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 [ ]
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MicroFinancial Incorporated
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(MICROFINANCIAL LOGO)
10M Commerce Way
Woburn, Massachusetts 01801
April 19, 2004
Dear Stockholder:
I am pleased to invite you to the 2004 Special Meeting of Stockholders in
Lieu of Annual Meeting of MicroFinancial Incorporated ("MicroFinancial"), which
will be held on Monday, May 17, 2004, at 3:00 p.m., at Edwards & Angell, LLP,
101 Federal Street, Boston, Massachusetts.
The accompanying Notice of Special Meeting of Stockholders and proxy
statement contain the matters to be considered and acted upon. Please read these
materials carefully.
Matters scheduled for consideration at the Special Meeting are the election
of two directors for three-year terms.
I hope you will be able to attend the meeting, but if you cannot do so, it
is important that your shares be represented and voted. ACCORDINGLY, I URGE YOU
TO MARK, SIGN, DATE AND RETURN THE ENCLOSED PROXY PROMPTLY IN THE RETURN
ENVELOPE PROVIDED.
Very truly yours,
/s/ PETER R. BLEYLEBEN
PETER R. BLEYLEBEN
Chairman
MICROFINANCIAL INCORPORATED
10M COMMERCE WAY
WOBURN, MASSACHUSETTS 01801
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
IN LIEU OF ANNUAL MEETING
APRIL 19, 2004
The Special Meeting of Stockholders in Lieu of Annual Meeting of
MicroFinancial Incorporated, a Massachusetts corporation ("MicroFinancial"),
will be held Monday, May 17, 2004, at 3:00 p.m., at Edwards & Angell, LLP, 101
Federal Street, Boston, Massachusetts for the purpose of considering and voting
upon:
1. The election of two directors for three-year terms.
2. The transaction of such other business as may properly come before
the Special Meeting.
The record date for determining stockholders entitled to notice of, and to
vote at, the Special Meeting is the close of business on April 12, 2004.
MicroFinancial's transfer books will not be closed.
By Order of the Board of Directors,
/s/ RICHARD F. LATOUR
RICHARD F. LATOUR
Clerk
Woburn, Massachusetts
April 19, 2004
YOUR VOTE IS IMPORTANT. PLEASE COMPLETE, DATE, SIGN AND MAIL THE ENCLOSED PROXY
AT YOUR EARLIEST CONVENIENCE, USING THE RETURN ENVELOPE ENCLOSED WITH THE PROXY.
IF YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
TABLE OF CONTENTS
PAGE
----
General..................................................... 1
Voting Procedures........................................... 2
Security Ownership of Certain Beneficial Owners and
Management................................................ 3
Section 16(a) Beneficial Ownership Reporting Compliance..... 5
Governance of the Corporation............................... 5
Members of the Board of Directors and their Committee
Assignments............................................ 5
Description of the Roles of the Committees................ 5
The Board's Presiding Director............................ 6
Selection of Nominees for the Board of Directors.......... 7
Determination of Director Independence.................... 8
Meetings of the Board of Directors During Fiscal 2003..... 8
Compensation of Directors................................. 8
Certain Relationships and Related Party Transactions
Involving Directors.................................... 8
Communications with the Board of Directors................ 9
The Corporation's Code of Ethics.......................... 10
Audit Committee Report...................................... 10
Compensation of Executive Officers.......................... 11
Executive Compensation Summary Table...................... 11
Option Grants in 2003..................................... 12
Option Exercises and Values at Year-End................... 13
Equity Compensation Plans................................. 14
Profit Sharing Plan and Discretionary Board of Director
Bonus Programs......................................... 14
Option Repricings......................................... 15
Employment Agreements..................................... 15
Compensation Committee Report............................... 17
Performance Graph........................................... 21
Independent Auditors........................................ 21
Fees to Independent Auditors for Fiscal 2003 and 2002..... 21
Approval by Audit Committee............................... 22
Proposal 1 -- Election of Directors......................... 22
Other Matters............................................... 26
2005 Stockholder Proposals.................................. 26
Financial Statements........................................ 26
Miscellaneous............................................... 27
Appendix A -- Audit Committee Charter....................... A-1
i
MICROFINANCIAL INCORPORATED
10M COMMERCE WAY
WOBURN, MASSACHUSETTS 01801
TELEPHONE 781-994-4800
------------------------
2004 SPECIAL MEETING OF STOCKHOLDERS
IN LIEU OF ANNUAL MEETING
PROXY STATEMENT
GENERAL
The enclosed proxy is solicited by the Board of Directors ("MicroFinancial
Board") of MicroFinancial Incorporated ("MicroFinancial" or the "Corporation")
in connection with the Special Meeting of Stockholders in Lieu of Annual Meeting
(the "Special Meeting") to be held on May 17, 2004. This proxy statement and the
enclosed proxy are first being sent to stockholders on or about April 19, 2004.
The proxy will be voted at the Special Meeting in accordance with the
instructions indicated on the proxy by the stockholder. If no instructions are
indicated, all shares represented by valid proxies received pursuant to this
solicitation (and not revoked before they are voted) will be voted FOR Proposal
No. 1 and FOR Proposal No. 2.
The record date for determining stockholders entitled to vote at the
Special Meeting is the close of business on April 12, 2004. On this date, there
were outstanding and entitled to vote 13,176,416 shares of Common Stock, par
value $0.01 per share, of the Corporation (the "Common Stock"), each of which is
entitled to one vote on each matter to be voted on at the Special Meeting. The
presence (in person or by proxy) of a majority of the aggregate number of shares
of Common Stock outstanding and entitled to vote on the record date is necessary
to constitute a quorum at the Special Meeting. Abstentions and "broker non-
votes" will be counted as present at the Special Meeting for purposes of
determining whether there is a quorum. A "broker non-vote" occurs when a broker
or other nominee, holding shares for a beneficial owner, has not received voting
instructions on a matter from such owner and is barred by stock exchange rules
from exercising discretionary authority to vote on the matter.
Management is not aware of any matter to be considered at the Special
Meeting other than those referred to in this proxy statement. If any other
business should properly come before the Special Meeting, the persons named in
the proxy will vote according to their best judgment.
VOTING PROCEDURES
A plurality of votes of the shares of Common Stock represented at the
Special Meeting is required to elect directors. In voting for the election of
directors, stockholders may cast their votes in favor of or against, but
abstentions may not be specified. The affirmative vote of a majority of the
shares of Common Stock represented at the Special Meeting and entitled to vote
is required to ratify the selection of auditors. If a broker's authority to vote
on a particular matter is limited, thus resulting in a broker non-vote, such
broker non-vote will not be counted in determining the number of votes cast or
entitled to vote at the Special Meeting. Abstentions are counted for this
purpose. Since a broker's authority is not limited with respect to Proposal No.
1, MicroFinancial does not expect to receive any broker non-votes with respect
to the special meeting.
A stockholder of record may revoke a proxy by delivering written notice of
revocation to Richard F. Latour, Clerk of MicroFinancial, at the address set
forth above, by filing a duly executed proxy bearing a later date, or by
attending the Special Meeting in person, notifying the Clerk, and voting by
ballot at the Special Meeting. Any stockholder of record attending the Special
Meeting may vote in person whether or not a proxy has been previously given, but
the mere presence (without notifying the Clerk) of a stockholder at the Special
Meeting will not constitute revocation of a previously given proxy. In addition,
stockholders whose shares of Common Stock are not registered in their own name
will need additional documentation from the record holder of the shares to vote
in person at the Special Meeting.
2
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 29, 2004 with
respect to the beneficial ownership of Common Stock of each person known by the
Corporation to be the beneficial owner of more than 5% of the 13,201,416 shares
of Common Stock outstanding as of such date (not including treasury stock), each
director and executive officer of the Corporation and all directors and
executive officers of the Corporation as a group. Each person named has sole
voting and investment power with respect to the shares indicated, except as
otherwise stated in the notes to the table.
NUMBER OF SHARES PERCENTAGE OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK
------------------------------------ --------------------- ----------------------
Peter R. Bleyleben(2).................................. 1,584,310 11.8%
66 Norfolk Road
Chestnut Hill, Massachusetts 02464
Torrence C. Harder(4).................................. 1,724,729 12.9%
675 Sudbury Road
Concord, Massachusetts 01742
Brian E. Boyle(3)...................................... 1,488,400 11.2%
11 Whispering Lane
Weston, Massachusetts 02493
Alexander Fleiss(5).................................... 970,095 7.3%
1030 Fifth Avenue, Apartment 3W
New York, New York 10028-0136
Royce & Associates, LLC................................ 701,700 5.3%
1414 Avenue of the Americas
New York, New York 10019
Alan J. Zakon(6)....................................... 223,000 1.7%
32 Cardinal Lane
Ocean Reef Club
Key Largo, Florida 33037
Fritz von Mering(7).................................... 25,000 *
50 Robin Hood Road
Winchester, MA 01890
Richard F. Latour(8)................................... 779,550 5.7%
11 Stillbrook Lane
Mansfield, Massachusetts 02048
James R. Jackson, Jr................................... 85,558 *
6 Hickory Ridge Road
Plaistow, New Hampshire 03865
John R. Plumlee........................................ 39,916 *
243 Pearl Street
Manchester, New Hampshire 03104
Carolina Salvo(9)...................................... 64,916 *
3 Woodridge Road
Medfield, Massachusetts 02052
Steven J. LaCreta...................................... 20,815 *
78 Main Street
Hampstead, NH 03841
3
NUMBER OF SHARES PERCENTAGE OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK
------------------------------------ --------------------- ----------------------
Stephen Constantino.................................... 27,978.4557 *
31 Maryknoll Drive
Hingham, MA 02043
All directors and executive officers as a group (11
persons)............................................. 6,064,172.4557 42.3%
---------------
* Less than 1%
(1) Unless otherwise indicated in the footnotes, each of the stockholders named
in this table has sole voting and investment power with respect to the
shares of Common Stock shown as beneficially owned by such stockholder,
except to the extent that authority is shared by spouses under applicable
law.
(2) Includes 205,000 shares of Common Stock issuable upon the exercise of
options issued to Dr. Bleyleben which vest on or before May 1, 2004.
(3) Includes 133,000 shares of Common Stock issuable upon the exercise of
options issued to Dr. Boyle which vest on or before May 1, 2004 and 10,700
shares of Common Stock held in the Brian E. Boyle Charitable Foundation, for
which Dr. Boyle disclaims beneficial ownership.
