<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 18, 1997.
REGISTRATION NO. 333-20733
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HPSC, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6159 04-2560004
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
--------------------------
60 STATE STREET, 35TH FLOOR
BOSTON, MASSACHUSETTS 02109-1803
(617) 720-3600
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
JOHN W. EVERETS, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
HPSC, INC.
60 STATE STREET, 35TH FLOOR
BOSTON, MASSACHUSETTS 02109-1803
(617) 720-3600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies of all communications to:
<TABLE>
<S> <C>
DENNIS W. TOWNLEY, ESQ. LEWIS J. GEFFEN, ESQ.
Hill & Barlow, P.C. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
One International Place P.C.
Boston, MA 02110-2607 One Financial Center
(617) 428-3000 Boston, MA 02111-2657
(617) 542-6000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MARCH 18, 1997
$20,000,000
HPSC LOGO
% SENIOR SUBORDINATED NOTES DUE 2007
--------------------------
The % Senior Subordinated Notes offered hereby (the "Notes") will mature
on April 1, 2007. Interest on the Notes is payable semiannually on April 1 and
October 1, beginning October 1, 1997. The Notes are redeemable at the option of
HPSC, Inc. ("HPSC"), in whole or in part, other than through the operation of
the Sinking Fund (defined herein), as described in this Prospectus, after April
1, 2002 at the redemption prices set forth herein, plus accrued but unpaid
interest to the date of repurchase.
On and after April 1, 2002, HPSC is required to redeem, on January 1, April
1, July 1 and October 1 of each year, a portion of the aggregate principal
amount of the Notes as set forth herein at a redemption price equal to 100% of
the aggregate principal amount of the Notes so redeemed, plus accrued but unpaid
interest to the redemption date. The principal amount of Notes to be redeemed
may at the option of HPSC be reduced in inverse order of maturity by an amount
equal to the sum of (i) the principal amount of Notes theretofore issued and
acquired at any time by HPSC and delivered to the Trustee for cancellation, and
not theretofore made the basis for the reduction of a Sinking Fund payment, and
(ii) the principal amount of Notes at any time redeemed and paid pursuant to the
optional redemption provisions of the Notes or which shall at any time have been
duly called for redemption (otherwise than through operation of the Sinking
Fund) and the redemption price shall have been deposited in trust for that
purpose and which theretofore have not been made the basis for the reduction of
a Sinking Fund payment. See "Description of Notes--Redemption--SINKING FUND."
Upon the occurrence of a Change of Control (defined herein), each holder of
the Notes will have the option to require HPSC to repurchase such holder's
Notes, in whole or in part, at a price equal to 101% of the principal amount
thereof, together with accrued but unpaid interest to the date of repurchase.
See "Description of Notes--Certain Covenants--REPURCHASE OF NOTES AT THE OPTION
OF THE HOLDER UPON A CHANGE OF CONTROL."
The Notes are unsecured, general obligations of HPSC, subordinate in right
of payment to all Secured Portfolio Debt (as defined) of HPSC, ranking PARI
PASSU with all existing unsecured Funded Recourse Debt (as defined) of HPSC, and
senior in right of payment to all future unsecured Funded Recourse Debt of HPSC.
In addition, as no existing or future subsidiary of HPSC has guaranteed or will
guarantee the Notes, the Notes will be effectively subordinated to any
Indebtedness of any Subsidiaries (as such terms are defined herein) of HPSC. At
December 31, 1996, after giving effect to the sale of the Notes and the
application of the estimated net proceeds thereof, the outstanding Secured
Portfolio Debt of the Company would have been $98.2 million, of which $74.3
million would have been Indebtedness of Subsidiaries of HPSC. The Company does
not currently have outstanding any Indebtedness that is subordinate or junior in
right of payment to the Notes.
HPSC does not intend to list the Notes on any securities exchange or to
include them on any quotation system, and no active trading market is likely to
develop. Although the Underwriters have indicated an intention to make a market
in the Notes, neither Underwriter is obligated to make a market in the Notes,
and any market making may be discontinued at any time without notice at the sole
discretion of such Underwriter. See "Underwriting."
--------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
<S> <C> <C> <C>
Per Senior Subordinated Note.................... 100% % %
Total(3)........................................ $20,000,000 $ $
</TABLE>
(1) HPSC has agreed to indemnify the Underwriters against certain liabilities
under the Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses payable by HPSC estimated at $500,000.
(3) HPSC has granted the Underwriters a 30-day option to purchase up to an
additional $3,000,000 principal amount of the Notes, solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to HPSC
will be $23,000,000, $ and $ .
------------------------------
The Notes are offered by the Underwriters, subject to prior sale, receipt
and acceptance by them, and subject to the right of the Underwriters to reject
any order in whole or in part and certain other conditions. It is expected that
delivery of the Notes will be made at the offices of Advest, Inc., New York, New
York, on or about , 1997.
ADVEST, INC. LEGG MASON WOOD WALKER
INCORPORATED
The date of this Prospectus is , 1997.
<PAGE>
[Map of the continental United States displaying the locations of the Company's
sales offices and the regional distribution of the Company's portfolio balances
for contracts owned and managed by HPSC (ACFC portfolio excluded)]
<TABLE>
<CAPTION>
REGION AMOUNT ($) NUMBER OF CONTRACTS
- ------------------------------ ----------- -------------------
<S> <C> <C>
West $54 million 2,900
Central $48 million 2,900
Southeast $48 million 3,100
Northeast $40 million 2,200
</TABLE>
HEADQUARTERS:
Boston, Massachusetts
BRANCHES:
Fairfield, New Jersey
Charlotte, North Carolina
Atlanta, Georgia
Peachtree City, Georgia
Valrico, Florida
Bloomingdale, Illinois
Chicago, Illinois
Itasca, Illinois
Dallas, Texas
Arvada, Colorado
Chatsworth, California
Emeryville, California
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act. Discussions containing such forward-looking
statements may be found in the material set forth under "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as within the Prospectus generally. When
used in this Prospectus, the words "believes," "anticipates," "expects,"
"plans," "intends," "estimates," "continue," "could," "may" or "will" (or the
negative of such words) and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties. Actual results in the future could differ materially from those
described in the forward-looking statements as a result of the risk factors set
forth beginning on page 9 and the matters set forth in this Prospectus
generally. HPSC cautions the reader, however, that such list of risk factors may
not be exhaustive. HPSC undertakes no obligation to release publicly the result
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The logo of HPSC is a registered service mark of HPSC. All trademarks and
trade names referred to in this Prospectus are the property of their respective
owners.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT INDICATES OTHERWISE,
WHEN USED HEREIN "HPSC" REFERS TO HPSC, INC., A DELAWARE CORPORATION, AND THE
"COMPANY" REFERS TO HPSC AND ITS SUBSIDIARIES, AS DESCRIBED BELOW. INVESTORS
SHOULD CAREFULLY CONSIDER THE RISK FACTORS RELATED TO THE PURCHASE OF NOTES OF
THE COMPANY. SEE "RISK FACTORS."
THE COMPANY
HPSC, Inc. is a specialty finance company engaged primarily in providing
financing for equipment and other professional practice-related expenses to the
dental, ophthalmic, general medical, chiropractic and veterinary professions
throughout the United States. The Company has over 20 years of experience as a
provider of financing to dental professionals in the United States.
In 1996, approximately 60.0% of the Company's originations were derived from
healthcare equipment financing. Management estimates that the Company currently
provides financing for equipment of more than 500 vendors. The Company competes
principally in the portion of the healthcare finance market where the size of
the transaction is $250,000 or less, sometimes referred to as the "small-ticket"
market. The average size of the Company's financing transactions during 1996 was
approximately $25,000. The Company's equipment financing transactions consist of
noncancellable, direct finance leases and installment sales contracts,
substantially all of which provide for a full payout at a fixed interest rate
over a term of one to seven years. The Company provides its leasing customers
with an option to purchase the leased equipment at the end of the term. Since
1991, over 99.0% of the Company's customers have exercised this option.
HPSC also finances the purchase of healthcare practices, particularly dental
practices. In addition, through its subsidiary, American Commercial Finance
Corporation, the Company makes asset-based loans to a variety of businesses in
the northeastern United States. In 1996, approximately 30.0% of the Company's
originations were generated from financing professional practice related
expenses, including practice finance, leasehold improvements, office furniture,
working capital and supplies, and approximately 10.0% arose from asset-based
lending.
At December 31, 1996, the Company's outstanding leases and notes receivable
owned and managed were approximately $208.0 million, consisting of 11,100 active
contracts. HPSC's financing contract originations were approximately $86.9
million in 1996 compared to approximately $61.3 million in 1995 and
approximately $28.4 million in 1994, annual increases of 41.9% and 115.8%,
respectively. ACFC originated lines of credit in the amount of approximately
$17.6 million in 1996, $12.1 million in 1995 and $5.0 million in 1994. The
Company markets its financing services to healthcare providers in a number of
ways, including through advertising and participation at trade shows and
conventions, through its sales staff with 14 offices in nine states and through
cooperative arrangements with equipment vendors.
The Company's strategy is to expand its business and to enhance its
profitability by (i) increasing its share of the dental equipment financing
market, as well as by expanding its activities in other healthcare markets; (ii)
diversifying the Company's revenue stream through its practice finance and
asset-based lending; (iii) emphasizing service to vendors and customers; (iv)
increasing its direct sales and other marketing efforts; (v) maintaining and
increasing the Company's access to low-cost capital and managing interest rate
risks; (vi) continuing to manage effectively its credit risks; and (vii)
capitalizing on information technology to increase productivity and enable the
Company to manage a higher volume of financing transactions.
HPSC was incorporated in Delaware in 1975. Its executive offices are located
at 60 State Street, Boston, Massachusetts 02109, and its telephone number is
(617) 720-3600. The Company's common stock is traded on the Nasdaq National
Market under the symbol "HPSC."
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the $20,000,000 principal amount of % Senior Subordinated
Company....................... Notes due 2007 (the "Notes").
Maturity Date................... April 1, 2007
Sinking Fund.................... Sinking fund payments beginning in year five to yield a
weighted average life to maturity of approximately seven
and one-half years. On and after April 1, 2002, HPSC is
required to redeem, on January 1, April 1, July 1 and
October 1 of each year, a portion of the aggregate
principal amount of the Notes as set forth herein at a
redemption price equal to 100% of the aggregate principal
amount of the Notes so redeemed, plus accrued but unpaid
interest to the redemption date. The principal amount of
Notes to be redeemed may at the option of HPSC be reduced
in inverse order of maturity by an amount equal to the sum
of (i) the principal amount of Notes theretofore issued
and acquired at any time by HPSC and delivered to the
Trustee for cancellation, and not theretofore made the
basis for the reduction of a Sinking Fund payment, and
(ii) the principal amount of Notes at any time redeemed
and paid pursuant to the optional redemption provisions of
the Notes or which shall at any time have been duly called
for redemption (otherwise than through operation of the
Sinking Fund) and the redemption price shall have been
deposited in trust for that purpose and which theretofore
have not been made the basis for the reduction of a
Sinking Fund payment. See "Description of
Notes--Redemption--Sinking Fund."
Interest Payment Dates.......... April 1 and October 1, beginning October 1, 1997
Ranking......................... The Notes will be unsecured, general obligations of HPSC,
subordinate in right of payment to all Secured Portfolio
Debt (as defined below under the heading "Description of
Notes--Certain Definitions") of HPSC, ranking PARI PASSU
with all existing unsecured Funded Recourse Debt (as
defined below under the heading "Description of
Notes--Certain Definitions") of HPSC, and senior in right
of payment to all future unsecured Funded Recourse Debt of
HPSC. In addition, as no existing or future subsidiary of
HPSC has guaranteed or will guarantee the Notes, the Notes
will be effectively subordinated to any Indebtedness of
any Subsidiaries (as such terms are defined below under
the heading "Description of Notes--Certain Definitions")
of HPSC. The Company does not currently have outstanding
any Indebtedness that is subordinate or junior in right of
payment to the Notes.
Optional Redemption............. The Notes will be nonredeemable for five years after
issuance. The Notes will be redeemable at the option of
HPSC, in whole or in part, after five years, at premiums
declining annually until April 1, 2002, at which time the
Notes will be redeemable at par plus accrued interest.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Repurchase Option Upon Death.... Upon the death of any Holder, HPSC will repurchase upon
request, at par plus accrued but unpaid interest, such
Holder's Notes, subject to limits of $25,000 in principal
amount per Holder per year and $250,000 in aggregate
principal amount for all Holders in any 12-month period,
and subject to other conditions being satisfied.
Change of Control............... Upon the occurrence of a Change of Control (as defined
below under the heading "Description of Notes--Certain
Covenants-- REPURCHASE OF NOTES AT THE OPTION OF THE
HOLDER UPON A CHANGE OF CONTROL"), each Holder of the
Notes will have the option to require HPSC to repurchase
such Holder's Notes, in whole or in part, at a price equal
to 101% of the principal amount thereof, together with
accrued but unpaid interest to the date of repurchase.
Use of Proceeds................. To repay indebtedness outstanding under the Revolver (as
defined herein) and for working capital and general
corporate purposes.
Principal Covenants............. The Indenture will contain certain covenants that will
restrict, among other things, the ability of the Company
to (i) incur Funded Recourse Debt and Disqualified Capital
Stock (as defined below under the heading "Description of
Notes--Certain Definitions"), (ii) make Restricted
Payments (as defined below under the heading "Description
of Notes--Certain Definitions"), (iii) restrict the
ability of Subsidiaries to pay dividends or make
distributions, (iv) incur liens, (v) enter into Affiliate
Transactions (as defined below under the heading
"Description of Notes--Certain Covenants--LIMITATION ON
TRANSACTIONS WITH AFFILIATES"), (vi) merge or consolidate
with or into another entity or sell substantially all of
its assets and (vii) engage in other lines of business.
</TABLE>
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEC. 26, DEC. 25, DEC. 31, DEC. 31, DEC. 31,
1992 1993 (1) 1994 (2) 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Earned income on leases and notes.................................. $21,734 $17,095 $11,630 $12,871 $17,515
Gain on sales of leases and notes.................................. -- -- -- 53 1,572
Provision for losses............................................... (4,307) (15,104) (754) (1,296) (1,564)
--------- --------- --------- --------- ---------
Net revenues................................................... 17,427 1,991 10,876 11,628 17,523
Selling, general and administrative expenses....................... 3,574 5,160 6,970 5,984 8,059
Interest expense................................................... 10,663 9,057 3,514 5,339 8,146
Interest income.................................................... (54) (78) (358) (375) (261)
Loss on write-off of foreign currency translation adjustment (3)... -- -- -- 601 --
--------- --------- --------- --------- ---------
Income (loss) before income taxes.................................. 3,244 (12,148) 750 79 1,579
Provision (benefit) for income taxes............................... 1,260 (4,870) 300 204 704
--------- --------- --------- --------- ---------
Net income (loss).................................................. $ 1,984 $ (7,278) $ 450 $ (125) $ 875
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per share........................................ $ 0.40 $ (1.48) $ 0.09 $ (0.03) $ 0.22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Shares used to compute net income (loss) per share................. 4,922,473 4,923,233 4,989,391 3,881,361 4,067,236
OTHER DATA:
Leases and notes receivable originated during period (4)........... $25,161 $14,152 $32,609 $68,554 $96,982
Number of leases and notes originated during period (4)............ 1,575 745 1,590 2,800 3,740
Average amount financed per contract originated during period
(4)............................................................. $ 16 $ 19 $ 21 $ 24 $ 26
Charge-offs divided by average net investment in leases and notes
(before allowance).............................................. 3.4% 12.4% 3.2% 1.4% 1.2%
Ratio of earnings to fixed charges (5)............................. 1.30x -- 1.21x 1.01x 1.19x
Pro forma ratio of earnings to fixed charges (6)................... 1.07x
EBITDA (7)......................................................... $14,889 $ (396) $ 6,136 $ 7,758 $12,587
Ratio of EBITDA to interest expense (8)............................ 1.40x -- 1.75x 1.45x 1.55x
Pro forma ratio of EBITDA to interest expense (6) (7) (9).......... 1.39x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEC. 31, 1996
-----------------------
DEC. 26, DEC. 25, DEC. 31, DEC. 31, AS
1992 1993 (1) 1994 1995 ACTUAL ADJUSTED(7)
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 625 $ 16,600 $ 419 $ 861 $ 2,176 $ 2,176
Restricted cash..................... -- -- 7,936 5,610 6,769 6,769
Net investment in leases and
notes............................ 157,058 109,752 91,193 119,916 149,222 149,222
Total assets........................ 158,857 130,437 103,148 130,571 163,217 164,717
Revolving credit borrowings......... 24,584 7,130 16,500 39,000 40,000 21,500
Senior notes........................ 50,000 50,000 41,024 49,523 76,737 76,737
Senior Subordinated Notes........... -- -- -- -- -- 20,000
Subordinated debt................... 19,090 19,962 -- -- -- --
Total liabilities................... 113,816 92,816 70,326 97,410 128,885 130,385
Total stockholders' equity.......... 45,041 37,621 32,822 33,161 34,332 34,332
</TABLE>
- ------------------------------
(1) In 1993, the Company experienced a substantial decrease in new business,
increased selling, general and administrative costs and a substantial
adjustment to its loan loss reserves, in each case largely as a result of
the bankruptcy of Healthco International, Inc., which previously had
referred to the Company substantially all of the Company's business.
(2) For 1994 and prior years, the Company's fiscal year was the 52 or 53 week
period ending on the last Saturday of the calendar year. The 1994 fiscal
year covers the 53-week period from December 26, 1993 to December 31, 1994.
In fiscal year 1995, the Company changed its fiscal year-end to December 31.
(3) Reflects a one-time, non-cash loss on write-off of cumulative foreign
currency translation adjustments related to the Company's discontinued
Canadian operations.
(4) For contracts originated by ACFC, originations reflect initial advances on
committed lines of credit. Excludes leases and notes receivable originated
by the Company's discontinued Canadian operations in 1992 and 1993.
6
<PAGE>
(5) For purposes of this ratio, earnings consist of earnings before income taxes
plus fixed charges. Fixed charges consist of interest expense and
amortization of debt issuance costs. Earnings before income taxes plus fixed
charges were insufficient to cover fixed charges in 1993 by approximately
$12.1 million. The ratio of earnings to fixed charges, excluding the loss on
write-off of foreign currency translation adjustment, was 1.13x for the year
ended December 31, 1995.
(6) In computing pro forma earnings to fixed charges and pro forma EBITDA (as
defined below) to interest expense, the Company assumes that it will incur
additional interest expense on the $20 million of new indebtedness at an
estimated interest rate of 10%, offset, in part, by a reduction of interest
expense at a weighted average interest rate of 7.25% on the $18.5 million of
debt that will be repaid with the net proceeds of the offering. In addition,
the pro forma calculation includes the effect of the amortization of debt
issue costs incurred in connection with this offering over a 10-year period.
(7) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented here to provide additional information
about the Company's ability to meet its future debt service and working
capital requirements. EBITDA is not a measure of financial performance under
generally accepted accounting principles ("GAAP") and should not be
considered as an alternative either to net income as an indicator of the
Company's operating performance, or to cash flows as a measure of the
Company's liquidity.
(8) Ratio of EBITDA (as defined above) to interest expense is widely used as an
indicator of a company's ability to service its debt, but is not necessarily
an indication of, and should not be considered as an alternative to, the
ratio of earnings to fixed charges. EBITDA was insufficient to cover
interest expense in 1993 by approximately $9.4 million.
(9) Adjusted to give effect to the sale of $20.0 million principal amount of the
Notes by the Company and the application of approximately $18.5 million of
net proceeds therefrom, taking into account an assumed underwriting discount
and estimated expenses of the offering, to repay senior secured bank debt.
See "Use of Proceeds" and "Capitalization."
------------------------------
EXCEPT AS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, AND FURTHER ASSUMES NO
EXERCISE OF THE 641,875 OPTIONS OUTSTANDING AS OF DECEMBER 31, 1996 TO PURCHASE
SHARES OF THE COMPANY'S COMMON STOCK AT A WEIGHTED AVERAGE EXERCISE PRICE OF
$3.36 PER SHARE. SEE "CAPITALIZATION" AND "UNDERWRITING."
7
<PAGE>
THE COMPANY
HPSC was incorporated in 1975 as a captive finance company for Healthco
International, Inc. ("Healthco") to provide financing to the dental profession
for Healthco equipment. Healthco was a leading distributor of merchandise,
equipment and services to dentists and institutional providers of dental care.
Healthco referred to HPSC substantially all of HPSC's business and provided
sales and related services to HPSC, as well as certain management, data
processing and administrative services. Healthco sold approximately 60% of the
stock of HPSC to the public in an initial public offering in 1983 and a
subsequent offering in 1986, retaining an ownership interest of approximately
40%. HPSC repurchased this interest from Healthco's secured creditors in 1995.
Healthco filed for bankruptcy on June 9, 1993, and subsequently was
liquidated. At that time, HPSC severed its relationship with Healthco and became
a fully autonomous finance company for healthcare providers. HPSC was able to
replace the business previously referred to it by Healthco with business from
other equipment vendors, which represented new sources of business in the
dental, medical and other healthcare professions. It also began to provide for
itself the sales, management, data processing and administrative services
formerly provided by Healthco. Since 1993, HPSC has provided financing for over
900 equipment vendors. HPSC's annual originations of financing contracts have
increased from $14.2 million in 1993, the year of Healthco's bankruptcy, to
$86.9 million in 1996, a cumulative increase of 512.7%.
In 1994, HPSC formed American Commercial Finance Corporation ("ACFC"), a
wholly-owned subsidiary, in order to expand into asset-based lending. ACFC
originated secured lines of credit in the amount of $5.0 million in 1994, $12.1
million in 1995 and $17.6 million in 1996.
In 1993, HPSC formed HPSC Funding Corp. I ("Funding I"), a wholly-owned
special-purpose subsidiary, in connection with a $70 million receivables-backed
securitization transaction. In 1995, HPSC formed HPSC Bravo Funding Corp.
("Bravo"), a wholly-owned special-purpose subsidiary, in connection with the
establishment of a $50 million (now $100 million) revolving credit
securitization facility. HPSC also has a Canadian subsidiary, Credident, Inc.
("Credident"), the operations of which were largely discontinued during 1994 and
1995.
Unless the context otherwise requires, references herein to the "Company"
refer to HPSC, Inc., Funding I, Bravo and ACFC, each a Delaware corporation.
8
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE
OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE NOTES OFFERED BY THIS
PROSPECTUS.
DEPENDENCE ON FUNDING SOURCES; RESTRICTIVE COVENANTS. The Company's
financing activities are capital intensive. The Company's revenues and
profitability are related directly to the volume of financing contracts it
originates. To generate new financing contracts, the Company requires access to
substantial short- and long-term credit. To date, the Company's principal
sources of funding for its financing transactions have been (i) a revolving
credit facility with The First National Bank of Boston, as Agent, for borrowing
up to $95.0 million (the "Revolver"), (ii) borrowings under a receivables-backed
limited recourse asset securitization transaction with Funding I in an original
amount of $70.0 million, (iii) a $100.0 million limited recourse revolving
credit facility with Bravo, (iv) a fixed-rate, full recourse term loan from a
savings bank, (v) specific recourse sales of financing contracts to savings
banks and other purchasers ((iv) and (v) constitute "Savings Bank Indebtedness")
and (vi) the Company's internally generated revenues. There can be no assurance
that the Company will be able to negotiate a new revolving credit facility at
the end of the current term of the Revolver in December 1997, complete
additional asset securitizations or obtain other additional financing, when
needed and on acceptable terms. The Company would be adversely affected if it
were unable to continue to secure sufficient and timely funding on acceptable
terms. The agreement governing the Revolver (the "Revolver Agreement") contains
numerous financial and operating covenants. There can be no assurance that the
Company will be able to maintain compliance with these covenants, and failure to
meet such covenants would result in a default under the Revolver Agreement.
Moreover, the Company's financing arrangements with Bravo and the savings banks
described above incorporate the covenants and default provisions of the Revolver
Agreement. Thus, any default under the Revolver Agreement will also trigger
defaults under these other financing arrangements. In addition, the Indenture
contains certain covenants that could restrict the Company's access to funding.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Business--Funding Sources,"
"Description of Notes" and "Description of Certain Indebtedness."
SECURITIZATION RECOURSE; PAYMENT RESTRICTION AND DEFAULT RISK. As part of
its overall funding strategy, the Company utilizes asset securitization
transactions with wholly-owned, bankruptcy-remote subsidiaries to seek fixed
rate, matched-term financing. The Company sells financing contracts to these
subsidiaries which, in turn, either pledge or sell the contracts to third
parties. The third parties' recourse with regard to the pledge or sale is
limited to the contracts sold to the subsidiary. If the contract portfolio of
these subsidiaries does not perform within certain guidelines, the subsidiaries
must retain or "trap" any monthly cash distribution to which the Company might
otherwise be entitled. This restriction on cash distributions could continue
until the portfolio performance returns to acceptable levels (as defined in the
relevant agreements), which restriction could have a negative impact on the cash
flow available to the Company. There can be no assurance that the portfolio
performance would return to acceptable levels or that the payment restrictions
would be removed. In July and August of 1996, the level of delinquencies of the
contracts held in Funding I rose above specified levels and triggered such a
payment restriction event, "trapping" any cash distributions to the Company. The
event was considered a default under the Revolver Agreement, which default was
waived by the lending banks. In September 1996, delinquency levels improved and
the payment restrictions were removed. A payment restriction event may occur
again before Funding I is fully paid out. The default provisions of the Revolver
Agreement were amended in December 1996 to conform to the default provisions of
the Funding I agreements. As a result, a payment restriction event under Funding
I will not constitute a default under the Revolver Agreement unless such event
continues for at least six months. There can be no assurance that any future
defaults will be waived by the lending banks. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and "Business--Funding Sources."
CUSTOMER CREDIT RISKS. The Company maintains an allowance for doubtful
accounts in connection with payments due under financing contracts originated by
the Company (whether or not such contracts
9
<PAGE>
have been securitized, held as collateral for loans to the Company or, when
sold, a separate recourse reserve is maintained) at a level which the Company
deems sufficient to meet future estimated uncollectible receivables, based on an
analysis of the delinquencies, problem accounts, and overall risks and probable
losses associated with such contracts, together with a review of the Company's
historical credit loss experience. There can be no assurance that this allowance
or recourse reserve will prove to be adequate. Failure of the Company's
customers to make scheduled payments under their financing contracts could
require the Company to (i) make payments in connection with its recourse loan
and asset sale transactions, (ii) lose its residual interest in any underlying
equipment and (iii) forfeit collateral pledged as security for the Company's
limited recourse asset securitizations. In addition, although the provision for
losses on the contracts originated by the Company have been 1.1% of the
Company's net investment in leases and notes for 1996, any increase in such
losses or in the rate of payment defaults under the financing contracts
originated by the Company could adversely affect the Company's ability to obtain
additional financing, including its ability to complete additional asset
securitizations and secured asset sales or loans. There can be no assurance that
the Company will be able to maintain or reduce its current level of credit
losses. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and
"Business--Collection and Loss Experience."
RANKING; SUBORDINATION OF THE NOTES. The Notes are unsecured, general
obligations of HPSC. The payment of the principal of, premium (if any) and
interest on the Notes is subordinate in right of payment, as set forth in the
Indenture, to the payment when due of all Secured Portfolio Debt of HPSC, which
includes, without limitation, the Revolver and Savings Bank Indebtedness. In
addition, none of HPSC's existing or future Subsidiaries has guaranteed or will
guarantee the Indebtedness under the Notes. Accordingly, the Indebtedness under
the Notes will be effectively subordinated to any Indebtedness of any Subsidiary
of HPSC, including, without limitation, Indebtedness of Funding I or Bravo. The
Notes will rank senior to all other subordinated Indebtedness of HPSC. The
Company does not currently have outstanding any Indebtedness that is subordinate
or junior in right of payment to the Notes. At December 31, 1996, after giving
effect to the sale of the Notes and the application of the estimated net
proceeds therefrom as described herein under "Use of Proceeds," the outstanding
Secured Portfolio Debt of the Company would have been $98.2 million, of which
$74.3 million would have been Indebtedness of Subsidiaries of HPSC. In addition,
under the recourse provisions of the agreements evidencing sales of financing
contracts, the Company had a contingent obligation of $16.7 million at December
31, 1996 to repurchase the Customer Receivables securing such agreements and/or
make payments on such receivables under certain circumstances, including
delinquencies of the underlying debtors. Upon the occurrence of a triggering
event under the recourse provisions of such agreements, such obligation to
repurchase and/or make payments on such receivables would constitute Secured
Portfolio Debt. Although the Indenture contains limitations on the amount of
additional Funded Recourse Debt which the Company may incur, the Indenture
contains no restrictions on the amount of Secured Portfolio Debt which the
Company may incur and, under certain circumstances, the amount of additional
Funded Recourse Debt permitted to be incurred could be substantial. In the event
of the bankruptcy, liquidation, reorganization or other dissolution of the
Company, there may not be sufficient assets remaining to satisfy the holders of
the Notes after satisfying the claims of any holders of Secured Portfolio Debt
of the Company and Indebtedness of any existing or future Subsidiaries of HPSC.
See "Description of Notes--Ranking; Subordination of the Notes."
COMPETITION. The Company's financing activities are highly competitive. The
Company competes for customers with a number of national, regional and local
finance companies, including those which, like the Company, specialize in
financing for healthcare providers. In addition, the Company's competitors
include those equipment manufacturers which finance the sale or lease of their
products themselves, conventional leasing companies and other types of financial
services companies such as commercial banks and savings and loan associations.
Many of the Company's competitors and potential competitors possess
substantially greater financial, marketing and operational resources than the
Company. Moreover, the Company's future profitability will be directly related
to its ability to obtain capital funding at favorable funding rates
10
<PAGE>
as compared to the capital costs of its competitors. The Company's competitors
and potential competitors include many larger, more established companies that
have a lower cost of funds than the Company and access to capital markets and to
other funding sources that may be unavailable to the Company. There can be no
assurance that the Company will be able to continue to compete successfully in
its targeted markets. See "Business--Competition."
EQUIPMENT MARKET RISK. The demand for the Company's equipment financing
services depends upon various factors not within its control. These factors
include general economic conditions, including the effects of recession or
inflation, and fluctuations in supply and demand related to, among other things,
(i) technological advances in and economic obsolescence of the equipment and
(ii) government regulation of equipment and payment for healthcare services. The
acquisition, use, maintenance and ownership of most types of medical and dental
equipment, including the types of equipment financed by the Company, are
affected by rapid technological changes in the healthcare field and evolving
federal, state and local regulation of healthcare equipment, including
regulation of the ownership and resale of such equipment. Changes in the
reimbursement policies of the Medicare and Medicaid programs and other
third-party payors, such as insurance companies, as well as changes in the
reimbursement policies of managed care organizations, such as health maintenance
organizations, may also affect demand for medical and dental equipment and,
accordingly, may have a material adverse effect on the Company's business,
operating results and financial condition.
CHANGES IN HEALTHCARE PAYMENT POLICIES. The increasing cost of medical care
has brought about federal and state regulatory changes designed to limit
governmental reimbursement of certain healthcare providers. These changes
include the enactment of fixed-price reimbursement systems in which the rates of
payment to hospitals, outpatient clinics and private individual and group
practices for specific categories of care are determined in advance of
treatment. Rising healthcare costs may also cause non-governmental medical
insurers, such as Blue Cross and Blue Shield associations and the growing number
of self-insured employers, to revise their reimbursement systems and policies
governing the purchasing and leasing of medical and dental equipment.
Alternative healthcare delivery systems, such as health maintenance
organizations, preferred provider organizations and managed care programs, have
adopted similar cost containment measures. Other proposals to reform the United
States healthcare system are considered from time to time. These proposals could
lead to increased government involvement in healthcare and otherwise change the
operating environment for the Company's customers. Healthcare providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investment in medical and dental equipment. Future
changes in the healthcare industry, including governmental regulation thereof,
and the effect of such changes on the Company's business cannot be predicted.
Changes in payment or reimbursement programs could adversely affect the ability
of the Company's customers to satisfy their payment obligations to the Company
and, accordingly, may have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Healthcare Provider
Financing--GOVERNMENT REGULATION AND HEALTHCARE TRENDS."
INTEREST RATE RISK. Except for $18.7 million of the Company's financing
contracts, which are at variable interest rates with no scheduled payments, the
Company's financing contracts require the Company's customers to make payments
at fixed interest rates for specified terms. However, approximately $40.0
million of the Company's borrowings currently are subject to a variable interest
rate. Consequently, an increase in interest rates, before the Company is able to
secure fixed-rate, long-term financing for such contracts or to generate
higher-rate financing contracts to compensate for the increased borrowing cost,
could adversely affect the Company's business, operating results and financial
condition. The Company's ability to secure additional long-term financing and to
generate higher-rate financing contracts is limited by many factors, including
competition, market and general economic conditions and the Company's financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business--Funding
Sources."
RESIDUAL VALUE RISK. At the inception of its equipment leasing
transactions, the Company estimates what it believes will be the fair market
value of the financed equipment at the end of the initial lease term
11
<PAGE>
and records that value (typically 10% of the initial purchase price) on its
balance sheet. The Company's results of operations depend, to some degree, upon
its ability to realize these residual values (as of December 31, 1996, the
estimated residual value of equipment at the end of the lease term was
approximately $9.3 million, representing approximately 5.7% of the Company's
total assets). Realization of residual values depends on many factors, several
of which are not within the Company's control, including, but not limited to,
general market conditions at the time of the lease expiration; any unusual wear
and tear on the equipment; the cost of comparable new equipment; the extent, if
any, to which the equipment has become technologically or economically obsolete
during the contract term; and the effects of any new government regulations. If,
upon the expiration of a lease contract, the Company sells or refinances the
underlying equipment and the amount realized is less than the original recorded
residual value for such equipment, a loss reflecting the difference will be
recorded on the Company's books. Failure to realize aggregate recorded residual
values could thus have an adverse effect on the Company's business, operating
results and financial condition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Healthcare
Provider Financing-- REALIZATION OF RESIDUAL VALUES ON EQUIPMENT LEASES."
SALES OF RECEIVABLES. As part of the Company's portfolio management
strategy and as a source of funding of its operations, the Company has sold
selected pools of its lease contracts and notes receivable due in installments
to a variety of savings banks. Each of these transactions is subject to certain
covenants that require the Company to (i) repurchase financing contracts from
the bank and/or make payments under certain circumstances, including the
delinquency of the underlying debtor, and (ii) service the underlying financing
contracts. The Company carries a recourse reserve for each transaction in its
allowance for losses and recognizes a gain that is included for accounting
purposes in earned income for leases and notes for the year in which the
transaction is completed. Each of these transactions incorporates the covenants
under the Revolver as such covenants were in effect at the time the asset sale
or loan agreement was entered into. Any default under the Revolver may trigger a
default under the loan or asset sale agreements. The Company may enter into
additional asset sale agreements in the future in order to manage its liquidity.
The level of recourse reserves established by the Company in relation to these
sales may not prove to be adequate. Failure of the Company to honor its
repurchase and/or payment commitments under these agreements could create an
event of default under the loan or asset sale agreements and under the Revolver.
There can be no assurance that a continuing market can be found to sell these
types of assets or that the purchase prices in the future would generate
comparable gain recognition. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Business--Funding Sources."
DEPENDENCE ON SALES REPRESENTATIVES. The Company is, and its growth and
future revenues are, dependent in large part upon (i) the ability of the
Company's sales representatives to establish new relationships, and maintain
existing relationships, with equipment vendors, distributors and manufacturers
and with healthcare providers and other customers and (ii) the extent to which
such relationships lead equipment vendors, distributors and manufacturers to
promote the Company's financing services to potential purchasers of their
equipment. As of December 31, 1996, the Company had 14 field sales
representatives and eight in-house sales personnel. Although the Company is not
materially dependent upon any one sales representative, the loss of a group of
sales representatives could, until appropriate replacements were obtained, have
a material adverse effect on the Company's business, operating results and
financial condition. See "Business--Sales and Marketing."
ABSENCE OF PUBLIC MARKET. There is no existing market for the Notes, and
there can be no assurance that one will develop or, if developed, as to whether
it will be sustained. Accordingly, there can be no assurance as to the liquidity
of any market that may develop, the ability of holders to sell their Notes or
the price that holders would receive upon sale of their Notes. The Underwriters
have advised the Company that they intend to make a market in the Notes;
however, they are not obligated to do so and any market making may be
discontinued at any time without notice. The Company does not intend to apply
for listing of the Notes on any securities exchange or quotation system. Future
trading prices of the Notes will depend
12
<PAGE>
on many factors, including, among others, prevailing interest rates, the
Company's operating results and the market for similar securities. See
"Underwriting."
NO RATING OF NOTES. The Notes are not rated by any financial rating
organization and may be characterized as "high-yield" securities. In recent
years, uncertainties in the high-yield debt market have been reflected in
volatile prices of such securities. Such volatility may have a material adverse
effect on the price of the Notes and the ability of a purchaser to resell the
Notes for any value. There can be no assurance that any purchaser of the Notes
will be able to resell the Notes in the future.
UNDERWRITERS' INFLUENCE ON THE MARKET. A significant number of the Notes
may be sold to customers of the Underwriters. Such customers may subsequently
engage in transactions for the sale or purchase of the Notes through or with the
Underwriters. Although they have no obligation to do so, the Underwriters intend
to make a market in the Notes and may otherwise effect transactions in such
securities. As a result, the Underwriters may exert a dominating influence on
the market for the Notes, if a market is developed, and such market activity by
the Underwriters may be discontinued at any time. The price and liquidity of the
Notes may be significantly affected by the degree, if any, of the Underwriters'
participation in the market for the Notes. See "Underwriting."
REPURCHASE OF THE NOTES UPON A CHANGE OF CONTROL. Upon a Change of Control
(as defined in the Indenture), the Company will be required to offer to
repurchase the Notes then outstanding at a purchase price equal to 101% of the
principal amount thereof, plus accrued but unpaid interest, to the date of
repurchase. There can be no assurance that the Company will have adequate funds
to repurchase the Notes in the event of a Change of Control. Such repurchase, if
made, could constitute an event of default under the Revolver Agreement and the
Indebtedness of the Subsidiaries of HPSC. The failure of the Company following a
Change of Control to make or consummate an offer to repurchase the Notes would
constitute an Event of Default under the Indenture. In such an event, the
Trustee or the holders of at least 25% in aggregate principal amount of the
outstanding Notes may accelerate the maturity of all of the outstanding Notes. A
Change of Control generally means any transaction which would result in any
person beneficially owning or controlling more than 50% of the voting stock of
HPSC. See "Description of Notes --Certain Covenants--REPURCHASE OF NOTES AT THE
OPTION OF THE HOLDER UPON A CHANGE OF CONTROL."
DEPENDENCE ON CURRENT MANAGEMENT. The operations and future success of the
Company are dependent upon the continued efforts of the Company's executive
officers, two of whom are also directors of the Company. The loss of the
services of any of these key executives could have a material adverse effect on
the Company's business, operating results and financial condition. See
"Management--Executive Officers and Directors."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Historically, the Company has
generally experienced fluctuating quarterly revenues and earnings caused by
varying portfolio performance and operating and interest costs. Given the
possibility of such fluctuations, the Company believes that quarterly
comparisons of the results of its operations during any fiscal year are not
necessarily meaningful and that results for any one fiscal quarter should not be
relied upon as an indication of future performance. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
BROAD DISCRETION IN USE OF PROCEEDS. The principal purpose of this offering
is to increase the Company's working capital. The Company intends to use the net
proceeds of this offering to repay, in part, amounts outstanding under the
Revolver and for working capital and general corporate purposes. Accordingly,
the Company's management will have broad discretion as to the use of such net
proceeds without any action or approval by the Company's stockholders. See "Use
of Proceeds."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes, after deducting
underwriting discounts and estimated offering expenses payable by the Company,
are estimated to be approximately $18.5 million ($21.3 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to use the net proceeds of this offering to repay, in part, amounts outstanding
under the Revolver and for working capital and general corporate purposes. As of
December 31, 1996, the total amount outstanding under the Revolver was
approximately $40.0 million. Management believes that the Company's liquidity is
adequate to meet current obligations and future projected levels of financings
and to carry on normal operations.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted to give effect to this offering and the
application of the estimated net proceeds therefrom. This table should be read
in conjunction with the Company's Consolidated Financial Statements and the
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(1)
---------- --------------
(DOLLARS IN THOUSANDS)
Revolving credit borrowings........................................................... $ 40,000 $ 21,500
Senior notes.......................................................................... 76,737 76,737
Senior Subordinated Notes............................................................. -- 20,000
Stockholders' equity:
Preferred stock, $1.00 par value per share: 5,000,000 shares authorized, none issued
and outstanding................................................................... -- --
Common stock, $0.01 par value per share: 15,000,000 shares authorized; 4,786,530
issued; and 4,657,930 shares outstanding (2)...................................... 48 48
Treasury stock (at cost): 128,600 shares............................................ (587) (587)
Additional paid-in capital.......................................................... 12,305 12,305
Retained earnings................................................................... 25,351 25,351
---------- --------------
37,117 37,117
Less deferred compensation and receivables.......................................... (2,785) (2,785)
---------- --------------
Total stockholders' equity........................................................ 34,332 34,332
---------- --------------
Total capitalization............................................................ $ 151,069 $ 152,569
---------- --------------
---------- --------------
</TABLE>
- ------------------------
(1) Adjusted to give effect to the sale of $20.0 million principal amount of the
Notes by the Company and the application of approximately $18.5 million of
net proceeds therefrom, taking into account an assumed underwriting discount
and estimated expenses of the offering, to repay amounts outstanding under
the Revolver.
(2) Includes 337,000 shares of restricted stock granted to certain key employees
of the Company, which shares are subject to certain Company performance and
employee service requirements prior to becoming fully vested. If the Company
does not meet the applicable performance requirements, or if the employee
does not meet the applicable service requirements, some or all of the
restricted stock held by that employee will revert to the Company and will
be retired or become treasury stock. See "Management--Executive
Compensation--STOCK OPTION AND STOCK INCENTIVE PLANS."
