTERS' RIGHTS. SEE "THE
MERGER--APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS."
This Proxy Statement is being furnished to stockholders of the Company in
connection with the solicitation of proxies by and on behalf of the Board of
Directors for use at the Special Meeting. All shares of Common Stock which are
entitled to vote and are represented at the Special Meeting by properly executed
proxies received and not duly and timely revoked will be voted at the Special
Meeting in accordance with the instructions contained therein. In the absence of
contrary instructions, such shares will be voted "FOR" the approval and adoption
of the Merger Agreement.
VOTE REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of Common Stock is required under the DGCL to approve and adopt the Merger
Agreement and the transactions contemplated thereby. The Principal Stockholders
have each entered into a Principal Stockholder Voting Agreement with FINOVA,
pursuant to which each Principal Stockholder has agreed (a) not to sell, pledge,
transfer, assign, encumber or
9
<PAGE> 19
otherwise alienate any shares of Common Stock owned by him or it of record or
beneficially, and (b) to vote, or cause to be voted, all shares of Common Stock
owned by him or it of record or beneficially in favor of the Merger Agreement
and the Merger. As of the Record Date, the Principal Stockholders are the
beneficial owners of an aggregate of 2,867,200 shares of Common Stock, or
approximately 53.1% of the outstanding shares of Common Stock of the Company.
Thus, the Principal Stockholders have sufficient voting power to approve and
adopt the Merger Agreement without the affirmative vote of any other
stockholders.
SOLICITATION, REVOCATION AND USE OF PROXIES
All expenses of this solicitation, including the cost of preparing and
mailing this Proxy Statement, will be borne by the Company. In addition to
solicitation by use of the mails, proxies may be solicited by directors,
officers and employees of the Company in person or by telephone, facsimile or by
other means of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements also will be made
with custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to the beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and the Company will reimburse such custodians,
nominees and fiduciaries for reasonable expenses incurred in connection
therewith.
A stockholder may revoke any proxy given pursuant to this solicitation at
any time prior to its exercise by filing with the Secretary of the Company a
written notice of revocation or delivering to the Company a duly executed proxy
representing such stockholder's shares of Common Stock and bearing a later date.
Furthermore, a stockholder giving a proxy may revoke such proxy by attending the
Special Meeting and voting his or her shares in person. Any written notice of
revocation or subsequent proxy should be delivered to Financing for Science
International, Inc., 10 Waterside Drive, Farmington, Connecticut 06032-3065,
before the taking of the vote at the Special Meeting.
IMPORTANT
STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES
WITH THEIR PROXY CARDS.
10
<PAGE> 20
THE PARTIES
THE COMPANY
The Company is engaged in the business of leasing essential equipment to
customers in its specialized markets which include technology based
corporations, research facilities and health care providers. The Company's lease
portfolio consists of equipment leased to customers engaged in electronics, life
sciences, healthcare, and industrial and commercial businesses.
The Company leases equipment, much of it advanced technology, generally
ranging from $100,000 to $2 million in cost. As of June 30, 1996, the Company's
lessees had on lease an aggregate of $283 million of equipment (based on
original acquisition cost), over an average initial lease term of 53 months. The
Company has approximately 374 different lessees, of which no one lessee
represented more than 10% of the Company's total revenues in 1995.
The Company was incorporated under the laws of the State of Delaware on
August 29, 1986 as Financing for Science and Industry, Inc. and changed its name
in April 1993 to Financing for Science International, Inc. Its principal
executive offices are located at 10 Waterside Drive, Farmington, Connecticut
06032-3065, telephone number (860) 676-1818. See "Business of the Company."
FINOVA
FINOVA was incorporated under the laws of the State of Delaware in 1965 and
is the successor of a California corporation that commenced operations in 1954.
FINOVA is a wholly owned subsidiary of The FINOVA Group Inc. FINOVA is a
financial services company primarily engaged in providing collateralized
financing and leasing products to commercial enterprises in focused market
niches with its business principally in the United States.
FINOVA extends revolving credit facilities, term loans and equipment and
real estate financing to "middle-market" businesses with financing needs falling
generally between $500,000 and $35,000,000. FINOVA also offers sales financing
programs to manufacturers, distributors, vendors and franchisors which
facilitate sales of their products to customers. FINOVA currently operates
primarily in 14 specific industry or market niches in which its expertise in
evaluating the creditworthiness of prospective customers and its ability to
provide value-added services enables it to differentiate itself from its
competitors to command product pricing which provides a satisfactory spread over
its borrowing costs.
FINOVA generates interest and other income through charges assessed on
outstanding loans, loan servicing, leasing and other fees. FINOVA's primary
expenses are the costs of funding its loan and lease business (including
interest paid on debt), provisions for possible credit losses, marketing
expenses, salaries and employee benefits, servicing and other operating expenses
and income taxes.
The principal executive offices of FINOVA are located at The FINOVA Group
Inc., 1850 North Central Avenue, P.O. Box 2209, Phoenix, Arizona 85002-2209,
telephone number (602) 207-4900.
MERGER SUB
Merger Sub is an inactive subsidiary of FINOVA which was incorporated under
the laws of the State of Delaware in 1992. Merger Sub will be used for the
purpose of effecting the Merger, pursuant to which Merger Sub will be merged
with and into the Company. It has no material assets and has not engaged in any
activities except in connection with the Merger. Merger Sub's principal
executive offices are located at 1850 North Central Avenue, P.O. Box 2209,
Phoenix, Arizona 85002-2209, telephone number (602) 207-4900.
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SPECIAL FACTORS
BACKGROUND; REASONS FOR THE MERGER
The Company's leasing activities have required significant amounts of
capital. Since the Company's investments in substantially all of its leased
assets have been leveraged with borrowings, its ability to generate new lease
transactions has been heavily dependent on credit availability.
The Company grew rapidly from its inception in 1986 through mid-1991.
During 1991 and 1992, however, growth slowed when the Company's ability to fund
new leases was restricted severely due to the widespread reduction in bank
lending in the northeastern United States. By September 1992, the Company had
restored its borrowing capacity with a new multi-bank revolving credit facility
for the temporary funding of new leases, enabling the Company to expand its
marketing activities.
In May and June of 1994, the Company completed an initial public offering
(the "Initial Public Offering") of 2,500,000 shares of Common Stock at a price
of $6.40 per share and 2,687,000 redeemable common stock purchase warrants (the
"Redeemable Warrants") at a price of $0.10 per warrant. The Initial Public
Offering provided the Company with approximately $13.5 million of additional
capital to continue the growth of the Company.
The Company's earnings before income taxes and extraordinary items declined
from $3.7 million for the year ended December 31, 1993 to $1.0 million for the
year ended December 31, 1994. The Company recorded a loss before income taxes
for the year ended December 31, 1995. Several factors contributed to this
decline in earnings. In 1994, results were negatively impacted by the creation
of a $1 million provision for losses resulting from the discontinuance of
certain of the Company's foreign operations. In 1995, results were negatively
impacted by the creation of a provision for losses relating to the carrying
value of assets resulting from the sale of Company-owned diagnostic imaging
centers and the additional provision for losses on the Company's medical lease
portfolio. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
While the provisions for losses accrued in 1995 depressed 1995's earnings,
the losses had the effect of reducing the burden of depreciation and other
charges in 1996 and thereafter. Despite the resulting improved outlook for 1996,
the Board of Directors believed that it was unclear whether the Company would be
able to raise sufficient equity capital for the Company to grow in its
increasingly competitive environment. Furthermore, it appeared likely that in
light of the depressed trading level of the Common Stock, additional equity
capital would have a dilutive effect on Company stockholders. Accordingly, the
Board decided to examine certain strategic alternatives.
On December 7, 1995, the Executive Committee of the Board of Directors met
in New York City to discuss the future strategic direction of the Company. The
Executive Committee is chaired by Mr. John M. Randolph and its other members are
Mr. Martin S. Orland and Ms. Diane M. Smith. Also present at the meeting were
Barry R. Bronfin, Sc.D., Chairman of the Company, Mr. Robert W. Maxwell,
President of the Company, and Mr. Steven B. Sands, a Director of the Company and
Co-Chairman of Sands Brothers & Co. Ltd. ("Sands"), the Company's investment
banking firm. The Executive Committee directed Dr. Bronfin and Mr. Randolph to
explore, on an informal basis, potential strategic alliances through their wide
range of contacts in the leasing industry. The Company did not engage Sands or
any other investment banker to assist in any such explorations or in effecting
the Merger.
Subsequent to the December 7 meeting of the Executive Committee, Dr.
Bronfin and Mr. Randolph contacted, both in person and by telephone, ten
potential strategic partners, including FINOVA. Each such potential strategic
partner was informed that the Board of Directors would likely be receptive to an
acquisition proposal providing for a per share consideration in excess of $7.00,
but the Company imposed no specific terms and conditions on its willingness to
hold discussions with any potential strategic partner. Further, the Company
contacted five investment bankers and consultants, which agreed, without formal
engagement, to discuss the Company's publicly disclosed financial information
with certain of their domestic and international clients to solicit interest in
a merger with, or an acquisition of, the Company. With the exception of FINOVA,
however,
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<PAGE> 22
no potential strategic partner or other third party made a specific acquisition
proposal for the Company. In most instances, the potential strategic partners
contacted indicated that there was not believed to be a strategic fit between
the potential strategic partners and the Company, either because of the
technologically advanced nature of the Company's leasing business or its risk
profile. The Company's customers include health care providers and other
technology based users, some of which do not have access to traditional
financing sources. The Company's reliance on this segment of its customer base
may be perceived to involve a high degree of credit risk.
The first meeting between representatives of the Company and FINOVA was
held on January 24, 1996 following an initial telephone call from Dr. Bronfin to
Mr. Samuel L. Eichenfield, President and Chief Executive Officer of FINOVA, on
January 3, 1996. Dr. Bronfin was aware of FINOVA and its business through his
familiarity with the leasing industry, and he had become acquainted with Mr.
Eichenfield through their mutual participation in industry related associations
and organizations. Dr. Bronfin called Mr. Eichenfield to inquire on a
preliminary basis whether FINOVA would be interested in discussing a potential
affiliation or acquisition of the Company. At the meeting, the Company was
represented by Dr. Bronfin and Mr. Maxwell, and FINOVA was represented by Mr.
Eichenfield and Mr. Robert E. Radway, Senior Vice President of FINOVA. The
meeting was followed by the Company's providing certain information to FINOVA.
Such information included copies of the Company's recent periodic reports filed
under the Securities Exchange Act of 1934, detailed data concerning the
Company's lease portfolio and certain projected financial information. The
discussions between representatives of the Company and FINOVA resulted in the
conclusion that there was a significant strategic fit between the two companies.
The niche markets serviced by the Company were those that FINOVA wanted to
pursue. FINOVA indicated, however, that it was interested only in an acquisition
of the Company, and that it was not interested in any other type of strategic
affiliation with the Company. The parties commenced negotiations concerning a
potential acquisition of the Company during March, 1996.
On March 18, 1996, Messrs. Eichenfield and Radway met with Dr. Bronfin and
Mr. Randolph in Phoenix, Arizona. These representatives of the parties discussed
several issues related to a potential acquisition of the Company by FINOVA,
including pricing mechanisms and structural matters. Although no specific
agreement was reached, Dr. Bronfin and Mr. Randolph indicated that the Company
would not accept any proposal to acquire the Company at a per share price that
was less than the per share price at which shares of Common Stock were offered
and sold in the Initial Public Offering.
On March 21, 1996, FINOVA indicated that it was prepared to offer a value
of $6.10 per share for 100% of the Company's outstanding Common Stock and Common
Stock equivalents, subject to the negotiation of a definitive merger agreement
containing customary terms and conditions and the completion of a "due
diligence" review of the Company. The form of the consideration (cash or FINOVA
common stock or a combination of both) was left open, although FINOVA indicated
that, in the event the transaction were to be structured as a stock transaction,
the Company would be required to terminate the Company's outstanding Redeemable
Warrants and certain additional warrants held by the underwriters of the Initial
Public Offering. The Company indicated its preference for a stock transaction
and reiterated its position that the Company would not accept any proposal to
acquire the Company at a per share price that was less than the per share price
at which shares of Common Stock were offered and sold in the Initial Public
Offering.
During the rest of March and April 1996, representatives of FINOVA and the
Company discussed alternative price levels and pricing mechanisms, including
adjustments based on changes in the Company's stockholders equity after December
31, 1995. During this period, FINOVA advised the Company that, notwithstanding
the Company's preference for a stock-for-stock transaction, FINOVA was not
prepared to proceed with an acquisition of the Company except on the basis of a
merger price payable solely in cash. In April 1996, FINOVA completed its initial
"due diligence" review of the Company and counsel to FINOVA and the Company
prepared and began negotiating draft merger documents. During March and April
1996, the Executive Committee and the full Board of the Company held four and
two meetings, respectively, in person or by conference telephone, to discuss the
status of, and the issues raised in, the negotiations with FINOVA.
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<PAGE> 23
The Annual Meeting of Stockholders of the Company was held on May 3, 1996.
Before and after the Annual Meeting, the Board met with its legal and financial
advisors to discuss the status of the negotiations with FINOVA and the structure
of the proposed transaction. Dr. Bronfin briefed the Board on the background of
the proposed transaction and summarized the process that had been undertaken by
him and Mr. Randolph at the direction of the Executive Committee. Among other
things, Dr. Bronfin indicated that both he and Mr. Randolph had contacted
numerous potential strategic partners and that, as of the date of the meeting,
only FINOVA continued to express interest in a potential transaction on terms
that were acceptable to the Company. Legal counsel to the Company briefed the
Board with respect to certain legal issues associated with a potential sale of
control of the Company and the terms and conditions set forth in the most recent
version of the draft Merger Agreement.
A representative of Kropschot Financial Services ("KFS"), the Company's
financial advisor, presented the Board with its preliminary analysis concerning
the fairness of the proposed transaction from a financial point of view. KFS
based its preliminary analysis on a number of factors, including without
limitation, (i) the market focus, growth opportunities and competition facing
the Company, (ii) the value of the tangible and intangible assets of the
Company, (iii) the earning capacity of the Company and the predictability of its
earnings, (iv) acquisition values of other leasing companies, (v) the market
valuation of the Company's Common Stock, and (vi) the valuations of comparable
public companies. For a more detailed summary of the report of KFS, please see
"Special Factors -- Opinion of Financial Advisor" below. Based on the foregoing
factors and all other analyses conducted and factors considered, KFS concluded
that a price of at least $6.35 per share was fair, from a financial point of
view, to the stockholders of the Company.
Mr. Maxwell presented an informal analysis of the Company's financial
growth prospects assuming it were to remain independent. By necessity, Mr.
Maxwell's presentation included certain estimates of the future financial
performance of the Company, several of which are set forth below. These
estimates were developed by Mr. Maxwell and other members of the Company's
management during the first quarter of 1996 and were based on a variety of
assumptions, many of which are difficult or impossible to predict accurately and
are beyond the control of the Company. In light of the significant uncertainties
inherent in estimates of any kind, the estimates provided below should not be
relied upon by any stockholder of the Company or be regarded as a representation
by the Company or any other person that the estimates would be achieved. The
estimates are provided in this Proxy Statement solely because they were
considered by the Board of Directors in evaluating the terms and conditions of
the proposed Merger. The estimates were not prepared with a view to public
disclosure or compliance with the published guidelines of the Securities and
Exchange Commission (the "SEC") or the American Institute of Certified Public
Accountants regarding financial forecasts. The Company does not, as a matter of
course, publicly disclose estimates of its future financial results, and the
Company does not intend to publicly update or publicly revise such estimates for
any reason. KPMG Peat Marwick LLP, independent auditors for the Company, has
neither examined nor compiled the information discussed below and accordingly
does not express an opinion or any other form of assurance with respect thereto.
For the year ended December 31, 1996, it was estimated that the Company
would generate net earnings of $3,667,000, or approximately $.64 per share. For
the year ended December 31, 1997, it was estimated that the Company would
generate net earnings of $6,738,000, or approximately $1.02 per share. Finally,
for the year ended December 31, 1998, it was estimated that the Company would
generate net earnings of $8,715,000, or approximately $1.22 per share. Mr.
Maxwell's presentation was rather informal, assumed no additional subordinated
debt or equity capital was obtained, and was limited to estimates of net
earnings and net earnings per share; it did not include estimates of any
particular items of revenue or expense or allow for any major lease defaults.
The forecasts presented to the Board of Directors were derived from the
Company's 1996 Business Plan, as previously approved by the Board but updated to
reflect current year-to-date performance. Projections were made for 1997 and
1998 using the same basic assumptions that were utilized in the preparation of
the 1996 Business Plan, with projected increases in new lease originations
during 1997 and 1998 of 29% and 25%, respectively. The projections were then
modified to reflect an alternative capital structure (replacing a portion
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<PAGE> 24
of the equity with long-term subordinated debt) to assess the impact of such a
change on earnings per share and the trading price of the Common Stock, assuming
a constant price to earnings multiple of 10.
The alternative capital structure involved the substitution of $20 million
of junior subordinated debt for approximately one-half of the Company's Common
Stock that would be repurchased by the Company at $6.00 per share effective June
30, 1996 and retired. The analysis assumed a 12% interest rate on the new
indebtedness, for an additional annual interest expense of $2,400,000, and a
constant price to earnings multiple for the Common Stock of 10:1. Under this
alternative scenario, the Company would generate reduced net earnings of
$2,971,000 for the year ending December 31, 1996, but would have increased
earnings per share of $.71 due to the lower number of shares that would be
outstanding. For the year ending December 31, 1997, the Company would generate
net earnings of $5,346,000, or $1.25 per share, and for the year ending December
31, 1998, the Company would generate net earnings of $7,323,000, or $1.53 per
share. Under the alternative capital structure, the price of the Common Stock
would be correspondingly higher assuming the price to earnings multiple remained
the same for both the alternative and the original capital structure which many
directors felt might not be realistic given the potential higher volatility of
earnings due to the higher degree of leverage in the alternative capital
structure. In addition to the uncertainties discussed below, a number of
directors also thought that it was uncertain whether the Company would be able
to purchase a sufficient number of shares of its Common Stock for an average
purchase price of $6.00 per share. However, no analysis of the feasibility of
such a recapitalization plan was made.
The Board discussed the foregoing estimates and the assumptions underlying
their preparation. Although the estimates provide an important source of
information to be considered in evaluating the terms and conditions of the
proposed Merger, it was the consensus of the Board that, for a number of
reasons, the foregoing estimates should not be viewed as indicative of the
likely future performance of the Company.
As noted below, the Company has a concentration of credit exposure in a
relatively small number of lessees, having a net investment of over $2 million
each with 20 lessees at March 31, 1996, representing approximately one-third of
the Company's $188 million total investment in direct finance leases at such
date. In addition, the eight problem accounts and two "watched" accounts
included in the Company's March 1996 problem account report had an aggregate net
book value of over $9 million (the watched accounts neither were nor are
presently delinquent). See "Special Factors -- Opinion of Financial
Advisor -- Valuation Methodology -- Value of Tangible and Intangible Assets." To
achieve the projected earnings, the Company would need to avoid any significant
credit losses on these and other accounts. Although the Company maintains
allowances for loss reserves at levels that are deemed sufficient to meet
probable losses currently evident in the portfolio, there can be no assurance
that the Company's reserves would prove to be adequate.
Moreover, to achieve the projected earnings, the Board of Directors
believed the Company would also need to (a) raise additional equity, (b) renew
or replace its bank lines and (c) expand its asset securitization programs.
While various discussions were progressing as of the date of the meeting, the
Company had no firm commitments relating to any of these matters. Company
management and KFS each suggested that the Company would need to raise
additional equity capital during 1997, based upon the projected growth of the
Company. Assuming the Company were able to maintain its current growth rate and
increase its new lease originations by approximately 25% per annum, management
estimated that the debt necessary to finance that new business would approximate
$100 million in 1997 and $125 million in 1998, substantially all of which the
Company would hope to obtain through securitizations, including securitizations
based on the issuance of commercial paper and long-term notes. The Company's
existing bank lines contain a covenant which limits the Company's total
indebtedness to 8.0 times the sum of its equity and subordinated debt. Assuming
this limitation remained unchanged, the increased borrowings projected over the
two-year period would necessitate approximately $25-$30 million in new equity
(or long-term subordinated debt or a combination of equity and long-term
subordinated debt) to fund the Company's operations through the end of 1998.
Although the actual dilution suffered by stockholders would depend on the price
at which the shares of Common Stock were offered and sold, there was substantial
concern that, given the recent trading level of the Common Stock, a secondary
offering of this magnitude would result in significant dilution to the Company's
existing stockholders, assuming such an offering could be completed at all. The
issuance of long-term subordinated debt on attractive terms was considered
unlikely because, among other reasons, the Company's earnings history was
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<PAGE> 25
uneven and substantially all of the Company's assets were pledged to secure
other indebtedness. Moreover, the consent of the Phoenix Mutual Life Insurance
Company as the holder of the Company's existing subordinated debt would be
required for the creation of additional subordinated debt and might be difficult
or costly to obtain. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- Asset
Securitizations and Long-Term Debt."
At the conclusion of the May 3 Board meeting, the Board of Directors
authorized Dr. Bronfin and Mr. Randolph to attempt to resolve several remaining
issues with FINOVA concerning the structure of the proposed transaction and to
indicate that, if these issues were addressed appropriately, the Board would be
willing to proceed toward the consummation of a merger agreement through which
FINOVA would acquire the Company in an all cash transaction valued at $6.40 per
share of Common Stock and Common Stock equivalents. Following the adjournment of
the meeting, Dr. Bronfin and Mr. Randolph telephoned Mr. Radway to discuss the
Company's remaining issues relating to the proposed transaction and to indicate
the Company's requirements to proceed with the transaction.
Among other things, Dr. Bronfin and Mr. Randolph indicated that the Board
was unwilling to accept as a condition of the closing of the Merger which had
been required by FINOVA that the Company enter into agreements with Sands
Brothers & Co., Ltd. ("Sands") and RAS Securities Corp. ("RAS") terminating
their investment banking relationships with the Company. Sands and RAS had in
place several agreements with the Company which were originated in connection
with the Initial Public Offering that would entitle one or both of them to
perform various investment banking services for the Company during the five-year
period following the Initial Public Offering. During the negotiations, FINOVA
had consistently taken the position that the termination of those relationships
was a condition precedent to FINOVA's willingness to proceed with and consummate
an acquisition of the Company. See "Special Factors -- Interests of Certain
Persons in the Merger -- Modification and Release Agreements with Underwriters."
Dr. Bronfin and Mr. Randolph also requested several changes to the Merger
Agreement intended, among other things, to limit the ability of FINOVA to
withdraw from the proposed transaction after the Merger Agreement was executed
and to clarify the provisions on the termination fees that would be payable by
the Company in the event that the Merger Agreement was terminated under certain
specified circumstances.
The Board met telephonically on May 8, 1996 to discuss a revised draft of
the Merger Agreement and FINOVA's response to the issues raised by the Company
immediately following the May 3 Board meeting. Dr. Bronfin reported that,
although FINOVA was willing to accede to most of the Company's requests, it was
unwilling to retreat from its demand that the Company enter into agreements with
Sands and RAS terminating their investment banking relationships with the
Company. After a period of discussion, the Board authorized management to
commence negotiations with Sands and RAS as to the terms and conditions under
which they would be willing to terminate their investment banking relationships
with the Company. Although Mr. Sands was present at and participated in the
meeting, he excused himself from the portion of the meeting during which this
issue was discussed. The Board also authorized management to continue the
negotiations with FINOVA and attempt to resolve all open issues.
On Friday, May 17, 1996, the Board met telephonically to consider and act
upon the proposed Merger Agreement. At that meeting, a representative of KFS
reported that, in the opinion of KFS, the consideration of $6.40 per share
offered by FINOVA was fair to the Company's stockholders from a financial point
of view. KFS' report was in substantially the same form as the preliminary
report presented to the Board at the May 3 meeting except that it had been
updated to reflect the final Merger Price and an updated analyst's report
concerning the future prospects of the Company. The updated analyst's report,
dated April 23, 1996, projected 1996 earnings per share of $.58, an increase of
$.07 per share over the $.51 per share projected in the analyst's previous
report, dated March 19, 1996. The Company's legal advisors reviewed the terms
and conditions of the Merger Agreement, as well as the other agreements that
were contemplated by the Merger Agreement, including (a) the Change of Control
Agreement proposed to be entered into between the Company and Mr. Maxwell, (b)
the Consulting Agreement proposed to be entered into between FINOVA and Dr.
Bronfin, (c) the Employment Termination Agreement proposed to be entered into
between the Company and Dr. Bronfin, (d) the Principal Stockholder Voting
Agreements proposed to be entered into between the Company and each of the
Principal Stockholders, and (e) the Subsidy Payment Agreement proposed to be
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<PAGE> 26
entered into between the Company and Dr. Bronfin. See "-- Interests of Certain
Persons in the Merger." The Company's legal advisors also advised the directors
concerning their fiduciary duties under Delaware law and reported that the
Company had reached separate agreements in principle with Sands and RAS with
respect to the termination of their respective investment banking relationships.
See "-- Interests of Certain Persons in the Merger -- Modification and Release
Agreements with Underwriters." The agreement in principle with Sands included,
among other things, a commitment by the Company to reduce the purchase price of
the Redeemable Warrants from $8.25 to $6.30 upon the effectiveness of the
Merger. Neither Sands nor RAS is the record holder of any Redeemable Warrants.
Thus, neither Sands nor RAS will receive any direct financial benefit from the
reduction in the exercise price of the Redeemable Warrants, nor will Sands or
RAS receive any fees upon exercise of the Redeemable Warrants following the
consummation of the Merger. See "The Merger -- Options and Warrants." Because
there had been insufficient time to circulate to the directors prior to the
meeting definitive copies of certain ancillary agreements proposed to be
executed contemporaneously with the Merger Agreement, the Board took no formal
action on the Merger Agreement or any of the ancillary agreements.
The Board reconvened telephonically on Saturday, May 18, 1996. The
Company's legal advisors again reviewed the terms and conditions of the proposed
Merger Agreement, as well as the other ancillary agreements contemplated
thereby. The Board then voted formally and unanimously to approve and adopt the
Merger Agreement and recommend that the Company's stockholders vote in favor of
the Merger Agreement and the transactions contemplated thereby. The Merger
Agreement and the related ancillary agreements described below were subsequently
executed and delivered by the parties on Sunday, May 19, 1996.
STRUCTURE OF THE TRANSACTION
FINOVA's and Merger Sub's purpose for the transaction is to acquire
beneficial ownership of 100% of the equity of the Company. The transaction has
been structured in part as a merger because it ensures that FINOVA, through
Merger Sub, will acquire beneficial ownership of 100% of the equity of the
Company in a single transaction pursuant to which the stockholders of the
Company will receive cash consideration in exchange for their shares of Common
Stock. Under the DGCL, any stockholder who does not wish to accept the Merger
Price provided for in the Merger Agreement has the right to dissent from the
Merger and to seek an appraisal of, and to be paid the fair cash value
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) for his or her shares of Common Stock, provided that
the stockholder complies with the provisions of Section 262 of the DGCL. See
"The Merger -- Appraisal Rights of Dissenting Stockholders."
RECOMMENDATION OF THE BOARD OF DIRECTORS
At a telephonic meeting of the Company's Board of Directors held on
Saturday, May 18, 1996, at which all of the Company's directors were present,
the Board of Directors approved the Merger Agreement and the transactions
contemplated thereby, determined to recommend to the stockholders of the Company
that they vote to approve and adopt the Merger Agreement and the transactions
contemplated thereby, and determined that the terms of the Merger are fair to,
and in the best interests of, the Company's stockholders. See "Special
Factors -- Background; Reasons for the Merger."
In reaching its decision to enter into the Merger Agreement with FINOVA and
not to remain as an independent company, the Board of Directors considered a
number of factors, including the factors summarized below. Although the Board
conducted no separate vote on the relative importance or significance of any of
the foregoing factors, it was the general consensus of the Board that, with the
possible exception of the factor summarized in clause (iv) below, each such
factor favored its decision to enter into the Merger Agreement and recommend its
approval by the stockholders of the Company. In view of the wide variety of
factors considered in connection with its evaluation of the Merger, the Board of
Directors did not find it practical to, and did not, quantify or otherwise
attempt to assign relative weights to the specific factors considered in
reaching its determination.
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(i) The Board's familiarity with and review of the Company's business,
results of operations, financial condition and prospects (including, without
limitation, the decline in the Company's earnings in 1994 and 1995, as discussed
under "Special Factors -- Background; Reasons for the Merger"), the possible
difficulty in generating necessary debt and equity capital on favorable terms.
In particular, based in part on its familiarity with and review of the Company's
business, results of operations, financial condition and prospects, the Board
concluded that the Company would need to raise substantial debt and equity
capital on favorable terms to fund the continued growth of the Company. At the
same time, several members of the Board expressed concern about the Company's
credit concentrations in a small number of lessees. The Board was also concerned
that the decline in the Company's earnings in 1994 and 1995 would make it
difficult or impossible to raise subordinated debt and equity capital on
favorable terms. See "Special Factors -- Background; Reasons for the Merger."
(ii) The written opinions KFS delivered on May 3 and May 17, 1996 to the
effect that, as of the respective date of each such opinion, the Merger Price to
be received by the holders of Common Stock pursuant to the Merger Agreement was
fair, from a financial point of view, to such holders. See "Special
Factors -- Opinion of Financial Advisor."
(iii) The presentations by KFS that discussed, among other things, the
relationship of the Merger Price to be received pursuant to the Merger Agreement
to the historical market prices for the Common Stock and the historical, current
and projected financial condition, results of operations, assets, liabilities
and prospects of the Company. In particular, the Board noted that the Merger
Price represented a premium over the historical market prices for the Common
Stock and that the Company was facing substantial risks and uncertainties on a
going forward basis. Among the risks and uncertainties were the need to raise
substantial additional debt and equity capital and the credit risk associated
with a high level of credit concentrations in a small number of lessees. In
recognition of these risks and uncertainties, KFS reported that there was a
significant risk that the Company would be unable to meet the financial
forecasts and projections relating to fiscal 1996 that had been prepared by
management and formed the basis for Mr. Maxwell's presentation at the May 3
meeting of the Board of Directors. See "Special Factors -- Opinion of Financial
Advisor."
(iv) The alternatives of the Company remaining an independent entity,
including the presentation of Mr. Maxwell at the May 3 meeting of the Board of
Directors which included a discussion of certain estimates prepared by
management concerning the future financial performance of the Company, it being
noted that, although there were plausible scenarios under which the Company
could achieve improved growth and profitability, it would be extremely difficult
to realize these estimates. See "Special Factors -- Background; Reasons for the
Merger."
(v) The premium which the Merger Price represents over the historical and
then current market prices for shares of Common Stock (as described in greater
detail under "Summary -- Market Prices of and Dividends on Common Stock and
Related Stockholders Matters"), including the fact that the Merger Price (a)
represents a premium of approximately 4.5% over the $6.125 market price of the
Common Stock at the close of trading on May 17, 1996 (the last trading day
immediately preceding the execution of the Merger Agreement) and (b) represents
a premium of approximately 20.4% over the highest monthly average daily stock
closing price of $5.316 for the period July 1994 through March 1996. See
"Summary -- Market Prices of and Dividends on Common Stock and Related
Stockholder Matters."
(vi) The fact that the Principal Stockholders, who own of record an
aggregate of approximately 53.1% of the Common Stock as of the Record Date, were
willing to enter into the Principal Stockholder Voting Agreements, pursuant to
which they agreed to vote the shares of Common Stock owned of record and
beneficially by them in favor of the Merger Agreement; it being noted by the
Board of Directors that the Principal Stockholders were being treated the same
as all other stockholders in the Merger with the exception of the Consulting
Agreement entered into by Dr. Bronfin in his capacity as an officer of the
Company. See "Special Factors -- Interests of Certain Persons in the
Merger -- Consulting Agreement Between FINOVA and Dr. Bronfin; Employment
Termination Agreement."
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(vii) The fact that there is generally a lack of liquidity for Company
stockholders; it being noted that approximately 53.1% of the outstanding shares
of Common Stock was owned beneficially by four stockholders and the Common Stock
is thinly traded.
(viii) The likelihood that FINOVA would be able to complete the Merger and
the fact that the Merger Agreement provides for limited conditions to the
obligations of FINOVA to consummate the Merger. In this regard, the Board of
Directors noted that the Merger Agreement contains no financing condition. See
"The Merger -- Conditions to Closing."
(ix) A review of the agreements with officers of the Company that were
proposed in regard to their continued employment with the Company and/or FINOVA,
for a limited period of time, after the Merger. In particular, the Board noted
that the officers of the Company had negotiated only limited contracts and
agreements providing for their continued employment with the Company and/or
FINOVA and that such contracts and agreements in the Board's opinion were fair
to the Company and such officers and in no way represented a diversion of the
Merger consideration to such officers at the expense of the Company's
stockholders. See "Special Factors -- Consulting Agreement between FINOVA and
Dr. Bronfin; Employment Termination Agreement" and "-- Change of Control
Agreement between the Company and Mr. Maxwell."
(x) The fact that Dr. Bronfin was willing to enter into a written subsidy
agreement, pursuant to which he agreed to provide the Company with a payment of
up to $250,000 if such payment was necessary for the Per Share Amount to equal
or exceed the specified minimum amount of $6.35. There was no assurance,
however, that such payment would be sufficient to close any shortfall in the Per
Share Amount from $6.35. See "Special Factors -- Interests of Certain Persons in
the Merger -- Subsidy Payment Agreement Between the Company and Dr. Bronfin."
(xi) The efforts of Dr. Bronfin and Mr. Randolph in exploring the financial
and strategic alternatives for the Company since December 7, 1995, it being
noted that Dr. Bronfin and Mr. Randolph had contacted, both in person and by
telephone, ten potential strategic partners to acquire the Company, including
FINOVA, and that no such potential strategic partner had indicated it was
prepared to make a specific acquisition proposal on terms and conditions that
were acceptable to the Company. See "Special Factors -- Background; Reasons for
the Merger."
(xii) A review of the terms and conditions of the Merger Agreement and the
fact that the Merger Agreement specifically provides the Company and its
stockholders with the flexibility, under certain circumstances, to terminate the
Merger Agreement and accept an Acquisition Proposal (as defined therein) for a
competing transaction. See "The Merger -- Additional Agreements -- No
Solicitation."
(xiii) The lack of any specific proposals from any other third party at a
price or otherwise on terms that are superior to the financial terms provided by
the Merger.
(xiv) The fact that the Merger Agreement would permit a reduction in the
exercise price of the Redeemable Warrants to $6.30 so that the holders thereof
would receive $.10 per Redeemable Warrant.
Based upon all of these factors, the Board of Directors unanimously
approved the Merger Agreement and unanimously recommends that the stockholders
of the Company vote in favor of the proposal to approve and adopt the Merger
Agreement.
OPINION OF FINANCIAL ADVISOR
The Board of Directors engaged KFS to analyze the terms of the Merger and
to render an opinion as to the fairness, from a financial point of view, of the
consideration to be paid to the Company's stockholders pursuant to the terms of
the Merger Agreement. The Board engaged KFS based on the reported qualifications
of KFS as a leading merger and acquisition advisor and valuation consultant to
equipment leasing and financing companies and as having arranged for the sale of
over 100 equipment leasing and financing businesses and portfolios and performed
valuations of approximately 60 equipment leasing companies.
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Except for this engagement, FSI and its affiliates, on the one hand, and
KFS and its affiliates, on the other hand, have not had any material
relationship during the past two years. The terms of KFS' engagement were the
subject of arm's length negotiations between representatives of KFS and
representatives of the Company and are set forth in a letter agreement dated
April 3, 1996 (the "Engagement Letter"). Pursuant to the Engagement Letter, the
Company has agreed to pay KFS a fee, not expected to exceed the $40,000 that the
Company has paid KFS to date. The amount payable to KFS is based upon the actual
time spent by KFS personnel working on the engagement. In addition, KFS is
entitled to reimbursement for its reasonable expenses and disbursements incurred
in connection with the engagement. No portion of KFS' fee is contingent upon the
successful consummation of the Merger. The Engagement Letter also requires the
Company to indemnify KFS against certain liabilities and expenses relating to or
arising out of the services performed by KFS in connection with the engagement.
On May 3 and May 17, 1996, KFS orally advised the Board of Directors, and
issued written opinions dated May 3 and May 10, to the effect that the
consideration to be paid by FINOVA to the stockholders of the Company pursuant
to the Merger Agreement is fair to the stockholders of the Company from a
financial point of view. At the request of the Board of Directors, KFS rendered
an updated written opinion, dated as of June 17, 1996 (the "Fairness Opinion"),
to the same effect. A copy of the Fairness Opinion is attached to this Proxy
Statement as Annex B and is incorporated herein by reference. Stockholders are
urged to read the Fairness Opinion in its entirety for a description of the
assumptions made, procedures followed, other matters considered and limits of
the review undertaken by KFS. The summary of the Fairness Opinion set forth in
this Proxy Statement is qualified in its entirety by reference to the full text
of the Fairness Opinion. The Fairness Opinion was prepared for the Board of
Directors of the Company, is directed only to the fairness to the stockholders
of the Company, from a financial point of view, of the consideration to be
received by such stockholders pursuant to the Merger Agreement and does not
constitute a recommendation to any stockholder as to how to vote at the Special
Meeting.
Basis of Fairness Opinion; Scope of Review
In rendering its Fairness Opinion, KFS performed, among other things, the
following:
(i) A review of various drafts of the Merger Agreement and the final
version of the Merger Agreement.
(ii) A review of certain publicly available Company financial statements,
both audited and unaudited, including the financial statements included in the
Company's Annual Reports on Form 10-K for the years ended December 31, 1994 and
1995, the financial statements included in the Company's quarterly reports on
Form 10-Q for the periods ended March 31, 1995, June 30, 1995, September 30,
1995 and March 31, 1996, and the financial statements included in the
prospectus, dated May 20, 1994, distributed in connection with the Initial
Public Offering.
(iii) A review of certain financial statements and other financial and
operating data concerning the Company prepared by management.
(iv) A review of certain financial forecasts of the Company prepared by
management along with the assumptions to such forecasts.
(v) Discussions with certain members of the Company's senior management
relating to the Company's past and current business operations, financial
condition and future prospects.
(vi) Visits to the Company's headquarters in Farmington, Connecticut where
KFS reviewed a number of customer credit and documentation files.
(vii) A review of the historical stock prices and trading volume of the
Common Stock.
(viii) A review of publicly available financial data and stock market
performance data of publicly traded companies which KFS deemed generally
comparable to the Company.
(ix) Such other studies, analyses, inquiries and investigations as KFS
deemed appropriate.
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KFS relied upon and assumed without independent verification the accuracy
and completeness of all financial and other information that was provided to it
by the Company and of the publicly available information about the Company that
KFS reviewed. With respect to the Company's forecasts for 1996, KFS assumed that
such forecasts had been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of the Company as
to its expected future performance. KFS did not assume any responsibility for
the information or forecasts provided to it. KFS relied upon assurances of
Company management that they are unaware of any facts that would make the
information or forecasts provided to KFS incomplete or misleading. In arriving
at its opinion, KFS did not perform or obtain any independent appraisal of the
assets of the Company.
The Fairness Opinion was based solely upon the information available to KFS
and the economic, market and other circumstances as they existed as of the date
of its opinion. Events occurring after the date of its opinion could materially
affect the assumptions used in preparing the Fairness Opinion.
Based upon and subject to the foregoing and also based upon other factors
that KFS considers relevant, including but not limited to its considerable
experience with mergers, acquisitions and valuations of equipment leasing and
financing companies, KFS is of the opinion that, as of the date of this Proxy
Statement, the cash purchase price of $6.40 per share of Common Stock is fair,
from a financial point of view, to the stockholders of the Company.
Valuation Methodology
The following is a summary of the valuation methodology utilized by KFS in
rendering the Fairness Opinion. This summary does not purport, however, to be a
complete description of the analyses underlying the Fairness Opinion. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances at hand. Accordingly, a fairness opinion is not readily
susceptible to summary description.
In determining whether the cash purchase price of $6.40 per share of Common
Stock is fair, from a financial point of view, to the Company's stockholders,
KFS considered a number of factors which impact a business' fair market value.
Fair market value is defined, for purposes of the valuation, as the price at
which an asset would change hands between a willing buyer and a willing seller
when the former is not under any compulsion to buy and the latter is not under
any compulsion to sell, and both parties are able, as well as willing, to trade
and are well informed about the asset and the market for that asset. For widely
held, actively traded public companies, the public market may provide an
indication of fair market value for a minority interest in the Company. Although
the Company has been a public company since May 20, 1994 and is traded on the
Nasdaq Stock Market, over half of the outstanding shares of Common Stock is
controlled, in the aggregate, by the Chairman of the Company and his family,
investment firms with which two directors are affiliated and another unrelated
stockholder. Consequently, there is a relatively small float of publicly traded
shares, and the Common Stock has been lightly traded. Accordingly, although the
Common Stock is publicly traded, KFS considered that it was additionally
appropriate to consider factors typically used to value closely held companies
in valuing the Company.
Relying on Internal Revenue Service guidelines for the valuation of shares
of a closely held company, KFS assessed the following factors with respect to
the Company: (a) the nature of the business and the history of the enterprise
from its inception; (b) the economic outlook in general and the condition and
outlook of the specific industry in particular; (c) the book value of the stock
and the financial condition of the business; (d) earning capacity; (e)
dividend-paying capacity; (f) goodwill and other intangible values; (g) sales of
the stock and the size of the block of stock to be valued; and (h) the market
price of stocks of corporations engaged in the same or a similar line of
business having their stocks actively traded in a free and open market, either
on an exchange or over-the-counter.
KFS considered the following factors most critical in assessing the
Company's value: (a) market focus, growth opportunities and competition; (b) the
value of tangible and intangible assets; (c) earning capacity and
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<PAGE> 31
predictability of earnings; (d) acquisition values of other leasing companies;
(e) market value of Company Common Stock; and (f) the value of comparable public
companies.
THE FOLLOWING IS A SUMMARY OF THE FOREGOING FACTORS AS DISCUSSED BY KFS IN
ITS WRITTEN REPORT TO THE BOARD OF DIRECTORS DELIVERED IN CONJUNCTION WITH THE
FAIRNESS OPINION:
Market Focus, Growth Opportunities and Competition. The equipment leasing
business is very competitive and has become more concentrated in large financial
service companies such as GE Capital, AT&T Capital and several major banks. The
industry also has a number of specialty leasing businesses, such as the Company,
that satisfy the special needs of niche markets. The Company has performed well
in redefining its focus to four target markets: electronics, life science,
health care and environmental/industrial. In serving the needs of growth
companies in growing markets, KFS believes the Company has the potential of
growing faster than the leasing industry as a whole.