(4) Includes 133,000 shares of Common Stock issuable upon the exercise of
options issued to Mr. Harder which vest on or before May 1, 2004; 92,200
shares of Common Stock held in trust for Mr. Harder's daughter, Lauren E.
Harder, over which Mr. Harder retains sole voting and investment power as
the sole trustee and for which Mr. Harder disclaims beneficial ownership;
92,200 shares of Common Stock held in trust for Mr. Harder's daughter,
Ashley J. Harder, over which Mr. Harder maintains voting and investment
power as the sole trustee and for which Mr. Harder disclaims beneficial
ownership; and 276,045 shares of Common Stock owned by Entrepreneurial
Ventures, Inc. over which Mr. Harder retains shared voting and investment
power through his ownership in, and positions as President and Director of,
Entrepreneurial Ventures, Inc.
(5) Includes 86,400 shares beneficially owned by Karen Fleiss, Mr. Fleiss'
mother, pursuant to a power of attorney held by Ms. Fleiss with respect to
such shares; and 294,500 shares directly beneficially owned by KMF Partners,
of which Ms. Fleiss serves as general partner, pursuant to an agreement by
which Mr. Fleiss advises KMF Partners concerning the voting of such shares.
KMF Partners is not under any obligation to vote its shares in accordance
with the advice of Mr. Fleiss. Ms. Fleiss and KMF Partners have the right to
receive and the power to direct the receipt of dividends from, or the
proceeds from the sale of, their respective shares.
(6) Includes 133,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Zakon which vest on or before May 1, 2004.
(7) Consists of 25,000 shares of restricted stock over which Mr. von Mering has
sole voting power. The stock may not be transferred by Mr. von Mering until
the shares are vested, and are forfeited if he leaves the Board of Directors
of the Corporation other than for reason of death or disability. The
restricted stock vested 20% upon grant, and vests 5% on the first day of
each quarter after the grant date.
(8) Includes 514,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Latour which vest on or before May 1, 2004.
(9) Includes 15,000 shares of Common Stock held jointly by Ms. Salvo and her
husband over which Ms. Salvo shares voting and investment power with her
husband.
4
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (as amended, the
"Exchange Act") requires the Corporation's directors, officers and persons who
beneficially own more than ten percent (10%) of the Common Stock (each, a
"Reporting Person") to file reports of ownership and changes of ownership with
the Securities and Exchange Commission. Copies of all filed reports are required
to be furnished to the Corporation pursuant to Section 16(a) of the Exchange
Act. Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Corporation pursuant to Rule 16a-3(e) of the Exchange Act
during fiscal year ending December 31, 2003 and on written representations from
Reporting Persons, the Corporation believes that each Reporting Person complied
with all applicable filing requirements during its fiscal year ended December
31, 2003.
GOVERNANCE OF THE CORPORATION
MEMBERS OF THE BOARD OF DIRECTORS AND THEIR COMMITTEE ASSIGNMENTS
The members of the Board of Directors on the date of this proxy statement,
and the committees of the Board on which they serve, are identified below:
AUDIT NOMINATING AND CORPORATE COMPENSATION AND
DIRECTOR COMMITTEE GOVERNANCE COMMITTEE BENEFITS COMMITTEE
-------- --------- ------------------------ ------------------
Peter R. Bleyleben..........................
Brian E. Boyle.............................. * ** *
Torrence C. Harder.......................... * * **
Richard Latour..............................
Fritz von Mering............................ *
Alan Zakon.................................. ** * *
---------------
* Member.
** Chairperson.
DESCRIPTION OF THE ROLES OF THE COMMITTEES
The Board of Directors has standing Audit, Nominating and Corporate
Governance and Compensation and Benefits Committees.
Audit Committee. The Audit Committee (Committee) is appointed by the Board
of Directors to assist the Board in monitoring (1) the integrity of the
financial statements of the Corporation, (2) compliance by the Corporation with
legal and regulatory requirements, (3) the independent auditor's qualifications
and independence, (4) performance of the Corporation's internal and independent
auditors, and (5) the business practices and ethical standards of the
Corporation. The Committee is also directly responsible for the appointment,
compensation, retention and oversight of the work of the Corporation's
independent auditors, and the preparation of the audit committee report included
in this proxy statement.
MicroFinancial is required by the rules of the SEC and the NYSE to satisfy
certain requirements with respect to its Audit Committee. In conformity with
those requirements, the MicroFinancial Board has approved the Audit Committee's
written charter which is included as Appendix A to this proxy statement.
All of the members of the Audit Committee are independent within the
meaning of SEC regulations, the listing standards of the New York Stock Exchange
and the Corporation's Corporate Governance Guidelines.
5
Mr. von Mering is qualified as an audit committee financial expert within the
meaning of SEC regulations and the Board has determined that he has accounting
and related financial management expertise within the meaning of the listing
standards of the NYSE.
The Audit Committee met two times during fiscal 2003.
Nominating and Corporate Governance Committee. The Nominating and
Corporate Governance Committee is appointed by the Board of Directors to assist
the Board in identifying qualified individuals to become directors, recommend to
the Board qualified director nominees for election at the stockholders' annual
meeting, determine membership on the Board committees, recommend a set of
Corporate Governance Guidelines, oversee annual self-evaluations by the Board
and self-evaluate itself annually, and report annually to the Board on the Chief
Executive Officer succession plan.
MicroFinancial is required by the rules of the SEC and the NYSE to satisfy
certain requirements with respect to its Nominating and Corporate Governance
Committee. In conformity with those requirements, the MicroFinancial Board has
approved the Nominating and Corporate Governance Committee's written charter
which may be found on the Corporation's web site at www.microfinancial.com.
All of the members of the Nominating and Corporate Governance Committee are
independent within the meaning of the listing standards of the New York Stock
Exchange and the Corporation's Corporate Governance Guidelines.
The Nominating and Corporate Governance Committee was established by the
Corporation in January 2004 and thus did not meet in fiscal 2003.
Compensation and Benefits Committee. The Compensation and Benefits
Committee is appointed by the Board of Directors to discharge the Board's
responsibilities relating to compensation of the Corporation's directors and
officers. The committee has overall responsibility for approving and evaluating
the director and officer compensation plans, policies and programs of the
Corporation. The committee is also responsible for producing the annual report
on executive compensation that is included in this proxy statement.
MicroFinancial is required by the rules of the SEC and the NYSE to satisfy
certain requirements with respect to its Compensation and Benefits Committee. In
conformity with those requirements, the MicroFinancial Board has approved the
Compensation and Benefits Committee's written charter which may be found on the
Corporation's web site at www.microfinancial.com.
All of the members of the Compensation and Benefits Committee are
independent within the meaning of the listing standards of the New York Stock
Exchange and the Corporation's Corporate Governance Guidelines.
The Compensation and Benefits Committee met two times during fiscal 2003.
THE BOARD'S PRESIDING DIRECTOR
In January 2004, the Board created a new position of presiding director,
whose primary responsibility is to preside over periodic executive sessions of
the Board in which management directors and other members of management do not
participate. The presiding director also advises the Chairman of the Board and,
as appropriate, Committee chairs with respect to agendas and information needs
relating to Board and Committee meetings, provides advice with respect to the
selection of Committee chairs and performs other duties that the Board may from
time to time delegate to assist the Board in the fulfillment of its
responsibilities.
6
Director Alan Zakon was selected by the non-management members of the Board
to serve in this position until the Company's 2005 annual meeting of
shareholders.
SELECTION OF NOMINEES FOR THE BOARD OF DIRECTORS
The Nominating and Corporate Governance Committee considers candidates for
Board membership suggested by its members and other Board members, as well as
management and shareholders. A shareholder who wishes to recommend a prospective
nominee for the Board should notify the Company's Corporate Secretary or any
member of the Nominating and Corporate Governance Committee in writing with
whatever supporting material the shareholder considers appropriate. The
Nominating and Corporate Governance Committee will also consider whether to
nominate any person nominated by a shareholder pursuant to the provisions of the
Company's bylaws relating to shareholder nominations.
Once the Nominating and Corporate Governance Committee has identified a
prospective nominee, the Committee makes an initial determination as to whether
to conduct a full evaluation of the candidate. This initial determination is
based on whatever information is provided to the Committee with the
recommendation of the prospective candidate, as well as the Committee's own
knowledge of the prospective candidate, which may be supplemented by inquiries
to the person making the recommendation or others. The preliminary determination
is based primarily on the need for additional Board members to fill vacancies or
expand the size of the Board and the likelihood that the prospective nominee can
satisfy the evaluation factors described below. If the Committee determines, in
consultation with the Chairman of the Board and other Board members as
appropriate, that additional consideration is warranted, it may gather
additional information about the prospective nominee's background and
experience. The Committee then evaluates the prospective nominee against the
standards and qualifications set out in the Company's Corporate Governance
Guidelines, including:
- the ability of the prospective nominee to represent the interests of the
shareholders of the Company;
- the prospective nominee's standards of integrity, commitment and
independence of thought and judgment;
- the prospective nominee's ability to dedicate sufficient time, energy and
attention to the diligent performance of his or her duties, including the
prospective nominee's service on other public company boards, as
specifically set out in the Company's Corporate Governance Guidelines;
- the extent to which the prospective nominee contributes to the range of
talent, skill and expertise appropriate for the Board; and
- the extent to which the prospective nominee helps the Board reflect the
diversity of the Company's shareholders, employees, customers, guests and
communities.
The Committee also considers such other relevant factors as it deems
appropriate, including the current composition of the Board, the balance of
management and independent directors, the need for Audit Committee expertise and
the evaluations of other prospective nominees. In connection with this
evaluation, the Committee determines whether to interview the prospective
nominee, and if warranted, one or more members of the Committee, and others as
appropriate, interview prospective nominees in person or by telephone. After
completing this evaluation and interview, the Committee makes a recommendation
to the full Board as to the persons who should be nominated by the Board, and
the Board determines the nominees after considering the recommendation and
report of the Committee.
7
DETERMINATION OF DIRECTOR INDEPENDENCE
In January 2004, the Board and the Nominating and Corporate Governance
Committee adopted Corporate Governance Guidelines for the Corporation. The
Guidelines adopted by the Board meet or exceed the new listing standards adopted
during the year by the New York Stock Exchange, and may be found on the
Corporation's web site at www.microfinancial.com.