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEC. 26, DEC. 25, DEC. 31, DEC. 31, DEC. 31,
1992 1993 (1) 1994 (2) 1995 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA:
Earned income on leases and notes.................... $21,734 $17,095 $11,630 $12,871 $17,515
Gain on sales of leases and notes.................... -- -- -- 53 1,572
Provision for losses................................. (4,307) (15,104) (754) (1,296) (1,564)
---------- ---------- ---------- ---------- ----------
Net revenues..................................... 17,427 1,991 10,876 11,628 17,523
Selling, general and administrative expenses......... 3,574 5,160 6,970 5,984 8,059
Interest expense..................................... 10,663 9,057 3,514 5,339 8,146
Interest income...................................... (54) (78) (358) (375) (261)
Loss on write-off of foreign currency translation
adjustment (3).................................... -- -- -- 601 --
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes.................... 3,244 (12,148) 750 79 1,579
Provision (benefit) for income taxes................. 1,260 (4,870) 300 204 704
---------- ---------- ---------- ---------- ----------
Net income (loss).................................... $ 1,984 $ (7,278) $ 450 $ (125) $ 875
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Net income (loss) per share.......................... $ 0.40 $ (1.48) $ 0.09 $ (0.03) $ 0.22
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Shares used to compute net income (loss) per share... 4,922,473 4,923,233 4,989,391 3,881,361 4,067,236
OTHER DATA:
Leases and notes receivable originated during period
(4)............................................... $25,161 $14,152 $32,609 $68,554 $96,982
Number of leases and notes originated during period
(4)............................................... 1,575 745 1,590 2,800 3,740
Average amount financed per contract originated
during period (4)................................. $ 16 $ 19 $ 21 $ 24 $ 26
Charge-offs divided by average net investment in
leases and notes (before allowance)............... 3.4% 12.4% 3.2% 1.4% 1.2%
Ratio of earnings to fixed charges (5)............... 1.30x -- 1.21x 1.01x 1.19x
Pro forma ratio of earnings to fixed charges (6)..... 1.07x
EBITDA (7)........................................... $14,889 $ (396) $ 6,136 $ 7,758 $12,587
Ratio of EBITDA to interest expense (8).............. 1.40x -- 1.75x 1.45x 1.55x
Pro forma ratio of EBITDA to interest expense (6) (7)
(9)............................................... 1.39x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEC. 31, 1996
-----------------------
DEC. 26, DEC. 25, DEC. 31, DEC. 31, AS
1992 1993 (1) 1994 1995 ACTUAL ADJUSTED(7)
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 625 $ 16,600 $ 419 $ 861 $ 2,176 $ 2,176
Restricted cash..................... -- -- 7,936 5,610 6,769 6,769
Net investment in leases and
notes............................ 157,058 109,752 91,193 119,916 149,222 149,222
Total assets........................ 158,857 130,437 103,148 130,571 163,217 164,717
Revolving credit borrowings......... 24,584 7,130 16,500 39,000 40,000 21,500
Senior notes........................ 50,000 50,000 41,024 49,523 76,737 76,737
Senior Subordinated Notes........... -- -- -- -- -- 20,000
Subordinated debt................... 19,090 19,962 -- -- -- --
Total liabilities................... 113,816 92,816 70,326 97,410 128,885 130,385
Total stockholders' equity.......... 45,041 37,621 32,822 33,161 34,332 34,332
</TABLE>
- ------------------------------
(1) In 1993, the Company experienced a substantial decrease in new business,
increased selling, general and administrative costs and a substantial
adjustment to its loan loss reserves, in each case largely as a result of
the bankruptcy of Healthco, which previously had referred to the Company
substantially all of the Company's business.
(2) For 1994 and prior years, the Company's fiscal year was the 52 or 53-week
period ending on the last Saturday of the calendar year. The 1994 fiscal
year covers the 53-week period from December 26, 1993 to December 31, 1994.
In fiscal year 1995, the Company changed its fiscal year-end to December 31.
(3) Reflects a one-time, non-cash loss on write-off of cumulative foreign
currency translation adjustments related to the Company's discontinued
Canadian operations.
15
<PAGE>
(4) For contracts originated by ACFC, originations reflect initial advances on
committed lines of credit. Excludes leases and notes receivable originated
by the Company's discontinued Canadian operations in 1992 and 1993.
(5) For purposes of this ratio, earnings consist of earnings before income taxes
plus fixed charges. Fixed charges consist of interest expense and
amortization of debt issuance costs. Earnings before income taxes plus fixed
charges were insufficient to cover fixed charges in 1993 by approximately
$12.1 million. The ratio of earnings to fixed charges, excluding the loss on
write-off of foreign currency translation adjustment, was 1.13x for the year
ended December 31, 1995.
(6) In computing pro forma earnings to fixed charges and pro forma EBITDA (as
defined below) to interest expense, the Company assumes that it will incur
additional interest expense on the $20 million of new indebtedness at an
estimated interest rate of 10%, offset, in part, by a reduction of interest
expense at a weighted average interest rate of 7.25% on the $18.5 million of
debt that will be repaid with the net proceeds of the offering. In addition,
the pro forma calculation includes the effect of the amortization of debt
issue costs incurred in connection with this offering over a 10-year period.
(7) EBITDA is defined as earnings from operations before interest, taxes,
depreciation and amortization. EBITDA is presented here to provide
additional information about the Company's ability to meet its future debt
service and working capital requirements. EBITDA is not a measure of
financial performance under generally accepted accounting principles
("GAAP") and should not be considered as an alternative either to net income
as an indicator of the Company's operating performance, or to cash flows as
a measure of the Company's liquidity.
(8) Ratio of EBITDA (as defined above) to interest expense is widely used as an
indicator of a company's ability to service its debt, but is not necessarily
an indication of, and should not be considered as an alternative to, the
ratio of earnings to fixed charges. EBITDA was insufficient to cover
interest expense in 1993 by approximately $9.4 million.
(9) Adjusted to give effect to the sale of $20.0 million principal amount of the
Notes by the Company and the application of approximately $18.5 million of
net proceeds therefrom, taking into account an assumed underwriting discount
and estimated expenses of the offering, to repay senior secured bank debt.
See "Use of Proceeds" and "Capitalization."
16
<PAGE>
SUMMARY QUARTERLY FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain unaudited quarterly statement of
operations and financing contract information for each of the eight quarters
ending with the quarter ended December 31, 1996. This data has been prepared on
the same basis as the audited financial statements contained elsewhere in this
Prospectus and includes all adjustments, consisting only of normal recurring
adjustments, necessary for the fair presentation of the information for the
periods presented, when read in conjunction with the Company's Consolidated
Financial Statements and related Notes thereto. Results for any previous fiscal
quarter are not necessarily indicative of results for the full year or for any
future quarter.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Earned income on leases and
notes..................... $ 2,718 $ 3,203 $ 3,417 $ 3,533 $ 3,773 $ 4,354 $ 4,435 $ 4,953
Gain on sale of leases and
notes..................... -- -- -- 53 83 193 609 687
Provision for losses........ (277) (264) (336) (419) (348) (452) (424) (340)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net revenues.............. 2,441 2,939 3,081 3,167 3,508 4,095 4,620 5,300
Selling, general and
administrative expenses... 1,480 1,520 1,537 1,447 1,647 1,867 2,066 2,479
Interest expense............ 915 1,297 1,481 1,646 1,670 1,951 2,202 2,323
Interest income............. (97) (102) (84) (92) (61) (57) (56) (87)
Loss on write-off of foreign
currency translation
adjustment................ -- -- -- 601 -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes..................... 143 224 147 (435) 252 334 408 585
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Provision for income
taxes..................... 56 88 58 2 100 130 160 314
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........... $ 87 $ 136 $ 89 $ (437) $ 152 $ 204 $ 248 $ 271
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) per
share..................... $ 0.02 $ 0.04 $ 0.02 $ (0.11) $ 0.04 $ 0.05 $ 0.06 $ 0.07
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Shares used to compute net
income (loss) per share... 5,044,811 3,838,116 3,903,464 3,906,637 4,013,862 4,069,795 4,145,270 4,066,906
OTHER DATA (2):
Leases and notes receivable
originated during
period.................... $14,687 $13,499 $17,843 $22,525 $20,282 $23,354 $22,389 $30,957
Number of leases and notes
originated during
period.................... 668 660 631 841 796 923 883 1,138
Average amount financed per
contract originated during
period.................... $ 22 $ 20 $ 28 $ 27 $ 25 $ 25 $ 25 $ 27
</TABLE>
- ------------------------------
(1) Reflects one-time, non-operating, non-cash loss on cumulative write-off of
foreign currency translation adjustments related to the Company's
discontinued Canadian operations.
(2) For contracts originated by ACFC, originations reflect initial advances on
committed lines of credit.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCING CONTRACT ACCOUNTING
OVERVIEW
The Company provides financing primarily to healthcare providers throughout
the United States. The Company finances dental, ophthalmic, general medical,
chiropractic, and veterinary equipment, as well as leasehold improvements,
office furniture and equipment, working capital and certain other costs involved
in opening or maintaining a healthcare provider's office. The Company
principally engages in two types of equipment financing transactions with its
customers, which are classified for accounting purposes either as direct finance
leases (which encompasses all leases) or notes. In a lease transaction, the
Company takes title to the financed equipment which is delivered by the vendor
to the customer. In a note transaction, the Company does not take title to or
retain a residual interest in any underlying equipment. The Company does not
carry any inventory in either type of transaction. The Company also finances the
acquisition of healthcare practices by healthcare providers, and engages in
asset-based lending through its wholly-owned subsidiary ACFC. Except for
approximately $18.7 million of ACFC receivables, the Company's financing
contracts with its customers are noncancellable and provide for a full payout at
a fixed financing rate with a fixed payment schedule over a term of one to seven
years.
When a financing transaction is initially activated, the Company records the
minimum payments and, in the case of leases, the estimated residual value
associated with the transaction. The difference between the sum of the payments
due plus residual, if applicable, less the cost of the transaction is recorded
as unearned income. The unearned income is recognized as revenue over the life
of the transaction using the interest method in essentially all cases. No later
than 145 days after scheduled payments become delinquent, recognition of revenue
for that transaction is suspended. Earned income includes fee income from
service charges on portfolio accounts, gains and losses on residual transactions
and asset sales, as well as miscellaneous income items, net of deferred
origination cost amortization.
The Company records an allowance for losses in its portfolio in connection
with its financing transactions. The extent of the allowance is based on a
specific analysis of potential loss accounts, delinquencies and historical loss
experiences. An account is written off when deemed uncollectible. The Company
occasionally repossesses equipment from customers who have defaulted on their
obligations to the Company; however, the Company held no such equipment for sale
at December 31, 1996 or December 31, 1995.
The Company considers its finance portfolio assets to consist of two general
categories of assets based on such assets' relative risk.
The first category of assets consists of the Company's lease contracts and
notes receivable due in installments, which comprise approximately 87.7% of the
Company's net investment in leases and notes at December 31, 1996 (90.1% at
December 31, 1995). Substantially all of such contracts and notes are due from
licensed medical professionals, principally dentists, who practice in individual
or small group practices. Such contracts and notes are at fixed interest rates
and have terms ranging from 12 to 84 months. The Company believes that leases
and notes entered into with medical professionals are generally "small-ticket,"
homogeneous transactions with similar risk characteristics. Except for the
amounts described in the following paragraph related to asset-based lending, all
of the Company's historical provision for losses, charge offs, recoveries and
allowance for losses have related to its lease contracts and notes due in
installments.
The second category of assets consists of the Company's notes receivable,
which comprise approximately 12.3% of the Company's net investment in leases and
notes at December 31, 1996 (9.9% at December 31, 1995). Such notes receivable
consist of commercial, asset-based, revolving lines of credit to small and
medium size manufacturers and distributors, at variable interest rates, and
typically have terms
18
<PAGE>
of two years. The Company began commercial lending activities in mid-1994.
Through December 31, 1996, the Company has not had any charge-offs of commercial
notes receivable. The provision for losses related to the commercial notes
receivable was $146,000, $95,000 and $43,000 in 1996, 1995 and 1994,
respectively. The amount of the allowance for losses related to the commercial
notes receivable was $284,000 and $138,000 at December 31, 1996 and 1995,
respectively.
LEASE CONTRACTS AND NOTES RECEIVABLE DUE IN INSTALLMENTS
Equipment financing transactions are classified as lease contracts when the
Company retains a residual interest in the equipment being financed and
therefore has a continuing economic interest in the relevant financing contract.
In addition, collectibility of the contract payments must be reasonably certain
and the transaction must meet at least one of the following criteria: (i) the
contract transfers ownership of the equipment to the customer at the end of the
contract term, (ii) the contract contains a bargain purchase option, (iii) the
contract term at inception is at least 75% of the estimated economic life of the
financed equipment, or (iv) the present value of the minimum payments required
of the customer is at least 90% of the fair market value of the equipment at the
inception of the contract. For lease contracts, the Company records the total
contract payments, estimated unguaranteed residual value and initial direct
costs as the gross investment in the lease contracts. The difference between the
gross investment in the lease contract and the cost to the Company of the
equipment being financed is recorded as unearned income. Interest income is
recognized over the term of the contract by amortizing the unearned income using
the interest method.
Transactions are classified as "notes receivable due in installments" when
no residual interest is retained by the Company and the customer takes title to
any equipment. Approximately one-half of the Company's equipment financings, and
all of its practice financings, are accounted for as notes receivable due in
installments. Earnings are recorded on a similar basis as that described above
for lease contracts.
NOTES RECEIVABLE
Transactions classified as "Notes Receivable" are asset-based loans
primarily secured by accounts receivable, inventory, and equipment. Interest on
the outstanding balances under these revolving lines of credit is computed daily
at variable rates as determined by each line of credit agreement. Additionally,
servicing and commitment fees may also be charged to the borrower.
GAIN ON SALE OF FINANCING TRANSACTIONS
As part of its portfolio management strategy, the Company occasionally sells
its financing contracts to other parties. Income is recorded at the time of the
sale in an amount that is approximately equal to the present value of the
anticipated future cash flow, partially offset by initial direct costs and
expenses and estimated credit losses under certain recourse provisions of the
related sale agreements. Generally, the Company retains the servicing of
financing contracts that are sold. Income equal to the estimated future costs of
servicing these financing contracts is deferred and recognized in proportion to
the estimated periodic servicing costs.
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Earned income from leases and notes for 1996 was approximately $17.5 million
(including approximately $2.6 million from ACFC) as compared to approximately
$12.9 million (approximately $1.3 million from ACFC) for 1995. This increase of
approximately 36.1% was due primarily to the increase in the net investment in
leases and notes from 1995 to 1996. The increase in net investment in leases and
notes resulted from an increase of approximately 41.4% in the Company's
financing contract originations for fiscal 1996 to approximately $97.0 million
(including approximately $10.0 million in ACFC originations, and excluding
approximately $3.8 million of initial direct costs) from approximately $68.6
million
19
<PAGE>
(including approximately $7.6 million in ACFC originations, and excluding
approximately $3.0 million of initial direct costs) for 1995. Gains on sales of
leases and notes increased to approximately $1.6 million in 1996 compared to
$53,000 in 1995. This increase was caused by higher levels of sales activity in
1996. Earned income on leases and notes is a function of the amount of net
investment in leases and notes and the level of financing contract interest
rates. Earned income is recognized over the life of the net investment in leases
and notes, using the interest method.
Interest expense net of interest income on cash balances for 1996 was
approximately $7.9 million (45.1% of earned income) compared to approximately
$5.0 million (38.6% of earned income) for 1995, an increase of 58.8%. The
increase in net interest expense was due primarily to a 31.9% increase in debt
levels from 1995 to 1996, which resulted from borrowings to finance the
Company's financing contract originations. The increase as a percentage of
earned income was due to higher interest rates on debt in 1996 as compared to
1995.
Net financing margin (earned income less net interest expense) for fiscal
1996 was approximately $9.6 million (55.0% of earned income) as compared to
approximately $7.9 million (61.4% of earned income) for 1995. The increase in
amount was due to higher earnings on a higher balance of earning assets. The
decline in percentage of earned income was due to higher debt during 1996 as
compared to 1995.
The provision for losses for fiscal 1996 was approximately $1.6 million
(8.9% of earned income) compared to approximately $1.3 million (10.1% of earned
income) for 1995. This increase in amount resulted from higher levels of new
financings in 1996 and the Company's continuing evaluation of its allowance for
losses. The allowance for losses at December 31, 1996 was approximately $4.1
million (2.7% of net investment in leases and notes) as compared to
approximately $4.5 million (3.7% of net investment in leases and notes) at
December 31, 1995. Net charge-offs were approximately $1.5 million in 1996
compared to approximately $1.4 million in 1995.
Selling, general and administrative expenses for fiscal 1996 were
approximately $8.1 million (46.0% of earned income) as compared to approximately
$6.0 million (46.5% of earned income) for 1995. This increase resulted from
increased staffing and systems and support costs required by higher volumes of
financing activity in 1996 and anticipated near-term growth.
In 1995, the Company incurred a loss on write-off of foreign currency
translation adjustment of approximately $601,000 in connection with substantial
liquidation of the Company's investment in its Canadian subsidiary. The Company
incurred no such loss in 1996.
The Company's income before income taxes for fiscal 1996 was approximately
$1.6 million compared to $79,000 for 1995. The provision for income taxes was
$704,000 (44.6% of income before tax) in 1996 compared to $204,000 (258.2%) in
1995. The 1995 provision was affected by the $601,000 foreign currency
translation adjustment related to the company's Canadian operations that was not
deductible.
The Company's net income for fiscal 1996 was $875,000 or $0.22 per share
compared to ($125,000) or ($0.03) per share for 1995. The increase in 1996 over
1995 was due to higher earned income from leases and notes and gains on sales
offset by increases in the provision for losses, higher selling, general and
administrative expenses, higher average debt levels and higher average rates of
interest on debt and a foreign currency translation adjustment in 1995.
At December 31, 1996, the Company had approximately $47.5 million of
customer applications which had been approved but had not resulted in a
completed transaction, compared to approximately $39.9 million of such customer
applications at December 31, 1995. Not all approved applications will result in
completed financing transactions with the Company.
FISCAL YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Earned income from leases and notes for fiscal 1995 was approximately $12.9
million compared to approximately $11.6 million in 1994. This increase of 11.2%
resulted primarily from an increase of 31.5% in the net investment in leases and
notes from 1994 to 1995. The Company financed new portfolio assets at
20
<PAGE>
a cost of approximately $68.6 million in 1995 compared to approximately $32.6
million in 1994, a 110.4% increase in the value of assets financed.
Interest expense net of interest income on cash balances for 1995 was
approximately $5.0 million (38.6% of earned income) compared to approximately
$3.2 million (27.1% of earned income) in 1994. The 57.3% increase in amount was
due primarily to a 42.7% increase in the level of debt required to support the
increase in new portfolio assets and higher average interest rates in 1995. The
Company funded its business in 1995 in part with fixed rate and revolving credit
arrangements. See "--Liquidity and Capital Resources" and Note B to the
Company's Consolidated Financial Statements contained elsewhere in this
Prospectus.
Net financing margin for fiscal 1995 was approximately $7.9 million (61.4%
of earned income), compared to approximately $8.5 million (72.9% of earned
income) in fiscal 1994. The declines in both the amount of net interest margin
and its percentage of earned income were due to the Company's higher levels of
debt at higher average interest rates on debt in 1995 as compared to 1994.
The provision for losses was approximately $1.3 million (10.1% of earned
income) in 1995 as compared to $754,000 (6.5% of earned income) in 1994. The
allowance for losses at December 31, 1995 was approximately $4.5 million (3.7%
of net investment in leases and notes), compared to approximately $4.6 million
(5.0% of net investment in leases and notes) at December 31, 1994. Net
charge-offs were approximately $1.4 million in 1995 compared to approximately
$3.1 million in 1994. The increase in the provision for losses was due to the
higher level of financing contract originations and the Company's continuing
adjustment of the provision for losses to reflect the risks and diversification
in its portfolio.
Selling, general and administrative expenses were approximately $6.0 million
(46.5% of earned income) in fiscal year 1995 compared to approximately $7.0
million (59.9% of earned income) in fiscal year 1994. The decrease in amount was
due to a reduction in expenses related to the Company's discontinued Canadian
operations in 1995 and the reversal of certain accruals related to the uncertain
impact on the Company of the bankruptcy of Healthco in 1993.
In 1994, the Company discontinued its Canadian operations as part of its
strategic plan to focus on its business in the United States. Consistent with
this strategy, and in an effort to begin to liquidate its Canadian operations,
the Company in 1994 sold a large portion of its Canadian portfolio to Newcourt
Credit Group, Inc. ("Newcourt") for approximately $7.0 million and used most of
the proceeds to repay third party debt. Some of the proceeds were repatriated to
the Company. As part of the sale agreement, the Company entered into a service
agreement whereby Newcourt agreed to manage certain accounts over the next
two-year period ending June 30, 1996. Since the Company no longer generated new
business in Canada, these managed accounts were written down to estimated net
realizable value. As a result of the transaction with Newcourt the Company's
total investment in Canada decreased from approximately $3.8 million to
approximately $2.1 million at December 31, 1994. In 1995, the Company continued
to liquidate its Canadian assets and repatriated another $700,000 to the United
States. At December 31, 1995, after currency adjustments, the Company's
investment in Canada was less than $800,000. Accordingly, the Company was deemed
to have substantially liquidated its Canadian investment. Therefore, in
accordance with Statement of Financing Accounting Standards No. 52 ("Foreign
Currency Translation"), the Company recognized in earnings the cumulative
translation losses incurred in prior years that had been deferred as a separate
component of equity.
The Company had income before income taxes in 1995 of $79,000 compared to
$750,000 in 1994. The provision for income taxes was $204,000 in 1995 compared
to $300,000 in 1994. The provision for income taxes in 1995 was 258.2% of income
before income taxes, due to the fact that the $601,000 foreign currency
translation adjustment related to the Company's Canadian operations was not
deductible. In addition, the Company had a $128,000 reduction in its tax
provision for a 1995 Canadian provincial refund of taxes from prior years.
The Company's net loss was $125,000 or $0.03 per share in 1995 compared to
net income of $450,000 or $0.09 per share in 1994. The decrease in 1995 was
primarily caused by the recognition of a non-cash
21
<PAGE>
write-off of a cumulative foreign currency translation adjustment of $601,000
related to the Company's discontinued Canadian operations.
The earnings per share impact from the Company's repurchase and retirement
of treasury shares in 1995 was less than $0.01. Earnings per share were
unfavorably affected in 1995 by $0.16 per share due to the 1995 write-off of the
Company's cumulative translation adjustment from the substantial liquidation of
its Canadian operations.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing activities require substantial amounts of capital,
and its ability to originate new financing transactions is dependent on the
availability of cash and credit. The Company currently has access to credit
under the Revolver, its securitization transactions with Bravo, and a loan
secured by financing contracts. The Company obtains cash from sales of its
financing contracts to various savings banks and from lease and note payments.
Substantially all of the assets of HPSC and ACFC and the stock of ACFC have been
pledged to HPSC's lenders as security under HPSC's various short- and long-term
credit arrangements. Borrowings under the securitizations are secured by
financing contracts, including the amounts receivable thereunder, and the assets
securing the financing contracts. The securitizations are limited recourse
obligations of the Company, structured so that the cash flow from the
securitized financing contracts services the debt. In these limited recourse
transactions, the Company retains some risk of loss because it shares in any
losses incurred, and it may forfeit the residual interest, if any, it has in the
securitized financing contracts should a default occur. The Company's borrowings
under the Revolver are full recourse obligations of HPSC. Most of the Company's
borrowings under the Revolver are used to temporarily fund new financing
contracts entered into by the Company and are repaid with the proceeds obtained
from other full or limited recourse financings and cash flow from the Company's
financing transactions.
At December 31, 1996, the Company had approximately $8.9 million in cash,
cash equivalents and restricted cash as compared to approximately $6.5 million
at the end of 1995. As described in Note D to the Company's Consolidated
Financial Statements included in this Prospectus, approximately $6.8 million of
such cash was restricted pursuant to financing agreements as of December 31,
1996, compared to approximately $5.6 million at December 31, 1995.
Cash provided by operating activities was approximately $6.7 million for the
year ended December 31, 1996 compared to approximately $4.5 million in 1995 and
cash used in operating activities of approximately $2.6 million in 1994. The
significant components of cash provided for 1996 as compared to 1995 were an
increase in net income in 1996 to $875,000 from a loss of $125,000 in 1995; an
increase in the gain on sales of leases and notes to approximately $1.6 million
in 1996 from $53,000 in 1995, which was caused by a higher level of sales
activity in 1996; and an increase in accounts payable and accrued liabilities of
approximately $2.4 million in 1996 as compared to 1995, which was caused by a
higher level of originations of lease contracts and notes receivable in 1996 as
compared to 1995.
Cash used in investing activities was approximately $34.4 million for the
year ended December 31, 1996 compared to approximately $32.6 million in 1995 and
cash provided by investing activities of approximately $15.7 million in 1994.
The primary components of cash used in investing activity for 1996 as compared
to 1995 were an increase in originations of lease contracts and notes receivable
to approximately $90.7 million from $63.9 million in 1995, offset by an increase
in proceeds from sales of lease contracts and notes receivable to approximately
$24.3 million in 1996 from approximately $1.5 million in 1995.
Cash provided by financing activities was approximately $29.0 million for
the year ended December 31, 1996 compared to cash provided by financing
activities of approximately $28.5 million for 1995 and cash used in financing
activities of approximately $29.3 million in 1994. The significant components of
cash provided by financing activity in 1996 as compared to 1995 were an increase
in the proceeds from issuance of senior notes in 1996 to approximately $53.0
million from approximately $28.4 million in 1995, offset by repayments of senior
notes in 1996 of approximately $26.0 million compared to
22
<PAGE>
approximately $23.4 million in 1995 and a decrease in net proceeds from demand
and revolving notes payable to banks to $1.0 million in 1996 from $25.6 million
in 1995.
On December 27, 1993, the Company raised $70.0 million through an asset
securitization transaction in which its wholly-owned subsidiary, Funding I,
issued senior secured notes (the "Funding I Notes") at a rate of 5.01%. The
Funding I Notes are secured by a portion of the Company's portfolio which it
sold in part and contributed in part to Funding I. Proceeds of this financing
were used to retire $50.0 million of 10.125% senior notes due December 28, 1993,
and $20.0 million of 10% subordinated notes due January 15, 1994. The Funding I
Notes had an outstanding balance of approximately $7.0 million at December 31,
1996. In July and August of 1996, the level of delinquencies in Funding I rose
above specified levels and triggered a payment restriction event. This
restriction had the effect of "trapping" any cash distribution that the Company
otherwise would have been eligible to receive. The event was considered a
technical default under the Revolver Agreement, which default was waived by the
lending banks in September 1996. In September 1996, delinquency levels improved
and the payment restrictions were removed. A payment restriction event is not
unusual during the later stages of a static pool securitization and may occur
again before Funding I is fully paid out. The Revolver Agreement was amended and
restated on December 12, 1996, amending the default provisions with respect to
Funding I payment restriction events to conform to the default provisions of the
Funding I agreements. As a result, a payment restriction event under Funding I
will not constitute a default under the Revolver Agreement unless such event
continues for at least six months. There can be no assurance that any future
defaults will be waived by the lending banks. Under the terms of the Funding I
securitization, when the principal balance of the Funding I Notes equals the
balance of the restricted cash in the facility, Funding I must automatically pay
the Funding I Notes and terminate. This event may occur during fiscal 1997,
prior to the scheduled termination of Funding I. In the event of an early
termination, the Company would incur a non-cash, non-operating charge against
earnings representing the early recognition of certain unamortized deferred
transaction origination costs. At December 31, 1996, these unamortized costs
were approximately $400,000 and were amortizing at approximately $17,000 per
month.
The Revolver Agreement, as amended and restated, increased the Company's
availability under the Revolver to $95.0 million. Under the Revolver Agreement,
the Company may borrow at variable rates of prime and at LIBOR plus 1.25% to
1.75%, dependent on certain performance covenants. At December 31, 1996, the
Company had $40.0 million outstanding under this facility and $55.0 million
available for borrowing, subject to borrowing base limitations. The Revolver
Agreement currently is not hedged and is, therefore, exposed to upward movements
in interest rates.
As of January 31, 1995, the Company, along with its newly-formed,
wholly-owned, special-purpose subsidiary Bravo, established a $50.0 million
revolving credit facility structured and guaranteed by Capital Markets Assurance
Corporation ("CapMAC"). Under the terms of the facility, Bravo, to which the
Company has sold and may continue to sell or contribute certain of its portfolio
assets, pledges its interests in these assets to a commercial-paper conduit
entity. Bravo incurs interest at variable rates in the commercial paper market
and enters into interest rate swap agreements to assure fixed rate funding.
Monthly settlements of principal and interest payments are made from the
collection of payments on Bravo's portfolio. HPSC may make additional sales to
Bravo subject to certain covenants regarding Bravo's portfolio performance and
borrowing base calculations. The Company is the servicer of the Bravo portfolio,
subject to meeting certain covenants. The required monthly payments of principal
and interest to purchasers of the commercial paper are guaranteed by CapMAC
pursuant to the terms of the agreement. The Company had approximately $67.5
million outstanding under the Bravo facility at December 31, 1996, and, in
connection with this facility, had 14 separate interest rate swap agreements
with The First National Bank of Boston with a total notional value of
approximately $65.2 million. Effective November 5, 1996, the Bravo facility was
increased to $100.0 million and amended to provide that up to $30.0 million of
such facility may be used as sales of receivables from Bravo for accounting
purposes. The Company had approximately $7.0 million outstanding from sales of
receivables under this portion of the facility at December 31, 1996.
23
<PAGE>
In April 1995, the Company entered into a fixed rate, fixed term loan
agreement with Springfield Institution for Savings ("SIS") under which the
Company borrowed approximately $3.5 million at 9.5% subject to certain recourse
and performance covenants. The Company had approximately $2.4 million
outstanding under this agreement at December 31, 1996. Also in fiscal 1995, the
Company entered into a sale agreement with SIS under which it sold approximately
$1.7 million of financing contracts (which included a cash payment of $1.5
million and scheduled future payments of $200,000), subject to certain recourse
covenants and servicing of these contracts by the Company, and recognized a net
gain of approximately $53,000 in connection with the sale. Through December 31,
1996, the Company had entered into several similar sale agreements with savings
banks and the Bravo securitization facility under which it received a total of
approximately $24.3 million during 1996 and recognized a net gain of
approximately $1.6 million.
Amortization of debt discount of $0, $0 and $38,000 in 1996, 1995 and 1994,
respectively, is included in interest expense.
The Company's existing senior secured debt, issued in connection with
certain securitization transactions as shown on the balance sheet contained in
the Company's Consolidated Financial Statements appearing elsewhere in this
Prospectus, reflect its approximate fair market value. The fair market value is
estimated based on the quoted market prices for the same or similar issues or on
the current rates offered to the Company for debt of the same maturity.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver, the Bravo facility and the loan from
SIS, along with cash obtained from the sales of its financing contracts and from
internally generated revenues and the anticipated net proceeds of this offering,
is adequate to meet current obligations and future projected levels of
financings and to carry on normal operations. In order to finance adequately its
anticipated growth, the Company will continue to seek to raise additional
capital from bank and non-bank sources, make selective use of asset sale
transactions in 1997 and use its current credit facilities. The Company expects
that it will be able to obtain additional capital at competitive rates, but
there can be no assurance it will be able to do so.
Inflation in the form of rising interest rates could have an adverse impact
on the interest rate margins of the Company and its ability to maintain adequate
earning spreads on its portfolio assets.
CERTAIN ACCOUNTING PRONOUNCEMENTS
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Current tax liabilities or assets are recognized,
through charges or credits to the current tax provision, for the estimated taxes
payable or refundable for the current year. Net deferred tax liabilities or
assets are recognized, through charges or credits to the deferred tax provision,
for the estimated future tax effects, based on enacted tax rates, attributable
to temporary differences. Deferred tax liabilities are recognized for temporary
differences that will result in amounts taxable in the future, and deferred tax
assets are recognized for temporary differences and tax benefit carryforwards
that will result in amounts deductible or creditable in the future.
Effective January 1, 1995, the Company adopted prospectively Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosure." These standards apply
to the Company's practice acquisition loans and asset-based lending. The
standards require that a loan be classified and accounted for as an impaired
loan when it is probable that the Company will be unable to collect all
principal and interest due on the loan in accordance with the loan's original
contractual terms. Impaired loans are valued based on the present value of
expected future cash flows, using the interest rate in effect at the time the
loan was placed on nonaccrual status. A loan's observable market value or
collateral value may be used as an alternative valuation technique. Impairment
exists when the recorded investment in a loan exceeds the value of the loan
measured using the above-mentioned valuation techniques. Such impairment is
recognized as a valuation reserve, which is included
24
<PAGE>
as a part of the Company's allowance for losses. The adoption of these new
standards did not have a material impact on the Company's allowance for losses.
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation." This standard was
effective January 1, 1996. The standard encourages, but does not require,
adoption of a fair value-based accounting method for stock-based compensation
arrangements and would supersede the provisions of Accounting Principles Board
Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees." An
entity may continue to apply APB No. 25 provided the entity discloses its pro
forma net income and earnings per share as if the fair value-based method had
been applied in measuring compensation cost. The Company continues to apply APB
No. 25 and to disclose the pro forma information required by SFAS No. 123.
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
(SFAS 125), effective for the Company on January 1, 1997, provides new methods
of accounting and reporting for transfers and servicing of financial assets and
extinguishments of liabilities. SFAS No. 127 has delayed the effective date of
certain sections of SFAS 125 until January 1, 1998. The Company's adoption of
the appropriate sections of SFAS 125 is not expected to have a material effect
on the Company's financial position or results of operations.
25
<PAGE>
BUSINESS
GENERAL
The Company is a specialty finance company engaged primarily in financing
healthcare providers throughout the United States. To date, the largest part of
the Company's revenues has been derived from its financing of healthcare
equipment. HPSC also finances the purchase of healthcare practices, particularly
dental practices. The Company has over 20 years of experience as a provider of
financing to dental professionals in the United States. Through its subsidiary,
ACFC, the Company also provides asset-based lending to a variety of businesses
in the northeastern United States.
HPSC provides financing for equipment and other practice-related expenses to
the dental, ophthalmic, general medical, chiropractic and veterinary
professions. On a consolidated basis, approximately 60.0% of the Company's
business arises from equipment financing, approximately 30.0% from related
financing, including practice finance, leasehold improvements, office furniture,
working capital and supplies, and approximately 10% from asset-based lending.
HPSC principally competes in the portion of the healthcare finance market where
the size of the transaction is $250,000 or less, sometimes referred to as the
"small-ticket" market. The average size of the Company's financing transactions
in 1996 has been approximately $25,000. In connection with its equipment
financings, the Company enters into noncancellable installment sales and lease
contracts, substantially all of which provide for a full payout at a fixed
interest rate over a term of one to seven years. The Company markets its
financing services to healthcare providers in a number of ways, including direct
marketing through trade shows, conventions and advertising, through its sales
staff with 14 offices in nine states and through cooperative arrangements with
equipment vendors.
At December 31, 1996, HPSC's outstanding leases and notes receivable owned
and managed were approximately $190 million, consisting of approximately 11,100
active contracts. HPSC's financing contract originations in 1996 were
approximately $86.9 million compared to approximately $60.9 million in 1995, an
increase of 42.7%, which compared to financing contract originations of
approximately $28.4 million in 1994, an increase of 114.4%. The following table
summarizes HPSC's financing contract originations for fiscal years 1994, 1995
and 1996 (excluding ACFC originations).
HPSC ORIGINATIONS BY MARKET (1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996
------------------------ ------------------------ ------------------------
<CAPTION>
DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF DOLLAR PERCENTAGE OF
MARKET AMOUNT ORIGINATIONS AMOUNT ORIGINATIONS AMOUNT ORIGINATIONS
- --------------------------------------------- --------- ------------- --------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Dental....................................... $ 19,000 67.0% $ 28,900 47.0% $ 45,900 53.0%
Other Medical (2)............................ 9,400 33.0% 32,000 53.0% 41,000 47.0%
--------- ------------- --------- ------------- --------- -------------
Total.................................... $ 28,400 100.0% $ 60,900 100.0% $ 86,900 100.0%
--------- ------------- --------- ------------- --------- -------------
--------- ------------- --------- ------------- --------- -------------
</TABLE>
- ------------------------
(1) Items financed include equipment (through leases and notes), leasehold
improvements, working capital, supplies, as well as practice finance.
(2) Includes financing contracts for the ophthalmic, general medical,
chiropractic and veterinary professions.
ACFC, the Company's wholly-owned subsidiary, provides asset-based financing,
principally in the northeastern United States, for companies which cannot
readily obtain traditional bank financing. The ACFC loan portfolio generally
provides the Company with a greater spread over its borrowing costs than the
Company can achieve in its healthcare financing business. The Company
anticipates that it will expand its asset-based financing business. The
following table summarizes ACFC's line of credit originations for fiscal 1994,
1995 and 1996.
26
<PAGE>
ACFC ORIGINATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Amount of Originated Lines of Credit................... $ 5,000 $ 12,100 $ 17,600
Balance Outstanding (period end)....................... $ 4,000 $ 12,000 $ 18,700
Number of Lines of Credit Originated................... 2 8 14
</TABLE>
The continuing increase in the Company's originations of financing contracts
and lines of credit resulted in a 36.1% increase in the Company's revenues for
fiscal year 1996, as compared with fiscal year 1995, and an 10.7% increase in
the Company's revenues for fiscal year 1995 compared with fiscal year 1994. This
percentage increase in revenues is lower than the percentage increase in
originations because revenues consist of earned income on leases and notes,
which is a function of the amount of net investment in leases and notes and the
level of interest rates, and is recognized over the life of the financing
contract, while originations are recognized at the time of origination.
BUSINESS STRATEGY
The Company's strategy is to expand its business and enhance its
profitability by (i) increasing its share of the dental equipment financing
market, the Company's traditional market, as well as by expanding its activities
in other healthcare markets; (ii) diversifying the Company's revenue stream
through its practice finance and asset-based lending businesses; (iii)
emphasizing service to vendors and customers; (iv) increasing its direct sales
and other marketing efforts; (v) maintaining and increasing its access to low-
cost capital and managing interest rate risks; (vi) continuing to manage
effectively its credit risks; and (vii) capitalizing on information technology
to increase productivity and enable the Company to manage a higher volume of
financing transactions. Important components of the Company's strategy include:
- INCREASE HEALTHCARE EQUIPMENT FINANCING. The Company's goal is to increase
its share of the dental equipment financing market, as well as to expand
its activities in other healthcare markets, such as the ophthalmic,
general medical, chiropractic and veterinary professions. The Company is
pursuing this goal by hiring sales personnel with experience in financing
for those professions, through direct sales calls and advertising and by
applying the Company's experience in the dental profession to other
medical professions. The Company has increased its share of the dental
equipment financing market in each year since 1993 and believes that it
can increase its market share in other targeted professions through its
sales and marketing efforts and high level of service. The Company
believes that it has benefited and will continue to benefit from
technological advances which stimulate the demand for new and upgraded
healthcare equipment. The Company also believes that regulatory trends in
the healthcare professions have resulted in greater demand for outpatient
services, which may result in greater need for medical outpatient
equipment and supporting office equipment, including office automation
equipment. The Company intends to pursue these potential opportunities for
new financing business. This Note offering will increase the Company's
capital base, thereby permitting the Company to increase its financing
activity.
- DIVERSIFY REVENUE STREAM. In addition to retaining and increasing its
share of the healthcare equipment financing market, the Company plans to
expand its presence in the practice finance and asset-based lending
markets. In 1996, practice finance transactions accounted for
approximately 13.0% of HPSC's financing contract originations. HPSC has
originated approximately 260 practice finance loans aggregating
approximately $24.6 million over the past three years. In addition to this
business being profitable on a stand-alone basis, management believes that
practice finance earns HPSC substantial goodwill among healthcare
providers. Asset-based lending through ACFC accounts for approximately 10%
of the Company's revenues on a consolidated basis. ACFC has entered into
24 asset-based lending transactions since its inception in 1994, totaling
approximately $34.7 million in lines of credit, and currently has
approximately $18.7 million of loans outstanding. The Company anticipates
that it will expand its asset-based financing business.
27
<PAGE>
- EMPHASIZE SERVICE TO VENDORS AND CUSTOMERS. The Company believes that
healthcare providers seek financing through the Company in large part due
to the high level of service it provides to both customers and vendors,
including the Company's familiarity with the specialized needs of dental
and medical professionals, the speed and convenience of financing
equipment through the Company and the Company's established relationships
with equipment vendors. The Company competes with other providers of
financing services for the business of vendors by ensuring that vendors in
approved equipment financing transactions are paid promptly for the
equipment, usually within one day of delivery to the customer. The Company
intends to continue to provide equipment vendors with timely, convenient
and competitive financing for their equipment sales and with a variety of
other value-added services that promote both the vendors' equipment sales
and the selection of the Company to provide financing, and thereby expects
to continue to obtain referrals for additional financing transactions. The
Company also will continue to emphasize customer service, which includes
the flexibility to customize financing arrangements to the needs of
individual healthcare providers. In most cases, the Company's sales
representatives work directly with the vendors' potential purchasers,
providing them with the guidance necessary to complete the equipment
financing transaction. The Company believes that such "consultative
financing" has enhanced, and will continue to enhance, customer
satisfaction and loyalty.
- INCREASE DIRECT SALES AND OTHER MARKETING EFFORTS. The Company currently
has sales and marketing personnel located in 14 offices across the United
States. The Company intends to open additional sales offices and to
continue to hire sales staff with significant prior experience in the
healthcare financing business. In addition to promoting its financing
services through its sales and marketing personnel, the Company relies on
various equipment financing referral sources and relationships with
vendors and manufacturers of dental, medical and other equipment and
intends to further leverage these relationships. Management believes that
this marketing approach is more effective than isolated solicitations of
equipment purchasers. The Company also expects to continue to broaden its
customer base through national advertising in trade journals and
magazines, by participation in trade shows and through the broad
dissemination of literature describing the Company's financing programs.
- REDUCE BORROWING COSTS AND MANAGE INTEREST RATE RISKS. In order to reduce
its borrowing costs and manage interest rate risks, the Company seeks to
match-fund its financing contracts through a variety of funding sources.
Currently the Company has access to funding through the $95 million
Revolver and the $100 million Bravo asset securitization facility, as well
as its asset sales to, and loans from, a number of savings banks. The
Company completed the Funding I and Bravo asset securitizations to take
advantage of the significantly lower cost of funds available under these
facilities, as compared with the Company's bank borrowings, with which to
finance its contract originations. The Company's recently completed
amendment to its Bravo asset securitization facility permits it to sell up
to $30 million of financing assets under that program on a limited
recourse basis. The Company will continue to seek advantageous sources of
credit, possibly including additional securitizations and asset sales, if
appropriate.
- MANAGE CREDIT RISK. The Company employs comprehensive credit review
procedures. The credit background of each potential customer is checked
with one or more commercial credit reporting agencies, including TRW Inc.,
Equifax Inc., Trans Union Corporation and Dun & Bradstreet Corporation.
Appropriate professional organizations may be consulted regarding the
customer's professional status. In addition to a customer's credit
profile, information such as the equipment type and vendor may be
considered in some circumstances. The delinquency rate (based on
contractual balances more than 60 days past due) of the Company's
equipment financing contract portfolio has declined from 11.0% in fiscal
year 1994 to 4.2% at December 31, 1996. The Company believes that its
delinquency rate has declined because of (i) the Company's comprehensive
on-line credit evaluation procedure to screen financing applications, (ii)
the Company's improved collection procedures and (iii) growth in the
Company's portfolio of financing contracts. Management believes that the
Company's credit and loss experience compares favorably with other
"small-ticket"
28
<PAGE>
equipment finance companies. The Company will continue its thorough credit
application screening process and will seek to maintain the decline in its
delinquency rate.