While the overall leasing industry grew rapidly from $43 billion in 1980 to
$125 billion in 1989, industry growth since 1989 has been slow, due in part to
the reduced tax benefits of leasing. The Company is not a tax-oriented lessor,
however, and by pursuing emerging growth companies, the Company does not always
face the intense rate competition that is prevalent when pursuing a leasing
business with successful established companies. The Company is also sometimes
able to negotiate the right to receive warrants in emerging growth companies
that could become more valuable if the company goes public or is sold.
Furthermore, by concentrating principally on technologically advanced equipment
and gaining an understanding of the equipment and the lessee's need for the
equipment, the Company improves its opportunities for residual value while
helping to reduce its potential credit losses.
Value of Tangible and Intangible Assets. KFS performed an analysis of the
Company's net tangible and intangible assets as reflected in its December 31,
1995 and March 31, 1996 balance sheets. KFS also reviewed the Company's debt
arrangements, including the asset securitizations it has used to finance most of
its lease portfolio. The Company has elected to structure its securitizations so
as not to recognize gains on sales at the inception of the securitizations.
However, because of the substantial cash collateral account balances, the
cross-collateralization of the pools of securitized leases and the specified
amounts of recourse to the Company, it retains substantially all the risk of
loss on the securitized leases. At June 30, 1996, the Company's net investment
in securitized leases totalled $167,316,831.
It was the conclusion of KFS that the Company has a concentration of credit
exposure in a relatively few large accounts, with 20 lessees having a net
investment of over $2 million each at March 31, 1996, representing about
one-third of the $188 million total net investment in direct finance leases. At
March 31, 1996, the Company had a $1,249,000 allowance for losses on direct
finance leases and notes secured by equipment, of which $170,000 was a reserve
for a specific account. The Company had provisions for credit losses of $177,000
in the first quarter of 1996 and $958,000 for the year 1995. The Company,
however, also reported a separate $3,533,000 provision for losses on medical
assets in 1995, consisting of $1,806,000 for credit or residual value losses on
the Company's portfolio of medical equipment in inventory and on lease, and
$1,727,000 related to assets at two medical centers taken over by the Company
upon lease default. These centers were sold February 1, 1996, and another
medical center that was similarly taken over was sold September 30, 1995. The
net loss from operating these medical centers was $620,000 in 1995. Total losses
related to credit problems and medical equipment residual value write-downs
exceeded $5,000,000 in 1995.
With healthcare equipment representing only 22% of 1995 lease bookings, it
is the belief of KFS that the Company's new business is now much more
diversified as compared to its previous concentration in the healthcare sector.
Healthcare equipment produced most of the Company's 1995 credit and residual
value losses. The Company retains residual values of $4.7 million on magnetic
resonance imaging ("MRI") systems. MRI equipment has been the Company's worst
residual category. In 1995, the Company realized substantial losses on booked
residuals on MRI equipment while realizing substantial gains on all other
equipment. Now that healthcare equipment leasing is declining and the medical
centers have been sold, it is the belief of KFS that the Company's exposure on
medical equipment leases is much more manageable.
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KFS expressed considerable concern relative to future potential credit
losses. KFS specifically noted that the eight problem accounts and two watched
accounts included in the Company's March 1996 problem account report have an
aggregate net book value of over $9 million (the watched accounts neither were
nor are presently delinquent). KFS noted the potential of risk of loss on one or
more of these accounts.
Problem accounts are those accounts where the lessee is out of compliance
with the lease contract, most commonly being consistently delinquent in making
scheduled rent payments. Watched accounts are those where the lessee is in
compliance with the lease contract but where the Company is aware of an actual
or potential deterioration in the lessee's financial condition and is paying
closer attention then usual to the lessee's progress. At June 30, 1996, the
Company had 9 accounts with an aggregate net book value of $3,529,000 that were
classified as problem accounts and 3 accounts with an aggregate net book value
of $6,811,000 that were classified as watched accounts.
KFS also selected a sampling of approximately 20 accounts from the
Company's portfolio concentration summary and the committed backlog report as of
March 31, 1996. These were mostly large accounts, but KFS also reviewed several
small accounts. KFS was impressed with the Company's thorough credit and
documentation procedures and the independent equipment appraisal reports
obtained for some transactions and noted the Company's preference to engage in
lease transactions where the perceived risk is greater than the actual risk.
Although KFS indicated it reviewed examples where the foregoing was true, it
also noted that the Company has a number of accounts which in the opinion of KFS
have substantial risks associated with them, including venture capital-backed
start ups, emerging growth companies and leveraged buy-outs. Regardless of
mitigating factors, such as security deposits or collateral value, it is the
belief of KFS that some of these accounts ultimately will result in losses.
KFS concluded, based on a review of the Company's lease portfolio, that a
potential acquiror of the Company would likely discount its valuation of the
Company by at least $1 million and possibly as much as $3 million due to the
possibility of future losses following an acquisition. KFS noted that each $1
million pre-tax charge reduces the Company's net worth by approximately $.11 per
share and that any reduction would have a significant impact on the valuation of
the Company.
KFS also considered the Company's portfolio of warrants and other equity
securities which the Company has received as part of its consideration for its
leasing activities. In 1995, the Company had $1 million of gains on the sale of
such securities. At March 31, 1996, the Company had such securities of publicly
traded issues valued at $663,000. Additionally, the Company held such securities
of privately held companies that could eventually be worth a considerable
amount.
KFS concluded that an acquiror could reasonably be expected to reduce the
carrying amount of the Company's lease portfolio to the fair value to reflect
the inherent risk in the assets by $2 million. This amount would be offset, in
part, by the value of the Company's portfolio of warrants and other equity
securities, which was estimated to be worth $1 million. The net effect after tax
would be to reduce by approximately $.11 the book value per share of the
Company, which was $4.99 at March 31, 1996. Accordingly, KFS concluded that such
an adjusted book value of the Company would approximate $4.88 per share at March
31, 1996.
Although the Company has many intangible assets, KFS found it difficult to
assign significant value to such assets given the Company's recent earnings
history and concluded that the goodwill premium for the Company likely would be
modest.
Earning Capacity and Predictability of Earnings. KFS noted that the
Company's earnings showed an excellent growth trend leading up to the May 1994
Initial Public Offering but that the earnings for 1994 and 1995 decreased
significantly. For the first quarter of 1996, the Company reported net income of
$764,000 or $.14 per share. In the 1996 business plan prepared by management in
the fall of 1995, net income of $3,246,000, or $.59 per share, was projected for
the year 1996. Near the end of the first quarter of 1996, management revised
this projection to net income of $3,703,000, or $.66 per share. Lease bookings
were projected to be $125 million and $120 million, respectively, in the last
two management projections for 1996, compared to $100 million in 1995. Sands,
the lead underwriter of the Initial Public Offering, has estimated the Company's
1996 earnings per share to be $.58 in its April 23, 1996 report on the Company
in contrast to its
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earlier estimate of $.51 per share on March 19, 1996. KFS believes that the
March 19 estimate for 1996 earnings of $.51 per share is more realistic than the
Company's or Sands' later projections because of the analysis that a potential
acquiror would make and the possible difficulty in the Company's attaining its
projected lease bookings.
KFS also noted in its report the importance to an acquiror or an investor
of the predictability of earnings and earning capacity. Since the Company went
public in 1994, its earnings have fluctuated significantly in a downward trend
and the Company has had to work hard to improve its credibility with investors.
Because of the disappointments in recent earnings, KFS believes an acquiror
would likely reduce the multiple of projected 1996 earnings that it would
otherwise be willing to pay.
The Company's earnings capacity is also important in assuring the continued
availability of favorable financing. KFS stated that significant credit losses
could have an adverse effect on the Company's future securitizations and the
Company's ability to renew and expand its short-term credit facility. In
addition, the Company's ability to expand its lease portfolio will require
additional equity from retained earnings and a possible future equity offering
which would require good earnings performance. KFS stated it expects the Company
to be able to finance its 1996 lease business and does not anticipate a
near-term cash flow problem. According to KFS, the Company's future access to
both the debt and equity markets will be heavily influenced, however, by its
earnings and its ability to keep credit problems under reasonable control. KFS
concluded that there may be some difficulty in meeting future financing
requirements which the Board of Directors needs to consider in determining the
Company's future direction.
Acquisition Values of Other Leasing Companies. According to KFS, there are
few publicly-owned equipment leasing companies and the vast majority of
equipment leasing companies are either subsidiaries of other companies or
privately-owned independent companies. Thus, there have been very few recent
acquisitions of publicly-owned equipment leasing companies. KFS has estimated
that most privately-owned equipment leasing company sales in recent years have
been in the range of 105% to 130% of adjusted net asset value and 6 to 9 times
the current year's net income.
Market Valuation of Company Common Stock. The Company went public on May
20, 1994 at a price of $6.40 per share of Common Stock. Purchasers in the
Initial Public Offering were required, for each share of Common Stock purchased,
to buy one separable Redeemable Warrant for $.10 entitling them to buy one share
of Common Stock for $8.25, exercisable from May 20, 1995 to May 20, 1999. KFS
noted that, after rising to a high of $6.75 on the date of the public offering,
the price of the Common Stock quickly declined and reached a low of $2.50 in May
1995. KFS further noted that the Common Stock has traded mostly in the $4 to
$5.50 range in the first three months of 1996. After ending March 1996 at
$5.375, the Common Stock rose to a high of $6.375 in early May 1996, its highest
price since June 1994. The Common Stock closed at $6.125 on May 17, 1996, the
last trading day prior to the execution of the Merger Agreement.
From July 1994 through March 1996, the Company's reported monthly Common
Stock trading volume has ranged from a low of 84,000 shares during November 1995
to 390,000 shares during October 1995 except for two months when trading
exceeded 600,000 shares. Monthly trading volume in the first quarter of 1996
averaged 175,000 shares. KFS concluded that due to a relatively small float of
publicly traded shares, the Company's market price is not necessarily indicative
of the Company's fair market value.
Comparable Public Companies. The written report of KFS discussed above
includes an attached separate report prepared by KFS in which DVI, Inc. ("DVI"),
The FINOVA Group Inc. ("The FINOVA Group") (the parent of FINOVA), Trans Leasing
International, Inc. ("Trans Leasing") and Winthrop Resources Corporation
("Winthrop") were selected as guideline companies for a comparison to the
Company. KFS considered the most important valuation ratio for comparison to be
the price to earnings ratio because most acquirors give greatest consideration
to earnings when valuing a company. Based on consensus investment banker
forecasts for the current year and April 23, 1996 stock prices, KFS reported
that the Company's Common Stock was trading at a price/earnings multiple of
11.76 ($6 price and $.51 earnings per share forecast), as compared to 13.72 for
DVI, 8.84 for Trans Leasing, 11.91 for Winthrop and 13.75 for The FINOVA Group.
If the Company were acquired for $6.40 per share, the price/earnings multiple
would be 12.55 based upon earnings of $.51 per share for 1996 as forecast by
Sands in March 1996, 10.85 based upon
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the Company management's original estimate of $.59 earnings per share for 1996,
and 9.7 based upon the Company's revised forecast of earnings per share prepared
near the end of the first quarter of 1996.
Based upon the Company's $4.99 book value per share at March 31, 1996, a
$6.00 stock price would be approximately 1.20 times its book value. The $6.40
acquisition price would represent 1.28 times book value and 1.31 times the $4.88
adjusted book value that KFS computed in its asset valuation. The price-to-book
value multiples are 1.67 for DVI, .56 for Trans Leasing, 2.92 for Winthrop and
1.82 for The FINOVA Group.
Conclusion
As reflected in the Fairness Opinion and subject to the qualifications
described therein, KFS has concluded that the cash price of $6.40 per share of
Common Stock is fair, from a financial point of view, to the holders of the
Company's Common Stock. KFS was not retained to determine a specific fair market
value for the Company's shares. KFS stated that some of the important factors
pertinent to its conclusion were as follows:
(i) The Company had very poor earnings performance in 1994 and 1995,
and the favorable first quarter 1996 results did not necessarily indicate
that the Company's problems have been solved.
(ii) The Company had significant credit exposure to a number of
businesses that have not achieved profitability. Significant credit losses
could limit the Company's access to capital markets.
(iii) The $6.40 price per share represents a 10.85 price/earnings
multiple based upon the Company's original plan for 1996 and a 12.55
multiple based upon what KFS believed to be a more reasonable estimate.
Both multiples were ample when compared to the multiples and performance of
comparable public companies, and the multiples were high when compared to
KFS' experience in acquisitions of privately-owned leasing companies. In
addition, KFS believed one would expect a relatively low multiple for a
business such as the Company whose earnings have had a relatively low level
of predictability.
(iv) The $6.40 price per share represented 1.31 times the adjusted
book value computed by KFS. This premium over the Company's net asset value
appeared to be at the high end of the range of reasonableness when the
Company's performance over the past two years and its level of credit risks
were considered.
(v) From July 1994 through March 1996, the Company's average daily
stock closing price by month never exceeded $5.316. A purchase price of
$6.40 represented a 20.4% premium over that highest monthly average.
THE FULL TEXT OF KFS' FAIRNESS OPINION TO THE BOARD OF DIRECTORS OF THE
COMPANY INITIALLY DATED AS OF MAY 3, 1996 AND UPDATED AS OF JUNE 17, 1996, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX B TO THIS PROXY STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE IN ITS ENTIRETY. HOLDERS OF COMPANY COMMON
STOCK ARE URGED TO READ THIS OPINION CAREFULLY IN ITS ENTIRETY. THE FAIRNESS
OPINION RELATES ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE
CASH PRICE OF $6.40 PER COMMON SHARE TO THE COMPANY'S COMMON STOCK HOLDERS AND
DOES NOT ADDRESS ANY OTHER ASPECT OF THE PROPOSED MERGER OR ANY RELATED
TRANSACTION AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO
HOW SUCH STOCKHOLDER SHOULD VOTE AT THE SPECIAL MEETING. THIS SUMMARY OF THE
OPINION BY KFS SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED, IN ITS ENTIRETY,
BY REFERENCE TO THE FULL TEXT OF SUCH OPINION ATTACHED HERETO AS ANNEX B.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. In considering the recommendations of the Board of Directors of
the Company with respect to the Merger, stockholders should be aware that
certain members of the Company's management and the Board of Directors have
certain interests summarized below that are in addition to or different from the
interests of stockholders generally and that may present them with potential
conflicts of interest in connection with the Merger. The Board of Directors has
recognized such interests and determined that such interests neither supported
nor detracted from the fairness of the Merger to the stockholders.
Consulting Agreement Between FINOVA and Dr. Bronfin; Employment Termination
Agreement. As an inducement for FINOVA to enter into the Merger Agreement,
Barry R. Bronfin and FINOVA have entered into a consulting agreement, dated May
19, 1996 (the "Consulting Agreement"). Dr. Bronfin is the Chairman of the
Company. Pursuant to the Consulting Agreement, Dr. Bronfin will act as a
consultant to FINOVA and its affiliates for a period commencing on the Closing
Date (as defined herein) of the Merger and ending on December 31, 1997 (the
"Consulting Period"). Dr. Bronfin will be compensated at the rate of $100,000
per annum for the period from the Closing Date through December 31, 1996 and at
the rate of $40,000 per annum for the remainder of the Consulting Period. In
addition, the Consulting Agreement prohibits Dr. Bronfin from competing directly
or indirectly with FINOVA or its affiliates or from having a direct or indirect
interest in any business competing with the business being conducted by FINOVA
or its affiliates. Ownership of less than 1% of the issued and outstanding
capital stock of any corporation, the stock of which is listed upon a national
exchange or regularly quoted by the Nasdaq Stock Market, shall not, by itself,
be deemed to be competition of the type that is prohibited by the Consulting
Agreement. FINOVA and Dr. Bronfin have also agreed that his consulting services
are as an independent contractor, and not as an employee of FINOVA.
The Consulting Agreement also contains a release, pursuant to which Dr.
Bronfin will release as of the Effective Time (as defined herein), FSI and its
affiliates, successors and assigns from any obligation under, or any rights with
respect to, and terminates all agreements, arrangements and understandings
between Dr. Bronfin and FSI or its affiliates, including without limitation all
stock purchase, registration, Board representation, employment, consulting and
expense reimbursement arrangements.
Dr. Bronfin and the Company have also entered into a separate Employment
Termination Agreement, dated May 19, 1996 (the "Termination Agreement"),
providing for the complete termination of his existing employment agreement,
effective upon the closing of an Acquisition of the Company. For purposes of the
Termination Agreement, an "Acquisition" is defined to mean an acquisition of the
business of the Company by FINOVA by means of a merger or consolidation with the
Company or by a purchase of the capital stock of the Company, if and when
incident thereto, (a) the composition of the Board of Directors of the Company
changes so that a majority of the Board is not comprised of individuals who were
members of the Board immediately prior to such merger, consolidation or purchase
of stock or assets or (b) the stockholders of the Company acquire the right to
receive, in exchange for or upon surrender of their stock, cash or other
securities or a combination of the two.
Change of Control Agreement Between the Company and Mr. Maxwell. Robert W.
Maxwell and the Company have entered into a Change of Control Agreement, dated
May 19, 1996 (the "Change of Control Agreement"). Mr. Maxwell is the President
and a director of the Company. The Change of Control Agreement provides that Mr.
Maxwell will continue to serve as an executive of the Company for a specified
period following a "Change of Control" of the Company. A "Change of Control" is
defined as a merger, consolidation or purchase of substantially all of the
assets of the Company, whereupon (a) the composition of the Board of Directors
changes so that a majority of the Board is not comprised of individuals who are
members of the Board immediately prior to such merger, consolidation or purchase
of assets; or (b) the stockholders of the Company acquire a right to receive, in
exchange for or upon surrender of their stock, cash or other securities or a
combination of stock and cash. In the event the Merger is consummated, it will
constitute a Change of Control whereupon Mr. Maxwell shall serve in such
executive capacity for a term commencing on the first date on which the Change
of Control occurs and expiring on the first anniversary of such date (the
"Employment Term"). During the Employment Term, Mr. Maxwell shall be employed as
the President of the Company or in some other executive capacity. He shall
perform the duties, undertake the
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<PAGE> 36
responsibilities and exercise the authority customarily performed, undertaken
and exercised by persons situated in similar executive capacities.
During the Employment Term, the Company shall pay Mr. Maxwell a salary
equal to Mr. Maxwell's salary in effect immediately prior to the Change of
Control. Mr. Maxwell's current base salary is $187,500. Mr. Maxwell shall also
be entitled to participate in all employee benefit plans, practices and programs
maintained by the Company and made available to employees generally, including
without limitation, all pension, retirement, profit-sharing, savings, medical,
hospitalization, disability, dental and life and travel accident insurance
benefit plans. Unless otherwise provided in the Change of Control Agreement, the
compensation of benefits under, and Mr. Maxwell's participation in, such plans,
practices and programs shall be on the same basis and terms as are applicable to
employees of the Company generally, but in no event on a basis less favorable in
terms of benefit levels and coverage than the most favorable of such plans,
practices and programs covering Mr. Maxwell at any time within ninety days
preceding the Change of Control, or if more favorable, at any time thereafter.
Mr. Maxwell shall also be entitled to participate in all executive benefit
or incentive compensation plans maintained or established by the Company for the
purpose of providing compensation and/or benefits to executives of the Company.
Any such plans shall be on the same basis and terms as other similarly situated
executives of the Company, but in no event on a basis less favorable in terms of
benefit levels or reward opportunities than the most favorable benefit levels
and reward opportunities applicable to Mr. Maxwell at any time within ninety
days preceding the Change of Control, or if more favorable at any time
thereafter. Mr. Maxwell shall also be entitled to all fringe benefits and
perquisites generally made available by the Company to its executives. Such
benefits shall be on the same basis and terms as other similarly situated
executives of the Company.
Mr. Maxwell may be terminated for "cause" (as defined in the Change of
Control Agreement) or he may voluntarily resign at any time during his
Employment Term. In the event the Company or its successors shall (a) fail to
keep Mr. Maxwell in an executive position with substantial duties and
responsibilities commensurate with his age, experience and prior level of
responsibility or (b) requires him to spend significantly more of his working
time than he presently does outside of Farmington, Connecticut, he shall be
deemed "Constructively Terminated," whereupon he shall have no further
obligations to the Company or its successors but shall continue to be
compensated under the terms set forth above.
During the Employment Term, unless he has otherwise voluntarily resigned,
Mr. Maxwell is prohibited from competing directly or indirectly with the Company
or any acquiring entity or in any business competing with the business conducted
by the Company or any acquiring entity. Ownership of less than 1% of the issued
and outstanding capital stock of any corporation the stock of which is listed
upon a national exchange or regularly quoted on the Nasdaq Stock Market shall
not, by itself, be deemed to be competition for the purposes of this provision.
Principal Stockholder Voting Agreements. As an inducement to FINOVA and
Merger Sub to enter into the Merger Agreement, the Principal Stockholders (as
defined below) have each entered into a voting agreement (individually, the
"Principal Stockholder Voting Agreement" and collectively, the "Principal
Stockholder Voting Agreements") with FINOVA, dated May 19, 1996, pursuant to
which each Principal Stockholder has agreed (a) not to sell, pledge, transfer,
assign, encumber or otherwise alienate any shares of Common Stock owned by him
or it of record or beneficially, and (b) to vote, or cause to be voted, all
shares of Common Stock owned by him or it of record or beneficially in favor of
the Merger Agreement and the Merger so long as the Merger Agreement is not
amended adversely to such Principal Stockholder. As of the Record Date, the
Principal Stockholders are the beneficial owners of an aggregate of 2,867,200
shares of Common Stock, or approximately 53.1% of the outstanding shares of
Common Stock of the Company. Under Delaware law, the affirmative vote of the
holders of at least a majority of the shares of Common Stock outstanding as of
the Record Date is required to approve and adopt the Merger Agreement and the
Merger. Thus, the Principal Stockholders have sufficient voting power to approve
and adopt the Merger Agreement without the affirmative vote of any other
stockholders.
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<PAGE> 37
The Principal Stockholders consist of Electra Investment Trust, P.L.C., Dr.
Barry R. Bronfin, AMEV Venture Associates III, L.P. and AMEV Venture Associates
III - International, L.P. Dr. Bronfin is the Chairman of the Board of Directors
of the Company. Ms. Diane M. Smith is a Senior Vice President of Electra, Inc.,
an affiliate of Electra Investment Trust, P.L.C. Mr. Martin S. Orland is the
President and Chief Executive Officer of Fortis Private Capital, Inc., an
affiliate of both of the aforementioned AMEV partnerships. Ms. Smith and Mr.
Orland were first elected to the Board of Directors of the Company by the
holders of a class of preferred stock that is no longer outstanding pursuant to
preferred stock voting rights provisions that are no longer included in the
Company's Certificate of Incorporation. The Principal Stockholders' obligations
pursuant to the Principal Stockholder Voting Agreements shall terminate upon the
earlier of the Effective Time of the Merger or the termination of the Merger
Agreement, but in no event later than October 31, 1996.
Agreements similar to the Principal Stockholder Voting Agreements have been
the subject of a number of challenges in Delaware and other states. The Company
cannot predict whether or not a Delaware court or other court of competent
jurisdiction would enforce any or all of the terms of the Principal Stockholder
Voting Agreements.
Subsidy Payment Agreement Between the Company and Dr. Bronfin. The Merger
Agreement provides that FINOVA and Merger Sub are not obligated to proceed with
and consummate the Merger in the event that the "Per Share Amount" (as defined
herein) is less than $6.35. See "The Merger--Per Share Amount." As an inducement
for the Company to enter into the Merger Agreement, Dr. Bronfin and the Company
have entered into a letter agreement, dated May 19, 1996 (the "Subsidy Payment
Agreement"), pursuant to which Dr. Bronfin has agreed to make a payment (the
"Subsidy Payment") to the Company in an amount up to $250,000 in the event the
Per Share Amount is less than $6.35, such that the Per Share Amount following
the Subsidy Payment is not less than $6.35. The Merger Agreement provides that,
in the event that such a Subsidy Payment is made, it shall be counted in the
calculation of the Per Share Amount. In the event that a Subsidy Payment is due
under the Subsidy Payment Agreement and Dr. Bronfin has not paid the Subsidy
Payment to the Company on or prior to such time as the Paying Agent is required
to pay Dr. Bronfin the Merger Price to which he shall be due with respect to the
certificates of Common Stock owned and surrendered by Dr. Bronfin, the Subsidy
Payment Agreement authorizes the Paying Agent, at the option of the Company, to
deduct the full amount of the Subsidy Payment from the amount of the total
Merger consideration then owed to Dr. Bronfin and to turn such amount over to
the Company. There can be no assurance that the Subsidy Payment will be
sufficient to close any shortfall in the Per Share Amount from $6.35.
Modification and Release Agreements with Underwriters. In May and June of
1994, the Company completed the Initial Public Offering of an aggregate of
2,500,000 shares of its Common Stock and 2,687,500 Redeemable Warrants. The
underwriters of the Initial Public Offering were Sands, RAS and Dresdner
Securities (USA), Inc. ("Dresdner") (collectively, the "Underwriters"). The
Underwriting Agreement, dated May 20, 1994 (the "Underwriting Agreement"),
executed by and among the Company and the Underwriters in connection with the
Initial Public Offering provides the Underwriters, during the five-year period
following the effectiveness of the Company's registration statement filed in
connection with the Initial Public Offering, with a preferential right to
perform certain specified investment banking services for or on behalf of the
Company.
The Company and Sands entered into a separate Investment Banking Agreement,
dated as of May 20, 1994 (the "Investment Banking Agreement"), pursuant to which
the Company engaged Sands to act as its investment banker for a period of five
years commencing as of the closing of the Initial Public Offering. Under the
original terms of the Investment Banking Agreement, the Company granted Sands a
right of first refusal to act as an underwriter or placement agent in any sale
or distribution of securities, including securitized loans, of the Company. The
Investment Banking Agreement was amended as of January 3, 1995 to provide, among
other things, that Sands shall not have a right of first refusal with respect to
any offering of securitized loans by the Company or its subsidiaries.
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<PAGE> 38
In connection with the Initial Public Offering, the Company entered into a
Warrant Agreement, dated May 27, 1994 (the "Public Warrant Agreement"), with
State Street Bank and Trust Company (the "Warrant Agent") under which the
Redeemable Warrants were issued. Among other things, the Public Warrant
Agreement provides for the payment of a solicitation fee to Sands or RAS, as the
case may be, equal to six percent (6%) of the aggregate purchase price of all
Redeemable Warrants the exercise of which was solicited by either Sands or RAS.
The solicitation fee is payable on the exercise of each Redeemable Warrant,
unless (i) RAS and Sands, as applicable, notifies the Warrant Agent that the
payment of such amount with respect to the Redeemable Warrant being exercised
violates the General Rules and Regulations promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") or the rules and
regulations of the National Association of Securities Dealers, Inc. or
applicable state securities laws, (ii) the Redeemable Warrants are those
underlying the Underwriters' Warrants (as defined below), (iii) the market price
of the Common Stock is lower than the purchase price, (iv) the Redeemable
Warrants are held in a discretionary account, or (v) the Redeemable Warrants are
exercised in an unsolicited transaction.
The Company also entered into a Warrant Agreement, dated May 20, 1994 (the
"Underwriters' Warrant Agreement"), with Sands and RAS, pursuant to which Sands
and RAS were granted the right to purchase, at any time from May 20, 1995 until
May 20, 1999, an aggregate of 250,000 shares of Common Stock and/or 250,000
Redeemable Warrants at an initial exercise price (subject to certain adjustments
as provided therein) of $10.56 per share of Common Stock and $.165 per
Redeemable Warrant, such Redeemable Warrant being exercisable to purchase one
share of Common Stock at an initial exercise price of $8.25.
In contemplation of entering into the Merger Agreement, the Company has
entered into separate Modification and Release Agreements with Sands and RAS,
dated May 19, 1996 (each a "Modification and Release Agreement" and
collectively, the "Modification Release Agreements"), pursuant to which Sands
and RAS have each agreed, from and after the effective date of the Merger, to
release the Company from any rights each may have under or by virtue of (i)
certain provisions of the Underwriting Agreement, (ii) the Underwriters' Warrant
Agreement, and (iii) certain provisions of the Public Warrant Agreement. The
Modification and Release Agreement between the Company and Sands also provides
for the complete termination of the Investment Banking Agreement as of the
effective date of the Merger. Each Modification and Release Agreement includes a
provision by which Sands and RAS, as the case may be, has agreed not to sue the
Company, FINOVA or their affiliates on account of any of the transactions
contemplated by the Merger Agreement. The consideration to be received by Sands
and RAS in connection with the Modification and Release Agreements is $300,000
and $50,000, respectively, payable at the closing held in connection with the
Merger. In the event that either (a) the Merger Agreement is terminated for any
reason whatsoever, or (b) the Closing (as defined herein) of the Merger does not
take place on or before October 1, 1996, the Modification and Release Agreements
shall become null and void and be of no further force or effect.
The Co-Chairman and Chief Executive Officer of Sands is Steven B. Sands,
who is also a member of the Board of Directors of the Company and the beneficial
owner as of February 7, 1996 of an aggregate of 480,600 shares of Common Stock
including 400,000 shares of Common Stock issuable upon exercise of the
Underwriters' Warrants issued to Sands in connection with the Initial Public
Offering.
Indemnification of Directors and Officers. The Merger Agreement provides
that FINOVA shall not take any action, for a period of six years following the
Merger, to impair any indemnification provisions now existing for the benefit of
any individual who served as a director or officer of the Company. See "The
Merger -- Additional Agreements -- Indemnification of Directors and Officers."
Stock Options. The Merger Agreement provides that, immediately prior to
the Effective Time, each option granted under an Employee Plan (as defined in
the Merger Agreement) by the Company to purchase shares of Common Stock, which
is then outstanding, whether or not vested or exercisable, shall become vested
and exercisable in accordance with its terms, shall be cancelled and the holder
thereof shall be entitled to receive from the Company immediately prior to the
Effective Time, an amount in cash equal to the excess, if any, of (a) the Merger
Price multiplied by the number of shares of Common Stock subject to such option,
over (b) the exercise price of such option multiplied by the number of shares of
Common Stock subject thereto. The following table sets forth the number of in
the money stock options held by each officer and
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<PAGE> 39
director of the Company as of the Record Date, the average exercise prices of
such options and the amount of cash which each such officer and director will be
entitled to receive by virtue of the Merger:
<TABLE>
<CAPTION>
CASH PAYABLE
AVERAGE UPON
NUMBER OF EXERCISE CONSUMMATION OF
NAME AND TITLE OPTIONS PRICE THE MERGER
- ------------------------------------------------- --------- -------- ---------------
<S> <C> <C> <C>
Joseph A. Gilbertie.............................. 48,000 $ 3.88 $120,918.75
Vice President and Controller
Kevin P. Kickery................................. 92,500 $ 2.07 $373,949.38
Vice President -- National Sales and Managing
Director-Healthcare
Robert S. Lees, M.D.............................. 2,000 $ 3.91 $ 4,987.50
Director and Chairman of the Company's Scientific
Advisory Board
Christopher M. Mathieu........................... 25,000 $ 3.03 $ 84,375.00
Vice President -- Director of Finance
Robert W. Maxwell................................ 164,000 $ 2.49 $603,475.00
President and Chief Operating Officer, Chief
Financial Officer, Chief Accounting Officer and
Director
Gerald A. Michaud................................ 11,000 $ 2.91 $ 38,384.38
Vice President -- Sales and Marketing and
Managing Director-Biotechnology
Robert D. Pomeroy, Jr............................ 109,000 $ 2.56 $395,211.25
Senior Vice President -- Director of Marketing
Richard Schwartz................................. 111,000 $ 2.49 $410,490.63
Senior Vice President, Secretary and General
Counsel
Duane E. Starr................................... 7,500 $ 3.19 $ 24,093.75
Senior Vice President -- Asset Management and
Credit
</TABLE>
Contracts and Agreements Entered Into Subsequent to the Execution and
Delivery of the Merger Agreement. Subsequent to the date on which the Merger
Agreement was executed and delivered by the parties, the Company is aware that
FINOVA and its parent corporation, The FINOVA Group, have entertained
discussions with certain of the Company's executive officers concerning the
terms and conditions under which such executive officers would be willing to
continue to serve the Company and/or FINOVA following the consummation of the
Merger. Effective as of July 31, 1996, The FINOVA Group and Richard Schwartz,
Senior Vice President, Secretary and General Counsel to the Company, entered
into a letter agreement pursuant to which The FINOVA Group and Mr. Schwartz
agreed that Mr. Schwartz would continue to serve the Company as Vice President,
Associate General Counsel and Assistant Secretary for a period of at least six
months following the effectiveness of the Merger, although either party is free
to terminate the employment relationship at any time with or without cause. Mr.
Schwartz will continue to be paid at the annual rate of $125,000, but if Mr.
Schwartz remains in the employ of the Company for the full six-month transition
period or is terminated without cause, he will be entitled to a transition bonus
of $37,500 in addition to severance payments due under currently existing plans
and policies of the Company estimated to be approximately $38,462, plus payment
for any accrued but unused vacation. Mr. Schwartz also will be eligible to
receive a cash bonus for 1996 and the portion of the six-month period occurring
in 1997 based on a pro-rated amount of his 1995 bonus of $35,000.00. In the
event that Mr. Schwartz and The FINOVA Group agree to continue his position
beyond the six-month transition period, Mr. Schwartz's employment will be
subject to mutually agreeable terms and will follow the general employment
policies and practices of the Company. Although FINOVA has not entered into
formal agreements with any other executive officers of the Company, it has
announced that it will pay certain other executive officers and employees of the
Company transition bonuses of varying amounts if such officers remain with the
Company through specified dates.
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<PAGE> 40
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain federal income tax consequences of
the Merger to stockholders of the Company. This summary does not purport to
discuss all tax consequences of the Merger to all stockholders.
The receipt of cash by a stockholder of the Company pursuant to the Merger
or pursuant to the exercise of dissenters' rights of appraisal (see "The
Merger -- Appraisal Rights of Dissenting Stockholders") will be a taxable event
for federal income tax purposes and may also be a taxable transaction under
applicable state, local, foreign or other tax laws. In general, a stockholder
will recognize gain or loss equal to the difference, if any, between the
stockholder's adjusted tax basis in his or her shares and the amount of cash
received for such shares in the Merger. In general, a stockholder who is not
exercising his or her dissenters' rights of appraisal will recognize such gain
or loss at the Effective Time. In general, such gain or loss will be capital
gain or loss, provided the shares are held as capital assets, and will be
long-term capital gain or loss if the stockholder's holding period for such
shares exceeds one year.
The receipt of cash by a stockholder pursuant to the Merger (or the
exercise of dissenter's rights of appraisal) may be subject to backup
withholding at the rate of 31% unless the stockholder (i) is a corporation or
comes within certain other exempt categories, or (ii) provides a certified
taxpayer identification number on Form W-9 and otherwise complies with the
backup withholding rules. Backup withholding is not an additional tax; any
amounts so withheld may be credited against the federal income tax liability of
the stockholder subject to the withholding.
Pursuant to the Merger Agreement, all options to purchase shares of Common
Stock, stock appreciation rights or limited stock appreciation rights or other
similar rights granted under the Company Stock Option Plans, whether or not then
exercisable or vested, shall be cancelled and FINOVA shall pay to each holder
thereof, net of any withholding taxes, an amount in respect of each such option
equal to the product of (a) the excess, if any, of the Merger Price pursuant to
the Merger Agreement over the exercise or strike price of such option and (b)
the number of shares of Common Stock subject to such options. The cash realized
by holders of such options will be taxed to such holder as ordinary income.
EACH STOCKHOLDER SHOULD CONSULT HIS OR HER OWN TAX ADVISOR WITH RESPECT TO
THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN HIS OR HER OWN INDIVIDUAL
CIRCUMSTANCES AND WITH RESPECT TO THE STATE, LOCAL, FOREIGN OR OTHER TAX
CONSEQUENCES OF THE MERGER. ANY STOCKHOLDER WHO IS A CITIZEN OR RESIDENT OF A
COUNTRY OTHER THAN THE UNITED STATES SHOULD CONSULT HIS OR HER OWN TAX ADVISOR
WITH RESPECT TO THE TAX TREATMENT IN SUCH COUNTRY OF THE MERGER AND WITH RESPECT
TO THE QUESTION OF WHETHER TAX CONSEQUENCES OTHER THAN THOSE DESCRIBED ABOVE MAY
APPLY BY REASON OF THE PROVISIONS OF THE INTERNAL REVENUE CODE APPLICABLE TO
FOREIGN PERSONS OR THE PROVISIONS OF ANY TAX TREATY APPLICABLE TO SUCH
STOCKHOLDER.
IF THE MERGER IS CONSUMMATED, THE COMPANY'S STOCKHOLDERS WILL NOT HAVE THE
OPPORTUNITY TO CONTINUE IN THEIR EQUITY INTEREST IN THE COMPANY AS AN
INDEPENDENT ENTITY AND THEREFORE WILL NOT SHARE IN ANY FUTURE EARNINGS AND
GROWTH OF THE COMPANY. MOREOVER, IF THE MERGER IS CONSUMMATED, PUBLIC TRADING OF
THE COMMON STOCK WILL CEASE, THE COMMON STOCK WILL NOT BE LISTED ON THE NASDAQ
STOCK MARKET, AND THE REGISTRATION OF THE COMMON STOCK UNDER THE EXCHANGE ACT
WILL BE TERMINATED.
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<PAGE> 41
THE MERGER
GENERAL
The Merger Agreement provides for the merger of Merger Sub with and into
the Company. Upon the effectiveness of the Merger, the separate existence of
Merger Sub will cease, and FINOVA will directly own 100% of the issued and
outstanding capital stock of the Company. The Company, as the surviving
corporation in the Merger, will succeed to all rights and obligations of Merger
Sub.
The following sections through "-- Termination, Amendment and Waiver"
contain a summary of the material provisions of the Merger Agreement not
summarized elsewhere in this Proxy Statement. THE DESCRIPTIONS OF THE TERMS AND
CONDITIONS OF THE MERGER AGREEMENT INCLUDED IN THIS PROXY STATEMENT ARE
QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE MERGER AGREEMENT, A COPY OF
WHICH IS ATTACHED AS ANNEX A TO THIS PROXY STATEMENT AND WHICH IS INCORPORATED
HEREIN BY REFERENCE. SUCH SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
THE MERGER AGREEMENT. STOCKHOLDERS ARE URGED TO REVIEW THE MERGER AGREEMENT
ITSELF CAREFULLY AND IN ITS ENTIRETY.
STOCKHOLDER MEETING; CLOSING; EFFECTIVE TIME
The Company is required to submit the Merger Agreement to its stockholders
for approval and adoption at a meeting to be held as soon as practicable after
the execution of the Merger Agreement which took place on May 19, 1996. The
Special Meeting has been called for that purpose. Subject to the Merger
Agreement receiving all requisite stockholder approvals and subject to the
fulfillment or waiver of the other conditions precedent set forth in the Merger
Agreement, the parties shall hold a closing (the "Closing") on the next business
day (or such later date as the parties may agree) following the later of (a) the
Special Meeting, or (b) the business day on which the last of the conditions set
forth in Article IV of the Merger Agreement is fulfilled or waived (such later
date, the "Closing Date"). On the Closing Date, the parties shall cause the
Merger to be consummated by filing a certificate of merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware in such form as
required by, and executed in accordance with the relevant provisions of, the
DGCL. The date and time of such filing, or such later date or time agreed upon
by FINOVA and the Company, is sometimes hereinafter referred to as the
"Effective Time."
CONVERSION AND CANCELLATION OF SECURITIES; MERGER PRICE
Pursuant to the Merger Agreement, at the Effective Time, each share of
Common Stock issued and outstanding immediately prior to the Effective Time
(other than shares of Common Stock held by the Company as treasury stock
immediately prior to the Effective Time, which shares shall be automatically
cancelled, and other than shares of Common Stock held by stockholders, if any,
who properly exercised their dissenters' rights under the DGCL) shall, by virtue
of the Merger and without any action on the part of the stockholder, be
converted into the right to receive $6.40 in cash, without interest (the "Merger
Price"). Also at the Effective Time, each share of Merger Sub common stock, par
value $1.00 per share, validly issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action by the
stockholder, be converted into 10,000 validly issued, fully paid and
nonassessable common shares, par value $1.00 per share, of the surviving
corporation which shall be the Company. As a result, following the Merger,
FINOVA will be the sole stockholder of the Company.
Stockholders who do not vote in favor of the Merger Agreement and who
otherwise comply with Section 262 of the DGCL will have the right to seek an
appraisal of the fair value of their shares. See "The Merger -- Appraisal Rights
of Dissenting Stockholders" below.
DISSENTING SHARES
"Dissenting Shares" are defined in the Merger Agreement as shares of
Company Common Stock held as of the Effective Time by a stockholder of record of
the Company who has not voted such shares of Common Stock in favor of the Merger
and with respect to which appraisal rights shall have been duly demanded and
perfected in accordance with Section 262 of the DGCL and not effectively
withdrawn or forfeited prior to the
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<PAGE> 42
Effective Time. Dissenting Shares shall not be converted into or represent the
right to receive the payment which the holders of Common Stock are entitled to
receive pursuant to the Merger Agreement, unless a dissenting stockholder shall
have forfeited his or her right to appraisal under the DGCL or withdrawn, with
the consent of the Company, his or her demand for appraisal. If a dissenting
stockholder has so forfeited or withdrawn his or her right to appraisal of
Dissenting Shares, then, as of the occurrence of such event, such holder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into and represent the right to receive the Merger Price payable in respect to
such shares.
The Merger Agreement provides that the Company shall give FINOVA (i) prompt
notice of any written demands for appraisal of any shares of Common Stock,
withdrawals of such demands, and any other instruments that relate to such
demands received by the Company, and (ii) the opportunity to direct all
negotiations and proceedings with respect to demands for appraisal under the
DGCL. The Company shall not, except for the prior consent of FINOVA, make any
payment with respect to any demands for appraisal of shares of Company Common
Stock or offer to settle or settle any such demands.
SURRENDER OF CERTIFICATES; PAYMENT
FINOVA has designated Harris Trust and Savings Bank to act as the paying
agent (the "Paying Agent") under the Merger Agreement. At the Effective Time,
FINOVA shall cause the Surviving Corporation to deposit with the Paying Agent
such funds as are required for the conversion of the shares of Common Stock into
the right to receive the Merger Price (the "Payment Fund").