Pursuant to the Guidelines, the Board undertook a review of director
independence in January 2004. During this review, the Board considered
transactions and relationships between each director or any member of his or her
immediate family and the Corporation and its subsidiaries and affiliates,
including those reported under "Certain Relationships and Related Transactions"
below. The Board also examined transactions and relationships between directors
or their affiliates and members of the Corporation's senior management or their
affiliates. As provided in the Guidelines, the purpose of this review was to
determine whether any such relationships or transactions were inconsistent with
a determination that the director is independent.
As a result of this review, the Board affirmatively determined that all of
the directors nominated for election at the annual meeting are independent of
the Corporation and its management under the standards set forth in the
Corporate Governance Guidelines, with the exception of Peter Bleyleben and
Richard Latour who are considered inside directors because of their employment
by the Corporation.
MEETINGS OF THE BOARD OF DIRECTORS DURING FISCAL 2003
During 2003, the MicroFinancial Board met twelve times and acted by
unanimous written consent two times. In 2003, all MicroFinancial Board members
attended 75% of the aggregate of the meetings of the MicroFinancial Board and
its committees on which they served. Three Board members attended the 2003
Special Meeting of Stockholders in Lieu of Annual Meeting.
COMPENSATION OF DIRECTORS
The MicroFinancial Board is comprised of six Directors, two of whom, Peter
Bleyleben and Richard F. Latour, are salaried employees of the Corporation who
receive no additional compensation for services rendered as Directors. The
members of the MicroFinancial Board who were not employees of the Corporation
("Non-Employee Directors") received stock options to purchase 50,000 shares of
Common Stock in 1999 and stock options to purchase 50,000 shares of Common Stock
in 2000 for their service on the MicroFinancial Board. In 2001, the Non-Employee
Directors each received stock options to purchase 25,000 shares of Common Stock.
In February 2002, the options granted in 2001 were voluntarily cancelled, and
the Directors received new options to purchase 45,000 shares of Common Stock. In
November 2002, the Non-Employee Directors each received stock options to
purchase 50,000 shares of Common Stock and in March 2003, Mr. Zakon received
50,000 shares of restricted stock, all of which had vested as of December 31,
2003. Directors also are reimbursed for out-of-state travel expenses incurred in
connection with attendance at meetings of the MicroFinancial Board and
committees thereof. In addition, the Corporation pays for a portion of each
Non-Employee Director's health care insurance.
Upon his appointment to the Board in February 2004, Fritz von Mering
received 25,000 shares of restricted stock, 20% of which vested immediately and
the remainder of which vests 5% per quarter thereafter until fully vested.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS INVOLVING DIRECTORS
Dr. Bleyleben, the Chairman and a Director of the Corporation, loaned the
Corporation $100,000 in the form of a term note on November 6, 2002, which
matures on February 1, 2005 and bears interest at a rate of
8
7.5% per annum. Additionally, per the terms of the note, in the event of a
payment default on the note, the interest rate will increase by 2 percentage
points, for as long as the default goes uncured. On May 1, 2001 he also loaned
$200,000 in the form of a subordinated note. This note matures on May 1, 2006
(with a one-year optional extension by the Corporation) and bears interest at a
rate of 12% per annum.
Dr. Boyle, a Director of the Corporation, loaned the Corporation $100,000
in the form of a term note on November 26, 2002, which matures on February 1,
2005 and bears interest at a rate of 7.5% per annum. Additionally, per the terms
of the note, in the event of a payment default on the note, the interest rate
will increase by 2 percentage points, for as long as the default goes uncured.
On May 1, 2001 he also loaned $200,000 in the form of a subordinated note. This
note matures on May 1, 2006 (with a one-year optional extension by the
Corporation) and bears interest at a rate of 12% per annum.
Mr. Harder, a Director of the Corporation, loaned the Corporation $50,000
in the form of a term note on November 13, 2002 which matures on February 1,
2005 and bears interest at a rate of 7.5% per annum. Additionally, per the terms
of the note, in the event of a payment default on the note, the interest rate
will increase by 2 percentage points, for as long as the default goes uncured.
On May 1, 2001 he also loaned $100,000 in the form of a subordinated note. This
note matures on May 1, 2006 (with a one-year optional extension by the
Corporation) and bears interest at a rate of 12% per annum.
Mr. Latour, President, Chief Executive Officer, Treasurer, Clerk, Secretary
and Director of the Corporation loaned the Corporation $75,000 in the form of a
subordinated note on May 1, 2001. This note matured on May 1, 2003, but may not
be paid until all of the Corporation's obligations under its senior credit
facility have been paid in full. The note paid interest at a rate of 9% per
annum through May 1, 2002, and at the prime rate plus 3% thereafter.
On December 1, 1998, Fritz Froelich, Dr. Bleyleben's father-in-law, loaned
the Corporation $35,000 in the form of a subordinated note. The note bears
interest at a rate of 8% per annum. This note matured on December 1, 2003, but
may not be paid until all of the Corporation's obligations under its senior
credit facility have been paid in full.
All of the foregoing transactions are on terms at least as favorable as
those that would have been obtained through arms-length negotiations.
COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Shareholders and other parties interested in communicating directly with
the non-management directors may do so by writing to any non-management
director, MicroFinancial Corporation, 10-M Commerce Way, Woburn, Massachusetts
01801. Effective March 15, 2004, the Nominating and Corporate Governance
Committee of the Board approved a process for handling letters received by the
Corporation and addressed to non-management members of the Board. Under that
process, the Chief Financial Officer of the Corporation reviews all such
correspondence and regularly forwards to the Board a summary of all such
correspondence and copies of all correspondence that, in the opinion of the
Chief Financial Officer, deals with the functions of the Board or committees
thereof or that he otherwise determines requires their attention. Directors may
at any time review a log of all correspondence received by the Corporation that
is addressed to members of the Board and request copies of any such
correspondence. Concerns relating to accounting, internal controls or auditing
matters are immediately brought to the attention of the Corporation's internal
audit department and handled in accordance with procedures established by the
Audit Committee with respect to such matters.
9
THE CORPORATION'S CODE OF ETHICS
The Corporation has adopted a Code of Business Conduct and Ethics, which is
applicable to all directors and employees of the Corporation, including the
principal executive officer, the principal financial officer and the principal
accounting officer. The Code of Business Conduct and Ethics may be found on the
Corporation's web site at www.microfinancial.com. The Corporation intends to
post amendments to or waivers from its Code of Business Conduct and Ethics (to
the extent applicable to its chief executive officer, principal financial
officer or principal accounting officer) at this location on its website.
AUDIT COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended, or
the Exchange Act that might incorporate future filings, including this proxy
statement, in whole or in part, the following Audit Committee Report set forth
herein shall not be incorporated by reference into any such filings and shall
not otherwise be deemed filed under such Acts.
In connection with the preparation and filing of The Corporation's Annual
Report on Form 10-K for the year ended December 31, 2003, the Audit Committee
(i) reviewed and discussed the audited financial statements with management,
(ii) discussed with Deloitte & Touche LLP, the Corporation's independent
auditors, the matters required to be discussed by Statement of Auditing
Standards 61 (as modified or supplemented) and (iii) received the written
disclosures and the letter from Deloitte & Touche LLP required by Independence
Standards Board Standard No. 1 (as modified or supplemented) and discussed the
independence of Deloitte & Touche LLP with Deloitte & Touche LLP. Based on the
review and discussions referred to above, among other things, the Audit
Committee recommended to the Board of Directors that the audited financial
statements be included in the Corporation's Annual Report on Form 10-K for the
year ended December 31, 2003.
AUDIT COMMITTEE:
Alan J. Zakon, Chairman,
Brian E. Boyle,
Torrence C. Harder,
Fritz von Mering
10
COMPENSATION OF EXECUTIVE OFFICERS
EXECUTIVE COMPENSATION SUMMARY TABLE
The following table sets forth the compensation of (i) Mr. Latour, the
Chief Executive Officer of the Corporation and (ii) the four most highly
compensated executive officers, other than Mr. Latour, who were serving as
executive officers of the Corporation as of December 31, 2003 (collectively, the
"Named Executive Officers"), in each case for the years ended December 31, 2003,
2002 and 2001. Determination of the most highly compensated executive officers
is based upon compensation for the Corporation's fiscal year ended December 31,
2003 and does not necessarily reflect the most highly compensated executive
officers for the Corporation's fiscal years ended December 31, 2002 and 2001.
SUMMARY COMPENSATION TABLE(1)
LONG TERM COMPENSATION AWARDS
-----------------------------
ANNUAL COMPENSATION SECURITIES
-------------------------- RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) STOCK AWARDS($) OPTIONS (#) COMPENSATION
--------------------------- ---- -------- -------- --------------- ----------- ------------
RICHARD F. LATOUR............ 2003 $251,539 $ 0 $ 0 200,000 $ 6,291(3)
President, Chief Executive 2002 $232,077 $236,560 0 300,000 $ 6,291
Officer, Treasurer, Clerk, 2001 $230,000 $306,643 0 90,000 $54,856
Secretary and Director
JAMES R. JACKSON, JR. ....... 2003 $181,108 $ 0 $67,249(4) 0 $ 3,143(4)
Vice President and Chief 2002 $104,769 $ 0 0 150,000(4) $ 0
Financial Officer
JOHN R. PLUMLEE.............. 2003 $173,783 $ 0 $39,234(5) 0 $ 5,229(5)
Vice President, MIS 2002 $169,029 $ 70,351 0 90,000(5) $ 5,229
2001 $165,000 $ 73,753 0 70,000(5) $19,456
CAROLINA SALVO............... 2003 $142,622 $ 0 $39,234(6) 0 $ 4,383(6)
Vice President, Legal 2002 $138,183 $ 73,698 0 90,000(6) $ 4,359
2001 $135,000 $ 73,753 0 70,000(6) $ 4,098
PETER R. BLEYLEBEN........... 2003 $130,000 $ 0 $ 0 0 $12,403(7)
Chairman and Director 2002 $239,038 $ 0 0 50,000 $12,227
2001 $277,116 $469,997 0 0 $97,636
---------------
(1) Columns required by the rules and regulations of the Securities and Exchange
Commission that contain no entries have been omitted.