- CAPITALIZE ON INFORMATION TECHNOLOGY. The Company has developed automated
information systems and telecommunications capabilities tailored to
support all areas within the organization. Systems support is provided for
accounting, taxes, credit, collections, operations, sales, sales support
and marketing. The Company has invested a significant amount of time and
capital in computer hardware and proprietary customized software and has
developed a substantial database of information that enables the Company
to better target its sales and marketing activities. The Company's Boston
headquarters is linked electronically with all of the Company's other
offices. Each salesperson's laptop computer can also connect to the Boston
office, permitting a salesperson to respond promptly to a customer's
financing request. This capability also permits the Company to control the
speed, accuracy and quality of the credit application process. The
Company's centralized data processing system provides timely support for
the marketing and service efforts of the Company's salespeople and for
equipment manufacturers and dealers. The Company's computerized systems
also provide management with accurate, up-to-date customer data which it
uses to strengthen the Company's internal controls and forecasting. The
Company believes that its system is among the most advanced in the
small-ticket equipment financing industry and can accommodate
significantly greater financing volume, giving the Company a competitive
advantage based on the speed of its contract processing, control over
credit risk and high level of service.
INDUSTRY OVERVIEW
The equipment financing industry in the United States includes a wide
variety of sources for financing the purchase and leasing of equipment, ranging
from specialty financing companies, which concentrate on a particular industry
or financing vehicle, to large banking institutions, which offer a full array of
financial services. According to the Equipment Leasing Association of America
("ELA") 1995 Annual Survey of Industry Activity & Business Operations, the total
financing volume in the United States for all types of equipment (including
medical) was estimated to be approximately $160 billion in 1995, of which
medical equipment, according to responses to the ELA survey, accounted for 3.1%
(or approximately $5.0 billion) of 1995 total annual financing volume.
The medical equipment finance industry includes two distinct markets which
are generally differentiated based on equipment price and type of healthcare
provider. The first market, in which the Company currently does not compete, is
financing of equipment priced at over $250,000, which is typically sold to
hospitals and other institutional purchasers. Because of the size of the
purchase, long sales cycle, and number of financing alternatives generally
available to these types of customers, their choice among financing alternatives
tends to be based primarily on cost of financing. The second market, in which
the Company competes, is the financing of lower-priced or "small-ticket"
equipment, where the price of the financed equipment is generally $250,000 or
less. Much of this equipment is sold to individual practitioners or small group
practices, including dentists, ophthalmologists, physicians, chiropractors,
veterinarians and other healthcare providers. The Company focuses on the
small-ticket market because it is able to respond in a prompt and flexible
manner to the needs of individual customers. Management believes that purchasers
in the small-ticket healthcare equipment market often seek the value-added sales
support and general ease of conducting business which the Company offers.
The Company believes that healthcare providers are increasingly choosing to
purchase rather than lease, equipment because of (i) the availability of a tax
deduction of up to $17,500 of the purchase price in the first year of equipment
use, (ii) changes in healthcare reimbursement methodologies that reduce
incentives to lease equipment for relatively short periods of time and (iii) a
reduced difference in financing costs between equipment purchases and equipment
leases, due to generally lower interest rates. Consistent with industry trends,
installment sales agreements (notes) now comprise 60% of the financing contracts
originated by the Company.
Although the Company has focused its business in the past on equipment
finance, it has expanded more recently into practice finance. Practice finance
is a specialized segment of the finance industry, in
29
<PAGE>
which the Company's primary competitors are banks. Practice finance is a
relatively new business opportunity for financing companies such as HPSC that
has developed as the sale of healthcare professional practices has increased.
The primary sources of healthcare practice financing are banks; not all
financing companies provide this service. Typically, HPSC has financed
approximately 70% of the cost of the practice being purchased, although buyers
are increasingly choosing to finance the entire purchase price. Management
believes that HPSC is a leading provider of dental practice financing, due in
large part to its active advertising program to the dental profession and direct
solicitation of dental healthcare providers.
HEALTHCARE PROVIDER FINANCING
TERMS AND CONDITIONS
The Company's business consists primarily of the origination of equipment
financing contracts pursuant to which the Company finances the acquisition by
healthcare providers of various types of equipment as well as leasehold
improvements, working capital and supplies. The contracts are either installment
sales agreements (notes) or lease agreements and are noncancellable. The
installment sales agreements are full payout contracts and provide for scheduled
payments sufficient, in the aggregate, to cover the Company's borrowing costs
and the costs of the underlying equipment, and to provide the Company with an
appropriate profit margin. The majority of contracts originated by the Company
(approximately 60%) are installment sales agreements. The balance of the
equipment financing contracts originated by the Company are leases. The Company
provides its leasing customers with an option to purchase the equipment at the
end of the lease for 10% of its original cost. Since 1991, approximately 99% of
lessees have exercised this option. The average cost of financings by HPSC in
1996 was approximately $26,000. In that period, HPSC entered into approximately
3,740 new financing contracts, an increase of approximately 33.6% from 1995.
All of the Company's equipment financing contracts require the customer to:
(i) maintain, service and operate the equipment in accordance with the
manufacturer's and government-mandated procedures; (ii) maintain property and
public liability insurance for the equipment; (iii) pay all taxes associated
with the equipment; and (iv) make all scheduled contract payments regardless of
the performance of the equipment. Substantially all of the Company's financing
contracts provide for principal and interest payments due monthly for the term
of the contract. In the event of default by a customer, the financing contract
provides that the Company has the rights afforded creditors under law, including
the right to repossess the underlying equipment and in the case of legal
proceedings arising from a default, to recover damages and attorneys' fees. The
Company's equipment financing contracts generally provide for late fees and
service charges to be applied on payments which are overdue. In 1996, the
Company billed approximately $1.1 million in late fees and service charges on
late payments, compared to approximately $700,000 in 1995. This increase was due
to growth in the Company's portfolio and to the completion of the Company's
implementation of a modified late fee and service charge program, rather than to
increased delinquencies.
Although the customer has the full benefit of the equipment manufacturers'
warranties with respect to the equipment it finances, the Company makes no
warranties to its customers as to the equipment. In addition, the financing
contract obligates the customer to continue to make contract payments regardless
of any defects in the equipment. Under an installment sale contract (note), the
customer holds title to the equipment and the Company has a lien on the
equipment to secure the loan; under a lease, the Company retains title to the
equipment. The Company has the right to assign any financing contract without
the consent of the customer.
A practice finance transaction typically takes the form of a loan to a
healthcare provider purchasing a practice, which is secured by the assets of the
practice being financed and may be secured by one or more personal guarantees or
personal assets. The average size of a practice finance transaction is
approximately $100,000, with a typical contract term of 60 to 72 months.
The length of the Company's lease agreements and notes due in installments
range from 12 to 84 months, with a median term of 60 months and an average
initial term of 55 months, and an average implicit
30
<PAGE>
interest rate, before the yield adjustment for deferred origination costs, of
13.0% for 1996 originations (excluding ACFC).
CUSTOMERS
The primary customers for the Company's financing contracts are healthcare
providers, including dentists, ophthalmologists, other physicians, chiropractors
and veterinarians. The following table provides the general composition of the
Company's healthcare finance portfolio as of December 31, 1996 (excluding ACFC's
portfolio).
HPSC LEASES AND NOTES RECEIVABLE (1)
<TABLE>
<CAPTION>
NUMBER OF
DOLLARS PERCENTAGE CONTRACTS PERCENTAGE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Dental........................................................... $ 130,910 69.0% 7,900 71.2%
Other Medical (2)................................................ $ 59,000 31.0% 3,200 28.8%
---------- ----- ----------- -----
Total........................................................ $ 189,910 100.0% 11,100 100.0%
---------- ----- ----------- -----
---------- ----- ----------- -----
</TABLE>
- ------------------------
(1) Includes receivables owned or managed.
(2) Includes ophthalmic, general medical, chiropractic and veterinary providers.
As of December 31, 1996, no single customer (or group of affiliated
customers) accounted for more than 1% of the Company's healthcare finance
portfolio.
The Company's customers are located throughout the United States, but
primarily in heavily populated states such as California, Florida, Texas,
Illinois and New York. The map located on the inside front cover page of this
Prospectus shows the distribution of HPSC's portfolio balance by region as of
December 31, 1996.
REALIZATION OF RESIDUAL VALUES ON EQUIPMENT LEASES
Since 1994, the Company has realized over 99% of the residual value of
equipment covered by leases. The overall growth in the Company's equipment lease
portfolio in recent years has resulted in increases in the aggregate amount of
recorded residual values. Substantially all of the residual values on the
Company's balance sheet as of December 31, 1996 are attributable to leases which
will expire by the end of 2001. Realization of such values depends on factors
not within the Company's control, such as the condition of the equipment, the
cost of comparable new equipment and the technological or economic obsolescence
of equipment. Although the Company has received over 99% of recorded residual
values for leases which expired during the last three years, there can be no
assurance that this realization rate will be maintained.
PRACTICE FINANCE
The Company regularly provides financing to healthcare providers in
connection with the acquisition of professional practices. HPSC typically makes
a loan to the professional acquiring the practice, which is secured by all of
the assets of the practice and which may require a personal guarantee and a
pledge of personal assets by the professional who is obtaining the financing.
Through December 31, 1996, the Company has originated a total of approximately
260 practice finance loans aggregating approximately $24.6 million, with an
average loan of approximately $100,000. The term of such loans averages 60 to 84
months. In 1996, practice finance generated approximately 13.0% of HPSC's
financing contract originations. Management believes that its practice finance
business contributes to the diversification of the Company's revenue sources and
earns HPSC substantial goodwill among healthcare providers. All practice finance
inquiries received at the Company's sales office, or by its salespersons in the
field, are referred to the Boston office for processing.
The Company solicits business for its practice finance services primarily by
advertising in trade magazines, attending healthcare conventions, and directly
approaching potential purchasers of healthcare
31
<PAGE>
practices. Over half of the healthcare practices financed by the Company to date
have been dental practices. The Company has also financed the purchase of
practices by chiropractors, ophthalmologists, general medical practitioners and
veterinarians.
The following table sets forth the estimated practice finance loan
originations for fiscal years 1994, 1995 and 1996.
PRACTICE FINANCE ORIGINATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
<S> <C> <C> <C>
1994 1995 1996
----------------- ----------------- ------------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amount of Originations............. $ 3,200 $ 8,400 $ 13,000
Number of Contracts................ 50 90 120
</TABLE>
GOVERNMENT REGULATION AND HEALTHCARE TRENDS
The majority of the Company's present customers are healthcare providers.
The healthcare industry is subject to substantial federal, state and local
regulation. In particular, the federal and state governments have enacted laws
and regulations designed to control healthcare costs, including mandated
reductions in fees for the use of certain medical equipment and the enactment of
fixed-price reimbursement systems, where the rates of payment to healthcare
providers for particular types of care are fixed in advance of actual treatment.
The United States Congress is considering changes to the Medicare program. The
impact on the Company's business of any changes to the Medicare program which
may be adopted cannot be predicted.
Major changes have occurred in the United States healthcare delivery system,
including the formation of integrated patient care networks (often involving
joint ventures between hospitals and physician groups), as well as the grouping
of healthcare consumers into managed-care organizations sponsored by insurance
companies and other third parties. Moreover, state healthcare initiatives have
significantly affected the financing and structure of the healthcare delivery
system. These changes have not yet had a material effect on the Company's
business, but the effect of any changes on the Company's future business cannot
be predicted.
The Company believes that the trend toward managed healthcare through health
maintenance organizations may have a positive effect on the Company's future
operations. The Company believes that as primary care physicians increasingly
become "gatekeepers" to more specialized care, the Company will be able to
accelerate its marketing programs to family and general practitioners. These
physicians would require additional, cost-effective equipment that emphasizes
early diagnosis and screening as compared to the more costly "big-ticket"
medical equipment purchased by hospitals for treatment purposes. Medicaid
managed care programs also encourage the increased availability of
cost-effective "small-ticket" equipment such as that financed by the Company.
Furthermore, the various reform initiatives are intended to result in a greater
percentage of the population having access to some type of health coverage,
which would increase the likelihood that healthcare providers will be reimbursed
at some (perhaps lower) rate for services provided to this expanded insured
population, thereby improving the credit quality of providers and increasing
their ability to purchase and finance new equipment.
ASSET-BASED LENDING
ACFC makes asset-based loans of $3 million or less, primarily secured by
accounts receivable, inventory and equipment. ACFC typically makes accounts
receivable loans to borrowers that cannot obtain traditional bank financing in a
variety of industries (none of which to date are medical). ACFC takes a security
interest in all of the borrower's assets and monitors collection of its
receivables. Advances on a revolving loan generally do not exceed 80% of the
borrower's eligible accounts receivable. ACFC also makes revolving and "term
like" inventory loans not exceeding 50% of the value of the customer's active
inventory, valued at the lower of cost or market rate. Finally, ACFC provides
term financing for
32
<PAGE>
equipment, which is secured by the machinery and equipment of the borrower. Each
of ACFC's officers has over ten years of experience providing these types of
financing on behalf of various finance companies.
The average ACFC loan is for a term of two to three years in an amount of $1
million. No single borrower accounts for more than 10% of ACFC's aggregate
portfolio, and no more than 25% of ACFC's portfolio is concentrated in any
single industry.
ACFC's loans are "fully followed," which means that ACFC receives daily
settlement statements of its borrowers' accounts receivable. ACFC participates
in the collection of its borrowers' accounts receivable and requires that
payments be made directly to an ACFC lock-box account. Availability under lines
of credit is usually calculated daily. ACFC's credit committee, which includes
members of the senior management of HPSC, must approve in advance all ACFC
loans. To date, ACFC has experienced no loan losses; however, there can be no
assurance that it will not experience losses in the future.
From its inception through December 31, 1996, ACFC has provided 24 lines of
credit totaling $34.7 million and currently has approximately $18.7 million of
loans outstanding to 18 borrowers. The annual dollar volume of originations of
lines of credit by ACFC has grown from $5.0 million in 1994 to $12.1 million in
1995 to $17.6 million in 1996. The Company anticipates that ACFC's asset-based
lending will continue to grow.
CREDIT AND ADMINISTRATIVE PROCEDURES
The Company processes all credit applications, and monitors all existing
contracts, at its corporate headquarters in Boston, Massachusetts (other than
ACFC applications and contracts, all of which are processed at ACFC's
headquarters in West Hartford, Connecticut). The Company's credit procedure
requires the review, verification and approval of a potential customer's credit
file, accurate and complete documentation, delivery of the equipment and
verification of installation by the customer, and correct invoicing by the
vendor. When a sales representative receives a credit application from a
potential customer, he or she enters it into the Company's computer system. The
Company's credit requirements usually include an acceptable personal payment
history and minimum credit rating scores on several credit reporting agency
models, and generally require that the borrower be a practicing licensed medical
professional. The credit of the potential customer is checked with one or more
commercial credit reporting agencies, including TRW Inc., Equifax Inc., Trans
Union Corporation and Dun & Bradstreet Corporation. Appropriate professional
organizations may be consulted regarding the customer's professional status. In
addition to a customer's credit profile, information such as the equipment type
and vendor may be considered. The type and amount of information and time
required for a credit decision varies according to the nature, size and
complexity of each transaction. In smaller, less complicated transactions, a
decision can often be reached within one hour; more complicated transactions may
require up to three or four days. Once the equipment is shipped and installed,
the vendor invoices the Company. The Company verifies that the customer has
received and accepted the equipment and obtains the customer's authorization to
pay the vendor. Following this telephone verification, the file is forwarded to
the contract administration department for audit, booking and funding and to
commence automated billing and transaction accounting procedures.
Timely and accurate vendor payments are essential to the Company's business.
In order to maintain its relationships with existing vendors and attract new
vendors, the Company makes most payments to vendors for financed equipment
within one day of equipment delivery to the customer.
ACFC's underwriting procedures include an evaluation of the collectibility
of the borrower's receivables that are pledged to ACFC, including an evaluation
of the validity of such receivables and the creditworthiness of the payors of
such receivables. ACFC may also require its customers to pay for credit
insurance with respect to its loans. The Loan Administration Officer of ACFC is
responsible for maintaining its lending standards and for monitoring its loans
and underlying collateral. Before approving a loan, ACFC examines the
prospective customer's books and records, and continues to make such
examinations and to monitor its customers' operations as it deems necessary
during the term of the loan. Loan officers are required to rate the risk of each
loan made by ACFC, and to update the rating upon
33
<PAGE>
receipt of any financial statement from the customer or when 90 days have
elapsed since the date of the last rating. Loan loss reserves are based on a
percentage of loans outstanding. An account will be placed in non-accrual status
when a customer is unable to service the debt and the collateral is
deteriorating.
The Company considers its finance portfolio assets to consist of two general
categories of assets based on such assets' relative risk.
The first category of assets consists of the Company's lease contracts and
notes receivable due in installments, which comprise approximately 87.7% of the
Company's net investment in leases and notes at December 31, 1996 (90.1% at
December 31, 1995). Substantially all of such contracts and notes are due from
licensed medical professionals, principally dentists, who practice in individual
or small group practices. Such contracts and notes are at fixed interest rates
and have terms ranging from 12 to 84 months. The Company believes that leases
and notes entered into with medical professionals are generally "small-ticket,"
homogeneous transactions with similar risk characteristics. Except for the
amounts described in the following paragraph related to asset-based lending, all
of the Company's historical provision for losses, charge offs, recoveries and
allowance for losses have related to its lease contracts and notes due in
installments.
The second category of assets consists of the Company's notes receivable,
which comprise approximately 12.3% of the Company's net investment in leases and
notes at December 31, 1996 (9.9% at December 31, 1995). Such notes receivable
consist of commercial, asset-based, revolving lines of credit to small and
medium size manufacturers and distributors, at variable interest rates, and
typically have terms of two years. The Company began commercial lending
activities in mid-1994. Through December 31, 1996, the Company has not had any
charge-offs of commercial notes receivable. The provision for losses related to
the commercial notes receivable was $146,000, $95,000 and $43,000 in 1996, 1995
and 1994, respectively. The amount of the allowance for losses related to the
commercial notes receivable was $284,000 and $138,000 at December 31, 1996 and
1995, respectively.
COLLECTION AND LOSS EXPERIENCE
The delinquency statistics for the Company's equipment financing contract
portfolio have improved every year since 1993. The delinquency rate (based on
contractual balances more than 60 days past due) of the Company's portfolio has
declined from 11.0% at December 31, 1994 to 4.2% at December 31, 1996. The
Company believes that the delinquency rate has declined because of (i) the
Company's comprehensive on-line credit evaluation procedure to screen financing
applications, (ii) the Company's improved collection procedures and (iii) growth
in the Company's portfolio of financing contracts. The Company believes that its
credit and loss experience compares favorably with other "small-ticket"
equipment finance companies.
The Company uses its own five-person in-house staff to collect late payments
from customers and manage accounts that are in litigation. When an account is 30
days past due, the Company begins collection procedures. The following table
illustrates HPSC's delinquent payment experience in fiscal 1994, 1995 and 1996
(excluding ACFC loans).
34
<PAGE>
DELINQUENCY EXPERIENCE (1)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
<S> <C> <C> <C>
1994 1995 1996
------------ ------------ ------------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Total Portfolio Owned and Managed..................................... $ 100,045 $ 130,066 $ 189,910
Contractual Delinquencies:
61-90 days.......................................................... $ 1,925 $ 2,314 $ 2,134
Over 90 days........................................................ 9,108 4,964 5,763
------------ ------------ ------------
Total Contractual Delinquencies (over 60 days)........................ $ 11,033 $ 7,278 $ 7,897
------------ ------------ ------------
------------ ------------ ------------
Contractual Delinquencies as a Percentage of Total Portfolio Owned and
Managed
61-90 days.......................................................... 1.9% 1.8% 1.1%
Over 90 days........................................................ 9.1 3.8 3.1
------------ ------------ ------------
Total Contractual Delinquencies (over 60 days)........................ 11.0% 5.6% 4.2%
------------ ------------ ------------
------------ ------------ ------------
Net charge-offs divided by Average Total Portfolio Owned and Managed
(2)................................................................. 1.7% 1.2% 0.9%
</TABLE>
- ------------------------
(1) Excludes ACFC. To date, ACFC has experienced no credit losses in its
asset-based lending portfolio.
(2) Excludes losses attributable to the Company's discontinued Canadian
operations.
ALLOWANCE FOR LOSSES; CHARGE-OFFS
The Company maintains an allowance for losses in connection with equipment
financing contracts and other loans held in the Company's portfolio at a level
which the Company deems sufficient to meet future estimated uncollectible
receivables, based on an analysis of delinquencies, problem accounts, and
overall risks and probable losses associated with such contracts, and a review
of the Company's historical loss experience. At December 31, 1996, this
allowance for losses was 2.7% of the Company's net investment in leases and
notes (before allowance). There can be no assurance that this allowance will
prove to be adequate. Failure of the Company's customers to make scheduled
payments under their financing contracts could require the Company to (i) make
payments in connection with the recourse portion of its borrowing relating to
such contract, (ii) forfeit its residual interest in any underlying equipment
and (iii) forfeit cash collateral pledged as security for the Company's asset
securitizations. In addition, although net charge-offs on the financing
contracts originated by the Company have been 1.1% of the Company's average net
investment in leases and notes (before allowance) for the year ended December
31, 1996, any increase in such losses or in the rate of payment defaults under
the financing contracts originated by the Company could adversely affect the
Company's ability to obtain additional funding, including its ability to
complete additional asset securitizations.
Accounts are normally charged off when future payment is deemed unlikely.
The following table illustrates the Company's historical allowance for losses
and charge-off experience.
35
<PAGE>
CHARGE-OFFS AND ALLOWANCE FOR LOSSES
<TABLE>
<CAPTION>
YEAR ENDED
----------------------------------------------------------
DEC. 26, DEC. 25, DEC. 31, DEC. 31, DEC. 31,
1992 1993 (1) 1994 1995 1996
---------- ----------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for losses:
Balance at beginning of period............................... $ 11,033 $ 9,216 $ 6,897 $ 4,595 $ 4,482
Additions(2)................................................. 4,307 15,104 754 1,266 1,114
Charge-offs.................................................. (6,179) (17,501) (3,350) (1,504) (1,609)
Recoveries................................................... 55 78 294 125 95
---------- ----------- --------- ---------- ----------
Balance at end of period..................................... $ 9,216 $ 6,897 $ 4,595 $ 4,482 $ 4,082
---------- ----------- --------- ---------- ----------
---------- ----------- --------- ---------- ----------
Net investment in leases and notes (before allowance)........ $ 166,274 $ 116,649 $ 95,788 $ 124,398 $ 153,304
Ending allowance divided by net investment in leases and
notes (before allowance)................................... 5.5% 5.9% 4.8% 3.6% 2.7%
Charge-offs divided by average net investment in leases and
notes (before allowance)................................... 3.5% 12.4% 3.2% 1.4% 1.2%
</TABLE>
- ------------------------
(1) In 1993, the Company experienced a substantial decrease in originations,
increased selling, general and administrative costs and a substantial
adjustment to its allowance for losses, in each case largely as a result of
the bankruptcy of Healthco, which previously had referred to the Company
substantially all of the Company's business.
(2) In connection with the sale of leases and notes during 1996 and 1995, the
Company recognized estimated recourse liability of $450,000 and $30,000,
respectively.
The above table includes a provision for losses related to the commercial
notes receivable of $146,000, $95,000 and $43,000 in 1996, 1995 and 1994,
respectively. The amount of the allowance for losses related to the commercial
notes receivable was $284,000 and $138,000 at December 31, 1996 and 1995,
respectively.
FUNDING SOURCES
GENERAL
The Company's principal sources of funding for its financing transactions
have been: (i) a $95 million Revolver, (ii) a receivables-backed limited
recourse asset securitization transaction with Funding I in an original amount
of $70 million, (iii) a securitized limited recourse revolving credit facility
with Bravo, currently in the amount of $100 million, (iv) a defined recourse
fixed-term loan from and sales of financing contracts to savings banks and other
purchasers and (v) the Company's internally generated revenues. Management
believes that the Company's liquidity is adequate to meet current obligations
and future projected levels of financings and to carry on normal operations.
The Revolver is a line of credit arrangement under which the Company may
borrow up to $95 million at any given time at variable rates. The Company is
subject to extensive borrowing covenants and certain restrictions on its
operations in connection with the Revolver. See "Description of Certain
Indebtedness."
The Company's securitization transactions provide funding for the Company's
financing transactions at more favorable interest rates than the Company is able
to obtain from conventional borrowing sources such as banks. In a
securitization, the Company sells or contributes financing contracts to a
special-purpose corporation ("SPC") wholly-owned by the Company. The SPC, in
turn, either itself or through a third-party trust to which the SPC has pledged
the financing contracts, issues securities representing an interest in the
financing contracts to outside investors (the securitization). The offering
proceeds from the securities are paid to the SPC, which then pays the Company
for the financing contracts or makes credit available to the Company at
favorable rates. Simultaneously, the Company and the SPC may arrange for
interest rate swaps with institutional lenders, such that any credit extended to
the Company by the SPC can be fixed at a lower rate of interest than that being
paid on the Company's financing contracts. The SPC
36
<PAGE>
enlists the services of a credit organization to guarantee the issued
securities, and pays a fee to the Company to service the underlying contracts
(subject to the Company's compliance with certain financial and performance
covenants). As the financing contracts generate revenue from customers' monthly
payments, that revenue is used by the SPC or the trust to make payments on the
securities. The SPC is intended to be bankruptcy remote, with assets entirely
separate from those of the Company. It is limited in its business activities to
owning the transferred financing contracts, completing the securitization of
those contracts and providing credit to the Company based on the securitization.
The SPC may incur indebtedness or other obligations only in relation to the
securitization. The Company has found that securitizations are an effective
means of obtaining credit on a limited recourse basis at favorable interest
rates.
Another funding source for the Company has been sales of its financing
contracts to, and borrowing against such contracts from, a variety of savings
banks. Each of these transactions is subject to certain covenants that may
require the Company to (i) repurchase financing contracts from the bank and make
payments under certain circumstances, including the delinquency of the
underlying debtor, and (ii) service the underlying financing contracts. The
Company carries a recourse reserve for each transaction in its allowance for
losses and recognizes a gain that is included for accounting purposes in earned
income for leases and notes for the year in which the transaction is completed.
Each of these transactions incorporates the covenants under the Revolver as such
covenants were in effect at the time the asset sale or loan agreement was
entered into. Any default under the Revolver may trigger a default under the
loan or asset sale agreements. The Company may enter into additional asset sale
agreements in the future in order to manage its liquidity.
THE REVOLVER
The Company executed a Revolving Credit Agreement on June 23, 1994 with The
First National Bank of Boston, individually and as Agent, and another bank, for
borrowing up to $20 million. This agreement was amended and restated in May
1995, increasing credit availability to $50 million and adding additional
lending banks. The agreement was next amended in December 1995 to increase
availability to $60 million and extend the term to December 31, 1996, and
amended again in July 1996 to increase availability to $75 million, and further
amended in December 1996 to increase availability to $95 million. There are
currently five banks providing the credit facility to the Company under the
Revolver Agreement. Under the Revolver Agreement, the Company may borrow at
variable rates of prime plus 0.25% to 0.50% and at LIBOR plus 1.75% to 2.00%,
depending upon certain performance covenants. At December 31, 1996, the Company
had approximately $40 million outstanding under this facility. The Revolver is
not currently hedged and is, therefore, exposed to upward movements in interest
rates. See "Description of Certain Indebtedness." The Revolver is secured by a
lien on the assets of HPSC and ACFC (including a pledge of the capital stock of
ACFC), including, without limitation, Customer Receivables (as defined herein).
Accordingly, indebtedness under the Revolver constitutes Secured Portfolio Debt
for purposes of the Indenture, and is senior in right of payment to the Notes.
FUNDING I
In December 1993, in a one-time receivables-backed securitization
transaction, Funding I (a wholly-owned SPC of the Company) issued $70 million of
secured notes ("Funding I Notes") bearing interest at 5.01% to three
institutional investors, Travelers Insurance Company, Prudential Insurance
Company and the Principal Group. Under the terms of the securitization, the
Company sold or contributed certain of its financing contracts, equipment
residual rights and rights to the underlying equipment to Funding I as
collateral for the Funding I Notes (the "Collateral"). The Funding I Notes are
rated "AAA" by Standard & Poor's. The required monthly payments of interest and
principal to holders of the Funding I Notes are unconditionally guaranteed by
Municipal Bond Investor Assurance Corporation ("MBIA") pursuant to the terms of
a Note guarantee insurance policy. In connection with the securitization, the
Company made an investment in Funding I, some or all of which may be required to
fund payments to holders of the Funding I Notes if certain default and
delinquency ratios relating to the Collateral are not met. As of December 31,
1996, Funding I had approximately $9.8 million of gross receivables as
collateral for the Funding I Notes. The securitization agreement also imposes
restrictions on cash balances of Funding I under certain
37
<PAGE>
conditions; at December 31, 1996, this restricted cash amounted to approximately
$4.0 million. At December 31, 1996, the Funding I Notes had an outstanding
balance of approximately $7.0 million. Note payments to investors for the years
1997 through 1999, based on projected cash flows from the Collateral, are
expected to be $5.3 million, $1.3 million and $226,000, respectively. The
Company is not permitted to sell or contribute additional financing contracts to
Funding I as long as the current investor notes are outstanding.
In July and August of 1996, the level of delinquencies of the contracts held
in Funding I rose above certain levels, as defined in the operative documents,
and triggered a payment restriction event. This restriction had the effect of
"trapping" any cash distribution that the Company otherwise would have been
eligible to receive. The event was considered a technical default under the
Revolver, which default was waived by the lending banks. In September 1996,
delinquency levels improved and the payment restrictions were removed. A payment
restriction event is not unusual during the later stages of a static pool
securitization and may occur again before Funding I is fully paid out. The
default provisions of the Revolver Agreement were amended on December 12, 1996
to conform to the default provisions of the Funding I agreements. As a result, a
payment restriction event under Funding I will not constitute a default under
the Revolver unless such event continues for at least six months. There can be
no assurance that any future defaults will be waived by the lending banks. Under
the terms of Funding I, when the principal balance of the Funding I Notes equals
the balance of the restricted cash in the facility, Funding I must automatically
pay the Funding I Notes and terminate. This event is expected to occur during
fiscal 1997. In the event of an early termination, the Company could incur a
non-cash, non-operating charge against earnings representing the early
recognition of certain unamortized deferred transaction origination costs. At
December 31, 1996, these unamortized costs were approximately $400,000 and were
amortizing at approximately $17,000 per month. The Notes are effectively
subordinated to the Funding I Notes, which also constitute Secured Portfolio
Debt. Funding I has not guaranteed payment of the Notes.
BRAVO
In January 1995, the Company entered into a revolving credit securitization
facility (the "Facility") with another SPC, Bravo, structured and guaranteed by
CapMAC. Under the Facility, the Company sells certain equipment financing
contracts to Bravo which, along with the underlying equipment, serve as
collateral or consideration for cash advanced to Bravo by Triple-A One Funding
Corporation ("Triple-A"), a commercial paper conduit entity. Bravo, in turn,
makes cash advances to the Company in return for the contracts. In November
1996, the Facility was amended to increase available borrowing to up to $100
million and to allow up to $30 million of the Facility to be used for sales of
financing contracts to Triple-A from Bravo, $7.0 million of which had been used
for such sales at December 31, 1996. Bravo incurs interest at variable rates in
the commercial paper market and enters into interest rate swap agreements to
assure fixed rate funding. Additional sales of financing contracts to Bravo from
the Company may be made subject to certain covenants regarding Bravo's portfolio
performance and borrowing base calculations. The Company's ability to make
additional sales under the Facility (and therefore to continue to draw advances
at commercial paper rates) will depend upon a number of factors, including
general conditions in the credit markets and the ability of the Company to
originate financing contracts which satisfy eligibility requirements set forth
in the Facility documents. There can be no assurance that the Company will
continue to originate eligible contracts.
In order to secure a AAA rating for its commercial paper, Triple-A has
established a liquidity line of credit with a group of liquidity banks, for
which The First National Bank of Boston serves as liquidity agent. Each
liquidity bank commits to make advances for a one-year term, which term may be
extended at the sole option of each liquidity bank. The Facility terminates on
the earlier of the termination of the liquidity banks' commitment to make
liquidity advances (currently December 1997) or October 28, 1999, or upon an
event of default. Upon termination of the Facility, no further advances will be
made to either Bravo or the Company, and Bravo will continue to pay principal,
interest and "sale" payments until all advances from Triple-A have been repaid
in full. The Company had approximately $67.5 million outstanding under the
Facility on December 31, 1996 and, in connection with the Facility, had 14
separate interest rate swap agreements with The First National Bank of Boston
with a total notional value of approximately
38
<PAGE>
$65.2 million. The weighted average cost of funds associated with Bravo's
borrowings under the Facility since January 1995 is approximately 7.3%.
The Notes are effectively subordinated to Bravo's obligations to Triple-A,
which also constitute Secured Portfolio Debt. Bravo has not guaranteed payment
of the Notes.
SAVINGS BANK LOAN AND SALES OF FINANCING CONTRACTS
In April 1995, the Company entered into a secured, fixed rate, fixed term
loan agreement with Springfield Institution for Savings under which the Company
borrowed $3.5 million at 9.5% subject to certain recourse and performance
covenants. The Company had approximately $2.4 million outstanding under this
agreement at December 31, 1996. In addition, between November 1995 and December
1996, the Company sold an aggregate of $20.6 million net amount of financing
contracts to the following savings banks: Cambridge Savings Bank; Century Bank
and Trust Co.; First Essex Bank, FSB; and Springfield Institution for Savings.
The loan agreement and the agreements evidencing financing contract sales are
secured by the underlying Customer Receivables. In addition, under the recourse
provisions of the agreements evidencing the financing contract sales, the
Company has a contingent obligation to repurchase the Customer Receivables
securing such agreements and/or make payments on such receivables under certain
circumstances, including delinquencies of the underlying debtors. Upon the
occurrence of a triggering event under the recourse provisions of such
agreements, the Company's obligation to repurchase and/or make payments on the
Customer Receivables would constitute Secured Portfolio Debt.
INFORMATION TECHNOLOGY
The Company has developed automated information systems and
telecommunications capabilities to support all areas within the organization.
Systems support is provided for accounting, taxes, credit, collections,
operations, sales, sales support and marketing. The Company has invested a
significant amount of time and capital in computer hardware and proprietary
software. The Company's computerized systems provide management with accurate
and up-to-date customer data which strengthens its internal controls and assists
in forecasting.
The Company contracts with an outside consulting firm to provide information
technology services and has developed its own customized computer software. The
Company's Boston office is linked electronically with all of the Company's other
offices. Each salesperson's laptop computer may also be linked to the computer
systems in the Boston office, permitting a salesperson to respond to a
customer's financing request, or a vendor's informational request, almost
immediately. Management believes that its investment in technology has
positioned the Company to manage increased equipment financing volume.
The Company's centralized data processing system provides timely support for
the marketing and service efforts of its salespeople and for equipment
manufacturers and dealers. The system permits the Company to generate collection
histories, vendor analyses, customer reports and credit histories and other data
useful in servicing customers and equipment suppliers. The system is also used
for financial and tax reporting purposes, internal controls, personnel training
and management. The Company believes that its system is among the most advanced
in the small-ticket equipment financing industry, giving the Company a
competitive advantage based on the speed of its contract processing, control
over credit risk and high level of service.
SALES AND MARKETING
GENERAL
In addition to promoting its financing services through its sales and
marketing employees, most of whom work out of the Company's regional offices,
the Company relies on various equipment financing referral sources and
relationships with vendors and manufacturers of dental, medical and other
equipment for the marketing of its services. The Company's sales and marketing
staff focuses its efforts primarily on these vendors in an effort to encourage
them to recommend the Company as a preferred funding source to
39
<PAGE>
purchasers of their equipment. The Company then enters into financing contracts
directly with the vendors' customers.
HPSC currently has 14 field sales and marketing personnel located in 14
offices throughout the United States, as well as eight sales representatives at
the Company's Boston headquarters. Sales personnel are assigned to a particular
region of the country or to a particular healthcare profession. Sales personnel
generally can obtain approval of a financing transaction within 24 to 48 hours,
and often within one hour, of completion of documentation through use of the
Company's computer system. Practice finance sales and marketing is managed
centrally from Boston, with leads referred to Boston from the Company's sales
offices. ACFC's employees are located in West Hartford, Connecticut. Its
business is presently conducted primarily in the northeastern United States with
all sales and marketing efforts managed from its West Hartford office.
The Company's sales force emphasizes customer service, including providing
customized financing arrangements for individual healthcare providers. In most
cases, the Company's sales representatives work directly with the vendors'
potential purchasers, providing them with the guidance necessary to complete the
equipment financing transaction. The Company believes that such "consultative
financing" enhances customer satisfaction and loyalty.
The Company also attempts to broaden its customer base through national
advertising in trade journals and magazines, by attending trade shows and
through the broad dissemination of literature describing the Company's financing
programs.
VENDORS
The Company's sales representatives establish formal and informal
relationships with equipment vendors and manufacturers. The primary objective of
these relationships is for the sales representative to support the equipment
manufacturer or vendor or their representatives in their sales efforts by
providing timely, convenient and competitive financing for their equipment
sales. In addition, the Company provides these vendors with a variety of
value-added services which simultaneously promote the vendors' equipment sales
as well as the selection of the Company for financing. These services include
consulting with the vendors on structuring financing transactions which meet the
needs of the vendor and the equipment purchaser; training the vendor's sales and
management staffs to understand and market the Company's various financing
products; customizing financing products to encourage product sales; and, in
most cases, working directly with the vendors' potential purchasers to provide
them with the guidance necessary to complete the equipment financing
transaction.
The Company believes this method of marketing is more effective than
isolated solicitations of equipment purchasers. During the year ended December
31, 1996, the Company estimates that vendor relationships generated a majority
of the Company's financing contract originations, but no one vendor's financing
accounted for more than 13% of the Company's financing contract originations.
The top ten vendors in terms of the dollar volume of the Company's financings
for the year ended December 31, 1996, accounted for approximately 35% of HPSC's
originations during that period.
MARKETING PROGRAMS
The Company employs a number of marketing strategies to promote its
healthcare provider financing services. For example, the Company advertises its
services in national publications targeting dental, ophthalmic and other
healthcare professionals. Representatives of the Company attend approximately 80
healthcare conventions per year, as well as solicit business directly from key
manufacturers and distributors of equipment. From time to time, the Company
participates in special promotions with equipment vendors to encourage both the
purchase and financing of healthcare equipment. The Company also distributes to
its customers and others informational brochures, which are produced by the
Company and which describe the various financing services provided by the
Company, as well as quarterly outlook fliers and a year-end tax advisory letter.
40
<PAGE>
COMPETITION
Healthcare provider financing and asset-based lending are highly competitive
businesses. The Company competes for customers with a number of national,
regional and local finance companies, including those which, like the Company,
specialize in financing for healthcare providers. In addition, the Company's
competitors include those equipment manufacturers which finance the sale or
lease of their products themselves, conventional leasing companies and other
types of financial services companies such as commercial banks and savings and
loan associations. Although the Company believes that it currently has a
competitive advantage based on its customer-oriented financing and value-added
services, many of the Company's competitors and potential competitors possess
substantially greater financial, marketing and operational resources than the
Company. Moreover, the Company's future profitability will be directly related
to the Company's ability to obtain capital funding at favorable rates as
compared to the capital costs of its competitors. The Company's competitors and
potential competitors include many larger, more established companies that have
a lower cost of funds than the Company and access to capital markets and to
other funding sources which may be unavailable to the Company. The Company's
ability to compete effectively for profitable equipment financing business will
continue to depend upon its ability to procure funding on attractive terms, to
develop and maintain good relations with new and existing equipment suppliers,
and to attract additional customers.
Historically, the Company's equipment finance business has concentrated on
leasing small-ticket dental, medical and office equipment. The Company may in
the future finance more expensive equipment than it has in the past. As it does
so, the Company's competition can be expected to increase. In addition, the
Company may face greater competition with its expansion into the practice
finance and asset-based lending markets.
EMPLOYEES
At December 31, 1996, the Company had 67 full-time employees, seven of whom
work for ACFC, and none of whom was represented by a labor union. Approximately
13 of the Company's employees are engaged in credit, collections and lease
documentation, approximately 30 are in sales, marketing and customer service,
and 19 are engaged in general administration, tax and accounting. Management
believes that the Company's employee relations are good.
PROPERTY
The Company leases approximately 11,320 square feet of office space at 60
State Street, Boston, Massachusetts for approximately $24,000 per month. This
lease expires on May 31, 1999 with a five-year extension option. ACFC leases
approximately 2,431 square feet at 433 South Main Street, West Hartford,
Connecticut for approximately $4,000 per month. This lease expires on August 31,
1999 with a three-year extension option. The Company's total rent expense for
1996 under all operating leases was $390,665. The Company also rents space as
required for its sales locations on a short-term basis. The Company believes
that its facilities are adequate for its current operations and for the
foreseeable future.
LEGAL PROCEEDINGS
Although the Company is from time to time subject to actions or claims for
damages in the ordinary course of its business and engages in collection
proceedings with respect to delinquent accounts, the Company is aware of no such
actions, claims, or proceedings currently pending or threatened that are
expected to have a material adverse effect on the Company's business, operating
results or financial condition.
41
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ --- ---------------------------------------------------------------
<S> <C> <C>
John W. Everets........................... 50 Chairman of the Board, Chief Executive Officer and Director (1)
Raymond R. Doherty........................ 51 President, Chief Operating Officer and Director (1)
Rene Lefebvre............................. 50 Vice President of Finance, Chief Financial Officer and
Treasurer
Joseph A. Biernat......................... 69 Director (2)
J. Kermit Birchfield...................... 57 Director (1)(3)
Dollie A. Cole............................ 66 Director (2)(3)
Samuel P. Cooley.......................... 65 Director (1)(2)(3)
Thomas M. McDougal........................ 57 Director (2)
Lowell P. Weicker, Jr..................... 65 Director (2)
</TABLE>
- ------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
John W. Everets has been Chairman of the Board and Chief Executive Officer
of HPSC since July 1993 and has been a director of HPSC since 1983. He was
Chairman of the Board and Chief Executive Officer of T.O. Richardson Co., Inc.,
a financial services company, from January 1990 until July 1993. Previously he
was Executive Vice President of Advest, Inc., an investment banking firm, from
1977 to January 1990. Mr. Everets also served as Chairman of the Board of
Billings and Co., Inc., a real estate investment banking firm, and Chairman of
Advest Credit Corp., both subsidiaries of Advest Group, Inc. Mr. Everets
formerly was Vice Chairman of the Connecticut Development Authority and Chairman
of the Loan Committee of the Connecticut Development Authority. Mr. Everets is
also a director of Dairy Mart Convenience Stores, Inc., Crown/Northcorp, and the
Eastern Company.
Raymond R. Doherty has been President of HPSC since December 1989 and Chief
Operating Officer of HPSC since August 1993. He was Treasurer of HPSC from
December 1988 until May 1994. He was elected a director of HPSC in June 1991.