As soon as practicable after the Effective Time, FINOVA shall cause the
Paying Agent to mail to each person who was, at the Effective Time, a holder of
record of a certificate or certificates (the "Certificates") evidencing
outstanding shares of Common Stock (i) a letter of transmittal specifying that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon delivery of the Certificates to the Paying Agent, which shall be
in a form and contain any other provisions as FINOVA and the Company, as the
surviving corporation, may reasonably agree, and (ii) instructions for use in
effecting the surrender of the Certificates in exchange for the Merger Price for
each share represented by the Certificates. Upon the proper surrender of
Certificates to the Paying Agent, together with a properly completed and duly
executed letter of transmittal, the Paying Agent shall distribute to the holder
of the Certificates a check for the cash being paid in respect of the Merger
Price for the aggregate number of shares of Common Stock represented by such
Certificates, and the Certificates so surrendered shall be cancelled. If for any
reason (including without limitation, losses) the Payment Fund is inadequate to
pay the amounts to which the stockholders of the Company are entitled, FINOVA
shall be liable for the payment thereof.
The cash paid upon the surrender of Certificates in accordance with the
Merger Agreement shall be deemed to have been paid in full satisfaction of all
rights to receive the Merger Price pertaining to such shares of Common Stock. In
no event will the holder of any surrendered Certificates be entitled to receive
interest on the Merger Price. At the Effective Time, the stock transfer books of
the Company shall be closed and no transfer of shares of Common Stock shall
thereafter be made.
Until exchanged pursuant to the procedures described above, each
Certificate will, after the Effective Time, be deemed for all purposes to
represent the right to receive the Merger Price in cash multiplied by the number
of shares of Common Stock represented by such Certificate.
PLEASE DO NOT SEND ANY CERTIFICATES WITH THE ENCLOSED PROXY CARD. IF THE
MERGER IS APPROVED, THE PROCEDURE FOR THE EXCHANGE OF YOUR SHARES OF COMMON
STOCK WILL BE AS SET FORTH ABOVE. YOU SHOULD NOT SEND IN YOUR CERTIFICATES UNTIL
YOU RECEIVE A TRANSMITTAL FORM FROM THE PAYING AGENT.
OPTIONS AND WARRANTS
Immediately prior to the Effective Time, each option granted under an
Employee Plan (as defined in the Merger Agreement) by the Company to purchase
shares of Common Stock, which is then outstanding, whether or not vested or
exercisable, shall become vested and exercisable in accordance with its terms,
shall
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be cancelled and the holder thereof shall be entitled to receive from the
Company immediately prior to the Effective Time, an amount in cash equal to the
excess, if any, of (a) the Merger Price multiplied by the number of shares of
Common Stock subject to such option, over (b) the exercise price of such option
multiplied by the number of shares of Common Stock subject thereto.
Immediately prior to the Effective Time, each warrant granted by the
Company to purchase shares of Common Stock which is then outstanding, including
both the warrant held by the Phoenix Home Life Mutual Insurance Company and the
Redeemable Warrants, shall remain outstanding in accordance with its terms, and
after the Effective Time, the holder thereof shall be entitled to receive from
the Company upon payment of the exercise price provided for therein an amount
equal to the Merger Price multiplied by the number of shares of the Company
Common Stock with respect to which such warrant is then being exercised.
In connection with the Merger, the Board of Directors of the Company shall
have taken action to reduce the exercise price of all of the Redeemable Warrants
from $8.25 to $6.30 per share. Holders of Redeemable Warrants will be permitted
to receive from the Company, as the surviving corporation, $6.40 in cash upon
the exercise of such warrants in accordance with their terms, at an exercise
price equal to $6.30 per share, at any time, up to their expiration date, after
the Effective Time of the Merger. The reduction in the exercise price of the
Redeemable Warrants shall be effective only at and after the Effective Time and
not prior thereto. The Company and its legal advisors are investigating
potential ways in which to streamline and facilitate the exercise of the
Redeemable Warrants.
The Company is permitted to arrange for a reduction in the amount to be
paid to each holder of cancelled options or warrants for any applicable
withholding taxes or other amounts required by law to be paid or withheld,
either through reducing the amount paid to, or by obtaining a cash payment from,
such holder.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of the
Company to FINOVA and Merger Sub regarding, among other things, the following
matters: (i) the Company's due organization, valid existence and good standing
under the laws of the State of Delaware and its qualification as a foreign
corporation authorized to do business and good standing in every jurisdiction in
which such qualification is required; (ii) the due organization and
qualification of each subsidiary of the Company in each required jurisdiction;
(iii) the Company's authorized, issued and outstanding capital stock; (iv) the
Certificate of Incorporation, By-laws, minute books and records of the Company
and its subsidiaries; (v) the Company's requisite corporate power and authority
to execute and deliver the Merger Agreement and to consummate the transactions
contemplated thereby; (vi) the absence of any violations of the Company's
Certificate of Incorporation or By-laws and the absence of any breach or default
under any Contract (as defined therein) to which the Company or any of its
subsidiaries is a party or the execution and delivery of the Merger Agreement by
the Company; (vii) information furnished expressly for inclusion in this Proxy
Statement; (viii) required consents or approvals by governmental or regulatory
authorities; (ix) Company filings with the SEC; (x) Company financial
statements; (xi) the validity of the Company's financing transactions; (xii) the
absence of certain material adverse changes since the Balance Sheet Date (as
defined therein); (xiii) disclosure of indebtedness; (xiv) title of the Company
and its subsidiaries in real and personal properties and assets; (xv) material
contracts; (xvi) insurance policies; (xvii) necessary authorizations from all
governmental authorities and compliance with applicable laws and regulations;
(xviii) federal, state, local and foreign tax returns; (xix) litigation; (xx)
employee benefit plans and employment agreements; (xxi) labor matters; (xxii)
environmental matters; (xxiii) intellectual property; (xxiv) the accuracy of
materials provided to FINOVA; and (xxv) the absence of brokers' and finders'
fees.
The Merger Agreement also contains representations and warranties of FINOVA
and Merger Sub to the Company regarding, among other things, the following
matters: (i) the due organization, valid existence and good standing of FINOVA
and Merger Sub under the laws of the State of Delaware; (ii) their requisite
corporate power and authority to execute and deliver the Merger Agreement and to
consummate the transactions contemplated thereby; (iii) the absence of any
violations of FINOVA's or Merger Sub's Certificate of Incorporation or By-laws
and the absence of any breach or default under any Contract (as
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<PAGE> 44
defined therein) to which either is a party in the execution and delivery of the
Merger Agreement by FINOVA and Merger Sub; (iv) required consents or approvals
by governmental or regulatory authorities; (v) information furnished expressly
for inclusion in this Proxy Statement; (vi) the absence of brokers' or finder's
fees; and (vii) financing available to pay the Merger Price for all issued and
outstanding shares of Company Common Stock.
ADDITIONAL AGREEMENTS
Pursuant to the Merger Agreement, the Company, FINOVA and Merger Sub have
covenanted and agreed, among other things, to the following:
Conduct of the Company's Business. Between the execution date of the
Merger Agreement and the Effective Time, unless FINOVA shall otherwise consent
in writing, and except as otherwise expressly contemplated, the business of the
Company and its subsidiaries shall be conducted only in, and such entities shall
not take any action except in, the ordinary course of business and in a manner
consistent with past practice, and the Company and its subsidiaries will use
their commercially reasonable efforts to preserve substantially intact the
business organization of the Company and its subsidiaries, to keep available the
services of those of its present officers, employees and consultants that are
integral to the operation of its business as presently conducted and to preserve
the present relationships of the Company and its subsidiaries with customers,
suppliers and other persons with which the Company and its subsidiaries have
significant business relations. By way of amplification and not limitation,
except as otherwise expressly contemplated in the Merger Agreement, the Company
has agreed on behalf of itself and, where applicable, its subsidiaries that,
without the prior written consent of FINOVA, it will, between the date of the
Merger Agreement and the Effective Time:
(a) not directly or indirectly do any of the following: (i) amend or
propose to amend its Certificate of Incorporation or By-laws; (ii) split,
combine or reclassify any outstanding shares of its capital stock, or
declare, set aside or pay any dividend payable in cash, stock, property or
otherwise with respect to such shares; (iii) redeem, purchase, acquire or
offer to acquire any shares of its capital stock; or (iv) enter into any
contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this paragraph (a);
(b) not, directly or indirectly (i) issue, sell, pledge or dispose of,
or agree to issue, sell, pledge or dispose of, any additional shares of, or
securities convertible or exchangeable for, or any options, warrants or
rights of any kind to acquire any shares of, its capital stock of any class
or other property or assets whether pursuant to any rights agreement, stock
option plans described on the Company Schedule to the Merger Agreement or
otherwise, provided that the Company may issue shares of Company Common
Stock pursuant to currently outstanding options and warrants referred to in
Section 2.3 of the Merger Agreement and the Company may sell the
outstanding shares of Melville Holding Co. Inc. common stock held by it as
of the date hereof; (ii) acquire (by merger, consolidation or acquisition
of stock or assets) any corporation, partnership or other business
organization or division thereof or make any equity investments therein,
except for the acquisition of warrants in Financing Transactions (as
defined in the Merger Agreement) in the ordinary course of business
consistent with past practice; (iii) issue, sell, pledge, dispose of or
encumber any assets of the Company or its subsidiaries, except for
Financing Transactions and Securitization Transactions (as defined in the
Merger Agreement) in the ordinary course of business consistent with past
practice, or enter into any Securitization Transactions involving an amount
of more than $75 million (other than the Securitization Transaction of
which the Note Agreement referred to in clause (iv) below is a part) or
which involves financing costs and fees not consistent with past practice
or which involves an implicit interest rate not consistent with past
practice and except for the transfer of three used MRI systems to Melville
Holding Co. Inc.; (iv) incur any indebtedness for borrowed money or issue
any debt securities, except under the Revolving Credit Agreement described
on the Company Schedule to the Merger Agreement, or any renewal, extension
or replacement thereof on substantially the same terms (except for any
application or termination fees imposed in connection with any such
renewal, extension or replacement in an amount not to exceed $100,000), in
an aggregate amount not to exceed $75 million or pursuant to the Note
Agreement, dated
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<PAGE> 45
as of March 1, 1996, between the Company and the Purchasers named therein
in an aggregate amount not to exceed $75 million and on terms which are
consistent with past practice; (v) make any commitments or agreements for
capital expenditures or capital additions or betterments exceeding in the
aggregate $50,000 except such as may be involved in ordinary repair,
maintenance or replacement of its assets; (vi) enter into or modify any
material contract, lease or agreement except in the ordinary course of
business and consistent with past practice; or (vii) enter into any
contract, agreement, commitment or arrangement with respect to any of the
matters set forth in paragraph (b);
(c) not, directly or indirectly, sell or exercise any options,
warrants or rights of any kind to acquire any equity securities (other than
as permitted by paragraph (b) above) of another entity without the prior
written consent of FINOVA which will not be unreasonably withheld; and
(d) advise FINOVA of each business decision made by the senior
management of the Company with respect to matters involving more than
$2,000,000 in the case of Financing Transactions, or $50,000 in the case of
matters other than Financing Transactions before such decision is
implemented or announced, and shall make available, from time to time at
FINOVA's request, senior management of the Company to consult with senior
management of FINOVA concerning the conduct of the business of the Company.
Stockholder Vote. The Company has agreed to promptly as practicable after
the execution date of the Merger Agreement take all action necessary in
accordance with Rules 14a-1 et seq. of the Securities Exchange Act of 1934 (the
"Exchange Act"), the DGCL and its Certificate of Incorporation and Bylaws to
call, give notice of and convene a meeting on a date determined by the Company
and acceptable to FINOVA of the Company's stockholders to consider and vote upon
the approval and adoption of the Merger Agreement and for such other purposes as
may be necessary or desirable.
Board Recommendation. The Merger Agreement requires the Company's Board of
Directors to, subject to its fiduciary duties, (i) recommend without
qualification of any nature that the Company's stockholders vote to approve and
adopt the Merger Agreement and any other matters to be submitted to the
Company's stockholders in connection therewith as to which FINOVA has no
reasonable objection and (ii) use its reasonable best efforts to solicit and
secure from the Company's stockholders such approval and adoption, which efforts
may include without limitation, soliciting stockholder proxies therefor and to
advise FINOVA upon its request, from time to time, as to the status of the
stockholder vote then tabulated.
Indemnification of Directors and Officers. FINOVA has agreed that it would
not permit the Company or any other entity within its control, for a period of
six years after the Effective Time, to take any action to impair any exculpatory
or indemnification provisions now existing in the Certificate of Incorporation
or By-laws of the Company for the benefit of any individual who served as a
director or officer of the Company at any time prior to the Effective Time (the
"Indemnification Provisions"), except for any changes which are required to
conform with changes in applicable law and any changes which do not affect the
application of such Indemnification Provisions to acts or omissions of such
individuals prior to the Effective Time. From and after the Effective Time until
the sixth anniversary of the Closing Date, FINOVA has unconditionally and
irrevocably guaranteed the indemnification obligations of the Company
contemplated by the Merger Agreement and by the Company's Certificate of
Incorporation and By-laws. However, the obligations of FINOVA in this regard
shall not exceed an amount equal to the sum of the aggregate Merger Price paid
plus the limit of coverage of the Company's directors and officers liability
insurance policy on the date of the Merger Agreement ($2 million).
Notwithstanding the foregoing, FINOVA may cause the Company to merge with or
into FINOVA or any of its affiliates; provided, however, that any such merger
shall not alter or impair the Indemnification Provisions. The Merger Agreement
also permits the Company, prior to the Closing, to purchase continuation or
"tail" coverage on its directors and officers liability insurance for a term not
to exceed six years, and up to $195,000 of the cost of such coverage shall not
be deemed to reduce the Closing Date Book Value (as defined therein) or
otherwise affect the calculation of the Per Share Amount.
No Solicitation. Without the prior written consent of FINOVA, the Company
may not, and may not authorize or permit any of its subsidiaries or their
officers, directors, employees, financial advisors and agents
("Representatives") to, directly or indirectly, solicit, initiate or encourage
(including by way of furnishing
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<PAGE> 46
information) or to take any other action to facilitate knowingly any inquiries
or the making of any proposal which constitutes or may reasonably be expected to
lead to an Acquisition Proposal from any person, or engage in any discussion or
negotiations relating thereto (other than a response to any such person
referring them to the appropriate provisions of the Merger Agreement) or accept
any Acquisition Proposal. An "Acquisition Proposal" is defined to mean a
proposal or offer (other than by a party to the Merger Agreement) for a tender
or exchange offer, merger, consolidation or other business combination involving
the Company or its wholly owned subsidiaries, FSI Funding Corp. I and FSI
Funding Corp. II, or any proposal to acquire in any manner a substantial equity
interest in, or a substantial portion of the assets of, the Company, FSI Funding
Corp. I or FSI Funding Corp. II.
Notwithstanding the foregoing, the Company may at any time prior to the
time the Company's stockholders shall have voted to approve the Merger
Agreement, engage in discussions or negotiations with a third party who (without
any solicitation, initiation or encouragement, directly or indirectly, by or
with the Company or its Representatives after the date of the Merger Agreement)
seeks to initiate such discussions or negotiations and may furnish such third
party information concerning the Company and its business, properties and assets
if, and only to the extent that, (a) the third party has first made an
Acquisition Proposal that is financially superior to the proposed Merger and the
Board has determined that the funds necessary for the Acquisition Proposal are
reasonably likely to be available (as determined in good faith in each case by
the Company's Board of Directors after consultation with its financial advisors)
and the Company's Board of Directors shall conclude in good faith, after
considering applicable provisions of state law and after consultation with
outside counsel, that such action is necessary for the Board of Directors to act
in a manner consistent with its fiduciary duties under applicable law, and (b)
prior to furnishing such information to or entering into discussions or
negotiations with such person or entity otherwise prohibited under the terms of
the Merger Agreement, the Company provides prompt notice to FINOVA to the effect
that it is furnishing information to or entering into discussions or
negotiations with such person or entity, and receives from such person or entity
an executed confidentiality agreement in reasonable customary form. The Company
may also accept an Acquisition Proposal from a third party, as long as it
concurrently terminates the Merger Agreement pursuant to a provision of the
Merger Agreement that may result in the payment of a termination fee. See "The
Merger -- Termination, Amendment and Waiver -- Termination Fees" below. The
foregoing agreement shall not prohibit the Company from complying with Rule
14e-2 promulgated under the Exchange Act with regard to a tender or exchange
offer.
The Company must notify FINOVA orally and in writing of any such inquiries,
offers or proposals (including without limitation, the terms and conditions of
any such proposal and the identity of the person making it), within 24 hours of
the receipt thereof, and must keep FINOVA informed of the status and details of
any such inquiry, offer or proposal, and must give FINOVA three days advance
notice of any agreement to be entered into with, or any information to be
supplied to, any person making such inquiry, offer or proposal.
The Merger Agreement also requires the Company to immediately cease and
terminate any existing solicitation, initiation, encouragement, activity or
negotiation with any parties theretofore conducted by the Company or its
Representatives with respect to the foregoing.
Purchase Price Adjustment of Redeemable Warrants. Prior to the closing of
the Merger, the Company shall take such actions as may be necessary to reduce
the purchase price of the Redeemable Warrants issued under the Warrant Agreement
so that, on and after the Effective Time of the Merger, the purchase price of
the Redeemable Warrants shall be $6.30 per share. Therefore, the only right of
the holders of such Redeemable Warrants from and after the Effective Time shall
be to receive $6.40 in cash upon exercise of each such Redeemable Warrant for
$6.30. See "The Merger -- Options and Warrants" above.
CONDITIONS TO CLOSING
Conditions to the Obligations of the Company and FINOVA and Merger
Sub. The respective obligations of the Company, on the one hand, and FINOVA and
Merger Sub, on the other hand, to consummate the transactions contemplated in
the Merger Agreement are subject to the requirements that: (a) the Merger
Agreement shall have been approved and adopted by the requisite vote of the
stockholders of
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the Company in accordance with the DGCL; (b) no federal, state or foreign
statute, rule, regulation, executive order, decree or injunction shall have been
enacted, entered, promulgated or enforced by any court, arbitrator or
administrative, governmental or regulatory authority or body, domestic or
foreign, which is in effect and has the effect of making the Merger illegal or
otherwise prohibiting the consummation of the Merger; and (c) any waiting period
applicable to the consummation of the Merger under the Hart-Scott-Rodino
Anti-Trust Improvements Act of 1976, as amended (the "HSR Act"), shall have
expired or been terminated.
Conditions to the Obligations of the Company. The obligations of the
Company to consummate the transactions contemplated by the Merger Agreement are
subject to the further requirements that: (a) the representations and warranties
of FINOVA and Merger Sub contained in the Merger Agreement or in any other
document delivered pursuant thereto (without regard to any materiality
qualification contained therein) shall be true and correct when made and, except
to the extent such representations and warranties speak as of an earlier date,
on and as of the Closing Date with the same effect as if made on and as of the
Closing Date, except to the extent that any inaccuracies therein, alone or in
the aggregate, would not have a material adverse effect on FINOVA, and at the
closing of the Merger FINOVA shall have delivered to the Company a certificate
to that effect; (b) each of the obligations of FINOVA and Merger Sub to be
performed on or before the Closing Date pursuant to the terms of the Merger
Agreement shall have been duly performed in all material respects on or before
the Closing Date and at the Closing FINOVA shall have delivered to the Company a
certificate to that effect; and (c) the Company shall have received an opinion
dated the Closing Date of Morgan, Lewis & Bockius LLP, counsel for FINOVA and
Merger Sub, in form and substance reasonably satisfactory to the Company and its
counsel.
Conditions to the Obligations of FINOVA and Merger Sub. The obligations of
FINOVA and Merger Sub to consummate the transactions contemplated hereby are
subject to the further requirements that: (a) the representations and warranties
of the Company contained in the Merger Agreement or in any other document
delivered pursuant thereto (without regard to any materiality qualification
contained therein) shall be true and correct when made and, except to the extent
such representations and warranties speak as of an earlier date, on and as of
the Closing Date with the same effect as if made on and as of the Closing Date,
except to the extent that any inaccuracies therein, alone or in the aggregate,
would not have a Company Material Adverse Effect (as defined in the Merger
Agreement), and at the Closing the Company shall have delivered to FINOVA a
certificate to that effect; (b) each of the obligations of the Company to be
performed on or before the Closing Date pursuant to the terms of the Merger
Agreement shall have been duly performed in all material respects on or before
the Closing Date and at the closing of the Merger the Company shall have
delivered to FINOVA a certificate to that effect; (c) there shall not be any
securities, rights, warrants, options, or other instruments outstanding which,
after consummation of the Merger, would be convertible into or exercisable for
securities of the surviving corporation; (d) the Company shall have obtained the
consent or approval of each person or entity whose consent or approval shall be
required under any agreement or instrument in order to permit the consummation
of the transactions contemplated by the Merger Agreement, except those which the
failure to obtain would not, individually or in the aggregate, have a Company
Material Adverse Effect, all of which have been disclosed in writing to FINOVA;
(e) the Company shall have made arrangements to terminate all plans and
arrangements that relate to employees or non-employees which involve the
issuance or future issuance (contingent or otherwise) of, or the value of the
rights granted pursuant to which is measured by, equity securities, in each case
without liability or cost to FINOVA or Merger Sub and without imposing any
future obligations on FINOVA, Merger Sub or the Company or any of its
subsidiaries; (f) the Company shall have made arrangements to terminate all
agreements, arrangements or understandings between it or any of its
subsidiaries, on the one hand, and Sands and RAS on the other hand; (g) there
shall not have occurred a Company Material Adverse Effect or an event which
could reasonably be expected to result in a Company Material Adverse Effect,
other than the effects of changes that are generally applicable in (i) the
equipment leasing and financing industry, (ii) the United States economy, or
(iii) the United States securities markets if, in any of (i), (ii) or (iii), the
effect on the Company and its subsidiaries is not disproportionate relative to
the effect on FINOVA and its subsidiaries; (h) the number of Dissenting Shares
shall be less than or equal to 10% of the number of issued and outstanding
shares of Company Common Stock; (i) FINOVA shall have received an opinion dated
the Closing Date from each of Hale and Dorr and Murtha, Cullina, Richter and
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<PAGE> 48
Pinney, counsel for the Company, in form and substance reasonably satisfactory
to FINOVA and its counsel; (j) the Per Share Amount shall have been finally
determined and shall not be less than $6.35; and (k) the Company shall have
demonstrated to FINOVA's reasonable satisfaction that delinquencies in lease
payments due and owing to the Company and 31 days or more past due (on a
contractual basis) do not exceed 4.25% of total lease contracts receivable as of
the Closing Date.
PER SHARE AMOUNT
As indicated above, FINOVA and Merger Sub are not obligated to proceed with
and consummate the Merger if, among other things, the "Per Share Amount" is less
than $6.35. See "The Merger -- Conditions to Closing -- Conditions to the
Obligations of FINOVA and Merger Sub." Generally speaking, the Per Share Amount
is intended to function as an objective means by which (a) the Company's
stockholders could receive payment for the projected increase in value of the
Company from December 31, 1995 (which was the date of the most recent financial
information utilized by FINOVA in connection with its internal financial
investigation and valuation of the Company prior to the execution of the Merger
Agreement) to the Closing Date and (b) FINOVA could assure itself that the
projected increase in value actually takes place. The calculation reflects the
premise that FINOVA valued the Company at $6.00 per share as of December 31,
1995. The calculation then adds to that amount the Company's pre-tax earnings
generated during the period commencing on January 1, 1996 and ending on the
Closing Date plus the amount, if any, by which the Company's general unallocated
reserves exceed $1,500,000 on the Closing Date. In calculating the Company's
earnings during this period, the Merger Agreement provides for certain
adjustments, which are intended, to the extent possible, to ensure that such
adjusted pre-tax earnings create additional value in the Company. Based on the
Company's then-current projections, FINOVA agreed to fix the Merger Price at
$6.40 per share. The Per Share Amount attempts to ensure that the value of the
Company, in fact, increases by at least $.35 per share, as calculated in
accordance with the Merger Agreement. The amount of the Per Share Amount and the
method by which it is to be calculated were the subject of extensive
negotiations between the parties and, except as described in general terms
above, do not necessarily bear any direct relationship to the Merger Price of
$6.40 per share.
In more specific terms, the Merger Agreement provides that the Per Share
Amount shall be equal to the sum of (i) $6.00 plus (ii) the quotient, rounded to
the nearest penny, of (A) the sum of the amount, if any, by which the Closing
Date Book Value of the Company exceeds $26,185,000, plus the amount, if any, by
which the Closing Date Loss Reserves exceeds $1,500,000, divided by (B) the
number of shares of Common Stock outstanding immediately prior to the Closing
Date. At December 31, 1995 and June 30, 1996, the Book Value of the Company was
$26,185,000 and $27,823,000, respectively. At December 31, 1995 and June 30,
1996, the Company's general unallocated loss reserves were $1,205,000 and
$925,000, respectively.
The "Closing Date Book Value" is defined to mean the Valuation Date Book
Value adjusted by an estimated amount agreed to by the Company and FINOVA as to
the probable change in the Valuation Date Book Value between the Valuation Date
and the Closing Date, and reduced by an amount equal to the Option Spread
Amount. The "Valuation Date Book Value" is defined to mean the consolidated net
book value of the Company and its subsidiaries as of the Valuation Date, as
shown on the Valuation Date Balance Sheet. The "Option Spread Amount" is defined
to mean the amount by which the product of the Merger Price multiplied by the
number of shares of Common Stock issuable upon the exercise of options or
warrants, outstanding immediately prior to the Effective Time which would be
exercisable at any time to purchase shares of Common Stock at an exercise price
per share equal to or less than the Merger Price, exceeds the product of the
weighted average exercise price (as of the Effective Time) of all such options
or warrants multiplied by the number of shares of Common Stock issuable upon the
exercise of such options or warrants. At June 30, 1996, the Option Spread Amount
was approximately $2,757,000, based upon the number of shares of Common Stock
issuable upon the exercise of options and warrants which would be exercisable
immediately prior to the Effective Time at their respective exercise prices as
of the Effective Time. The Company cannot predict what the Option Spread Amount
will be as of the Effective Time due to the possible exercise of options after
the date of this Proxy Statement and prior to the Effective Time.
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The "Closing Date Loss Reserves" is defined to mean the Valuation Date Loss
Reserves adjusted by an estimated amount agreed to between the Company and
FINOVA as to the probable change in the Valuation Date Loss Reserves between the
Valuation Date and the Closing Date. The "Valuation Date Loss Reserves" is
defined to mean the amount of the general unallocated asset contra-accounts
which are included in allowances for doubtful accounts (as opposed to reserves
which are specifically allocated to particular doubtful accounts) on the
Valuation Date Balance Sheet. For purposes of the foregoing, the Merger
Agreement provides that the Company may allocate all or any part of its pre-tax
earnings to its Valuation Date Loss Reserves in developing the estimation of
Closing Date Loss Reserves.
For purposes of the foregoing, the Merger Agreement provides that the
Company shall prepare a balance sheet of the Company and its subsidiaries (the
"Valuation Date Balance Sheet"), as of the close of business on the last day of
the calendar month immediately preceding the month in which the Special Meeting
is held (the "Valuation Date"). The Valuation Date Balance Sheet shall be
prepared by the Company, reviewed by FINOVA and FINOVA's independent public
accountants and approved by FINOVA (such approval not to be unreasonably
withheld), together with the related statement of income for the period
commencing on January 1, 1996 and ending on the Valuation Date (collectively,
the "Valuation Financial Statements").
The Company may, in the preparation of the Valuation Date Balance Sheet,
allocate all or any part of its pre-tax earnings, accrued from January 1, 1996
through the Closing Date, to its Valuation Date Loss Reserves to the extent that
such allocations do not reduce the Company's Total Stockholders' Equity, as of
the closing, below $26,185,000. In addition, there shall be accrued as
liabilities on the Valuation Financial Statements (i) an amount equal to the
amount, if any, by which all legal, accounting, auditing, investment banking or
financial advisory fees and proxy printing and mailing costs and other related
expenses reasonably estimated to be incurred by the Company or its subsidiaries
in connection with the Merger Agreement and the transactions contemplated
thereby for all periods through the Effective Time, whether or not billed or
payable as of the Valuation Date ("Transaction Costs") and any amounts paid or
payable by the Company to the Underwriters of the Initial Public Offering to
terminate their rights under the Underwriting Agreement and any related
agreements, exceeds $400,000, and (ii) all obligations under all employment
arrangements or consulting arrangements to which the Company is a party with
respect to periods commencing on, or after or as a result of the closing,
excluding however, the Company's obligations under its consulting agreement with
Mr. Randolph and the Change of Control Agreement with Mr. Maxwell. The Company
believes payments to the Underwriters to terminate their rights under the
Underwriting Agreement and related agreements will approximate $355,000. The
Company cannot be certain as to the amount of additional Transaction Costs that
it will incur. The Company does not anticipate incurring material obligations
under employment arrangements or consulting arrangements commencing on, or
after, or as a result of the Closing, beyond the exclusions mentioned within
this paragraph. In addition, there shall be excluded from the Valuation
Financial Statements (i) any gains attributable to the Company's exercise on or
after January 1, 1996 of any options, warrants or rights of any kind to acquire
any equity securities of another entity, (ii) up to an aggregate of $400,000
with respect to both any Transaction Costs and any amounts paid or payable by
the Company to the Underwriters of the Company's Initial Public Offering to
terminate their rights under the Underwriting Agreement and any related
agreements, and (iii) up to $195,000 with respect to the Company's purchase of
"tail" coverage on its directors and officers liability insurance. The Company
has received an informal and preliminary quotation for the continuation of its
directors and officers liability insurance for a single premium of approximately
$190,000. The Company can provide no assurance, however, that it will be able to
obtain such coverage or what cost it would incur if it shall be able to obtain
such coverage. The Merger Agreement expressly provides that the Valuation
Financial Statements may reflect the payment by Dr. Bronfin to the Company of up
to $250,000 and, upon the express written consent of FINOVA which shall not be
unreasonably withheld, of additional sums to assist the Company in achieving a
Per Share Amount of at least $6.35. Except for the foregoing negotiated
adjustments, the Valuation Financial Statements shall be prepared in accordance
with generally accepted accounting principles applied on a basis consistent with
the accounting principles and practices followed in preparing the Company's 1995
audited financial statements.
As an inducement for the Company to enter into the Merger Agreement, Dr.
Bronfin and the Company have entered into the Subsidy Payment Agreement,
pursuant to which Dr. Bronfin agreed to make a payment
40
<PAGE> 50
to the Company in an amount up to $250,000 to the extent the Per Share Amount is
less than $6.35, such that the Per Share Amount following the Subsidy Payment is
not less than $6.35. As noted above, the Merger Agreement expressly provides
that, in the event that such a Subsidy Payment is made, it shall be counted in
the calculation of the Per Share Amount. However, there can be no assurance that
the Subsidy Payment will be sufficient to close any shortfall in the Per Share
Amount from $6.35. See "Special Factors -- Interests of Certain Persons in the
Merger -- Subsidy Payment Agreement Between the Company and Dr. Bronfin."
The Company estimates that, if the Closing took place on June 30, 1996, the
Per Share Amount would have been approximately $6.32, resulting in a Subsidy
Payment of approximately $142,000. Based on current forecasts and projections,
the Company estimates that the Per Share Amount would be approximately $6.49 as
of August 30, 1996, reflecting a gross "safety margin" of approximately $745,000
before any Subsidy Payment would be required. It should be noted, however, that
these figures represent only the Company's internal estimates and projections
and have not been reviewed or approved by FINOVA or the Company's independent
public accountants. There can be no assurance that the Per Share Amount (after
giving effect to the Subsidy Payment) will equal or exceed $6.35.
Any dispute which may arise between the Company and FINOVA as to the
preparation of the Valuation Financial Statements, including the determination
of the Closing Date Book Value or the Closing Date Loss Reserves, or the
calculation of the Per Share Amount is required to be resolved as follows: (a)
FINOVA must notify the Company in writing within 10 business days after its
receipt of the report of the Company that FINOVA disputes such matters and such
notice must specify in reasonable detail the nature of the dispute; (b) during
the three business day period following the date of such notice, the Company and
FINOVA are required to attempt to resolve such dispute and to determine the
appropriateness of the Per Share Amount; and (c) if at the end of such three
business day period, FINOVA and the Company have failed to reach a written
agreement with respect to such dispute, the matter must be referred to Price
Waterhouse LLP, independent certified public accountants (the "Arbitrator"),
which is to act as an arbitrator and issue its report as to the Valuation
Financial Statements within 30 days after such dispute is referred to it. Unless
otherwise ordered by the Arbitrator, each of the parties is required to bear all
costs and expenses incurred by it in connection with such arbitration, except
that the fees and expenses of the Arbitrator are to be borne equally by the
Company and FINOVA. The decision of the Arbitrator shall be final and binding
and there is no right of appeal therefrom.
TERMINATION, AMENDMENT AND WAIVER
Termination. The Merger Agreement may be terminated and the transactions
contemplated thereby may be abandoned at any time prior to the Closing Date by
the mutual written consent of each of FINOVA, Merger Sub and the Company.
The Merger Agreement may be terminated by either FINOVA or the Company if
(a) the Merger shall not have been consummated on or before (i) September 1,
1996 if the SEC does not review the Proxy Statement or if no matter is under
dispute relative to the calculation of the Per Share Amount, (ii) September 15,
1996 if the SEC reviews the Proxy Statement or (iii) 30 days after the referral
to the Arbitrator of any disputed matters relative to the calculation of the Per
Share Amount (the "Termination Date"); (b) a court, arbitrator or
administrative, governmental or regulatory authority or body, domestic or
foreign, shall have issued an order, decree or ruling or taken any other action
(which order, decree or ruling the parties are required to use their
commercially reasonable efforts to lift), in each case permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the Merger
Agreement, and such order, decree, ruling or other action shall have become
final and nonappealable; (c) the other party shall have breached, or failed to
comply with, in any material respect any of its obligations under the Merger
Agreement or any representation or warranty made by the other shall have been
incorrect in any material respect when made or shall have since ceased to be
true and correct in any material respect, and which breach shall not have cured,
in the case of a representation or warranty, prior to closing of the Merger, or
in the case of a covenant or agreement within 30 days after notice thereof and,
in the case of a breach, failure or misrepresentation by the Company, such
breach, failure or misrepresentation, individually or in the aggregate, results
or would reasonably be expected to result in a Company Material Adverse Effect
(as defined in the
41
<PAGE> 51
Merger Agreement); or (d) the required approvals of the stockholders of the
Company shall fail to have been obtained at the Special Meeting, including any
adjournments thereof.
The Merger Agreement may be terminated by FINOVA (a) after the occurrence
of an event which could reasonably be expected to result in a Company Material
Adverse Effect, other than the effects of changes that are generally applicable
in (i) the equipment leasing and financing industry, (ii) the United States
economy, or (iii) the United States securities markets if, in any of (i), (ii)
or (iii), the effect on the Company and its subsidiaries is not disproportionate
relative to the effect on FINOVA and its subsidiaries; (b) if the Board of
Directors of the Company or any committee of the Board of Directors of the
Company (i) withdraws or modifies in any adverse manner its approval or
recommendation of the Merger Agreement, (ii) fails to reaffirm such approval or
recommendation upon FINOVA's reasonable request, or (iii) approves or recommends
any acquisition of the Company or a material portion of its assets or any tender
offer for shares of its capital stock, in each case other than by FINOVA or an
affiliate thereof.
The Merger Agreement may be terminated by the Company at any time prior to
the approval of the Merger Agreement by the stockholders of the Company, upon
three days' prior notice to FINOVA, if, as a result of an Acquisition Proposal
(as defined in the Merger Agreement) by a party other than FINOVA or any of its
affiliates, the Board of Directors of the Company determines in good faith that
their fiduciary obligations under applicable law require that such Acquisition
Proposal be accepted. In order to terminate the Merger Agreement under this
provision, (a) the Board of Directors of the Company shall have concluded in
good faith, after considering applicable provisions of state law and after
giving effect to all concessions which may be offered by FINOVA pursuant to
clause (b) below and after consultation with outside counsel, that such action
is necessary for the Board of Directors to act in a manner consistent with its
fiduciary duties under applicable law and (b) prior to any such termination, the
Company shall, and shall cause its respective financial and legal advisors to,
negotiate with FINOVA for a maximum of three business days to make such
adjustments in the terms and conditions of the Merger Agreement as would enable
the Company to proceed with the transactions contemplated therein.
Effect of Termination. The Merger Agreement generally provides that, in
the event of its termination, the Merger Agreement shall become void and of no
effect, and there shall be no liability on the part of FINOVA, Merger Sub or the
Company, except for the termination fees described below and except that (a)
each party shall be liable for the payment of its own expenses and shall
continue to be bound by the confidentiality agreement executed between the
parties in connection with the Merger Agreement and (b) no party shall be
relieved from liability for any willful breach of the Merger Agreement.
Notwithstanding the general agreement between the parties with respect to the
payment of their own expenses, the Merger Agreement provides that, in the event
the Merger Agreement is terminated, the Company shall reimburse FINOVA for
one-half of the filing fees paid by it under the HSR Act.
Termination Fees. In the event that FINOVA terminates the Merger Agreement
due to a breach of any representation or warranty of the Company set forth in
Article II of the Merger Agreement, the Company is required to pay $750,000 to
FINOVA within five days after such termination if the Company knew or in the
exercise of reasonable diligence should have known that such representation or
warranty was not true in all material respects when made.
In the event that FINOVA terminates the Merger Agreement because the Board
of Directors of the Company or any committee of the Board of Directors of the
Company (a) withdraws or modifies in any adverse manner its approval or
recommendation of the Merger Agreement, (b) fails to reaffirm such approval or
recommendation upon FINOVA's reasonable request, or (c) approves or recommends
any acquisition of the Company or a material portion of its assets or any tender
offer for shares of its capital stock (in each case other than by FINOVA or an
affiliate thereof), the Company is required to reimburse FINOVA within three
days after such termination for all out-of-pocket costs and expenses incurred by
FINOVA or its affiliates (including without limitation all filing fees under the
HSR Act) in connection with the transactions contemplated by the Merger
Agreement, not to exceed $400,000. In the event of the foregoing, FINOVA must
provide the Company with an itemized listing of all such fees and expenses, and
the Company is obligated to pay such amount within five (5) business days after
the date of receipt of such listing.
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<PAGE> 52
In the event that (a) the Merger Agreement (i) is terminated by the Company
or FINOVA because the Company is unable to obtain the requisite stockholder
approval of the Merger Agreement and the transactions contemplated thereby or by
FINOVA because the Board of Directors of the Company or any committee of the
Board of Directors of the Company (A) shall withdraw or modify in any adverse
manner its approval or recommendation of the Merger Agreement, (B) shall fail to
reaffirm such approval or recommendation upon FINOVA's reasonable request, or
(C) shall approve or recommend any acquisition of the Company or a material
portion of its assets or any tender offer for shares of its capital stock (in
each case other than by FINOVA or an affiliate thereof), or (ii) is terminated
by FINOVA as a result of the Company's breach of the nonsolicitation provision
set forth in the Merger Agreement (see "Merger Agreement -- Additional
Agreements -- No Solicitation" above), which breach is not cured within 30 days
after notice thereof to the Company, and (b) within 12 months from the date of
termination the Company shall enter into a definitive agreement relating to an
Acquisition Proposal, the Company or any successor thereto shall pay to FINOVA a
cash termination fee of $1,500,000 within five business days after the execution
of such definitive agreement.
The Merger Agreement provides that FINOVA or Merger Sub, as the case may
be, shall be entitled, if at all, only to one payment, in the event of a
termination of the Merger Agreement, which payment shall be the largest of the
payments to which FINOVA or Merger Sub would be entitled to pursuant to the
foregoing provisions of the Merger Agreement.
Amendment. The Merger Agreement may be amended by FINOVA and the Company
pursuant to a writing adopted by action taken by FINOVA and the Company at any
time before the Effective Time; provided, however, that, after approval of the
Merger Agreement by the stockholders of the Company, no amendment may be made
which would alter or change the amount or kinds of consideration to be received
by the Company's stockholders. The Merger Agreement may not be amended except by
an instrument in writing signed by the parties.
Waiver. At any time before the Effective Time, any party to the Merger
Agreement may (a) extend the time for the performance of any of the obligations
or other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained in the Merger Agreement or in any
document delivered pursuant thereto, and (c) waive compliance with any of the
agreements or conditions contained in the Merger Agreement. Any agreement on the
part of a party to any such extension or waiver shall be valid only as against
such party and only if set forth in an instrument in writing signed by such
party.
Arbitration. All controversies, disputes or claims ("Disputes") arising
among the parties relating to the Merger Agreement, except for those concerning
the calculation of the Per Share Amount, shall be settled by arbitration in
accordance with such rules as may be agreed upon by the parties, or, failing
agreement on such rules within thirty (30) days of written request for such
agreement, in accordance with the Rules for Commercial Arbitration of the
American Arbitration Association ("AAA"), as amended from time to time and as
modified by the Merger Agreement. Disputes shall be presented before a single
arbitrator (the "AAA Arbitrator") sitting in Wilmington, Delaware. The decision
of the AAA Arbitrator shall be final and binding, except as provided in the
Federal Arbitration Act and except for errors of law based on findings of fact.
The parties have irrevocably submitted to the exclusive jurisdiction of the
courts of Delaware and expressly waive their rights to a trial by jury.
Plans of the Company if the Merger is Not Consummated. If the stockholders
fail to approve and adopt the Merger Agreement, the Merger and related
transactions will not be consummated and the Merger Agreement and ancillary
agreements will be terminated. Costs incurred by the Company in contemplation of
the Merger would have an adverse impact on the Company's 1996 earnings. It is
not known whether a sale of the Company would occur in the foreseeable future.
The Company believes that its revolving credit facility, which will expire on
September 30, 1996, can be renewed thereby allowing the Company to continue to
fund new leases, although there can be no assurance that this will be the case.
In addition, the Company would expect to need additional equity capital and/or
subordinated debt during 1997 and 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Special Factors -- Background; Reasons for the Merger."
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<PAGE> 53
SOURCE AND AMOUNT OF FUNDS
Approximately $37.3 million will be required to pay the Merger Price to the
holders of all shares of Common Stock and Common Stock equivalents outstanding
as of the Effective Time (assuming no holders of shares of Common Stock exercise
their statutory dissenters' rights of appraisal). It is currently anticipated
that all of such funds will be paid from FINOVA's available cash balances and
borrowings from available sources. FINOVA's available cash balances and unused
borrowing capacity substantially exceed the aggregate Merger Price.
ACCOUNTING TREATMENT
The Company understands that FINOVA will account for the Merger as a
"purchase" under generally accepted accounting principles.