(2) Bonuses are paid over a three-year period, with one-third payable each year.
The remaining two-thirds is subject to discretionary review by the
Corporation and, therefore, does not vest to the employee. The bonus amount
set forth for each fiscal year thus represents the amount actually paid for
such fiscal year, plus amounts relating to the prior two fiscal years. In
March 2003, the Board of Directors voted to issue promissory notes to these
executives, which are payable subject to the Company's achievement of
specific financial objectives, to cover the deferred portion of the
profit-sharing plan payments, all of which remain outstanding.
(3) Amounts for Mr. Latour include: (a) contributions by the Corporation under
the Corporation's 401(k) retirement/profit sharing plan in 2003 ($3,200),
2002 ($3,200), and 2001 ($3,200); (b) split dollar life insurance premiums
paid by the Corporation in 2001 ($50,782) (this policy was terminated in
2002 and the Corporation was repaid the cash value under the policy) and (c)
executive disability insurance policy premiums paid by the Corporation in
2003 ($3,091), 2002 ($3,091) and 2001 ($874).
11
(4) Mr. Jackson joined the Company in 2002. Amounts for Mr. Jackson include
contributions by the Corporation under the Corporation's 401(k)
retirement/profit sharing plan in 2003 ($3,143) and 2002 ($0).
In February 2003, all options outstanding to Mr. Jackson were cancelled, and
replaced by 85,558 shares of restricted stock. The value of such shares at
December 31, 2003, using the closing stock price of the Corporation's Common
Stock of $2.90 on such date, was $248,118. As of December 31, 2003, all of
such shares had vested.
(5) Amounts for Mr. Plumlee include: (a) contributions by the Corporation under
the Corporation's 401(k) retirement/profit sharing plan in 2003 ($4,213),
2002 ($4,213) and 2001 ($3,440); (b) split dollar life insurance premiums
paid by the Corporation in 2001 ($15,000) (this policy was terminated in
2002 and the Corporation was repaid the cash value under the policy) and (c)
executive disability insurance policy premiums paid by the Corporation in
2003 ($1,016), 2002 ($1,016) and 2001 ($1,016).
In February 2003, all options outstanding to Mr. Plumlee were cancelled,
and replaced by 49,916 shares of restricted stock, of which 10,000 were
sold in 2003. The value of the shares of restricted stock still owned by
Mr. Plumlee at December 31, 2003, using the closing stock price of the
Corporation's Common Stock of $2.90 on such date, was $115,756. As of
December 31, 2003, all of such shares had vested.
(6) Amounts for Ms. Salvo include: (a) contributions by the Corporation under
the Corporation's 401(k) retirement/profit sharing plan in 2003 ($3,673),
2002 ($3,673) and 2001 ($3,440); and (b) executive disability insurance
policy premiums paid by the Corporation in 2003 ($710), 2002 ($686) and 2001
($658).
In February 2003, all options outstanding to Ms. Salvo were cancelled, and
replaced by 49,916 shares of restricted stock. The value of such shares at
December 31, 2003, using the closing stock price of the Corporation's
Common Stock of $2.90 on such date, was $144,756. As of December 31, 2003,
all of such shares had vested.
(7) Amounts for Dr. Bleyleben include: (a) contributions by the Corporation
under the Corporation's 401(k) retirement/profit sharing plan in 2003
($4,411), 2002 ($4,411), and 2001 ($3,200); (b) split dollar life insurance
premiums paid by the Corporation in 2001 ($90,382) (this policy was
terminated in 2002 and the Corporation was repaid the cash value under the
policy) and (c) executive disability insurance policy premiums paid by the
Corporation in 2003 ($7,992), 2002 ($7,816) and 2001 ($4,054).
OPTION GRANTS IN 2003
The following table indicates the aggregate options granted in 2003 to the
Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
--------------------------------------------------------- ASSUMED STOCK
PERCENT OF FOR TERM(3)
NUMBER OF TOTAL POTENTIAL VALUE
SECURITIES OPTIONS/SARS AT RATES OF
UNDERLYING GRANTED TO EXERCISE OR APPRECIATION OPTION
OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION -------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
---- ------------- -------------- ----------- ---------- -------- --------
Richard F. Latour....... 200,000 100% $0.86 1/28/13 $280,170 $446,124
James R. Jackson, Jr.... 0
John R. Plumlee......... 0
Carolina Salvo.......... 0
Peter R. Bleyleben...... 0
12
---------------
(1) Stock options were granted under the Plan. No stock appreciation rights were
awarded with these grants. All options granted first become exercisable, in
five equal annual installments, beginning one year from the grant date, and
have a ten-year term. If a change of control of MicroFinancial were to
occur, the options would become immediately exercisable in full.
(2) The percentages in the table for the stock options granted in 2003 are based
on a total of 200,000 stock options granted in 2003 to MicroFinancial
employees, all of which were granted to Mr. Latour.
(3) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of the Common Stock
appreciates from the date of grant to the expiration of the option at
annualized rates of 5% and 10%. These assumed rates of appreciation have
been specified by the SEC for illustrative purposes only and are not
intended to forecast future financial performance or possible future
appreciation in the price of the Common Stock. The actual amount the
executive officer may realize will depend on the extent to which the stock
price exceeds the exercise price of the options on the date the option is
exercised.
OPTION EXERCISES AND VALUES AT YEAR-END
The following table indicates the value of unexercised options held at
December 31, 2003. No options were exercised in 2003.
AGGREGATED OPTION/SAR EXERCISES AND
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SAR'S AT FISCAL OPTIONS/SAR'S AT FISCAL
YEAR-END(#) YEAR-END($)(1)(2)
SHARES ACQUIRED VALUE --------------------------- ---------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
Richard F. Latour.... 0 $0 386,000 454,000 $248,000 $423,000
James R. Jackson,
Jr................. 0 $0 0 0 0 0
John R. Plumlee...... 0 $0 0 0 0 0
Carolina Salvo....... 0 $0 0 0 0 0
Peter R. Bleyleben... 0 $0 160,000 90,000 $ 26,300 $ 39,450
---------------
(1) Value based on $2.90, the closing price of the Common Stock on December 31,
2003, minus the exercise price. For Mr. Latour, the exercise price of
236,000 exercisable options and 204,000 unexercisable options exceeded the
closing price of the Common Stock on December 31, 2003. For Dr. Bleyleben
the exercise price of 140,000 exercisable options and 60,000 unexercisable
options exceeded the closing price of the Common Stock on December 31, 2003.
(2) The value of unexercised in-the-money stock options at December 31, 2003 is
presented to comply with regulations of the Securities and Exchange
Commission. The actual amount realized upon exercise of stock options (if
any) will depend upon the excess of the fair market value of the Common
Stock over the exercise price at the time the stock option is exercised.
There is no assurance that the values of unexercised stock options reflected
in this table will be realized.
13
EQUITY COMPENSATION PLANS
The following table summarizes information, as of December 31, 2003,
relating to equity compensation plans of the Corporation pursuant to which
grants of options, restricted stock, restricted stock units or other rights to
acquire shares may be granted from time to time.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED IN
WARRANTS AND RIGHTS WARRANTS AND RIGHTS COLUMN (A))
-------------------------- -------------------- ------------------------
PLAN CATEGORY (a) (b) (c)
------------- -------------------------- -------------------- ------------------------
Equity compensation plans
approved by security
holders(1)..................... 1,675,000 $7.139(2) 2,325,000
Equity compensation plans not
approved by security holders... -- -- --
Total............................ 1,675,000 $7.139(2) 2,325,000
---------------
(1) This plan is the Corporation's 1998 Equity Incentive Plan (which was
approved by shareholders at the 2001 special meeting of stockholders in lieu
of annual meeting).
(2) Weighted average exercise price of outstanding options; excludes restricted
stock.
PROFIT SHARING PLAN AND DISCRETIONARY BOARD OF DIRECTOR BONUS PROGRAMS
The Corporation pays annual bonuses and makes profit sharing payments as
determined by the Compensation Committee of the MicroFinancial Board. Each year
the Compensation Committee indicates to the executive officers the percentage of
the following year's pre-tax profits on which profit sharing plan payments will
be based. Upon the conclusion of the audit of the prior year's financial
results, the Compensation Committee determines the total percentage of pre-tax
profits eligible for profit-sharing plan payments, and awards payments to all
Named Executive Officers, as well as ten other employees. To enhance long-term
retention of these executives, only one-third of the amount awarded is paid at
that point in time. The remaining two-thirds may be paid out over the next two
years in the discretion of the Compensation Committee and are subject to
separate annual approvals of the Compensation Committee. In March 2003, the
Board of Directors voted to issue promissory notes to these executives, which
are payable subject to the Company's achievement of specific financial
objectives, to cover the deferred portion of the profit-sharing plan payments,
all of which remain outstanding.
14
OPTION REPRICINGS
TEN YEAR OPTION REPRICINGS
LENGTH OF
NUMBER OF NUMBER OF ORIGINAL
SECURITIES MARKET PRICE SHARES OF OPTION TERM
UNDERLYING OF STOCK AT EXERCISE PRICE RESTRICTED REMAINING AT
OPTIONS TIME OF AT TIME OF STOCK GRANTED DATE OF
NAME DATE REPRICED(#) REPRICING($) REPRICING($) (#)(1) REPRICING(1)
---- -------- ------------ ------------ -------------- ------------- ------------
Richard F. Latour...... 0
James R. Jackson,
Jr. ................. 11/25/02 150,000 $.786 $ 1.585 85,558 117 months
John R. Plumlee........ 2/25/99 50,000 $.786 $12.313 49,916 72 months
2/24/00 50,000 $.786 $ 9.781 84 months
2/20/01 40,000 $.786 $ 13.10 96 months
11/13/01 30,000 $.786 $ 9.48 105 months
2/28/02 40,000 $.786 $ 6.70 108 months
11/25/02 50,000 $.786 $ 1.585 117 months
Carolina Salvo......... 2/25/99 50,000 $.786 $12.313 49,916 72 months
2/24/00 50,000 $.786 $ 9.781 84 months
2/20/01 40,000 $.786 $ 13.10 96 months
11/13/01 30,000 $.786 $ 9.48 105 months
2/28/02 40,000 $.786 $ 6.70 108 months
11/25/02 50,000 $.786 $ 1.585 117 months
Peter R. Bleyleben..... 0
---------------
(1) All options outstanding to Messrs. Jackson, Plumlee and Ms. Salvo were
cancelled in February 2003, and replaced by 85,558, 49,916 and 49,916 shares
of restricted stock, respectively. The restricted stock vested 20% upon
grant, and 5% on the first day of each quarter after the grant date, with
accelerated vesting if the price of the Corporation's Common Stock exceeded
certain thresholds during the vesting period. As of December 31, 2003, all
of these shares of restricted stock had vested.