Mr. Doherty previously served as Chairman and Chief Executive Officer of HPSC
from October 1992 until July 1993, Chief Operating Officer of HPSC from December
1989 to October 1992, and Chief Financial Officer of HPSC from December 1988 to
October 1992. He was Assistant Treasurer of HPSC from June 1986 to December
1988. He was Vice President and Chief Operating Officer of Healthco, a company
engaged in sales of dental equipment and formerly affiliated with the Company,
from October 1992 until August 1993. He was the Senior Vice President of Finance
and Operational Controls of Healthco from January 1986 to October 1992.
Rene Lefebvre has been Chief Financial Officer, Vice President of Finance
and Treasurer of HPSC since May 1994. From June 1993 until May 1994, he was
Chief Financial Officer of NETTS, Inc., a vocational training institution. He
was an independent financial services consultant from February 1992 through May
1993. He served as interim Chief Financial Officer of the Business Funding Group
from June through November of 1991. From September 1982 until March 1991, Mr.
Lefebvre was Chief Financial Officer of Eaton Financial Corporation, a
subsidiary of AT&T Capital Corporation.
42
<PAGE>
Joseph A. Biernat became a director of HPSC in December 1993. Since his
retirement in 1987, Mr. Biernat has served as a consultant for several
investment management firms. From 1965 until 1987, he was employed with United
Technologies Corporation, most recently as Senior Vice President-Treasurer, and
prior thereto as President, Treasurer and Chief Financial Officer of Philco-Ford
Finance Corporation. He is also a director of the ITT Mutual Funds and
previously has been a director of several financial and civic organizations.
J. Kermit Birchfield became a director of HPSC in December 1993. He
currently serves as Chairman of Displaytech, Inc., a privately-held manufacturer
of miniature high-resolution ferrite liquid crystal display screens and as a
consultant for various businesses. From 1990 until 1994, Mr. Birchfield served
as Senior Vice President, Secretary, and General Counsel with M/A-COM, Inc., a
publicly-held manufacturer of semiconductors and communications equipment.
Before joining M/A-COM, he was Senior Vice President for Legal and Governmental
Affairs and General Counsel for the Georgia Pacific Corporation. Mr. Birchfield
is a Managing Director of Century Partners, Incorporated, a privately-held
investment and operating company. He is also a director of Intermountain
Industries Inc. and its wholly-owned public utility subsidiary, Intermountain
Gas Company; Dairy Mart Convenience Stores, Inc.; and Massachusetts Financial
Services Company's Compass group of mutual funds.
Dollie A. Cole, a director of HPSC since 1991, has been involved for many
years in the leadership of several business, charitable and civic organizations.
She serves as Chairman of the Dollie Cole Corporation, a venture capital and
industrial consulting firm. For seven years Ms. Cole was an owner and board
member of Checker Motors and Checker Taxi until selling her interest in 1988.
Ms. Cole was also Senior Editor of Curtis Publishing until 1977, and was
director of Public Relations for Magnetic Video and Twentieth Century Fox Video
until 1985. She serves as a consultant to the Solar and Electric 500 Company,
and to Separation Dynamics, an international company involved in the energy and
manufacturing industries. In addition to these business activities, Ms. Cole
serves on the boards of Project Hope--the World Health Organization, the
National Captioning Institute for the Hearing Impaired, the Smithsonian
Institution and on the National Academy of Science--President's Circle Board.
Samuel P. Cooley became a director of HPSC in December 1993. From 1955 until
his retirement in 1993, Mr. Cooley was employed with Shawmut Bank Connecticut,
N.A., and its predecessors and affiliates, including Hartford National Bank and
Connecticut National Bank. His most recent position was Executive Vice President
and Senior Credit Approval Officer. Mr. Cooley is also a director of Lydall,
Inc. and serves as a director or trustee of numerous nonprofit organizations in
Connecticut.
Thomas M. McDougal, D.D.S., was elected a director of HPSC in 1991. He has
been a practicing dentist for approximately 30 years. He is active in national,
state and local dental organizations and has lectured extensively throughout the
United States. He is a past President of the Dallas County Dental Society and is
past Chairman of its Continuing Education Committee and its Banking, Nominating
and Patient Relations Committee.
Lowell P. Weicker, Jr. was elected a director in December 1995. Mr. Weicker
began his political career in 1962, when he was elected as a member of
Connecticut's House of Representatives for the Town of Greenwich, serving three
terms. Mr. Weicker served concurrently as First Selectman of Greenwich from 1964
to 1968. He was elected to the United States House of Representatives from
Connecticut's 4th District in 1968 and was subsequently elected to the United
States Senate in 1970, 1976 and 1982, serving until January 1989. In January
1991, Mr. Weicker was elected Governor of Connecticut, a position which he held
until January 1995. He is presently a visiting professor at the University of
Virginia. Mr. Weicker is also a director of UST Corp., Phoenix Home Life Mutual
Funds and Compuware Corp.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of the
Company.
43
<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Executive Committee, an Audit Committee and a
Compensation Committee. The Executive Committee exercises all the powers of the
Board of Directors in accordance with the policy of the Company, to the extent
permitted by Delaware law, during intervals between meetings of the Board of
Directors. The Audit Committee reviews the Company's external and internal
auditing procedures, reviews with the Company's independent auditors the scope
and results of their audit for the year, reviews with the Company's management
the plan, scope and results of the Company's operations, and studies and makes
recommendations periodically to the Board of Directors on these and related
matters. The Compensation Committee's functions are to be available for
consultation on compensation matters with the Chairman of the Board, to review
the salaries and other forms of compensation of officers of the Company and to
make recommendations to the Board of Directors regarding the grant of stock
options and restricted stock to officers, key employees and consultants, and
regarding stock option and restricted stock matters generally. None of the
members of the Audit Committee or the Compensation Committee is a past or
current officer or employee of the Company. The Board of Directors does not
maintain a nominating committee or a committee performing similar functions.
ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation classifies the Board of
Directors into three classes, with the members of the respective classes serving
for staggered three-year terms. The Class I directors are Messrs. Weicker and
McDougal; the Class II directors are Messrs. Biernat, Doherty and Cooley; and
the Class III directors are Messrs. Everets and Birchfield and Ms. Cole. The
terms of the directors comprising each class expire upon the election and
qualification of directors at the annual meetings of stockholders to be held
following the fiscal years of the Company ending December 31, 1998, 1996 and
1997, respectively. At each annual meeting of stockholders, nominees for
director will be eligible for re-election or election for full three-year terms.
DIRECTOR COMPENSATION
The Company pays each non-employee director a fee of $5,000 per annum plus
$2,500 per annum for each committee of the Board of Directors on which he or she
serves and $500 for each meeting attended. In addition, the Company reimburses
directors for their travel expenses incurred in attending meetings of the Board
of Directors or its committees. Pursuant to the Company's 1995 Stock Incentive
Plan (the "1995 Stock Plan"), each non-employee continuing director is granted
1,000 non-qualified stock options to purchase shares of Common Stock on the day
of each annual meeting of stockholders during the term of the 1995 Stock Plan.
Mr. Weicker received a non-qualified stock option exercisable for 4,000
shares of Common Stock at $4.75 per share, the fair market value of Common Stock
on the date of grant, at the time that he joined the Board of Directors. This
option was not granted under any of the Company's stock option plans.
EXECUTIVE COMPENSATION
COMPENSATION SUMMARY
The following table sets forth certain information regarding all
compensation received by the Company's Chief Executive Officer and the other two
current executive officers (collectively, the "Named Executive Officers") for
services rendered in all capacities during the Company's past three fiscal
years.
44
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION
------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS(1)(2) OPTIONS COMPENSATION(3)
- -------------------------------- --------- ---------- ---------- ------------- ------------ ----------- ----------------
John W. Everets(4).............. 1996 $ 239,200 $ 50,000 $ -0- $ -0- -0- $ 15,688
Chairman of the Board, 1995 210,000 -0- -0- 809,375 -0- 18,959
Chief Executive Officer 1994 210,000 125,000 96,636(5) -0- -0- 15,904
and Director
Raymond R. Doherty(6)........... 1996 197,300 33,000 -0- -0- -0- 14,738
President, Chief 1995 190,000 -0- -0- 393,750 -0- 18,606
Operating Officer 1994 190,000 75,000 -0- -0- -0- 22,885
and Director
Rene Lefebvre(7)................ 1996 132,300 13,000 -0- -0- -0- 10,404
Vice President of 1995 125,000 -0- -0- 109,375 -0- 10,905
Finance, Chief Financial 1994 78,731 15,000 -0- -0- 30,000 1,790
Officer and Treasurer
</TABLE>
- ------------------------
(1) The Company's stockholders approved the 1995 Stock Incentive Plan (the "1995
Stock Plan") at the 1995 annual meeting of stockholders. The 1995 Stock Plan
provides for the issuance of up to 550,000 options and/or grants of shares
of restricted stock to key employees and non-employee directors of the
Company. The 1995 Stock Plan is administered by the Compensation Committee
of the Board of Directors. Upon the recommendation of the Compensation
Committee, the Board of Directors adopted an amendment to the 1995 Stock
Plan to provide service requirements for participation in the 1995 Stock
Plan in addition to the performance conditions which were contained in the
1995 Stock Plan as originally adopted.
The 1995 Stock Plan, as amended (the "Amended 1995 Stock Plan"), provides
that shares of restricted stock granted under the Amended 1995 Stock Plan
shall vest for participants when (i) certain performance conditions are met
(50% vest if and when during the five-year period from the date of grant
(the "Performance Period") the closing price of a share of the Company's
Common Stock, as reported on the Nasdaq National Market for a consecutive
ten-day period, equals or exceeds 134.175% of the closing price on the grant
date (the "Partial Performance Condition"), and the remaining 50% vest if
and when during the Performance Period the closing price of a share of the
Company's Common Stock, as reported on the Nasdaq National Market for a
consecutive ten-day period, equals or exceeds 168.35% of the closing price
on the grant date (the "Full Performance Condition")) and (ii) the holder of
the restricted stock has completed five (5) years of continuous service from
the grant date (the "Service Requirement").
The Partial Performance Condition for the shares of restricted stock granted
to Messrs. Everets, Doherty and Lefebvre in 1995 is $5.90 per share and the
Full Performance Condition is $7.37 per share. Upon a "change in control" of
the Company (as defined in the Amended 1995 Stock Plan), all awards granted
prior to such date become fully vested. Upon the termination of a
participant's employment by the Company without "cause" (as defined in the
Amended 1995 Stock Plan) or by reason of death or disability during the
Performance Period, any awards for which the Partial Performance Condition
or the Full Performance Condition shall have been satisfied no later than
four months after the date of such termination of employment shall become
fully vested and shall be deemed to satisfy the Service Requirement. The
Partial Performance Condition for the restricted stock granted in 1995 to
Messrs. Everets, Doherty and Lefebvre was met in 1996, but the shares of
restricted stock held by these individuals remain subject to the Service
Requirement.
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<PAGE>
(2) The amounts reported in this column represent the market price as reported
on the Nasdaq National Market of the restricted stock awarded under the
Amended 1995 Stock Plan on the grant date without diminution in value
attributable to the restrictions on such stock. The aggregate non-vested
restricted stock holdings at the end of fiscal 1996 were as follows: for Mr.
Everets--185,000 shares (the value of these shares at the end of fiscal 1996
equaled $1,110,000, which is 137% of the value at the grant date); for Mr.
Doherty--90,000 shares (the value of these shares at the end of fiscal 1996
equaled $540,000, which is 137% of the value at the grant date); and for Mr.
Lefebvre--25,000 shares (the value of these shares at the end of fiscal 1996
equaled $150,000, which is 137% of the value at the grant date). Dividends
on stock awards will be paid at the same rate as dividends, if any, are paid
to all stockholders.
(3) Includes term life insurance premiums paid by the Company and Company
contributions to the Named Executive Officer's 401(k) retirement plan
account, respectively, in the following amounts for fiscal 1996: Mr.
Everets, $3,024 and $4,750; Mr. Doherty, $3,024 and $3,800; and Mr.
Lefebvre, $756 and $2,646. Also includes the value of shares of Common Stock
in the Company's Employee Stock Ownership Plan ("ESOP") allocated to Named
Executive Officers in fiscal 1996 (for services rendered during fiscal 1995)
in the following amounts: Mr. Everets, $7,914; Mr. Doherty $7,914; and Mr.
Lefebvre, $7,002. The value of the allocated ESOP shares was calculated by
using the December 31, 1996 closing price for the Company's Common Stock of
$6.00 per share as reported on the Nasdaq National Market. The Company has
not allocated shares of Common Stock to participants in its ESOP for
services rendered during fiscal 1996 as of the date of this Prospectus.
(4) Mr. Everets' employment with the Company commenced in July 1993. His
compensation is governed by an employment agreement with the Company dated
as of July 19, 1996. See "Employment Agreements."
(5) Includes relocation and temporary living expenses of $81,806 paid in fiscal
1994 in connection with Mr. Everets' relocation to the Boston area.
(6) Mr. Doherty's compensation is governed by an employment agreement with the
Company dated as of August 2, 1996. See "Employment Agreements."
(7) Mr. Lefebvre's employment with the Company commenced in May 1994. His
compensation is governed by an employment agreement with the Company dated
April 6, 1994. See "Employment Agreements."
EMPLOYMENT AGREEMENTS
JOHN W. EVERETS AND RAYMOND R. DOHERTY
As of July 19, 1996 and August 2, 1996, the Company entered into new
employment agreements with John W. Everets and Raymond R. Doherty, respectively.
The Company agreed to pay a base annual salary of $250,000 to Mr. Everets and
$200,000 to Mr. Doherty as well as a bonus of up to 100% of base salary to each
individual under an incentive plan developed by the Compensation Committee of
the Board in consultation with management and approved by the full Board of
Directors.
Each employment agreement has a three-year term and thereafter will
automatically renew from year to year unless either party to such agreement
gives notice of intention to terminate the agreement six months in advance of
any anniversary. Either party to each employment agreement may terminate it at
any time for any reason. In the event of a decision not to renew by either party
or a termination by the Company which is not "for cause" (as defined in each
agreement) with respect to either Mr. Everets or Mr. Doherty (or, in the case of
Mr. Everets, in the event of voluntary termination), the Company will pay the
employee his base monthly salary plus his maximum monthly bonus and normal
employee benefits for the next 12 months. Upon a termination by the Company
which is not "for cause," all of Mr. Everets' stock options will fully vest.
Each employee has agreed not to compete with the business of the Company while
receiving severance payments and to maintain in confidence all of the Company's
confidential information. In the event of the employee's termination due to
death or disability, the Company will pay the employee or his estate the
employee's base monthly salary for six months from the date of death or
disability. The
46
<PAGE>
employee and his family will also be entitled to receive the employee's benefits
during this six-month period.
If, within three years after a "change of control" of the Company (as
defined in each agreement), either the Company terminates the employee other
than "for cause" or the employee terminates his employment due to a "change in
employment" (as defined in each agreement), the Company will pay the employee up
to 2.99 times the employee's average annual compensation for the preceding five
calendar years before the date of the change of control; the non-compete
provisions will no longer apply; the employee's stock options will fully vest;
and normal employee benefits will continue for 12 months. If, within three years
after a "change of control," the employee terminates his employment for any
reason other than a "change in employment," the Company will pay the employee
his base monthly salary plus his maximum monthly bonus and normal employee
benefits for 12 months.
RENE LEFEBVRE
On April 6, 1994, the Company entered into an employment agreement with
Rene Lefebvre for employment commencing in May 1994. The Company agreed to pay
Mr. Lefebvre an initial base annual salary of $125,000 (which has since been
increased to $135,000) as well as a bonus of up to 50% of base salary at the
discretion of the Chief Executive Officer and subject to approval of the
Compensation Committee of the Board of Directors. The Company also granted to
Mr. Lefebvre options to purchase 30,000 shares of Common Stock, which vest over
a five-year period in equal annual installments, at a price of $3.5625 per
share, which was the fair market value of a share of Common Stock on the date of
grant.
The employment agreement has a three-year term and thereafter will
automatically renew from year to year unless either party to such agreement
gives notice of intention to terminate the agreement 60 days in advance of any
anniversary. Either party to Mr. Lefebvre's employment agreement may terminate
it at any time for any reason. The Company is obligated to pay Mr. Lefebvre's
salary for three months after termination, if it does not renew the agreement,
and for six months after termination, if it otherwise terminates his employment
other than "for cause" (as defined in his agreement). Mr. Lefebvre has agreed
not to compete with the business of the Company while receiving severance
payments and to maintain in confidence all of the Company's confidential
information. In the event of a "change of control" of the Company (as defined in
his agreement), Mr. Lefebvre's stock options will fully vest.
OPTION GRANTS IN LAST FISCAL YEAR
The Company made no option or SAR grants to the Named Executive Officers in
its last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information regarding the exercise of stock
options by the Named Executive Officers during fiscal year 1996 and the value of
unexercised "in-the-money" options at fiscal 1996 year-end. The columns showing
the number of options exercised during fiscal year 1996 and the value realized
thereby have been omitted because none of the Named Executive Officers exercised
any options during fiscal year 1996.
47
<PAGE>
AGGREGATED UNEXERCISED OPTIONS AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE MONEY OPTIONS
OPTIONS AT AT FISCAL 1996 YEAR-END
FISCAL 1996 YEAR-END EXERCISABLE/UNEXERCISABLE
NAME EXERCISABLE/UNEXERCISABLE (1)
- ------------------------------------------------------------ ----------------------- --------------------------
<S> <C> <C>
John W. Everets............................................. 170,000/5,000 $ 561,250/$13,750
Raymond R. Doherty.......................................... 132,000/18,000 $ 408,000/$60,750
Rene Lefebvre............................................... 18,000/12,000 $ 43,875/$29,250
</TABLE>
- ------------------------
(1) An "in-the-money" option is an option for which the exercise price to
purchase the underlying stock is less than the December 31, 1996 market
price per share of the Company's Common Stock as reported on the Nasdaq
National Market ($6.00 per share); the value shown reflects stock price
appreciation since the date of grant of the option.
STOCK OPTION AND STOCK INCENTIVE PLANS
The Company has outstanding options under three stock option plans which
were terminated in May 1995 upon approval of the 1995 Stock Incentive Plan by
the Company's stockholders at the 1995 annual meeting. As of December 31, 1996,
the Company had 76,875 options to purchase Common Stock outstanding under its
Employee Stock Option Plan dated March 23, 1983, as amended (the "1983 Plan"),
345,000 options to purchase Common Stock outstanding under its Stock Option Plan
dated March 5, 1986 (the "1986 Plan") and 145,000 options to purchase Common
Stock outstanding under its 1994 Stock Plan dated March 23, 1994 (the "1994
Plan"). Options exercisable under the 1983, 1986 and 1994 Plans at December 31,
1996 were 74,500, 306,000 and 65,667, respectively. As of December 31, 1996, the
Company had 14,000 options to purchase Common Stock outstanding which were not
granted pursuant to any plan, 6,000 of which were exercisable at that date.
Options granted under the 1983 Plan are either incentive stock options or
non-qualified options and were granted with an exercise price of no less than
100% or 85%, respectively, of the fair market value of the Common Stock of the
Company on the date of grant. Under the 1986 Plan, only officers and directors
of the Company and its subsidiaries were eligible to participate and only
non-qualified stock options were granted. Key employees, directors of and
consultants to the Company were eligible to participate in the 1994 Plan. Only
non-qualified options were granted under the 1994 Plan and the option exercise
price was in each case not less than 50% of the fair market value of the Common
Stock on the date of grant.
The stockholders of the Company approved the Company's 1995 Stock Incentive
Plan (the "1995 Stock Plan") at the 1995 annual meeting. The 1995 Stock Plan
provides for the issuance of up to 550,000 options and/or grants of shares of
restricted stock to key employees and non-employee directors. The 1995 Stock
Plan is administered by the Compensation Committee of the Board of Directors. As
of December 31, 1996, the Company had 61,000 options to purchase Common Stock
outstanding under the 1995 Stock Plan, 11,000 of which were exercisable.
Pursuant to the recommendation of the Compensation Committee, the Board of
Directors adopted an amendment to the 1995 Stock Plan to provide service
requirements for participation in the 1995 Stock Plan in addition to the
performance conditions which were contained in the 1995 Stock Plan as originally
adopted. The 1995 Stock Plan, as amended (the "Amended 1995 Stock Plan"),
provides that shares of restricted stock granted under the Amended 1995 Stock
Plan shall vest for participants when (i) certain performance conditions are met
(50% vest if and when during the five-year period from the date of grant (the
"Performance Period") the closing price of a share of the Company's Common
Stock, as reported on the Nasdaq National Market for a consecutive ten-day
period, equals or exceeds 134.175% of the closing price on the grant date (the
"Partial Performance Condition"), and the remaining 50% vest if and when during
the Performance Period the closing price of a share of the Company's Common
Stock, as reported
48
<PAGE>
on the Nasdaq National Market for a consecutive ten-day period, equals or
exceeds 168.35% of the closing price on the grant date (the "Full Performance
Condition")) and (ii) the holder of the restricted stock has completed five (5)
years of continuous service from the grant date (the "Service Requirement").
The Partial Performance Condition for the shares of restricted stock granted
to Messrs. Everets, Doherty and Lefebvre in fiscal year 1995 is $5.90 per share
and the Full Performance Condition is $7.37 per share. Upon a "change in
control" of the Company (as defined in the Amended 1995 Stock Plan), all
restricted stock awards granted prior to such date become fully vested. Upon the
termination of a participant's employment by the Company without "cause" (as
defined in the Amended 1995 Stock Plan) or by reason of death or disability
during the Performance Period, any restricted stock awards for which the Partial
Performance Condition or the Full Performance Condition shall have been
satisfied no later than four months after the date of such termination of
employment shall become fully vested and shall be deemed to satisfy the Service
Requirement. The Partial Performance Condition for the restricted stock granted
to Messrs. Everets, Doherty and Lefebvre was met in fiscal year 1995, but the
shares of restricted stock held by these individuals remain subject to the
Service Requirement.
Awards of 337,000 restricted shares of the Company's Common Stock were
granted in May 1995. The Partial Performance Condition of these shares is $5.90
per share with respect to 332,000 shares and $6.04 per share with respect to
5,000 shares; the Full Performance Condition is $7.37 per share with respect to
332,000 shares and $7.58 with respect to 5,000 shares.
The Amended 1995 Stock Plan provides that with respect to options granted to
key employees (except non-employee directors), the option term and the terms and
conditions upon which the options may be exercised will be determined by the
Compensation Committee of the Company's Board of Directors for each such option
at the time it is granted (except as delegated to the Chief Executive Officer
for non-executive officer grants). Options granted to key employees of the
Company may be either incentive stock options (within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
and subject to the restrictions of that section on certain terms of such
options) or non-qualified options, as designated by the Compensation Committee.
At December 31, 1996, there were options exercisable for an aggregate of
8,000 shares of Common Stock outstanding to key employees and options
exercisable for an aggregate of 11,000 shares of Common Stock outstanding to
non-employee directors of the Company, pursuant to the automatic formula grant
under the Amended 1995 Stock Plan.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Board of Directors has approved, upon the recommendation of the
Compensation Committee, the adoption by the Company of a Supplemental Executive
Retirement Plan (the "SERP"). Under the SERP, which became effective on January
1, 1997, the Company will provide certain retirement income benefits to certain
of its executive employees, as such employees are designated from time to time
by the Board upon recommendation of the Chairman of the Board. Currently, the
beneficiaries of the SERP are Messrs. Everets, Doherty and Lefebvre. The SERP
will be administered by an Administrative Committee of one or more members as
appointed by the Board, which members shall be the members of the Compensation
Committee if no other appointment is in effect at any given time. The SERP is
intended to be unfunded for purposes of the Internal Revenue Code and the
Employee Retirement Income Security Act of 1974, as amended.
Benefits under the SERP are intended to supplement the retirement benefits
received by executive employees through other Company programs, such as the ESOP
and SESOP and 401(k) Plan (as such terms are defined herein) described below, as
well as Social Security benefits attributable to Company-paid FICA taxes.
Benefits under the SERP, payable upon normal retirement at age 65 (or upon early
retirement at age 62) as an actuarial equivalent of a life annuity, are based
upon age, length of service (up to a maximum of 15 credited years of service)
and an average of the participant's three highest consecutive calendar years of
compensation out of the five calendar years immediately preceding the normal or
early retirement date or other date of termination of employment ("Average Final
Compensation"). The SERP
49
<PAGE>
provides for making payments to the executive in amounts equal to 65% of the
employee's Average Final Compensation, offset by amounts deemed available under
the 401(k) Plan and Social Security benefits, to the extent attributable to the
Company's contribution and to Company-paid FICA taxes, respectively, as well as
the deemed value of shares allocated to the employee under the Company's ESOP
and SESOP. The amount deemed available under the Company's 401(k) Plan and the
deemed value of shares in the ESOP and SESOP shall equal, respectively, (1) the
amount of the Company's contributions to the 401(k) Plan accreted at a deemed
simple annual interest rate of 7% and (2) the value of the HPSC shares allocated
to the executive's account in the ESOP and SESOP as of the date of the
executive's initial participation in the ESOP and SESOP, also accreted at a
deemed simple annual interest rate of 7% until the date of the executive's
termination of employment. Accrual and vesting of benefits are contingent on the
executive's continued service as an employee of the Company, with accrual in
equal amounts over the first 15 years of service and vesting over a period of 10
years, starting in the sixth year of service, provided that an executive's
benefits will also fully accrue and vest upon a "change in control" of the
Company (as defined in the SERP) unless such change in control is approved by at
least a two-thirds vote of the incumbent Board of Directors. Limited service
credit (up to a maximum of three years) is given for service before 1993 and
full service credit is given for service between January 1, 1993 and the
effective date of the SERP. For all periods prior to the effective date, service
as either an employee of the Company or a member of its Board of Directors is
credited. On and after the effective date, only service as an employee is
credited. Benefits will be paid from the SERP only upon a participant's
termination of employment and the occurrence of any one of the following: (i)
attainment by the employee of his or her early or normal retirement age, (ii)
the employee's death, (iii) if the Company's net worth decreases below $25
million, or (iv) if there is a change in control of the Company.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN BENEFIT TABLE(1)
<TABLE>
<CAPTION>
YEARS OF SERVICE
---------------------------
AVERAGE FINAL COMPENSATION 5 10 15+
---------------------------------------- ------- -------- --------
<S> <C> <C> <C>
$100,000................................ $16,250 $ 48,750 $ 65,000
150,000................................ 24,375 73,125 97,500
200,000................................ 32,500 97,500 130,000
250,000................................ 40,625 121,875 162,500
300,000................................ 48,750 146,250 195,000
400,000................................ 65,000 195,000 260,000
500,000................................ 81,250 243,750 325,000
</TABLE>
- ------------------------
(1) Amounts shown do not reflect offset for benefits received and attributable
to the Company under the Company's 401(k) plan, employee stock ownership
plans, and FICA contributions.
For the Named Executive Officers, the years of credited service and 1996
compensation as of December 31, 1996, were: Mr. Everets--7.0 years, $250,000;
Mr. Doherty--7.0 years, $200,000; and Mr. Lefebvre--2.7 years, $135,000.
The SERP will be unfunded for purposes of the Employment Retirement Income
Security Act of 1974, as amended, and the Internal Revenue Code. However, the
Company has purchased an annuity contract at an initial cost of $258,425 per
year, the first payment of which was made in November 1996, to cover its
obligations under the SERP. It is anticipated that the Company will recover all
of its costs related to the SERP, other than potential earnings thereon. The
Company is not obligated to continue the SERP, and may terminate the SERP at any
time provided that no termination shall reduce any participant's vested benefits
thereunder. Any disputes arising under the SERP shall be determined by binding
arbitration.
50
<PAGE>
EMPLOYEE STOCK OWNERSHIP PLANS
In December 1993, the Company established an Employee Stock Ownership Plan
(the "ESOP") for the benefit of all eligible employees. The ESOP is invested
primarily in Common Stock of the Company on behalf of the participating
employees. The Company made contributions of $105,000 in fiscal year 1996 for
the 1995 allocation to the ESOP, $110,000 in fiscal year 1995 for the 1994
allocation to the ESOP and $99,000 in fiscal year 1994 for the 1993 allocation
to the ESOP.
Employees with five or more years of service with the Company from and after
December 1993 at the time of termination of employment will be fully vested in
their benefits under the ESOP. For a participant with fewer than five years of
service from December 1993 through his or her termination date, his or her
account balance will vest at the rate of 20% for each year of service. Upon the
retirement or other termination of an ESOP participant, the shares of Common
Stock in which he or she is vested, at the option of the participant, may be
converted to cash or may be distributed to the participant. The unvested shares
are allocated to the remaining ESOP participants. The Company has issued 300,000
shares of Common Stock to the ESOP in consideration of a Promissory Note in the
principal amount of $1,050,000, payable in ten equal annual installments
beginning September 1, 1994, with interest at prime plus 1%; 28,282 shares of
Common Stock were allocated to participant accounts for fiscal year 1994 under
the ESOP, 31,372 shares of Common Stock were allocated to participant accounts
for fiscal year 1995 and 30,000 shares of Common Stock were allocated to
participant accounts for fiscal year 1996.
In July 1994, the Company adopted a Supplemental Employee Stock Ownership
Plan (the "SESOP") for the benefit of all eligible employees. Eligibility
requirements are similar to the ESOP described above except that any amounts
allocated under the SESOP will be allocated first to the accounts of certain
highly compensated employees, to make up for certain limitations on Company
contributions under the ESOP imposed by the Internal Revenue Code, and next to
all eligible employees on a non-discriminatory basis. The Company has issued
350,000 shares of Common Stock to this plan in consideration of a Promissory
Note in the principal amount of $1,225,000, payable in ten equal annual
installments beginning September 1, 1995, with interest at prime plus 1%. As of
December 31, 1996, no allocations of Common Stock had been made to participant
accounts under the SESOP.
401(K) SAVINGS PLAN
The Company has established a Savings Plan pursuant to Section 401(k) of the
Internal Revenue Code (the "401(k) Plan"), available to substantially all
employees, which allows participants to make contributions to the 401(k) Plan
through salary deductions. The Company matches employee contributions up to a
maximum of 2% of the employee's salary. Amounts contributed to the 401(k) Plan
and any earnings or interest accrued thereon are generally not subject to
federal income tax until distributed to the participant. Both employee and
employer contributions to the 401(k) Plan vest immediately. The Company's
contributions to the 401(k) Plan were $62,841 in fiscal year 1996, $49,419 in
fiscal year 1995, and $37,975 in fiscal year 1994.
STOCK LOAN PROGRAM
On January 5, 1995 the Compensation Committee approved a Stock Loan Program
whereby executive officers and other senior personnel of the Company earning
more than $80,000 per year may borrow from the Company an amount equal to the
cost of purchasing two shares of Common Stock, solely for the purpose of
acquiring such stock, for each share of Common Stock purchased by the employee
from sources other than Company funds. Such borrowings may not exceed $200,000
in any fiscal quarter of the Company, $200,000 per employee or $400,000 during
the term of the loan program for all employees. All shares purchased with such
loans are pledged to the Company as collateral for repayment of the loans. The
loans are recourse, bear interest at a variable rate which is one-half of one
percent above the Company's cost of funds, payable monthly in arrears, and are
payable as to principal no later than five (5) years after the date of the loan.
As of the date of this Prospectus, the Company has loans outstanding to
executive officers in the following amounts secured by the number of shares of
Common Stock listed: Mr. Everets,
51
<PAGE>
$98,000, secured by 26,133 shares; Mr. Doherty, $37,500, secured by 10,000
shares; and Mr. Lefebvre, $37,500, secured by 10,000 shares. None of the loans
to the Named Executive Officers has been repaid as of December 31, 1996, other
than monthly interest payments thereon. The largest aggregate amount of
outstanding indebtedness under the Stock Loan Program since its inception has
been $218,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Ms. Cole (Chair) and
Messrs. Birchfield and Cooley. None of these individuals is or has been an
employee of the Company. No executive officer of the Company serves as a member
of the board of directors or compensation committee of any entity that has one
or more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee.
CERTAIN TRANSACTIONS
STOCK LOAN PROGRAM
On January 5, 1995 the Compensation Committee approved a Stock Loan Program
whereby executive officers and other senior personnel of the Company earning
more than $80,000 per year may borrow from the Company an amount equal to the
cost of purchasing two shares of Common Stock, solely for the purpose of
acquiring such stock, for each share of Common Stock purchased by the employee
from sources other than Company funds. Such borrowings may not exceed $200,000
in any fiscal quarter of the Company, $200,000 per employee or $400,000 during
the term of the loan program for all employees. All shares purchased with such
loans are pledged to the Company as collateral for repayment of the loans. The
loans are recourse, bear interest at a variable rate which is one-half of one
percent above the Company's cost of funds, payable monthly in arrears, and are
payable as to principal no later than five (5) years after the date of the loan.
As of the date of this Prospectus, the Company has loans outstanding to
executive officers in the following amounts secured by the number of shares of
Common Stock listed: Mr. Everets, $98,000, secured by 26,133 shares; Mr.
Doherty, $37,500, secured by 10,000 shares; and Mr. Lefebvre, $37,500, secured
by 10,000 shares. None of the loans to the Named Executive Officers has been
repaid as of December 31, 1996, other than monthly interest payments thereon.
The largest aggregate amount of outstanding indebtedness under the Stock Loan
Program since its inception has been $218,000.
REPURCHASE OF SHARES FORMERLY HELD BY HEALTHCO INTERNATIONAL, INC.
On November 1, 1994, the Company executed an agreement with certain secured
creditors of Healthco International, Inc. ("Healthco") under which the Company
made a cash payment of approximately $1.8 million and issued a note payable of
$4.5 million to such creditors to (i) settle net liabilities of approximately
$1.3 million due to Healthco and (ii) purchase the 1,225,182 shares of the
Company's Common Stock. The secured creditors also released the Company from any
claims that may arise out of the bankruptcy of Healthco. Before its bankruptcy,
Healthco had pledged the shares of the Company's Common Stock to secure its
obligations to the secured creditors. In July 1995, the shares were released
from the pledge agreement upon the Company's completion of payment of the note.
The Company retired 1,125,182 of these shares and holds 100,000 of these shares
in its treasury.
CONSULTING AGREEMENT BETWEEN MR. EVERETS AND ADVEST, INC.
In January 1990, in connection with Mr. Everets' termination of his
employment with Advest, Inc. ("Advest"), one of the Underwriters, Mr. Everets
agreed to provide consulting services on a limited basis to Advest on various
matters. Since that date, Mr. Everets has received $1,000 per month from Advest
for such services. The agreement has no fixed term and is terminable by either
party at any time without notice.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of March 1, 1997 certain information with
respect to the beneficial ownership of the Common Stock by: (i) each person or
entity known by the Company to beneficially own 5% or more of the Common Stock;
(ii) each director of the Company; (iii) each of the Named Executive Officers;
and (iv) all directors and executive officers of the Company as a group. The
information in the table and in the related notes has been furnished by or on
behalf of the indicated owners. Unless otherwise noted, the Company believes the
persons and entities referred to in this table have sole voting and investment
power with respect to the shares listed in this table. The percentage owned is
calculated with respect to each person by treating shares issuable to such
person within 60 days of March 1, 1997 as outstanding, in accordance with rules
of the Securities and Exchange Commission ("SEC"). The Company had 4,657,930
shares of Common Stock outstanding as of March 1, 1997.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP OF
COMMON STOCK PERCENT
NAME (AND ADDRESS OF OWNER OF MORE THAN 5%) (1)(2) OF CLASS
- ------------------------------------------------------- ----------------- ---------
<S> <C> <C>
John W. Everets........................................ 461,733(3)(4)(5)(6) 9.6%
60 State Street, 35th Floor
Boston, MA 02109-1803
Tweedy, Browne Company, L.P............................ 385,562(7) 8.3%
52 Vanderbilt Avenue
New York, NY 10017
Harder Management Company, Inc......................... 364,390(8) 7.8%
Somerset Court
281 Winter Street, Suite 340
Waltham, MA 02154
Fidelity Management and Research Corporation........... 352,500(9) 7.6%
82 Devonshire Street
Boston, MA 02109-3605
Hollybank Investments, LP.............................. 352,000(10) 7.6%
One Financial Center, Suite 1600
Boston, MA 02111
John W. Everets and Raymond R. Doherty................. 350,000(11) 7.5%
as Trustees of the HPSC, Inc.
Supplemental Employee Stock
Ownership Plan and Trust
60 State Street, 35th Floor
Boston, MA 02109-1803
Dimensional Fund Advisors, Inc......................... 342,900(12) 7.4%
1299 Ocean Avenue, 11th Floor
Santa Monica, CA 90401
John W. Everets and Raymond R. Doherty................. 300,000(13) 6.4%
as Trustees of the HPSC, Inc.
Employee Stock Ownership Plan
60 State Street, 35th Floor
Boston, MA 02109-1803
Raymond R. Doherty..................................... 245,280(3)(4)(6) 5.1%
Rene Lefebvre.......................................... 66,766(4)(6) 1.4%
Joseph A. Biernat...................................... 10,000 *
J. Kermit Birchfield................................... 40,667(14) *
Dollie A. Cole......................................... 42,500 *
Samuel P. Cooley....................................... 11,000 *
Thomas M. McDougal..................................... 27,000 *
Lowell P. Weicker, Jr.................................. 5,900(15) *
All Directors and Executive Officers as a group (9
persons)............................................. 910,846(3)(6) 17.9%
</TABLE>
53
<PAGE>
- ------------------------
* Percent of class less than 1%.
(1) Includes shares of the Company's Common Stock which the named security
holder has the right to acquire within 60 days of December 31, 1996 through
the exercise of options granted by the Company to the named individuals or
group as follows: Messrs. Biernat, Birchfield and Cooley, 10,000 shares
each; Ms. Cole and Dr. McDougal, 27,000 shares each; Mr. Weicker, 5,000
shares; Mr. Everets, 175,000 shares; Mr. Doherty, 132,000 shares; Mr.
Lefebvre, 24,000 shares; and all such persons collectively, 420,000 shares.
(2) Includes allocated shares under the HPSC, Inc. Employee Stock Ownership Plan
(the "ESOP") of 6,033 for Mr. Everets, 8,030 for Mr. Doherty, 2,766 for Mr.
Lefebvre and 16,829 for all executive officers and directors as a group.
(3) Excludes the 300,000 shares held in the ESOP for the benefit of the employee
participants (other than the shares allocated to the respective ESOP
accounts of Messrs. Doherty and Everets listed in Note (2) above) and the
350,000 shares held in the HPSC, Inc. Supplemental Employee Stock Ownership
Plan and Trust (the "SESOP") for the benefit of the employee participants.
Although Messrs. Doherty and Everets are the trustees of both the ESOP and
SESOP and accordingly share voting power with respect to all unallocated
shares and share dispositive power with respect to all shares in the ESOP
and the SESOP, they disclaim beneficial ownership of all such shares, other
than the shares allocated to their respective ESOP accounts listed in Note
(2) above.
(4) Includes 26,133 shares, 10,000 shares and 10,000 shares, respectively, for
Messrs. Everets, Doherty and Lefebvre, purchased under the Stock Loan
Program described in "Management--Executive Compensation--Stock Loan
Program" and "Certain Transactions--Stock Loan Program." All such shares are
pledged to the Company pursuant to the Stock Loan Program.
(5) Includes 100 shares held by Mr. Everets' son, A. Hale W. Everets. Mr.
Everets disclaims beneficial ownership of such shares.
(6) Includes 185,000, 90,000 and 25,000 restricted shares granted to Messrs.
Everets, Doherty and Lefebvre, respectively, on May 12, 1995, as described
in "Management--Executive Compensation-- Summary Compensation Table."
(7) Based solely upon information reported on Schedule 13D as filed with the
SEC. Tweedy, Browne Company, L.P. ("TBC"), TBK Partners, L.P. ("TBK") and
Vanderbilt Partners, L.P. ("Vanderbilt") filed an Amendment No. 5 to its
Schedule 13D with the SEC on February 18, 1997. TBC is the beneficial owner
of 360,562 shares of the Company's Common Stock. TBK and Vanderbilt own
directly 15,000 and 10,000 shares of the Company's Common Stock,
respectively. The aggregate number of shares of the Company's Common Stock
of which TBC, TBK and Vanderbilt could be deemed to be beneficial owners is
385,562. TBC has investment discretion with respect to 360,562 shares and
sole power to dispose or direct the disposition of all of such shares. TBC
has shared power to vote or direct the vote of 331,465 shares. TBK has the
sole power to vote or direct the voting of and to dispose or direct the
disposition of the 15,000 shares it holds. Vanderbilt has the sole power to
vote or direct the voting of and dispose or direct the disposition of the
10,000 shares it holds. The general partners of TBC and Vanderbilt are
Christopher H. Browne, William H. Browne and John D. Spears. The general
partners of TBK are Christopher H. Browne, William H. Browne, Thomas P.
Knapp and John D. Spears. The general partners of TBC, by reason of their
positions as such, may be deemed to have shared power to dispose of or to
direct the disposition of 360,562 shares and shared power to vote or to
direct the vote of 331,465 shares. Each of the general partners of TBK and
Vanderbilt, by reason of his position as such, may be deemed to have shared
power to vote or direct the vote of and to dispose or direct the disposition
of the 15,000 shares held by TBK and the 10,000 shares held by Vanderbilt,
respectively.
54
<PAGE>
(8) Harder Management Company, Inc. ("Harder") filed a Schedule 13G with the SEC
reporting that it is a registered investment adviser and that the 364,390
shares of the Company's Common Stock held by Harder is held on behalf of its
clients in accounts over which Harder has complete investment discretion.
Harder disclaims beneficial ownership of the 364,390 shares except in its
capacity as an investment adviser.
(9) Based solely upon information reported on Schedule 13G as filed with the
SEC. Fidelity Management and Research Corporation ("FMRC") filed an
Amendment No. 1 to its Schedule 13G with the SEC on February 14, 1997 for
the year ended December 31, 1996 reporting that it is a registered
investment adviser and as such, has sole power to dispose or to direct the
disposition of 352,500 shares of Common Stock of the Company. FMRC reports
that it has no voting authority with respect to such shares.
(10) Hollybank Investments, LP ("Hollybank") reports that Dorsey R. Gardner,
Hollybank's general partner, has sole voting power with respect to an
additional 30,580 shares of Common Stock of the Company held in his name.
Mr. Gardner disclaims beneficial ownership, except to the extent of his
partnership interest, in the 352,000 shares of Company Common Stock held by
Hollybank.
(11) None of the 350,000 shares have been allocated to the accounts of
participants in the SESOP. Messrs. Doherty and Everets disclaim beneficial
ownership of all such shares.
(12) Based solely on information reported on Schedule 13G as filed with the SEC.