REGULATORY APPROVAL
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger cannot be consummated until notifications
have been given and certain information has been furnished to the FTC and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
specified waiting period requirements have been satisfied. FINOVA and the
Company filed notification and report forms under the HSR Act with the FTC and
the Antitrust Division on June 6, 1996 and June 7, 1996, respectively. The
applicable waiting period under the HSR Act terminated on July 7, 1996. At any
time before or after consummation of the Merger, the Antitrust Division or the
FTC could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of FINOVA or the
Company. At any time before or after the Effective Time, and notwithstanding
that the HSR Act waiting period has expired, any state could take such action
under the antitrust laws as it deems necessary or desirable. Such action could
include seeking to enjoin the consummation of the Merger or seeking divestiture
of the Company or businesses of FINOVA or the Company by FINOVA. Private parties
may also seek to take legal action under the antitrust laws under certain
circumstances.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under the DGCL, any stockholder who does not wish to accept the Merger
Price provided for in the Merger Agreement has the right to dissent from the
Merger and to seek an appraisal of, and to be paid the fair cash value
(exclusive of any element of value arising from the accomplishment or
expectation of the Merger) for, his or her shares of Common Stock (the
"Dissenting Shares") provided that the stockholder complies with the provisions
of Section 262 of the DGCL ("Appraisal Rights").
The following is intended as a brief summary of the material provisions of
the statutory procedures required to be followed by a stockholder to dissent
from the Merger and perfect the stockholder's Appraisal Rights. This summary,
however, is not a complete statement of all applicable requirements and is
qualified in its entirety by reference to Section 262 of the DGCL, the text of
which is set forth in Annex C hereto.
If any stockholder elects to demand appraisal of his or her shares of
Common Stock, the stockholder must satisfy each of the following conditions:
(i) the stockholder must deliver to the Company a written demand for
appraisal of his or her shares of Common Stock before the vote with respect
to which the Merger is taken (this written demand for appraisal must be in
addition to and separate from any proxy or vote abstaining from or against
the Merger; voting against or failing to vote for the Merger by itself does
not constitute a demand for appraisal within the meaning of Section 262);
and
(ii) the stockholder must not vote in favor of the Merger (an
abstention or failure to vote will satisfy this requirement, but a vote in
favor of the Merger, by proxy or in person, will constitute a waiver of the
stockholder's Appraisal Rights in respect of the shares of Common Stock so
voted and will nullify any previously filed written demands for appraisal).
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<PAGE> 54
Within ten days after the Effective Time, the Company must give written
notice that the Merger has become effective to each stockholder who so filed a
written demand for appraisal and who did not vote in favor of the Merger. Within
120 days after the Effective Time, but not thereafter, either the Company or any
stockholder who has complied with the requirements of Section 262 of the DGCL
may file a petition in the Delaware Court of Chancery (the "Court") demanding a
determination of the fair value of the shares of Common Stock held by all
stockholders entitled to appraisal. The Company does not presently intend to
file such a petition in the event there are dissenting stockholders. INASMUCH AS
THE COMPANY HAS NO OBLIGATION TO FILE SUCH A PETITION, THE FAILURE OF A
STOCKHOLDER TO DO SO WITHIN THE PERIOD SPECIFIED COULD NULLIFY SUCH
STOCKHOLDER'S PREVIOUSLY WRITTEN DEMAND FOR APPRAISAL. At any time within 60
days after the Effective Time, any stockholder who has demanded appraisal has
the right to withdraw the demand and to accept the payment of the Merger Price
pursuant to the Merger Agreement.
If any stockholder fails to comply with the above provisions and the Merger
becomes effective, the stockholder will be entitled to receive the Merger Price
as provided for in the Merger Agreement but will have no Appraisal Rights with
respect to his or her shares of Common Stock.
All demands for appraisal should be addressed to Financing for Science
International, Inc., 10 Waterside Drive, Farmington, Connecticut, 06032-3065,
Attention: Secretary, before the vote on the Merger Agreement is taken at the
Special Meeting, and should be executed by, or on behalf of, the holder of
record of the shares of Common Stock. The demand must reasonably inform the
Company of the identity of the stockholder and the intention of the stockholder
to demand appraisal of his or her shares of Common Stock.
To be effective, a demand for appraisal must be made by or in the name of
the registered stockholder, fully and correctly, as the stockholder's name
appears in his or her stock certificate(s) and cannot be made by the beneficial
owner if the beneficial owner does not also hold the shares of Common Stock of
record. The beneficial holder must, in such cases, have the registered owner
submit the required demand in respect of such shares of Common Stock.
If shares of Common Stock are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, execution of a demand for appraisal
should be made in such a capacity, and if the shares of Common Stock are owned
of record by more than one person, as in joint tenancy or tenancy in common, the
demand should be executed by or for all joint owners. An authorized agent,
including one for two or more joint owners, may execute the demand for appraisal
for a stockholder of record; however, the agent must identify the record owner
or owners and expressly disclose the fact that, in executing the demand, he or
she is acting as agent for the record owner. A record owner, such as a broker,
who holds shares of Common Stock as a nominee for others, may exercise his or
her right of appraisal with respect to the shares of Common Stock held for one
or more beneficial owners, while not exercising this right for other beneficial
owners. In such case, the written demand should state the number of shares of
Common Stock as to which appraisal is sought. Where no number of shares of
Common Stock is expressly mentioned, the demand will be presumed to cover all
shares of Common Stock held in the name of such record owner.
If a petition for appraisal is duly filed by a stockholder and a copy
thereof is delivered to the Company, the Company will then be obligated within
20 days thereafter to provide the Court with a duly verified list containing the
names and addresses of all stockholders who have demanded an appraisal of their
shares of Common Stock. After notice to such stockholders, the Court is
empowered to conduct a hearing upon the petition, to determine those
stockholders who have complied with Section 262 of the DGCL and who have become
entitled to Appraisal Rights. The Court may require the stockholders who have
demanded payment for their shares of Common Stock to submit their stock
certificates to the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
After determination of the stockholders entitled to an appraisal, the Court
will appraise the shares of Common Stock, determining their fair value exclusive
of any element of value arising from the accomplishment or expectation of the
Merger. When the value is so determined, the Court will direct the payment by
the Company of such value, with interest thereon accrued during the pendency of
the proceeding if the Court so
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<PAGE> 55
determines, to the stockholders entitled to receive the same, upon surrender to
the Company by such holders of the certificates representing such shares of
Common Stock. In determining fair value, the Court is required to take into
account all relevant factors.
Stockholders considering seeking appraisal should be aware that the fair
value of their shares of Common Stock determined under Section 262 of the DGCL
could be more, the same, or less than the Merger Price that they are entitled to
receive pursuant to the Merger Agreement if they do not seek appraisal of their
shares of Common Stock, and that investment banking opinions as to fairness from
a financial point of view are not necessarily opinions as to fair value under
Section 262 of the DGCL.
Costs of the appraisal proceeding may be imposed upon the parties thereto
(i.e., the Company and the stockholders participating in the appraisal
proceeding) by the Court as the Court deems equitable in the circumstances. Upon
the application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, to be charged pro rata against the value of all
shares of Common Stock entitled to appraisal.
Any stockholder who demands Appraisal Rights will not, after the Effective
Time, be entitled to vote shares of Common Stock subject to such demand for any
purpose or to receive payments of dividends or any other distribution with
respect to such shares of Common Stock (other than with respect to payment as of
a record date prior to the Effective Time) or to receive the Merger Price
pursuant to the Merger Agreement; however, if no petition for appraisal is filed
within 120 days after the Effective Time, or if such stockholder delivers a
written withdrawal of his or her demand for appraisal and an acceptance of the
Merger, either within 60 days after the Effective Time, or thereafter with
written approval of the Company, then the right of such stockholder to appraisal
will cease and such stockholder will be entitled to receive the Merger Price
without interest.
In addition, FINOVA and Merger Sub are not obligated to consummate the
Merger if, among other things, the number of Dissenting Shares is greater than
10% of the number of issued and outstanding shares of Company Common Stock.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DGCL FOR
PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. IN VIEW OF
THE COMPLEXITY OF SECTION 262 OF THE DGCL, STOCKHOLDERS OF THE COMPANY WHO ARE
CONSIDERING DISSENTING FROM THE MERGER SHOULD CONSULT THEIR LEGAL ADVISORS.
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<PAGE> 56
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
Except as otherwise stated below, the following table sets forth
information regarding beneficial ownership of shares of Common Stock as of
February 7, 1996, by each stockholder known to the Company to be the beneficial
owner of more than 5% of the outstanding shares of Common Stock, each director,
each executive officer listed in the Summary Compensation Table included in the
Company's Form 10-K for the year ended December 31, 1995, and all executive
officers and directors as a group. Persons named in the following table had sole
voting and investment power with respect to all shares shown as beneficially
owned by them, subject to community property laws where applicable and other
information contained in the footnotes to the table. Information with respect to
beneficial ownership was based upon the Company's Common Stock records and data
supplied to the Company by its stockholders.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP(1) OF CLASS
- ------------------------------------------------------------------ ------------ --------
<S> <C> <C>
5% BENEFICIAL OWNERS OTHER THAN DIRECTORS
Electra Investment Trust, P.L.C. (2)(3)........................... 1,260,000 23.08
65 Kingsway
London WC2B 6QT
England
Fortis Private Capital Funds (3)(4)............................... 480,000 8.91
One Chase Manhattan Plaza, 41st Floor
New York, New York 10005
William Harris Investors, Inc.(5)................................. 594,800 10.32
2 North LaSalle Street, Suite 400
Chicago, Illinois 60602
Irving B. Harris(6)............................................... 333,000 5.97
2 North LaSalle Street, Suite 505
Chicago, Illinois 60602
DIRECTORS AND OTHER NAMED EXECUTIVE OFFICERS
Barry R. Bronfin, Sc.D.(7)........................................ 1,216,440 22.49
10 Waterside Drive
Farmington, Connecticut 06032
Robert S. Lees, M.D.(8)........................................... 19,075 *
Robert W. Maxwell(9).............................................. 140,000 2.54
Geoffrey W. Nelson(10)............................................ 2,000 *
Martin S. Orland(11).............................................. 489,250 9.06
John M. Randolph(12).............................................. 73,250 1.35
Steven B. Sands(13)............................................... 480,600 8.30
Diane M. Smith(14)................................................ 1,268,250 23.20
Gerald A. Michaud................................................. -- --
Robert D. Pomeroy, Jr.(15)........................................ 70,000 1.28
Richard Schwartz(16).............................................. 72,500 1.33
All executive officers and directors as a group (17).............. 3,014,300 62.32
</TABLE>
- ---------------
* Less than 1%
(1) Except as otherwise noted, the persons named in the table have sole voting
and investment power with respect to all shares shown as beneficially owned
by them.
(2) Includes 70,000 shares issuable pursuant to Redeemable Warrants exercisable
within 60 days. Diane M. Smith, a director of the Company, is a Senior Vice
President of Electra, Inc., the U.S. investment advisor of Electra
Investment Trust, P.L.C. ("Electra P.L.C.").
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<PAGE> 57
(3) Electra P.L.C., AMEV Venture Associates III, L.P. ("AMEV") and AMEV Venture
Associates III-International, L.P. ("AMEV-International") have certain
rights of refusal and co-sale with respect to the shares of Common Stock
beneficially owned by Dr. Bronfin.
(4) Consists of 356,640 shares held by AMEV and 123,360 shares held by
AMEV-International, each of which has shared voting and disposition power
for the other's shares and has the same address as Fortis Private Capital,
Inc. ("Fortis"). Fortis is an indirectly wholly-owned subsidiary of the
corporation which controls the general partner of AMEV-International, and
Fortis wholly owns the corporate general partner of AMEV. Mr. Orland, a
director of the Company, is the President of Fortis and shares voting power
for the shares with the other directors of the two general partners.
(5) Includes the 333,000 shares beneficially owned by Irving B. Harris, the
Chairman of William Harris Investors Inc. All shares have been acquired on
behalf of discretionary clients who are entitled to receive any dividends
and any proceeds from sale of the shares. The power to vote is shared as to
all the shares. 374,000 of the shares are issuable pursuant to Redeemable
Warrants exercisable within 60 days.
(6) Includes 185,000 shares issuable pursuant to Redeemable Warrants
exercisable within 60 days of which power to vote or dispose is shared for
75,000 shares held by the William Harris & Co. Employee Profit Sharing
Trust, a retirement plan in which Mr. Harris has an approximate 55.45%
beneficial interest. William Harris & Co., the plan sponsor, is a holding
company of which Mr. Harris is the sole shareholder, the President and a
director. Ownership of all the shares also is reported by William Harris
Investors, Inc., of which Mr. Harris is the Chairman and 49.5% shareholder.
Power to vote or dispose is shared for 19,000 shares held by the Irving
Harris Foundation.
(7) Includes 250,000 shares held in two trusts for the benefit of Dr. Bronfin's
children, for which Dr. Bronfin's wife is trustee. Dr. Bronfin disclaims
beneficial ownership of such shares. Also includes 10,000 shares issuable
pursuant to Redeemable Warrants and 9,240 shares issuable pursuant to stock
options exercisable within 60 days.
(8) Includes 9,075 shares issuable pursuant to stock options exercisable within
60 days.
(9) Includes 120,000 shares issuable pursuant to stock options exercisable
within 60 days.
(10) Includes 1,000 shares issuable pursuant to Redeemable Warrants exercisable
within 60 days.
(11) Includes 480,000 shares held by affiliates of Fortis as to which Mr. Orland
shares voting power and does not have disposition power, and 500 shares
issuable pursuant to Redeemable Warrants and 8,250 shares issuable pursuant
to stock options exercisable within 60 days.
(12) Mr. Randolph disclaims beneficial ownership of 5,000 of the shares held by
the Kathleen M. Randolph Trust (1991). Shares directly owned by Mr.
Randolph include 30,000 shares issuable pursuant to Redeemable Warrants
exercisable within 60 days and 8,250 shares issuable pursuant to stock
options exercisable within 60 days.
(13) Consists of (i) 13,500 shares owned by a limited partnership that Mr. Sands
controls, (ii) 67,100 shares owned by limited partnerships of which Mr.
Sands is a controlling shareholder, officer and director of the corporate
general partner, and (iii) 400,000 shares underlying certain warrants
exercisable within 60 days (the "Underwriters' Warrants") owned by a
limited partnership that Mr. Sands controls that had been acquired by Sands
Brothers in connection with the Initial Public Offering and pursuant to
which there may be acquired (A) 200,000 shares, and (B) certain Redeemable
Warrants exercisable within 60 days for 200,000 shares.
(14) Includes 1,260,000 shares held by Electra P.L.C. and 8,250 shares issuable
pursuant to stock options exercisable within 60 days, as to both of which
Ms. Smith disclaims beneficial ownership.
(15) Includes 70,000 shares issuable pursuant to stock options exercisable
within 60 days.
(16) Includes 72,500 shares issuable pursuant to stock options exercisable
within 60 days.
(17) Includes 1,260,000 shares owned by Electra P.L.C., 480,000 shares owned by
Fortis, 480,600 shares owned by Mr. Sands, 403,065 shares issuable pursuant
to stock options exercisable within 60 days, and 250,000 shares held in
trusts for which Dr. Bronfin's wife is trustee.
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<PAGE> 58
BUSINESS OF THE COMPANY
The Company is engaged in the business of leasing essential equipment to
customers in its specialized markets which include technology-based
corporations, research facilities, and healthcare providers. The portfolio
consists of equipment leased to customers engaged in electronics, life sciences,
healthcare, and industrial and commercial businesses.
The Company leases equipment, much of it advanced technology, generally
ranging from $100,000 to $2,000,000 in cost. The Company's leases as of June 30,
1996 had an average term of 53 months. The Company's leases are classified
predominantly as direct finance leases. Direct finance leases are full payout
leases whereby the Company will recover substantially all the equipment and
related financing costs during the initial noncancelable lease term. This
classification contrasts with operating leases which are usually shorter term
and do not provide for the lessor to recover all or substantially all of the
equipment cost during the initial lease term. While the Company generally
retains title to the equipment, the leases require the lessees to maintain and
insure the equipment and to pay property, sales and similar taxes.
The Company's growth depends upon its ability to finance at competitive
interest rates its purchases of equipment for lease. The Company's financing
program relies upon two elements -- a $60 million revolving credit facility for
short-term financing which was to expire on June 30, 1996, and a lease
securitization program for permanent financing. The revolving credit facility
was extended for a 90 day period in the amount of $44,375,000. Equipment
purchases are funded initially through the revolving credit facility at floating
rates. Subsequently, the Company's lease receivables are pooled and asset-backed
notes with fixed rates which are secured by the pool are issued to institutional
investors in private placements. The Company has completed eight such
securitizations, issuing $271 million as of June 30, 1996 of such asset-backed
notes. Under this financing strategy, the Company believes it can leverage its
capital base, limit its exposure to interest rate fluctuations and generate
liquidity.
LEASES
Substantially all of the Company's leases are noncancelable for a specified
term during which the Company receives lease payments sufficient to pay all of
the Company's financing costs and 90% or more of the acquisition costs of the
underlying equipment. The initial noncancelable lease term is usually less than
the equipment's estimated economic life. Initial lease terms for new equipment
generally range from 36-60 months. As of June 30, 1996, the Company's lessees
had on lease an aggregate of $283 million of equipment (based on original
acquisition cost), over an average initial lease term of 53 months. The Company
had 374 different lessees, of which no one lessee represented more than 10% of
the Company's total revenues in 1995. The Company has been reducing its relative
percentage of leases to health care businesses and increasing the percentages to
electronics, life sciences and industrial businesses. At June 30, 1996, as
measured by net investments, these percentages were 34% healthcare, 21% life
sciences, 22% electronics and 23% industrial and commercial.
The Company uses standard lease contracts, the terms and conditions of
which vary somewhat from transaction to transaction. In substantially all cases,
lessees are required 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, public liability and
malpractice risks; (iii) pay all taxes associated with the equipment; and (iv)
make all lease payments regardless of the performance of the equipment. The
Company's standard lease contracts provide that in the event of a default by a
lessee the Company can require payment of liquidated damages to make the Company
whole and can seize and remove the equipment for subsequent sale, re-lease or
other disposal at its discretion. The lessee's obligation to pay liquidated
damages may be satisfied from the proceeds of the Company's sale or re-lease of
the equipment and also, in a number of instances, by the Company's sale or other
realization on any assets that have been pledged as collateral for the lessee's
obligations. Generally, any additions, accessions or upgrades to the equipment
regardless of the source of payment automatically become incorporated into the
equipment and owned by the Company.
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<PAGE> 59
The Company's leases fall within three general categories: (i) leases which
grant the lessee an option, or require the lessee, to purchase the leased
equipment at a fixed price or renew the lease at a fixed rate (transactions
which require the purchase of the equipment at the end of the term may be
documented as a loan with a note and security agreement); (ii) leases which
grant the lessee an option to purchase the leased equipment at a nominal price
at the expiration of the lease, and (iii) leases which grant the lessee an
option, or require the lessee, to purchase the leased equipment at fair market
value or to renew the lease at a fair market rate or to return the equipment at
the expiration of the initial lease term, which typically include maximum and/or
minimum pricing provisions.
EQUIPMENT AND RESIDUAL VALUES
At the inception of a lease, the Company estimates the fair market value of
the leased equipment that it would obtain at the end of the initial lease term
and records that value as the residual value on its balance sheet. Over the
lease term, the portion of unearned income related to residual value is accreted
to income using the interest method. The Company periodically reviews, at least
annually, the residual value estimates recorded on its books based on its own
analysis, prevailing market data and reports from appraisers. Under generally
accepted accounting principles, any downward revision would result in an
immediate charge to earnings, while no upward revision may be recorded until
actually realized as gain.
At the end of the initial lease term, when the equipment is either sold or
re-leased, the amount by which the net proceeds exceed or fall short of the
residual value is recorded as a gain or loss. When equipment is re-leased at a
gain, the Company recognizes the gain ratably over the renewal term. The
Company's results of operations may be affected by its ability to realize the
residual value of equipment on those leases where the lessees have fair market
value purchase options at expiration of the lease term.
At June 30, 1996, 47% of the leases in the Company's portfolio (as measured
by acquisition costs) bore no residual value on the Company's books, generally
because the leases granted a purchase option at a nominal price to the lessee or
required the lessee to purchase the equipment at a fixed price, 35% bore
guarantees of a certain residual value and 18% bore residual values based upon
the Company's estimates of the fair market value of the leased equipment at end
of term. At June 30, 1996, the Company had on its books an aggregate of
$24,884,000 residual value, of which $13,121,000 was guaranteed, primarily by
lessees. At June 30, 1996, $10,417,000 represented residual value of medical
equipment. There can be no assurance, however, that the residual values will be
realized. At June 30, 1996, $10,039,000 or 40% of the aggregate unearned income
related to residual values had been accreted to income.
Although the Company does not expect significant physical deterioration of
its equipment during the initial lease term, the Company operates in markets
characterized by technological advances which may affect present or future
residual values. The risks of technical and economic obsolescence of equipment
is ever present, particularly for the high technology equipment that the Company
leases.
The Company's leases typically require equipment returned by a lessee to be
in fully operational condition, certified by the manufacturer as qualified for
its service and maintenance programs and accepted for reinstallation, and to
comply with all regulatory rules or guidelines for operation of the equipment.
The costs relating to these requirements are obligations of the lessee.
MARKETING
The Company's marketing relies upon the efforts of its professional staff
working directly with its target customer base, lease referral sources including
investment bankers and venture capital firms and relationships with equipment
manufacturers. Using these principal marketing channels, the Company actively
cultivates customers in its target markets. During 1995, lease referrals and
direct solicitation of specifically targeted customers generated the majority of
lease originations, comprising 55% and 33%, respectively. Approximately 12% of
lease originations in 1995 were generated by vendor programs.
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CREDIT APPROVAL PROCESS
The control of credit losses is an important element of the Company's
business and the risk of credit losses is a major factor in the Company's
evaluation of prospective leasing transactions. The Company has adopted policies
and procedures to evaluate the credit worthiness of its customers. All credit
analyses and decisions are centralized at the Company's headquarters. Credit
analyses are performed by experienced professional personnel who have the
specialized expertise to conduct their credit reviews taking into account
various factors affecting credit risk such as collateral value, credit
enhancements and regulatory factors. Upon completion of the review, each
prospective lease is rated based upon the Company's credit rating guidelines.
DISCONTINUED MEDICAL SUBSIDIARIES
During 1995, the Company had three wholly-owned subsidiaries that each
operated a medical diagnostic imaging center in the United States primarily
utilizing equipment repossessed by the Company from lessees. Such imaging center
operations were undertaken to preserve the value of repossessed equipment. One
subsidiary was acquired in 1993, one was formed in 1994 and one was acquired and
sold during 1995. Revenue of the subsidiaries in 1995 was $2,458,000. At
December 31, 1995, the Company had two subsidiaries neither of which was
profitable in 1995 and which were sold on February 1, 1996. The sale of these
two remaining centers resulted in a charge of $1,727,000 which has been included
in the provision for losses on medical assets for the year ended December 31,
1995. The Company does not intend to operate medical imaging centers in the
future.
COMPETITION
Participants in equipment leasing include finance companies, independent
leasing companies, leasing subsidiaries of national and regional commercial
banks, major equipment manufacturers, and captive leasing subsidiaries of major
equipment manufacturers.
The Company competes primarily against generalist and a few specialty
lessors, as well as alternative financing methods such as bank borrowing and
bond financing (including tax-exempt financing). The Company believes that it
competes effectively in its target markets because of its expertise in its
specialized markets and its ability to structure leases to meet the individual
customer's needs.
GOVERNMENT REGULATION
Although the Company's business operations generally are not directly
subject to governmental regulations, certain of its customers, particularly
healthcare providers, are subject to extensive regulations which could affect
their ability to meet their obligations which, in turn, could have an adverse
effect on the Company. A significant portion of the Company's present customers
are public or private healthcare providers and the healthcare industry is
subject to substantial federal, state and local regulation. Some customers may
be affected adversely by legislative and regulatory changes designed to reduce
or limit payments to providers of healthcare as well as market pressures to
constrain payments to healthcare providers.
Certain of the research and development organizations which are customers,
including government contractors and recipients of government-sponsored research
grants, are regulated by the Government agencies funding them. Changes in the
applicable regulations and their interpretations may affect the Company's
scientific equipment leasing activities.
EMPLOYEES
At June 30, 1996, the Company had 39 full-time and three part-time
employees. None of the Company's employees are represented by a labor union and
management believes that the Company's employee relations are satisfactory.
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PROPERTIES
The Company's general headquarters are located in Farmington, Connecticut
and occupy a portion of one floor, containing approximately 15,144 square feet
of space in a modern office building, under a lease which expires September 30,
2002 and provides for 2,011 additional square feet of space to be occupied by
October 1997. Annual base rental is $17 per square foot until October 1, 1999
and $21 per square foot thereafter, subject to annual adjustment for certain
variations in operating expenses and property taxes.
LEGAL PROCEEDINGS
On July 3, 1996, a complaint seeking class action status was filed against
the Company in the Superior Court of the State of Delaware in and for New Castle
County on behalf of the holders of Redeemable Warrants. The complaint alleges
that the Company breached an implied covenant of good faith said to be implicit
in the Warrant Agreement, dated May 27, 1996, between the Company and State
Street Bank and Trust Company (the "Warrant Agreement"), by entering into the
Merger Agreement and reducing the exercise price of the Redeemable Warrants from
$8.25 to $6.30 effective upon the Merger and by offering $6.40 to each holder of
Redeemable Warrants who exercises a Redeemable Warrant after the Merger. The
consideration to be paid to the Company's stockholders pursuant to the Merger
Agreement is $6.40 per share. The complaint also names The FINOVA Group as a
co-defendant for inducing the Company to breach the alleged implied covenant of
good faith associated with the Warrant Agreement and for intentionally
interfering with the prospective economic advantage of the holders of the
Redeemable Warrants. The complaint seeks monetary damages estimated by the
plaintiffs to be approximately $3 million. The named plaintiffs include Irving
B. Harris, who is the beneficial owner of more than 5% of the Company's voting
securities, and his associates William H. Harris, William Harris & Co. Profit
Sharing Trust and Jerome Kahn. The Company believes the complaint is without
merit and has filed a motion to dismiss the action.
Except for the foregoing, the Company is not currently a party to any legal
proceedings that it believes could have, either individually or in the
aggregate, a material adverse effect upon its business or financial condition.
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SELECTED HISTORICAL FINANCIAL AND OPERATING DATA OF THE COMPANY
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Total revenue................................ $ 12,796 $ 12,212 $ 26,284 $ 17,875 $ 14,763 $11,823 $11,515
Expenses:
Interest................................... 6,901 5,783 12,261 8,794 7,275 6,201 7,091
Selling, general and administrative........ 1,485 3,342 6,682 4,325 2,882 2,213 2,032
Provision for credit losses................ 757 553 958 550 178 168 410
Depreciation and amortization.............. 835 1,957 3,791 2,136 720 226 250
Lease restructuring charge(1).............. -- -- -- -- -- 2,567 --
Provision for losses on medical
assets(2)................................ -- -- 3,533 -- -- -- --
Provision for foreign operations(3)........ -- -- -- 1,053 -- -- --
-------- -------- -------- -------- -------- ------- -------
Total expenses......................... 9,978 11,635 27,225 16,858 11,055 11,375 9,783
-------- -------- -------- -------- -------- ------- -------
Earnings (loss) before income taxes and
extraordinary item......................... 2,818 577 (941) 1,017 3,708 448 1,732
Provision (benefit) for income taxes......... 1,184 242 (275) 672 1,557 199 730
Extraordinary item(1)(4)..................... -- -- -- -- (227) 1,575 --
-------- -------- -------- -------- -------- ------- -------
Net earnings (loss).......................... $ 1,634 $ 335 $ (666) $ 345 $ 1,924 $ 1,824 $ 1,002
======== ======== ======== ======== ======== ======= =======
Net earnings (loss) per common and common
equivalent shares(5)(6).................... $ .29 $ .06 $ (.12) $ .08 $ .59 $ .56 $ .25
======== ======== ======== ======== ======== ======= =======
Weighted average number of common and common
equivalent shares outstanding(5)(6)........ 5,705 5,523 5,546 4,589 3,278 3,278 2,461
======== ======== ======== ======== ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------------------- ------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................. $238,956 $194,213 $225,453 $172,015 $141,346 $86,058 $86,786
Short-term notes payable..................... 8,839 28,291 27,814 36,881 20,124 17,927 9,821
Long-term notes payable...................... 179,287 119,568 153,217 93,033 90,043 46,011 60,372
Redeemable preferred stock................... -- -- -- -- 9,116 8,894.. 8,772
Total stockholders' equity................... 27,823 27,003 26,185 26,750 4,398 2,627 1,028
Book value per common share outstanding...... 5.16 5.08 4.88 5.01 3.55 2.15 .84
</TABLE>
- ---------------
(1) Restructuring charge in 1992 includes the adjustment to the carrying value
of certain leased assets. Most of these leased assets were subject to
limited recourse debt which the Company repurchased from various lenders at
a discount from par. The gain on extinguishment of this debt of $2,680,000
pre-tax is shown as an extraordinary item of $1,575,000 after tax for the
year ended December 31, 1992.
(2) Provision for losses on medical assets in 1995 includes the adjustment to
the carrying value of assets relating to the sale of the medical centers and
the additional provision for losses on the Company's medical lease
portfolio.
(3) Provision for foreign operations in 1994 includes the adjustment to the
carrying value of certain assets owned by the Company.
(4) The extraordinary item in 1993 represents debt prepayment fees of $393,000
pre-tax, of $227,000 after tax, incurred upon the company's first asset
securitization when it refinanced higher-rate borrowings with proceeds from
such securitization.
(5) Also includes shares issuable on the exercise of certain outstanding options
and the warrant issued in connection with the 11.99% subordinated note. Net
earnings attributable to common shares in 1991 have been reduced by
cumulative dividends on the preferred stock outstanding during that year.
(6) In 1994, 1993 and 1992 gives effect to the conversion of all outstanding
shares of Series A Preferred Stock into an aggregate of 1,600,000 shares of
Common Stock on May 27, 1994.
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<PAGE> 63
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is engaged in the business of leasing essential equipment to
customers in its specialized markets which include technology-based
corporations, research facilities and healthcare providers. The Company's
earnings primarily result from the excess of lease revenues over the related
interest, selling, general and administrative expenses and depreciation and
amortization incurred by the Company. Interest is the single largest expense of
the Company and is a function of the amounts of and the rates of interest on
outstanding indebtedness incurred by the Company to finance its equipment lease
portfolio.
The Company's lease assets are comprised of direct finance leases, notes
secured by equipment and operating leases. The majority of the Company's
revenues are derived from its portfolio of direct finance leases. For financial
reporting purposes, substantially all of the Company's leases are classified as
direct finance leases in accordance with Statement of Financial Accounting
Standards No. 13.
The Company accounts for its initial investment in direct finance leases by
recording on the balance sheet the total minimum lease payments receivable plus
the estimated residual value of equipment plus the initial direct costs incurred
less the unearned lease income. Unearned lease income represents the excess of
total minimum lease payments plus the estimated residual value, if any, over the
cost of the equipment. Unearned lease income is recognized, using the interest
method, as direct finance lease revenue over the term of the lease. The Company
also realizes additional revenue or loss to the extent that the amount obtained
from selling or re-leasing equipment exceeds or is less than its recorded
residual value following expiration of the initial lease term.
In certain cases, the Company will obtain warrants or other forms of equity
securities in its lessees as part of the Company's compensation for its leasing
activities. At June 30, 1996, the Company held stock or warrants in 19
companies. No value was recorded on its balance sheet nor will income be
recognized until the securities are sold.
All lease contracts which do not meet the criteria of direct finance leases
are accounted for as operating leases. Operating leases are accounted for on the
balance sheet by recording the equipment at cost and depreciating the equipment
on a straight line basis generally over the term of the lease to its estimated
net realizable value at the expiration of the lease term. The monthly payments
are recorded as rental income over the lease term. The Company has entered into
only a limited number of operating leases.
Between June 1993 and January 1996, the Company operated up to three
medical imaging centers which it had repossessed from former lessees with the
intent to dispose of the businesses when conditions permitted. The financial
results of these subsidiaries were consolidated with the Company's leasing
operations. Patient service revenue generated by these subsidiaries were
consolidated with the Company's leasing operations. Patient service revenue
generated by these subsidiaries is reported in other revenue and the related
operating costs are reported in selling, general and administrative,
depreciation and amortization expenses. At the end of the third quarter of 1995,
the Company sold one of these subsidiaries. At December 31, 1995, the Company
had two remaining centers which were subsequently sold on February 1, 1996.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1996 and June 30, 1995
Direct finance lease revenues for the six months ended June 30, 1996 were
$10,592,000, 26.9% higher than the $8,346,000 for the comparable period in 1995,
primarily due to the growth in the portfolio of direct finance leases. Net
investment in direct finance leases and notes secured by equipment increased to
$194,276,000 at June 30, 1996 from $157,965,000 at June 30, 1995, an increase of
23.0%, as a result of new lease originations. New lease originations for the six
months ended June 30, 1996 were $41,594,000, 8.1% higher than the $38,473,000
for the comparable period in 1995, due to increased marketing activity. The
backlog, consisting of lease commitments, subject to delivery, installation and
acceptance of equipment and, in
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<PAGE> 64
some cases, completion of lease documentation, at June 30, 1996 was $60,460,000,
compared to $51,248,000 at June 30, 1995. The increased backlog at June 30, 1996
was attributable to increased marketing activity and temporary delays in
delivery and acceptance of leased equipment.
Other revenue for the six months ended June 30, 1996 was $2,204,000, a
43.0% decrease from the $3,866,000 for the same period in 1995. The decrease is
primarily due to the inclusion of $1,155,000 of patient service revenue in 1995
compared to only $22,000 in 1996, reflecting the disposition of the Company's
medical imaging centers. Other revenue also includes interest income, gains on
residual values realized through cash sales, gains from early lease terminations
and miscellaneous fee income.
At the end of the second quarter, unearned income expected to flow from the
portfolio of finance leases (includes unearned income related to notes secured
by equipment) rose to $43,749,000, up 10.2% from the $39,692,000 at June 30,
1995. Unearned income amortizes through the Company's revenues over the terms of
the respective leases.
Interest expense for the six months ended June 30, 1996 was $6,901,000,
19.3% higher than the $5,783,000 for the six months ended June 30, 1995. The
increase was due to a larger portfolio and was partially offset by lower
interest cost on borrowings during the six months ended June 30, 1996, compared
to the same period in 1995.
Selling, general and administrative expenses for the six months ended June
30, 1996 were $1,485,000, a 55.6% decrease from the $3,342,000 for 1995. The
decrease was primarily attributable to the sale of the Company's medical imaging
centers which accounted for $1,288,000 of such expenses in 1995.
Depreciation and amortization costs decreased to $835,000 for the six
months ended June 30, 1996 from $1,957,000 for the same period in 1995. The
lower level of depreciation expense, $466,000 in 1996 compared to $1,727,000 in
1995, reflects the reduced amounts of medical diagnostic systems re-deployed on
operating leases and of equipment in inventory awaiting re-lease following
termination of its initial lease term. The amortization of lease securitization
transaction costs, $369,000 in 1996 compared to $230,000 in 1995, is recognized
ratably over the lives of the pools of leased assets to which they relate.
The provision for losses on the Company's lease portfolio was increased to
$757,000 during the six months ended June 30, 1996 compared to $553,000 for the
same period in 1995. The Company's allowances for losses were $2,755,000 in the
six months ended June 30, 1996 compared to $1,517,000 for same period in 1995.
Charges of $1,086,000 were made against the allowances during the six months
ended June 30, 1996 reflecting the disposition of certain equipment which was
previously specially reserved for in 1995, whereas in 1995 there were no charges
to the allowances. The Company maintains allowances at a level it deems
sufficient to meet probable losses currently evident in the portfolio. The
levels of the allowances are based upon an analysis of delinquencies and problem
accounts, an assessment of overall risks and probable future losses in the
portfolio, and a review of the Company's historical loss experience. However,
there can be no assurance that the Company's reserves will prove to be adequate.
At June 30, 1996 the level of delinquent lease receivables (defined as
leases where one or more payments are more than 30 days past due) as a percent
of the Company's total lease receivable balance was .9% compared to 2.3% at June
30, 1995.
Net earnings for the six months ended June 30, 1996 were $1,634,000
compared to net earnings of $335,000 for the comparable period in 1995.
Year ended December 31, 1995 compared to year ended December 31, 1994
For the year 1995, the Company's total revenues increased 47.0% to
$26,284,000, compared with $17,875,000 for the same period in 1994. Revenue from
finance leases increased 31.2% to $17,852,000 from $13,607,000 a year earlier.
Other revenue was $7,619,000, an increase of 123.6% over the $3,408,000 in 1994.
This increase was primarily due to the $1,039,000 increase in patient service
revenue, reflecting the revenues of three medical subsidiaries in 1995 when only
the revenues of two medical subsidiaries were included in 1994. Other revenue
also includes sales of securities received from lessees, interest income, net
gains on
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<PAGE> 65
residual values realized through cash sales, gains from early lease terminations
and miscellaneous fee income. Additionally, $661,000 was recorded as other
revenue in 1995 as a result of proceeds received from a former lessee who
defaulted in a prior year. Other revenue, exclusive of patient service revenues,
is expected to grow with the Company's increased leasing activities.
Net investment in direct finance leases and notes secured by equipment
increased to $187,656,000 at December 31, 1995 from $142,715,000 at December 31,
1994, an increase of 31.5%, as a result of new lease originations. The new lease
originations reflected stronger growth in non-medical sectors. During 1995, new
leases were attributable 22% to healthcare, 27% to life sciences, 24% to
electronics and 27% to industrial and commercial leases. New lease originations
were $100,660,000 for the year ended December 31, 1995, compared to $69,343,000
for the prior year. The backlog, consisting of lease commitments subject to
delivery, installation and acceptance of equipment and, in some cases,
completion of lease documentation, at December 31, 1995 was $46,397,000 compared
to $46,199,000 at December 31, 1994. Conversion of backlog into leases is
generally expected to occur within a one-year period.
At the end of 1995, unearned income expected to flow from the portfolio of
finance leases rose to a record $40,746,000, up 28.8% from the $31,633,000 at
December 31, 1994. Unearned income amortizes through the Company's revenues over
the terms of the respective leases, which averaged 53 months at December 31,
1995.
At December 31, 1995, 43% of the leases in the portfolio (as measured by
acquisition cost) bore no residual value exposure, generally because the leases
granted a purchase option at a nominal price or required the lessee to purchase
the equipment at a fixed price, 33% limited residual value exposure because a
major portion thereof was guaranteed, primarily by the lessees, and 24% bore the
Company's estimates of the fair market value of the leased equipment at end of
term.
Interest expense for the year ended December 31, 1995 was $12,261,000,
39.4% higher than the $8,794,000 for the year ended December 31, 1994. The
increase was due to the larger portfolio during the year ended December 31,
1995, compared to the prior year. The Company benefited from lower borrowing
costs due to a more favorable interest rate environment and improved borrowing
terms with its lenders such as lower spreads on borrowed funds.
Selling, general and administrative expenses excluding the medical
subsidiaries for the year ended December 31, 1995 were $3,858,000, $1,025,000
higher than the $2,833,000 for 1994 due to the expenses of increased marketing
activity and administration for the larger portfolio. Selling, general and
administrative expenses attributable to the medical subsidiaries totaled
$2,824,000 in 1995, $1,332,000 higher than the $1,492,000 in 1994. This increase
reflected the costs of the three medical subsidiaries owned in 1995, when only
two were owned in 1994.
Depreciation and amortization costs increased to $3,791,000 for the year
ended December 31, 1995 from $2,136,000 in 1994, primarily reflecting increased
depreciation of equipment on operating leases and in inventory. The higher level
of depreciation expense, $3,203,000 in 1995 (including $703,000 related to
equipment at the Company's medical operating subsidiaries) compared to
$1,728,000 in 1994, reflected the larger amount of medical diagnostic systems
re-deployed on operating leases and equipment in inventory awaiting re-lease or
sale following termination of the lease term. Amortization of debt issue costs
were $588,000 for the year ended December 31, 1995, compared to $408,000 in
1994; such costs are amortized ratably over the term of the related debt.
Reserves for losses on the Company's lease portfolio increased a total of
$2,764,000 during 1995, of which $958,000 was through the provision for credit
losses and $1,806,000 through the provision for losses on medical assets. This
compares to a provision for credit losses of $550,000 during 1994. The Company's
allowance for losses was $3,084,000 at December 31, 1995 compared to $964,000 at
December 31, 1994. Charges of $644,000 were made to the allowance during 1995
reflecting the disposition of certain equipment at below book value, compared to
1994, when $360,000 was charged to the allowance. A reserve of $1,277,000 was
netted against the "Equipment held for lease or sale, net," a reserve of
$432,000 was netted against the "Net Investment in Operating Leases," and a
reserve of $1,375,000 was netted against the "Net Investment in Direct Financing
Leases and Notes Secured by Equipment," on the Consolidated Balance Sheet at
56
<PAGE> 66
December 31, 1995. The Company maintained the allowance at a level it deemed
sufficient to meet probable losses currently evident in the portfolio. The level
of the allowance is based upon an analysis of delinquencies and problem
accounts, an assessment of overall risk and probable future losses in the
portfolio, and a review of the Company's historical loss experience. However,
there can be no assurance that the Company's reserves will prove to be adequate.
At December 31, 1995, the level of delinquent lease receivables (defined as
leases where one or more payments are more than 30 days past due) as a percent
of the Company's total lease receivables balance was 1.65% compared to 2.8% at
December 31, 1994.
Net loss for the year ended December 31, 1995 was $666,000 and net earnings
for the year ended December 31, 1994 were $345,000.
Net losses from the three medical subsidiaries for the year ended December
31, 1995 were $620,000 ($27,000 was attributable to the subsidiary sold at the
end of the third quarter) compared to net losses of $332,000 a year earlier. The
Company sold one of these subsidiaries effective September 30, 1995. The sale
was at book value and no gain or loss was recorded. The sale involved a
combination of cash and secured notes. The Company sold the two remaining
centers on February 1, 1996 for cash. Accordingly, the Company incurred a charge
during its fourth quarter of 1995 to reflect the loss in the related asset
values expected in the sale. As of December 31, 1995, the Company had equipment
valued at $543,000 at the two remaining medical subsidiaries after the effect of
the provision for losses on medical assets which included $1,727,000 for the
medical assets used in those operations.
The United Kingdom subsidiary, which reduced the scope of its activities
during the first quarter of 1995, accounted for a pre-tax loss of $294,000 for
the year ended December 31, 1995, compared to a loss of $393,000 in 1994.
Expenses of the foreign subsidiary were reduced to $82,000 in the second half of
1995 compared to $426,000 in the first half. Total expenses for the year ended
December 31, 1995 were $508,000 compared to $452,000 in 1994. At December 31,
1995, approximately 2% of the Company's total lease portfolio consisted of
equipment in the United Kingdom.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
For the year 1994, the Company's total revenues increased 21.1% to
$17,875,000, compared with $14,763,000 for the same period in 1993. Revenue from
finance leases increased 6.4% to $13,607,000 from $12,786,000 a year earlier.