COMPENSATION AND BENEFITS COMMITTEE:
Torrence C. Harder, Chairman,
Alan J. Zakon,
Brian E. Boyle
EMPLOYMENT AGREEMENTS
The Corporation has entered into Employment Agreements with Dr. Bleyleben
and Mr. Latour for a three-year period commencing June 12, 1998, subject to
automatic successive one-year renewals unless terminated pursuant to the terms
thereof. In the event of a termination of the Employment Agreements by the
Corporation without cause, or by Dr. Bleyleben or Mr. Latour for specified good
reason, the Employment Agreements provide for three years of severance payments
to Dr. Bleyleben and Mr. Latour, respectively, on the basis of their highest
base salary during the employment period. In addition, Dr. Bleyleben and Mr.
Latour
15
would also be entitled to a prorated payment of base salary and bonus to the
date of termination, and the acceleration of deferred compensation and accrued
but unpaid amounts under the Corporation's bonus and/or profit sharing plans.
Dr. Bleyleben's and Mr. Latour's current base salaries, respectively, are
$130,000 and $260,000. The bonus for the current fiscal year will be determined
by the MicroFinancial Board. If, in connection with a payment under their
Employment Agreement, either Dr. Bleyleben or Mr. Latour shall incur any excise
tax liability on the receipt of "excess parachute payments" as defined in
Section 280G of the Internal Revenue Code of 1986, as amended, the Employment
Agreements provide for gross-up payments to return them to the after-tax
position they would have been in if no excise tax had been imposed. As used in
each Employment Agreement, "for good reason" means the assignment to the
executive of duties inconsistent with the executive's position, authority,
duties or responsibilities; the failure by the Corporation to pay the agreed
base salary and provide the executive with benefits; moving the executive to a
location outside of the metropolitan Boston, Massachusetts area; and the failure
by the Corporation to require a successor to assume all obligations under the
Employment Agreement.
The Corporation has also entered into separate employment agreements with
Messrs. Jackson and Plumlee and Ms. Salvo, as well as six other employees, which
are designed to provide an incentive to each executive to remain with the
Corporation pending and following a Change in Control (as defined below). Each
employment agreement has an initial term of one year following a Change in
Control, with automatic extensions upon the expiration of the initial one-year
term for successive one-month periods (such date and each annual anniversary
thereof, the "Renewal Date"). Pursuant to each employment agreement, the
executive will be entitled to receive an annual base salary of not less than
twelve times the highest monthly base salary paid or payable to the executive
within the twelve months preceding the Change in Control. If the employment
agreement is terminated by the MicroFinancial Board other than for cause, death
or disability, or is terminated by the executive for specified good reason, the
Corporation shall pay to the executive, the aggregate of the following amounts:
(i) one times annual base salary in the case of Mr. Jackson and one and one-half
times the annual base salary in the case of Mr. Plumlee and Ms. Salvo; (ii) any
other compensation or bonus previously deferred by the executive, together with
any accrued interest or earnings thereon; and (iii) any accrued vacation pay.
Pursuant to each employment agreement, if the Executive's employment is
terminated during the Change of Control employment period, the Company shall pay
the amounts referenced above to the Executive in a lump sum in cash within 30
days after the date of termination. If the Executive's employment is terminated
prior to the first day of the Change of Control employment period, the Company
is obligated to pay the amounts referenced above, however, payments of the
Executive's annual base salary would be payable over twelve months, in the case
of Mr. Jackson and eighteen months in the case of Mr. Plumlee and Ms. Salvo with
payment to be made at the same time that the Company pays other peer executives
of the Company.
"Change in Control" means (i) the acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more of either the then outstanding shares of Common Stock or the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors; (ii) individuals who,
as of the date of the original employment agreements constitute the
MicroFinancial Board, cease for any reason to constitute at least a majority of
the MicroFinancial Board or are divested of possession by appointment of a
trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code, except
with respect to any director who was approved by a vote of at least a majority
of the directors then comprising the MicroFinancial Board; (iii) approval by the
shareholders of the Corporation or, in the instance of proceedings for the
Corporation pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy
Code, approval by the bankruptcy judge, of a reorganization, merger or
consolidation, in each case, unless, following such reorganization, merger or
consolidation, more than 60% of, respectively, the then outstanding
16
shares of Common Stock of the corporation resulting from such reorganization,
merger or consolidation and the combined voting power of the then outstanding
voting securities of such corporation entitled to vote generally in the election
of directors continues to be owned by the shareholders who were the beneficial
holders of such stock prior to such transaction; or (iv) approval by the
shareholders or, in the instance of proceedings for the Company pursuant to
Chapter 7 or Chapter 11 of the United States Bankruptcy Code, approval by the
bankruptcy judge, of the Corporation of a complete liquidation or dissolution of
the Corporation or the sale or other disposition of all or substantially all of
the assets of the Corporation.
COMPENSATION COMMITTEE REPORT
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended, or
the Exchange Act that might incorporate future filings, including this proxy
statement, in whole or in part, the following Compensation Committee Report
shall not be incorporated by reference into any such filings and shall not
otherwise be deemed filed under such Acts.
OVERVIEW AND PHILOSOPHY
The Compensation Committee of the Board of Directors (the "Compensation
Committee") is composed of three members, all of whom are outside directors of
the Corporation. The Compensation Committee provides overall guidance on the
Corporation's compensation and benefits philosophy. In addition, the
Compensation Committee approves and monitors the Corporation's:
- executive compensation and benefits programs
- executive employment agreements, if any
- 1998 Equity Incentive Plan
The primary objectives of the Compensation Committee are to assure that the
Corporation's executive compensation and benefits programs:
- reflect the Corporation's entrepreneurial orientation
- are competitive with other growing companies of similar size and business
- safeguard the interests of the Corporation and its stockholders
- are effective in driving performance to achieve financial goals and
create stockholder value
- foster teamwork on the part of management
- are cost-efficient and fair to employees, management and stockholders
- are well communicated to and understood by program participants
The Corporation's executive compensation policies are designed to attract,
motivate and retain highly qualified executive officers who can enhance
stockholder value, and to support a performance-oriented environment that
rewards achievement of the Corporation's financial goals. The Compensation
Committee meets at least once during each fiscal year to review the
Corporation's existing compensation and benefits programs and to consider
modifications that seek to provide a direct relationship between executive
compensation and sustained corporate performance.
The Corporation compensates its executive officers through four principal
types of compensation: annual base salary, profit-sharing payments, board bonus
payments, and long-term incentive awards through stock options. The Corporation,
as a matter of policy, places substantial emphasis on both the profit sharing
plan and
17
long-term stock options since the Corporation believes that correlating both
annual financial performance of the Corporation and long term share valuation
with executive officer compensation is in the best interest of the shareholders.
BASE SALARY
The annual base salary of each executive officer is based on the scope of
his or her responsibility and accountability within the Corporation, as well as
on performance and experience criteria. In addition, the Compensation Committee
considers salary and other compensation arrangements of other companies of
similar size, business and similar growth to determine appropriate levels
required to attract, motivate and retain the most qualified management
personnel.
The Compensation Committee determines and makes final decisions regarding
base salary of executives on an annual basis. The Compensation Committee
recognizes that, to some degree, the determination of an executive officer's
base salary involves subjective considerations.
PROFIT SHARING PLAN
A significant component of an executive officer's total cash compensation
may consist of a profit sharing plan payment, which is intended to make the
executive officer's compensation dependent on the Corporation's performance and
to provide executive officers with incentives to achieve the Corporation's
goals, increase stockholder value, and work as a team.
For purposes of determining profit sharing payments, the Corporation, since
the early days of its existence, has placed a heavy emphasis on financial
profits achieved by the Corporation. Each year the Compensation Committee
indicates to the executive officers the percentage of the following year's
pre-tax profits on which profit sharing plan payments will be based. Upon the
conclusion of the audit of the prior year's financial results, the Compensation
Committee determines the total percentage of pre-tax profits eligible for
profit-sharing plan payments, and awards payments to Dr. Bleyleben and one other
executive of the Corporation. To enhance long term retention of these
executives, only one-third of the amount awarded is paid at that point in time.
The remaining two-thirds may be paid out over the next two years in the
discretion of the Compensation Committee and are subject to separate annual
approvals of the Compensation Committee.
To enhance the retention of other senior personnel and to foster a spirit
of teamwork, the Compensation Committee also establishes a pool along the same
philosophy as for the two executives, and delegates to the Chairman and Chief
Executive Officer the decision as to how and to whom to allocate the approved
funds. Any such bonuses are also determined and paid upon completion of the
Corporation's annual audit.
BOARD BONUS PAYMENTS
In addition, the Compensation Committee may approve an additional bonus
based on the Committee's subjective evaluation of the quality and success of the
executive.
LONG TERM STOCK OPTION COMPENSATION
The Compensation Committee believes that providing key employees, including
executive officers, with the opportunity to acquire stock ownership over time is
the most desirable way to align their interests with those of the Corporation's
stockholders. Stock options, awarded under the Plan, provide an incentive that
focuses the attention of executive officers on managing the Corporation from the
perspective of an owner with an equity interest in the business. In addition,
stock options are a key part of the Corporation's program for motivating and
rewarding managers and other employees over the long term. Through the grant of
stock
18
options, the Corporation has encouraged its managers and other employees to
obtain and hold the Corporation's stock. Stock options granted to employees are
tied to future performance of the Corporation's stock and will provide value
only when the price of the Corporation's stock exceeds the option grant price.
The Compensation Committee determines and makes final decisions regarding
stock option awards made under the Plan. Such factors as performance and
responsibilities of individual managers and the management team as a whole, as
well as general industry practices play an integral role in the determination of
the number of options awarded to a particular executive officer or employee. In
determining the size of the individual award of options, the Compensation
Committee also considers the number of options outstanding and previously
granted, the amount of options remaining available for grant under the Plan, the
aggregate amount of current awards, and the amount necessary to retain qualified
personnel.