Dimensional Fund Advisors, Inc. ("Dimensional") filed an Amendment No. 6 to
its Schedule 13G with the SEC in February 1997 reporting that it is a
registered investment adviser and is deemed to have beneficial ownership of
the 342,900 shares of Common Stock of the Company held by it, all of which
shares are owned by advisory clients of Dimensional. Officers of Dimensional
also serve as officers of DFA Investment Dimensions Group Inc. (the "Fund")
and The DFA Investment Trust Company (the "Trust"), each an open-end
managment investment company registered under the Investment Company Act of
1940. In their capacities as officers of the Fund and the Trust, these
officers vote 74,800 shares which are owned by the Fund and 43,800 shares
which are owned by the Trust, all of which shares are included in the
342,900 shares over which Dimensional is deemed to have sole dispositive
power.
(13) 89,654 of these shares have been allocated to the accounts of ESOP
participants and 210,346 shares are unallocated. Messrs. Doherty and Everets
disclaim beneficial ownership of all such shares, other than the shares
allocated to their respective ESOP accounts listed in Note (2) above.
(14) Includes 3,000 shares held by Mr. Birchfield's spouse. Mr. Birchfield
disclaims beneficial ownership of such shares.
(15) Includes 200 shares held by Mr. Weicker's spouse. Mr. Weicker disclaims
beneficial ownership of such shares.
55
<PAGE>
DESCRIPTION OF NOTES
The Notes will be issued pursuant to an indenture (the "Indenture") to be
dated as of March , 1997, by and between HPSC and State Street Bank and Trust
Company, as trustee (the "Trustee"). The terms of the Notes include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following
summary of certain provisions of the Indenture is a summary only, does not
purport to be complete and is qualified in its entirety by reference to all of
the provisions of the Indenture. A copy of the Indenture has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
Capitalized terms used herein and not otherwise defined shall have the meanings
assigned to them in the Indenture.
GENERAL
The Notes will mature on April 1, 2007. Interest on the Notes will accrue at
the rate of % per annum from the date of issuance or from the most recent
Interest Payment Date to which interest has been paid or provided for, payable
semi-annually on April 1 and October 1 of each year, commencing October 1, 1997,
to the Persons in whose names such Notes are registered at the close of business
on the March 15 or September 15 immediately preceding such Interest Payment
Date. Interest will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be presented for registration of transfer or exchange, at the
office or agency of HPSC maintained for such purpose, which office or agency
shall be maintained in the City of Boston, Massachusetts. At the option of HPSC,
payment of interest may be made by check mailed to the Holders of the Notes at
the addresses set forth upon the registry books of HPSC. No service charge will
be made for any registration of transfer or exchange of Notes, but HPSC may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. Until otherwise designated by HPSC,
HPSC's office or agency will be the corporate trust office of the Trustee
maintained for such purpose. The Notes will be issued only in fully registered
form, without coupons, in denominations of $1,000 and integral multiples
thereof.
RANKING; SUBORDINATION OF THE NOTES
The Notes are unsecured, general obligations of HPSC, limited in aggregate
principal amount to $23.0 million. The payment of the principal of, premium (if
any) and interest on the Notes is subordinated in right of payment, as set forth
in the Indenture, to the payment when due of all Secured Portfolio Debt of HPSC,
including, without limitation, Indebtedness under the Revolver Agreement and
Savings Bank Indebtedness. In addition, none of HPSC's existing or future
Subsidiaries has guaranteed or will guarantee the Indebtedness under the Notes.
Accordingly, the Indebtedness under the Notes will effectively be "structurally
subordinated" to any Indebtedness of any Subsidiary of HPSC. At December 31,
1996, after giving effect to the sale of the Notes and the application of the
estimated net proceeds therefrom as described herein under "Use of Proceeds",
the outstanding Secured Portfolio Debt of the Company would have been $98.2
million, of which $74.3 million would have been Indebtedness of Subsidiaries of
HPSC. In addition, under the recourse provisions of the agreements evidencing
sales of financing contracts, the Company had a contingent obligation of
approximately $16.7 million at December 31, 1996 to repurchase the Customer
Receivables securing such agreements and/or make payments on such receivables
under certain circumstances, including delinquencies of the underling debtors.
Upon the occurrence of a triggering event under the recourse provisions of such
agreements, such obligation to repurchase and/or make payments on such
receivables would constitute Secured Portfolio Debt. Although the Indenture
contains limitations on the amount of additional Funded Recourse Debt which the
Company may incur, the Indenture contains no restrictions on the amount of
Secured Portfolio Debt which the Company may incur and, under certain
circumstances, the amount of additional Funded Recourse Debt permitted to be
incurred could be substantial. See "Certain Covenants--LIMITATION ON INCURRENCE
OF FUNDED RECOURSE DEBT AND DISQUALIFIED CAPITAL STOCK" below.
Indebtedness of HPSC that is Secured Portfolio Debt will rank senior to the
Notes in accordance with the provisions of the Indenture. The Notes will in all
respects rank (i) PARI PASSU with any and all other
56
<PAGE>
existing unsecured Funded Recourse Debt of HPSC and (ii) senior in right of
payment with all future unsecured Funded Recourse Debt of HPSC. HPSC has agreed
in the Indenture that it will not incur, directly or indirectly, any additional
unsecured Funded Recourse Debt which is subordinate or junior in ranking in any
respect to any Indebtedness of HPSC unless such unsecured Funded Recourse Debt
is expressly subordinated in right of payment to the Notes. Unsecured
Indebtedness is not deemed to be subordinate or junior to Secured Indebtedness
merely because it is unsecured. HPSC does not currently have outstanding any
indebtedness that is subordinate or junior in right of payment to the Notes. In
the event of the bankruptcy, liquidation, reorganization or other dissolution of
HPSC, there may not be sufficient assets remaining to satisfy the holders of the
Notes after satisfying the claims of any holders of Secured Portfolio Debt and
Indebtedness of any existing or future subsidiaries of HPSC.
Upon any payment or distribution of assets of HPSC or upon a total or
partial liquidation or dissolution or reorganization of or similar proceeding
relating to HPSC or its property, the holders of Secured Portfolio Debt will be
entitled to receive payment in full of the Secured Portfolio Debt before Holders
of Notes are entitled to receive any payment and, until the Secured Portfolio
Debt is paid in full, any payment or distribution to which Holders of Notes
would be entitled but for the subordination provisions of the Indenture will be
made to holders of the Secured Portfolio Debt as their interest may appear. If a
distribution is made to Holders of Notes that due to the subordination
provisions should not have been made to them, such Holders of Notes are required
to hold the distribution in trust for the holders of Secured Portfolio Debt and
pay it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, HPSC
shall promptly notify the holders of the Designated Secured Portfolio Debt (or
their Representative) of the acceleration. If any Designated Secured Portfolio
Debt is outstanding, HPSC may not pay the Notes until five days after such
holders or the Representative of the Designated Secured Portfolio Debt receive
notice of such acceleration and, thereafter, may pay the Notes only if the
subordination provisions of the Indenture otherwise permit payment at that time.
HPSC may not pay principal of, premium (if any) or interest on, the Notes or
make any deposit pursuant to the provisions described under "Legal Defeasance
and Covenant Defeasance" below and may not otherwise purchase or retire any
Notes if any Secured Portfolio Debt is not paid when due. However, payment from
the money or the proceeds of U.S. Government Obligations held in any defeasance
trust described under "Legal Defeasance or Covenant Defeasance" below is not
subordinated to any Secured Portfolio Debt or subject to the restrictions
described herein. In addition, the Company may pay the Notes without regard to
the foregoing if HPSC and the Trustee receive written notice approving such
payment from the Representative of any such Secured Portfolio Debt which is not
paid when due.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency (i) creditors of HPSC who are holders of Secured
Portfolio Debt may recover ratably more than holders of the Notes, (ii) funds
which would otherwise be payable to the holders of the Notes will be paid to
holders of Secured Portfolio Debt (or their representatives) to the extent
necessary to pay such Secured Portfolio Debt in full and (iii) HPSC may be
unable to meet its obligations fully with respect to the Notes or such other
indebtedness and obligations in respect thereof.
REDEMPTION
SINKING FUND
On or after April 1, 2002, the Company is required to redeem on January 1,
April 1, July 1 and October 1 of each year (each, a "Sinking Fund Payment
Date"), a portion of the aggregate principal amount of the Notes as set forth
below (each, a "Sinking Fund Payment") at a Redemption Price equal to
57
<PAGE>
100% of the aggregate principal amount of the Notes so redeemed, plus accrued
but unpaid interest to the Redemption Date:
<TABLE>
<CAPTION>
SINKING FUND PRINCIPAL AMOUNT
PAYMENT DATE TO BE REDEEMED
- ---------------------------------------------------------------------------- ----------------
<S> <C>
</TABLE>
The principal amount of Notes to be redeemed may at the option of HPSC be
reduced in inverse order of maturity by an amount equal to the sum of (i) the
principal amount of Notes theretofore issued and acquired at any time by HPSC
and delivered to the Trustee for cancellation and not theretofore made the basis
for the reduction of a Sinking Fund Payment and (ii) the principal amount of
Notes at any time redeemed and paid pursuant to the provisions set forth below
under the heading "OPTIONAL REDEMPTION," or which shall at any time have been
duly called for redemption (otherwise than through operation of the Sinking
Fund) and the Redemption Price shall have been deposited in trust for that
purpose and which theretofore have not been made the basis for the reduction of
a Sinking Fund Payment.
OPTIONAL REDEMPTION
HPSC will not have the right to redeem any Notes prior to April 1, 2002. The
Notes will be redeemable at the option of HPSC, in whole or in part, otherwise
than through operation of the Sinking Fund, at any time on or after April 1,
2002, at the following redemption prices (expressed as percentages of the
principal amount) if redeemed during the 12-month period commencing 1, of
the years indicated below, in each case together with accrued and unpaid
interest thereon to the Redemption Date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -------------
<S> <C>
</TABLE>
Except as described above and as set forth below under "--Certain
Covenants--REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF
CONTROL and--REPURCHASE OF NOTES UPON DEATH OF HOLDER," HPSC is not required to
make any mandatory redemption with respect to the Notes.
SELECTION AND NOTICE
In the case of a partial redemption, the Trustee shall select the Notes or
portions thereof for redemption on a pro rata basis, by lot or in such other
manner it deems appropriate and fair. The Notes may be redeemed in part, but
only in multiples of $1,000. Notice of any redemption, whether through operation
of the Sinking Fund or otherwise, will be sent by first class mail at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
upon the registry books of the Registrar. Any notice which relates to a Note to
be redeemed in part only must state the portion of the principal amount equal to
the unredeemed portion thereof and must state, among other things, that on and
after the date of redemption, upon surrender of such Note, a new Note or Notes
in a principal amount equal to the unredeemed portion thereof will be issued. On
and after the date of redemption, interest will cease to accrue on the Notes or
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portions thereof called for redemption (subject to the right of Holders of
record on a Record Date to receive interest due on an Interest Payment Date that
is on or prior to such date of redemption).
CERTAIN COVENANTS
REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON A CHANGE OF CONTROL
The Indenture provides that in the event that a Change of Control (as
defined below) has occurred, each Holder of Notes will have the right, at such
Holder's option, pursuant to an irrevocable and unconditional offer by HPSC (the
"Change of Control Offer"), to require HPSC to repurchase all or any part of
such Holder's Notes (provided, that the principal amount of such Notes must be
$1,000 or an integral multiple thereof) on a date determined by HPSC (the
"Change of Control Purchase Date") that is no later than 45 Business Days after
the occurrence of such Change of Control, at a cash price (the "Change of
Control Purchase Price") equal to 101% of the principal amount thereof, together
with accrued and unpaid interest to the Change of Control Purchase Date. The
Change of Control Offer shall be made within 15 Business Days following a Change
of Control and shall remain open for 20 Business Days (or such later date as may
be required by applicable law, rule or regulation) following the commencement
(the "Change of Control Offer Period") thereof. Upon expiration of the Change of
Control Offer Period, HPSC shall purchase all Notes properly tendered in
response to the Change of Control Offer and such offer shall terminate.
As used herein, a "Change of Control" means (i) any sale, merger or
consolidation with or into any Person or any transfer or other conveyance,
whether direct or indirect, of all or substantially all of the assets of HPSC,
on a consolidated basis, in one transaction or in a series of related
transactions, if, immediately after giving effect to such transaction, any
"person" or "group" (as such terms are used for purposes of Sections 13(d) and
14(d) of the Exchange Act, whether or not applicable) is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the total voting
power in the aggregate normally entitled to vote in the election of directors,
managers or trustees, as applicable, of the transferee or surviving entity, (ii)
any "person" or "group" (as such terms are used for purposes of Sections 13(d)
and 14(d) of the Exchange Act, whether or not applicable) is or becomes the
"beneficial owner," directly or indirectly, of more than 50% of the total voting
power in the aggregate of all classes of Capital Stock of HPSC then outstanding
normally entitled to vote in elections of directors or (iii) during any period
of 12 consecutive months after the Issue Date, individuals who at the beginning
of any such 12-month period constituted the Board of Directors of HPSC (together
with any new directors whose election by such Board or whose nomination for
election by the shareholders of HPSC was approved by a vote of a majority of the
directors then still in office who were either directors at the beginning of
such period or whose election, recommendation, or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of HPSC then in office.
On or before the Change of Control Purchase Date, HPSC will (i) accept for
payment Notes or portions thereof properly tendered pursuant to the Change of
Control Offer and (ii) deposit with the Paying Agent cash sufficient to pay the
Change of Control Purchase Price (together with accrued but unpaid interest) of
all Notes so tendered. Promptly following the Change of Control Purchase Date,
HPSC will deliver to the Trustee the Notes so accepted, together with an
Officers' Certificate listing the Notes or portions thereof being purchased by
HPSC. The Paying Agent will promptly mail to the Holders of Notes so accepted
payment in an amount equal to the Change of Control Purchase Price (together
with accrued but unpaid interest), and the Trustee will promptly authenticate
and mail or deliver to such Holders a new Note equal in principal amount to any
unpurchased portion of the Note surrendered. Any Notes not so accepted will be
promptly mailed or delivered by HPSC to the Holder thereof. HPSC will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Purchase Date.
The phrase "all or substantially all" of the assets of HPSC will likely be
interpreted under applicable state law and will be dependent upon particular
facts and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of the
assets of HPSC has occurred, in which case a Holder's ability to obtain the
benefit of a Change of Control Offer may be impaired.
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The Revolver Agreement contains, and other Indebtedness that may be incurred
in the future could contain, prohibitions on certain events that would
constitute a Change in Control and on a repurchase of the Notes upon a Change in
Control. Moreover, the exercise by the Holders of their right to require HPSC to
repurchase the Notes could cause a default under such Indebtedness even if the
Change of Control itself does not, due to the prohibition on repurchases and the
financial effect of such repurchase on HPSC. The breach of any such prohibitions
or any such default could result in a default and subsequent acceleration of any
such Indebtedness and the enforcement of available remedies thereunder. In
addition, HPSC's ability to pay cash to the Holders of Notes upon a repurchase
may be limited by HPSC's then existing financial resources.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable federal and state
securities laws.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of HPSC, and, thus, the removal of incumbent
management. The Change of Control purchase feature resulted from negotiations
between HPSC and the Underwriters.
REPURCHASE OF NOTES UPON DEATH OF HOLDER
Upon the death of any Holder of Notes, HPSC will repurchase such Holder's
Notes on request, if (i) the Notes have been registered in the Holder's name
since their date of issuance or for a period of six months prior to the date of
such Holder's death, whichever is less, (ii) the repurchase payments with
respect to such Holder's Notes will not exceed $25,000 in aggregate principal
amount in any calendar year, (iii) HPSC will not, after giving effect to such
payment, have made repurchase payments on Notes of deceased Holders in an
aggregate principal amount exceeding $250,000 in any calendar year (if such
aggregate principal amount exceeds $250,000, the Trustee will repay such Notes
up to $250,000 in aggregate principal amount in the order in which such requests
for repurchase were received), (iv) either the Company or the Trustee has been
notified in writing of the request for repurchase within one year after the
Holder's death, and if less than all of such Holder's Notes are repurchased
pursuant to such initial request, either HPSC or the Trustee has been notified
in writing of subsequent requests for repurchase of additional Notes of such
Holder within one year after any such preceding notice, (v) HPSC is not, after
giving effect to such payment, in default under any Indebtedness and (vi) HPSC
is not subject to any law, regulation, agreement or administrative directive
preventing such repurchase. The Revolver contains a prohibition on any
repurchase of the Notes without the consent of the holders of 66 2/3% of the
outstanding principal amount under the Revolver. Notes for which such repurchase
is requested shall, subject to the limitations described above, be repaid at
100% of the principal amount thereof, together with accrued but unpaid interest
to the repurchase date, within 30 days following receipt by HPSC of the
following: (A) a written request for payment signed by a duly authorized
representative of the deceased Holder, which shall indicate the name of the
deceased Holder, the date of death of the deceased Holder and the principal
amount of Notes to be repurchased, (B) the certificates, if any, representing
the Notes to be repurchased and (C) evidence satisfactory to HPSC and the
Trustee of the death of the Holder and evidence of authority of the
representative to the extent required by the Trustee. Authorized representatives
of a deceased Holder shall include executors, administrators or other legal
representatives of an estate, trustees of a trust, joint owners of Notes owned
in joint tenancy or tenancy by the entirety, custodians, conservators,
guardians, attorneys-in-fact and other persons generally recognized as having
legal authority to act on behalf of others.
The death of a person owning a Note in joint tenancy or tenancy by the
entirety with another or others shall be deemed the death of the Holder of the
Note, and the entire principal amount of the Note so held shall be subject to
repurchase, together with accrued but unpaid interest thereon to the repurchase
date. The death of a person owning a Note by tenancy in common shall be deemed
the death of a Holder of a Note only with respect to the deceased Holder's
interest in the Note so held by tenancy in common, except that in the event a
Note is held by husband and wife as tenants in common, the death of either shall
be deemed the death of the Holder of the Note, and the entire principal amount
of the Note so held shall be subject to repurchase. The death of a person who,
during his or her lifetime, was entitled to substantially
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all of the beneficial interests of ownership of a Note, will be deemed the death
of the Holder thereof for purposes of this provision, regardless of the
registered Holder, if such beneficial interest can be established to the
satisfaction of the Trustee. Such beneficial interest will be deemed to exist in
typical cases of nominee ownership, ownership under the Uniform Transfers (or
Gifts) to Minors Act, community property or other joint ownership arrangements
between a husband and wife and trust arrangements where one person has
substantially all of the beneficial ownership interests in the Note during his
or her lifetime.
LIMITATION ON INCURRENCE OF FUNDED RECOURSE DEBT AND DISQUALIFIED CAPITAL
STOCK
(a) The Indenture provides that, except as described below, HPSC will not,
and will not permit any of its Subsidiaries to, directly or indirectly, issue,
assume, guaranty, incur, become directly or indirectly liable with respect to
(including as a result of an Acquisition), or otherwise become responsible for,
contingently or otherwise (individually and collectively, to "incur" or, as
appropriate, an "incurrence"), any Funded Recourse Debt (including Acquired
Recourse Debt) or any Disqualified Capital Stock; PROVIDED that (i) HPSC may,
and may permit any of its Subsidiaries to, incur Funded Recourse Debt (including
Acquired Recourse Debt) or any Disqualified Capital Stock if (A) no Default or
Event of Default shall have occurred and be continuing at the time of, or would
occur after giving effect on a pro forma basis to, such incurrence of Funded
Recourse Debt or Disqualified Capital Stock and the application of proceeds
therefrom and (B) on the date of such incurrence (the "Incurrence Date"), the
Consolidated Interest Coverage Ratio of HPSC for the Reference Period
immediately preceding the Incurrence Date, after giving effect on a pro forma
basis to such incurrence of such Funded Recourse Debt or Disqualified Capital
Stock and, to the extent set forth in the definition of Consolidated Interest
Coverage Ratio, the use of proceeds therefrom, would be at least 1.55 to 1.0 and
(ii) HPSC may, and may permit any of its Subsidiaries to, incur any Permitted
Recourse Debt (including, without limitation, Secured Portfolio Debt).
(b) The Indenture provides that HPSC will not, directly or indirectly, incur
any unsecured Funded Recourse Debt unless such unsecured Funded Recourse Debt is
subordinated in right of payment to payment of the Notes upon terms and
conditions no less favorable to the holders of the Notes than the subordination
provisions contained in the Indenture.
(c) The Indenture provides that HPSC will not, and will not permit any of
its Subsidiaries to, directly or indirectly, incur any unsecured Funded Recourse
Debt which by its terms (or by the terms of any agreement governing such
unsecured Funded Recourse Debt) is subordinated to any other Indebtedness of
HPSC unless such unsecured Funded Recourse Debt is also by its terms (or by the
terms of any agreement governing such Funded Recourse Debt) made expressly
subordinate to the Notes to the same extent and in the same manner as such
unsecured Funded Recourse Debt is subordinated pursuant to subordination
provisions that are most favorable to the holders of any other Indebtedness of
HPSC. Unsecured Indebtedness is not deemed to be subordinate or junior to
Secured Indebtedness merely because it is unsecured.
(d) Indebtedness of any Person which is outstanding at the time such Person
becomes a Subsidiary of HPSC or is merged with or into or consolidated with HPSC
or a Subsidiary of HPSC shall be deemed to have been incurred at the time such
Person becomes such a Subsidiary of HPSC or is merged with or into or
consolidated with HPSC or a Subsidiary of the Company, as applicable.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture provides that HPSC will not, and will not permit any of its
Subsidiaries to, directly or indirectly, make any Restricted Payment if, after
giving effect to such Restricted Payment on a pro forma basis, (1) a Default or
an Event of Default shall have occurred and be continuing, (2) HPSC is not
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio in the covenant "Limitation on Incurrence
of Additional Indebtedness and Disqualified Capital Stock" or (3) the aggregate
amount of all Restricted Payments made by HPSC and its Subsidiaries, including
after giving effect to such proposed Restricted Payment, from and after the
Issue Date, would exceed the sum of (a) $2.5 million, plus (b) 50% of the
aggregate Consolidated Net Income of HPSC for the period (taken as one
accounting period), commencing on the first day of the first full fiscal quarter
commencing after the Issue Date, to and including the last day of the fiscal
quarter ended immediately
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prior to the date of each such calculation (or, in the event Consolidated Net
Income for such period is a deficit, then minus 100% of such deficit), plus (c)
100% of the aggregate Net Cash Proceeds received by HPSC and not applied in
connection with a Qualified Exchange from the issue or sale by HPSC after the
Issue Date of its Qualified Capital Stock or its debt securities that have been
converted into Qualified Capital Stock (other than an issue or sale to a
Subsidiary of HPSC), including the Net Cash Proceeds received by HPSC upon the
exercise, exchange or conversion of such securities into Qualified Capital
Stock, plus (d) the Net Cash Proceeds received by HPSC or any of its
Subsidiaries from its investment in, and the sale, disposition or other
liquidation of, any Restricted Investment.
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit (v) a Qualified Exchange; (w) the payment of any
dividend on Qualified Capital Stock within 60 days after the date of its
declaration if such dividend could have been made on the date of such
declaration in compliance with the foregoing provisions; (x) any redemption or
repurchase or payment on account of Capital Stock of HPSC permitted to be made
under (i) the Restricted Stock Plan or (ii) the Stock Option Plan, in an amount
equal to the sum of the exercise prices paid to HPSC by the holder of such
Capital Stock upon the exercise of such stock options; (y) (i) any redemption or
repurchase by HPSC of its Capital Stock, (ii) any contribution or dividend paid
by HPSC to the ESOP or (iii) any loan made by HPSC to the ESOP, in each case (A)
only to the extent made in the ordinary course of business consistent with past
practice and pursuant to the terms of the ESOP and the provisions of ERISA and
the Code and (B) not to exceed in the aggregate $300,000 per calendar year; and
(z) any contribution or dividend paid by the ESOP, in each case only to the
extent used by the ESOP (i) to pay administrative expenses of the ESOP in an
amount not to exceed $100,000 per year or (ii) to repay Indebtedness of the ESOP
owed to HPSC or its Subsidiaries. The full amount of any Restricted Payment made
pursuant to the foregoing clauses (w) and (x) of the immediately preceding
sentence, however, will be deducted in the calculation of the aggregate amount
of Restricted Payments available to be made which is referred to in clause (3)
of the immediately preceding paragraph.
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES
The Indenture provides that HPSC will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, assume or suffer to exist any
consensual restriction on the ability of any Subsidiary of HPSC to pay dividends
or make other distributions to or on behalf of, or to pay any obligation to or
on behalf of, or otherwise to transfer assets or property to, or make or pay
loans or advances to or on behalf of, HPSC or any Subsidiary of HPSC, except (a)
restrictions imposed by the Notes or the Indenture, (b) restrictions imposed by
applicable law, (c) existing restrictions under specified Indebtedness
outstanding on the Issue Date or under any Acquired Recourse Debt not incurred
in violation of the Indenture or any agreement relating to any property, asset,
or business acquired by HPSC or any of its Subsidiaries, which restrictions, in
each case, existed at the time of acquisition, were not put in place in
connection with or in anticipation of such acquisition and are not applicable to
any Person, other than to the Person acquired, or to any property, asset or
business, other than the property, assets and business so acquired, (d) any such
restriction or requirement imposed by Indebtedness of HPSC and its Subsidiaries
under the Revolver Agreement (including any Indebtedness issued to refinance,
refund or replace such Indebtedness in whole or in part, including any extended
maturity or increase in the amount thereof), provided such restriction or
requirement is no more restrictive than that imposed by the Revolver Agreement
in effect as of the Issue Date, (e) restrictions with respect solely to a
Subsidiary of HPSC imposed pursuant to a binding agreement which has been
entered into for the sale or disposition of all or substantially all of the
Capital Stock or assets of such Subsidiary, provided such restrictions apply
solely to the Capital Stock or assets of such Subsidiary which are being sold,
(f) in connection with and pursuant to permitted Refinancings, replacements of
restrictions imposed pursuant to clause (c) of this paragraph that are not more
restrictive than those being replaced and do not apply to any other Person or
assets than those that would have been covered by the restrictions in the
Indebtedness so refinanced, (g) any such restriction or requirement imposed by
non-recourse or limited-recourse Indebtedness of a special purpose Subsidiary of
HPSC which was or is incurred solely in connection with securitization of
Customer Receivables in the ordinary course of business consistent with past
practice and (h) any Lien permitted by the covenant "Limitation on Liens."
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LIMITATION ON LIENS
The Indenture provides that HPSC will not, and will not permit any of its
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any of their respective Non-Receivable Assets, whether now
owned or hereinafter acquired, securing any Funded Recourse Debt of HPSC unless
the Notes are equally and ratably secured; PROVIDED that (i) the foregoing
restrictions shall not prohibit HPSC or its Subsidiaries from incurring
Permitted Liens and (ii) if such Funded Recourse Debt is by its terms expressly
subordinate to the Notes, the Lien securing such Funded Recourse Debt shall be
subordinate and junior to the Lien securing the Notes with the same relative
priority as such subordinated Funded Recourse Debt shall have with respect to
the Notes.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture provides that HPSC will not, and will not permit any of its
Subsidiaries to, enter into any contract, agreement, arrangement or transaction
with any Affiliate (an "Affiliate Transaction") or any series of related
Affiliate Transactions, unless such Affiliate Transaction is made in good faith,
the terms of such Affiliate Transaction are fair and reasonable to HPSC or such
Subsidiary, as the case may be, and are on terms at least as favorable as the
terms which could be obtained by HPSC or such Subsidiary, as the case may be, in
a comparable transaction made on an arm's-length basis with Persons who are not
Affiliates; provided, however, that the foregoing restrictions will not apply to
Exempted Affiliate
Transactions.
Without limiting the foregoing, any Affiliate Transaction or series of
related Affiliate Transactions (i) involving consideration to either party in
excess of $2.0 million, must be evidenced by a resolution of a committee of
non-employee directors of HPSC who are disinterested with respect to such
transaction (an "Independent Committee"), set forth in an Officers' Certificate
addressed and delivered to the Trustee, certifying that (a) the terms of such
Affiliate Transaction are fair and reasonable to HPSC or such Subsidiary, as the
case may be, and no less favorable to HPSC or such Subsidiary, as the case may
be, than could have been obtained in an arm's-length transaction with a
non-Affiliate and (b) such Affiliate Transaction has been approved by a majority
of the members of an Independent Committee, and (ii) involving consideration to
either party in excess of $5.0 million must be evidenced by a resolution of an
Independent Committee in accordance with the foregoing clause (i) and, prior to
the consummation thereof, a written favorable opinion as to the fairness of such
transaction to HPSC or such Subsidiary, as the case may be, from a financial
point of view from an independent investment banking firm of national
reputation; provided, however, that the foregoing restrictions will not apply to
Exempted Affiliate Transactions.
LIMITATION ON MERGER, SALE OR CONSOLIDATION
The Indenture provides that HPSC will not, directly or indirectly,
consolidate with or merge with or into another Person or sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, unless (i) either (a) HPSC is the
continuing entity or (b) the resulting, surviving or transferee entity is a
corporation organized under the laws of the United States, any state thereof or
the District of Columbia and expressly assumes by supplemental indenture all of
the obligations of HPSC in connection with the Notes and the Indenture; (ii) no
Default or Event of Default shall exist or shall occur immediately after giving
effect on a pro forma basis to such transaction; (iii) immediately after giving
effect to such transaction on a pro forma basis, the Consolidated Net Worth of
the consolidated resulting, surviving or transferee entity is at least equal to
the Consolidated Net Worth of HPSC immediately prior to such transaction; and
(iv) immediately after giving effect to such transaction on a pro forma basis,
the consolidated resulting, surviving or transferee entity would immediately
thereafter be permitted to incur at least $1.00 of additional Funded Recourse
Debt pursuant to the Consolidated Interest Coverage Ratio set forth in the
covenant "Limitation on Incurrence of Additional Funded Recourse Debt and
Disqualified Capital Stock."
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of HPSC in accordance with the foregoing, the successor
corporation formed by such consolidation or into which
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HPSC is merged or to which such transfer is made, shall succeed to, and be
substituted for, and may exercise every right and power of, HPSC under the
Indenture with the same effect as if such successor corporation had been named
therein as HPSC, and when a successor corporation duly assumes all of the
obligations of HPSC pursuant to the Indenture and the Notes, HPSC shall be
released from the obligations under the Notes and the Indenture except with
respect to any obligations that arise from, or are related to, such transaction.
LIMITATION ON LINES OF BUSINESS
The Indenture provides that neither HPSC nor any of its Subsidiaries shall
directly or indirectly engage to any substantial extent in any line or lines of
business activity other than that which, in the reasonable good faith judgment
of the Board of Directors of HPSC, is a Related Business.
LIMITATION ON STATUS AS INVESTMENT COMPANY
The Indenture prohibits HPSC and its Subsidiaries from being required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended), or from otherwise becoming subject to
regulation as an investment company.
REPORTS
The Indenture provides that whether or not HPSC is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, HPSC shall deliver to
the Trustee and each Holder of Notes, within ten days after it is or would have
been required to file such with the Commission, annual and quarterly financial
statements substantially equivalent to financial statements that would have been
included in reports filed with the Commission, if HPSC were subject to the
requirements of Section 13 or 15(d) of the Exchange Act, including, with respect
to annual information only, a report thereon by HPSC's certified independent
public accountants as such would be required in such reports to the Commission,
and, in each case, together with management's discussion and analysis of
financial condition and results of operations which would be so required. In
addition, whether or not required by the rules and regulations of the
Commission, HPSC will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such a
filing).
EVENTS OF DEFAULT AND REMEDIES
The Indenture defines an Event of Default as (i) the failure by HPSC to pay
any installment of interest on the Notes as and when the same becomes due and
payable and the continuance of any such failure for 15 days, (ii) the failure by
HPSC to pay all or any part of the principal of, or premium, if any, on the
Notes when and as the same becomes due and payable at maturity, upon redemption
or repurchase, by acceleration or otherwise, including, without limitation,
payment of the Change of Control Purchase Price, (iii) the failure by HPSC to
comply with the provisions described under the covenant "Limitation on Merger,
Sale or Consolidation," (iv) the failure by HPSC to observe or perform any other
covenant or agreement contained in the Notes or the Indenture and, subject to
certain exceptions, the continuance of such failure for a period of 30 days
after written notice is given to HPSC by the Trustee or to HPSC and the Trustee
by the Holders of at least 25% in aggregate principal amount of the Notes
outstanding, (v) certain events of bankruptcy, insolvency or reorganization in
respect of HPSC or any of its Subsidiaries, (vi) a default in any Indebtedness
of HPSC or any of its Subsidiaries with an aggregate principal amount in excess
of $1 million (a) resulting from the failure to pay principal of, premium, if
any, or interest on such Indebtedness prior to the expiration of the grace
period provided in such Indebtedness or (b) as a result of which the maturity of
such Indebtedness has been accelerated prior to its stated maturity, or (vii)
the failure by HPSC or any of its Subsidiaries to pay final judgments
aggregating in excess of $1.0 million if (A) any creditor has commenced an
enforcement proceeding with respect to such final judgements or (B) such final
judgments remain undischarged for a period (during which execution shall not be
effectively stayed) of 30 days after their entry.
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If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (vi) above relating to HPSC or any Subsidiary), then
in every such case, unless the principal of all of the Notes shall have already
become due and payable, either the Trustee or the Holders of 25% in aggregate
principal amount of the Notes then outstanding, by notice in writing to HPSC
(and to the Trustee if given by Holders), may declare all principal and accrued
interest thereon to be due and payable immediately. If an Event of Default
specified in clause (v) above relating to HPSC or any Subsidiary occurs, all
principal and accrued interest thereon will be immediately due and payable on
all outstanding Notes without any declaration or other act on the part of
Trustee or the Holders. Holders of a majority in aggregate principal amount of
Notes generally are authorized to rescind such acceleration if all existing
Events of Default (other than the non-payment of the principal of, premium, if
any, and interest on the Notes which have become due solely by such
acceleration) have been cured or waived, except a default with respect to any
provision which cannot be modified or amended by majority approval.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any default, except a default
in the payment of principal of, premium on, or interest on any Note not yet
cured or a default with respect to any covenant or provision which cannot be
modified or amended without the consent of the Holder of each outstanding Note
affected. Subject to the provisions of the Indenture relating to the duties of
the Trustee, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request, order or direction of any
of the Holders, unless such Holders have offered to the Trustee reasonable
security or indemnity. Subject to all provisions of the Indenture and applicable
law, the Holders of a majority in aggregate principal amount of the Notes at the
time outstanding will have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture provides that HPSC may, at its option and at any time, elect
to have its obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that HPSC shall be deemed to have paid
and discharged the entire Indebtedness represented, and the Indenture shall
cease to be of further effect as to all outstanding Notes, except as to (i)
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due from the trust
funds described in the following paragraph; (ii) HPSC's obligations with respect
to such Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes, and the maintenance of an office or
agency for payment and money for security payments held in trust; (iii) the
rights, powers, trust, duties, and immunities of the Trustee, and HPSC's
obligations in connection therewith; and (iv) the Legal Defeasance and Covenant
Defeasance (as defined) provisions of the Indenture. In addition, HPSC may, at
its option and at any time, elect to have the obligations of HPSC released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described in the
Indenture under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
HPSC must irrevocably deposit with the Trustee, in trust, for the benefit of the
Holders of the Notes, U.S. legal tender, noncallable government securities or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on such Notes on the stated date for
payment thereof or on the redemption date of such principal or installment of
principal of, premium, if any, or interest on such Notes, and the Holders of
Notes must have a valid, perfected, first priority security interest in such
trust; (ii) in the case of Legal Defeasance, HPSC shall have delivered to the
Trustee an opinion of counsel in the U.S. reasonably acceptable to the Trustee
confirming that (A) HPSC has received from, or there has been published by the
Internal Revenue Service, a ruling or (B) since the date of the Indenture, there
has been a change in the applicable Federal
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income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of such Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Legal Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, HPSC shall have delivered to the Trustee an opinion of counsel in
the U.S. reasonably acceptable to such Trustee confirming that the Holders of
such Notes will not recognize income, gain or loss for Federal income tax
purposes as a result of such Covenant Defeasance and will be subject to Federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default shall have occurred and be continuing on the date of
such deposit or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under the Indenture
or any other material agreement or instrument to which HPSC or any of its
Subsidiaries is a party or by which any of them is bound; (vi) HPSC shall have
delivered to the Trustee an Officers' Certificate stating that the deposit was
not made by HPSC with the intent of preferring the Holders of such Notes over
any other creditors of HPSC or with the intent of defeating, hindering, delaying
or defrauding any other creditors of HPSC or others; and (vii) HPSC shall have
delivered to the Trustee an Officers' Certificate and an opinion of counsel,
each stating that the conditions precedent provided for in, in the case of the
Officers' Certificate, (i) through (vi) and, in the case of the opinion of
counsel, clauses (i) (with respect to the validity and perfection of the
security interest), (ii) (if applicable), (iii) and (v) of this paragraph have
been complied with. The Revolver Agreement prohibits the Company from making the
payments required for defeasance without the consent of the holders of 66 2/3%
of the outstanding principal amount under the Revolver.
AMENDMENTS AND SUPPLEMENTS
The Indenture contains provisions permitting HPSC and the Trustee to enter
into a supplemental indenture for certain limited purposes without the consent
of the Holders. With the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding, HPSC and the
Trustee are permitted to amend or supplement the Indenture or any supplemental
indenture or modify the rights of the Holders; provided that no such
modification may, without the consent of each Holder affected thereby: (i)
change the Stated Maturity of or the Change of Control Purchase Date on any
Note, or reduce the principal amount thereof or the rate (or extend the time for
payment) of interest thereon or any premium payable upon the redemption thereof,
or change the place of payment where, or the coin or currency in which, any Note
or any premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the Stated
Maturity thereof (or, in the case of redemption, on or after the Redemption
Date), or reduce the Change of Control Purchase Price or alter the redemption
provisions or the provisions under the covenants "Repurchase of Notes at the
Option of the Holder Upon a Change of Control" or "Repurchase of Notes Upon
Death of Holder" in a manner adverse to the Holders, (ii) make a change that
would adversely affect the contractual ranking of the Notes, (iii) reduce the
percentage in principal amount of the outstanding Notes, the consent of whose
Holders is required for any such amendment, supplemental indenture or waiver
provided for in the Indenture or (iv) modify any of the waiver provisions,
except to increase any required percentage or to provide that certain other
provisions of the Indenture cannot be modified or waived without the consent of
the Holder of each outstanding Note affected thereby; PROVIDED that no such
amendment or supplement to the subordination provisions of the Indenture, or
indenture or indentures supplemental thereto which add any provision to or
change in any manner or eliminate any of the subordination provisions of the
Indenture will be effective unless such amendment, supplement or indenture or
indentures supplemental thereto has been approved in writing by the
Representative or Representatives of all Designated Secured Portfolio Debt then
outstanding.
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PAYMENTS FOR CONSENT
The Indenture prohibits HPSC and any of its Subsidiaries from, directly or
indirectly, paying or causing to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any terms or provisions of the Notes
unless such consideration is offered to be paid or agreed to be paid to all
Holders of the Notes which so consent, waive or agree to amend in the time frame
set forth in the solicitation documents relating to such consent, waiver or
agreement.
NO PERSONAL LIABILITY OF STOCKHOLDERS, OFFICERS, DIRECTORS
The Indenture provides that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of HPSC or any successor
entity shall have any personal liability in respect of the obligations of HPSC
under the Indenture or the Notes by reason of his, her or its status as such
stockholder, employee, officer or director.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by and
construed in accordance with the laws of the State of New York, as applied to
contracts made and performed within the State of New York.
CONCERNING THE TRUSTEE
State Street Bank and Trust Company is the Trustee under the Indenture.
State Street Bank and Trust Company is a Massachusetts corporation.
The Indenture contains certain limitations on the right of the Trustee,
should it be or become a creditor of HPSC, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions with HPSC; however, if it acquires any conflicting interest (as
defined), it must eliminate such conflict or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee. However, the Trustee may
refuse to follow any direction that conflicts with applicable laws or the
Indenture, is unduly prejudicial to the rights of other Holders of the Notes or
would involve the Trustee in personal liability. The Indenture will provide that
in case an Event of Default shall occur (which shall not be cured), the Trustee
will be required, in the exercise of its powers, to use the degree of care of a
prudent person in the conduct of his or her own affairs. Subject to such
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any of the Holders,
unless they shall have offered to the Trustee satisfactory indemnity.
CERTAIN DEFINITIONS
"ACFC" means American Commercial Finance Corporation, a Delaware
corporation, together with its successors and permitted assigns.
"Acquired Recourse Debt" means Funded Recourse Debt or Disqualified Capital
Stock of any Person existing at the time such Person becomes a direct or
indirect Subsidiary of HPSC or is merged or consolidated into or with HPSC or
one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any Person or
substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with HPSC. For purposes
of this definition, the term "control" means the power
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to direct the management and policies of a Person, directly or through one or
more intermediaries, whether through the ownership of voting securities, by
contract or otherwise, provided that a beneficial owner of 10% or more of the
total voting power normally entitled to vote in the election of directors,
managers or trustees, as applicable, shall for such purposes be deemed to
constitute control.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (i) the sum of the
product of (a) the number of years from the date of determination to the date or
dates of each successive scheduled principal (or redemption) payment of such
security or instrument, multiplied by (b) the amount of each such respective
principal (or redemption) payment, by (ii) the sum of all such principal (or
redemption) payments.
"Beneficial Owner" for purposes of the definition of Change of Control has
the meaning attributed to it in Rules 13d-3 and 13d-5 under the Exchange Act (as
in effect on the Issue Date), whether or not applicable, except that a "person"
shall be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in Boston, Massachusetts are
authorized or obligated by law or executive order to close.
"Capitalized Lease Obligation" means rental obligations under a lease that
are required to be capitalized for financial reporting purposes in accordance
with GAAP, and the amount of Indebtedness represented by such obligations shall
be the capitalized amount of such obligations, as determined in accordance with
GAAP.
"Capital Stock" means, (i) with respect to any Person formed as a
corporation, any and all shares, interests, rights to purchase (other than
convertible or exchangeable Indebtedness), warrants, options, participations or
other equivalents of or interests (however designated) in stock issued by that
corporation and (ii) with respect to any Person formed other than as a
corporation, any and all partnership or other equity interests of such Person.
"Cash Equivalent" means (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) maturing within one year after
the date of acquisition, (ii) time deposits, certificates of deposit, bankers'
acceptances and commercial paper issued by the parent corporation of any
domestic commercial bank of recognized standing having capital and surplus in
excess of $1 billion, (iii) commercial paper issued by any other issuer which at
the time of purchase is rated at least A-1 or the equivalent thereof by Standard
& Poor's Corporation ("S&P") or at least P-1 or the equivalent thereof by
Moody's Investors Service, Inc. ("Moody's"), (iv) securities commonly known as
"short-term bank notes" issued by any commercial bank denominated in U.S.
Dollars which at the time of purchase is rated at least A-2 or the equivalent
thereof by S&P or at least P-2 or the equivalent thereof by Moody's, (v)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (i) and (ii) above entered into
with any commercial bank meeting the qualifications specified in clause (ii)
above and (vi) shares of any money market fund, or similar fund, in each case
having assets in excess of $1 billion, which invests predominantly in
investments of the type described in clauses (i), (ii), (iii), (iv) or (v)
above.