Other revenues were $3,408,000, an increase of 91.5% over the $1,780,000 in
1993. This increase was primarily due to the $1,046,000 increase in patient
service revenue, reflecting the revenues of two medical subsidiaries in 1994
when only the revenues of one medical subsidiary were included in 1993. Other
revenue also includes sales of securities acquired during the course of the
Company's leasing activities, interest income, net gains on residual values
realized through cash sales, gains from early lease terminations and
miscellaneous fee income.
Net investment in direct finance leases and notes secured by equipment
increased to $142,715,000 at December 31, 1994 from $121,502,000 at December 31,
1993, an increase of 17.5%, as a result of new lease originations. New lease
originations were $69,343,000 for the year ended December 31, 1994, compared to
$76,930,000 for the prior year. The backlog, consisting of lease commitments
subject to delivery, installation and acceptance of equipment and, in some
cases, completion of lease documentation, at December 31, 1994 was $46,199,000
compared to $19,950,000 at December 31, 1993.
At the end of 1994, unearned income expected to flow from the portfolio of
finance leases rose to $31,633,000, up 3.9% from the $30,455,000 at December 31,
1993. Unearned income amortizes through the Company's revenues over the terms of
the respective leases, which averaged 54 months at December 31, 1994.
Interest expense for the year ended December 31, 1994 was $8,794,000, 20.9%
higher than the $7,275,000 for the year ended December 31, 1993. The increase
was due to the larger portfolio during the year ended December 31, 1994,
compared to the prior year. The Company benefited from lower borrowing costs due
to a more favorable interest rate environment and improved borrowing terms with
its lenders.
57
<PAGE> 67
Selling, general and administrative expenses excluding the medical
subsidiaries for the year ended December 31, 1994 were $2,833,000, $436,000
higher than the $2,397,000 for 1993 due to the expenses of managing the larger
portfolio. Selling, general and administrative expenses attributable to the
medical subsidiaries established in 1994 and 1993 totaled $1,492,000 in 1994,
compared to $485,000 in 1993 when only one center was in operation.
Depreciation and amortization costs increased to $2,136,000 for the year
ended December 31, 1994 from $720,000 in 1993, primarily reflecting increased
depreciation of equipment on operating leases and in inventory. The higher level
of depreciation expenses, $1,728,000 in 1994 compared to $436,000 in 1993,
reflects the larger amount of medical diagnostic systems re-deployed on
operating leases including equipment at the medical subsidiaries and equipment
in inventory awaiting re-lease or sale following termination of the lease term.
Lease securitization transaction costs of $408,000 for the year ended December
31, 1994, compared to $284,000 in 1993, are amortized ratably over the life of
the pool of leased assets to which they relate.
Reserves for losses were increased $550,000 through the provision for
credit losses during 1994 compared to $178,000 during 1993. The Company's
allowance for credit losses was $964,000 at December 31, 1994 compared to
$774,000 at December 31, 1993. Charges of $360,000 were made to the allowance
during the year ended December 31, 1994, reflecting the disposition of certain
impaired diagnostic equipment at below book value.
At December 31, 1994, the level of delinquent lease receivables (defined as
leases where one or more payments are more than 30 days past due) as a percent
of the Company's total lease receivable balance was 2.8% compared to 6.4% at
December 31, 1993. The improvement was due in part to improved collection
procedures in place with a larger portfolio and the termination of certain
delinquent leases and repossession of the leased equipment and its subsequent
redeployment.
Net earnings for the years ended December 31, 1994 and 1993 were $345,000
and $1,924,000, respectively.
Net losses from the two medical subsidiaries for the year ended December
31, 1994 were $332,000 compared to net losses of $172,000 a year earlier.
In connection with the Company's decision to reduce the scope of its
overseas operations, the Company established a provision to reflect the
write-down of certain assets related to the subsidiary in 1994. The provision is
shown as a separate expense in the consolidated statements of earnings. At
December 31, 1994, approximately 2% of the Company's total lease portfolio
consisted of equipment in the United Kingdom.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's leasing activities require significant amounts of capital.
Since the Company's investments in substantially all of its leased assets are
leveraged with borrowings, its ability to originate new lease transactions is
dependent on credit availability. Substantially all of the assets of the Company
have been pledged to the Company's lenders as security under the Company's
various short- and long-term loan arrangements.
Funds required to support the Company's operations have been derived from
new equity, new borrowings and internally generated funds. The internally
generated funds were derived from the receipts of direct finance lease
receivables less the debt service payments associated with the receivables and
other lease-related payments, and, on occasion, sales of leased assets.
Cash Flow
Net cash flow provided by operating activities was $4,571,000 and
$3,073,000 for the six months ended June 30, 1996 and 1995, respectively.
58
<PAGE> 68
Net cash used in investing activities was $4,760,000 and $16,242,000 for
the six months ended June 30, 1996 and 1995, respectively. The decrease in net
cash used in 1996 is due to greater levels of cash flow from the Company's
portfolio as compared to 1995.
Net cash used in financing activities was $636,000 and $11,874,000 for the
six months ended June 30, 1996 and 1995, respectively.
During the years ended December 31, 1995, 1994 and 1993, the Company
generated cash flow from operating activities of $6,739,000, $4,764,000 and
$3,083,000, respectively.
Net cash used in investing activities was $54,699,000, $34,605,000 and
$45,179,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Finance lease related receipts, net of amounts included in income, totaled
$49,628,000, 41,103,000 and $26,872,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
Net cash provided by financing activities, primarily debt issuance in
excess of debt repayment, was $38,045,000, $27,556,000 and $43,596,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Lease Financing
The Company's lease financing program relies upon two elements -- a
revolving credit facility for short-term financing which was established in 1992
and increased from $50 million to $60 million in January, 1996 and a lease
securitization program for permanent financing which was initiated in 1993.
Equipment purchases are funded initially through the revolving credit facility
at floating rates. Subsequently, the Company's lease receivables are pooled and
asset-backed notes with fixed rates which are secured by the pool are issued to
institutional investors in private placements. As of June 30, 1996, the Company
had completed eight such securitizations in which its subsidiaries issued $271
million of such notes (included in the Company's Consolidated Balance Sheets).
Securitization permits the Company to obtain financing at fixed rates over terms
which match the Company's leases, substantially all of which are written at
fixed rates over fixed terms. Occasionally, the Company will discount leases
individually with banks or other institutional lenders at fixed rates over
matched terms. At June 30, 1996, 93% of the Company's borrowings were at fixed
interest rates, thereby minimizing the Company's exposure to fluctuations in
interest rates on the portion of its lease portfolio financed under these
borrowing arrangements.
During 1996, 1995 and 1994, the Company has entered into a number of
interest rate hedging contracts. By entering into these contracts, the Company
is able to protect the spread of its portfolio by "locking in" or "capping" the
interest rate on its borrowings during the period from the date it enters a
lease until it permanently finances the lease at fixed rates, typically through
an asset securitization. That interval customarily does not exceed nine months.
The Company charges its lessees rental rates which "float" against comparable
term U.S. Treasury obligations until the date of lease commencement.
At June 30, 1996, the Company had commitments to customers to provide
$60,460,000 in equipment financing. Upon delivery to and acceptance by the
customers of leased equipment, the equipment will be recorded in the Company's
lease portfolio.
Short-Term Borrowings
The Company had the ability to borrow up to $50,000,000 which was increased
in January 1996 to $60,000,000, to finance over a short-term the purchase of
equipment for lease under a revolving credit facility with a consortium of seven
banks. The credit facility was to expire on June 30, 1996; however, the credit
facility was extended for a 90 day period in the amount of $44,375,000.
Borrowings outstanding under this line were $8,839,000 at June 30, 1996. The
Company also had outstanding commitments to customers to provide $60,460,000 in
equipment financing at June 30, 1996. The total of the borrowings outstanding
and commitments exceeds the maximum amount available under the line. The Company
expects to continue to securitize, or arrange other borrowings for its lease
receivables during the course of 1996 and, therefore, expects to have sufficient
funds available to meet outstanding commitments. However, in the event the
Merger
59
<PAGE> 69
is not consummated prior to September 30, 1996, the Company believes there will
be sufficient time to arrange for the extension of the facility and to determine
if replacement or long term renewal of the facility is appropriate. If the
facility is not renewed, the Company believes that leases funded under the line
could be sold, or discounted on a recourse or non-recourse basis as is the
industry custom, to generate sufficient proceeds to repay the then outstanding
borrowings. Borrowings under the facility were $27,814,000 and $36,881,000 at
December 31, 1995 and 1994, respectively, and bore interest at variable rates
based on LIBOR plus 2% or Prime. At December 31, 1995, the Prime rate was 8.25%
and LIBOR was 5.00%. The borrowings are secured by lease and note receivables,
the leased equipment and other assets. The terms of the facility require, among
other things, that the Company maintain certain financial ratios and prohibit
payment of dividends.
Asset Securitizations and Long-Term Debt
The Company completed its seventh and eighth asset securitizations in March
and June 1996, when it transferred pools of leases to Funding Corp. II, which
issued an aggregate of $54,254,000 of senior notes and subordinated notes to a
group of institutional investors. The senior notes issued by Funding Corp II are
rated AA+ and its subordinated notes are rated BBB by Duff & Phelps. The source
of repayment for these notes is the stream of lease payments. Security for the
notes consists of (i) a pledge of the pool of lease assets and (ii) a
$14,106,000 cash collateral account. The noteholders also have unlimited
recourse to the assets of Funding Corp. II and, in addition, recourse to the
general assets of the Company for losses in the asset pool up to a maximum of
$4,702,000.
These asset securitizations generated sufficient cash proceeds to the
Company to allow repayment of debt previously incurred to fund the leases.
Substantially all of the cash flow from the pool will be dedicated to servicing
the notes and, therefore, unavailable to the Company until there has been
significant amortization of the notes. The Company has realized substantial and
continuing interest expense savings through asset securitizations and has
intended to use such securitizations as a low-cost source of permanent financing
for its portfolio of new leases. There can be no certainty as to the ability of
the Company to complete future asset securitizations.
In 1995, the Company completed three asset securitizations when it
transferred pools of leases with an aggregate net investment of $96,454,000 to
Funding Corp. II, which issued an aggregate of $102,475,000 of senior notes and
subordinated notes to a group of institutional investors.
In 1994, the Company completed one securitization when it transferred pools
of leases, with a net investment of $35,849,000, to Funding Corp. I which issued
senior notes, subordinated notes and residual value notes for $32,436,000 to a
group of institutional investors.
The Company completed its first two asset securitizations in 1993. Under
these transactions, the Company transferred pools of leases to Funding Corp. I,
which issued an aggregate of $81,843,000 of senior notes, subordinate notes and
residual value notes to a group of institutional investors.
All eight securitizations completed by the Company were structured as
financing transactions for financial reporting purposes, under which no gain or
loss was recorded at the time of the transaction. This contrasts with
alternative structures adopted by some lessors whereby under Statement of
Financial Accounting Standards No. 77, a gain on sale is recorded at the time of
securitization.
The interest rates on all Funding Corp. I and II notes are fixed, and their
respective repayments correspond to the rate of amortization of the related pool
of leases. The Company acts as a servicer for billing and collection for these
leases on behalf of Funding Corp I and II and the trustees for the respective
note holders.
Each of the eight asset securitizations has been expected to generate
sufficient cash proceeds to the Company to allow repayment of the notes issued
in the securitization, funding of the cash collateral account and payment of
transaction costs. The majority of the cash flow from the pools has been
dedicated to servicing the notes and, therefore, unavailable to the Company.
However, commencing in 1996, the Company expects excess cash flow from both
Funding Corp. I and Funding Corp. II to begin to flow back to the Company. The
60
<PAGE> 70
Company has realized substantial and continuing interest expense savings through
these securitization and has intended to use asset securitizations as a low-cost
source of permanent financing for its portfolio of new leases. However, asset
securitizations may require the Company to provide substantial cash collateral.
In the event the Merger is not consummated, there can be no certainty as to the
ability of the Company to complete future asset securitizations.
The Company has outstanding a $5,000,000 subordinated note due October 15,
2001. The note bears interest at the rate of 11.99% per annum. In accordance
with the terms of the note agreement, the Company is subject to certain
restrictive covenants such as minimum net worth requirements. The Company was in
compliance with all of these covenants at June 30, 1996.
On May 5, 1995 the Company received a $3,400,000 term loan which bears
interest at variable rates based on Prime or LIBOR at the option of the Company.
The loan is expected to be repaid, and is secured, by an assignment of the
Company's' right to receive future cash distributions from FSI Funding Corp I.
Repayments are scheduled to occur from September 1996 to September 1997. The
Company was in compliance with all of these covenants at June 30, 1996.
The Board of Directors has authorized the repurchase of the Company's
publicly-traded common stock from time-to-time throughout 1996, up to a maximum
of $500,000. To date, the Company has not repurchased any shares in 1996.
Please see Note 1 of Notes to Consolidated Financial Statements for a
discussion of recently issued accounting pronouncements.
TAX CONSIDERATIONS
In accordance with generally accepted accounting principles, the Company
does not recognize depreciation from equipment under its direct finance leases
for financial reporting purposes, but it does recognize depreciation for tax
purposes from its ownership of equipment on leases qualifying as "true" leases
for income tax purposes.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP are the Company's Independent Accountants.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Special Meeting to respond to appropriate questions of stockholders and make a
statement if they so desire.
STOCKHOLDER PROPOSALS FOR THE 1997 MEETING
If the Merger is not consummated, the Company will hold its 1997 annual
meeting of the stockholders of the Company in accordance with its By-laws and
Delaware law. Pursuant to the rules of the SEC, the deadline for stockholders to
submit proposals to be considered for inclusion in the proxy material for the
1997 annual meeting of stockholders is December 4, 1996. The By-laws of the
Company provide additional requirements affecting the submission of proposals or
nominations by stockholders.
OTHER MATTERS
Pursuant to the By-laws of the Company, no matter may properly be presented
for consideration at the Special Meeting except those described in the Notice of
Special Meeting mailed together with this Proxy Statement.
61
<PAGE> 71
INDEX OF FSI FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
- ------------------------------------------------------------------------------- -------------
<S> <C>
YEARS ENDED DECEMBER 31, 1995 AND 1994
Independent Auditors Report.................................................... F-2
Consolidated Balance Sheets -- December 31, 1995 and 1994...................... F-3
Consolidated Statements of Earnings -- Years Ended December 31, 1995, 1994,
1993......................................................................... F-4
Consolidated Statements of Stockholders Equity -- Years Ended December 31,
1995,
1994, 1993................................................................... F-5
Consolidated Statements of Cash Flows -- Years Ended December 31, 1995, 1994,
1993......................................................................... F-6
Notes to Consolidated Financial Statements..................................... F-7 to F-18
Independent Auditors Report on financial statement schedules................... F-19
Schedule I. Condensed Financial Information................................... F-20 to F-25
INTERIM PERIODS ENDED JUNE 30, 1996 AND 1995
Condensed Consolidated Balance Sheets at June 30, 1996 and December 31, 1995... F-26
Condensed Consolidated Statements of Earnings for the six months ended
June 30, 1996 and 1995....................................................... F-27
Condensed Consolidated Statements of Stockholders Equity for the six months
ended June 30, 1996 and 1995................................................. F-28
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995....................................................... F-29
Notes to Condensed Consolidated Financial Statements........................... F-30
</TABLE>
F-1
<PAGE> 72
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders of
Financing for Science International, Inc.:
We have audited the accompanying consolidated balance sheets of Financing
for Science International, Inc. and Subsidiaries as of December 31, 1995 and
1994 and the related consolidated statements of earnings, stockholders equity,
and cash flows for each of the years in the three-year period ended December 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Financing
for Science International, Inc. and Subsidiaries as of December 31, 1995 and
1994, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995 in conformity with
generally accepted accounting principles.
/s/ KPMG PEAT MARWICK LLP
----------------------------------
Hartford, Connecticut KPMG PEAT MARWICK LLP
March 8, 1996
F-2
<PAGE> 73
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
ASSETS (NOTE 1)
Cash and cash equivalents.............................................. $ 1,740 $ 3,921
Restricted cash and cash equivalents................................... 20,954 7,734
Net investment in direct finance leases and notes secured by equipment
(note 2)............................................................. 187,656 142,715
Net investment in operating leases..................................... 3,584 4,700
Equipment held for lease or sale, net.................................. 3,432 4,277
Office furniture and equipment, net.................................... 983 2,971
Other assets, net...................................................... 7,104 5,697
-------- --------
Total assets................................................. $225,453 $172,015
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and other liabilities................................. $ 8,594 $ 6,324
Accounts payable for equipment......................................... 5,119 4,098
Deferred income taxes (note 7)......................................... 4,524 4,929
Short-term notes payable (note 6)...................................... 27,814 36,881
Long-term notes payable (note 6)....................................... 148,217 88,033
Subordinated note payable (note 6)..................................... 5,000 5,000
-------- --------
Total liabilities............................................ 199,268 145,265
-------- --------
Stockholders' equity (notes 6 and 8):
Preferred stock ($.01 par; 2,000,000 shares authorized none
issued)........................................................... -- --
Common stock ($.01 par; 20,000,000 shares authorized; 5,407,500
issued and 5,369,600 outstanding (1995) and 5,340,000 issued and
outstanding (1994))............................................... 54 53
Additional paid-in capital........................................ 22,468 22,158
Foreign currency translation adjustments.......................... (104) (31)
Retained earnings, restricted..................................... 3,930 4,570
Treasury stock.................................................... (163) --
-------- --------
Total stockholders equity.................................... 26,185 26,750
-------- --------
Commitments (note 10)
Total liabilities and stockholders equity.................... $225,453 $172,015
======== ========
Book value per common share outstanding................................ $ 4.88 $ 5.01
======== ========
</TABLE>
F-3
<PAGE> 74
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Revenue:
Direct finance leases....................................... $17,852 $13,607 $12,786
Rental income from operating leases......................... 813 860 197
Other revenue (note 3)...................................... 7,619 3,408 1,780
------- ------- -------
Total revenue....................................... 26,284 17,875 14,763
------- ------- -------
Expenses:
Interest.................................................... 12,261 8,794 7,275
Selling, general and administrative......................... 6,682 4,325 2,882
Provision for credit losses................................. 958 550 178
Depreciation and amortization............................... 3,791 2,136 720
Provision for losses on medical assets (note 4)............. 3,533 -- --
Provision for foreign operations (note 5)................... -- 1,053 --
------- ------- -------
Total expenses...................................... 27,225 16,858 11,055
------- ------- -------
Earnings (loss) before income taxes and extraordinary item.... (941) 1,017 3,708
Provision (benefit) for income taxes (note 7)................. (275) 672 1,557
------- ------- -------
Earnings (loss) before extraordinary item........... (666) 345 2,151
Extraordinary item:
Loss on extinguishment of debt.............................. -- -- (227)
------- ------- -------
Net earnings (loss)................................. $ (666) $ 345 $ 1,924
======= ======= =======
Earnings (loss) per common and common equivalent shares (notes
1 and 8):
Earnings (loss) before extraordinary item........... $ (.12) $ .08 $ .66
======= ======= =======
Net earnings (loss)................................. $ (.12) $ .08 $ .59
======= ======= =======
Weighted average number of common and common equivalent shares
outstanding (notes 1 and 8)................................. 5,546 4,589 3,278
======= ======= =======
</TABLE>
F-4
<PAGE> 75
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON FOREIGN TOTAL
STOCK ADDITIONAL CURRENCY STOCK-
$.01 PAID-IN TRANSLATION TREASURY RETAINED HOLDERS
PAR CAPITAL ADJUSTMENTS STOCK EARNINGS EQUITY
------ ---------- ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992....... $ 12 $ -- $ (4) $ -- $2,619 $ 2,627
Accretion of preferred stock to
stated value.................. -- -- -- -- (222) (222)
Sale of common stock............. -- 92 -- -- -- 92
Net earnings..................... -- -- -- -- 1,924 1,924
Translation adjustment........... -- -- (23) -- -- (23)
--- ------- ----- ----- ------ -------
Balance at December 31, 1993....... 12 92 (27) -- 4,321 4,398
Accretion of preferred stock to
stated value.................. -- -- -- -- (96) (96)
Sale of common stock............. 25 12,874 -- -- -- 12,899
Conversion of redeemable Series A
preferred stock............... 16 9,192 -- -- -- 9,208
Net earnings..................... -- -- -- -- 345 345
Translation adjustment........... -- -- (4) -- -- (4)
--- ------- ----- ----- ------ -------
Balance at December 31, 1994....... 53 22,158 (31) -- 4,570 26,750
Issuance of common stock upon
exercise of stock options... 1 310 -- -- -- 311
Purchase of treasury stock.... -- -- -- (163) -- (163)
Net loss...................... -- -- -- -- (666) (666)
Translation adjustment........ -- -- (73) -- 26 (47)
--- ------- ----- ----- ------ -------
Balance at December 31, 1995....... $ 54 $ 22,468 $(104) $ (163) $3,930 $26,185
=== ======= ===== ===== ====== =======
</TABLE>
F-5
<PAGE> 76
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)..................................... $ (666) $ 345 $ 1,924
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization...................... 3,791 2,136 720
Provision for credit losses........................ 958 550 178
Provision for foreign operations................... -- 1,053 --
Provision for losses on medical assets............. 3,533 -- --
Changes in assets and liabilities:
Increase in accounts payable and other
liabilities..................................... 2,270 949 682
(Decrease) Increase in deferred income taxes....... (405) 598 1,326
Increase in other assets........................... (2,742) (867) (1,747)
--------- -------- --------
Net cash provided by operating activities....... 6,739 4,764 3,083
--------- -------- --------
Cash flows from investing activities:
Financial lease-related receipts, net of amounts
included in income................................... 49,628 41,103 26,872
Purchase of equipment to be leased...................... (100,465) (72,727) (68,487)
Initial direct costs incurred........................... (3,566) (2,799) (3,194)
Purchase of office furniture and equipment.............. (296) (182) (256)
Other................................................... -- -- (114)
--------- -------- --------
Net cash used in investing activities........... (54,699) (34,605) (45,179)
--------- -------- --------
Cash flows from financing activities:
(Decrease) Increase in short-term notes payable......... (9,067) 16,757 2,197
Proceeds from procurement of long-term notes payable.... 107,424 34,922 86,052
Principal payments on long-term notes payable........... (47,240) (31,932) (42,020)
Increase in restricted funds on deposit with bank....... (13,220) (5,090) (2,644)
Net proceeds from issuance of common stock.............. 311 12,899 11
Payment to acquire treasury stock....................... (163) -- --
--------- -------- --------
Net cash provided by financing activities....... 38,045 27,556 43,596
--------- -------- --------
Net (decrease) increase in cash and cash equivalents...... (9,915) (2,285) 1,500
Restricted funds on deposit with bank..................... 20,954 7,734 2,644
Cash and cash equivalents at beginning of year............ 11,655 6,206 2,062
--------- -------- --------
Cash and cash equivalents at end of year.................. $ 22,694 $ 11,655 $ 6,206
========= ======== ========
</TABLE>
F-6
<PAGE> 77
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Financing for Science International, Inc. is a Delaware corporation
incorporated in 1986. The Company, as lessor, engages primarily in the business
of leasing essential equipment to customers in its specialized market which
includes technology-based corporations, research facilities and healthcare
providers throughout the United States. In 1992, Financing for Science Limited
("FSL"), a wholly-owned subsidiary, was established to conduct the Company's
business in Great Britain. In 1993, FSI Funding Corp. I ("Funding Corp. I"), a
special-purpose wholly-owned subsidiary, was incorporated to effect the
placement of securitized notes backed by leases, lease receivables and the
related equipment which were originated by the Company. In 1995, FSI Funding
Corp. II ("Funding Corp. II"), a special-purpose wholly-owned subsidiary, was
incorporated to effect the placement of securitized notes backed by leases,
lease receivables and the related equipment which were originated by the
Company. Unless otherwise indicated, all references to the Company refer to the
Company and its consolidated subsidiaries.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Financing for
Science International, Inc. and all wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
(c) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(d) NET INVESTMENT IN DIRECT FINANCE LEASES AND NOTES SECURED BY EQUIPMENT
Completed lease contracts which qualify as direct finance leases, as
defined by Statement of Financial Accounting Standards ("SFAS") No. 13, are
accounted for on the balance sheet by recording the total minimum lease payments
receivable, the estimated residual value of the leased equipment, the initial
direct costs incurred in originating the leases and the unearned lease income.
The unearned lease income represents the excess of the total minimum lease
payments, plus the estimated residual value expected to be realized, over the
cost of the related equipment. The unearned income is recognized over the term
of each lease by applying a constant periodic rate of return to the declining
net investment in each lease. Notes secured by equipment which require periodic
principal and interest payments have been recorded at the principal balance
outstanding.
(e) INITIAL DIRECT COSTS
Initial direct costs ("IDC") for direct finance leases recorded for years
ended December 31, 1995, 1994 and 1993 were $3,566, $2,799 and $3,194,
respectively. These costs are amortized over the term of each lease by applying
a constant periodic rate of return to the declining balance of IDC. Total IDC
amortized as an adjustment to direct finance lease income was $2,036, $1,579 and
$1,021 for 1995, 1994 and 1993, respectively.
F-7
<PAGE> 78
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
IDC incurred on leases in process of closing but not yet booked is included
in other assets on the balance sheet and amounted to $1,384 and $1,335 at
December 31, 1995 and 1994, respectively.
(f) RESIDUAL VALUES
Residual values represent the estimated amount to be realized at lease
termination from the disposition of leased equipment under direct finance
leases. Amounts to be realized at lease termination, in excess of any guaranteed
minimums, depend on the fair market value of the related equipment and may vary
from the recorded residual value. Residual values are reviewed by the Company at
least annually. Declines in residual values for assets on direct finance leases
are recognized as an immediate charge to earnings. Declines in residual values
for assets on operating leases are recognized as adjustments to depreciation.
(g) ALLOWANCE FOR CREDIT LOSSES
In connection with the financing of leases, notes and other receivables,
the Company records an allowance for credit losses to provide for estimated
losses in the portfolio. The allowance for credit losses is based on a detailed
analysis of delinquencies and problem accounts, an assessment of overall risks,
management's evaluation of probable losses in the portfolio as a whole and a
review of historical loss experience. The Company's account write-off policy is
based on an analysis of the aging of the Company's portfolio, a review of all
nonperforming accounts and collection history. Specific accounts are reserved
for or written off when analysis indicates that the accounts are uncollectible.
(h) NET INVESTMENT IN OPERATING LEASES
Equipment under operating leases is recorded at the lower of cost or the
estimated realizable value and is depreciated on a straight-line basis over the
estimated useful life of the equipment. The Company records the monthly payments
as rental income when received. Accumulated depreciation was $1,672 and $1,259
at December 31, 1995 and 1994, respectively. The allowance for loss on equipment
under operating leases was $432 and $0 as of December 31, 1995 and 1994,
respectively.
(i) EQUIPMENT HELD FOR LEASE OR SALE
The Company's investment in equipment held for lease or sale represents
payments to suppliers for the purchase of equipment to be leased and the lower
of the Company's cost or the estimated net realizable value of equipment which
has come off lease and is pending final disposition. The equipment held for
lease or sale consisted of the following:
<TABLE>
<CAPTION>
1995 1994
------- ------
<S> <C> <C>
Payments for equipment to be leased............................... $ 1,645 $1,287
Equipment pending lease or sale................................... 3,064 2,990
Allowance for loss on equipment held for sale..................... (1,277) --
------- ------
$ 3,432 $4,277
======= ======
</TABLE>
(j) OFFICE FURNITURE AND EQUIPMENT
Office furniture and equipment consists of owned and leased furniture,
fixtures and equipment used by the Company in its operations. These assets are
stated at historical cost. Depreciation is computed on a straight-line basis
over the estimated useful lives of the related assets, or over the term of the
lease. Accumulated depreciation was $1,227 and $829 at December 31, 1995 and
1994, respectively.
F-8
<PAGE> 79
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(k) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date. The Company
has determined it is more likely than not that the deferred tax assets will be
realized through future taxable earnings and the reversal of temporary
differences representing future taxable items.
(l) CASH AND CASH EQUIVALENTS
For financial statement purposes, the Company considers certificates of
deposit with original maturities of less than three months to be cash
equivalents. At December 31, 1995 and 1994 cash and cash equivalents include
$20,954 and $7,734, respectively, which is restricted and is not available to
the Company other than to provide funds for required debt service of the
Company's securitized notes.
(m) COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
The earnings (loss) per common share computation is based on the weighted
average number of shares of common stock outstanding in 1995, 1994 and 1993, and
includes the common stock equivalency of options granted to employees under the
Company's stock option plans and the outstanding warrants. The computation also
assumes conversion of all outstanding Series A preferred stock into shares of
common stock for 1994 and 1993.
(n) HEDGING PROGRAMS
In connection with its lease securitization program, the Company adopted an
interest rate hedging program in 1994. The Company enters into hedging
contracts, from time-to-time, to protect its spreads against interest rate
increases on those leases which have commenced and are being funded at floating
rates prior to securitization.
The Company has used, but is not limited to, forward interest rate
agreements and interest rate caps. The amount of such hedging contracts depends
on many factors such as the outlook for interest rates, the amount of leases
awaiting securitization and the cost of the hedging contracts. The Company does
not enter into speculative contracts; however, if the underlying transaction
associated with the hedging contract were terminated early, the contract would
be considered speculative. The gain or loss on a speculative hedge contract
would be recognized immediately.
As of December 31, 1995, $454 has been capitalized and is included in other
assets for amounts paid in settlement of various hedging contracts. These
amounts are being amortized ratably over the term of the loans in anticipation
of which the contracts were entered.
(o) ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" ("FAS No. 123"). This statement
addressed the accounting for the cost of stock-based compensation, such as stock
options. FAS No. 123 permits either expensing the cost of stock-based
compensation over the vesting period or disclosing in the financial statement
footnotes what this expense would have been. This cost would be measured at the
grant date based upon estimated fair values, using option
F-9
<PAGE> 80
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
pricing models. The Company expects to adopt the financial statement footnote
disclosure alternative of FAS No. 123 in 1996.
(2) NET INVESTMENT IN DIRECT FINANCE LEASES AND NOTES SECURED BY EQUIPMENT
The balance of net investment in direct finance leases and notes secured by
equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
<S> <C> <C>
Lease contracts receivable in installments..................... $178,597 $138,194
Notes secured by equipment..................................... 21,478 12,777
Estimated residual value....................................... 25,143 20,900
Initial direct costs........................................... 4,559 3,441
Unearned lease income.......................................... (40,746) (31,633)
Allowance for losses........................................... (1,375) (964)
-------- --------
Net investment in direct finance leases and notes
secured by equipment............................... $187,656 $142,715
======== ========
</TABLE>
Aggregate future rentals under lease contracts and payments of notes as of
December 31, 1995 are due periodically in approximately equal installments as
follows:
<TABLE>
<S> <C>
Years ending December 31:
1996............................................................ $ 70,413
1997............................................................ 59,301
1998............................................................ 43,784
1999............................................................ 23,305
2000............................................................ 6,097
Thereafter...................................................... 1,745
--------
$204,645
========
</TABLE>
As of December 31, 1995, approximately 35% of the future rentals are from
lessees which are in the healthcare sector, 19% from the industrial sector, 25%
from the electronics sector and 21% from the life sciences sector. Approximately
37% of the future rentals are from lessees located in the northeastern United
States and 22% are from lessees located in California. Approximately 22% of
future rentals are from the top 10 lessees, while no individual lessee accounted
for more than 3% of future rentals. Substantially all of the investment in
direct finance leases and notes secured by equipment is pledged to secure
borrowings of the Company (see note 6).
F-10
<PAGE> 81
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(3) OTHER REVENUE
Other revenue consisted of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Interest income.......................................... $1,155 $ 477 $ 405
Gain on sale of financing transactions................... 1,083 779 221
Patient service revenue, net............................. 2,380 1,341 295
Gain on sale of securities............................... 1,765 324 28
Miscellaneous............................................ 1,296 487 831
------ ------ ------
Total other revenue............................ $7,619 $3,408 $1,780
====== ====== ======
</TABLE>
(4) PROVISION FOR LOSSES ON MEDICAL ASSETS
The Company sold its two remaining medical imaging centers on February 1,
1996. The provision for losses on medical assets includes $1,727 related to the
assets used at these medical imaging centers and $1,806 for credit or residual
value losses on the Company's portfolio of medical equipment in inventory and on
lease.
(5) PROVISION FOR FOREIGN OPERATIONS
In connection with the Company's decision to reduce the scope of its
overseas operations, the Company established a provision to reflect the
write-down of certain assets related to the subsidiary in 1994. The provision is
shown as a separate expense in the consolidated statements of earnings. At
December 31, 1995 and 1994, the FSL portfolio consisted of $3,194 and $3,834 of
net investment in direct finance leases, respectively.
(6) NOTES PAYABLE
Long-term notes payable are summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Funding Corp I.......................................... $ 47,511 $79,358
Funding Corp II......................................... 90,581 --
All other notes payable................................. 10,125 8,675
-------- -------
Total......................................... $148,217 $88,033
======== =======
</TABLE>
At December 31, 1995, Funding Corp I had $47,511 of senior and subordinated
notes outstanding. Security for the notes consists of (i) a pledge of the pool
of the lease assets totaling $54,705 at December 31, 1995, and (ii) a cash
collateral account with a balance of $4,400 at December 31, 1995. The
noteholders also have unlimited recourse to the assets of Funding Corp I and, in
addition, recourse to the general assets of the Company for possible losses in
the asset pool up to a maximum of $3,433. The monthly coupon rate on the notes
is 6.35% on the senior notes and varies from 6.35% to 11.23% on the subordinated
notes. The latest individual maturity is October 2000. The restricted net assets
of Funding Corp I at December 31, 1995 and 1994 were $12,215 and $9,825,
respectively.
In 1995, Funding Corp II entered into a securitization program with a group
of institutional investors. In March, July and November of 1995, Funding Corp II
issued senior and subordinated notes of $42,256, $25,614 and $34,705,
respectively. Proceeds from the notes were used to repay certain indebtedness of
the Company. At December 31, 1995, Funding Corp II had $90,581 of senior and
subordinated notes outstanding.
F-11
<PAGE> 82
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Security for the notes consists of (i) a pledge of the pool of the lease assets
totaling $86,369 at December 31, 1995 and (ii) a cash collateral account with a
balance of $9,223 at December 31, 1995. The noteholders also have unlimited
recourse to the assets of Funding Corp II and, in addition, recourse to the
general assets of the Company for possible losses in the asset pool up to a
maximum of $3,074. The monthly coupon rate on the notes varies from 7.62% to
6.30% on the senior notes and 8.49% to 7.18% on the subordinated notes. The
latest individual maturity is July 2002. The restricted net assets of Funding
Corp II at December 31, 1995 and 1994 were $7,764 and $0, respectively.
The notes issued by Funding Corp I and II ( the "Notes") represent
obligations solely of Funding Corp I and II. The assets of the Company which
have not been transferred to Funding Corp I and II are not available to pay
creditors of Funding Corp I and II other than pursuant to a guarantee by the
Company limited to $3,433 for Funding Corp I and $3,074 for Funding Corp II.
Funding Corp I and II have no significant assets other than the leases, the
lease receivables and their respective interests (either ownership or perfected
security interest) in related equipment and cash collateral. The assets of
Funding Corp I and II are not available to pay creditors of the Company (other
than the holders of the Notes) except through distribution of surplus cash
generated by the portfolio.
At December 31, 1995 and 1994 the remaining notes payable consisted of
$3,469 recourse and $6,656 nonrecourse notes payable to banks and other lenders.
These notes have fixed interest at rates varying from 8.0% to 10.75%. Each such
note generally represents a discounted lease rental or note receivable stream
and amortizes in approximately equal installments. The latest individual
maturity is May 1999.
The Company issued a $5,000, 11.99% subordinated note due October 15, 2001.
In accordance with the terms of this note, the Company is subject to certain
restrictive covenants. As of December 31, 1995, the Company was in compliance
with such covenants. A warrant to purchase shares of common stock of the Company
was issued in conjunction with the 11.99% subordinated note and is exercisable
for $4.8879 per share for 230,177 shares. The value assigned to the warrant was
$78 ($.35 per share) and has been accounted for as an increase to stockholders'
equity. The corresponding premium on this note has been recorded in other assets
and is being amortized ratably over the term of the note as an adjustment to
interest expense.
Required aggregate annual payments of long-term notes payable subsequent to
December 31, 1995 are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1996............................................................ $ 58,342
1997............................................................ 46,857
1998............................................................ 32,377
1999............................................................ 20,481
2000............................................................ 6,895
Thereafter...................................................... 1,977
--------
166,929
Less interest................................................... 18,712
--------
$148,217
========
</TABLE>
Amounts due under all long-term notes, other than the 11.99% subordinated
note, are secured by the Company's lease and note receivables and the leased
equipment.
The Company had the ability to borrow up to $50,000, increased in January
1996 to $60,000, to finance over a short-term the purchase of equipment for
lease under a revolving credit facility with a consortium of
F-12
<PAGE> 83
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
banks. The credit facility expires (unless the Company and the banks agree to
renew the facility) on June 30, 1996 at which time the Company will be obligated
to retire the outstanding borrowings. Borrowings outstanding under this line
were $27,814 at December 31, 1995. The Company also had outstanding commitments
to customers to provide $46,397 in equipment financing at December 31, 1995 (see
note 10). The total of the borrowings outstanding and commitments exceeds the
maximum amount available under the line. The Company expects to continue to
securitize, or arrange other borrowings for its lease receivables during the
course of 1996 and, therefore, expects to have sufficient funds available under
the line to meet outstanding commitments. Currently, negotiations are underway
to renew the credit facility. If this line of credit is not renewed, the Company
believes there will be sufficient time after the non-renewal is known that if
alternative replacement lines have not been established, any lease funded under
the line at expiry could be sold, or discounted on a recourse or nonrecourse
basis as is the industry custom, to generate sufficient proceeds to repay the
then outstanding borrowings. Borrowings under this line were $27,814 and $36,881
at December 31, 1995 and 1994, respectively, and bore interest at variable rates
based on LIBOR plus 2% or Prime. At December 31, 1995, Prime rate was 8.25% and
LIBOR was 5.00%. The borrowings are secured by lease and note receivables, the
leased equipment and other assets. The terms of the revolving credit facility
require, among other things, that the Company maintain certain financial ratios
and prohibit payment of dividends.
Cash payments for interest on all debt amounted to $12,045, $8,711 and
$7,343 for the years ended December 31, 1995, 1994 and 1993, respectively.
(7) INCOME TAXES
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ------
<S> <C> <C> <C>
Earnings (loss) before extraordinary item.................. $(275) $672 $1,557
Extraordinary item......................................... -- -- (166)
----- ---- ------
$(275) $672 $1,391
===== ==== ======
</TABLE>
Income tax expense (benefit) attributable to earnings (loss) before
extraordinary item consisted of:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ------
<S> <C> <C> <C>
Current:
Federal.................................................. $ 50 $ -- $ --
State.................................................... 80 74 65
----- ---- ------
Total current portion............................ 130 74 65
----- ---- ------
Deferred:
Federal.................................................. (369) 241 1,119
State.................................................... 26 115 373
Foreign.................................................. (62) 242 --
----- ---- ------
Total deferred portion........................... (405) 598 1,492
----- ---- ------
Total....................................... $(275) $672 $1,557
===== ==== ======
</TABLE>
F-13
<PAGE> 84
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Income tax expense (benefit) attributable to earnings (loss) before
extraordinary item differed from the amounts computed by applying the federal
income tax rate of 34% to pretax earnings (loss) before extraordinary items as a
result of the following:
<TABLE>
<CAPTION>
1995 1994 1993
----- ---- ------
<S> <C> <C> <C>
Computed (expected) tax expense (benefit).................. $(320) $346 $1,261
Increase (reduction) in income taxes resulting from:
Change in the valuation allowance for deferred tax assets
allocated to income tax expense....................... -- 68 (18)
State income taxes, net of federal income tax benefit.... 17 107 289
Other, net............................................... 28 151 25
----- ---- ------
$(275) $672 $1,557
===== ==== ======
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred tax assets:
Leasing revenue................................................ $39,131 $29,566
Allowance for credit losses.................................... 805 386
Net operating loss carryforward................................ 3,176 2,816
Alternative minimum tax credit carryforward.................... 190 68
Other.......................................................... 1,596 318
------- -------
Total gross deferred tax assets........................ 44,898 33,154
------- -------
Less valuation allowance......................................... (68) (68)
------- -------
Net deferred tax assets................................ 44,830 33,086
------- -------
Deferred tax liabilities:
Leased equipment, principally due to difference in
depreciation................................................ 48,046 36,986
Other.......................................................... 1,308 1,029
------- -------
Total gross deferred tax liabilities................... 49,354 38,015
------- -------
Net deferred tax liability............................. $ 4,524 $ 4,929
======= =======
</TABLE>
The valuation allowance for deferred tax assets as of January 1, 1995 was
$68. There was no net change in the total valuation allowance for the period
ended December 31, 1995. The Company has determined it is more likely than not
that the deferred tax assets will be realized through future taxable earnings
and the reversal of temporary differences representing future taxable items.
At December 31, 1995, the Company had available approximately $8 million of
net operating loss carryforwards, for federal income tax purposes, to offset
future taxable income. These carryforwards expire in the years 2008 through
2018. The Company also had available approximately $190 of alternative minimum
tax credit carryforwards which have no expiration date.
Cash payments for income taxes during the years ended December 31, 1995,
1994 and 1993 amounted to $275, $114 and $373, respectively.
F-14
<PAGE> 85
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(8) PREFERRED STOCK AND COMMON STOCK
On May 27, 1994, in its initial public offering of securities, the Company
sold 2,500,000 shares of common stock at $6.40 per share, 2,500,000 redeemable
warrants at $.10 per warrant, and at nominal consideration underwriters'
warrants to purchase from the Company 250,000 shares of common stock and/or
250,000 redeemable warrants. On June 17, 1994, the Company's underwriters
exercised an over allotment option and purchased 187,500 additional redeemable
warrants at $.10 per warrant. In addition, at the closing of the offering, all
previously outstanding Series A preferred stock was converted into 1,600,000
shares of common stock.
Each warrant was exercisable beginning May 20, 1995 for one share of common
stock at an exercise price of $8.25 per share. The warrants are redeemable by
the Company beginning May 20, 1996 at a price of $0.05 per warrant if the
closing price per share of the common stock has been at least $9.625 for 20
consecutive trading days during a period ending on the tenth day prior to the
date of the notice of redemption. The redeemable warrants will expire on May 20,
1999.