In accordance with its business strategy and compensation philosophy, the
Corporation has granted stock options to key executives and managers to afford
them an opportunity to participate in the Corporation's future growth and to
focus them on the contributions which are necessary for the financial success
and business growth of the Corporation and, thereby, the creation of value for
its stockholders.
Stock options are typically awarded based on an assessment of each
recipient's ongoing contribution to overall corporate performance. The
Corporation's Chief Executive Officer's input for the size and timing of option
grants to other executives and managers is an important determinant of the
actual grants given. As a means to encourage a stock option recipient to remain
in service with the Corporation, stock option awards typically vest over a
period of five years from the date of grant. All incentive stock options have
exercise prices at least equal to the fair market value of the Corporation's
stock on the date of grant.
2003 COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
The general policies described above for the compensation of the executive
officers also apply to the compensation approved by the Compensation Committee
with respect to the 2003 compensation for Richard F. Latour, the Corporation's
Chief Executive Officer.
Mr. Latour's base salary was $260,000 in 2003, $250,000 in 2002, $230,000
in 2001 and $220,000 in 2000. Mr. Latour was paid a profit sharing plan payment
in 2003 of approximately $0, in 2002 of approximately $237,000, in 2001 of
approximately $247,000 and in 2000 of approximately $218,000 and an additional
board bonus of $0, $0, $60,000 and $60,000, respectively, for the same years.
During the same time period, the Corporation's pre-tax profits (losses) were
$36.1 million in 2000, $26.4 million in 2001, $(36.8) million in 2002 and
$(26.1) million in 2003.
At December 31, 2003, Mr. Latour had options to purchase 840,000 shares of
Common Stock. Options to acquire 150,000 shares of common stock were granted to
him on February 25, 1999 at an exercise price equal to the then fair market
value of $12.313 per underlying share. Options to acquire 100,000 shares of
common stock were granted to him on February 24, 2000 at an exercise price equal
to the then fair market value of $9.781 per underlying share. Options to acquire
90,000 shares of common stock were granted to him on February 20, 2001 at an
exercise price equal to the then fair market value of $13.10 per underlying
share. Options to acquire 100,000 shares of common stock were granted to him on
February 28, 2002 at an exercise price equal to the then fair market value of
$6.70 per underlying share. Options to acquire 200,000 shares were granted to
him on November 25, 2002 at an exercise price equal to the then fair market
value of $1.585 per underlying share. Options to acquire 200,000 shares were
granted to him on January 28, 2003 at an exercise price equal to the then fair
market value of $0.86 per underlying share. Due to the relatively large number
of shares held and options granted to and exercised by Mr. Latour in the past,
the Compensation Committee is of the opinion that the financial incentive of Mr.
Latour is fully aligned with those of all other shareholders.
19
Mr. Latour continues to fulfill a central and critical role in the
development of the Corporation as a whole, including but not limited to the
achievement of the Corporation's 2004 goals, and it is the Compensation
Committee's expectation that he will continue to have an important influence on
the Corporation's goals outlined for 2004. The Compensation Committee believes
that Mr. Latour's compensation arrangement reflects the above-described
compensation philosophy of the Corporation designed to align management
compensation closely with financial performance and increased stockholder value.
IRS MATTERS
Under Section 162(m) of the Internal Revenue Code and the regulations
promulgated thereunder, deductions for employee remuneration in excess of $1
million which is not performance-based are disallowed for publicly traded
companies. Since levels of compensation paid by the Corporation are expected to
be significantly below $1 million, the Compensation Committee has determined
that it is unnecessary at this time to seek to qualify the components of its
compensation program as performance-based compensation within the meaning of
Section 162(m).
COMPENSATION AND BENEFITS COMMITTEE:
Torrence C. Harder, Chairman,
Alan J. Zakon,
Brian E. Boyle
20
PERFORMANCE GRAPH
Notwithstanding anything to the contrary set forth in any of the
Corporation's previous filings under the Securities Act of 1933, as amended, or
the Exchange Act that might incorporate future filings, including this proxy
statement, in whole or in part, the following Performance Graph shall not be
incorporated by reference into any such filings and shall not otherwise be
deemed filed under such Acts.
The following graph illustrates a fifty-nine (59) month comparison of
cumulative total returns for the Corporation's Common Stock, the NYSE Stock
Index and the S&P Mid-Cap Financials Index from February 5, 1999 through
December 31, 2003. Cumulative total return for the periods shown in the
Performance Graph is measured assuming an initial investment of $100 on February
5, 1999, the date of the Corporation's initial public offering, and the
reinvestment of dividends, if any.
NOTE: MANAGEMENT CAUTIONS THAT THE HISTORIC STOCK PRICE PERFORMANCE INFORMATION
SHOWN IN THIS GRAPH MAY NOT BE INDICATIVE OF CURRENT STOCK PRICE LEVELS OR
FUTURE STOCK PRICE PERFORMANCE.
(PERFORMANCE GRAPH)
INDEPENDENT AUDITORS
FEES TO INDEPENDENT AUDITORS FOR FISCAL 2003 AND 2002
Audit Fees. The aggregate fees billed by Deloitte & Touche LLP and its
affiliates (collectively, "Deloitte & Touche"), for professional services
rendered for the audit of the Corporation's annual financial statements for the
fiscal year ended December 31, 2003 and for the reviews of the financial
statements included in the Corporation's Quarterly Reports on Form 10-Q for that
fiscal year and for services provided in
21
connection with statutory or regulatory filings or engagements were $238,700 and
the audit fees for the fiscal year ended December 31, 2002 were $249,900.
Audit-Related Fees. The aggregate fees billed by Deloitte & Touche for
assurance and related services reasonably related to employee benefit plan
audits and due diligence and consultation on a business transaction and not
reported under the foregoing "Audit Fees" section rendered to the Corporation
for the fiscal year ended December 31, 2003 were $33,500, and the audit-related
fees for the fiscal year ended December 31, 2002 were $11,830.
Tax Fees. The aggregate fees billed by Deloitte & Touche for professional
services related to the review of the Corporation's tax returns rendered to the
Corporation for the fiscal year ended December 31, 2003 were $15,510, and the
tax fees for the fiscal year ended December 31, 2002 were $0.
All Other Fees. There were no other fees billed by Deloitte & Touche for
services rendered to the Corporation, other than the services described under
"Audit Fees," "Audit-Related Fees," and "Tax Fees" for the fiscal years ended
December 31, 2003 and 2002.
APPROVAL BY AUDIT COMMITTEE
The charter of the Audit Committee requires that the Committee approve in
advance any audit or permissible non-audit engagement or relationship between
the Corporation and the independent auditors. The Committee has delegated to the
Chairman of the Audit Committee the authority to approve in advance all audit or
non-audit services to be provided by the independent auditor if presented to the
full Committee at the next regularly scheduled meeting of the Audit Committee.
The Committee also determined that pre-approval was not required on any items
which individually would total less than $50,000.
PROPOSAL 1
ELECTION OF DIRECTORS
As of the date of this proxy statement, the MicroFinancial Board consists
of 6 persons. The MicroFinancial Board is divided into three classes, with each
class serving staggered terms of three years, so that only one class is elected
in any one year. Two directors are to be elected at the Special Meeting to serve
until the 2007 Special Meeting and until their successors are elected and have
qualified. The nominees for this class of directors are Peter R. Bleyleben and
Richard F. Latour. A Director is elected by a plurality of votes of the shares
of Common Stock, present in person or represented by proxy, and entitled to vote
at the Special Meeting when there is a quorum. The nominees for director are
presently directors of MicroFinancial. They have consented to being named a
nominee in this proxy statement and have agreed to serve as a director if
elected at the Special Meeting. In the event that the nominees are unable to
serve, the persons named in the proxy have discretion to vote for other persons
if those other persons are designated by the MicroFinancial Board. The
MicroFinancial Board has no reason to believe that the nominees will be
unavailable for election.
THE MICROFINANCIAL BOARD RECOMMENDS
A VOTE "FOR" THE NOMINEES FOR ELECTION AS DIRECTORS.
22
NOMINEES FOR DIRECTOR
NOMINEE, AGE AND PRINCIPAL OCCUPATION AND
COMMITTEE MEMBERSHIP OTHER INFORMATION
-------------------- ------------------------
Peter R. Bleyleben, 51 Peter R. Bleyleben serves as Chairman of the Board of
Directors of the Corporation. He served as President, Chief
Executive Officer and Director of the Corporation or its
predecessor since June 1987 until January 2002, and Chief
Executive Officer until October 2002. He is also a director
of UpToDate in Medicine, Inc. Before joining the
Corporation, Dr. Bleyleben was Vice President and Director
of the Boston Consulting Group, Inc. ("BCG") in Boston.
During his more than eight years with BCG, Dr. Bleyleben
focused his professional strategic consulting practice on
the financial services and telecommunications industries.
Prior to joining BCG, Dr. Bleyleben earned an M.B.A. with
distinction and honors from the Harvard Business School, an
M.B.A. and a Ph.D. in Business Administration and Economics,
respectively, from the Vienna Business School in Vienna,
Austria and a B.S. in Computer Science from the Vienna
Institute of Technology.
Richard F. Latour, 50 Richard F. Latour has served as President, Chief Executive
Officer, Treasurer, Clerk and Secretary of the Company since
October 2002 and as President, Chief Operating Officer,
Chief Financial Officer, Treasurer, Clerk and Secretary, as
well as a director of the Corporation, since February 2002.
From 1995 to January 2002, he served as Executive Vice
President, Chief Operating Officer, Chief Financial Officer,
Treasurer, Clerk and Secretary. From 1986 to 1995 Mr. Latour
served as Vice President of Finance and Chief Financial
Officer. Prior to joining the Company, Mr. Latour was Vice
President of Finance for eleven years with Trak
Incorporated, an international manufacturer and distributor
of consumer goods, where he was responsible for all
financial and operational functions. Mr. Latour earned a
B.S. in accounting from Bentley College in Waltham,
Massachusetts.