"Consolidated EBITDA" means, with respect to any Person, for any period, the
Consolidated Net Income of such Person for such period adjusted to add thereto
(to the extent deducted from net revenues in determining Consolidated Net
Income), without duplication, the sum of consolidated income tax expense for
such period, (ii) consolidated depreciation and amortization expense for such
period, (iii) non-cash charges of such Person and its Consolidated Subsidiaries
during such period less the amount of all cash payments made during such period
to the extent such payments relate to non-cash charges that were added back in
determining Consolidated EBITDA for such period, (iv) Consolidated Interest
Expense for such period and (v) to the extent not excluded from the Consolidated
Net Income of such Person for such
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period, losses (determined on a consolidated basis in accordance with GAAP)
which are either extraordinary (as determined in accordance with GAAP) or are
unusual or nonrecurring.
"Consolidated Interest Coverage Ratio" of any Person on any date of
determination (the "Transaction Date") means the ratio, on a pro forma basis, of
(a) the aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts, whether positive or
negative, attributable to operations and businesses permanently discontinued or
disposed of) for the Reference Period to (b) the aggregate Consolidated Interest
Expense of such Person (exclusive of amounts attributable to operations and
businesses permanently discontinued or disposed of, but only to the extent that
the obligations giving rise to such Consolidated Interest Expense would no
longer be obligations contributing to such Person's Consolidated Interest
Expense subsequent to the Transaction Date) during the Reference Period;
provided, that for purposes of such calculation, (i) Acquisitions which occurred
during the Reference Period or subsequent to the Reference Period and on or
prior to the Transaction Date (including any Consolidated EBITDA associated with
such Acquisition) shall be assumed to have occurred on the first day of the
Reference Period, (ii) transactions giving rise to the need to calculate the
Consolidated Interest Coverage Ratio shall be assumed to have occurred on the
first day of the Reference Period, (iii) the incurrence or repayment of any
Indebtedness or issuance of any Disqualified Capital Stock during the Reference
Period or subsequent to the Reference Period and on or prior to the Transaction
Date (and the application of the proceeds therefrom to the extent used to
refinance or retire other Indebtedness), other than under a revolving credit or
similar facility to the extent that the proceeds were used to finance working
capital requirements in the ordinary course of business, shall be assumed to
have occurred on the first day of such Reference Period and (iv) the
Consolidated Interest Expense of such Person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
rate in effect on the Transaction Date had been the applicable rate for the
entire period, unless such Person or any of its Subsidiaries is a party to a
Hedging and Interest Swap Obligation (which shall remain in effect for the
12-month period immediately following the Transaction Date) that has the effect
of fixing the interest rate on the date of computation, in which case such rate
(whether higher or lower) shall be used.
"Consolidated Interest Expense" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of (a) interest expensed or capitalized, paid, accrued, or scheduled
to be paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person and its
Consolidated Subsidiaries during such period, including (i) original issue
discount and noncash interest payments or accruals on any Indebtedness, (ii) the
interest portion of all deferred payment obligations and (iii) all commissions,
discounts and other fees and charges owed with respect to bankers' acceptances
and letters of credit financing and currency and Hedging and Interest Swap
Obligations, in each case to the extent attributable to such period and (b) the
amount of dividends accrued or payable (other than in additional shares of such
Preferred Stock) by such Person or any of its Consolidated Subsidiaries in
respect of Preferred Stock (other than by Subsidiaries of such Person to such
Person or such Person's Consolidated Subsidiaries). For purposes of this
definition, (x) interest on a Capitalized Lease Obligation shall be deemed to
accrue at an interest rate reasonably determined by HPSC to be the rate of
interest implicit in such Capitalized Lease Obligation in accordance with GAAP,
(y) interest expense attributable to any Indebtedness represented by the
guaranty of such Person or a Subsidiary of such Person of an obligation of
another Person shall be deemed to be the interest expense attributable to the
Indebtedness guaranteed, and (z) dividends in respect of Preferred Stock shall
be deemed to be an amount equal to the actual dividends paid divided by one
minus the applicable actual combined Federal, state, local and foreign income
tax rate of HPSC and its Consolidated Subsidiaries (expressed as a decimal).
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication): (a) net gains (but not net losses) from the
sale, lease, transfer or other disposition of property or assets not in the
ordinary course of business; (b) net gains (but not net losses)
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which are either extraordinary (as determined in accordance with GAAP) or are
either unusual or nonrecurring, (c) the net income, if positive, of any other
Person accounted for by the equity method of accounting, except to the extent of
the amount of any dividends or distributions actually paid in cash to such
Person or a Consolidated Subsidiary of such Person during such period, but in
any case not in excess of such Person's PRO RATA share of such Person's net
income for such period, (d) the net income, if positive, of any Person acquired
in a pooling-of-interests transaction for any period prior to the date of such
acquisition, (e) the net income, if positive, of any of such Person's
Consolidated Subsidiaries in the event and solely to the extent that the
declaration or payment of dividends or similar distributions is not at the time
permitted by operation of the terms of its charter or bylaws or any other
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Consolidated Subsidiary, (f) all gains (but not
losses) from currency exchange transactions not in the ordinary course of
business consistent with past practice, and (g) any non-cash expense determined
in accordance with GAAP in connection with a transaction between the Company and
the ESOP.
"Consolidated Net Worth" of any Person at any date means the aggregate
consolidated stockholders' equity of such Person (plus amounts of equity
attributable to Preferred Stock) and its Consolidated Subsidiaries, as would be
shown on the consolidated balance sheet of such Person prepared in accordance
with GAAP, adjusted to exclude (to the extent included in calculating such
equity), (a) the amount of any such stockholders' equity attributable to
Disqualified Capital Stock or treasury stock of such Person and its Consolidated
Subsidiaries, (b) all upward revaluations and other write-ups in the book value
of any asset of such Person or a Consolidated Subsidiary of such Person
subsequent to the Issue Date and (c) all investments in Subsidiaries that are
not Consolidated Subsidiaries and in Persons that are not Subsidiaries.
"Consolidated Subsidiary" means, for any Person, each Subsidiary of such
Person (whether now existing or hereafter created or acquired) the financial
statements of which are consolidated for financial statement reporting purposes
with the financial statements of such Person in accordance with GAAP.
"Customer" means any Person for whom HPSC or any of its Subsidiaries
finances property, equipment, practice acquisition, goods, leasehold
improvements or working capital requirements.
"Customer Receivable" means any obligation of any kind or nature, however
denominated, to HPSC or any of its Subsidiaries (i) incurred by Customers in the
ordinary course of the respective business of HPSC and its Subsidiaries or (ii)
arising from the purchase or acquisition by HPSC or any of its Subsidiaries of
any lease, promissory note, account receivable, loan or similar financial
arrangement, or any right or asset reasonably related to any of the foregoing.
"Designated Secured Portfolio Debt" means (a) the Indebtedness under the
Revolver Agreement and (b) any other Secured Portfolio Debt which (i) at the
date of determination has an aggregate principal amount outstanding of, or under
which at the date of determination the holders thereof are committed to lend up
to, at least $10,000,000 and (ii) is specifically designated by HPSC in the
instrument governing such Secured Portfolio Debt as "Designated Secured
Portfolio Debt" for purposes of the Indenture.
"Disqualified Capital Stock" means (a) except as set forth in (b), with
respect to any Person, Capital Stock of such Person that, by its terms or by the
terms of any security into which it is then convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time would
be, required to be redeemed or repurchased (including at the option of the
holder thereof) by such Person or any of its Subsidiaries, in whole or in part,
on or prior to the Stated Maturity of the Notes and (b) with respect to any
Subsidiary of any Person (including with respect to any Subsidiary of HPSC), any
Capital Stock of such Subsidiary other than any common stock with no preference,
privileges, or redemption or repayment provisions.
"ESOP" means, collectively, the HPSC, Inc. Employee Stock Ownership Plan and
the HPSC, Inc. Supplemental Employee Stock Ownership Plan, and any successor
employee stock ownership plans having terms similar to the foregoing plans, as
amended from time to time by a resolution of the Board of Directors of HPSC or a
duly authorized committee thereof.
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"Exempted Affiliate Transaction" means (a) transactions solely between HPSC
and any of its Wholly-Owned Subsidiaries or solely among Wholly-Owned
Subsidiaries of HPSC, (b) transactions permitted under the terms of the covenant
"Limitation on Restricted Payments", (c) customary employee compensation and
retirement arrangements approved by a majority of independent (as to such
transactions) members of the Board of Directors of HPSC, (d) reasonable fees and
compensation paid to, and indemnities to, and directors and officers and
ERISA-based fiduciary liability insurance provided on behalf of, officers,
directors, agents or employees of HPSC or any of its Subsidiaries or the ESOP or
any trustee thereof, in each case in the ordinary course of business and as
determined in good faith by the Board of Directors of HPSC and (e) any guarantee
by HPSC or any of its Subsidiaries of any Indebtedness of HPSC and/or any
Wholly-Owned Subsidiary of HPSC (but not of any other Person).
"Funded Recourse Debt" means, without duplication, any Indebtedness of HPSC
or any Subsidiary of HPSC which by its terms matures at or is extendable or
renewable at the sole option of the obligor without requiring the consent of the
obligee to a date more then one year after the date of the creation or
incurrence of such obligation; provided, however, that Funded Recourse Debt
shall not include any Non-Recourse Indebtedness of HPSC or any Subsidiary of
HPSC.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession as in effect on the Issue Date.
"Hedging and Interest Swap Obligations" means, with respect to any Person,
the obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Indebtedness" of any Person means, without duplication; (a) all liabilities
and obligations, contingent or otherwise, of any such Person, (i) in respect of
borrowed money (whether or not the recourse of the lender is to the whole of the
assets of such Person or only to a portion thereof), (ii) evidenced by bonds,
notes, debentures or similar instruments, (iii) representing the balance
deferred and unpaid of the purchase price of any property or services, except
(other than accounts payable or other obligations to trade creditors which have
remained unpaid for greater than 90 days past their original due date, unless
contested in good faith) those incurred in the ordinary course of its business
that would constitute ordinarily a trade payable to trade creditors, (iv)
evidenced by bankers' acceptances or similar instruments issued or accepted by
banks, (v) for the payment of money relating to a Capitalized Lease Obligation,
or (vi) evidenced by a letter of credit or a reimbursement obligation of such
Person with respect to any letter of credit; (b) all net obligations of such
Person under Hedging and Interest Swap Obligations; (c) all liabilities and
obligations of others of the kind described in the preceding clauses (a) or (b)
that such Person has guaranteed or that is otherwise its legal liability or
which are secured by any assets or property of such Person; and (d) all
immediately enforceable obligations to purchase, redeem or acquire any Capital
Stock of such Person (other than, in the case of HPSC or any of its
Subsidiaries, obligations under the Restricted Stock Plans or the Stock Option
Plans).
"Investment" by any Person in any other Person means (without duplication);
(a) the acquisition (whether by purchase, merger, consolidation or otherwise) by
such Person (whether for cash, property, services, securities or otherwise) of
Capital Stock, bonds, notes, debentures, partnership or other ownership
interests or other securities, including any options or warrants, of such other
Person or any agreement to make any such acquisition; (b) the making by such
Person of any deposit with, or advance, loan or other extension of credit to,
such other Person (including the purchase of property from another Person
subject to an understanding or agreement, contingent or otherwise, to resell
such property to such other Person) or any commitment to make any such advance,
loan or extension (but excluding accounts receivable or deposits arising in the
ordinary course of business); (c) other than guarantees of Indebtedness of HPSC
or any Subsidiary to the extent permitted by the covenant "Limitation on
Incurrence of Additional Funded
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Recourse Debt and Disqualified Capital Stock," the entering into by such Person
of any guarantee of, or other credit support or contingent obligation with
respect to, Indebtedness or other liability of such other Person; and (d) the
making of any capital contribution by such Person to such other Person.
"Issue Date" means the date of first issuance of the Notes under the
Indenture.
"Net Cash Proceeds" means the aggregate amount of Cash and Cash Equivalents
received by HPSC in the case of a sale of Qualified Capital Stock, plus in the
case of any issuance of Qualified Capital Stock by HPSC upon any exercise,
exchange or conversion of securities (including options, warrants, rights and
convertible or exchangeable debt) of HPSC that were issued for cash on or after
the Issue Date, the amount of cash originally received by HPSC upon the issuance
of such securities (including options, warrants, rights and convertible or
exchangeable debt) less, in each case, the sum of all payments, fees,
commissions and reasonable and customary expenses (including, without
limitation, the fees and expenses of legal counsel and investment banking fees
and expenses) incurred in connection with such sale of Qualified Capital Stock.
"Non-Receivable Asset" means any asset, property or right of HPSC or any of
its Subsidiaries, other than any Customer Receivable, or asset related to such
Customer Receivable, such as inventory, records, intellectual property and
proceeds of Customer Receivables.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness (i) as to which neither HPSC nor any of its Subsidiaries (a)
provide credit support (including any undertaking, agreement or instrument which
would constitute Indebtedness), (b) is directly or indirectly liable or (c)
constitutes the lender and (ii) with respect to which no default would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of
HPSC or any Subsidiary to declare a default on such other Indebtedness or cause
the payment therefor to be accelerated or payable prior to its stated maturity.
"Permitted Lien" means any of the following:
(a) Liens existing on the Issue Date;
(b) Liens imposed by governmental authorities for taxes, assessments or
other charges not yet subject to penalty or which are being contested in
good faith and by appropriate proceedings, if adequate reserves with respect
thereto are maintained on the books of HPSC in accordance with GAAP;
(c) statutory Liens of carriers, warehousemen, mechanics, materialmen,
landlords, repairmen or other like Liens arising by operation of law in the
ordinary course of business provided that (i) the underlying obligations are
not overdue for a period of more than 30 days or (ii) such Liens are being
contested in good faith and by appropriate proceedings and adequate reserves
with respect thereto are maintained on the books of HPSC in accordance with
GAAP;
(d) Liens securing the performance of bids, trade contracts (other than
for borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature incurred in the
ordinary course of business;
(e) easements, rights-of-way, zoning, similar restrictions and other
similar encumbrances or title defects which, singly or in the aggregate, do
not in any case materially detract from the value of the property, subject
thereto (as such property is used by HPSC or any of its Subsidiaries) or
interfere with the ordinary conduct of the business of HPSC or any of its
Subsidiaries;
(f) Liens arising by operation of law in connection with judgments, only
to the extent, for an amount and for a period not resulting in an Event of
Default with respect thereto;
(g) pledges or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security legislation;
(h) Liens on the property or assets of a Person existing at the time
such Person becomes a Subsidiary or is merged with or into HPSC or a
Subsidiary, provided in each case that such Liens were
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in existence prior to the date of such acquisition, merger or consolidation,
were not incurred in anticipation thereof and do not extend to any other assets;
(i) Liens on property or assets existing at the time of the acquisition
thereof by HPSC or any of its Subsidiaries, provided that such Liens were in
existence prior to the date of such acquisition and were not incurred in
anticipation thereof;
(j) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse to
the Holders of the Notes than the terms of the Liens securing such
refinanced Indebtedness;
(k) Liens securing Secured Portfolio Debt;
(l) Liens securing Purchase Money Indebtedness or Capitalized Lease
Obligations permitted to be incurred under clause (c) of the definition of
"Permitted Recourse Debt;"
(m) Liens in favor of HPSC or any Subsidiary; and
(n) Liens securing the Notes.
"Permitted Recourse Debt" means any of the following:
(a) Indebtedness of HPSC evidenced by the Notes pursuant to the
Indenture up to the amounts specified therein as of the Issue Date;
(b) Indebtedness of HPSC and its Subsidiaries under the Revolver
Agreement (including any Indebtedness issued to refinance, refund or replace
such Indebtedness in whole or in part, including any extended maturity or
increase in the amount thereof);
(c) Indebtedness of HPSC and its Subsidiaries (in addition to
Indebtedness permitted by any other clause of this paragraph) in an
aggregate amount outstanding at any time (including any Indebtedness issued
to refinance, replace or refund such Indebtedness in whole or in part) of up
to $1.5 million;
(d) Refinancing Indebtedness of HPSC and its Subsidiaries incurred with
respect to any Indebtedness or Disqualified Capital Stock, as applicable,
described in clause (ii) of the proviso contained in the description of the
covenant "Limitation on Incurrence of Funded Recourse Debt and Disqualified
Capital Stock" or described in clause (e) of this definition of "Permitted
Recourse Debt";
(e) Indebtedness of HPSC owed to any Wholly-Owned Subsidiary, and
Indebtedness of any Subsidiary of HPSC owed to any other Wholly-Owned
Subsidiary or to HPSC; provided that any such obligations of HPSC owed to
any Wholly-Owned Subsidiary shall be unsecured and subordinated in all
respects to HPSC's obligations pursuant to the Notes; and, provided,
further, that if any Wholly-Owned Subsidiary ceases to be a Wholly-Owned
Subsidiary of HPSC or if HPSC or any Wholly-Owned Subsidiary transfers such
Indebtedness to any Person (other than to HPSC or another Wholly-Owned
Subsidiary), such events, in each case, shall constitute the incurrence of
such Indebtedness by HPSC or such Wholly-Owned Subsidiary, as the case may
be, at the time of such event;
(f) Indebtedness of HPSC and its Subsidiaries existing on the Issue
Date;
(g) Indebtedness of HPSC and its Subsidiaries incurred solely in respect
of bankers acceptances, letters of credit, surety bonds and performance
bonds (in each case to the extent that such incurrence does not result in
the incurrence of any obligation for the payment of borrowed money of
others) issued (i) in connection with the incurrence or refinancing of
Secured Portfolio Debt and (ii) in the ordinary course of business
consistent with past practice;
(h) Indebtedness of HPSC and its Subsidiaries represented by Hedging and
Interest Swap Obligations entered into in the ordinary course of business
consistent with past practice and related to Indebtedness of HPSC and its
Subsidiaries otherwise permitted to be incurred pursuant to the Indenture;
and
(i) Secured Portfolio Debt.
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"Purchase Money Indebtedness" means Indebtedness of HPSC or its Subsidiaries
to the extent that (i) such Indebtedness is incurred in connection with the
acquisition of specified assets and property (the "Subject Assets") for the
business of HPSC or the Subsidiaries, including Indebtedness which existed at
the time of the acquisition of such Subject Asset and was assumed in connection
therewith, and (ii) the Liens securing such Indebtedness are limited to the
Subject Asset.
"Qualified Capital Stock" means any Capital Stock of HPSC that is not
Disqualified Capital Stock.
"Qualified Exchange" means any legal defeasance, redemption, retirement,
repurchase or other acquisition of Capital Stock or Subordinated Indebtedness of
HPSC issued on or after the Issue Date with the Net Cash Proceeds received by
HPSC from the substantially concurrent (i.e., within 60 days) sale (other than
to a Subsidiary of HPSC or the ESOP) of Qualified Capital Stock or any issuance
of Qualified Capital Stock in exchange for any Capital Stock or Subordinated
Indebtedness issued on or after the Issue Date.
"Reference Period" with regard to any Person means the four full fiscal
quarters (or such lesser period during which such Person has been in existence)
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indenture.
"Refinancing Indebtedness" means Indebtedness or Disqualified Capital Stock
(a) issued in exchange for, or the proceeds from the issuance and sale of which
are used substantially concurrently to repay, redeem, defease, refund,
refinance, discharge or otherwise retire for value, in whole or in part, or (b)
constituting an amendment, modification or supplement to, or a deferral or
renewal of (each of (a) and (b) above is a "Refinancing"), any Indebtedness or
Disqualified Capital Stock in a principal amount or, in the case of Disqualified
Capital Stock, liquidation preference, not to exceed (after deduction of
reasonable and customary fees and expenses incurred in connection with the
Refinancing) the lesser of (i) the principal amount or, in the case of
Disqualified Capital Stock, liquidation preference, of the Indebtedness or
Disqualified Capital Stock so refinanced and (ii) if such Indebtedness being
refinanced was issued with an original issue discount, the accreted value
thereof (as determined in accordance with GAAP) at the time of such Refinancing;
provided, that (A) such Refinancing Indebtedness of any Subsidiary of HPSC shall
only be used to refinance outstanding Indebtedness or Disqualified Capital Stock
of such Subsidiary, (B) Refinancing Indebtedness shall (x) not have an Average
Life shorter than the Indebtedness or Disqualified Capital Stock to be so
refinanced at the time of such Refinancing and (y) in all respects, be no less
subordinated or junior, if applicable, to the rights of Holders of the Notes
than was the Indebtedness or Disqualified Capital Stock to be refinanced and (C)
such Refinancing Indebtedness shall have no installment of principal (or
redemption payment) scheduled to come due earlier than the scheduled maturity of
any installment of principal of the Indebtedness or Disqualified Capital Stock
to be so refinanced which was scheduled to come due prior to the Stated
Maturity.
"Related Business" means the business conducted by HPSC and its Subsidiaries
as of the Issue Date and any and all businesses that in the good faith judgment
of the Board of Directors of HPSC are related businesses.
"Restricted Investment" means any Investment other than:
(a) Investments in Customer Receivables;
(b) Investments in Cash Equivalents;
(c) Investments existing on the Issue Date;
(d) Investments in HPSC or a Wholly-Owned Subsidiary;
(e) Investments in any Person engaged in a Related Business if, as a
consequence of such Investment, (i) such Person becomes a Wholly-Owned
Subsidiary or (ii) such Person is merged, consolidated or amalgamated with
or into, or conveys substantially all of its assets to HPSC or a
Wholly-Owned Subsidiary;
(f) Investments consisting of loans or advances to employees of HPSC or
any of its Subsidiaries (i) for moving, entertainment, travel and other
similar expenses in the ordinary course of business not exceeding $250,000
outstanding in the aggregate at any one time or (ii) pursuant to the HPSC
Stock
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Loan Program not exceeding $400,000 (or such greater amount as may be
permitted under Federal Reserve regulations from time to time) outstanding
in the aggregate at any one time;
(g) Investments made as a result of the receipt of non-cash
consideration in connection with the sale, lease, disposal, pledge,
encumbrance or other transfer of Customer Receivables;
(h) Investments not otherwise specified in clauses (a) through (g) above
not exceeding $1 million outstanding in the aggregate at any one time; and
(i) Investments not otherwise specified in clauses (a) through (h) above
which are from time to time permitted to be made by HPSC or any of its
Subsidiaries under Section 8.3 (or any successor provision) of the Revolver
Agreement.
"Restricted Payment" means, with respect to any Person, (a) the declaration
or payment of any dividend or other distribution in respect of any Capital Stock
of such Person or any Subsidiary of such Person, (b) any payment on account of
the purchase, redemption or other acquisition or retirement for value of Capital
Stock of such Person or any Subsidiary of such Person, (c) other than with the
proceeds from the substantially concurrent (i.e., within 60 days) sale of, or in
exchange for, Refinancing Indebtedness, any purchase, redemption or other
acquisition or retirement for value of, any payment in respect of any amendment
of the terms of or any defeasance of, any Subordinated Indebtedness of such
Person or any Affiliate or Subsidiary of such Person, directly or indirectly, by
such Person or any Subsidiary of such Person prior to the scheduled maturity,
any scheduled repayment of principal, or any scheduled sinking fund payment, as
the case may be, of such Subordinated Indebtedness and (d) any Restricted
Investment by such Person; provided, however, that the term "Restricted Payment"
does not include (i) any dividend, distribution or other payment on or with
respect to, or on account of the purchase, redemption or other acquisition or
retirement for value of, Capital Stock of an issuer to the extent payable solely
in shares of Qualified Capital Stock of such issuer or (ii) any dividend,
distribution or other payment to HPSC or to any of its Wholly-Owned Subsidiaries
by HPSC or any of its Subsidiaries.
"Restricted Stock Plans" shall mean collectively, (i) HPSC's 1995 Stock
Incentive Plan and (ii) comparable plans providing for the issuance of Capital
Stock of HPSC to officers, directors and employees of HPSC and its Subsidiaries
having terms similar to the foregoing, each as amended from time to time by a
resolution of the Board of Directors of HPSC or a duly authorized committee
thereof.
"Revolver Agreement" means the credit agreement dated as of December 12,
1996, as amended on the Issue Date, by and among HPSC and ACFC, certain
financial institutions, and The First National Bank of Boston, as agent,
providing for an aggregate $95.0 million revolving credit facility, including
any related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, as such credit agreement and/or related
documents may by HPSC be amended, restated, supplemented, renewed, replaced or
otherwise modified from time to time whether or not with the same agent,
trustee, representative lenders or holders and irrespective of any changes in
the terms and conditions thereof. Without limiting the generality of the
foregoing, the term "Revolver Agreement" shall include any amendment, amendment
and restatement, renewal, extension, restructuring, supplement or modification
to any Revolver Agreement by HPSC and all refundings, refinancings and
replacements of any such Revolver Agreement by HPSC, including any agreement (i)
extending the maturity of any Indebtedness incurred thereunder or contemplated
thereby, (ii) adding or deleting borrowers or guarantors thereunder, so long as
borrowers and issuers thereunder include HPSC and its successors and assigns,
(iii) increasing the amount of Indebtedness incurred thereunder or available to
be borrowed thereunder or (iv) otherwise altering the terms and conditions
thereof.
"Savings Bank Indebtedness" of HPSC or any Subsidiary means Indebtedness to
a savings bank or other financial institution which Indebtedness is (i) created,
incurred, assumed or guaranteed by HPSC or such Subsidiary of HPSC in order to
finance one or more Customer Receivables created in the ordinary course of
business of HPSC or such Subsidiary and (ii) secured by a lien on such Customer
Receivable(s).
"Secured Portfolio Debt" of HPSC or any Subsidiary means (a) any
Indebtedness, including principal, interest (including, without limitation,
interest accruing after the commencement of any bankruptcy case or proceedings
whether or not allowed as a claim in such case or proceeding), fees, collateral
protection
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expenses and enforcement costs, of HPSC or such Subsidiary under the Revolver
Agreement, (b) Savings Bank Indebtedness and (c) any other Indebtedness of HPSC
or such Subsidiary, whether outstanding on the Issue Date or thereafter created,
incurred, assumed or guaranteed by HPSC or such Subsidiary, which Indebtedness
described in clause (c) is (i) created, incurred, assumed or guaranteed by HPSC
or such Subsidiary of HPSC in order to finance one or more Customer Receivables
created in the ordinary course of business of HPSC or such Subsidiary and (ii)
secured by a Lien on such Customer Receivable(s).
"Senior Indebtedness" of HPSC or any Subsidiary means any Indebtedness of
HPSC or such Subsidiary, whether outstanding on the Issue Date or thereafter
created, incurred, assumed or guaranteed by HPSC or such Subsidiary, other than
Indebtedness as to which the instrument creating or evidencing the same or the
assumption or guarantee thereof expressly provides that such Indebtedness is
subordinated or junior to the Notes. Notwithstanding the foregoing, however, in
no event shall Senior Indebtedness include (a) Indebtedness to any Subsidiary of
HPSC or any officer, director or employee of HPSC or any Subsidiary of HPSC or
(b) Indebtedness incurred in violation of the terms of the Indenture.
"Sinking Fund" means the method provided for in the Indenture and the Notes
of amortizing the aggregate principal amount of the Notes.
"Stated Maturity," when used with respect to any Note, means April 1, 2007.
"Stock Option Plans" shall mean collectively, (i) HPSC's 1995 Stock
Incentive Plan and (ii) comparable plans providing for the issuance of options
to purchase Capital Stock of HPSC to officers, directors and employees of HPSC
and its Subsidiaries having terms similar to the foregoing, each as amended from
time to time by a resolution of the Board of Directors of HPSC or a duly
authorized committee thereof.
"Subordinated Indebtedness" means Indebtedness of HPSC that is (i)
subordinated in right of payment to the Notes in any respect or (ii) any
Indebtedness which is expressly subordinate to Senior Indebtedness and has a
stated maturity on or after the Stated Maturity.
"Subsidiary," with respect to any Person, means (i) a corporation a majority
of whose Capital Stock with voting power, under ordinary circumstances, to elect
directors is at the time, directly or indirectly, owned by such Person, by such
Person and one or more Subsidiaries of such Person or by one or more
Subsidiaries of such Person, or (ii) any other Person (other than a corporation
described in clause (i) above) in which such Person, one or more Subsidiaries of
such Person, or such Person and one or more Subsidiaries of such Person,
directly or indirectly, at the date of determination thereof has at least
majority ownership interest. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not constitute a Subsidiary of HPSC or any of HPSC's
Subsidiaries.
"Wholly-Owned Subsidiary" means a Subsidiary of HPSC of which all of the
outstanding Capital Stock or other ownership interests shall at the time be
owned by HPSC or by one or more Wholly-Owned Subsidiaries of HPSC or by HPSC and
one or more Wholly-Owned Subsidiaries of HPSC.
BOOK-ENTRY, DELIVERY AND FORM; CERTIFICATED NOTES
The Notes will initially be issued in the form of one or more registered
notes in global form (the "Global Notes"). Each Global Note will be deposited on
the Issue Date with, or on behalf of, The Depository Trust Company ("DTC" or the
"Depository") and registered in the name of Cede & Co., as nominee of the
Depository.
DTC has advised HPSC that it is (i) a limited purpose trust company
organized under the laws of the State of New York, (ii) a member of the Federal
Reserve System, (iii) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and (iv) a "Clearing Agency" registered pursuant to
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants (collectively, the "Participants") and facilitates the clearance
and settlement of securities transactions between Participants through
electronic book-entry changes to the accounts of its Participants, thereby
eliminating the need for physical transfer and delivery of certificates. The
Depository's Participants include securities brokers and dealers, banks and
trust companies (collectively, the "Indirect Participants") that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly. Beneficial
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owners may elect to hold Notes purchased by them through the Depository. Persons
who are not Participants may beneficially own securities held by or on behalf of
the Depository only through Participants or Indirect Participants.
HPSC expects that pursuant to procedures established by the Depository (i)
upon deposit of the Global Notes, the Depository will credit the accounts of
Participants designated by the Underwriters with an interest in the Global Notes
and (ii) ownership of the Notes evidenced by the Global Notes will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depository (with respect to the interests of Participants),
the Participants and the Indirect Participants. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes or to pledge the Notes as collateral
will be limited to such extent.
So long as the Depository or its nominee is the registered owner of a Global
Note, the Depository or such nominee, as the case may be, will be considered the
sole owner or Holder of the Notes represented by the Global Note for all
purposes under the Indenture. Except as provided below, owners of beneficial
interests in a Global Note will not be entitled to have Notes represented by
such Global Note registered in their names, will not receive or be entitled to
receive physical delivery of Certificated Notes, and will not be considered the
owners or holders thereof under the Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. As a result, the ability of a person having a beneficial
interest in Notes represented by a Global Note to pledge such interest to
persons or entities that do not participate in the Depository's system or to
otherwise take actions with respect to such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Accordingly, each person owning a beneficial interest in a Global Note must
rely on the procedures of the Depository and, if such beneficial owner is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such beneficial owner owns its interest, to exercise any rights of
a Holder under the Indenture or such Global Note. HPSC understands that under
existing industry practice, in the event HPSC requests any action of Holders or
a person that is an owner of a beneficial interest in a Global Note desires to
take any action that the Depository, as the Holder of such Global Note, is
entitled to take, the Depository would authorize the Participants to take such
action and the Participants would authorize beneficial owners owning through
such Participants to take such action or would otherwise act upon the
instructions of such beneficial owners. Neither HPSC nor the Trustee will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of Notes by the Depository, or for maintaining,
supervising or reviewing any records of the Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, interest on any
Notes represented by a Global Note registered in the name of the Depository or
its nominee on the applicable record date will be payable by the Trustee to or
at the direction of the Depository or its nominee in its capacity as the
registered Holder of the Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, HPSC and the Trustee may treat the
persons in whose names the Notes, including the Global Notes, are registered as
the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither HPSC nor the Trustee has or
will have any responsibility or liability for the payment of such amounts to
beneficial owners of the Notes (including principal, premium, if any, and
interest), or to immediately credit the accounts of the relevant Participants
with such payment, in amounts proportionate to their respective holdings in
principal amount of beneficial interest in the Global Note as shown on the
records of the Depository. Payments by the Participants and the Indirect
Participants to the beneficial owners of the Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
participants or the Indirect Participants.
CERTIFICATED NOTES
If (i) HPSC notifies the Trustee in writing that the Depository is no longer
willing or able to act as a depository and HPSC is unable to locate a qualified
successor within 90 days or (ii) HPSC, at its option,
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notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the Depository of
its Global Note, Certificated Notes will be issued to each person that the
Depository identifies as the beneficial owner of the Notes represented by the
Global Note. In addition, subject to certain conditions, any person having a
beneficial interest in a Global Note may, upon request to the Trustee, exchange
such beneficial interest for Certificated Notes. Upon any such issuance, the
Trustee is required to register such Certificated Notes in the name of such
person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
Neither HPSC nor the Trustee shall be liable for any delay by the Depository
or any participant or Indirect Participant in identifying the beneficial owners
of the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from the Depository for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the Notes to be issued).
SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Notes represented
by the Global Note (including principal, premium, if any, and interest) be made
by wire transfer of immediately available funds to the accounts specified by the
Depositary or its nominee. With respect to Notes represented by Certificated
Notes, however, HPSC will make all payments of principal, premium, if any, and
interest by mailing a check to each such Holder's registered address. Secondary
trading in long-term notes and debentures of corporate issuers is generally
settled in clearing-house or next-day funds.
TRUSTEE AND REGISTRAR
The trustee and registrar for the Company's Notes is State Street Bank and
Trust Company, of Boston, Massachusetts.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The Second Amended and Restated Credit Agreement (referred to herein as the
Revolver) by and among the Company, The First National Bank of Boston,
individually and as Managing Agent, NationsBank, N.A., individually and as
Agent, and certain other lending banks (the "Banks"), contains numerous
operating and financial covenants that impose limitations on the Company's
ability to operate its business. These covenants include restrictions on
indebtedness, liens and investments of the Company; prohibitions on dividends,
mergers or consolidations and disposition of assets of the Company; requirements
relating to certain receivables, reserve and delinquency ratios; and limitations
on capital expenditures. The Revolver also permits the Banks, upon an Event of
Default by the Company (as defined in the Revolver Agreement), to declare all
amounts owed by the Company under the Revolver immediately due and payable. The
Revolver currently expires in December 1997 and provides for borrowing by the
Company of up to $95 million, approximately $40 million of which was outstanding
as of December 31, 1996. The net proceeds from the offering of the Notes will be
used by the Company to repay, in part, amounts outstanding under the Revolver.
CERTAIN NEGATIVE COVENANTS
RESTRICTIONS ON INDEBTEDNESS. The Company has covenanted and agreed that,
so long as any obligation is outstanding under the Revolver, it will not, and
will not permit any of its subsidiaries to, incur, assume or guarantee any
indebtedness other than (i) indebtedness under the Revolver, (ii) current
liabilities incurred in the ordinary course of business, (iii) taxes and other
governmental charges, (iv) subordinated debt, (v) lease obligations not
exceeding $1 million at any time outstanding, (vi) indebtedness of subsidiaries
to the Company, as long as the subsidiary has executed a guaranty in favor of
the Banks and Agent secured by a perfected first priority security interest in
all assets of the debtor subsidiary, (vii) indebtedness under the asset sales
agreements with the savings banks, subject to certain conditions, (viii)
indebtedness incurred by Bravo under the credit agreement pertaining to the
securitization facility and (ix) certain other pre-existing or ordinary course
indebtedness.
RESTRICTIONS ON LIENS. For so long as the Revolver remains outstanding, the
Company has agreed that it will not and will not permit its subsidiaries to (i)
create or incur any lien, encumbrance, mortgage, pledge, charge, restriction or
other security interest on its property or assets or the income or profits
therefrom, (ii) transfer any property or assets, or income or profits therefrom,
to pay for other indebtedness or priority obligations, (iii) acquire property or
assets upon a conditional sale or other title retention or a purchase money
security agreement, (iv) allow to remain unpaid for more than 30 days any
indebtedness that may be given priority over general creditors, or (v) sell,
assign, pledge or otherwise transfer any accounts, contract rights, general
intangibles, chattel paper or instruments, with or without recourse. However,
the Company may create or incur liens on property of the subsidiaries in favor
of the Company to secure indebtedness owed to the Company by the Subsidiaries,
liens to secure taxes and other governmental charges, liens in favor of the
Agent for the benefit of the Banks under the Revolver, liens on margin stock,
liens granted by Bravo in connection with the securitization facility, and liens
on Company assets granted to certain savings banks in connection with loans
against and sales of the Company's contract receivables.
RESTRICTIONS ON INVESTMENTS. For so long as the Revolver remains
outstanding, the Company and its subsidiaries may not permit to exist or remain
outstanding any investments other than (i) one-year, marketable direct or
guaranteed obligations of the United States, (ii) demand deposits, certificates
of deposit, bankers acceptances and time deposits of United States banks with
total assets over $1 billion, (iii) commercial paper securities rated at least
P1 by Moody's Investors Services, Inc. or A1 by Standard and Poor's or
short-term bank notes rated at least P2 or A2, (iv) investments in the Company's
subsidiaries so long as such entities remain subsidiaries, the aggregate amount
of investments made by the Company and its subsidiaries in ACFC does not exceed
$15 million in fiscal 1997 and the aggregate investment by the Company in
Credident does not exceed $100,000 in any fiscal year, (v) promissory notes
received for asset dispositions, (vi) advances to employees for moving,
entertainment, travel and similar business expenses, not to exceed $250,000 in
the aggregate at any time outstanding, (vii) investments made pursuant to the
Stock Purchase Agreement and (viii) other investments not exceeding $1 million.
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RESTRICTIONS ON CORPORATE POWERS. For so long as the Revolver remains
outstanding, the Company may not make any distributions to its shareholders,
including (i) dividends on, and purchase, redemption or other retirement of,
shares of capital stock of the Company, (ii) return of capital to its
shareholders, or (iii) any other distribution on or in respect of any shares of
any class of Company capital stock. In addition, the Company and its
subsidiaries may not be party to any merger or consolidation or asset or stock
acquisition, other than in the ordinary course of business, may not dispose of
any assets other than in the ordinary course of business, and may not transfer a
material amount of Customer Receivables (as defined in the Revolver Agreement)
without the prior written approval of the Banks. The Company also may not engage
in any sale and leaseback transaction, and may not amend, supplement or
otherwise modify the terms of any subordinated debt agreement or prepay or
repurchase any subordinated debt or indebtedness outstanding under the
securitizations with Funding I and Bravo or the asset transactions with the
savings banks listed above in "Funding Sources--Savings Bank Loans and Asset
Sales." The Company may not sell, assign or otherwise dispose of, or grant
options with respect to, the capital stock of Funding I. Neither HPSC nor ACFC
may change the character of its business or its credit policy if such change
would impair the collectibility of any outstanding financing contract.
FINANCIAL COVENANTS
The Revolver also imposes several financial and operating requirements and
limitations on the Company, including (i) maintenance of a minimum consolidated
tangible net worth; (ii) a limitation on capital expenditures of $700,000 in the
aggregate; (iii) a limitation on lease obligations of $5 million in the
aggregate; (iv) a permitted ratio of indebtedness plus security deposits
received on accounts receivable to consolidated tangible net worth plus
subordinated debt; (v) permitted reissued customer receivables as a percentage
of gross customer receivables; (vi) permitted delinquent customer receivables as
a percentage of gross customer receivables; (vii) minimum reserves as a
percentage of contractually delinquent customer receivables at the end of any
fiscal quarter; (viii) minimum allowance for doubtful accounts of both the
Company and ACFC as a percentage of net investment in leases and notes; (ix)
minimum average collections at the end of any three month period as a percentage
of billings; (x) a ratio of consolidated earnings before interest and taxes to
consolidated total interest expense; and (xi) maximum aggregate accounts
receivable by any single equipment supplier as a percentage of total accounts
receivable.
EVENTS OF DEFAULT
Events of Default by the Company under the Revolver Agreement include: (i)
failure to pay principal or interest on loans under the Revolver as it becomes
due and payable; (ii) failure to comply with covenants under the Revolver; (iii)
false representation or warranty under the Revolver; (iv) failure to pay any
obligation under any other borrowing arrangement or lease agreement which could
require acceleration of all obligations thereunder; (v) commencement of
proceedings in bankruptcy, including dissolution or liquidation; (vi)
acceleration of payment, prepayment or repurchase of debt under the
securitization arrangements with Funding I and Bravo, subject to certain
limitations; (vii) certain violations under the Employee Retirement Income
Security Act of 1974, as amended; (viii) a change of control of the Company;
(ix) any default or event of default under the Company's credit agreement with
Springfield Institution for Savings; and (x) ceasing to hold 100% of the capital
stock of ACFC.
There can be no assurance that the Company will be able to continue to
comply with all of its obligations under the Revolver. Any failure to comply
with such obligations which leads to an Event of Default under the Revolver
would have a material adverse effect on the Company's business, operating
results and financial condition. In July and August 1996, the level of
delinquencies under certain of the Company's financing transactions triggered a
payment restriction event under Funding I, which event was considered a
technical default under the previous Revolver agreement. This default
subsequently was waived by the Banks; however, a payment restriction event is
not unusual during the later stages of a static pool securitization and may
occur again before Funding I is fully paid out. The current Revolver provides
that such a payment restriction event will not constitute a default unless it
continues for at least six months. There can be no assurance that the Company
will be able to secure further waivers from the Banks in the event of a
subsequent payment restriction event that constitutes a default under the
Revolver. See "Risk Factors--Dependence on Funding Sources; Restrictive
Covenants," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Funding Sources."
80
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, Advest,
Inc. and Legg Mason Wood Walker, Incorporated (the "Underwriters"), have
severally agreed to purchase from the Company the following respective principal
amounts of Notes at face value less the underwriting discounts and commissions
set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
PRINCIPAL
UNDERWRITER AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
Advest, Inc.................................................................... $ 10,000,000
Legg Mason Wood Walker, Incorporated........................................... 10,000,000
-------------
Total...................................................................... $ 20,000,000
-------------
-------------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company, its counsel and independent
auditors. The nature of the Underwriters' obligation is that they are committed
to purchase all Notes offered hereby if any of such Notes are purchased.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public at face value as set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of %. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of % to certain other dealers. After the offering
of the Notes hereby, the offering price and other selling terms may be changed
by the Underwriters.
The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to $3,000,000
principal amount of Notes, at face value less the underwriting discounts set
forth on the cover page of this Prospectus. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the principal amount of
Notes to be purchased by it shown in the above table bears to the total
principal amount of Senior Notes offered hereby. The Company will be obligated,
pursuant to the option, to sell such Notes to the Underwriters. The Underwriters
may exercise such option only to cover over-allotments made in connection with
the sale of Notes offered hereby. If purchased, the Underwriters will offer such
additional senior notes on the same terms as those on which the $20,000,000
principal amount of Notes are being offered.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Underwriters have advised the Company that they do not intend to confirm
sales to any account over which they exercise discretionary authority.