Each underwriters' warrant was exercisable beginning May 20, 1995 at $10.56
per share of common stock and $0.165 per redeemable warrant. The purchase price
payable upon exercise of the underwriters' warrants may be paid by the surrender
of the underwriters' warrant certificates with a deemed value equal to the
difference between the exercise price and the market price for the purchased
shares or redeemable warrants. The underwriters' warrants will expire on May 20,
1999.
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock, $.01 par value per share. The Board of Directors is authorized, subject
to any limitations prescribed by law, without further stockholder approval, to
issue such shares of Preferred Stock in one or more series. Each such series of
Preferred Stock shall have such rights, preferences, privileges and
restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors.
The Company has granted common stock options to certain key employees,
Directors and Scientific Advisory Board members under its stock option plans.
Stock options have been granted at exercise prices equal to the fair value of
the common stock at the dates of grant and, accordingly, no expense was
recognized for financial reporting purposes with respect to options granted.
F-15
<PAGE> 86
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes the activity under the plans for the periods
indicated:
<TABLE>
<CAPTION>
OPTIONS EXERCISE PRICE
OUTSTANDING PER SHARE
----------- -------------------
<S> <C> <C>
Outstanding at December 31, 1992..................... 200,000 $ .53 - $ .81
Granted.............................................. 299,500 $4.60
Exercised............................................ --
Canceled............................................. --
------- ----------------
Outstanding at December 31, 1993..................... 499,500 $ .53 - $4.60
Granted.............................................. 302,000 $4.81 - $6.5625
Exercised............................................ --
Canceled............................................. (43,000)
------- ----------------
Outstanding at December 31, 1994..................... 758,500 $ .53 - $6.5625
Granted.............................................. 250,250 $2.78125 - $4.125
Exercised............................................ (67,500) $4.60
Canceled............................................. (165,337)
------- ----------------
Outstanding at December 31, 1995..................... 775,913 $ .53 - $6.5625
=======
</TABLE>
As of December 31, 1995, options to purchase 437,803 shares were
exercisable. Total shares reserved for the plans at December 31, 1995 were
975,000.
The Company has a restricted stock plan for outside directors of the
Company and 50,000 shares of common stock were reserved for the plan. The
following summarizes shares issued under the plan: in 1989, 10,000 shares at an
issue price of $.47 per share; in 1991, 10,000 shares at an issue price of $.81
per share; in 1993, 10,000 shares at an issue price of $1.08 per share and
10,000 shares at an issue price of $2.00 per share. As of December 31, 1995,
10,000 unissued shares of common stock were reserved for future issue under the
plan.
(9) FAIR VALUE DISCLOSURES
Fair value is a subjective and imprecise measurement that is based on
assumptions and market data which require significant judgment and may only be
valid at a particular point in time. The use of different market assumptions or
valuation methodologies may have a material effect on the estimated fair value
amounts. Accordingly, management cannot provide assurance that the fair values
presented are indicative of the amounts that the Company could realize in a
current market exchange.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments at December 31, 1995.
Cash and Cash Equivalents
For cash and cash equivalents, the carrying amount approximates fair value.
Net Investment in Notes Secured by Equipment
The fair value of the note portfolio is determined by discounting the
expected future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and for the same remaining
maturities.
F-16
<PAGE> 87
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Short-Term Notes Payable
The carrying amount approximates fair value.
Long-Term Notes Payable and Subordinated Note Payable
The fair value of the notes payable is determined based on discounting
expected cash flows at the rates currently offered to the Company for debt of
the same remaining maturities and similar terms.
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995.
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- --------
<S> <C> <C>
Assets:
Net investment in notes secured by equipment......... $ 21,478 $ 21,478
====== ======
Liabilities:
Long-term notes payable.............................. $148,217 $149,593
====== ======
</TABLE>
Matching maturities of its earning assets and debt is a key component of
the financial strategy used by the Company to manage interest rate risks. The
fair value of the Company's lease portfolio is not a required disclosure under
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, and
therefore, only the fair value of the notes payable and notes secured by
equipment have been disclosed. However, the Company believes that fluctuations
in the fair value of the Company's debt are for the most part offset by changes
in the fair value of the Company's lease portfolio.
Commitments to Provide Financing
The fair value of commitments is estimated using the fees currently charged
to enter similar agreements. The fair value of such commitment fees approximates
carrying value.
(10) COMMITMENTS
At December 31, 1995, the Company had commitments to customers to provide
$46,397 in equipment financing of which $6,723 has been ordered from vendors.
Upon delivery to and acceptance by the customers of leased equipment, the
equipment will be recorded in the Company's lease portfolio.
F-17
<PAGE> 88
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(11) QUARTERLY DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------ ------ ------ -------
<S> <C> <C> <C> <C>
1995:
Total revenue........................ $5,249 $6,963 $6,959 $ 7,113
Earnings (loss) before income
taxes............................. 48 529 920 (2,438)
Net earnings (loss).................. 28 307 534 (1,535)
Net earnings (loss) per common and
common equivalent shares.......... .01 .06 .10 (.27)
1994:
Total revenue........................ $4,560 $4,328 $4,236 $ 4,751
Earnings (loss) before income
taxes............................. 1,052 1,151 243 (1,429)
Net earnings (loss).................. 610 668 140 (1,073)
Net earnings (loss) per common and
common equivalent shares.......... .19 .16 .03 (.19)
</TABLE>
The net loss for the fourth quarter of 1995 reflects the provision for
losses on medical assets (note 4). The net loss for the fourth quarter of 1994
reflects the provision for foreign operations (note 5).
F-18
<PAGE> 89
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders of
Financing for Science International, Inc.:
Under date of March 8, 1996, we reported on the consolidated balance sheets
of Financing for Science International, Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of earnings, stockholders
equity, and cash flows for each of the years in the three-year period ended
December 31, 1995, as contained in the 1995 annual report to stockholders. These
consolidated financial statements and our report thereon are included in the
Company's annual report on Form 10-K for the year ended December 31, 1995. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedules as listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statement schedules based on our
audits.
In our opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
/s/ KPMG PEAT MARWICK LLP
--------------------------
KPMG Peat Marwick LLP
Hartford, Connecticut
March 8, 1996
F-19
<PAGE> 90
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED BALANCE SHEETS FSI FUNDING CORP. I
DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................ $ 7,379 $ 7,734
Net investment in direct finance leases and notes secured by equipment... 54,705 81,860
Other assets............................................................. 1,058 1,798
------- -------
Total assets................................................... $63,142 91,392
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and other liabilities................................... $ 3,416 2,209
Long-term notes payable.................................................. 47,511 79,358
------- -------
Total liabilities.............................................. 50,927 81,567
Stockholder's equity..................................................... 12,215 9,825
------- -------
Total liabilities and stockholder's equity............................. $63,142 $91,392
======= =======
</TABLE>
F-20
<PAGE> 91
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS FSI FUNDING CORP. I
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Total revenue.............................................................. $8,271 $8,829
------ ------
Interest expense........................................................... 4,803 5,434
Other expense.............................................................. 404 440
------ ------
Total expenses................................................... 5,207 5,874
Earnings before income taxes............................................... 3,064 2,955
Provision for income taxes................................................. 1,287 1,241
------ ------
Net earnings..................................................... $1,777 $1,714
====== ======
</TABLE>
F-21
<PAGE> 92
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS FSI FUNDING CORP. I
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities................... $ 4,337 $ 2,520
-------- --------
Cash flows from investing activities:
Net decrease (increase) in net investment in direct finance lease
and notes secured by equipment................................... 27,155 (14,437)
-------- --------
Net cash provided by (used in) investing activities......... 27,155 (14,437)
-------- --------
Cash flows from financing activities:
Proceeds from procurement of long-term debt......................... -- 32,436
Principal payments on long-term debt................................ (31,847) (22,084)
Proceeds from issuance of common stock.............................. -- 4,818
-------- --------
Net cash provided by (used in) financing activities......... (31,847) 15,170
-------- --------
Net (decrease) increase in cash and cash equivalents.................. (355) 3,253
Cash and cash equivalents at beginning of year........................ 7,734 4,481
-------- --------
Cash and cash equivalents at end of year.............................. $ 7,379 $ 7,734
======== ========
</TABLE>
F-22
<PAGE> 93
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED BALANCE SHEET FSI FUNDING CORP. II
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
ASSETS
Cash and cash equivalents....................................................... $ 13,575
Net investment in direct finance leases and notes secured by equipment.......... 86,369
Other assets.................................................................... 1,208
--------
Total assets.......................................................... $101,152
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accounts payable and other liabilities.......................................... $ 2,807
Long-term notes payable......................................................... 90,581
--------
Total liabilities..................................................... 93,388
Stockholder's equity............................................................ 7,764
--------
Total liabilities and stockholder's equity............................ $101,152
========
</TABLE>
F-23
<PAGE> 94
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED STATEMENT OF EARNINGS FSI FUNDING CORP. II
FROM FEBRUARY 21, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Total revenue....................................................................... $6,186
------
Interest expense.................................................................... 3,378
Other expense....................................................................... 178
------
Total expenses............................................................ 3,556
------
Earnings before income taxes........................................................ 2,630
Provision for income taxes.......................................................... 1,105
------
Net earnings.............................................................. $1,525
======
</TABLE>
F-24
<PAGE> 95
FINANCING FOR SCIENCE INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED STATEMENT OF CASH FLOWS FSI FUNDING CORP. II
FROM FEBRUARY 21, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net cash used in operating activities................................... $ (885)
--------
Cash flows from investing activities:
Net increase in net investment in direct finance leases and notes
secured by equipment.................................................... (86,369)
--------
Net cash used in investing activities................................... (86,369)
--------
Cash flows from financing activities:
Proceeds from procurement of long-term debt..................................... 102,475
Principal payments on long-term debt............................................ (11,894)
Proceeds from issuance of common stock.......................................... 10,248
--------
Net cash provided by financing activities............................... 100,829
--------
Net increase in cash and cash equivalents......................................... 13,575
Cash and cash equivalents at beginning of period.................................. --
--------
Cash and cash equivalents at end of period........................................ $ 13,575
========
</TABLE>
F-25
<PAGE> 96
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1996 AND DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
1995
JUNE 30, ------------
1996
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................................... $ 2,187 $ 1,740
Restricted cash and cash equivalents................................ 27,426 20,954
Net Investment in direct finance leases and notes secured by
equipment......................................................... 194,276 187,656
Other assets........................................................ 15,067 15,103
-------- --------
Total assets.............................................. $ 238,956 $225,453
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deferred income taxes and other liabilities......................... $ 23,007 $ 18,237
Short-term notes payable............................................ 8,839 27,814
Long-term notes payable............................................. 174,287 148,217
Subordinated note payable........................................... 5,000 5,000
-------- --------
Total liabilities......................................... 211,133 199,268
-------- --------
Stockholders' Equity
Preferred stock ($.01 par; 2,000,000 shares authorized; none
issued)........................................................ -- --
Common stock ($.01 par; 20,000,000 shares authorized; 5,432,500
issued and 5,394,600 outstanding (1996) and 5,407,500 issued
and 5,369,600 outstanding (1995)).............................. 54 54
Additional paid-in capital........................................ 22,481 22,468
Foreign currency translation adjustments.......................... (113) (104)
Retained earnings................................................. 5,564 3,930
Treasury Stock.................................................... (163) (163)
-------- --------
Total stockholders' equity................................ 27,823 26,185
-------- --------
Total liabilities and stockholders' equity................ $ 238,956 $225,453
======== ========
Book value per common share outstanding........................... 5.16 4.88
======== ========
</TABLE>
F-26
<PAGE> 97
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------- -------------------
1996 1995 1996 1995
------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Direct finance leases............................... $5,266 $4,215 $10,592 $ 8,346
Other revenue....................................... 1,374 2,748 2,204 3,866
------ ------ ------- -------
Total revenue............................... 6,640 6,963 12,796 12,212
------ ------ ------- -------
Expenses:
Interest............................................ 3,477 2,872 6,901 5,783
Selling, general and administrative................. 682 1,959 1,485 3,342
Provision for doubtful receivables.................. 580 451 757 553
Depreciation and amortization....................... 400 1,152 835 1,957
------ ------ ------- -------
Total expenses.............................. 5,139 6,434 9,978 11,635
------ ------ ------- -------
Earnings before income taxes.......................... 1,501 529 2,818 577
Provision for income taxes............................ 631 222 1,184 242
------ ------ ------- -------
Net earnings.......................................... $ 870 $ 307 1,634 $ 335
====== ====== ======= =======
Net earnings per common share......................... $ .15 $ .06 $ .29 $ .06
====== ====== ======= =======
Weighted average number of common and common
equivalent shares................................... 5,746 5,531 5,705 5,523
====== ====== ======= =======
</TABLE>
F-27
<PAGE> 98
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON FOREIGN
STOCK ADDITIONAL CURRENCY TOTAL
$.01 PAID-IN TRANSLATION RETAINED TREASURY STOCKHOLDERS
PAR CAPITAL ADJUSTMENTS EARNINGS STOCK EQUITY
------ ---------- ----------- -------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995........... $ 53 $ 22,158 $ (31) $4,570 $ -- $26,750
Net earnings......................... -- -- -- 335 -- 335
Purchases of Stock................... -- -- -- -- (107) (107)
Translation adjustment............... -- -- 25 -- -- 25
--- ------- ----- ------ ----- -------
Balance at June 30, 1995............. $ 53 $ 22,158 $ (6) $4,905 $ (107) $27,003
=== ======= ===== ====== ===== =======
Balance at January 1, 1996........... $ 54 $ 22,468 $(104) $3,930 $ (163) $26,185
Issuance of common stock upon
exercise of stock option........... -- 13 -- -- -- 13
Net earnings......................... -- -- -- 1,634 -- 1,634
Translation adjustment............... -- -- (9) -- -- (9)
--- ------- ----- ------ ----- -------
Balance at June 30, 1996............. $ 54 $ 22,481 $(113) $5,564 $ (163) $27,823
=== ======= ===== ====== ===== =======
</TABLE>
F-28
<PAGE> 99
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities............................ $ 4,571 $ 3,073
-------- --------
Cash flows from investing activities:
Finance lease related receipts, net of amounts included in income.... 35,782 22,782
Purchase of equipment to be leased................................... (39,340) (37,536)
Initial direct costs incurred........................................ (1,174) (1,310)
Purchase of office furniture and equipment........................... (28) (178)
-------- --------
Net cash used in investing activities........................ (4,760) (16,242)
-------- --------
Cash flows from financing activities:
Decrease in short-term notes payable................................. (18,975) (8,590)
Proceeds from procurement of long-term notes payable................. 54,254 45,556
Principal payments on long-term notes payable........................ (28,184) (19,021)
Increase in restricted funds on deposit with banks................... (6,472) (5,964)
Proceeds from issuance of common stock................................. 13 --
Payments to acquire treasury stock..................................... -- (107)
-------- --------
Net cash provided by financing activities.................... 636 11,874
-------- --------
Net increase (decrease) in cash and cash equivalents................. 447 (1,295)
Restricted funds on deposit with banks................................. 27,426 13,698
Cash and cash equivalents at beginning of period....................... 1,740 3,921
-------- --------
Cash and cash equivalents at end of period............................. $ 29,613 $ 16,324
======== ========
</TABLE>
F-29
<PAGE> 100
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) The information furnished in the accompanying unaudited Condensed
Consolidated Balance Sheets, Statements of Earnings, Statements of Stockholders
Equity and Statements of Cash Flows reflects all adjustments (consisting only of
items of a normal recurring nature) which are, in the opinion of management,
necessary for a fair statement of the Company's results of operations and
financial position for the interim periods. The financial statements should be
read in conjunction with the audited financial statements and notes included in
the Company's Annual Report for the year ended December 31, 1995. The interim
financial results are not necessarily indicative of results for the full year.
F-30
<PAGE> 101
ANNEX A
AGREEMENT AND PLAN OF MERGER
A-1
<PAGE> 102
AGREEMENT AND PLAN OF MERGER
AMONG
FINANCING FOR SCIENCE INTERNATIONAL, INC.
FINOVA CAPITAL CORPORATION
AND
FINOVA BUSINESS CREDIT CORP.
DATED AS OF MAY 19, 1996
<PAGE> 103
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
ARTICLE I
THE MERGER.......................................................................... -1-
SECTION 1.1. The Merger........................................................... -1-
SECTION 1.2. Stockholder Meeting, Closing, Effective Time of the Merger........... -1-
SECTION 1.3. Determination of Merger Price........................................ -2-
SECTION 1.4. Conversion and Cancellation of Securities............................ -2-
SECTION 1.5. Dissenting Shares.................................................... -2-
SECTION 1.6. Surrender of Certificates; Payment................................... -2-
SECTION 1.7. Options and Warrants................................................. -3-
SECTION 1.8. Company Action....................................................... -4-
SECTION 1.9. Arrangements with Certain Stockholders of the Company................ -4-
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................... -4-
SECTION 2.1. Organization, Powers and Qualifications.............................. -4-
SECTION 2.2. Subsidiaries......................................................... -5-
SECTION 2.3. Capital Stock........................................................ -5-
SECTION 2.4. Certificate of Incorporation, By-Laws, Minute Books and Records...... -6-
SECTION 2.5. Authority; Binding Effect............................................ -6-
SECTION 2.6 Conflict with Other Agreements; Approvals............................ -6-
SECTION 2.7. Proxy Statement and Other Information................................ -6-
SECTION 2.8 Consents and Approvals............................................... -6-
SECTION 2.9. SEC Reports.......................................................... -7-
SECTION 2.10. Financial Statements................................................. -7-
SECTION 2.11. Financing Business Representations................................... -7-
SECTION 2.12. Absence of Certain Changes........................................... -9-
SECTION 2.13. Indebtedness; Absence of Undisclosed Liabilities..................... -9-
SECTION 2.14. Assets............................................................... -10-
SECTION 2.15. Contracts............................................................ -10-
SECTION 2.16. Insurance............................................................ -10-
SECTION 2.17. Authorizations, Compliance With Law.................................. -11-
SECTION 2.18. Taxes................................................................ -11-
SECTION 2.19. Absence of Litigation................................................ -11-
SECTION 2.20. Employee Benefit Plans: Employment Agreements........................ -11-
SECTION 2.21. Labor Matters........................................................ -12-
SECTION 2.22. Environmental Matters................................................ -13-
SECTION 2.23. Intellectual Property................................................ -14-
SECTION 2.24. Accuracy of Materials................................................ -15-
SECTION 2.25. Brokers and Finders.................................................. -15-
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT............................................ -15-
SECTION 3.1. Organization and Powers.............................................. -15-
SECTION 3.2. Authority; Binding Effect............................................ -15-
SECTION 3.3. Conflict with Other Agreements; Approvals............................ -15-
SECTION 3.4. Consents and Approvals............................................... -16-
</TABLE>
i
<PAGE> 104
<TABLE>
<CAPTION>
PAGE NO.
----
<S> <C> <C>
SECTION 3.5. Proxy Statement and Other Information................................ -16-
SECTION 3.6. Brokers.............................................................. -16-
SECTION 3.7. Financing............................................................ -16-
ARTICLE IV
OTHER AGREEMENTS.................................................................... -16-
SECTION 4.1. Conduct of the Company's Business.................................... -16-
SECTION 4.2. Per Share Valuation.................................................. -18-
SECTION 4.3. Access to Information................................................ -19-
SECTION 4.4. Stockholder Vote; Proxy Statement.................................... -19-
SECTION 4.5. Reasonable Best Efforts.............................................. -20-
SECTION 4.6. Expenses of the Company.............................................. -20-
SECTION 4.7. Public Announcements................................................. -20-
SECTION 4.8. Notification......................................................... -20-
SECTION 4.9. Regulatory and Other Authorizations.................................. -20-
SECTION 4.10. Further Assurances................................................... -21-
SECTION 4.11. Indemnification of Directors and Officers............................ -21-
SECTION 4.12. No Solicitation...................................................... -21-
SECTION 4.13. Purchase Price Adjustment of Certain Warrants........................ -22-
ARTICLE V
CONDITIONS TO CLOSING............................................................... -22-
SECTION 5.1. Conditions to the Obligations of the Company and Parent and Merger
Sub.................................................................. -22-
SECTION 5.2. Conditions to the Obligations of the Company......................... -22-
SECTION 5.3. Conditions to the Obligations of Parent and Merger Sub............... -23-
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER................................................... -24-
SECTION 6.1. Termination.......................................................... -25-
SECTION 6.2. Effect of Termination................................................ -25-
SECTION 6.3. Amendment............................................................ -25-
SECTION 6.4. Waiver............................................................... -25-
ARTICLE VII
MISCELLANEOUS....................................................................... -26-
SECTION 7.1. Survival of Representations and Warranties........................... -26-
SECTION 7.2. Entire Agreement..................................................... -26-
SECTION 7.3. Notices.............................................................. -26-
SECTION 7.4. Governing Law........................................................ -27-
SECTION 7.5. Descriptive Headings................................................. -27-
SECTION 7.6. Parties in Interest.................................................. -27-
SECTION 7.7. Counterparts......................................................... -27-
SECTION 7.8. Expenses............................................................. -27-
SECTION 7.9. Personal Liability................................................... -27-
SECTION 7.10. Binding Effect; Assignment........................................... -27-
SECTION 7.11. Arbitration.......................................................... -27-
</TABLE>
ii
<PAGE> 105
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement"), dated as of May 19,
1996, is made by and among Financing for Science International, Inc., a Delaware
corporation (the "Company"), FINOVA Capital Corporation, a Delaware corporation
("Parent"), and FINOVA Business Credit Corp., a Delaware corporation and
wholly-owned subsidiary of Parent ("Merger Sub").
W I T N E S S E T H
WHEREAS, the respective Boards of Directors of Parent, Merger Sub and the
Company and the stockholders of Merger Sub have each approved the acquisition of
the Company by Parent pursuant to a merger of Merger Sub with and into the
Company upon the terms and subject to the conditions hereinafter set forth
pursuant to which each outstanding share of Common Stock, par value $.01 per
share ("Company Common Stock"), of the Company will be converted into the right
to receive cash, without interest, in the amount of the Merger Price
(hereinafter defined);
WHEREAS, the Boards of Directors of the Company and Merger Sub have
approved and adopted this Agreement, and Parent, as the sole stockholder of
Merger Sub, has approved and adopted this Agreement;
NOW, THEREFORE, in consideration of the mutual representations, warranties,
covenants, agreements and conditions set forth below, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. The Merger. Subject to the terms and conditions hereof and in
accordance with the General Corporate Law of the State of Delaware, as amended
(the "DGCL"), at the Effective Time (hereinafter defined): (a) Merger Sub shall
be merged with and into the Company (the "Merger") and the separate existence of
Merger Sub shall cease; (b) the Company, as the surviving corporation in the
Merger (the "Surviving Corporation"), (i) shall be a wholly-owned subsidiary of
Parent, (ii) shall continue its corporate existence under the laws of the state
of Delaware, (iii) shall retain its present name and (iv) shall succeed to all
rights, assets, liabilities and obligations of Merger Sub and the Company in
accordance with the DGCL; (c) the Certificate of Incorporation of the Company,
as in effect immediately prior to the Effective Time, shall continue as the
Certificate of Incorporation of the Surviving Corporation, provided however that
Section 4 of the Certificate of Incorporation of the Company as the Surviving
Corporation shall be amended in its entirety to read as follows: "The aggregate
number of shares which the Corporation shall have authority to issue is one
million of the par value of $.01 per share"; (d) the By-laws of Merger Sub, as
in effect immediately prior to the Effective Time, shall continue as the By-laws
of the Surviving Corporation; (e) the directors of Merger Sub immediately prior
to the Effective Time shall be the directors of the Surviving Corporation; and
(f) the officers of Merger Sub immediately prior to the Effective Time shall
continue as the officers of the Surviving Corporation. From and after the
Effective Time, the Merger will have all the effects provided by applicable law.
SECTION 1.2. Stockholder Meeting, Closing, Effective Time of the
Merger. The Company shall submit this Agreement and the Merger to its
stockholders for approval and adoption at a meeting to be held as soon as
practicable following the date of this Agreement in accordance with Section 4.4
hereof. Subject to the Merger receiving all requisite stockholder approvals and
subject to the other provisions of this Agreement, the parties shall hold a
closing (the "Closing") on the next business day (or such later date as the
parties hereto may agree) following the later of (a) the Meeting, or (b) the
business day on which the last of the conditions set forth in Article IV hereof
is fulfilled or waived (such later date, the "Closing Date"), at 10:00 A.M. at
the offices of Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania, or at
such other time or place as the parties agree upon. On the Closing Date, the
parties hereto shall cause the merger to be consummated by filing a certificate
of merger (the "Certificate of Merger") with the Secretary of State of the State
of Delaware in such form as required by, and executed in accordance with the
relevant provisions of, the DGCL (the date
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and time of such filing, or such later date or time agreed upon by Parent and
the Company and set forth therein, the "Effective Time.")
SECTION 1.3. Determination of Merger Price. The "Merger Price" shall mean
$6.40 in cash without interest.
SECTION 1.4. Conversion and Cancellation of Securities.
(a) At the Effective Time, each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares of
Company Common Stock described in Section 1.4(b) hereof and other than
Dissenting Shares) shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive the Merger
Price.
(b) At the Effective Time, each share of Company Common Stock held in the
treasury of the Company immediately prior to the Effective Time, shall by virtue
of the Merger and without any action on the part of the holder thereof, be
automatically cancelled and retired and cease to exist, and no cash, securities
or other property shall be payable in respect thereof.
(c) At the Effective Time, each share of Merger Sub common stock, par value
$1.00 per share ("Merger Sub Common Stock"), validly issued and outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action by the holder thereof, be converted into ten thousand validly
issued, fully paid and nonassessable common shares, par value $1.00 per share,
of the Surviving Corporation ("Surviving Corporation Common Stock").
SECTION 1.5. Dissenting Shares.
(a) For purposes of this Agreement, "Dissenting Shares" means shares of
Company Common Stock held as of the Effective Time by a stockholder of record of
the Company (a "Company Stockholder") who has not voted such shares of Company
Common Stock in favor of the Merger and with respect to which appraisal rights
shall have been duly demanded and perfected in accordance with Section 262 of
the DGCL and not effectively withdrawn or forfeited prior to the Effective Time.
Dissenting Shares shall not be converted into or represent the right to receive
the payment which the holders of Company Common Stock are entitled to receive
pursuant to Section 1.4, unless such Company Stockholder shall have forfeited
his or her right to appraisal under the DGCL or withdrawn, with the consent of
the Company, his or her demand for appraisal. If such Company Stockholder has so
forfeited or withdrawn his or her right to appraisal of Dissenting Shares, then,
as of the occurrence of such event, such holder's Dissenting Shares shall cease
to be Dissenting Shares and shall be converted into and represent the right to
receive the Merger Price payable in respect of such shares pursuant to Section
1.4.
(b) The Company shall give the Parent (i) prompt notice of any written
demands for appraisal of any shares of Company Common Stock, withdrawals of such
demands, and any other instruments that relate to such demands received by the
Company, and (ii) the opportunity to direct all negotiations and proceedings
with respect to demands for appraisal under the DGCL. The Company shall not,
except with the prior consent of the Parent, make any payment with respect to
any demands for appraisal of shares of Company Common Stock or offer to settle
or settle any such demands.
SECTION 1.6. Surrender of Certificates; Payment.
(a) Prior to the Closing Date, Parent shall select Harris Trust and Savings
Bank, N.A. or State Street Bank and Trust Company or another bank or trust
company reasonably acceptable to the Company to act as paying agent (the "Paying
Agent") and, at the Effective Time, Parent shall cause the Surviving Corporation
to deposit with the Paying Agent such funds as are required for the conversion
of shares of Company Common Stock pursuant to Section 1.4 hereof (the "Payment
Fund"). Schedule 1.6 hereto sets forth the Payment Fund calculations, subject to
adjustment solely for exercises during the interim of outstanding warrants or
options as of the date hereof.
(b) As soon as practicable after the Effective Time, Parent shall cause the
Paying Agent to mail to each person who was, at the Effective Time, a holder of
record of a certificate or certificates that immediately prior
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to the Effective Time evidenced outstanding shares of Company Common Stock (the
"Certificates") (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Paying Agent, which shall be in a form and
contain any other provisions as Parent and the Surviving Corporation may
reasonably agree and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for the Merger Price for each share represented by such
Certificates. Upon the proper surrender of Certificates to the Paying Agent,
together with a properly completed and duly executed letter of transmittal, the
Paying Agent shall distribute to the holder of the Certificates a check for the
cash being paid in respect of the Merger Price for the aggregate number of
shares of Company Common Stock represented by such Certificates, and the
Certificates so surrendered shall be cancelled. If for any reason (including
without limitation, losses) the Payment Fund is inadequate to pay the amounts to
which the holders of shares of Company Common Stock shall be entitled, Parent
shall be liable for the payment thereof. In no event shall the holder of any
surrendered Certificates be entitled to receive interest on the Merger Price. If
a check is to be sent to a person other than the person in whose name the
Certificates so surrendered are registered, it shall be a condition of the
payment that the Certificates so surrendered shall be properly endorsed and the
signatures thereon properly guaranteed and otherwise in proper form for transfer
and that the persons requesting such payment shall pay to the Paying Agent any
transfer or other taxes required by reason of the delivery of such check to a
person other than the registered holder of the Certificates so surrendered, or
shall establish to the satisfaction of the Paying Agent that such tax has been
paid or is not applicable.
(c) The cash paid and distributed upon the surrender of Certificates in
accordance with the terms of Section 1.4(b) hereof shall be deemed to have been
paid in full satisfaction of all rights pertaining to such shares of Company
Common Stock.
(d) Except as otherwise expressly provided herein, Parent shall pay all
charges and expenses, including those of the Paying Agent, in connection with
the exchange of Certificates for the Merger Price for the shares represented
thereby. Any cash delivered or made payable to the Paying Agent pursuant to
Section 1.6(a) hereof, and not exchanged pursuant to Section 1.6(b) hereof for
Certificates within six months after the Effective Time, shall be returned by
the Paying Agent to Parent which shall thereafter act as paying agent subject to
the rights of holders of Certificates hereunder.
(e) At the Effective Time, the stock transfer books of the Company shall be
closed and no transfer of shares of Company Common Stock shall thereafter be
made.
(f) None of Parent, Merger Sub, the Company, the Surviving Corporation or
the Paying Agent will be liable to any holder of shares of Company Common Stock
for any checks delivered to a state abandoned property administrator or other
public official pursuant to any applicable abandoned property, escheat or
similar law.
(g) If any Certificates shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificates to
be lost, stolen or destroyed, the Paying Agent will deliver in exchange for such
lost, stolen or destroyed Certificates the Merger Price for the shares
represented thereby, deliverable in respect thereof, as determined in accordance
with the terms hereof. When authorizing such payment in exchange for any lost,
stolen or destroyed Certificates, the person to whom the Merger Price is
delivered, as a condition precedent to such delivery, shall give Parent or the
Surviving Corporation, as relevant (the "Payor"), a bond satisfactory to the
Payor against any claim that may be made against the Payor with respect to the
Certificates alleged to have been lost, stolen or destroyed.
SECTION 1.7. Options and Warrants.
(a) Immediately prior to the Effective Time, each option granted under an
Employee Plan (hereinafter defined) by the Company to purchase shares of the
Company Common Stock, which is then outstanding, whether or not vested or
exercisable, shall be vested and exercisable in accordance with their terms,
shall be cancelled and the holder thereof shall be entitled to receive from the
Company immediately prior to the Effective Time an amount in cash equal to the
excess, if any, of (a) the Merger Price multiplied by the number of shares of
Company Common Stock subject to such option, over (b) the exercise price of such
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option multiplied by the number of shares of Company Common Stock subject
thereto. The funds required to make such payments shall be made available to the
Company by Parent immediately prior to the Effective Time.
(b) Immediately prior to the Effective Time, each warrant granted by the
Company to purchase shares of Company Common Stock, which is then outstanding,
shall remain outstanding in accordance with its terms, and after the Effective
Time the holder thereof shall be entitled to receive from the Company upon
payment of the exercise price provided for therein an amount equal to the Merger
Price multiplied by the number of shares of Company Common Stock with respect to
which such warrant is then being exercised.
(c) Appropriate arrangements shall be made for reduction of the amount to
be paid to each holder of cancelled options or warrants for any applicable
withholding taxes or other amounts required by law to be paid or withheld,
either through reducing the amount paid to, or by obtaining a cash payment from,
such holder. Prior to the Effective Time, the Board of Directors of the Company
shall take such action as may be required under the governing option plans and
agreements and warrants to effectuate the foregoing.
SECTION 1.8. Company Action.
(a) The Company represents and warrants that the Company's Board of
Directors has determined that the Merger is fair to and in the best interests of
the Company's stockholders and has approved and adopted this Agreement and the
Merger and resolved to recommend approval and adoption of this Agreement and the
Merger by the Company's stockholders. The Company represents and warrants that
Kropschot Financial Services, the Company's financial advisor (the "Company
Investment Banker"), has advised the Board of Directors of the Company that the
Merger Price to be paid to the Company's stockholders in the Merger is fair to
the Company and its stockholders from a financial point of view.
(b) The Company represents and warrants that its Board of Directors, by
resolutions duly adopted, has approved the acquisition of Company Common Stock
by Parent or Merger Sub pursuant to this Agreement and the transactions
contemplated hereby, the Principal Stockholder Agreements (hereinafter defined)
and the transactions contemplated thereby, and the business combination of
Merger Sub and the Company pursuant to this Agreement and the Merger, all as
contemplated by Section 203 of the DGCL, and that, accordingly, this Agreement,
the Principal Stockholder Agreement, and the transactions contemplated hereby
and thereby and Parent's and Merger Sub's rights hereunder and thereunder or any
other "business combination" (as defined therein) between Parent or any of its
affiliates and the Company are not subject to any limitations or obligations
imposed by Section 203 of the DGCL.
SECTION 1.9. Arrangements with Certain Stockholders of the
Company. Contemporaneously with the execution and delivery hereof, certain
stockholders of the Company are executing and delivering stockholders letter
agreements (the "Principal Stockholder Agreements") which restrict such
stockholders from alienating prior to the Effective Date any shares of Company
Common Stock now owned by them and obligating such stockholders to vote or cause
to be voted at the Meeting (hereinafter defined) all shares of Company Common
Stock held of record or beneficially by them (the "Principal Stockholder
Shares") in favor of this Agreement, subject to any termination of this
Agreement (i) by Parent or (ii) by the Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, Parent and Merger
Sub as follows, except as set forth on a Disclosure Schedule delivered by the
Company concurrently with the execution and delivery of this Agreement (the
"Company Schedule"), each of which exceptions shall specifically identify the
relevant subsection hereof to which it relates and shall be deemed to be
representations and warranties as if made hereunder:
SECTION 2.1. Organization, Powers and Qualifications. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. The Company has all
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requisite corporate power and authority to carry on its business as it has been
and is now being conducted and to own, lease and operate the properties and
assets used in connection therewith. The Company is duly qualified as a foreign
corporation authorized to do business and is in good standing in every
jurisdiction in which such qualification is required, all of which jurisdictions
are disclosed on the Company Schedule, except where the failure to be so
qualified would not have a Company Material Adverse Effect. As used in this
Agreement, "Company Material Adverse Effect" shall mean any fact, condition,
event, development or occurrence which, individually or when taken together with
all other such facts, conditions, events, developments or occurrences, is
reasonably likely to have a material adverse effect on the financial condition,
operating results, business or prospects of the Company and the Subsidiaries
(hereinafter defined), taken as a whole.
SECTION 2.2. Subsidiaries. With respect to each of the following direct
or indirect subsidiaries of the Company ("Subsidiaries"), which constitute all
subsidiaries of the Company:
FSI Funding Corp. I
FSI Funding Corp. II
Financing for Science Limited
Denton Imaging, Inc.
Highland Park Medical Imaging, Inc.
Melville Holding Co., Inc.
the Company Schedule lists the jurisdiction of its organization and the amount
of its securities outstanding and the owners thereof. Each Subsidiary is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Each Subsidiary has all requisite power and
authority to carry on its business as it has been and is now being conducted and
to own, lease and operate the assets and properties used in connection
therewith. Each Subsidiary is duly qualified to do business and is in good
standing in each jurisdiction, as set forth on the Company Schedule, in which
such qualification is required, except where the failure to be so qualified
would not have a Company Material Adverse Effect. All issued and outstanding
shares of capital stock of each Subsidiary have been duly authorized, are fully
paid and nonassessable, and, except as set forth on the Company Schedule, are
lawfully owned of record and beneficially by the Company or another Subsidiary
free and clear of all pledges, liens, claims, security interests and other
charges or defects in title of any nature whatsoever. There are no existing
subscriptions, options, warrants, convertible securities, calls, commitments, or
agreements calling for or requiring the issuance, transfer, sale or other
disposition of any shares of the capital stock of any Subsidiary, or calling for
or requiring the issuance of any securities or rights convertible into or
exchangeable for shares of capital stock of any Subsidiary. Except for the
Subsidiaries or as set forth on the Company Schedule, neither the Company nor
any Subsidiary owns any shares of any corporation nor has any interest, either
of record, beneficially or equitably, in any association, partnership, joint
venture or other legal entity.
SECTION 2.3. Capital Stock. The Company has authorized capital stock
consisting of 20,000,000 shares of Common Stock, par value $.01 per share, of
which 5,394,600 shares are issued and outstanding and 37,900 shares are held as
treasury shares, and (b) 2,000,000 shares of Preferred Stock, par value $.01 per
share, none of which is issued or outstanding. All of the issued and outstanding
shares have been duly authorized and are validly issued and outstanding, fully
paid and nonassessable, and were issued in compliance with all applicable
Federal and state laws, including without limitation, securities laws; and all
of such treasury shares were acquired by the Company in compliance with all
applicable laws, including without limitation all applicable Federal and state
securities laws. No shares of capital stock issued by the Company are or were at
the time of their issuance subject to preemptive rights. There are no existing
subscriptions, options, warrants, calls, commitments, agreements, conversion
rights or other rights of any character (contingent or otherwise) to purchase or
otherwise acquire from the Company at any time, or upon the happening of any
stated event, any shares of the capital stock of the Company whether or not
presently issued or outstanding, except as set forth on the Company Schedule.
The Company Schedule accurately sets forth the information described therein
with respect to all such options and warrants, including the date of grant
thereof, the number of shares subject thereto, the current exercise price
thereof, the term therefor and, except in the case of publicly traded warrants,
the record holders thereof. There are no voting trusts or other agreements or
understandings to
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which the Company is a party, nor, to the knowledge of the Company to which any
stockholder of the Company is a party, with respect to the voting of capital
stock of the Company.
SECTION 2.4. Certificate of Incorporation, By-Laws, Minute Books and
Records. The copies of the Certificate of Incorporation and all amendments
thereto and of the By-laws, as amended, of the Company and the Subsidiaries
which have been delivered to Parent are true, correct and complete copies
thereof. The minute books of the Company and the Subsidiaries which have been
made available for inspection contain minutes, which are accurate and complete
in all material respects, of all meetings and accurate consents in lieu of
meetings of the Board of Directors (and any committee thereof) and of the
stockholders of the Company and the Subsidiaries since the respective dates of
incorporation. The books and records of the Company and each Subsidiary
accurately reflect, in all material respects, the transactions to which the
Company or the Subsidiary is a party or by which their properties are subject or
bound, and the assets and liabilities of the Company or the Subsidiary.
SECTION 2.5. Authority; Binding Effect. The Company has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. All necessary action, corporate
or otherwise, required to have been taken by or on behalf of it by applicable
law, its charter document or otherwise to authorize (a) the approval, execution
and delivery on its behalf of this Agreement and (b) its performance of its
obligations under this Agreement and the consummation of the transactions
contemplated hereby has been taken, except that the transactions must be
approved by the stockholders of the Company pursuant to Section 251 of the DGCL.
This Agreement constitutes the Company's valid and binding agreement,
enforceable against it in accordance with its terms, except (A) as the same may
be limited by applicable bankruptcy, insolvency, moratorium or similar laws of
general application relating to or affecting creditors' rights, including
without limitation, the effect of statutory or other laws regarding fraudulent
conveyances and preferential transfers, and (B) for the limitations imposed by
general principles of equity and commercial reasonableness.
SECTION 2.6. Conflict with Other Agreements; Approvals. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby will not, (a) violate or conflict with the Company's charter
or bylaws or (b) constitute a breach or default (or an event that with notice or
lapse of time or both would become a breach or default) or give rise to any
lien, third party right of termination, cancellation, material modification or
acceleration under any Contract (hereinafter defined) to which the Company or
any Subsidiary is a party or by which it is bound, except where such breach,
default, lien, third party right, cancellation, modification or acceleration
would not have a Company Material Adverse Effect, or (c) constitute a violation
of any law, rule or regulation to which the Company or any Subsidiary is
subject.
SECTION 2.7. Proxy Statement and Other Information. None of the
information contained in the Proxy Statement (hereinafter defined) (other than
information related to Parent or Merger Sub which is furnished in writing by
Parent or Merger Sub expressly for inclusion in the Proxy Statement) will, at
the time the Proxy Statement is mailed, contain any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
SECTION 2.8. Consents and Approvals. Neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby
will require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, except (a) for
filings required under the Securities Exchange Act of 1934, as amended, and the
rules and regulations thereunder (the "Exchange Act"), and applicable state
securities laws, (b) for notification pursuant to, and expiration or termination
of the waiting period under, the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and the rules and regulations thereunder (the "HSR Act"), (c)
the filing and recording of the Certificate of Merger in accordance with the
DGCL, and (d) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent it from performing its obligations under this Agreement without having a
Company Material Adverse Effect.
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SECTION 2.9. SEC Reports. The Company has filed all required forms,
reports and documents with the Securities and Exchange Commission (the "SEC")
since the initial public offering of Company Common Stock on May 27, 1994
(collectively, the "Company SEC Reports"), including without limitation the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the
"Company 1995 Form 10-K"). The Company's SEC Reports have complied in all
material respects with all applicable requirements of the Securities Act of
1933, as amended, and the rules and regulations thereunder (the "Securities
Act"), and the Exchange Act. As of their respective dates, none of the Company's
SEC Reports, including without limitation, any financial statements or schedules
included or incorporated by reference therein, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The Company has heretofore delivered to Parent, in the form filed
with the SEC, all of the Company SEC Reports.