23
CONTINUING DIRECTORS
DIRECTOR, AGE AND PRINCIPAL OCCUPATION AND
COMMITTEE MEMBERSHIP OTHER INFORMATION
-------------------- ------------------------
Terms Expiring in 2005
Torrence C. Harder, 60 Torrence C. Harder has served as a Director of the
Chairman, Compensation and Corporation since 1986, served as Chairman of the
Benefits Committee; Audit Compensation and Benefits Committee since 1997, has been a
Committee; Nominating and member of the Audit Committee since 1997 and the Nominating
Corporate Governance Committee and Corporate Governance Committee since January 2004. He
has been the President and Director of Harder Management
Corporation, Inc., a registered investment advisory firm,
since its establishment in 1971. He has also been the
President and Director of Entrepreneurial Ventures, Inc., a
private equity investment firm, since its founding in 1986.
Mr. Harder is a Director of RentGrow, Inc., Trade Credit
Corporation and UpToDate in Medicine, Inc., a privately held
company. Mr. Harder earned an M.B.A. from the Wharton School
of the University of Pennsylvania, and a B.A. with honors
from Cornell University.
Fritz von Mering, 51 Fritz von Mering has served as a Director of the Corporation
Audit Committee and has been a member of the Audit Committee since 2004. He
is currently the Vice President of Corporate Development and
a Director of Boston Communications Group, Inc. ("Boston
Communications"), a Boston-based provider of call processing
to the global wireless industry. He has also served as the
Chief Financial Officer of Boston Communications from 1989
to 1999. Prior to joining Boston Communications, Mr. von
Mering was the Chief Financial Officer of Massachusetts Gas
& Electric from 1986 to 1989. Before joining Massachusetts
Gas & Electric, Mr. von Mering was regional vice president
and general manager for Metromedia's paging division from
1980 to 1986. Prior to Metromedia, Mr. von Mering held
various positions at Coopers & Lybrand, where he earned his
C.P.A. Mr. von Mering earned his B.S. in Accounting from
Boston College and an M.B.A. from Babson College.
24
DIRECTOR, AGE AND PRINCIPAL OCCUPATION AND
COMMITTEE MEMBERSHIP OTHER INFORMATION
-------------------- ------------------------
Terms Expiring in 2006
Brian E. Boyle, 56 Brian E. Boyle, the Chief Executive Officer of the
Chairman, Nominating and Corporate Corporation from 1985 to 1987 and Chairman of the
Governance Committee; Audit MicroFinancial Board from 1985 to 1995, has served as a
Committee; Compensation and Director of the Corporation or its predecessor since 1985
Benefits Committee; and has been a member of the Audit Committee and the
Compensation Committee since 1997 and the Chairman of the
Nominating and Corporate Governance Committee since January
2004. He is currently the Vice Chairman and a Director of
Boston Communications. He also served as Chairman of GoldK,
Inc. from 1999 to March of 2003, and was the Chief Executive
Officer of GoldK, Inc. from 1999 until November 2002. Prior
to joining Boston Communications, Dr. Boyle was the Chairman
and Chief Executive Officer of Credit Technologies, Inc., a
Massachusetts-based provider of credit decision and customer
acquisition software, from 1989 to 1993. From 1995 to 1999
he was a Director of Saville Systems, a global
telecommunications billing software company, with its United
States headquarters in Burlington, Massachusetts, and served
as a member of its Compensation Committee from 1995 to
October 1999. Dr. Boyle is also a director of several
private companies. Dr. Boyle earned his A.B. in Mathematics
and Economics from Amherst College and a B.S. in Electrical
Engineering and Computer Science, an M.S. in Operations
Research, an E.E. in Electrical Engineering and Computer
Science and a Ph.D. in Operations Research, all from the
Massachusetts Institute of Technology.
Alan J. Zakon, 68 Alan J. Zakon has served as a Director of the Corporation
Chairman, Audit Committee; since 1988, Chairman of the Audit Committee since 1997 and
Compensation and Benefits on the Compensation and Benefits Committee since 1997 and
Committee; Nominating and the Nominating and Corporate Governance Committee since
Corporate Governance Committee January 2004. Since 1995, he has been the Vice Chairman and
a Director, and since November 1997, Chairman of the
Executive Committee, of Scientific Games Corporation, a New
York-based global gaming and simulcasting company. Dr. Zakon
served as Managing Director of Bankers Trust Corporation
from 1989 to 1995 where he was Chairman of the Strategic
Policy Committee. Dr. Zakon is a Director of Arkansas-Best
Freight Corporation, a nationwide commercial transportation
and trucking company and a Director of InfraRedx, a
privately held medical research and development company. Dr.
Zakon holds a B.A. from Harvard University, an M.S. in
Industrial Management from the Sloan School at the
Massachusetts Institute of Technology and a Ph.D. in
Economics and Finance from the University of California at
Los Angeles.
25
OTHER MATTERS
Management does not know of any matters which will be brought before the
Special Meeting other than those specified in the Notice of Special Meeting of
Stockholders. However, if any other matters properly come before the Special
Meeting, the persons named in the form of proxy, or their substitutes, will vote
on such matters in accordance with their best judgment.
2005 STOCKHOLDER PROPOSALS
Proposals of stockholders to be included in the proxy statement and form of
proxy for the Corporation's 2005 Special Meeting of Stockholders must be
received by December 20, 2004. Stockholders who wish to make a proposal at the
aforementioned Special Meeting of Stockholders, other than one that will be
included in the Corporation's proxy materials, must notify the Corporation no
later than January 19, 2005 of such a proposal. If a stockholder makes such a
timely notification, the proxies solicited by the MicroFinancial Board will
confer discretionary voting authority on the persons named as attorneys in the
proxy and such persons may exercise discretionary voting authority under
circumstances consistent with the rules of the Securities and Exchange
Commission. If a stockholder who wishes to present a proposal fails to notify
the Corporation by January 19, 2005, the stockholder shall not be entitled to
present the proposal at the meeting. Notwithstanding the failure to timely
notify the Corporation, if the proposal is brought before the meeting, then the
proxies solicited by the MicroFinancial Board will confer discretionary voting
authority on the persons named as attorneys in the proxy.
Proposals should be mailed to Richard F. Latour, Clerk of MicroFinancial,
at 10M Commerce Way, Woburn, Massachusetts 01801.
FINANCIAL STATEMENTS
The financial statements of the Corporation are contained in the
Corporation's Annual Report on Form 10-K for its fiscal year ended December 31,
2003 that was filed with the Securities and Exchange Commission on March 30,
2004, a copy of which is included with this proxy statement. Such report and the
financial statements contained therein are not to be considered as a part of
this soliciting material.
26
MISCELLANEOUS
All the expenses of preparing, assembling, printing and mailing the
material used in the solicitation of proxies by the Board will be paid by the
Corporation. In addition to the solicitation of proxies by use of the mails,
officers and regular employees of the Corporation may solicit proxies on behalf
of the Board by telephone, telegram or personal interview, the expenses of which
will be borne by the Corporation. Arrangements may also be made with brokerage
houses and other custodians, nominees and fiduciaries to forward soliciting
materials to the beneficial owners of stock held of record by such persons at
the expense of the Corporation.
Submitted by Order of the Board of
Directors,
/s/ Richard F. LATOUR
RICHARD F. LATOUR
Clerk
Woburn, Massachusetts
April 19, 2004
27
APPENDIX A
MICROFINANCIAL INCORPORATED
AUDIT COMMITTEE CHARTER
COMMITTEE'S PURPOSE
The Audit Committee (Committee) is appointed by the Board of Directors
(Board) to assist the Board in monitoring (1) the integrity of the financial
statements of the Company, (2) compliance by the Company with legal and
regulatory requirements, (3) the independent auditor's qualifications and
independence, (4) performance of the Company's internal and independent
auditors, and (5) the business practices and ethical standards of the Company.
The Committee is also directly responsible for (a) the appointment,
compensation, retention and oversight of the work of the Company's independent
auditors, and (b) the preparation of the report that the Securities and Exchange
Commission (Commission) requires to be included in the Company's annual proxy
statement. While the Committee has the responsibilities and powers set forth in
this Charter, it is not the duty of the Committee to plan or conduct audits or
to determine that the Company's financial statements and disclosures are
presented fairly in all material respects in accordance with generally accepted
accounting principles. These are the responsibility of management and the
independent auditor.
COMMITTEE STRUCTURE & MEMBERSHIP
Independence. The Committee shall consist of three or more members of the
Board of Directors, each of whom shall be independent. Independence shall be
determined as to each member by the full Board. To be considered independent,
each Committee member must meet the independence requirements of the New York
Stock Exchange (NYSE), the Sarbanes-Oxley Act of 2002 (SOX) and the rules and
regulations of the Commission. Audit Committee members shall not simultaneously
serve on the audit committees of more than two other public companies.
Financial Literacy. All members of the Committee shall be financially
literate, as defined by the Commission, or must become financially literate
within a reasonable period of time after their appointment to the Committee, and
at least one member of the Committee shall be an audit committee financial
expert, as determined in the judgment of the Board with reference to applicable
law and NYSE rules.
Chairman. Unless a Chairman is elected by the full Board, the members of
the Committee shall designate a Chair by majority vote of all the Committee
members.
Compensation. The compensation of Audit Committee members shall be as
determined by the Board of Directors. No member of the Audit Committee may
receive any consulting, advisory or other compensatory fee from the Company
other than fees paid in his or her capacity as a member of the Board of
Directors or a committee of the Board.
Selection and Removal. Members of the Audit Committee shall be appointed
by the Board of Directors. The Board of Directors may remove members of the
Audit Committee from such committee, with or without cause.
MEETINGS
The Committee shall meet at least four times annually or more frequently as
circumstances dictate. Meetings may be in person or by telephone as needed to
conduct the business of the Committee. The
A-1
Committee may take action by the unanimous written consent of the members in the
absence of a meeting. The Committee shall meet periodically with management and
the independent auditor in separate executive sessions.
AUTHORITY AND RESPONSIBILITY OF THE COMMITTEE
The Audit Committee shall have the authority (1) to exercise all powers
with respect to the appointment, compensation, retention and oversight of the
work of the independent auditor for the Company and its subsidiaries, (2) to
retain special legal, accounting or other consultants to advise the Committee
and to pay the fees of such advisors and (3) to determine the amount of funds it
needs to operate and direct the CFO make such funds available.