The Company has no plans to list the Notes on any securities exchange. The
Company has been advised by each of the Underwriters that each presently intends
to make a market in the Notes, although neither is obliged to do so. Any such
market making activity may be discontinued at any time, for any reason, without
notice. If both Underwriters cease to act as a market maker for the Notes for
any reason, there can be no assurance that another firm or person will make a
market therein. There can be no assurance that an active market for the Notes
will develop, or, if developed, at what prices the Notes will trade.
LEGAL MATTERS
The validity of the Notes being offered hereby will be passed upon for the
Company by Hill & Barlow, a Professional Corporation, Boston, Massachusetts.
Certain legal matters in connection with this offering will be passed upon for
the Underwriters by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston,
Massachusetts.
81
<PAGE>
EXPERTS
The consolidated financial statements of HPSC, Inc. as of and for the year
ended December 31, 1996 included in this Prospectus have been audited by
Deloitte & Touche LLP ("Deloitte & Touche"), independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements as of December 31, 1995 and for the
fiscal years ended December 31, 1995 and December 31, 1994 included in this
Prospectus, have been so included in reliance on the report of Coopers & Lybrand
L.L.P. ("Coopers & Lybrand"), independent accountants, given on the authority of
said firm as experts in auditing and accounting.
Coopers & Lybrand resigned as independent accountants for the Company on
June 12, 1996. None of the reports of Coopers & Lybrand on the financial
statements of the Company for either of the past two fiscal years contained an
adverse opinion or a disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. During the Company's two most
recent fiscal years and the subsequent interim period preceding the resignation
of Coopers & Lybrand, there were no disagreements with Coopers & Lybrand on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Coopers & Lybrand, would have caused it to make reference to the
subject matter of the disagreement in connection with its report. None of the
reportable events listed in Item 304(a)(1)(v) of Regulation S-K occurred with
respect to the Company during the Company's two most recent fiscal years and the
subsequent interim period preceding the resignation of Coopers & Lybrand.
On June 19, 1996, the Company engaged Deloitte & Touche as its independent
accountants.
ADDITIONAL INFORMATION
The Company intends to furnish to the holders of the Notes unaudited
quarterly financial statements and annual reports containing consolidated
financial statements audited by an independent accounting firm.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the Notes offered hereby. This Prospectus, which constitutes
part of the Registration Statement, omits certain of the information contained
in the Registration Statement and the exhibits and schedules thereto on file
with the Commission pursuant to the Securities Act and the rules and regulations
of the Commission thereunder.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Commission (collectively, "Exchange Act Filings").
The Registration Statement, including exhibits and schedules thereto, as
well as the Company's Exchange Act Filings, may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, DC 20549, and at the Commission's regional offices
at Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be obtained
at prescribed rates from the Public Reference Section of the Commission at its
principal office in Washington, D.C. The Commission also maintains a Web site on
the Internet that contains reports, proxy and information statements and other
information regarding registrants such as the Company that file electronically
with the Commission. The address of such site is: http://www.sec.gov. Statements
contained in this Prospectus as to the contents of any contract or other
document are not necessarily complete and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
82
<PAGE>
HPSC, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Reports of Independent Accountants......................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............................................... F-4
Consolidated Statements of Operations for Each of the Years Ended December 31, 1996, 1995 and 1994......... F-5
Consolidated Statements of Changes in Stockholders' Equity................................................. F-6
Consolidated Statements of Cash Flows for Each of the Years Ended December 31, 1996, 1995 and 1994......... F-7
Notes to Consolidated Financial Statements................................................................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of HPSC, Inc.:
We have audited the accompanying consolidated balance sheet of HPSC, Inc.
and subsidiaries as of December 31, 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of HPSC, Inc. and
subsidiaries as of December 31, 1996, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
February 28, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of HPSC, Inc.:
We have audited the accompanying consolidated balance sheet of HPSC, Inc. as
of December 31, 1995, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the two years in the
period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of HPSC, Inc. as
of December 31, 1995, and the consolidated results of its operations and its
cash flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note A to the financial statements, the Company adopted
Statement of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan," as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan--Income
Recognition and Disclosure," effective January 1, 1995.
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 25, 1996
F-3
<PAGE>
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents............................................................ $ 2,176 $ 861
Restricted Cash...................................................................... 6,769 5,610
Investment in Leases and Notes:
Lease contracts and notes receivable due in installments........................... 160,049 128,687
Notes receivable................................................................... 18,688 12,002
Estimated residual value of equipment at end of lease term......................... 9,259 9,206
Less unearned income............................................................... (34,482) (25,875)
Less allowance for losses.......................................................... (4,082) (4,482)
Less security deposits............................................................. (4,522) (3,427)
Deferred origination costs......................................................... 4,312 3,805
------------ ------------
Net investment in leases and notes............................................. 149,222 119,916
------------ ------------
Other Assets:
Other assets....................................................................... 3,847 3,096
Refundable income taxes............................................................ 1,203 1,088
------------ ------------
Total Assets................................................................... $ 163,217 $ 130,571
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving Credit Borrowings.......................................................... $ 40,000 39,000
Senior Notes......................................................................... 76,737 49,523
Accounts Payable and Accrued Liabilities............................................. 5,916 3,537
Accrued Interest..................................................................... 450 339
Estimated Recourse Liabilities....................................................... 480 30
Income Taxes:
Currently payable.................................................................. 300 368
Deferred........................................................................... 5,002 4,613
------------ ------------
Total Liabilities.............................................................. $ 128,885 97,410
------------ ------------
Stockholders' Equity:
Preferred Stock, $1.00 par value; authorized 5,000,000 shares;
Issued--None..................................................................... -- --
Common Stock, $.01 par value; 15,000,000 shares authorized; and issued 4,786,530 in
1996 and 1995.................................................................... 48 48
Treasury Stock (at cost) 128,600 shares in 1996 and 100,000 in 1995................ (587) (410)
Additional paid-in capital......................................................... 12,305 11,311
Retained earnings.................................................................. 25,351 24,476
------------ ------------
37,117 35,425
Less: Deferred compensation........................................................ (2,590) (2,066)
Notes receivable from officers and employees................................... (195) (198)
------------ ------------
Total Stockholders' Equity..................................................... 34,332 33,161
------------ ------------
Total Liabilities and Stockholder's Equity..................................... $ 163,217 $ 130,571
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1996 1995 1994
---------- ---------- ----------
Revenues
Earned income on leases and notes........................................ $ 17,515 $ 12,871 $ 11,630
Gain on sales of leases and notes........................................ 1,572 53 --
Provision for losses..................................................... (1,564) (1,296) (754)
---------- ---------- ----------
Net Revenues......................................................... 17,523 11,628 10,876
Operating and Other (Income) Expenses
Selling, general and administrative...................................... 8,059 5,984 6,970
Interest expense......................................................... 8,146 5,339 3,514
Interest income on cash balances......................................... (261) (375) (358)
Loss on write-off of foreign currency translation adjustment............. -- 601 --
---------- ---------- ----------
Income before Income Taxes................................................. 1,579 79 750
Provision for Income Taxes................................................. 704 204 300
---------- ---------- ----------
Net Income (Loss).......................................................... $ 875 $ (125) $ 450
---------- ---------- ----------
---------- ---------- ----------
Net Income (Loss) per Share................................................ $ .22 $ (.03) $ .09
---------- ---------- ----------
---------- ---------- ----------
Shares Used to Compute Net Income (Loss) per Share......................... 4,067,236 3,881,361 4,989,391
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE CUMULATIVE
FROM FOREIGN
COMMON STOCK ADDITIONAL OFFICERS CURRENCY
-------------------- PAID-IN RETAINED TREASURY DEFERRED AND TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCK COMPENSATION EMPLOYEES ADJUSTMENT
---------- ------- -------- -------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 25,
1993........................ 4,923,571 $ 49 $13,645 $24,151 $ -- $-- $-- $(224)
Issuance of Common Stock...... 824 -- 3 -- -- -- -- --
Net Income.................... -- -- -- 450 -- -- -- --
Purchase of Treasury Stock.... -- -- -- -- (5,023) -- -- --
Issuance of Common Stock to
ESOP & SESOP................ 650,000 7 2,268 -- -- (2,275) -- --
ESOP Compensation............. -- -- -- -- -- 99 -- --
Foreign currency translation
adjustments................. -- -- -- -- -- -- -- (328)
---------- ------- -------- -------- -------- ------------ ----- -----
Balance at December 31,
1994........................ 5,574,395 56 15,916 24,601 (5,023) (2,176) -- (552)
Issuance of Common Stock...... 317 -- -- -- -- -- -- --
Net Loss...................... -- -- -- (125) -- -- -- --
Retirement of Treasury
Stock....................... (1,125,182) (12) (4,601) -- 4,613 -- -- --
Restricted Stock Awards....... 337,000 4 (4) -- -- -- -- --
ESOP Compensation............. -- -- -- -- -- 110 -- --
Foreign currency translation
adjustments................. -- -- -- -- -- -- -- (49)
Recognized in current period
upon liquidation of foreign
subsidiary.................. -- -- -- -- -- -- -- 601
Increase in Notes Receivable
from Officers and
Employees................... -- -- -- -- -- -- (198) --
---------- ------- -------- -------- -------- ------------ ----- -----
Balance at December 31,1995... 4,786,530 48 11,311 24,476 (410) (2,066) (198) --
Net Income.................... -- -- -- 875 -- -- -- --
Restricted Stock Awards....... -- -- 994 -- -- (994) -- --
Purchase of Treasury Stock.... -- -- -- -- (177) -- -- --
Restricted Stock
Compensation................ -- -- 365 --
ESOP Compensation............. -- -- -- -- -- 105 -- --
Decrease in Notes Receivable
from Officers and
Employees................... -- -- -- -- -- -- 3 --
---------- ------- -------- -------- -------- ------------ ----- -----
Balance at December 31,
1996........................ 4,786,530 $ 48 $12,305 $25,351 $ (587) $(2,590) $(195) $--
---------- ------- -------- -------- -------- ------------ ----- -----
---------- ------- -------- -------- -------- ------------ ----- -----
<CAPTION>
TOTAL
--------
<S> <C>
Balance at December 25,
1993........................ $37,621
Issuance of Common Stock...... 3
Net Income.................... 450
Purchase of Treasury Stock.... (5,023)
Issuance of Common Stock to
ESOP & SESOP................ --
ESOP Compensation............. 99
Foreign currency translation
adjustments................. (328)
--------
Balance at December 31,
1994........................ 32,822
Issuance of Common Stock...... --
Net Loss...................... (125)
Retirement of Treasury
Stock....................... --
Restricted Stock Awards....... --
ESOP Compensation............. 110
Foreign currency translation
adjustments................. (49)
Recognized in current period
upon liquidation of foreign
subsidiary.................. 601
Increase in Notes Receivable
from Officers and
Employees................... (198)
--------
Balance at December 31,1995... 33,161
Net Income.................... 875
Restricted Stock Awards....... --
Purchase of Treasury Stock.... (177)
Restricted Stock
Compensation................ 365
ESOP Compensation............. 105
Decrease in Notes Receivable
from Officers and
Employees................... 3
--------
Balance at December 31,
1996........................ $34,332
--------
--------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income (loss)........................................................... $ 875 $ (125) $ 450
Adjustments to reconcile net income to net cash provided by operating
activities:
Foreign currency translation adjustments.................................. -- 601 --
Depreciation and amortization............................................. 2,862 2,340 1,872
Deferred income taxes..................................................... 389 (926) (1,093)
Restricted stock compensation............................................. 365 -- --
Gain on sale of receivables............................................... (1,572) (53) --
Provision for losses on lease contracts and notes receivable.............. 1,564 1,296 754
Increase (decrease) in accrued interest................................... 111 46 (3,141)
Increase (decrease) in accounts payable and accrued liabilities........... 2,379 1,087 (2,898)
(Decrease) increase in accrued income taxes............................... (68) 348 (290)
Decrease (increase) in refundable income taxes............................ (115) 358 827
(Increase) decrease in other assets....................................... (110) (458) 921
---------- ---------- ----------
Cash provided by (used in) operating activities............................. 6,680 4,514 (2,598)
---------- ---------- ----------
Cash Flows from Investing Activities
Origination of lease contracts and notes receivable due in installments..... (90,729) (63,945) (29,710)
Portfolio receipts, net of amounts included in income....................... 38,445 37,654 43,727
Proceeds from sales of lease contracts and notes receivable due in
installments.............................................................. 24,344 1,500 6,958
Net increase in notes receivable............................................ (6,730) (7,570) (4,370)
Net increase (decrease) in security deposits................................ 1,095 788 (221)
Net increase in other assets................................................ (834) (844) (700)
Loans to employees.......................................................... 3 (198) (9)
---------- ---------- ----------
Cash (used in) provided by investing activities............................. (34,406) (32,615) 15,675
---------- ---------- ----------
Cash Flows from Financing Activities
Repayment of senior notes and subordinated debt............................. (26,019) (23,385) (98,976)
Proceeds from issuance of senior notes, net of debt issue costs............. 52,973 28,422 69,033
Repayment of notes payable-treasury stock purchase.......................... -- (4,500) --
Net proceeds from demand and revolving notes payable to banks............... 1,000 25,570 9,370
Purchase of treasury stock.................................................. (177) -- (523)
Increase (decrease) in restricted cash...................................... 1,159 2,326 (7,936)
Proceeds from issuance of common stock...................................... -- -- 3
Repayment of employee stock ownership plan promissory note.................. 105 110 99
Other....................................................................... -- -- (328)
---------- ---------- ----------
Cash provided by (used in) financing activities............................. 29,041 28,543 (29,258)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 1,315 442 (16,181)
Cash and cash equivalents at beginning of year................................ 861 419 16,600
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 2,176 $ 861 $ 419
---------- ---------- ----------
---------- ---------- ----------
Supplemental disclosures of cash flow information:
Interest paid............................................................... $ 7,719 $ 4,510 $ 6,630
Income taxes paid........................................................... 765 1,423 2,018
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS--HPSC, Inc. ("HPSC") and its consolidated subsidiaries (the
"Company") provide credit primarily to healthcare professionals throughout the
United States.
The Company leases dental, ophthalmic, chiropractic, veterinary, podiatry
and other medical equipment utilized in the healthcare professions. The Company
does not carry any inventory. The Company acquires the financed equipment from
vendors at their customary selling price to other customers. All leases are
classified as direct financing leases.
The Company also finances the acquisition of healthcare practices by
healthcare professionals and provides financing on leasehold improvements,
office furniture and equipment and certain other costs involved in opening or
maintaining a healthcare provider's office. In connection with sales of leases
and notes receivable, the Company may retain the rights to service the assets
sold and receive a service fee in connection with such activities. In addition,
through its wholly-owned subsidiary, ACFC, the Company provides asset-based
financing to commercial enterprises.
CONSOLIDATION--The accompanying consolidated financial statements include
HPSC, Inc. and the following wholly-owned subsidiaries: HPSC Funding Corp. I
("Funding I"), a special purpose corporation formed in connection with a
securitization transaction in 1993; Credident, Inc. ("Credident") the Company's
Canadian subsidiary; American Commercial Finance Corporation ("ACFC"), an
asset-based lender focused primarily on accounts receivable and inventory
financing at variable rates; and HPSC Bravo Funding Corp. ("Bravo"), a special
purpose corporation formed in connection with securitizations in 1995 and 1996.
All intercompany transactions have been eliminated.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. A significant area requiring the use of management estimates
is the allowance for losses on lease and notes receivable, including the
recourse provisions related to lease and note receivables sold. Actual results
could differ from those estimates.
REVENUE RECOGNITION--The Company finances equipment only after a customer's
credit has been approved and a financing agreement for the transaction has been
executed. The Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses. When a transaction is
initially activated, the Company records the minimum payments and the estimated
residual value, if any, associated with the transaction. An amount equal to the
sum of the payments due plus residual less the cost of the transaction is
recorded as unearned income. The unearned income is recognized as revenue over
the life of the transaction using the interest method in essentially all cases.
Recognition of revenue on these assets is suspended no later than when a
transaction becomes 145 days delinquent. Also included in earned income are fee
income from service charges on portfolio accounts, gains and losses on residual
transactions plus miscellaneous income items net of initial direct cost
amortization.
SALES OF LEASES AND NOTES RECEIVABLE--The Company sells leases and notes
receivable to third parties. Gains on sales of leases and notes are recognized
at the time of the sale in an amount equal to the present value of the
anticipated future cash flows, net of initial direct costs, expenses and
estimated credit losses under certain recourse provisions of the related sale
agreements. Generally, the Company retains the servicing of lease receivables
sold. Servicing fees specified in the sale agreements, which approximate
F-8
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
market-rate servicing fees, are deferred and recognized as revenue in proportion
to the estimated periodic servicing costs.
DEFERRED ORIGINATION COSTS--The Company capitalizes initial direct costs
that relate to the origination of leases and notes receivable. These initial
direct costs are comprised of certain specific activities related to processing
requests for financing. Deferred origination costs are amortized over the life
of the receivable as an adjustment of yield.
ALLOWANCE FOR LOSSES--The Company records an allowance for losses in its
portfolio. The extent of the allowance is based on a specific analysis of
potential loss accounts, delinquencies and historical loss experiences. An
account is specifically reserved for or written off when deemed uncollectible.
The Company occasionally repossesses equipment from lessees who have
defaulted on their obligations to the Company. There was no such equipment held
for sale at December 31, 1996 or December 31, 1995.
Effective January 1, 1995, the Company adopted prospectively, SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure." These standards, which do not apply to the Company's lease
contracts, apply to the Company's practice acquisition and asset-based loans,
the two major risk classifications used to aggregate loans for purposes of SFAS
No. 114. The standards require that a loan be classified and accounted for as an
impaired loan when it is probable that the Company will be unable to collect all
principal and interest due on the loan in accordance with the loan's original
contractual terms.
Impaired practice acquisition and asset-based loans are valued based on the
present value of expected future cash flows, using the interest rate in effect
at the time the loan was placed on nonaccrual status. A loan's observable market
value or collateral value may be used as an alternative valuation technique.
Impairment exists when the recorded investment in a loan exceeds the value of
the loan measured using the above-mentioned valuation techniques. Such
impairment is recognized as a valuation reserve, which is included as a part of
the Company's allowance for losses. The Company had no impaired loans at
December 31, 1996 or 1995.
ACCOUNTING FOR STOCK-BASED COMPENSATION--In October 1995, the Financial
Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for
Stock-Based Compensation." This standard was effective January 1, 1996. The
standard encourages, but does not require, adoption of a fair value-based
accounting method for stock-based compensation arrangements and would supersede
the provisions of Accounting Principles Board Opinion No. 25 (APB No. 25),
"Accounting for Stock Issued to Employees." An entity may continue to apply APB
No. 25 provided the entity discloses its pro forma net income and earnings per
share as if the fair value-based method had been applied in measuring
compensation cost. The Company continues to apply APB No. 25 and has disclosed
the pro forma information required by SFAS No. 123.
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND
EXTINGUISHMENTS OF LIABILITIES--Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (SFAS No. 125), effective for the Company on
January 1997, provides new methods of accounting and reporting for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS No. 127
has delayed the effective date of certain sections of SFAS No. 125 until January
1, 1998. The Company's adoption of the appropriate sections of SFAS No. 125 is
not expected to have a material effect on the Company's financial position or
results of operations.
F-9
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES--The Company accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Current tax liabilities or assets are
recognized, through charges or credits to the current tax provision, for the
estimated taxes payable or refundable for the current year. Net deferred tax
liabilities or assets are recognized, through charges or credits to the deferred
tax provision, for the estimated future tax effects, based on enacted tax rates,
attributable to temporary differences. Deferred tax liabilities are recognized
for temporary differences that will result in amounts taxable in the future, and
deferred tax assets are recognized for temporary differences and tax benefit
carryforwards that will result in amounts deductible or creditable in the
future. The effect of enacted changes in tax law, including changes in tax
rates, on these deferred tax assets and liabilities is recognized in income in
the period that includes the enactment date. A deferred tax valuation reserve is
established if it is more likely than not that all or a portion of the Company's
deferred tax assets will not be realized. Changes in the deferred tax valuation
reserve are recognized through charges or credits to the deferred tax provision.
FOREIGN CURRENCY TRANSLATION--The Company accounts for translation of
foreign currency in accordance with Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation" (SFAS No. 52). Over a number of years,
the accounts of the Company's Canadian subsidiary, Credident, when translated
into US dollars, lost value as a result of the decline in the Canadian dollar in
relation to the U.S. dollar. In accordance with SFAS No. 52, the cumulative
amount of such translation losses had been presented as a reduction of
stockholders' equity. The Company discontinued its Canadian operations in 1994,
and during 1995, the Company substantially liquidated its investment in
Credident. In accordance with SFAS No. 52, upon substantial liquidation in 1995,
the cumulative exchange losses were reflected in the statement of operations and
eliminated as a separate component of stockholders' equity. During 1996, such
translation adjustments, which were not significant, were reflected in current
operations.
NET INCOME (LOSS) PER SHARE--Earnings per share computations are based on
the weighted average number of common and common share equivalents outstanding.
The weighted average number of common and common share equivalents outstanding
do not include unallocated shares under the Company's ESOP and SESOP plans,
unvested restricted stock awards and treasury stock. Fully diluted and primary
income per share are the same for each of the periods presented.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
INTEREST RATE CONTRACTS--The Company utilizes interest rate contracts to
reduce the interest rate risk associated with the Company's variable rate
borrowings. The Company has established a control environment which includes
policies and procedures for risk assessment and the approval, reporting and
monitoring of derivative financial instrument activities. The Company does not
hold or issue derivative financial instruments for trading purposes. The
differentials to be received or paid under contracts designated as hedges are
recognized in income as they accrue over the life of the contracts as
adjustments to interest expense.
PROPERTY AND EQUIPMENT--Office furniture, equipment and capital leases are
recorded at cost and depreciated using the straight-line method over a period of
three to five years. Leasehold improvements are amortized over the shorter of
the life of the lease or the asset. Upon retirement or other disposition, the
cost and related accumulated depreciation of the assets are removed from the
accounts and the resulting gain or loss is reflected in income. Net property,
plant and equipment is included in other assets and was not material at December
31, 1996 and 1995.
F-10
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED COMPENSATION--Deferred compensation includes notes receivable from
the Company's Employee Stock Ownership Plan ("ESOP") and Supplemental Employee
Stock Ownership Plan ("SESOP"), and deferred compensation related to restricted
stock awards. Deferred compensation consists of the following:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
ESOP............................................................. $ 736 $ 841 $ 951
SESOP............................................................ 1,225 1,225 1,225
Restricted Stock................................................. 629 -- --
--------- --------- ---------
Total.......................................................... $ 2,590 $ 2,066 $ 2,176
--------- --------- ---------
--------- --------- ---------
</TABLE>
NON-CASH OPERATING, INVESTING AND FINANCING ACTIVITIES--On November 1, 1994,
the Company executed an agreement with certain secured creditors of Healthco
International, Inc. ("Healthco") under which it settled all existing and
potential claims between the Company and Healthco and purchased 1,225,182 shares
of stock. In 1994, the Company made a cash payment of $1,785,000 and issued a
note payable of $4,500,000 to the secured creditors of Healthco to (i) settle
net liabilities of $1,262,000 due to Healthco and (ii) to purchase the 1,225,182
shares of stock.
In 1996, the Company recognized $365,000 in compensation expense relating to
restricted stock awards under its 1995 Stock Incentive Plan (Note G).
FISCAL YEAR--For 1994 and prior years, the Company's fiscal year was the 52
or 53 week period ending on the last Saturday of the calendar year. The 1994
fiscal year covers the 53-week period from December 26, 1993 to December 31,
1994. In fiscal year 1995, the Company changed its fiscal year-end to December
31.
RECLASSIFICATIONS--Certain amounts in the 1995 and 1994 consolidated
financial statements have been reclassified to conform to the current year
presentation.
NOTE B. LEASES AND NOTES RECEIVABLE
The Company considers its finance portfolio assets to consist of two general
categories of assets based on such assets' relative risk.
The first category of assets consists of the Company's lease contracts and
notes receivable due in installments, which comprise approximately 87.7% of the
Company's net investment in leases and notes at December 31, 1996 (90.1% at
December 31, 1995). Substantially all of such contracts and notes are due from
licensed medical professionals, principally dentists, who practice in individual
or small group practices. Such contracts and notes are at fixed interest rates
and have terms ranging from 12 to 84 months. The Company believes that leases
and notes entered into with medical professionals are generally "small-ticket,"
homogeneous transactions with similar risk characteristics. Except for the
amounts described in the following paragraph related to asset-based lending, all
of the Company's historical provision for losses, charge offs, recoveries and
allowance for losses have related to its lease contracts and notes due in
installments.
The second category of assets consists of the Company's notes receivable,
which comprise approximately 12.3% of the Company's net investment in leases and
notes at December 31, 1996 (9.9% at December 31, 1995). Such notes receivable
consist of commercial, asset-based, revolving lines of credit to small and
medium size manufacturers and distributors, at variable interest rates, and
typically have terms of two years. The Company began commercial lending
activities in mid-1994. Through December 31, 1996,
F-11
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. LEASES AND NOTES RECEIVABLE (CONTINUED)
the Company has not had any charge offs of commercial notes receivable. The
provision for losses related to the commercial notes receivable was $146,000,
$95,000 and $43,000 on 1996, 1995 and 1994, respectively. The amount of the
allowance for losses related to the commercial notes receivable was $284,000 and
$138,000 at December 31, 1996 and 1995, respectively.
A summary of activity in the Company's allowance for losses which relates to
the Company's investment in leases and notes for each of the years in the
three-year period ended December 31, 1996 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995 1994
- -------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Beginning balance............................................. $ (4,482) $ (4,595) $ (6,897)
Provision for losses.......................................... (1,114) (1,266) (754)
Charge offs................................................... 1,609 1,504 3,350
Recoveries.................................................... (95) (125) (294)
--------- --------- ---------
Balance, end of year.......................................... $ (4,082) $ (4,482) $ (4,595)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company's receivables are exposed to credit risk. To reduce the risk to
the Company, stringent underwriting policies in approving leases and notes are
closely monitored by management.
The total contractual balances of delinquent lease contracts and notes
receivable due in installments over 90 days past due amounted to $5,763,000 at
December 31, 1996 compared to $4,964,000 at December 31, 1995. An account is
initially considered delinquent when not paid within thirty days of the billing
due date.
The Company's agreements with its customers, except for notes receivable
related to ACFC (approximately $18,688,000 in 1996 and $12,002,000 in 1995), are
non-cancelable and provide for a full payout at a fixed financing rate with a
fixed payment schedule over a term of three to seven years. Scheduled future
receipts on lease contracts and notes receivable due in installments, including
interest and excluding the residual value of the equipment and ACFC receivables,
as of December 31 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS):
- ---------------------------------------------------------------------------------------
<S> <C>
1997............................................................................... $ 50,156
1998............................................................................... $ 37,740
1999............................................................................... $ 31,221
2000............................................................................... $ 22,941
2001 and thereafter................................................................ $ 17,991
</TABLE>
At December 31, 1996 and 1995, the Company had outstanding unfunded
asset-based lending commitments of approximately $14,853,000 and $7,100,000.
These amounts represent the aggregate difference between committed lines of
credit and advances on such lines. The rates on such commitments fluctuate based
on the prime rate. As a result, the Company is not exposed to interest rate risk
on such commitments. In addition, at December 31, 1996 and 1995, the Company had
approved fixed rate lease and practice finance applications outstanding but not
yet activated of approximately $47,500,000 and $39,900,000, respectively. These
approved applications are subject to reevaluation if not accepted within 60
days. While the Company is not legally bound to honor such approvals prior to
activation, it has historically honored such approvals. The Company may be
exposed to unfavorable movements in interest rates between the approval date and
the activation date.
F-12
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C. SALES OF LEASE AND NOTES RECEIVABLE
In November 1995, the Company received a total of approximately $1,500,000
in connection with a sale of notes receivable due in installments. In 1996, the
Company sold additional leases and notes receivable due in installments,
received a total of $24,344,000 in initial proceeds and is scheduled to receive
$4,074,000 in future payments from such sales. The related sales agreements are
subject to certain covenants that, among other matters, may require the Company
to repurchase the assets sold and/or make payments under certain circumstances,
primarily on the failure of the underlying debtors to pay when due (the
"recourse provisions"). At the time of sale, the Company recognizes its
estimated liability under the recourse provisions. In connection with the sale
of leases and notes during 1996 and 1995, the Company recognized estimated
recourse liability of $450,000 and $30,000 respectively. The Company has
contingent obligations to repurchase leases and notes due in installments, which
had an outstanding balance of $16,696,000 at December 31, 1996 and $1,466,000 at
December 31, 1995. In addition, under the sales agreements the Company is
obligated to continue to service the assets sold. The Company recorded a
servicing liability of approximately $395,000 and $20,000 related to sale
transactions in 1996 and 1995, respectively, which will be recognized as revenue
in proportion to the estimated future periodic servicing costs. The Company
recognized approximately $15,000 of such revenue in 1996. Gains of approximately
$1,572,000 and $53,000 were recognized by the Company in 1996 and 1995,
respectively, related to sales of notes and leases.
NOTE D. REVOLVING CREDIT BORROWINGS AND OTHER DEBT
Debt of the Company as of December 31, 1996 and December 31, 1995 is
summarized below.
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- ----------------------------------------------------------------------- ---------- ---------
<S> <C> <C>
Revolving credit arrangement Due Dec. 31, 1997......................... $ 40,000 $ 39,000
---------- ---------
Senior Notes:
Senior Notes (Funding I)
Due Dec., 1999....................................................... 6,861 20,150
Senior Notes (Bravo)
Due Nov., 2000 through Aug., 2001.................................... 67,524 26,303
Senior Notes (SIS)
Due Mar., 2001....................................................... 2,352 3,070
---------- ---------
Total Senior Notes..................................................... 76,737 49,523
---------- ---------
Total.................................................................. $ 116,737 $ 88,523
---------- ---------
---------- ---------
</TABLE>
REVOLVING CREDIT ARRANGEMENT--In May 1995, the Company executed an Amended
and Restated Revolving Loan agreement with the First National Bank of Boston as
Managing Agent (the "Revolving Loan Agreement"), increasing availability under
this arrangement to $50,000,000. The Revolving Loan Agreement was amended in
December 1995 to increase availability to $60,000,000 and to extend the term to
December 31, 1996. In December, 1996, the Revolving Loan Agreement was further
amended to increase availability to $95,000,000 and extend the term to December
30, 1997. Under the Revolving Loan Agreement, the Company may borrow at variable
rates of prime or in Eurodollar loans at LIBOR plus 1.25% to 1.75%, dependent
upon certain performance covenants. Such rates on the outstanding borrowings
were 7.5% and 8.0% at December 31, 1996 and 1995, respectively. In connection
with the arrangement, all HPSC and ACFC assets, including ACFC stock but
excluding assets collateralized under the senior notes, have been pledged as
collateral. The Revolving Loan Agreement has not been historically hedged, and
is not hedged at December 31, 1996, and is, therefore, exposed to upward
movements in
F-13
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. REVOLVING CREDIT BORROWINGS AND OTHER DEBT (CONTINUED)
interest rates. Management believes that the Company's liquidity is adequate to
meet current obligations and future projected levels of financings, and to carry
on normal operations. The Company will continue to seek to raise additional
capital from bank and non-bank sources, and from selective use of asset-sale
transactions in the future. The Company expects that it will be able to obtain
additional capital at competitive rates, but there can be no assurance that it
will be able to do so.
In July and August of 1996, the level of delinquencies of the contracts held
in Funding I rose above certain levels, as defined in the operative documents,
and triggered a payment restriction event. This restriction had the effect of
"trapping" any cash distribution that the Company otherwise would have been
eligible to receive. The event was considered a technical default under the
Revolving Loan Agreement, which default was waived by the lending banks. In
September 1996, delinquency levels improved and the payment restrictions were
removed. A payment restriction is not unusual during the later stages of a
static pool securitization and may occur again before Funding I is fully paid
out. The default provisions of the Revolving Credit Agreement were amended on
December 12, 1996 to conform to the default provisions of the Funding I
agreements. As a result, a payment restriction event under Funding I will not
constitute a default under the Revolving Loan Agreement unless such event
continues for at least six months.
SENIOR NOTES (FUNDING I)--The Company borrowed $70,000,000 in a
receivable-backed securitization transaction ("Securitization") on December 27,
1993. Under the terms of the Securitization, the Company formed a wholly-owned,
special-purpose subsidiary, Funding I, to which the Company sold or contributed
certain of its equipment lease contracts, conditional sales agreements,
leasehold improvement loans, equipment residual rights and rights to underlying
equipment ("Collateral"). Funding I subsequently issued $70,000,000 of secured
notes ("Notes"), bearing interest at a fixed rate of 5.01%, secured by the
Collateral. The Notes are rated "AAA" by Standard & Poor's. Monthly payments of
interest and principal on the Notes are made through the application of
regularly scheduled monthly receivable payments on the Collateral. The Company
is the servicer of the Collateral portfolio, subject to its meeting certain
covenants. The required monthly payments of interest and principal to holders of
the Notes are unconditionally guaranteed by Municipal Bond Investor Assurance
Corporation pursuant to the terms of a Note guarantee insurance policy.
As of December 31, 1996 and 1995, Funding I had gross receivables of
approximately $9,758,000 and $26,984,000, respectively, which were pledged as
Collateral. The Agreement also provides for restrictions on cash balances under
certain conditions relating to default and delinquency ratios applicable to the
Collateral. At December 31, 1996 and 1995, restricted cash amounted to
approximately $4,014,000 and approximately $4,693,000, respectively.
Note payments to investors, based on projected cash flows from the
Collateral, for the years 1997 through 1999 are expected to be as follows:
$5,328,000, $1,307,000, and $226,000, respectively. However, the agreement also
contains a provision that requires early termination and payment to investors
when the restricted cash contains an amount equal to investor balances. This
event may occur during 1997.
SENIOR NOTES (BRAVO)--As of January 31, 1995, the Company, along with its
wholly-owned, special-purpose subsidiary, HPSC Bravo Funding Corp. ("Bravo") had
available borrowings of $50,000,000 under a revolving credit facility structured
and guaranteed by Capital Markets Assurance Corporation ("CapMAC"). Under the
terms of the facility, Bravo, to which the Company sells and may continue to
sell or contribute certain of its portfolio assets, pledges its interests in
these assets to a commercial-paper conduit entity. Bravo incurs interest at
variable rates in the commercial paper market and enters into interest rate swap
agreements to assure fixed rate funding. In November 1996, the facility was
amended to
F-14
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. REVOLVING CREDIT BORROWINGS AND OTHER DEBT (CONTINUED)
increase available borrowing to $100,000,000 and to allow up to $30,000,000 of
the facility to be used for sales of financing contracts.
Monthly settlements of principal and interest payments are made from the
collection of payments on Bravo's transactions. The terms of the facility
restrict the use of certain collected cash. Such restricted cash amounted to
approximately $2,755,000 and $917,000 at December 31, 1996 and 1995,
respectively. Additional sales to Bravo from HPSC may be made subject to certain
covenants regarding Bravo's portfolio performance and borrowing base
calculations.
The Company is the servicer of the Bravo portfolio, subject to its meeting
certain covenants. The required monthly payments of principal and interest to
purchasers of the commercial paper are guaranteed by CapMAC pursuant to the
terms of the agreement.
In the normal course of its business, the Company enters into interest rate
swap contracts to hedge its interest rate risk related to its variable rate
notes payable. Under such interest rate swap contracts, the Company pays a fixed
rate of interest and receives a variable rate from the counterparty. Credit risk
is the possibility that a loss may occur if a counterparty to a transaction
fails to perform according to the terms of the contract. The notional amount of
interest rate contracts is the amount upon which interest and other payments
under the contract are based.
At December 31, 1996, the Company had approximately $67,524,000 outstanding
under the loan portion of this facility and, in connection with these
borrowings, had 14 separate interest rate swap agreements with the Bank of
Boston with a total notional value of approximately $65,231,000. The Company had
utilized approximately $6,991,000 of the sale pool and in connection with such
sale, had one interest rate swap agreement with a total notional value of
approximately $6,713,000.
At December 31, 1995, the Company had approximately $26,303,000 outstanding
under the loan facility. In connection with these borrowings, the Company had
six interest rate swap agreements with a notional value of approximately
$27,500,000.
The amounts of borrowings outstanding under the loan portion of the Bravo
facility, the notional amount of swaps outstanding related to such loans and the
effective interest rate under the swaps, assuming payments are made as scheduled
will be as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR %) BORROWINGS SWAPS RATE
- --------------------------------------------------------------- ----------- --------- ---------
<S> <C> <C> <C>
December 31, 1996.............................................. $ 67,524 $ 65,231 6.29%
December 31, 1997.............................................. $ 46,493 $ 46,576 6.28%
December 31, 1998.............................................. $ 28,255 $ 29,152 6.24%
December 31, 1999.............................................. $ 13,593 $ 14,338 6.19%
December 31, 2000.............................................. $ 4,155 $ 4,553 6.16%
December 31, 2001.............................................. $ 675 $ 854 6.14%
</TABLE>
SENIOR NOTES (SIS)--In April 1995, the Company entered into a secured, fixed
rate, fixed term loan agreement with Springfield Institution for Savings under
which the Company borrowed $3,500,000 at 9.5% subject to certain recourse and
performance covenants.
Certain debt/securitization agreements contain restrictive covenants which,
among other things, include minimum net worth, interest coverage ratios, capital
expenditures, and portfolio performance guidelines. At December 31, 1996, the
Company was in compliance with the provisions of its debt covenants.
F-15
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. REVOLVING CREDIT BORROWINGS AND OTHER DEBT (CONTINUED)
The scheduled maturities of the Company's revolving credit borrowings and
other debt at December 31, 1996 are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $ 67,004
1998............................................................... $ 20,248
1999............................................................... $ 15,534
2000............................................................... $ 9,770
2001............................................................... $ 3,508
Thereafter......................................................... $ 673
</TABLE>
NOTE E. LEASE COMMITMENTS
The Company leases various office locations under noncancelable lease
arrangements that have terms of from three to five years and that generally
provide renewal options from one to five years. Rent expense under all operating
leases was $391,000, $318,000, and $198,000 for 1996, 1995 and 1994,
respectively.
Future minimum lease payments for commitments exceeding twelve months under
non-cancelable operating leases as of December 31, 1996, are as follows (in
thousands):
<TABLE>
<S> <C>
1997.................................................................... $ 324
1998.................................................................... $ 324
1999.................................................................... $ 146
2000.................................................................... -0-
2001 & thereafter....................................................... -0-
</TABLE>
NOTE F. INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.
The components of income (loss) before income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------- --------- --------- ---------
Domestic............................................................. $ 1,699 $ 154 $ 891
Foreign.............................................................. (120) (75) (141)
--------- --------- ---------
Income (loss) before income taxes.................................... $ 1,579 $ 79 $ 750
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F. INCOME TAXES (CONTINUED)
Income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS) 1996 1995 1994
- --------------------------------------------------------------------- --------- --------- ---------
Federal:
Current............................................................ $ 251 $ 832 $ 808
Deferred........................................................... 310 (569) (530)
State
Current............................................................ 64 426 635
Deferred........................................................... 79 (357) (563)
Foreign
Current............................................................ -- (128) (50)
Deferred........................................................... -- -- --
--------- --------- ---------
Provision (credit) for income taxes.................................. $ 704 $ 204 $ 300
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes arise from the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS) 1996 1995 1994
- ----------------------------------------------------------------- --------- --------- ---------
Operating method................................................. 142 $ (2,501) $ (3,498)
Alternative minimum tax credit................................... -- 609 2,147
Other............................................................ 247 966 258
--------- --------- ---------
$ 389 $ (926) $ (1,093)
--------- --------- ---------
--------- --------- ---------
</TABLE>
A reconciliation of the statutory federal income tax rate and the effective
tax rate as a percentage of pre-tax income for each year is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Statutory rate................................................... 34.0% 34.0% 34.0%
State taxes net of US federal income tax benefit................. 6.0 55.7 5.2
Effect of prior year foreign tax recovery........................ -- (162.0) --
Foreign loss not benefited....................................... 2.6 22.7 --
Non-deductible write-off of foreign currency translation
adjustment..................................................... -- 258.5 --
Other............................................................ 2.0 49.3 .8
--- --------- ---
44.6% 258.2% 40.0%
--- --------- ---
--- --------- ---
</TABLE>
F-17
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F. INCOME TAXES (CONTINUED)
The items which comprise a significant portion of deferred tax liabilities
as of December 31, 1996 and December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1996 1995
- --------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Operating method........................................................... $ 5,146 $ 5,004
Other...................................................................... (144) (391)
--------- ---------
Deferred income taxes...................................................... $ 5,002 $ 4,613
--------- ---------
--------- ---------
</TABLE>
At December 31, 1996 consolidated retained earnings included $260,000 of
unremitted earnings from the Company's foreign subsidiary. In the event of
repatriation, the Company does not anticipate any significant additional income
taxes.
NOTE G. STOCK OPTION AND STOCK INCENTIVE PLANS
STOCK OPTION PLANS--The Company had three stock option plans in place which
provided for the granting of options to purchase up to 801,875 shares of common
stock: the Employee Stock Option Plan dated March 23, 1983, as amended (the
"1983 Plan"), the Stock Option Plan dated March 5, 1986 (the "1986 Plan") and
the 1994 Stock Plan dated March 23, 1994 (the "1994 Plan"). These three plans
were terminated in May 1995 upon the approval of the 1995 Stock Incentive Plan
discussed below.
Options granted under the 1983 Plan are either incentive stock options or
non-qualified options and were granted at no less than 85% of the fair market
value of the Common Stock on the date of grant. Officers and directors of the
Company and its subsidiaries were eligible to participate under the 1986 Plan
and only non-qualified stock options were granted under the 1986 Plan. Options
under the Plan were granted at an exercise price equal to the market price on
the date of grant. Key employees, directors of and consultants to the Company
were eligible to participate in the 1994 Plan. Only non-qualified options were
granted under the 1994 Plan. The Plan required that the option exercise price in
each case be at least 50% of the fair market value of the Common Stock on the
date of grant. All options granted under the Plan had an exercise price equal to
the fair market value of the Common Stock on the grant date. Options vest over
five years of service.
1995 STOCK INCENTIVE PLAN--The Company has outstanding stock options and
awards of restricted stock under its 1995 Stock Incentive Plan dated March 8,
1995, as amended March 14, 1996, (the "1995 Stock Plan") pursuant to which
550,000 shares of Common Stock are reserved. A total of 138,000 shares of the
Company's Common Stock remained available for grants of options or awards of
restricted stock under the 1995 Stock Plan at December 31, 1996.
1995 STOCK PLAN--RESTRICTED STOCK--The 1995 Stock Plan provides that
restricted shares of Common Stock awarded under the plan will remain unvested
until certain performance and service conditions are both met.