SECTION 2.10. Financial Statements. The Company has delivered to Parent
true and complete copies of (a) consolidated and consolidating balance sheets of
the Company and Subsidiaries at December 31, 1995 and 1994 and the related
consolidated and consolidating statements of earnings, changes in stockholders'
equity and statements of cash flow for the years then ended, together with the
notes thereto, audited by the Company Auditors (the "Audited Financial
Statements"); and (b) unaudited consolidated and consolidating balance sheets of
the Company and Subsidiaries at March 31, 1996 and 1995 and related consolidated
and consolidating statements of income, changes in stockholders' equity and
statements of cash flow for the periods ended March 31, 1996 and 1995 (the
"Interim Financial Statements"), all of which have been prepared in accordance
with generally accepted accounting principles consistently applied throughout
the periods involved ("GAAP"), except as otherwise disclosed in the notes
thereto. Such balance sheets, including the related notes, fairly present in all
material respects the consolidated and consolidating financial position, assets
and liabilities (whether accrued, absolute, contingent or otherwise) of the
Company and Subsidiaries at the dates indicated and such consolidated and
consolidating statements of income, changes in stockholders' equity and
statements of cash flow fairly present in all material respects the consolidated
and consolidating results of operations, changes in stockholders' equity and
cash flow of the Company and Subsidiaries for the periods indicated. The
unaudited consolidated and consolidating financial statements as at and for the
periods ending March 31, 1996 and 1995 contain all adjustments, which are solely
of a normal recurring nature, necessary to present fairly in all material
respects the financial position at March 31, 1996 and 1995 and the results of
operations and changes in stockholders' equity and financial position for the
periods then ended. (The audited consolidated balance sheet of the Company and
Subsidiaries at December 31, 1995 described above is referred to herein as the
"Company 1995 Balance Sheet" and December 31, 1995 is referred to herein as the
"Balance Sheet Date"). The unaudited consolidated balance sheet of the Company
and its Subsidiaries at March 31, 1996, described above, is referred to herein
as the "Company 1996 Interim Balance Sheet" and March 31, 1996 is referred to
herein as the "Interim Balance Sheet Date".
SECTION 2.11. Financing Business Representations.
(a) The Company Schedule sets forth for each financing transaction
conducted by the Company or any Subsidiary with respect to any type of property
under which the Company is the lessor, the seller, the lender or an assignee
thereof and which would be reflected in a consolidated balance sheet of the
Company and any Subsidiary in the lines captioned "net investment in direct
finance leases" or "net investment in operating leases" (the "Financing
Transactions") the following information as of the Interim Balance Sheet Date:
(i) the contract number assigned by the Company; (ii) the name of the party
obligated to make rent, purchase price or debt service payments; (iii) the
billing address of such obligor; the primary location of the equipment; (iv) the
initial cost of equipment leased, sold or acting as collateral; (v) the general
type of equipment leased, sold or acting as collateral; (vi) the remaining
amount of all receivables of the Company related to such transaction; (vii) the
amount and timing of rental, purchase price or debt service payments to the
Company with respect thereto; (viii) the date the related lease, installment
sale or loan agreement commenced and terminates; (ix) the principal amount and
remaining term of any nonrecourse debt of the Company with respect thereto; (x)
the type of purchase option granted with respect to the equipment; (xi) the
residual value reflected on the Company's books of any equipment to which the
Company is entitled upon
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expiration of the related lease or installment sales agreement as reflected on
the Company 1995 Balance Sheet; and (xii) whether such transaction is classified
as a "true lease" for tax purposes.
(b) Accurate and complete copies of each of the agreements, contracts,
leases and other instruments entered into with respect to Financing Transactions
(the "Financing Documents") are in the files of the Company and have been made
available to Parent. The original execution copy of the Financing Documents are
in the possession of the Company, a trustee under a securitization transaction
or a secured lender to the Company. The Company has caused to be filed UCC-1
financing statements with respect to each item of property involved in any
Financing Transaction and has made such other filings or notifications, or taken
possession or has obtained certificates of title, as are necessary to give the
Company a perfected security interest in and lien upon such property.
(c) Each of the Financing Documents is valid and enforceable in accordance
with its terms except as may be limited by bankruptcy laws or other similar laws
affecting rights of creditors generally; the Company is, and to the Company's
knowledge all other parties thereto are, in compliance in all material respects
with the provisions thereof; the Company is not, and to the Company's knowledge
no other party thereto is, in default in the performance, observance or
fulfillment of any material obligation, covenant or condition contained therein
(except overdue accounts at the date of the Company 1995 Balance Sheet which are
accurately reflected on the aging schedule included on the Company Schedule);
and, to the Company's knowledge, no event has occurred which with or without the
giving of notice or lapse of time, or both, would constitute a default
thereunder.
(d) There has been no adverse determination in any administrative
proceeding or in any court of law, nor any adverse settlement, ongoing
administrative proceeding or other action, in each of the foregoing cases
involving or by the Internal Revenue Service, which resulted in, or seeks to
result in, a determination with respect to any equipment subject to a lease in
which the Company is designated as the lessor that such lease is or was not a
true lease for tax purposes or that the Company was not the full owner thereof
for tax purposes or which had that result with respect to any other lease which
may have been entered into by the Company at any time and which lease is
substantially similar to any existing lease to which any leased equipment
included in the assets of the Company is subject. The Company has no knowledge
of any action or proceeding, either concluded, pending, or threatened, by the
Internal Revenue Service against the lessee of any equipment subject to a lease
in which the Company or a Subsidiary is designated as the lessor based on the
assertion that the lease was not a true lease for tax purposes.
(e) With respect to each Financing Transaction as to which the Company has
taken the position that it is a true lease for tax purposes, involving any
equipment subject to a lease in which the Company or a Subsidiary is designated
lessor; (i) no lessee is permitted or required under the applicable Financing
Documents to acquire title to such leased equipment upon payment of a stated
amount of rentals or other payments which it is required to make; (ii) no such
leased equipment is subject to an option of the lessee to purchase the leased
equipment at a price which is lower than 10% of its original cost to the
Company; (iii) the reasonably estimated economic useful life of each item of
leased equipment, determined as of the time the Company entered into the leasing
transaction with respect thereto and as of the Closing Date, is at least
significantly in excess of the base term of the related lease (including in such
base term any period for which the lease may be renewed at the option of the
lessee for a specified rental that is less than the fair rental value of the
leased equipment); (iv) the Company has no right to cause the purchase of any
such item of leased equipment by the lessee thereof; and (v) the Company
realized or (but for the transaction provided by this Agreement) expected at the
time of inception of the transaction to realize a cash profit with respect to
each such leasing transaction apart from the value of tax deductions,
allowances, credits and other tax attributes arising from such transaction.
(f) The Company Schedule sets forth for each transaction described in the
portfolio securitization transactions entered into by the Company or any
Subsidiary and the related interest rate swap transactions, including without
limitation any rights of the Company in respect of the servicing, collection or
credit enhancement of the assets included in such securitized portfolios (the
"Securitization Assets") the following information as of the Balance Sheet Date:
the outstanding principal due to investors; the outstanding amount
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of the Company's recourse or repurchase obligation for defaulted transactions in
the pool, a projection of the base servicing fees and credit enhancement, excess
servicing, or incentive fees assuming scheduled lease runoffs; a projection of
program fee expenses assuming scheduled lease runoffs; and a list of leases in
each securities pool specifying for each lease the information described in
subsection (a) of this Section 2.11.
SECTION 2.12. Absence of Certain Changes. Except as described on the
Company Schedule, since the Balance Sheet Date, the Company and the Subsidiaries
have conducted their business solely in the ordinary course consistent with past
practice. Except as otherwise disclosed in the Company 1995 Form 10-K (without
further amendment or additions after the date hereof), since the Balance Sheet
Date the Company and the Subsidiaries have not
(a) suffered any material adverse change in the financial condition,
results of operations or business or prospects of the Company and the
Subsidiaries (taken as a whole), except for material adverse changes due to
general economic or industry-wide conditions;
(b) been subject to any other events or conditions of any character that,
individually or in the aggregate, have or are reasonably likely to be expected
to have a Company Material Adverse Effect or on the ability of the Company to
perform its obligations under this Agreement, except for material adverse
changes due to general economic or industry-wide conditions;
(c) incurred any liabilities, other than liabilities incurred in the
ordinary course of business consistent with past practice, or discharged or
satisfied any lien or encumbrance, or paid any liabilities, other than in the
ordinary course of business consistent with past practice, or failed to pay or
discharge when due any liabilities of which the failure to pay or discharge has
caused or will cause any material damage or risk of material loss to it or any
of its assets or properties;
(d) sold, encumbered, assigned or transferred any assets or properties,
except for Financing Transactions entered into in the ordinary course of
business consistent with past practice;
(e) created, incurred, assumed or guaranteed any indebtedness for money
borrowed, or mortgaged, pledged or subjected any of its assets to any mortgage,
lien, pledge, security interest, conditional sales contract or other encumbrance
of any nature whatsoever, except for Permitted Liens (hereinafter defined) and
with respect to Financing Transactions, security interests, liens and landlord's
rights which are subordinated to the interests of the Company and do not
significantly affect the value thereof;
(f) made or suffered any amendment or termination of any material
agreement, contract, commitment, lease or plan to which it is a party or by
which it is bound, or cancelled, modified or waived any substantial debts or
claims held by it or waived any rights of substantial value, except, in the case
of Financing Transactions, for any such amendment, termination, cancellation,
modification or waiver in the ordinary course of business;
(g) declared, set aside or paid any dividend or made or agreed to make any
other distribution or payment in respect of its capital shares or redeemed,
purchased or otherwise acquired or agreed to redeem, purchase or acquire any of
its capital shares;
(h) increased the salaries or other compensation of, or made any advance
(excluding advances for ordinary and necessary business expenses) or loan to,
any of its employees or made any increase in, or any addition to, other benefits
to which any of its employees may be entitled;
(i) changed any of the accounting principles followed by it or the methods
of applying such principles; or
(j) entered into any transaction other than in the ordinary course of
business consistent with past practice.
SECTION 2.13. Indebtedness; Absence of Undisclosed Liabilities. The
Company Schedule discloses as of the date hereof all indebtedness for money
borrowed of the Company or any Subsidiary, accurately disclosing for each such
indebtedness the payee, the original principal amount of the loan, the current
unpaid balance of the loan, the interest rate, the maturity date, and any
penalty or premium which any lender has the contractual right to impose with
respect to any prepayment thereof. Neither the Company nor the Subsidiaries
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have any material indebtedness, liability or obligation of the type required by
GAAP to be reflected on a balance sheet that is not reflected or reserved
against in the Company 1995 Balance Sheet or otherwise disclosed in the Company
1995 Form 10-K, except for such indebtedness, liabilities or obligations which
have arisen since the Balance Sheet Date in the ordinary course of business.
SECTION 2.14. Assets. The Company and the Subsidiaries have good and
marketable title to all their real and personal properties and assets, including
without limitation those assets and properties reflected in the Company 1995
Balance Sheet in the amounts and categories reflected therein (but excluding
property subject to Financing Transactions), free and clear of all mortgages,
liens, pledges, charges or encumbrances or other third party interests of any
nature whatsoever, except for the following ("Permitted Liens"): (a) the lien of
current taxes not yet due and payable, (b) properties, interests, and assets
disposed of by the Company or any Subsidiary since the Balance Sheet Date solely
in the ordinary course of business consistent with past practice, (c) such
secured indebtedness as is disclosed in the Company 1995 Balance Sheet covering
the properties referred to therein, and (d) such imperfections of title,
easements and encumbrances, if any, as are not substantial in character, amount
or extent and do not materially detract from the value, or interfere with the
present or proposed use, of the properties subject thereto. To the best
knowledge of the Company, all buildings, structures, facilities, equipment and
other items of tangible personal property reflected on the Company 1995 Balance
Sheet or acquired since the date thereof are in good operating condition and
repair, subject to normal wear and maintenance, are useable in the regular and
ordinary course of business of the Company and the Subsidiaries and conform to
all applicable laws, statutes, ordinances, codes, rules and regulations and
Authorizations relating to their construction, use and operation. The location
of all real property owned by the Company or the Subsidiaries is disclosed on
the Company Schedule.
SECTION 2.15. Contracts.
(a) The Company Schedule lists each written or oral contract, agreement,
arrangement, lease, instrument, mortgage or commitment to which the Company or
its Subsidiaries is a party or may be bound ("Contract") (i) which involves
payments of more than $50,000 over the term thereof (other than Financing
Transactions); (ii) which is with any present or former employee or for the
employment of any person or consultant or which is a non-compete arrangement
with any employee of the Company or its Subsidiaries; (iii) which is a severance
agreement, program or policy of the Company or its Subsidiaries with or relating
to its employees, (iv) under the terms of which any of the rights or obligations
of a party thereto will be modified or altered as a result of the transactions
contemplated hereby or which contains change in control provisions related to
the Company or its Subsidiaries; (v) which is an arrangement limiting or
restraining the Company or any Subsidiary or any successor thereto from engaging
or competing in any manner or in any business; (vi) under which the Company or
any Subsidiary guarantees the payment or performance by others or in any way is
or will be liable with respect to obligations of any other person; or (vii)
which is a material arrangement not made in the ordinary course of business.
(b) There have been filed as exhibits to, or incorporated by reference in,
the Company 1995 Form 10-K all Contracts that are material as described in, and
required to be filed pursuant to, Item 601(b)(10) of Regulation S-K.
(c) All Contracts are valid and binding and in full force and effect on the
date of this Agreement except to the extent they have previously expired in
accordance with their terms. Neither the Company nor the Subsidiaries have
violated any provision of, or committed or failed to perform any act which with
notice, lapse of time or both would constitute a default under the provisions
of, any Contract, the termination or violation of which, or the default under
which, might have a Company Material Adverse Effect. True and complete copies of
all Contracts listed on the Company Schedule or listed in the Company 1995 Form
10-K, together with all amendments thereto, have been made available to Parent.
SECTION 2.16. Insurance. The Company Schedule accurately sets forth as of
the day preceding the date hereof all policies of insurance, other than title
insurance policies, held by or on behalf of the Company and all outstanding
claims thereunder in excess, individually or in the aggregate, of $100,000. All
such policies of insurance are in full force and effect, and no notice of
cancellation has been received. In the reasonable
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judgment of the Company, such policies are in amounts which are adequate in
relation to the business and properties of the Company, and all premiums to date
have been paid in full.
SECTION 2.17. Authorizations, Compliance With Law. The Company and the
Subsidiaries hold all licenses, franchises, certificates, consents, permits and
authorizations ("Authorizations") from all governmental authorities and other
persons necessary for the lawful conduct of their respective businesses and
their use and occupancy of their assets and properties, except where the failure
to hold any of the foregoing would not have a Company Material Adverse Effect.
The Company has not violated, and is not in violation of or default under, any
such Authorizations or, any applicable laws, statutes, ordinances, codes, rules
and regulations of any governmental authorities, except where such violations do
not, and in so far as reasonably can be foreseen will not, have a Company
Material Adverse Effect, and the Company has not received any notice from a
governmental or regulatory authority within five years of the date hereof of any
such violation.
SECTION 2.18. Taxes.
(a) All federal, state, local and foreign tax returns, reports, statements
and other similar filings required to be filed by the Company or the
Subsidiaries (the "Tax Returns") with respect to any federal, state, local or
foreign taxes, assessments, interest, penalties, deficiencies, fees and other
governmental charges or impositions, (including without limitation all income
tax, unemployment compensation, social security, payroll, sales and use, excise,
privilege, property, ad valorem, franchise, license, school and any other tax or
similar governmental charge or imposition under laws of the United States or any
state or municipal or political subdivision thereof or any foreign country or
political subdivision thereof) ("Taxes") have been filed with the appropriate
governmental agencies in all jurisdictions in which such Tax Returns are
required to be filed, except for local or municipal tax returns for which any
such failure to file would not, in the aggregate, have a Company Material
Adverse Effect, and all such Tax Returns properly reflect the liabilities of the
Company and the Subsidiaries for Taxes for the periods, property or events
covered thereby.
(b) All Taxes, including those without limitation which are called for by
the Tax Returns, or heretofore or hereafter claimed to be due by any taxing
authority from the Company, have been properly accrued or paid except to the
extent any such failure to accrue for or pay any such Taxes would not, in the
aggregate, have a Company Material Adverse Effect. The accruals for Taxes
contained in the 1995 Balance Sheet are adequate to cover the tax liabilities of
the Company and the Subsidiaries as of that date and include adequate provision
for all deferred taxes, and nothing has occurred subsequent to that date to make
any of such accruals inadequate.
(c) Neither the Company nor the Subsidiaries have received any notice of
assessment or proposed assessment in connection with any Tax Returns and there
are not pending tax examinations of or tax claims asserted against the Company
or the Subsidiaries or any of their respective assets or properties which are
likely to result in a Company Material Adverse Effect. The Company has not
extended, or waived the application of, any statute of limitations of any
jurisdiction regarding the assessment or collection of any Taxes.
(d) There are no tax liens (other than any lien for current taxes not yet
due and payable) on any of the assets or properties of the Company or the
Subsidiaries. The Company has no knowledge of any basis for any additional
assessment of any Taxes. The Company and the Subsidiaries have made all deposits
required by law to be made with respect to employees' withholding and other
employment taxes, including without limitation the portion of such deposits
relating to taxes imposed upon the Company or the Subsidiaries.
SECTION 2.19. Absence of Litigation. There are no claims, actions, suits,
proceedings or investigations pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries, or any properties or
rights of the Company or any of its subsidiaries, before any court, arbitrator
or administrative, governmental or regulatory authority or body, domestic or
foreign, that could have a Company Material Adverse Effect.
SECTION 2.20. Employee Benefit Plans: Employment Agreements.
(a) The Company Schedule lists all employee benefit plans (as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) and all bonus, stock option, stock
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purchase, incentive, deferred compensation, supplemental retirement, severance
and other similar fringe or employee benefit plans, programs or arrangements,
and any current or former employment or executive compensation or severance
agreements, written or otherwise, for the benefit of, or relating to, any
employee, director or consultant of the Company, any trade or business (whether
or not incorporated) which is a member of a controlled group including the
Company or which is under common control with the Company (an "ERISA Affiliate")
within the meaning of Section 414 of the Internal Revenue Code of 1986, as
amended (the "Code"), or any subsidiary of the Company, as well as each plan
with respect to which the Company or an ERISA Affiliate could incur liability
under Section 4069 (if such plan has been or were terminated) or Section 4212(c)
of ERISA (together, the "Employee Plans"), excluding former agreements under
which the Company has no remaining obligations and any of the foregoing that are
required to be maintained by the Company under the laws of any foreign
jurisdiction. A copy of each such written Employee Plan (other than those
referred to in Section 4(b)(4) of ERISA) has been made available to Parent.
(b) (i) Except as set forth on the Company Schedule, none of the Employee
Plans promises or provides retiree medical or other retiree welfare benefits to
any person (other than benefits required to be provided under Part 6 of Subtitle
B of Title I of ERISA or comparable state law relating to mandatory health
insurance coverage following a termination of employment) and none of the
Employee Plans is a "multiemployer plan" as such term is defined in Section
3(37) of ERISA; (ii) there has been no "prohibited transaction", as such term is
defined in Section 406 of ERISA and Section 4975 of the Code, with respect to
any Employee Plan, which could result in any material liability of the Company
or any of its subsidiaries; (iii) all Employee Plans are in compliance in all
material respects with the requirements prescribed by any and all statutes
(including ERISA and the Code), orders, or governmental rules and regulations
currently in effect with respect thereto (including all applicable requirements
for notification to participants or the Department of Labor, Internal Revenue
Service (the "IRS") or Secretary of the Treasury), and the Company and each of
its subsidiaries have performed all material obligations required to be
performed by them under, are not in any material respect in default under or
violation of, and have no knowledge of any default or violation by any other
party to, any of the Employee Plans; (iv) each Employee Plan intended to qualify
under Section 401(a) of the Code and each trust intended to qualify under
Section 501(a) of the Code is the subject of a favorable determination letter
from the IRS, and nothing has occurred which may reasonably be expected to
impair such determination; (v) all contributions required to be made to any
Employee Plan pursuant to Section 412 of the Code, or the terms of the Employee
Plan or any collective bargaining agreement, have been made on or before their
due dates and a reasonable amount has been accrued for contributions to each
Employee Plan for the current plan years; (vi) with respect to each Employee
Plan, no "reportable event" within the meaning of Section 4043 of ERISA
(excluding any such event for which the thirty (30) day notice requirement has
been waived under the regulations to Section 4043 of ERISA) nor any event
described in Section 4062, 4063 or 4041 of ERISA has occurred; and (vii) neither
the Company nor any ERISA Affiliate has incurred, nor reasonably expects to
incur, any liability under Title IV of ERISA (other than liability for premium
payments to the Pension Benefit Guaranty Corporation arising in the ordinary
course).
(c) The Company Schedule sets forth a true and complete list of each
current or former employee, officer or director of the Company or any of its
subsidiaries who holds any option to purchase Company Common Stock as of the
date hereof, together with the number of shares of Company Common Stock which
are subject to such option, the date of grant of such option, the extent to
which such option is vested (or will become vested within six months from the
date hereof, or as a result of, the Merger), the option price of such option (to
the extent determined as of the date hereof,) whether such option is intended to
qualify as an incentive stock option within the meaning of Section 422(b) of the
Code (an "ISO"), and the expiration date of such option. The Company Schedule
also sets forth the total number of such ISOs and such nonqualified options.
SECTION 2.21. Labor Matters. There are no controversies pending or, to
the knowledge of the Company, threatened, between the Company or any of the
Subsidiaries or any of their respective employees, which controversies have or
may reasonably be expected to have a Company Material Adverse Effect. Neither
the Company nor any of the Subsidiaries is party to any collective bargaining
agreement or other labor agreement with any union or labor organization and no
union or labor organization has been recognized by the
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Company nor or any of the Subsidiaries as a bargaining representative for
employees of the Company or any of the Subsidiaries. The Company does not know
of any activity or proceeding of any labor organization (or representative
thereof) or employee group to organize any such employees. In addition, (a)
there is no strike, picketing or work stoppage by, or any lockout of, employees
of the Company or the Subsidiaries or any material dispute, slowdown or labor
disturbance pending or, to the knowledge of the Company, threatened, against or
involving the Company or any of its Subsidiaries, and (b) there is no material
proceeding, claim, suit, action or governmental investigation pending or, to the
knowledge of the Company, threatened, in respect of which any director, officer,
employee or agent of the Company or any of its Subsidiaries is or may be
entitled to claim indemnification from the Company or a Subsidiary pursuant to
their respective charters or By-laws or under any indemnification agreements.
SECTION 2.22. Environmental Matters. To the Company's knowledge, without
additional due diligence or investigation and notwithstanding the provisions of
Section 6.2(b):
(a) The Company and each of the Subsidiaries is in material compliance
with all applicable Environmental Laws and neither the Company nor any of
the Subsidiaries has received any written or oral communication from any
person or governmental authority that alleges that the Company or any of
the Subsidiaries is not in material compliance with applicable
Environmental Laws where such non-compliance could reasonably be expected
to result in a Company Material Adverse Effect.
(b) The Company and each of the Subsidiaries has obtained or has
applied for all material Environmental Permits, where and if such
Environmental Permits are specifically required of the Company or
Subsidiaries, necessary for the construction of their facilities or the
conduct of their operations, and all such material Environmental Permits
are effective or, where applicable, a renewal application has been timely
filed and is pending agency approval, and the Company and the Subsidiaries
are in material compliance with all terms and conditions of the
Environmental Permits. There are no past or present events, conditions,
circumstances, activities, practices, incidents, actions or plans that may
interfere with, or prevent, future continued material compliance on the
part of the Company or any of the Subsidiaries with the material
Environmental Permits. There are no matters or conditions that would
preclude reissuance or transfer of any material Environmental Permit,
including amendment of such instrument, to Parent or one of its
Subsidiaries where such action is necessary to maintain compliance with
Environmental Laws in all material respects.
(c) There are no future requirements imposed by any currently existing
Environmental Law or Environmental Permit which could reasonably be
expected to result in the accrual of a material cost not disclosed in
writing to Parent.
(d) There is no material Environmental Claim (as defined below)
pending or, to the knowledge of the Company, threatened (i) against the
Company or any of the Subsidiaries, or (ii) against any real or personal
property or operations which the Company or any of the Subsidiaries owns,
leases, operates or manages, in whole or in part.
(e) There are no Releases of any Hazardous Material that would be
reasonably likely to form the basis of any material Environmental Claim
against the Company or any of the Subsidiaries, or against any person or
entity whose liability for any material Environmental Claim the Company or
any of the Subsidiaries has or may have retained or assumed either
contractually or by operation of law.
(f) With respect to any predecessor of the Company or any of the
Subsidiaries, there are no material Environmental Claims pending or
threatened, or any Releases of Hazardous Materials that would be reasonably
likely to form the basis of any material Environmental Claim against the
Company or any of the Subsidiaries.
(g) Neither the Company nor any of its Subsidiaries, nor, to the
knowledge of the Company, any owner of premises leased or operated by the
Company or any of its Subsidiaries has filed any notice with respect to
such premises under federal, state, local or foreign law indicating past or
present treatment, storage or disposal of Hazardous Materials, as regulated
under 40 C.F.R. Parts 264-267 or any state, local or foreign equivalent or
is engaging or has engaged in business operations involving the generation,
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transportation, treatment, recycle or disposal of any waste regulated under
Environmental Laws pertaining to radioactive materials or the nuclear power
industry, including without limitation, requirements of Volume 10 of the
Code of Federal Regulations.
(h) None of the properties owned, leased or operated by the Company,
the Subsidiaries or, to the knowledge of the Company, any predecessor
thereof are now or were in the past, listed on the National Priorities list
of Superfund Sites, the CEREAL Information System, or any other comparable
state or local environmental database.
(i) The Merger will not require any governmental approvals under the
Environmental Laws, including those that are triggered by sales or
transfers of businesses or real property.
(j) As used in this Section 2.22:
(i) "Environmental Claim" means any and all administrative,
regulatory or judicial actions, suits, demands, demand letters,
directives, claims, liens, investigations, proceedings or notices of
noncompliance or violation (written or oral) by any person or entity
(including any federal, state, local or foreign governmental authority
having jurisdiction over the Company or the Subsidiaries) alleging
potential liability (including without limitation, potential
responsibility for or liability for enforcement, investigatory costs,
cleanup costs, governmental response costs, removal costs, remedial
costs, natural resources damages, property damages, personal injuries or
penalties) arising out of, based on or resulting from (A) the presence,
or Release or threatened Release into the environment, of any Hazardous
Materials at any location, whether or not owned, operated, leased or
managed by the Company or any of the Subsidiaries (including without
limitation obligations to clean up contamination resulting from leaking
underground storage tanks); or (B) circumstances forming the basis of
any violation or alleged violation of any Environmental Law; or (C) any
and all claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief
resulting from the presence or Release of any Hazardous Materials.
(ii) "Environmental Laws" means all applicable foreign, federal,
state and local laws (including the common law), rules, requirements and
regulations relating to pollution, the environment (including without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or protection of human health as it relates to the
environment including without limitation, laws and regulations relating
to Releases of Hazardous Materials, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials.
(iii) "Hazardous Materials" means (A) any petroleum or any
by-products or fractions thereof, asbestos in any form that is or could
become friable, urea formaldehyde foam insulation, any form of natural
gas, explosives, and polychlorinated biphenyls; (B) any chemicals,
materials or substances, whether waste materials, raw materials or
finished products, which are now defined as or included in the
definition of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous substances," "restricted hazardous
wastes," "toxic substances," "toxic pollutants," "pollutants,"
"contaminants," or words of similar import under any Environmental Law;
and (C) any other chemical, material or substance, whether waste
materials, raw materials or finished products, regulated or forming the
basis of liability under any Environmental Law in a jurisdiction in
which the Company or any of the Subsidiaries operates.
(iv) "Release" means any release, spill, emission, leaking,
injection, deposit, disposal, discharge, dispersal, leaching or
migration into the environment (including without limitation ambient
air, soil, surface water, groundwater or property.
SECTION 2.23. Intellectual Property.
(a) Except as set forth on the Company Schedule, each of the Company
and the Subsidiaries owns, or is licensed or otherwise possesses legally
enforceable rights to use all United States and foreign patents,
trademarks, trade names, service marks, copyrights, trade secrets and
applications therefor, that are used
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in the business of the Company as currently conducted (the "Company
Intellectual Property Rights"). The Company Schedule lists all patents,
registered and material unregistered trademarks and service marks,
registered copyrights, trade names and any applications therefor included
in the Company Intellectual Property Rights.
(b) No claims with respect to the Company Intellectual Property Rights
are currently pending or, to the knowledge of the Company, are overtly
threatened by any person, nor does the Company know of any valid grounds
for any bona fide claims (i) that the use by the Company of the Company
Intellectual Property Rights infringes on any copyright, patent, trademark,
service mark or trade secret; (ii) against the use by the Company of any
Company Intellectual Property Rights; (iii) challenging the ownership or
validity of any of the Company Intellectual Property Rights; or (iv)
challenging the Company's license or legally enforceable right to use of
the Company Intellectual Property Rights not owned by the Company.
SECTION 2.24. Accuracy of Materials. The Company has made available to
Parent copies of all documents listed on the Company Schedule hereto or referred
to herein. Such copies are, and all documents and materials delivered or made
available in connection with Parent's investigation of the Company in connection
with the transactions contemplated hereby are, true and complete and include all
amendments, supplements and modifications thereto or waivers currently in effect
thereunder.
SECTION 2.25. Brokers and Finders. Neither the Company nor any Subsidiary
nor any of their respective officers, directors or employees has employed any
broker or finder or incurred any liability for any brokerage fees, commissions
or finder's fees in connection with the transactions contemplated herein, except
that the Company has employed the Company Investment Banker as its financial
advisor.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent and Merger Sub each represents and warrants to the Company as
follows:
SECTION 3.1. Organization and Powers. Each of Parent and Merger Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Each of Parent and Merger Sub has all requisite
corporate power and authority to carry on its business as it has been and is now
being conducted and to own, lease and operate the properties and assets used in
connection therewith.
SECTION 3.2. Authority; Binding Effect. Each of Parent and Merger Sub has
all requisite corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. All necessary
action, corporate or otherwise, required to have been taken by or on behalf of
each of Parent and Merger Sub by applicable law, its charter document or
otherwise to authorize (a) the approval, execution and delivery on its behalf of
this Agreement and (b) its performance of its obligations under this Agreement
and the consummation of the transactions contemplated hereby has been taken.
This Agreement constitutes each of Parent's and Merger Sub's valid and binding
agreement, enforceable against it in accordance with its terms, except (A) as
the same may be limited by applicable bankruptcy, insolvency, moratorium or
similar laws of general application relating to or affecting creditors' rights,
including without limitation, the effect of statutory or other laws regarding
fraudulent conveyances and preferential transfers, and (B) for the limitations
imposed by general principles of equity and commercial reasonableness.
SECTION 3.3. Conflict with Other Agreements; Approvals. The execution and
delivery of this Agreement do not, and the consummation of the transactions
contemplated hereby will not, (a) violate or conflict with Parent's or Merger
Sub's charter or bylaws or (b) constitute a breach or default (or an event that
with notice or lapse of time or both would become a breach or default) or give
rise to any lien, third party right of termination, cancellation, material
modification or acceleration under any Contract (hereinafter defined) to which
Parent or any subsidiary is a party or by which it is bound, except where such
breach, default, lien, third party right, cancellation, modification or
acceleration would not have a material adverse effect on the financial
condition, operating results, business or prospects of Parent and its
subsidiaries, taken as a whole, or (c) constitute a violation of any law, rule
or regulation to which Parent or any subsidiary is subject.
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SECTION 3.4. Consents and Approvals. Neither the execution and delivery
of this Agreement nor the consummation of the transactions contemplated hereby
will require any consent, approval, authorization or permit of, or filing with
or notification to, any governmental or regulatory authority, except (a) for
notification pursuant to, and expiration or termination of the waiting period
under, the HSR Act, (b) the filing and recording of the Certificate of Merger in
accordance with the DGCL, and (c) where the failure to obtain such consents,
approvals, authorizations or permits, or to make such filings or notifications,
would not prevent it from performing its obligations under this Agreement
without having a material adverse effect on it and its subsidiaries taken as a
whole.
SECTION 3.5. Proxy Statement and Other Information. None of the
information related to Parent or Merger Sub which is supplied by Parent in
writing expressly for inclusion in the Proxy Statement (hereinafter defined)
will, at the time the Proxy Statement is mailed, contain any untrue statement of
a material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representation or warranty is otherwise made by
Parent or Merger Sub with respect to the Proxy Statement.
SECTION 3.6. Brokers. Neither it nor any of its officers, directors or
employees has employed any broker or finder or incurred any liability for any
brokerage fees, commissions or finder's fees in connection with the transactions
contemplated herein.
SECTION 3.7. Financing. Parent has on hand or access to, and will make
available to Merger Sub on or prior to the Effective Time, funds sufficient to
pay the Merger Price for all issued and outstanding shares of Company Common
Stock pursuant to the Merger and to pay all other amounts owing by the Company
or Merger Sub in connection with the transactions contemplated by this
Agreement.
ARTICLE IV
OTHER AGREEMENTS
SECTION 4.1. Conduct of the Company's Business. The Company covenants and
agrees that, between the date of this Agreement and the Effective Time, unless
Parent shall otherwise consent in writing, and except as otherwise expressly
contemplated hereby, the business of the Company and the Subsidiaries shall be
conducted only in, and such entities shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice; and
the Company and its Subsidiaries will use their commercially reasonable efforts
to preserve substantially intact the business organization of the Company and
its Subsidiaries, to keep available the services of those of its present
officers, employees and consultants that are integral to the operation of its
business as presently conducted and to preserve the present relationships of the
Company and its Subsidiaries with customers, suppliers and other persons with
which the Company and the Subsidiaries have significant business relations. By
way of amplification and not limitation, except as otherwise expressly
contemplated by this Agreement, the Company agrees on behalf of itself and its
Subsidiaries that, without the prior written consent of Parent, they will,
between the date of this Agreement and the Effective Time:
(a) not directly or indirectly do any of the following: (i) amend or
propose to amend its Certificate of Incorporation or By-Laws; (ii) split,
combine or reclassify any outstanding shares of its capital stock, or
declare, set aside or pay any dividend payable in cash, stock, property or
otherwise with respect to such shares; (iii) redeem, purchase, acquire or
offer to acquire any shares of its capital stock; or (iv) enter into any
contract, agreement, commitment or arrangement with respect to any of the
matters set forth in this paragraph (a);
(b) not, directly or indirectly (i) issue, sell, pledge or dispose of,
or agree to issue, sell, pledge or dispose of, any additional shares of, or
securities convertible or exchangeable for, or any options, warrants or
rights of any kind to acquire any shares of, its capital stock of any class
or other property or assets whether pursuant to any rights agreement, stock
option plans described on the Company Schedule or otherwise, provided that
the Company may issue shares of Company Common Stock pursuant to currently
outstanding options and warrants referred to in Section 2.3 hereof and the
Company may sell
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the outstanding shares of Melville Holding Co. Inc. common stock held by it
as of the date hereof; (ii) acquire (by merger, consolidation or
acquisition of stock or assets) any corporation, partnership or other
business organization or division thereof or make any equity investments
therein, except for the acquisition of warrants in Financing Transactions
in the ordinary course of business consistent with past practice; (iii)
issue, sell, pledge, dispose of or encumber any assets of the Company or
the Subsidiaries, except for Financing Transactions and Securitization
Transactions in the ordinary course of business consistent with past
practice, or enter into any Securitization Transactions involving an amount
of more than $75 million (other than the Securitization Transaction of
which the Note Agreement referred to in clause (iv) below is a part) or
which involves financing costs and fees not consistent with past practice
or which involves an implicit interest rate not consistent with past
practice and except for the transfer of three used MRI systems to Melville
Holding Co. Inc.; (iv) incur any indebtedness for borrowed money or issue
any debt securities, except under the Revolving Credit Agreement described
on the Company Schedule, or any renewal, extension or replacement thereof
on substantially the same terms (except for any application or termination
fees imposed in connection with any such renewal, extension or replacement,
in an amount not to exceed $100,000), in an aggregate amount not to exceed
$75 million or pursuant to the Note Agreement, dated as of March 1, 1996,
between the Company and the Purchasers named therein in an aggregate amount
not to exceed $75 million and on terms which are consistent with past
practice; (v) make any commitments or agreements for capital expenditures
or capital additions or betterments exceeding in the aggregate $50,000
except such as may be involved in ordinary repair, maintenance or
replacement of its assets; (vi) enter into or modify any material contract,
lease or agreement except in the ordinary course of business and consistent
with past practice; or (vii) enter into any contract, agreement, commitment
or arrangement with respect to any of the matters set forth in this
paragraph (b);
(c) not, directly or indirectly, sell or exercise any options,
warrants or rights of any kind to acquire any equity securities (other than
as permitted by paragraph (b) above) of another entity without the prior
written consent of Parent which will not be unreasonably withheld;
(d) not, directly or indirectly, (i) grant any increase in the salary
or other compensation of its employees except in the ordinary course of
business and consistent with past practice or grant any bonus to any
employee or enter into any employment agreement or make any loan to or
enter into any material transaction of any other nature with any officer or
employee of the Company; (ii) take any action to institute any new
severance or termination pay practices with respect to any directors,
officers or employees of the Company or to increase the benefits payable
under its severance or termination pay practices; or (iii) adopt or amend,
in any respect, except as may be required by applicable law or regulation,
any bonus, profit sharing, compensation, stock option, restricted stock,
pension, retirement, deferred compensation, employment or other employee
benefit plan, agreement, trust, fund, plan or arrangement for the benefit
or welfare of any directors, officers or employees;
(e) not, directly or indirectly, change in any material respect its
accounting policies, methods or procedures except as required by generally
accepted accounting principles consistently applied or as contemplated by
Section 4.2 hereof;
(f) not, directly or indirectly, take any action which would cause its
representations and warranties contained herein to become inaccurate in any
material respect;
(g) advise Parent of each business decision made by the senior
management of the Company with respect to matters involving more than
$2,000,000 in the case of Financing Transactions, or $50,000 in the case of
matters other than Financing Transactions before such decision is
implemented or announced, and shall make available, from time to time at
Parent's request, senior management of the Company to consult with senior
management of Parent concerning the conduct of the business of the Company;
and
(h) promptly disclose to Parent any information contained in its
representations and warranties or the Company Schedule which, because of an
event occurring after the date hereof, is incomplete or is no longer
correct as of all times after the date hereof until the Closing Date;
provided, however, that none of such disclosures shall be deemed to modify,
amend or supplement the representations and warranties of
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the Company or the Company Schedule hereto for the purposes of Article V
hereof, unless Parent shall have consented thereto in writing.
SECTION 4.2. Per Share Valuation. Prior to the Closing, Parent and
Company shall calculate the Per Share Amount in accordance with the procedures
herein set forth. The "Per Share Amount" shall be equal to the sum of (1) six
dollars, plus (2) the quotient, rounded to the nearest penny, of (A) the sum of
the amount, if any, by which the Closing Date Book Value exceeds $26,185,000,
plus the amount, if any, by which the Closing Date Loss Reserves exceeds
$1,500,000, divided by (B) the number of outstanding shares of Company Common
Stock immediately prior to the Closing.
(a) As soon as practicable after the close of business on the last day of
the calendar month immediately preceding the month in which the Meeting is to be
held (the "Valuation Date"), the Company shall prepare a balance sheet of the
Company and its subsidiaries as of the Valuation Date (the "Valuation Date
Balance Sheet") which shall be prepared by the Company, reviewed by Parent and
Parent's independent public accountants and approved by Parent (such approval
not to be unreasonably withheld), and the related statement of income for the
period commencing on the Balance Sheet Date and ending on the Valuation Date
(together, the "Valuation Financial Statements"). For purposes of this
transaction, the Company may, in the preparation of the Valuation Date Balance
Sheet, allocate all or any part of its pre-tax earnings, accrued from January 1,
1996 through the Closing Date, to its Valuation Date Loss Reserves to the extent
that such allocations do not reduce the Company's Total Stockholders' Equity, as
shown on the Company 1995 Balance Sheet, below $26,185,000. In addition, there
shall be accrued as liabilities on the Valuation Financial Statements (i) an
amount equal to the amount, if any, by which all legal, accounting, auditing,
investment banking or financial advisory fees and proxy printing and mailing
costs and other related expenses reasonably estimated to be incurred by the
Company or the Subsidiaries in connection with the transactions contemplated
hereby for all periods through the Effective Time, whether or not billed or
payable as of the Valuation Date ("Transaction Costs") and any amounts paid or
payable by the Company to the Underwriters (as defined in Section 5.3(f) hereof)
of its initial public offering to terminate their rights under the Underwriting
Agreement and any related agreements, exceeds $400,000, and (ii) all obligations
under all employment arrangements or consulting arrangements to which the
Company is a party with respect to periods commencing on, or after or as a
result of the Closing, excluding however, the Company's obligations under the
consulting agreement with Mr. Randolph and the change of control agreement with
Mr. Robert W. Maxwell described on the Company Schedule. In addition, there
shall be excluded from the Valuation Financial Statements (i) any gains
attributable to the Company's exercise on or after January 1, 1996 of any
options, warrants or rights of any kind to acquire any equity securities of
another entity, (ii) up to an aggregate of $400,000 with respect to both any
Transaction Costs and any amounts paid or payable by the Company to the
Underwriter of its initial public offering to terminate their rights under the
Underwriting Agreement and any related agreements and (iii) up to $195,000 with
respect to the Company's purchase of "tail" coverage on its directors and
officers liability insurance. The Valuation Financial Statements may reflect the
payment by Mr. Bronfin to the Company of up to $250,000 and, upon the express
written consent of the Parent which shall not be unreasonably withheld, of
additional sums to assist the Company in achieving a Per Share Amount of at
least $6.35. Except as expressly contemplated hereby, the Valuation Financial
Statements shall be prepared in accordance with GAAP applied on a basis
consistent with the accounting principles and practices followed in preparing
the Audited Financial Statements.
(b) The "Closing Date Book Value" shall mean the Valuation Date Book Value
adjusted by an estimated amount agreed to by the Company and Parent as to the
probable change in the Valuation Date Book Value between the Valuation Date and
the Closing Date, and reduced by an amount equal to the Option Spread Amount.
The "Valuation Date Book Value" shall mean the consolidated net book value of
the Company and the Subsidiaries as of the Valuation Date as shown on the
Valuation Date Balance Sheet. The "Option Spread Amount" shall mean the amount
by which the product of the Merger Price multiplied by the number of shares of
Company Common Stock issuable upon the exercise of options or warrants,
outstanding immediately prior to the Effective Time which would be exercisable
at any time to purchase shares of Company Common Stock at an exercise price per
share equal to or less than the Merger Price, exceeds the product of the
weighted average exercise price (as of the Effective Time) of all such options
or warrants
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multiplied by the number of shares of Company Common Stock issuable upon the
exercise of such options or warrants. The "Closing Date Loss Reserves" shall
mean the Valuation Date Loss Reserves adjusted by an estimated amount agreed to
between the Company and the Parent as to the probable change in the Valuation
Date Loss Reserves between the Valuation Date and the Closing Date. The
"Valuation Date Loss Reserves" shall mean the amount of the general unallocated
asset contra-accounts which are included in allowances for doubtful accounts (as
opposed to reserves which are specifically allocated to particular doubtful
accounts) on the Valuation Date Balance Sheet. For purposes of this transaction,
the Company may allocate all or any part of its pre-tax earnings to its
Valuation Date Loss Reserves consistent with paragraph (a) above in developing
the estimation of Closing Date Loss Reserves.