As part of its oversight role, the Committee may investigate any matter
brought to its attention, with the full power to retain outside counsel or other
experts for this purpose. The Audit Committee may request any officer or
employee of the Company or the Company's outside counsel or independent auditor
to attend a meeting of the Committee or to meet with any member of, or
consultant to, the Committee. Without limiting the generality of the foregoing,
the Audit Committee shall:
Financial Statement and Disclosure Matters
1. Review and discuss prior to public dissemination the annual audited and
quarterly unaudited financial statements with management and the independent
auditor, including major issues regarding accounting, disclosure and auditing
procedures and practices as well as the adequacy of internal controls that could
materially affect the Company's financial statements. In addition, the review
shall include the Company's disclosures under "Management's Discussion and
Analysis of Financial Condition and Results of Operations." Based on the annual
review, the Audit Committee shall recommend inclusion of the financial
statements in the Annual Report on Form 10-K to the Board.
2. Discuss with management and the independent auditor significant
financial reporting issues and judgments made in connection with the preparation
of the Company's financial statements, including any significant changes in the
Company's selection or application of accounting principles, any major issues as
to the adequacy of the Company's internal controls and any special steps adopted
in light of material control deficiencies.
3. Review and discuss reports from the independent auditors on:
a. All critical accounting policies and practices to be used.
b. All alternative treatments of financial information within
generally accepted accounting principles that have been discussed with
management, ramification of the use of such alternative disclosures and
treatments, and the treatment preferred by the independent auditor.
c. Other material written communications between the independent
auditor and management, such as any management letter.
4. Discuss with management the Company's earnings press releases as well as
financial information and earnings guidance provided to analysts and rating
agencies. Such discussion may be done generally consisting of discussing the
types of information to be disclosed and the types of presentations to be made.
5. Discuss with management and the independent auditor the effect on the
Company's financial statements of significant regulatory and accounting
initiatives as well as off-balance sheet structures.
A-2
6. Discuss with management the Company's major financial risk exposures and
the steps management has taken to monitor and control such exposures, including
the Company's risk assessment and risk management policies.
7. Review with the independent auditor any audit problems or difficulties
and management's response, including, but not limited to (1) any restrictions on
the scope of the auditor's activities, (2) any restriction on the access of the
independent auditor to requested materials, (3) any significant disagreements
with management and (4) any audit differences that were noted or proposed by the
auditor but for which the Company's financial statements were not adjusted (as
immaterial or otherwise). The Committee will resolve any disagreements between
the auditors and management regarding financial reporting.
8. Review disclosures made to the Audit Committee by the Company's CEO and
CFO during their certification process for the Form 10-K and Form 10-Q about any
significant deficiencies in the design or operation of disclosure controls and
procedures and any fraud involving management or other employees who have a
significant role in the Company's internal controls.
9. Discuss at least annually with the independent auditor the matters
required to be discussed by Statement of Auditing Standards No. 61 as
amended -- Communication with Audit Committees.
10. Prepare the Audit Committee report that the Commission requires to be
included in the Company's annual proxy statement and review the matters
described in such report.
11. Obtain quarterly assurances from the senior internal auditing
executive, if applicable and management that the system of internal controls is
adequate and effective. Obtain annually a report from the independent auditor,
with attestation, regarding management's assessment of the effectiveness of the
internal control structure and procedures for financial reporting.
Responsibility for the Company's Relationship with the Independent Auditor
12. Be solely responsible for the appointment, compensation, retention and
oversight of the work of the independent auditors employed by the Company. The
independent auditor shall report directly to the Audit Committee. If the
appointment of the independent auditors is submitted for any ratification by
stockholders, the Audit Committee shall be responsible for making the
recommendation of the independent auditors.
13. Review, at least annually, the qualifications, performance and
independence of the independent auditor. In conducting such review, the
Committee shall obtain and review a report by the independent auditor describing
(1) the independent auditor's internal quality-control procedures, (2) any
material issues raised by the most recent internal quality-control review, or
peer review, of the independent auditor or by any inquiry or investigation by
governmental or professional authorities within the preceding five years
regarding any independent audit carried out by the independent auditor or any
services provided by the independent auditor which could affect the financial
statements of the Company, and any steps taken to deal with any such issues, and
(3) all relationships between the independent auditor and the Company that could
be considered to bear on the auditor's independence. This evaluation shall
include the review and evaluation of the lead partner of the independent auditor
and shall ensure the rotation of partners in accordance with Commission rules
and the securities laws. In addition, the Committee shall consider the
advisability of regularly rotating the audit independent auditor in order to
maintain the independence between the independent auditor and the Company.
14. Approve in advance any audit or permissible non-audit engagement or
relationship between the Company and the independent auditors. The Committee
shall establish guidelines for the retention of the independent auditor for any
permissible non-audit services. The Committee hereby delegates to the Chairman
A-3
of the Committee the authority to approve in advance all audit or non-audit
services to be provided by the independent auditor if presented to the full
Committee at the next regularly scheduled meeting.
15. Meet with the independent auditor prior to the audit to review the
planning and staffing of the audit including the responsibilities and staffing
of the Company's internal audit department personnel who will assist in the
audit.
16. Adopt policies for the Company's hiring of employees or former
employees of the independent auditor who participated in any capacity in the
audit of the Company.
Oversight of the Company's Internal Audit Function
17. Review the appointment and replacement of the senior internal auditing
executive.
18. Review the activities and organizational structure of the internal
auditing department and the significant reports to management prepared by the
internal auditing department and management's responses.
19. Discuss with the independent auditor and management the internal audit
department responsibilities, budget and staffing and any recommended changes in
the planned scope of the internal audit department.
Compliance Oversight Responsibility
20. Obtain from the independent auditor assurance that Section 10A(b) of
the Securities Exchange Act of 1934, as amended, has not been implicated.
21. Obtain reports from management and the Company's senior internal
auditing executive that the Company is in conformity with applicable legal
requirements and the Company's Code of Business Conduct and Ethics. Review
disclosures required to be made under the securities laws of insider and
affiliated party transactions. Advise the Board with respect to the Company's
policies and procedures regarding compliance with applicable laws and
regulations and with the Company's Code of Business Conduct and Ethics.
22. Establish and maintain procedures for the receipt, retention and
treatment of complaints received by the Company regarding accounting, internal
controls or auditing matters. Also, the Committee shall maintain the Anonymous
Reporting Hotline for the confidential anonymous submission by employees of the
Company of concerns regarding questionable accounting, internal controls or
auditing matters.
23. Discuss with management and the independent auditor any correspondence
with regulators or governmental agencies and any published reports that raise
material issues regarding the Company's financial statements or accounting
policies.
24. Review at least annually legal matters with the Company's Outside
Counsel that may have a material impact on the financial statements, the
Company's compliance policies, and any material reports or inquiries received
from regulators or governmental agencies.
Other
25. Report regularly to the Board with respect to any issues that arise
with respect to the quality or integrity of the Company's financial statements,
the Company's compliance with legal or regulatory requirements, the performance
and independence of the Company's independent auditors or the performance of the
internal audit function.
26. Review and reassess the adequacy of this Charter annually and recommend
any proposed changes to the Board for approval.
27. Perform an annual performance self-evaluation.
A-4
SPECIAL MEETING OF STOCKHOLDERS IN LIEU OF ANNUAL MEETING OF
MICROFINANCIAL INCORPORATED
MONDAY, MAY 17, 2004
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
Please detach and mail in the envelope provided.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
1. Election of the following directors for three-year terms.
NOMINEES
[ ] FOR ALL NOMINEES [ ] Peter R. Bleyleben
[ ] Richard F. Latour PLEASE MARK, DATE, SIGN AND MAIL THIS PROXY CARD IN THE
[ ] WITHHOLD AUTHORITY ACCOMPANYING ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
FOR ALL NOMINEES UNITED STATES.
[ ] FOR ALL EXCEPT THE BOARD OF DIRECTORS OF THE CORPORATION RECOMMENDS A VOTE FOR
(See instructions below) THE ELECTION OF THE NOMINEES FOR DIRECTOR FOR THREE-YEAR TERMS.
INSTRUCTION: To withhold authority to vote for any
individual nominee(s), mark "FOR ALL EXCEPT"
and fill in the circle next to each nominee
you wish to withhold, as shown here:
------------------------------------------------------------
------------------------------------------------------------
To change the address on your account, please check the
box at right and indicate your new address in the address
space above. Please note that changes to the registered
name(s) on the account may not be submitted via this
method. [ ] MARK HERE IF YOU PLAN TO ATTEND THE MEETING. [ ]
Signature of Stockholder Date: Signature of Stockholder Date:
------------------- ------------- ------------------- -------------
NOTE: This proxy must be signed exactly as the name appears hereon. When shares
are held jointly, each holder should sign. When signing as executor,
administrator, attorney, trustee or guardian, please give full title as
such. If the signer is a corporation, please sign full corporate name by
duly authorized officer, giving full title as such. If signer is a
partnership, please sign in partnership name by authorized person.
PROXY
MICROFINANCIAL INCORPORATED
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE CORPORATION
FOR THE SPECIAL MEETING OF STOCKHOLDERS IN LIEU OF ANNUAL MEETING
TO BE HELD ON MAY 17, 2004, OR ANY ADJOURNMENTS THEREOF.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS DIRECTED BY THEIR STOCKHOLDER(S).
The undersigned stockholder of MicroFinancial Incorporated (the
"Corporation") hereby appoints Peter R. Bleyleben and Richard F. Latour (each a
"Proxy Agent"), jointly and severally with full power of substitution to each as
proxies for and on behalf of the undersigned, to attend the Special Meeting of
Stockholders in Lieu of Annual Meeting of MicroFinancial Incorporated, to be
held at Edwards & Angell, LLP, 101 Federal Street, Boston, Massachusetts on
Monday, May 17, 2004, at 3:00 P.M., or any adjournments thereof, and to vote as
directed below all stock of the Corporation which the undersigned would be
entitled to vote if personally present.
By acceptance, each Proxy Agent agrees that this Proxy will be voted in the
manner directed by the stockholder giving this Proxy. If no direction is
specified, the Proxy will be voted FOR the election of the nominees for Director
for three-year terms, as set forth on the reverse. Discretionary authority is
hereby conferred as to all other matters which may properly come before the
meeting or any adjournments thereof. This Proxy, if properly executed and
delivered, will revoke all other Proxies.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL
BE VOTED FOR THE NOMINEES FOR DIRECTOR FOR THREE-YEAR TERMS.
CONTINUED, AND TO BE SIGNED, ON REVERSE SIDE