The performance condition is met with respect to 50% of the restricted
shares if and when during the five-year period after the date of grant ("the
Performance Period") the closing price of the Company's Common Stock, as
reported on the Nasdaq National Market System for a consecutive ten-day period,
equals at least 134.175% of the closing price on the grant date (the "Partial
Performance Condition"). The performance condition is met with respect to the
remaining 50% of the restricted shares if and when during the Performance Period
the closing price of the Company's Common Stock, as reported on the
F-18
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. STOCK OPTION AND STOCK INCENTIVE PLANS (CONTINUED)
Nasdaq National Market System for a consecutive ten-day period, equals at least
168.35% of the closing price on the grant date (the "Full Performance
Condition").
The service condition is met with respect to all restricted shares (provided
that the applicable performance condition has also been met) by the holder's
continuous service for the Company throughout the Performance Period provided
that such holder shall also have completed five (5) years of continued service
with the Company from the date of grant. Upon a change of control of the Company
(as defined in the 1995 Stock Plan), all restricted stock awards granted prior
to such change of control become fully vested.
Upon the termination of a holder's employment by the Company without cause
or by reason of death or disability during the Performance Period, any
restricted stock awards for which the applicable performance condition is
satisfied no later than four months after the date of such termination of
employment shall become fully vested.
Awards of 337,000 restricted shares of the Company's Common Stock were made
in May 1995. The Partial Performance Condition of these shares is $5.90 per
share with respect to 332,000 shares and $6.04 with respect to 5,000 shares, and
the Full Performance Condition is $7.37 per share with respect to 332,000 shares
and $7.58 with respect to 5,000 shares. Additional paid in capital and deferred
compensation of $994,000 was recorded when the performance criteria was achieved
with respect to 50% of the restricted shares in June 1996. Compensation expense
of $365,000 was recognized in 1996 and the remaining deferred compensation will
be recognized over the remaining term of the service condition.
1995 STOCK PLAN--STOCK OPTIONS--The 1995 Stock Plan provides that with
respect to options made to key employees (except non-employee directors), the
option term and the terms and conditions upon which the options may be exercised
will be determined by the Compensation Committee of the Company's Board of
Directors for each such option at the time it is granted (except so delegated to
the chief executive officer for non-executive officer grants). Options granted
to key employees of the Company may be either incentive stock options (within
the meaning of Section 422 of the Internal Revenue Code of 1986 and subject to
the restrictions of that section on certain terms of such options) or
non-qualified options, as designated by the Compensation Committee.
With respect to automatic options to non-employee directors of the Company
(which must be non-qualified options), the 1995 Stock Plan specifies the option
term and the terms and conditions upon which the options may be exercised. Each
non-employee director who is such at the conclusion of any regular annual
meeting of the Company's stockholders while the 1995 Stock Plan is in effect and
who will continue to serve on the Board of Directors is granted such automatic
options to purchase 1,000 shares of the Company's Common Stock at a price equal
to the closing price of the Common Stock, as reported on the Nasdaq National
Market System, on the date of grant of the option. Each automatic option is
exercisable immediately in full or for any portion thereof and remains
exercisable for ten years after the date of grant, unless terminated earlier (as
provided in the Plan) upon or following termination of the holder's service as a
director.
OTHER OPTION GRANTS--At December 31, 1996, there were options exercisable
for an aggregate of 2,000 shares of Common Stock outstanding to a consultant and
options exercisable for an aggregate of 4,000 shares of Common Stock outstanding
to a non-employee director of the Company.
F-19
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. STOCK OPTION AND STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes stock option and restricted stock activity:
<TABLE>
<CAPTION>
OPTIONS
------------------------
<S> <C> <C> <C>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE RESTRICTED
OPTIONS PRICE STOCK
----------- ----------- -----------
Outstanding at January 1, 1994................................................. 471,875 $ 2.96
Granted...................................................................... 190,000 $ 3.70
Exercised....................................................................
Expired......................................................................
Forfeited.................................................................... (25,000) $ 3.25
----------- ----- -----------
Outstanding at December 31, 1994............................................... 636,875 $ 3.17 --
Granted...................................................................... 25,000 $ 4.33 337,000
Exercised....................................................................
Expired......................................................................
Forfeited.................................................................... (50,000) $ 3.56
----------- ----- -----------
Outstanding at December 31, 1995............................................... 611,875 $ 3.19 337,000
Granted...................................................................... 60,000 $ 5.15
Exercised....................................................................
Expired......................................................................
Forfeited.................................................................... (30,000) $ 3.31
----------- ----- -----------
Outstanding at December 31, 1996............................................... 641,875 $ 3.36 337,000
----------- ----- -----------
----------- ----- -----------
</TABLE>
The following table sets forth information regarding options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
RANGE OF NUMBER OF OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE CURRENTLY OPTIONS GRANTED OPTIONS EXERCISABLE WEIGHTED AVERAGE
PRICES NUMBER OF OPTIONS EXERCISABLE EXERCISABLE PRICE PRICE REMAINING LIFE (YEARS)
- ---------------- ------------------ -------------------- ----------------- ------------------- -----------------------
<S> <C> <C> <C> <C> <C>
2.63--3.25 391,875 356,500 $ 2.87 $ 2.86 6.10
3.38--4.00 175,000 89,667 $ 3.75 $ 3.76 7.42
4.50--4.88 59,000 18,000 $ 4.70 $ 4.72 8.78
6.13--6.63 16,000 7,000 $ 6.40 $ 6.19 9.16
------- ------- ----- ----- ---
2.63--6.63 641,875 471,167 $ 3.37 $ 3.15 6.29
------- ------- ----- ----- ---
------- ------- ----- ----- ---
</TABLE>
The weighted average grant date fair values of options granted for the years
ending December 31, 1996 and 1995 were $3.07 and $4.24, respectively.
STOCK PURCHASE PLAN--Under the Stock Purchase Plan, eligible employees were
granted options to acquire, through authorized payroll deductions, shares of
common stock. The Stock Purchase Plan provided for options to be granted twice
each year, on the first day of a six-month payment period, with exercise of the
option to take place on the last business day of each such payment period at a
purchase price of the lesser of 85% of the fair market value of the shares on
the option grant date or on the option exercise date. The Stock Purchase Plan
was terminated upon the approval of the Stock Incentive Plan in May, 1995.
During 1995 and 1994, 317 and 824 shares, respectively, were issued under the
Stock Purchase Plan.
F-20
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. STOCK OPTION AND STOCK INCENTIVE PLANS (CONTINUED)
NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES (STOCK LOAN PROGRAM)--On
January 5, 1995, the Compensation Committee approved a Stock Loan Program
whereby executive officers and other senior personnel of the Company earning
more than $80,000 per year may borrow from the Company an amount equal to the
cost of purchasing two shares of Common Stock, solely for the purpose of
acquiring such stock, for each share of Common Stock purchased by the employee
from sources other than Company funds. Such borrowings may not exceed $200,000
in any fiscal quarter of the Company, $200,000 per employee or $400,000 during
the term of the loan program for all employees. The loans are recourse, bear
interest at a variable rate which is one-half of one percent above the Company's
cost of funds, payable monthly in arrears, and are payable as to principal no
later than five years after the date of the loan. All shares purchased with such
loans are pledged to the Company as collateral for repayment of the loans.
PRO FORMA DISCLOSURE--As described in Note A, the Company uses the intrinsic
value method to measure compensation expense associated with the grants of stock
options or awards to employees. Had the Company used the fair value method to
measure compensation, reported net income and earnings per share would have been
as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Income before income taxes................................................. $ 1,598 $ (64)
Provision for income taxes................................................. 735 204
--------- ---------
Net income (loss).......................................................... $ 863 $ (140)
--------- ---------
--------- ---------
Net income (loss) per share................................................ $ 0.21 $ (0.04)
--------- ---------
--------- ---------
</TABLE>
For purposes of determining the above disclosure requires by Statement of
Financial Accounting Standards No. 123, the fair value of options on their grant
date was measured using the Black/Scholes option pricing model. Key assumptions
used to apply this pricing model were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Risk-free interest rate................................................ 6.0% 6.7%
Expected life of option grants......................................... 10 years 10 years
Expected volatility of underlying stock................................ 36.4% 46.6%
</TABLE>
The pro forma presentation only includes the effects of grants made
subsequent to January 1, 1995.
NOTE H. EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OWNERSHIP PLAN--In December 1993, the Company established a
stock bonus type of Employee Stock Ownership Plan ("ESOP") for the benefit of
all eligible employees. The ESOP is expected to be primarily invested in common
stock of the Company on behalf of the employees. ESOP contributions are at the
discretion of the Company's Board of Directors and are determined annually.
However, it is the Company's present intention to make contributions sufficient
to repay the ESOP's Promissory Note on a level funding basis over a 10-year
period. The Company measures the expense related to such contributions based on
the original cost of the stock which was originally issued to the ESOP. Shares
of stock which were issued to the ESOP are allocated to the participants based
on a calculation of the ratio of the annual contribution amount to the original
principal of the Promissory Note. The Company made contributions of $105,000 in
1996, $110,000 in 1995, and $99,000 in 1994.
Employees with five or more years of service with the Company from and after
December 1993 at the time of termination of employment will be fully vested in
their benefits under the ESOP. For a participant
F-21
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H. EMPLOYEE BENEFIT PLANS (CONTINUED)
with fewer than five years of service from December 1993 through his or her
termination date, his or her account balance will vest at the rate of 20% for
each year of employment. Upon the retirement or other termination of an ESOP
participant, the shares of common stock in which he or she is vested, at the
option of the participant, may be converted to cash or may be distributed. The
unvested shares are allocated to the remaining participants. The Company has
issued 300,000 shares of Common Stock to this plan in consideration of a
Promissory Note in the principal amount of $1,050,000. As of December 31, 1996,
89,654 shares of Common Stock have been allocated to participant accounts under
the ESOP and 210,346 shares remain unallocated. The market value of unallocated
share was $1,262,076.
SUPPLEMENTAL EMPLOYEE STOCK OWNERSHIP PLAN--In July, 1994, the Company
adopted a Supplemental Employee Stock Ownership Plan ("SESOP") for the benefit
of all eligible employees. Eligibility requirements are similar to the ESOP
discussed above except that any amounts allocated under the SESOP would first be
allocated to the accounts of certain highly compensated employees to make up for
certain limitations on Company contributions under the ESOP required by the 1993
Tax Act and next to all eligible employees on a non-discriminatory basis. The
Company has issued 350,000 shares of Common Stock to this plan in consideration
for a Promissory Note in the principal amount of $1,225,000. SESOP contributions
are at the discretion of the Company's Board of Directors's and are determined
annually. No contributions have been made nor have any allocations yet been made
to participant accounts.
SAVINGS PLAN--The Company has established a Savings Plan covering
substantially all full-time employees, which allows participants to make
contributions by salary deductions pursuant to Section 401(k) of the Internal
Revenue Code. The Company matches employee contributions up to a maximum of 2%
of the employee's salary. Both employee and employer contributions are vested
immediately. The Company's contributions to the Savings Plan were $62,841 in
1996, $49,419 in 1995 and $37,975 in 1994.
NOTE I. PREFERRED STOCK PURCHASE RIGHTS PLAN
Pursuant to a rights agreement between the Company and the First National
Bank of Boston, as rights agent, dated August 3, 1993, the Board of Directors
declared a dividend on August 3, 1993 of one preferred stock purchase right
("Right") for each share of the Company's common stock (the "Shares")
outstanding on or after August 13, 1993. The Right entitles the holder to
purchase one one-hundredth of a share of Series A Preferred Stock, which
fractional share is substantially equivalent to one share of Common Stock, at an
exercise price of $20. The Rights will not be exercisable or transferable apart
from the Common Stock until the earlier to occur of (i) 10 days following a
public announcement that a person or affiliated group has acquired 15 percent or
more of the outstanding Common Stock (such person or group, an "Acquiring
Person"), or (ii) 10 business days after an announcement or commencement of a
tender offer which would result in a person or group's becoming an Acquiring
Person, subject to certain exceptions. The Rights beneficially owned by the
Acquiring Person and its affiliates become null and void upon the Rights
becoming exercisable.
If a person becomes an Acquiring Person or certain other events occur, each
Right entitles the holder, other than the Acquiring Person, to purchase common
stock (or one one-hundredths of a share of Preferred Stock, in the discretion of
the Board of Directors) having a market value of two times the exercise price of
the Right. If the Company is acquired in a merger or other business combination,
each exercisable Right entitles the holder, other than the Acquiring Person, to
purchase Common Stock of the acquiring company having a market value of two
times the exercise price of the Right.
At any time after a person becomes an Acquiring Person and prior to the
acquisition by such person of 50% or more of the outstanding Common Stock, the
Board of Directors may direct the Company to
F-22
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE I. PREFERRED STOCK PURCHASE RIGHTS PLAN (CONTINUED)
exchange the Rights held by any person other than an Acquiring Person at an
exchange ratio of one share of Common Stock per Right. The Rights may be
redeemed by the Company, subject to approval of the Board of Directors, for one
cent per Right in accordance with the provisions of the Rights Plan. The Rights
have no voting or dividend privileges.
NOTE J. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments" ("SFAS No. 107"), requires the Company to disclose the estimated
fair values for certain of its financial instruments. Financial instruments
include items such as loans, interest rate contracts, notes payable, and other
items as defined in SFAS No. 107.
Fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
Quoted market prices are used when available; otherwise, management
estimates fair value based on prices of financial instruments with similar
characteristics or using valuation techniques such as discounted cash flow
models. Valuation techniques involve uncertainties and require assumptions and
judgments regarding prepayments, credit risk and discount rates. Changes in
these assumptions will result in different valuation estimates. The fair values
presented would not necessarily be realized in an immediate sale; nor are there
plans to settle liabilities prior to contractual maturity. Additionally, SFAS
No. 107 allows companies to use a wide range of valuation techniques; therefore,
it may be difficult to compare the Company's fair value information to other
companies' fair value information.
The following table presents a comparison of the carrying value and
estimated fair value of the Company's financial instruments at December 31,
1996:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
IN THOUSANDS VALUE FAIR VALUE
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents........................................... $ 2,176 $ 2,176
Restricted cash..................................................... $ 6,769 $ 6,769
Net investment in leases and notes.................................. $ 149,222 $ 149,222
Financial liabilities:
Notes payable....................................................... $ 116,737 $ 116,130
Interest rate contracts............................................. $ -0- $ (336)
</TABLE>
The following table presents a comparison of the carrying value and
estimated fair value of the
Company's financial instruments at December 31, 1995:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
IN THOUSANDS VALUE FAIR VALUE
- ---------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents........................................... $ 861 $ 861
Restricted cash..................................................... $ 5,610 $ 5,610
Net investment in leases and notes.................................. $ 119,916 $ 119,916
Financial liabilities:
Notes payable....................................................... $ 88,523 $ 88,523
</TABLE>
F-23
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
Cash, cash equivalents and restricted cash: For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Net investment in leases and notes: The estimated fair value of net
investment in leases and notes approximates carrying value. Loans at rates
similar to those in the current portfolio could be made to borrowers with
similar credit ratings and for similar remaining maturities. For nonaccrual
practice acquisition and asset-based loans, fair value is estimated by
discounting management's estimate of future cash flows with a discount rate
commensurate with the risk associated with such assets.
Notes payable: The fair market value of the Company's senior notes is
estimated based on the quoted market prices for the same or similar issues
or on the current rates offered to the Company for debt of the same
maturity. At December 31, 1995, the Company's senior notes, as shown on the
accompanying balance sheet, reflect their approximate fair market value.
Interest rate contracts: The fair value of interest rate contracts is
estimated based on the estimated amount necessary to terminate the
agreements. At December 31, 1995, this amount was not material to the
financial statements.
F-24
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
The Company...................................... 8
Risk Factors..................................... 9
Use of Proceeds.................................. 14
Capitalization................................... 14
Selected Consolidated Financial Data............. 15
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 18
Business......................................... 26
Management....................................... 42
Certain Transactions............................. 52
Principal Stockholders........................... 53
Description of Notes............................. 56
Description of Certain Indebtedness.............. 79
Underwriting..................................... 81
Legal Matters.................................... 81
Experts.......................................... 82
Additional Information........................... 82
Index to Financial Statements.................... F-1
</TABLE>
$20,000,000
[LOGO]
% SENIOR SUBORDINATED
NOTES DUE 2007
---------------------
PROSPECTUS
---------------------
ADVEST, INC.
LEGG MASON WOOD WALKER
INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses payable by the Company
in connection with the sale of the Notes being registered hereby. All the
amounts shown are estimated, except the SEC registration fee and the NASD filing
fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 6,970
NASD filing fee................................................... 2,800
Blue Sky fees and expenses........................................ 5,000
Printing and engraving expenses................................... 100,000
Legal fees and expenses........................................... 250,000
Auditors' accounting fees and expenses............................ 100,000
Trustee and Registrar fees........................................ 15,000
Miscellaneous expenses............................................ 20,230
---------
Total....................................................... $ 500,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation, subject to the applicable
indemnification provisions of the General Corporation Law of the State of
Delaware (the "DGCL"). Section 145 of the DGCL empowers a Delaware corporation
to indemnify, subject to the standards therein prescribed, any person in
connection with any action, suit or proceeding brought or threatened by reason
of the fact that such person is or was a director, officer, employee or agent of
the corporation or was serving as such with respect to another corporation or
other entity at the request of such corporation.
In accordance with Section 102(b)(7) of the DGCL, Article 9 of the Company's
Restated Certificate of Incorporation, as amended, provides that "[n]o director
shall be personally liable to the corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such director as a director, except
to the extent required by law (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith, or which involve intentional misconduct or a knowing violation of
law, (iii) pursuant to Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived an improper personal
benefit. Any repeal or modification of this Article 9 shall not increase the
personal liability or alleged liability of any director for any act or omission
occurring prior to such repeal or modification, or otherwise adversely affect
any right or protection of a director existing at the time of such repeal or
modification. The provisions of this Article 9 shall not affect rights or
indemnification under the corporation's by-laws or otherwise."
The Company's Amended and Restated By-Laws contain provisions that require
the Company to indemnify its directors and officers to the fullest extent
permitted by Delaware law.
The Underwriting Agreement (Exhibit 1.1 hereto) provides for indemnification
by the underwriters of the Company, its directors and executive officers, and
each person, if any, who controls the Company, for certain liabilities,
including liabilities arising under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company granted a non-qualified stock option to Lowell P. Weicker, Jr.,
a director of the Company, on December 7, 1995 for the purchase of 4,000 shares
of Common Stock of the Company at an exercise price of $4.75 per share (the
market price per share on the date of grant). Any shares purchased by Mr.
Weicker under this option will not be registered under the Securities Act. Mr.
Weicker's option will
II-1
<PAGE>
expire on December 7, 2005 unless terminated earlier in accordance with the
terms of the option agreement.
The Company granted a non-qualified stock option to Terry Lierman effective
April 9, 1996 for the purchase of 10,000 shares of Company Common Stock at an
exercise price of $4.50 per share, in recognition of Mr. Lierman's agreement to
assist the Company in obtaining certain financing transactions. Any shares
purchased by Mr. Lierman under this option will not be registered under the
Securities Act. Mr. Lierman's option will expire on April 9, 2001 unless
terminated earlier in accordance with the terms of the option agreement.
No underwriters were engaged in connection with the foregoing issuances of
securities. Such issuances were made in reliance upon the exemption from
registration set forth in Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement by and among HPSC, Previously filed
Inc. and the Underwriters
3.1 Restated Certificate of Incorporation of HPSC, Inc. Incorporated by reference to Exhibit 3.1 to HPSC's
filed in the State of Delaware on April 25, 1983 Annual Report on Form 10-K for the fiscal year
ended December 31, 1995
3.2 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.2 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year
September 14, 1987 ended December 31, 1995
3.3 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.3 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year
May 22, 1995 ended December 31, 1995
3.4 Amended and Restated By-Laws Previously filed
4.1 Rights Agreement dated as of August 3, 1993 between Incorporated by reference to Exhibit 4 to HPSC's
the Company and The First National Company and The Amendment No. 1 to its Current Report on Form 8-K
First National Bank of Boston, N.A., including as filed August 11, 1993
Exhibit B thereto the form of Rights Certificate
4.2 Form of Indenture Previously filed
4.3 Form of Senior Subordinated Note Included in Exhibit 4.2
5.1 Opinion of Hill & Barlow regarding legality of Previously filed
Senior Subordinated Notes
10.1 Lease dated as of March 8, 1994 between the Incorporated by reference to Exhibit 10.1 to HPSC's
Trustees of 60 State Street Trust and HPSC, Inc., Annual Report on Form 10-K for the fiscal year
dated September 10, 1970 and relating to the ended December 31, 1994
principal executive offices of HPSC, Inc. at 60
State Street, Boston, Massachusetts
10.2 HPSC, Inc. Stock Option Plan, dated March 5, 1986 Incorporated by reference to Exhibit 10.6 to HPSC's
Annual Report on Form 10-K for the fiscal year
ended December 30, 1989
10.3 Employment Agreement between HPSC, Inc. and John W. Previously filed
Everets, dated as of July 19, 1996
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
10.4 Employment Agreement between HPSC, Inc. and Raymond Previously filed
R. Doherty dated as of August 2, 1996
10.5 Employment Agreement between HPSC, Inc. and Rene Incorporated by reference to Exhibit 10.5 to HPSC's
Lefebvre dated April 6, 1994 Quarterly Report on Form 10-Q for the quarter ended
June 25, 1994
10.6 HPSC, Inc. Employee Stock Ownership Plan Agreement Incorporated by reference to Exhibit 10.9 to HPSC's
dated December 22, 1993 between HPSC, Inc. and John Annual Report on Form 10-K for the fiscal year
W. Everets and Raymond R. Doherty, as trustees ended December 25, 1993
10.7 First Amendment effective January 1, 1993 to HPSC, Incorporated by reference to Exhibit 10.2 to HPSC's
Inc. Employee Stock Ownership Plan Quarterly Report on Form 10-Q for the quarter ended
June 25, 1994
10.8 Second Amendment effective January 1, 1994 to HPSC, Incorporated by reference to Exhibit 10.11 to
Inc. Employee Stock ownership Plan HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994
10.9 Third Amendment effective January 1, 1993 to HPSC, Incorporated by reference to Exhibit 10.12 to
Inc. Employee Stock Ownership Plan HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994
10.10 HPSC, Inc. Supplemental Employee Stock Ownership Incorporated by reference to Exhibit 10.3 to HPSC's
Plan and Trust dated July 25, 1994 Quarterly Report on Form 10-Q for the quarter ended
June 25, 1994
10.11 HPSC, Inc. 1994 Stock Plan dated as of March 23, Incorporated by reference to Exhibit 10.4 to HPSC's
1994 and related forms of Nonqualified Option Grant Quarterly Report on Form 10-Q for the quarter ended
and Option Exercise Form June 25, 1994
10.12 HPSC, Inc. Supplemental Executive Retirement Plan Previously filed
dated as of January 1, 1997
10.13 HPSC, Inc. 401(k) Plan dated February, 1993 between Incorporated by reference to Exhibit 10.15 to
HPSC, Inc. and Metropolitan Life Insurance Company HPSC's Annual Report on Form 10-K for the fiscal
year ended December 25, 1993
10.14 Indenture and Service Agreement dated as of Incorporated by reference to Exhibit 10.10 to
December 23, 1993 by and among HPSC Funding Corp. HPSC's Annual Report on Form 10-K for the fiscal
I, HPSC, Inc. and State Street Bank and Trust year ended December 25, 1993
company of Connecticut, N.A.
10.15 Sale and Contribution Agreement dated as of Incorporated by reference to Exhibit 10.11 to
December 23, 1993 between HPSC Funding Corp. I and HPSC's Annual Report on Form 10-K for the fiscal
HPSC, Inc. year ended December 25, 1993
10.16 Note Purchase Agreement dated as of December 23, Incorporated by reference to Exhibit 10.12 to
1993 among HPSC Funding Corp. I, HPSC, Inc. and the HPSC's Annual Report on Form 10-K for the fiscal
Prudential Life Insurance Company of America year ended December 25, 1993
10.17 Insurance Agreement dated as of December 23, 1993 Incorporated by reference to Exhibit 10.13 to
among Municipal Bond Investors Assurance HPSC's Annual Report on Form 10-K for the fiscal
Corporation, HPSC Funding Corp. I, HPSC, Inc. and year ended December 25, 1993
State Street Bank and Trust Company of Connecticut,
N.A.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
10.18 Undertaking with respect to Exhibits to certain Incorporated by reference to Exhibit 10.14 to
Agreements HPSC's Annual Report on Form 10-K for the fiscal
year ended December 25, 1993
10.19 Second Amended and Restated Revolving Credit Previously filed
Agreement dated as of December 12, 1996 between
HPSC, Inc., The First National Bank of Boston,
individually and as Managing Agent, NationsBank,
N.A., individually and as Agent, and the banks
named therein
10.20 Loan Agreement dated April 13, 1995 between HPSC, Incorporated by reference to Exhibit 10.1 to HPSC's
Inc. and Springfield Institution for Savings Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995
10.21 Sale Agreement dated November 16, 1995 between Incorporated by reference to Exhibit 10.24 to
HPSC, Inc. and Springfield Institution for Savings HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995
10.22 Stock Purchase Agreement, dated as of November 1, Incorporated by reference to Exhibit 10.3 to HPSC's
1994, by and among HPSC, Inc. and each of Chemical Quarterly Report on Form 10-Q for the quarter ended
Bank; The CIT Group/ Business Credit, Inc.; Van September 24, 1994
Kampen Merritt Prime Rate Income Trust; the Nippon
Credit Bank, Ltd.; Union Bank of Finland, Grand
Cayman Branch; HPSC, Inc.; The Bank of Tokyo Trust
Company; and Morgens, Waterfall, Vintiadis & Co.
Inc., and related Schedules
10.23 Purchase and Contribution Agreement dated as of Incorporated by reference to Exhibit 10.31 to
January 31, 1995 between HPSC, Inc. and HPSC Bravo HPSC's Annual Report on Form 10-K for the fiscal
Funding Corp. year ended December 31, 1994
10.24 Credit Agreement dated as of January 31, 1995 among Incorporated by reference to Exhibit 10.32 to
HPSC Bravo Funding Corp., Triple-A One Funding HPSC's Annual Report on Form 10-K for the fiscal
Corporation, as lender, and CapMAC, as year ended December 31, 1994
Administrative Agent and as Collateral Agent
10.25 Agreement to furnish copies of Omitted Exhibits to Incorporated by reference to Exhibit 10.33 to
Certain Agreements with HPSC Bravo Funding Corp. HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994
10.26 Amendment documents, effective November 5, 1996, to Previously filed
Credit Agreement dated as of January 31, 1995 among
HPSC Bravo Funding Corp., Triple-A One Funding
Corporation, as lender, and CapMAC, as
Administrative Agent and as Collateral Agent
10.27 Amended and Restated HPSC, Inc. 1995 Stock Incorporated by reference to Exhibit 10.29 to
Incentive Plan HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995
10.28 Stock Option grant to Lowell P. Weicker effective Incorporated by reference to Exhibit 10.30 to
December 7, 1995 HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
11.1 Statement of Computation of Earnings per Share Filed herewith
12.1 Statement re computation of ratio of earnings to Filed herewith
fixed charges
13.1 Annual Report to Stockholders for the fiscal year Incorporated by reference to Exhibit 13 to HPSC's
ended December 31, 1995 Annual Report on Form 10-K for the fiscal year
ended December 31, 1995
16.1 Letter from Coopers & Lybrand L.L.P. re change in Incorporated by reference to Exhibit 16 to HPSC's
certifying accountant Current Report on Form 8-K dated June 16, 1996
21.1 Subsidiaries of HPSC, Inc. Incorporated by reference to Exhibit 21 to HPSC's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1995
23.1 Consent of Deloitte & Touche LLP Filed herewith
23.2 Consent of Coopers & Lybrand L.L.P. Filed herewith
23.3 Consent of Hill & Barlow, a Professional Included in Exhibit 5.1
Corporation
25.1 Statement of Eligibility of Trustee on Form T-1 Previously filed
27.1 HPSC, Inc. Financial Data Schedule Filed herewith
b. Financial Statement Schedules.
None.
</TABLE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 14, or otherwise, the Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Company hereby undertakes to provide at the closing of this
offering to the Underwriters specified in the Underwriting Agreement
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 2 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Boston, Commonwealth of Massachusetts on the 18th day of March, 1997.
<TABLE>
<S> <C> <C>
HPSC, INC.
By: /s/ JOHN W. EVERETS
-----------------------------------------
John W. Everets
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE
OFFICER
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 18th day of March, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------
<C> <S>
Chairman of the Board,
/s/ JOHN W. EVERETS Chief Executive Officer
- ------------------------------ and Director (Principal
John W. Everets Executive Officer)
Vice President of Finance,
/s/ RENE LEFEBVRE Chief Financial Officer
- ------------------------------ and Treasurer (Principal
Rene Lefebvre Financial and Accounting
Officer)
/s/ RAYMOND R. DOHERTY
- ------------------------------ President, Chief Operating
Raymond R. Doherty Officer and Director
/s/ JOSEPH A. BIERNAT
- ------------------------------ Director
Joseph A. Biernat
/s/ J. KERMIT BIRCHFIELD
- ------------------------------ Director
J. Kermit Birchfield
/s/ DOLLIE A. COLE
- ------------------------------ Director
Dollie A. Cole
/s/ SAMUEL P. COOLEY
- ------------------------------ Director
Samuel P. Cooley
/s/ THOMAS M. MCDOUGAL
- ------------------------------ Director
Thomas M. McDougal
/s/ LOWELL P. WEICKER, JR.
- ------------------------------ Director
Lowell P. Weicker, Jr.
</TABLE>
II-6
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1997.
REGISTRATION NO. 333-20733
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HPSC, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement by and among HPSC, Previously filed
Inc. and the Underwriters
3.1 Restated Certificate of Incorporation of HPSC, Inc. Incorporated by reference to Exhibit 3.1 to HPSC's
filed in the State of Delaware on April 25, 1983 Annual Report on Form 10-K for the fiscal year
ended December 31, 1995
3.2 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.2 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year
September 14, 1987 ended December 31, 1995
3.3 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.3 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year
May 22, 1995 ended December 31, 1995
3.4 Amended and Restated By-Laws Previously filed
4.1 Rights Agreement dated as of August 3, 1993 between Incorporated by reference to Exhibit 4 to HPSC's
the Company and The First National Company and The Amendment No. 1 to its Current Report on Form 8-K
First National Bank of Boston, N.A., including as filed August 11, 1993
Exhibit B thereto the form of Rights Certificate
4.2 Form of Indenture Previously filed
4.3 Form of Senior Subordinated Note Included in Exhibit 4.2
5.1 Opinion of Hill & Barlow regarding legality of Previously filed
Senior Subordinated Notes
10.1 Lease dated as of March 8, 1994 between the Incorporated by reference to Exhibit 10.1 to HPSC's
Trustees of 60 State Street Trust and HPSC, Inc., Annual Report on Form 10-K for the fiscal year
dated September 10, 1970 and relating to the ended December 31, 1994
principal executive offices of HPSC, Inc. at 60
State Street, Boston, Massachusetts
10.2 HPSC, Inc. Stock Option Plan, dated March 5, 1986 Incorporated by reference to Exhibit 10.6 to HPSC's
Annual Report on Form 10-K for the fiscal year
ended December 30, 1989
10.3 Employment Agreement between HPSC, Inc. and John W. Previously filed
Everets, dated as of July 19, 1996
10.4 Employment Agreement between HPSC, Inc. and Raymond Previously filed
R. Doherty dated as of August 2, 1996
10.5 Employment Agreement between HPSC, Inc. and Rene Incorporated by reference to Exhibit 10.5 to HPSC's
Lefebvre dated April 6, 1994 Quarterly Report on Form 10-Q for the quarter ended
June 25, 1994
10.6 HPSC, Inc. Employee Stock Ownership Plan Agreement Incorporated by reference to Exhibit 10.9 to HPSC's
dated December 22, 1993 between HPSC, Inc. and John Annual Report on Form 10-K for the fiscal year
W. Everets and Raymond R. Doherty, as trustees ended December 25, 1993
10.7 First Amendment effective January 1, 1993 to HPSC, Incorporated by reference to Exhibit 10.2 to HPSC's
Inc. Employee Stock Ownership Plan Quarterly Report on Form 10-Q for the quarter ended
June 25, 1994
10.8 Second Amendment effective January 1, 1994 to HPSC, Incorporated by reference to Exhibit 10.11 to
Inc. Employee Stock ownership Plan HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
10.9 Third Amendment effective January 1, 1993 to HPSC, Incorporated by reference to Exhibit 10.12 to
Inc. Employee Stock Ownership Plan HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994
10.10 HPSC, Inc. Supplemental Employee Stock Ownership Incorporated by reference to Exhibit 10.3 to HPSC's
Plan and Trust dated July 25, 1994 Quarterly Report on Form 10-Q for the quarter ended
June 25, 1994
10.11 HPSC, Inc. 1994 Stock Plan dated as of March 23, Incorporated by reference to Exhibit 10.4 to HPSC's
1994 and related forms of Nonqualified Option Grant Quarterly Report on Form 10-Q for the quarter ended
and Option Exercise Form June 25, 1994
10.12 HPSC, Inc. Supplemental Executive Retirement Plan Previously filed
dated as of January 1, 1997
10.13 HPSC, Inc. 401(k) Plan dated February, 1993 between Incorporated by reference to Exhibit 10.15 to
HPSC, Inc. and Metropolitan Life Insurance Company HPSC's Annual Report on Form 10-K for the fiscal
year ended December 25, 1993
10.14 Indenture and Service Agreement dated as of Incorporated by reference to Exhibit 10.10 to
December 23, 1993 by and among HPSC Funding Corp. HPSC's Annual Report on Form 10-K for the fiscal
I, HPSC, Inc. and State Street Bank and Trust year ended December 25, 1993
company of Connecticut, N.A.
10.15 Sale and Contribution Agreement dated as of Incorporated by reference to Exhibit 10.11 to
December 23, 1993 between HPSC Funding Corp. I and HPSC's Annual Report on Form 10-K for the fiscal
HPSC, Inc. year ended December 25, 1993
10.16 Note Purchase Agreement dated as of December 23, Incorporated by reference to Exhibit 10.12 to
1993 among HPSC Funding Corp. I, HPSC, Inc. and the HPSC's Annual Report on Form 10-K for the fiscal
Prudential Life Insurance Company of America year ended December 25, 1993
10.17 Insurance Agreement dated as of December 23, 1993 Incorporated by reference to Exhibit 10.13 to
among Municipal Bond Investors Assurance HPSC's Annual Report on Form 10-K for the fiscal
Corporation, HPSC Funding Corp. I, HPSC, Inc. and year ended December 25, 1993
State Street Bank and Trust Company of Connecticut,
N.A.
10.18 Undertaking with respect to Exhibits to certain Incorporated by reference to Exhibit 10.14 to
Agreements HPSC's Annual Report on Form 10-K for the fiscal
year ended December 25, 1993
10.19 Second Amended and Restated Revolving Credit Previously filed
Agreement dated as of December 12, 1996 between
HPSC, Inc., The First National Bank of Boston,
individually and as Managing Agent, NationsBank,
N.A., individually and as Agent, and the banks
named therein
10.20 Loan Agreement dated April 13, 1995 between HPSC, Incorporated by reference to Exhibit 10.1 to HPSC's
Inc. and Springfield Institution for Savings Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995
10.21 Sale Agreement dated November 16, 1995 between Incorporated by reference to Exhibit 10.24 to
HPSC, Inc. and Springfield Institution for Savings HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
10.22 Stock Purchase Agreement, dated as of November 1, Incorporated by reference to Exhibit 10.3 to HPSC's
1994, by and among HPSC, Inc. and each of Chemical Quarterly Report on Form 10-Q for the quarter ended
Bank; The CIT Group/ Business Credit, Inc.; Van September 24, 1994
Kampen Merritt Prime Rate Income Trust; the Nippon
Credit Bank, Ltd.; Union Bank of Finland, Grand
Cayman Branch; HPSC, Inc.; The Bank of Tokyo Trust
Company; and Morgens, Waterfall, Vintiadis & Co.
Inc., and related Schedules
10.23 Purchase and Contribution Agreement dated as of Incorporated by reference to Exhibit 10.31 to
January 31, 1995 between HPSC, Inc. and HPSC Bravo HPSC's Annual Report on Form 10-K for the fiscal
Funding Corp. year ended December 31, 1994
10.24 Credit Agreement dated as of January 31, 1995 among Incorporated by reference to Exhibit 10.32 to
HPSC Bravo Funding Corp., Triple-A One Funding HPSC's Annual Report on Form 10-K for the fiscal
Corporation, as lender, and CapMAC, as year ended December 31, 1994
Administrative Agent and as Collateral Agent
10.25 Agreement to furnish copies of Omitted Exhibits to Incorporated by reference to Exhibit 10.33 to
Certain Agreements with HPSC Bravo Funding Corp. HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1994
10.26 Amendment documents, effective November 5, 1996, to Previously filed
Credit Agreement dated as of January 31, 1995 among
HPSC Bravo Funding Corp., Triple-A One Funding
Corporation, as lender, and CapMAC, as
Administrative Agent and as Collateral Agent
10.27 Amended and Restated HPSC, Inc. 1995 Stock Incorporated by reference to Exhibit 10.29 to
Incentive Plan HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995
10.28 Stock Option grant to Lowell P. Weicker effective Incorporated by reference to Exhibit 10.30 to
December 7, 1995 HPSC's Annual Report on Form 10-K for the fiscal
year ended December 31, 1995
11.1 Statement of Computation of Earnings per Share Filed herewith
12.1 Statement re computation of ratio of earnings to Filed herewith
fixed charges
13.1 Annual Report to Stockholders for the fiscal year Incorporated by reference to Exhibit 13 to HPSC's
ended December 31, 1995 Annual Report on Form 10-K for the fiscal year
ended December 31, 1995
16.1 Letter from Coopers & Lybrand L.L.P. re change in Incorporated by reference to Exhibit 16 to HPSC's
certifying accountant Current Report on Form 8-K dated June 16, 1996
21.1 Subsidiaries of HPSC, Inc. Incorporated by reference to Exhibit 21 to HPSC's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1995
23.1 Consent of Deloitte & Touche LLP Filed herewith
23.2 Consent of Coopers & Lybrand L.L.P. Filed herewith
23.3 Consent of Hill & Barlow, a Professional Included in Exhibit 5.1
Corporation
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NO. DESCRIPTION OF DOCUMENT METHOD OF FILING
- --------- --------------------------------------------------- ---------------------------------------------------
<C> <S> <C>
25.1 Statement of Eligibility of Trustee on Form T-1 Previously filed
27.1 HPSC, Inc. Financial Data Schedule Filed herewith
</TABLE>
<PAGE>
EXHIBIT 11.1
HPSC, INC.
CALCULATION OF EARNINGS PER SHARE
OUTSTANDING SHARE RECONCILIATION
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994 (1)
---- ---- ----
Weighted Average Shares Outstanding 4,684,147 4,696,376 5,565,461
LESS:
Unissued ESOP/SESOP (560,348) (590,348) (621,720)
Restricted Stock (278,108) (224,667) --
ADD:
Option Effect 221,545 -- 45,650
--------- --------- --------
SHARES USED TO COMPUTE NET
INCOME/(LOSS) PER SHARE 4,067,236 3,881,361 4,989,391
--------- --------- ---------
--------- --------- ---------
(1) For 1994 and prior years, the Company's
fiscal year was the 52 or 53 week period
ending on the last Saturday of the calendar
year. The 1994 fiscal year covers the 53
week period from December 26, 1993 to
December 31, 1994. In fiscal year 1995,
the Company changed its fiscal year end to
December 31.
<PAGE>
Exhibit 12.1
HPSC, INC.
COMPUTATION OF RATIO OF EARNINGS
BEFORE FIXED CHARGES TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
PROFORMA
YEAR ENDED, YEAR ENDED,
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 25, DECEMBER 26,
1996 (1) 1996 1995 1994 (2) 1993 1992
<S> <C> <C> <C> <C> <C> <C>
Excess (deficiency) of earnings
available to cover fixed charges (3)
Earnings:
Income (loss) before income taxes $ 653 $1,579 $ 79 $ 750 $(12,148) $ 3,244
Add: Fixed charges 9,072 8,146 5,339 3,514 9,057 10,663
--------------------------------------------------------------------------------
Earnings, as adjusted 9,725 9,725 5,418 4,264 (3,091) 13,907
--------------------------------------------------------------------------------
Fixed charges:
Interest on indebtedness 8,922 8,146 5,339 3,476 8,185 9,900
Amortization of debt issue costs 150 - - 38 872 763
--------------------------------------------------------------------------------
Fixed charges 9,072 8,146 5,339 3,514 9,057 10,663
--------------------------------------------------------------------------------
Excess (deficiency) of earnings to fixed
charges $ 653 $1,579 $ 79 $ 750 $(12,148) $ 3,244
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Ratio of earnings to fixed charges 1.07 1.19 1.01 1.21 N/A(4) 1.30
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
(1) In computing pro forma earnings to fixed
charges, the Company assumes that it will incur
additional interest expense on the $20 million
of new indebtedness at an estimated interest
rate of 10%, offset, in part, by a reduction of
interest expense at a weighted average interest
rate of 7.25% on the $18.5 million of debt that
will be repaid with the net proceeds of the offering.
Additionally, the pro forma calculation includes
the effect of the amortization of debt issue
costs incurred in connection with this offering
over a 10-year period.
(2) For 1994 and prior years, the Company's fiscal
year was the 52 or 53 week period ending on the
last Saturday of the calendar year. The 1994 fiscal
year covers the 53 week period December 26, 1993 to
December 31, 1994. In fiscal year 1995, the Company
changed its fiscal year-end to December 31.
(3) For purposes of these computations,
earnings consist of income (loss) before
income taxes plus fixed charges. Fixed
charges consist of interest on indebtedness
and amortization of debt issue costs.
(4) Earnings before income taxes plus fixed
charges were insufficient to cover fixed
charges in 1993 by $12,148,000.
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-20733 of HPSC, Inc. of our report dated February 28, 1997 appearing
in the Prospectus, which is a part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
Deloitte & Touche LLP
Boston, Massachusetts
March 17, 1997
<PAGE>
EXHIBT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement
on Form S-1 (File No. 333-20733) of our report dated March 25,
1996, on our audits of the financial statements and financial
statement schedules of HPSC, Inc. We also consent to the
reference to our firm under the caption "Experts".
/s/ Coopers & Lybrand L.L.P
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 8,945
<SECURITIES> 0
<RECEIVABLES> 178,937
<ALLOWANCES> 4,082
<INVENTORY> 0
<CURRENT-ASSETS> 158,167
<PP&E> 1,969
<DEPRECIATION> 728
<TOTAL-ASSETS> 163,217
<CURRENT-LIABILITIES> 45,716
<BONDS> 76,737
0
0
<COMMON> 48
<OTHER-SE> 34,332
<TOTAL-LIABILITY-AND-EQUITY> 163,217
<SALES> 0
<TOTAL-REVENUES> 17,515
<CGS> 0
<TOTAL-COSTS> 8,059
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,564
<INTEREST-EXPENSE> 8,146
<INCOME-PRETAX> 1,579
<INCOME-TAX> 704
<INCOME-CONTINUING> 875
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 875
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