(c) Any dispute which may arise between the Company and Parent as to the
preparation of the Valuation Financial Statements, including the determination
of the Closing Date Book Value or the Closing Date Loss Reserves, or the
calculation of the Per Share Amount shall be resolved in the following manner:
(i) Parent shall notify the Company in writing within 10 business days
after its receipt of the report of the Company pursuant hereto that Parent
disputes such matters and such notice shall specify in reasonable detail
the nature of the dispute;
(ii) during the three business day period following the date of such
notice, the Company and Parent shall attempt to resolve such dispute and to
determine the appropriateness of the Per Share Amount; and
(iii) if at the end of the three business day period specified in
subsection (ii) above, Parent and the Company shall have failed to reach a
written agreement with respect to such dispute, the matter shall be
referred to Price Waterhouse LLP, independent certified public accountants
(the "Arbitrator"), which shall act as an arbitrator and shall issue its
report as to the Valuation Financial Statements within 30 days after such
dispute is referred to the Arbitrator. Unless otherwise ordered by the
Arbitrator, each of the parties hereto shall bear all its costs and
expenses incurred by it in connection with such arbitration, except that
the fees and expenses of the Arbitrator hereunder shall be borne equally by
the Company and Parent. This provision for arbitration shall be
specifically enforceable by the parties and the decision of the Arbitrator
in accordance with the provisions hereof shall be final and binding and
there shall be no right of appeal therefrom. Unless otherwise agreed by the
Company and Parent, the rules of the American Arbitration Association shall
apply to such arbitration.
SECTION 4.3. Access to Information. Between the date of this Agreement
and the Closing Date, the Company will (a) give Parent and its authorized
representatives reasonable access, during regular business hours upon reasonable
notice, to all offices, warehouses and other facilities and to all of its books
and records, (b) permit Parent to make such reasonable inspections as it may
require, and (c) cause its officers and those of its subsidiaries to furnish
Parent with such financial and operating data and other information with respect
to the business and properties of the Company, as Parent may from time to time
reasonably request and as the Company may have on hand or be able to produce
without hardship. All such access and information obtained by Parent and its
authorized representatives shall be subject to the terms and conditions of the
letter agreement between the Company and Parent dated February 6, 1996 (the
"Confidentiality Agreement").
SECTION 4.4. Stockholder Vote; Proxy Statement.
(a) As promptly as practicable after the date hereof, the Company shall
take all action necessary in accordance with Rules 14a-1 et seq. of the Exchange
Act, the DGCL and its Certificate of Incorporation and By-laws to call, give
notice of and convene a meeting on a date determined by the Company and
acceptable to Parent of its stockholders (the "Meeting") to consider and vote
upon the approval and adoption of this Agreement and for such other purposes as
may be necessary or desirable. The Company's Board of Directors shall, subject
to its fiduciary duties, recommend without qualification of any nature that the
Company's stockholders vote to approve and adopt this Agreement and any other
matters to be submitted to the Company's stockholders in connection therewith as
to which Parent has no reasonable objection. The Company's Board of Directors
shall, subject to its fiduciary duties, use its reasonable best efforts to
solicit and secure from its stockholders such approval and adoption, which
efforts may include without limitation,
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soliciting stockholder proxies therefor and to advise Parent upon its request,
from time to time, as to the status of the stockholder vote then tabulated.
(b) As promptly as practicable after the date hereof, the Company shall
prepare and file with the SEC in accordance with Rules 14a-1 et seq. of the
Exchange Act a preliminary draft of a proxy statement ("Proxy Statement"). The
Company, Parent and Merger Sub shall cooperate fully with each other in the
preparation and filing of the Proxy Statement and any amendments and supplements
thereto. The Proxy Statement shall not be filed, and no amendment or supplement
thereto shall be made by the Company, without Parent's prior approval which
shall not be unreasonably delayed or withheld and no written communication with
the SEC shall be had, without prior consultation with Parent and Merger Sub and
their counsel. As promptly as practicable after the completion of any review by,
or in the absence of such review, a termination of any applicable waiting period
of, the SEC, the Company shall cause to be mailed a definitive Proxy Statement
to its stockholders entitled to vote at the Meeting. The Company represents,
warrants and covenants that the Proxy Statement will be prepared in accordance
with the Exchange Act and that, except for information related to Parent or
Merger Sub which is furnished in writing by Parent or Merger Sub expressly for
inclusion in the Proxy Statement, the Proxy Statement will not, at the time the
Proxy Statement is mailed or at the time of the Meeting, contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
SECTION 4.5. Reasonable Best Efforts. Subject to the fiduciary duties of
the Company's Board of Directors, each of the parties hereto agrees to use its
reasonable best efforts to take, or cause to be taken, all appropriate action,
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws, statutes, ordinances, codes, rules and regulations to
consummate and make effective the transactions contemplated by this Agreement in
the most expeditious manner practicable, including without limitation the
satisfaction of all conditions to the Merger, and to consummate the Merger no
later than August 30, 1996.
SECTION 4.6. Expenses of the Company. The Company agrees that it will use
its best efforts to limit the expenses it incurs in connection with the
consummation of the transactions contemplated by this Agreement, including
without limitation, the fees and expenses of its counsel, its independent public
accountants and the fees and expenses related to the preparation and
distribution of the Proxy Statement, to $400,000.
SECTION 4.7. Public Announcements. Except as may be required by
applicable law, no party hereto shall make any public announcements or otherwise
communicate with any news media with respect to this Agreement or any of the
transactions contemplated hereby without prior consultation with the other
parties as to the timing and contents of any such announcement as may be
reasonable under the circumstances; provided, that nothing contained herein
shall prevent any party from promptly making all filings with governmental
authorities and public announcements as may, in its judgment, be required in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby.
SECTION 4.8. Notification. Each party hereto shall, in the event of, or
promptly after obtaining knowledge of the occurrence or threatened occurrence
of, any fact or circumstance that would cause or constitute a breach of any of
its representations and warranties set forth herein, give notice thereof to the
other parties and shall use its best efforts to prevent or promptly to remedy
such breach.
SECTION 4.9. Regulatory and Other Authorizations. Each party hereto
agrees to use its best efforts to obtain all Authorizations, consents, orders
and approvals of federal, state, local and foreign regulatory bodies and
officials and non-governmental third parties that may be or become necessary for
(i) its respective execution and delivery of, and the performance of its
respective obligations pursuant to, this Agreement and (ii) the ownership of the
Surviving Corporation by Parent, and each party will cooperate fully with the
other parties in promptly seeking to obtain all such authorizations, consents,
orders and approvals. Without limitation, the Company and Parent shall each make
an appropriate filing of a Notification and Report Form pursuant to the HSR Act
no later than 20 days after the date hereof and shall promptly respond to any
request for additional information with respect thereto. Each such filing shall
request early termination of the waiting period imposed by the HSR Act. If this
Agreement is terminated, the Company shall reimburse Parent for one-half of the
filing fees paid by Parent under the HSR Act.
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SECTION 4.10. Further Assurances. Each of the parties hereto shall
execute such documents and other instruments and take such further actions as
may be reasonably required or desirable to carry out the provisions hereof and
consummate the transactions contemplated hereby or, at and after the Effective
Time, to evidence the consummation of the transactions contemplated by this
Agreement. Upon the terms and subject to the conditions hereof, each of the
parties hereto shall take or cause to be taken all actions and to do or cause to
be done all other things necessary, proper or advisable to consummate and make
effective as promptly as practicable the transactions contemplated by this
Agreement and to obtain in a timely manner all necessary waivers, consents and
approvals and to effect all necessary registrations and filings.
SECTION 4.11. Indemnification of Directors and Officers. Parent shall
not, and shall not permit the Company or any other entity, for a period of six
years after the Effective Time, to take any action to impair any exculpatory or
indemnification provisions now existing in the charter or bylaws of the Company
for the benefit of any individual who served as a director or officer of the
Company at any time prior to the Effective Time (the "Indemnification
Provisions"), except for any changes which are required to conform with changes
in applicable law and any changes which do not affect the application of such
Indemnification Provisions to acts or omissions of such individuals prior to the
Effective Time. From and after the Effective Time until the sixth anniversary of
the Closing Date, Parent hereby unconditionally and irrevocably guarantees the
indemnification obligations of the Company contemplated by this Section 4.11 and
by the Company's Charter and bylaws; provided that the obligations of Parent
pursuant to this provision shall not exceed an amount equal to the sum of the
aggregate Merger Price paid hereunder plus the limit of coverage of the
Company's directors and officers liability insurance policy on the date hereof.
Notwithstanding the foregoing, Parent may cause the Company to merge with or
into Parent or any of its affiliates; provided, however, that any such merger
shall not alter or impair the Indemnification Provisions. Parent acknowledges
that prior to the Closing, the Company may purchase "tail" coverage on its
directors and officers liability insurance for a term not to exceed six years
and up to $195,000 of the cost of such coverage shall not be deemed to reduce
the Closing Date Book Value or otherwise affect the calculation of the Per Share
Amount.
SECTION 4.12. No Solicitation. Without the prior written consent of
Parent, from and after the date hereof, the Company will not, and will not
authorize or permit any of the Subsidiaries or their officers, directors,
employees, financial advisors and agents ("Representatives") to, directly or
indirectly, solicit, initiate or encourage (including by way of furnishing
information) or take any other action to facilitate knowingly any inquiries or
the making of any proposal which constitutes or may reasonably be expected to
lead to an Acquisition Proposal (as defined herein) from any person, or engage
in any discussion or negotiations relating thereto (other than a response to any
such person referring them to the provisions of this Agreement) or accept any
Acquisition Proposal; provided, however, that notwithstanding any other
provision hereof, the Company may (a) at any time prior to the time the
Company's stockholders shall have voted to approve this Agreement engage in
discussions or negotiations with a third party who (without any solicitation,
initiation or encouragement, directly or indirectly, by or with the Company or
the Representatives after the date hereof) seeks to initiate such discussions or
negotiations and may furnish such third party information concerning the Company
and its business, properties and assets if, and only to the extent that, (i) the
third party has first made an Acquisition Proposal, that is financially superior
to the transactions contemplated by this Agreement and the Board has determined
that the funds necessary for the Acquisition Proposal are reasonably likely to
be available (as determined in good faith in each case by the Company's Board of
Directors after consultation with its financial advisors) and the Company's
Board of Directors shall conclude in good faith, after considering applicable
provisions of state law and after consultation with outside counsel, that such
action is necessary for the Board of Directors to act in a manner consistent
with its fiduciary duties under applicable law, and (ii) prior to furnishing
such information to or entering into discussions or negotiations with such
person or entity otherwise prohibited under this sentence, the Company provides
prompt notice to Parent to the effect that it is furnishing information to or
entering into discussions or negotiations with such person or entity otherwise
prohibited under this sentence and receives from such person or entity an
executed confidentiality agreement in reasonably customary form, (b) comply with
Rule 14e-2 promulgated under the Exchange Act with regard to a tender or
exchange offer, and/or (c) accept an Acquisition Proposal from a third party,
provided that if the Company accepts any such Acquisition Proposal, then the
Company must concurrently terminate this Agreement pursuant to Section 6.1(h)
hereof. The Company shall immediately
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cease and terminate any existing solicitation, initiation, encouragement,
activity, or negotiation with any parties conducted heretofore by the Company or
its Representatives with respect to the foregoing. The Company shall notify
Parent orally and in writing of any such inquiries, offers or proposals
(including without limitation, the terms and conditions of any such proposal and
the identity of the person making it), within 24 hours of the receipt thereof,
shall keep Parent informed of the status and details of any such inquiry, offer
or proposal, and shall give Parent three days' advance notice of any agreement
to be entered into with, or any information to be supplied to, any person making
such inquiry, offer or proposal. As used herein, "Acquisition Proposal" shall
mean a proposal or offer (other than by another party to this Agreement) for a
tender or exchange offer, merger, consolidation or other business combination
involving the Company or FSI Funding Corp. I or FSI Funding Corp. II or any
proposal to acquire in any manner a substantial equity interest in, or a
substantial portion of the assets of, the Company or FSI Funding Corp. I or FSI
Funding Corp. II.
SECTION 4.13. Purchase Price Adjustment of Certain Warrants. Prior to the
Closing, the Company shall take such actions as may be necessary to reduce the
Purchase Price (as defined in the Warrant Agreement) of the warrants issued
under the Warrant Agreement, dated as of May 27, 1994, between the Company and
State Street Bank and Trust Company so that on and after the Effective Time the
Purchase Price shall be $6.30 and therefore the only right of the holder of such
warrants from and after the Effective Time shall be to receive $6.40 in cash
upon exercise of each such warrant for $6.30. In connection therewith, the
Company shall enter into such agreements, give such notices and make such
filings as shall be necessary to accomplish such Purchase Price adjustment.
ARTICLE V
CONDITIONS TO CLOSING
SECTION 5.1. Conditions to the Obligations of the Company and Parent and
Merger Sub. The respective obligations of the Company, on the one hand, and
Parent and Merger Sub, on the other hand, to consummate the transactions
contemplated hereby are subject to the requirements that:
(a) this Agreement shall have been approved and adopted by the
requisite vote of the stockholders of the Company in accordance with the
DGCL;
(b) no federal, state or foreign statute, rule, regulation, executive
order, decree or injunction shall have been enacted, entered, promulgated
or enforced by any court, arbitrator or administrative, governmental or
regulatory authority or body, domestic or foreign, which is in effect and
has the effect of making the Merger illegal or otherwise prohibiting the
consummation of the Merger; and
(c) any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
SECTION 5.2. Conditions to the Obligations of the Company. The
obligations of the Company to consummate the transactions contemplated hereby
are subject to the further requirements that:
(a) the representations and warranties of Parent and Merger Sub
contained in this Agreement or in any other document delivered pursuant
hereto (without regard to any materiality qualifier contained therein)
shall be true and correct when made and, except to the extent such
representations and warranties speak as of an earlier date, on and as of
the Closing Date with the same effect as if made on and as of the Closing
Date, except to the extent that any inaccuracies therein, alone or in the
aggregate, would not have a material adverse effect on Parent, and at the
Closing Parent shall have delivered to the Company a certificate to that
effect;
(b) each of the obligations of Parent and Merger Sub to be performed
on or before the Closing Date pursuant to the terms of this Agreement shall
have been duly performed in all material respects on or before the Closing
Date and at the Closing Parent shall have delivered to the Company a
certificate to that effect; and
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(c) the Company shall have received an opinion dated the Closing Date
of Morgan, Lewis & Bockius, counsel for Parent and Merger Sub, in form and
substance reasonably satisfactory to the Company and its counsel.
SECTION 5.3. Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the transactions contemplated
hereby are subject to the further requirements that:
(a) the representations and warranties of the Company contained in
this Agreement or in any other document delivered pursuant hereto (without
regard to any materiality qualifier contained therein) shall be true and
correct when made and, except to the extent such representations and
warranties speak as of an earlier date, on and as of the Closing Date with
the same effect as if made on and as of the Closing Date, except to the
extent that any inaccuracies therein, alone or in the aggregate, would not
have a Company Material Adverse Effect and at the Closing the Company shall
have delivered to Parent a certificate to that effect;
(b) each of the obligations of the Company to be performed on or
before the Closing Date pursuant to the terms of this Agreement shall have
been duly performed in all material respects on or before the Closing Date
and at the Closing the Company shall have delivered to Parent a certificate
to that effect;
(c) there shall not be any securities, rights, warrants, options, or
other instruments outstanding which, after consummation of the Merger,
would be convertible into or exercisable for securities of the Surviving
Corporation;
(d) the Company shall have obtained the consent or approval of each
person or entity whose consent or approval shall be required under any
agreement or instrument in order to permit the consummation of the
transactions contemplated hereby, except those which the failure to obtain
would not, individually or in the aggregate, have a Company Material
Adverse Effect, all of which have been disclosed in writing to Parent;
(e) the Company shall have made arrangements to terminate all plans
and arrangements that relate to employees or non-employees which involve
the issuance or future issuance (contingent or otherwise) of, or the value
of the rights granted pursuant to which is measured by, equity securities,
in each case without liability or cost to Parent or Merger Sub and without
imposing any future obligations on Parent, Merger Sub or the Company or any
Subsidiary;
(f) the Company shall have made arrangements to terminate all
agreements, arrangements or understandings between it or any of the
Subsidiaries, on the one hand, and Sands Brothers & Co., Ltd. and RAS
Securities Corp. (the "Underwriters"), on the other hand;
(g) there shall not have occurred a Company Material Adverse Effect or
an event which could reasonably be expected to result in a Company Material
Adverse Effect other than the effects of changes that are generally
applicable in (A) the equipment leasing and financing industry, (B) the
United States economy, or (C) the United States securities markets if, in
any of (A), (B) or (C), the effect on the Company and its Subsidiaries is
not disproportionate relative to the effect on Parent and its subsidiaries;
(h) the number of Dissenting Shares shall be less than or equal to 10%
of the number of issued and outstanding shares of Company Common Stock;
(i) Parent shall have received an opinion dated the Closing Date of
Hale and Dorr and Murtha, Cullina, Richter and Pinney, counsel for the
Company, in form and substance reasonably satisfactory to Parent and its
counsel;
(j) the Per Share Amount shall have been finally determined and shall
not be less than $6.35; and
(k) the Company shall have demonstrated to Parent's reasonable
satisfaction that delinquencies in lease payments due and owing to the
Company and 31 days or more past due (on a contractual basis) do not exceed
4.25% of total lease contracts receivable as of the Closing Date. Any
disputes relating to the satisfaction or nonsatisfaction of this condition
shall be resolved in accordance with the procedures set forth in Section
4.2(c) hereof.
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ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
SECTION 6.1. Termination. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time prior to the
Closing Date:
(a) by mutual written consent of each of Parent and the Company;
(b) by either Parent or the Company if the Merger shall not have been
consummated on or before (i) September 1, 1996 if the Securities and
Exchange Commission does not review the Proxy Statement or if no matter is
under dispute under Section 4.2 hereof, (ii) September 15, 1996 if the
Securities and Exchange Commission reviews the Proxy Statement or (iii) 30
days after the referral of disputed matters to the Arbitrator pursuant to
Section 4.2(c)(iii) hereof (the "Termination Date"); provided, however,
that the right to terminate this Agreement under this Section 6.1(b) shall
not be available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before the Termination Date;
(c) by either Parent or the Company if a court, arbitrator or
administrative, governmental or regulatory authority or body, domestic or
foreign, shall have issued an order, decree or ruling or taken any other
action (which order, decree or ruling the parties shall use their
commercially reasonable efforts to lift), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order, decree, ruling or other
action shall have become final and nonappealable;
(d) by either Parent or the Company if the other shall have breached,
or failed to comply with, in any material respect any of its obligations
under this Agreement or any representation or warranty made by the other
shall have been incorrect in any material respect when made or shall have
since ceased to be true and correct in any material respect, and which
breach shall not have been cured, in the case of representation or
warranty, prior to Closing, or in the case of a covenant or agreement
within 30 days after notice thereof and, in the case of a breach, failure
or misrepresentation by the Company, such breach, failure or
misrepresentation, individually or in the aggregate, results or would
reasonably be expected to result in a Company Material Adverse Effect;
(e) by Parent after the occurrence of an event which could reasonably
be expected to result in a Company Material Adverse Effect, other than the
effects of changes that are generally applicable in (A) the equipment
leasing and financing industry, (B) the United States economy, or (C) the
United States securities markets if, in any of (A), (B) or (C), the effect
on the Company and its Subsidiaries is not disproportionate relative to the
effect on Parent and its subsidiaries;
(f) by Parent if the Board of Directors of the Company or any
committee of the Board of Directors of the Company (i) shall withdraw or
modify in any adverse manner its approval or recommendation of this
Agreement, (ii) shall fail to reaffirm such approval or recommendation upon
Parent's reasonable request, (iii) shall approve or recommend any
acquisition of the Company or a material portion of its assets or any
tender offer for shares of its capital stock, in each case, other than by
Parent or an affiliate thereof, or (iv) shall resolve to take any of the
actions specified in this clause (f);
(g) by either Parent or the Company if the required approvals of the
stockholders of the Company shall fail to have been obtained at the
Meeting, including any adjournments thereof; or
(h) by the Company, prior to the approval of this Agreement by the
stockholders of the Company, upon three days' prior notice to Parent, if,
as a result of an Acquisition Proposal by a party other than Parent or any
of its affiliates, the Board of Directors of the Company determines in good
faith that their fiduciary obligations under applicable law require that
such Acquisition Proposal be accepted; provided, however, that (i) the
Board of Directors of the Company shall have concluded in good faith, after
considering applicable provisions of state law and after giving effect to
all concessions which may be offered by Parent pursuant to clause (ii)
below, after consultation with outside counsel, that such action is
necessary for the Board of Directors to act in a manner consistent with its
fiduciary duties under applicable law and (ii) prior to any such
termination, the Company shall, and shall cause its respective financial
and legal advisors to, negotiate with Parent for a maximum of three
business days to make such
24
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adjustments in the terms and conditions of this Agreement as would enable
the Company to proceed with the transactions contemplated hereby.
SECTION 6.2. Effect of Termination.
(a) In the event of termination of this Agreement as provided in Section
6.1 hereof, this Agreement shall forthwith become void and there shall be no
liability on the part of any of the parties, except (i) as set forth in Sections
7.8, 7.9 and 7.10 hereof or the Confidentiality Agreement, and (ii) nothing
herein shall relieve any party from liability for any willful breach hereof.
(b) In the event of termination of this Agreement by Parent under Section
6.1(d) hereof due to a breach of any representation or warranty contained in
Article II hereof, the Company shall pay to Parent within five days after such
termination the amount of $750,000 if the Company knew or in the exercise of
reasonable diligence should have known that such representation or warranty was
not true in all material respects when made.
(c) In the event of termination of this Agreement by Parent under Section
6.1(f) hereof, the Company shall reimburse the Parent, within three days after
such termination for all out of pocket costs and expenses incurred by Parent or
its affiliates (including without limitation all filing fees under the HSR Act)
in connection with the transactions contemplated hereby, not to exceed $400,000.
Parent shall provide the Company with an itemized listing of all such fees and
expenses, and the Company shall be obligated to pay such amount within five (5)
business days after the date of receipt of such listing.
(d) If (i) this Agreement (A) is terminated by the Company pursuant to
Section 6.1(g) or (h) hereof or by Parent pursuant to Section 6.1(f) or (g)
hereof, or (B) is terminated as a result of the Company's breach of Section 4.12
hereof which is not cured within 30 days after notice thereof to the Company,
and (ii) within 12 months from the date of termination the Company shall enter
into a definitive agreement relating to an Acquisition Proposal, the Company or
any successor thereto shall pay to Parent a cash termination fee of $1,500,000
within five business days after the execution of such definitive agreement.
(e) The Company agrees that the agreements contained in paragraphs (b), (c)
and (d) above are an integral part of the transactions contemplated by this
Agreement and constitute liquidated damages and not a penalty. If the Company
fails to promptly pay to Parent any fee due under such paragraphs, the Company
shall pay the costs and expenses (including reasonable legal fees and expenses)
in connection with any action, including the filing of any lawsuit or other
legal action, taken to collect payment, together with interest on the amount of
any unpaid fee at the publicly announced prime rate of Citibank, N.A. from the
date such fee was required to be paid. The parties expressly agree that Parent
or Merger Sub, as the case may be, shall be entitled, if at all, only to one
payment, in the event of a termination of this Agreement, which payment shall be
the largest of the payments to which Parent or Merger Sub would be entitled to
pursuant to Section 6.2(b), (c) or (d) hereof.
SECTION 6.3. Amendment. This Agreement may be amended by Parent and the
Company pursuant to a writing adopted by action taken by Parent and the Company
at any time before the Effective Time; provided, however, that, after approval
of this Agreement by the stockholders of the Company, no amendment may be made
which would alter or change the amount or kinds of consideration to be received
by the holders of Company Common Stock upon consummation of the Merger or which
would materially and adversely affect the holders of Company Common Stock. This
Agreement may not be amended except by an instrument in writing signed by the
parties.
SECTION 6.4. Waiver. At any time before the Effective Time, any party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto and (c) waive compliance with any of the agreements or
conditions contained herein. Any agreement on the part of a party to any such
extension or waiver shall be valid only as against such party and only if set
forth in an instrument in writing signed by such party.
25
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ARTICLE VII
MISCELLANEOUS
SECTION 7.1. Survival of Representations and Warranties. The
representations and warranties contained herein shall not survive beyond the
Closing Date. This Section 7.1 shall not limit any covenant or agreement of the
parties hereto which by its terms requires performance after the Closing Date.
SECTION 7.2. Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all prior written and oral and all contemporaneous oral agreements
and understandings with respect to the subject matter hereof.
SECTION 7.3. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by telecopy, or by registered or certified mail (postage prepaid,
return receipt requested) or by overnight courier service to the respective
parties as follows:
if to Parent or Merger Sub:
FINOVA Capital Corporation
P.O.Box 2209
1850 North Central Avenue
Phoenix, AX 85002-2209
Telecopy: (602) 207-1019
Telephone: (602) 207-6900
Attention: Robert E. Radway
with copies to:
The FINOVA Group, Inc.
P.O. Box 2209
1850 North Central Avenue
Phoenix, AX 85002-2209
Telecopy: (602) 207-4099
Telephone: (602) 207-6900
Attention: William J. Hallinan
and
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
Telecopy: (215) 963-5299
Telephone (215) 963-5694
Attention: N. Jeffrey Klauder
if to the Company:
Financing For Science International, Inc.
10 Waterside Drive
Farmington, Connecticut 06032-3065
Telecopy: (860) 676-1814
Telephone: (860) 676-1818
Attention: Richard Schwartz
26
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with copies to:
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Telecopy: (617) 526-5000
Telephone: (617) 526-6410
Attention: Steven D. Singer
and
Murtha, Cullina, Richter and Pinney
City Place I
185 Asylum Street
Hartford, Connecticut 06103
Telecopy: (203) 240-6150
Telephone: (203) 240-6053
Attention: Richard S. Smith, Jr.
or to such other address as the party to whom notice is given may have
previously furnished to the others in writing in the manner set forth above. Any
notice or communication delivered in person shall be deemed effective on
delivery. Any notice or communication sent by telecopy shall be deemed effective
on the first business day at the place of which such notice or communication is
received following the day on which such notice or communication was sent. Any
notice or communication sent by registered or certified mail shall be deemed
effective on the fifth business day at the place from which such notice or
communication was mailed following the day in which such notice or communication
was mailed.
SECTION 7.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of the
laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
SECTION 7.5. Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of or
to affect the meaning or interpretation of this Agreement.
SECTION 7.6. Parties in Interest. This Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person
(including without limitation any employee of the Company or any Subsidiary) any
rights or remedies of any nature whatsoever under or by reason of this Agreement
except for Section 4.11 (which is intended to be for the benefit of the persons
provided for therein, and may be enforced by such persons.)
SECTION 7.7. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.
SECTION 7.8. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with the transactions contemplated by this
Agreement shall be paid by the party incurring such expenses.
SECTION 7.9. Personal Liability. This Agreement shall not create or be
deemed to create or permit any personal liability or obligation on the part of
any direct or indirect stockholder of any party hereto or any officer, director,
employee, agent, representative or investor of any party hereto.
SECTION 7.10. Binding Effect; Assignment. This Agreement shall inure to
the benefit of be binding upon the parties hereto and their respective legal
representatives and successors. This Agreement may not be assigned by any party
hereto.
SECTION 7.11. Arbitration.
(a) Resolution of Disputes. All controversies, disputes or claims
("Disputes") arising among the parties arising out of or relating to this
Agreement or the subject matter hereof (except for those matters
27
<PAGE> 132
expressly governed by Section 4.2(c) hereof), and the arbitrability of any
Dispute, shall be settled by arbitration as provided below. The arbitration and
all preliminary proceedings related thereto shall be conducted in accordance
with such rules as may be agreed upon by the parties, or, failing agreement on
such rules within 30 days of written request for such agreement, in accordance
with the Rules for Commercial Arbitration of the American Arbitration
Association ("AAA"), as amended from time to time and as modified by this
Agreement. The dispute shall be presented to a single arbitrator (the "AAA
Arbitrator"), sitting in Wilmington, Delaware.
(b) Selection of AAA Arbitrator. The AAA Arbitrator shall be selected
jointly by the parties within fifteen (15) days after demand for arbitration is
made by a party. If the parties are unable to agree on an AAA Arbitrator within
that period, then any party may request that the AAA select the AAA Arbitrator
in accordance with its then existing rules for doing so. The AAA Arbitrator
shall possess substantive legal experience in the principal issues in dispute.
(c) Discovery. Any discovery permitted shall be limited to information
directly relevant to the controversy or Dispute in arbitration. In the event of
discovery disputes, the AAA Arbitrator is directed to issue such orders as are
appropriate to limit discovery in accordance with the foregoing and as are
reasonable in light of the issues in dispute, the amount in controversy, and
other relevant considerations. To the extent the parties are unable to agree on
the scope of discovery, the AAA Arbitrator shall require the party seeking
discovery on an issue to present the legal and factual basis for the Dispute and
shall permit the party opposing discovery to respond. The AAA Arbitrator shall
permit discovery on an issue only if the AAA Arbitrator concludes that there is
a reasonable and good faith basis in law and in fact for bringing such
allegations and that the discovery appears likely to present substantive
evidence regarding that Dispute. The AAA Arbitrator may permit limited discovery
to permit investigation of some of the Disputes or to determine whether a
Dispute has sufficient basis in law or in fact to warrant further discovery, but
shall issue appropriate orders to restrict the scope of such discovery. The
federal or state rules of procedure and evidence shall not apply to the
arbitration proceedings, including without limitation the rules of discovery.
The AAA Arbitrator shall consider claims of privilege, work product and other
restrictions on discovery as appear to be warranted.
(d) Fees. The AAA Arbitrator shall award the prevailing party its
attorney's and experts' fees and disbursements incurred in resolving the dispute
and shall award double costs and expenses or other sanctions to the extent the
AAA Arbitrator finds any Dispute advanced in the proceedings to be frivolous or
without a good faith basis in fact and in law when such Dispute was first
presented for arbitration.
(e) Award/Consent to Jurisdiction. Except as may otherwise be agreed in
writing by the parties or as ordered by the AAA Arbitrator upon substantial
justification shown, the hearing for the dispute shall be held within ninety
(90) days of submission of the dispute to arbitration. The AAA Arbitrator shall
render a final award within thirty (30) days following conclusion of the hearing
and any required post-hearing briefing or other proceedings ordered by the AAA
Arbitrator. The AAA Arbitrator shall state the factual and legal basis for the
award. The decision of the AAA Arbitrator shall be final and binding, except as
provided in the Federal Arbitration Act, 9 U.S.C. sec.1. et seq., and except for
errors of law based on the findings of fact. Final judgment may be entered upon
such an award in any court of competent jurisdiction, but entry of such judgment
shall not be required to make the award effective. The parties hereby
irrevocably submit to the exclusive jurisdiction and venue of the state and
federal courts located in Wilmington, Delaware. THE PARTIES EXPRESSLY WAIVE
THEIR RIGHTS TO A TRIAL BY JURY.
28
<PAGE> 133
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed as an instrument under seal on its behalf by its officers thereunto
duly authorized on the day and year first above written.
FINANCING FOR SCIENCE INTERNATIONAL,
INC.
By: /s/ BARRY R. BRONFIN
--------------------------------------
Name: Barry R. Bronfin
Title: Chairman and CEO
FINOVA CAPITAL CORPORATION
By: /s/ ROBERT E. RADWAY
--------------------------------------
Name: Robert E. Radway
Title: Senior Vice President
FINOVA BUSINESS CREDIT CORP.
By: /s/ ROBERT E. RADWAY
--------------------------------------
Name: Robert E. Radway
Title: Senior Vice President
29
<PAGE> 134
TABLE OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
DEFINED TERM NO.
- -------------------------------------------------------------------------------------- ----
<S> <C>
AAA................................................................................... -28-
AAA Arbitrator........................................................................ -28-
Acquisition Proposal.................................................................. -22-
Agreement............................................................................. -1-
Arbitrator............................................................................ -19-
Audited Financial Statements.......................................................... -7-
Authorizations........................................................................ -11-
Balance Sheet Date.................................................................... -7-
Certificate of Merger................................................................. -1-
Certificates.......................................................................... -3-
Closing............................................................................... -1-
Closing Date.......................................................................... -1-
Closing Date Loss Reserves............................................................ -19-
Closing Date Book Value............................................................... -18-
Company............................................................................... -1-
Company Common Stock.................................................................. -1-
Company Intellectual Property Rights.................................................. -15-
Company Stockholder................................................................... -2-
Company Investment Banker............................................................. -4-
Company Material Adverse Effect....................................................... -5-
Company Schedule...................................................................... -4-
Company 1995 Balance Sheet............................................................ -7-
Company 1995 Form 10-K................................................................ -7-
Company SEC Reports................................................................... -7-
Company 1996 Interim Balance Sheet.................................................... -7-
Confidentiality Agreement............................................................. -19-
Contract.............................................................................. -10-
DGCL.................................................................................. -1-
Disputes.............................................................................. -27-
Dissenting Shares..................................................................... -2-
Effective Time........................................................................ -2-
Employee Plans........................................................................ -12-
Environmental Laws.................................................................... -14-
Environmental Claim................................................................... -14-
ERISA................................................................................. -11-
ERISA Affiliate....................................................................... -12-
Exchange Act.......................................................................... -6-
Financing Documents................................................................... -8-
Financing Transactions................................................................ -7-
GAAP.................................................................................. -7-
Hazardous Materials................................................................... -14-
HSR Act............................................................................... -6-
Indemnification Provisions............................................................ -21-
Interim Financial Statements.......................................................... -7-
Interim Balance Sheet................................................................. -7-
</TABLE>
30
<PAGE> 135
<TABLE>
<CAPTION>
PAGE
DEFINED TERM NO.
- -------------------------------------------------------------------------------------- ----
<S> <C>
IRS................................................................................... -12-
ISO................................................................................... -12-
Meeting............................................................................... -19-
Merger................................................................................ -1-
Merger Sub............................................................................ -1-
Merger Price.......................................................................... -2-
Merger Sub Common Stock............................................................... -2-
Option Spread Amount.................................................................. -18-
Parent................................................................................ -1-
Paying Agent.......................................................................... -2-
Payment Fund.......................................................................... -2-
Payor................................................................................. -3-
Per Share Amount...................................................................... -18-
Permitted Liens....................................................................... -10-
Principal Stockholder Shares.......................................................... -4-
Principal Stockholder Agreements...................................................... -4-
Proxy Statement....................................................................... -20-
Release............................................................................... -14-
Representatives....................................................................... -21-
SEC................................................................................... -7-
Securities Act........................................................................ -7-
Securitization Assets................................................................. -8-
Subsidiaries.......................................................................... -5-
Surviving Corporation................................................................. -1-
Surviving Corporation Common Stock.................................................... -2-
Tax Returns........................................................................... -11-
Taxes................................................................................. -11-
Termination Date...................................................................... -24-
Transaction Costs..................................................................... -18-
Underwriters.......................................................................... -23-
Valuation Date........................................................................ -18-
Valuation Date Balance Sheet.......................................................... -18-
Valuation Financial Statements........................................................ -18-
Valuation Date Book Value............................................................. -18-
Valuation Date Loss Reserves.......................................................... -19-
</TABLE>
31
<PAGE> 136
ANNEX B
FAIRNESS OPINION OF KROPSCHOT FINANCIAL SERVICES
B-1
<PAGE> 137
KROPSCHOT FINANCIAL SERVICES
3341 MONET DRIVE
PALM BEACH GARDENS, FLORIDA 33410
June 17, 1996
PRIVATE AND CONFIDENTIAL
Board of Directors
Financing for Science International, Inc.
10 Waterside Drive
Farmington, CT 06032
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to the holders of the outstanding shares of common stock of Financing
for Science International, Inc. ("FFSI") of the cash consideration of $6.40 per
common share to be received by FFSI stockholders under the Agreement and Plan of
Merger dated as of May 19, 1996 (the "Agreement") among FFSI, FINOVA Capital
Corporation (the principal operating subsidiary of the FINOVA Group Inc.) and
FINOVA Business Credit Corp.
For purposes of this opinion and in connection with our review of the
proposed transaction, we have, among other things:
1. Reviewed the Agreement, and preliminary drafts thereof, and a draft of
the preliminary proxy statement filed with the Securities and Exchange
Commission on June 17, 1996 for the special meeting of FFSI shareholders
to vote upon a proposal to approve and adopt the Agreement;
2. Reviewed certain publicly available FFSI financial statements, both
audited and unaudited, including those included in the Annual Reports on
Form 10-K for the years ended December 31, 1994 and 1995, the initial
public offering prospectus dated May 20, 1994 and the Quarterly Reports
on Form 10-Q for the periods ended March 31, 1995, June 30, 1995,
September 30, 1995 and March 31, 1996;
3. Reviewed certain financial statements and other financial and operating
data concerning FFSI prepared by its management;
4. Reviewed certain financial forecasts of FFSI prepared by its management;
5. Met with certain members of FFSI's senior management to discuss the
company's past and current business operations, financial condition and
future prospects;
6. Visited FFSI's headquarters in Farmington, CT where we reviewed a number
of customer credit and documentation files;
7. Reviewed the historical stock price and trading volume of the common
stock of FFSI;
8. Reviewed publicly available financial data and stock market performance
data of publicly traded companies which we deemed generally comparable
to FFSI; and
9. Conducted such other studies, analyses, inquiries and investigations as
we deemed appropriate.
We have relied upon and assumed without independent verification the
accuracy and completeness of all of the financial and other information that has
been provided to us by FFSI and of the publicly available information that was
reviewed by us. With respect to FFSI's financial forecasts for 1996, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of FFSI as to the
expected future performance of FFSI. We do not assume any responsibility for the
information or forecasts provided to us. We have relied upon the assurances of
the management of FFSI that they are unaware of any facts that would make the
information or forecasts provided to us incomplete or misleading. In arriving at
our opinion, we have not performed or obtained any independent appraisal of the
assets of FFSI.
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<PAGE> 138
Our opinion is based solely upon the information available to us and the
economic, market and other circumstances as they exist as of the date hereof.
Events occurring after the date hereof could materially affect the assumptions
used in preparing this opinion.
Based upon and subject to the foregoing and also based upon other factors
that we consider relevant, including but not limited to our considerable
experience with mergers, acquisitions and valuations of equipment leasing and
financing companies, we are of the opinion that, as of the date hereof, the cash
purchase price of $6.40 per common share is fair, from a financial point of
view, to the holders of FFSI's common stock.
Sincerely,
KROPSCHOT FINANCIAL SERVICES
Bruce E. Kropschot
President
BEK:bdk
B-3
<PAGE> 139
ANNEX C
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
C-1
<PAGE> 140
DELAWARE GENERAL CORPORATION LAW
SEC.262 APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec.228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of his shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.sec.251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale
C-2
<PAGE> 141
of all or substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are valuable for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or 253
of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown
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on the list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington, Delaware
or such publication as the Court deems advisable. The forms of the notices by
mail and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
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<PAGE> 143
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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<PAGE> 144
<TABLE>
<S> <C>
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
For Against Abstain
1) Approval and adoption of the Agreement [ ] [ ] [ ]
and Plan of Merger, dated as of May 19,
1996 by and among Financing for
Science International, Inc., FINOVA
Capital Corporation and FINOVA
Business Credit Corp.
2) To transact such other business as may properly come
before the meeting or any postponement or adjournment
thereof.
RECORD DATE SHARES:
----------------------------------------------------
| |
| |
| |
---------------------------------------------------- Mark box at right if you plan to attend the meeting. [ ]
Please be sure to sign and date this PROXY. Date
- ----------------------------------------------------------- Mark box at right if comments or address change [ ]
| | have been noted on the reverse side of this card.
| |
- ----Shareholder sign here-------Co-owner sign here---------
</TABLE>
- -------------------------------------------------------------------------------
DETACH CARD DETACH CARD
FINANCING FOR SCIENCE INTERNATIONAL, INC.
Please take note of the important information enclosed with this proxy card.
Your vote counts, and you are strongly encouraged to exercise your right to
vote your shares.
Please mark the boxes on the proxy card to indicate how your shares shall be
voted. Then sign the card, detach it and return your proxy card in the
enclosed postage paid envelope.
Your vote must be received prior to the Special Meeting of Stockholders on
August 29, 1996.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Financing for Science International, Inc.
<PAGE> 145
PROXY PROXY
FINANCING FOR SCIENCE INTERNATIONAL, INC.
10 WATERSIDE DRIVE
FARMINGTON, CT 06032
PROXY CARD FOR THE AUGUST 29, 1996 SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF FINANCING FOR
SCIENCE INTERNATIONAL, INC.
The undersigned, having read the Notice of Special Meeting of Stockholders and
Proxy Statement dated August 9, 1996 receipt of which is hereby acknowledged,
does hereby appoint John M. Randolph, Robert W. Maxwell and Geoffrey W. Nelson,
and each of them, the lawful attorneys and proxies of the undersigned, each
with several powers of substitution, to vote and act at the Special Meeting of
Stockholders of Financing for Science International, Inc. to be held at The
Farmington Inn, located at 827 Farmington Avenue, Farmington, CT, on Thursday,
August 29, 1996, at 10:00 A.M., local time, and at any postponement or
adjournment thereof, with respect to all shares of Common Stock, $.01 par
value, held of record by the undersigned on July 22, 1996, with all the powers
that the undersigned would possess if personally present and voting, as follows
on the reverse side of this card.
THIS PROXY WILL BE VOTED AS DIRECTED BUT IN THE ABSENCE OF SUCH DIRECTION, IT
WILL BE VOTED FOR ITEM 1.
- -----------------------------------------------------------------------------
PLEASE VOTE, DATE, AND SIGN ON OTHER SIDE AND RETURN PROMPTLY IN
ENCLOSED ENVELOPE.
- -----------------------------------------------------------------------------
Please sign this proxy exactly as your name appears on the books of the
Company. Joint owners should each sign personally. Trustees and other
fiduciaries should indicate the capacity in which they sign, and where more
than one name appears, a majority must sign, if a corporation, this signature
should be that of an authorized officer who should state his or her title.
- -----------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
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