<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1997.
REGISTRATION NO. 333-20733
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
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 10, 1997
$20,000,000
HPSC LOGO
% SENIOR SUBORDINATED NOTES DUE 2007
--------------------------
The % Senior Subordinated Notes offered hereby (the "Notes") will mature
on 1, 2007. Interest on the Notes is payable semiannually on
1 and 1, beginning 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 1, 2002 at the redemption prices set forth herein,
plus accrued but unpaid interest to the date of repurchase.
On and after 1, 2002, HPSC is required to redeem, on 1,
1, 1 and 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, $14.0 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................... , 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 1, 2002, HPSC is
required to redeem, on 1, 1, 1
and 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.......... 1 and 1, beginning 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 1, 200 , 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 1995 1996
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME 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 (2)... -- -- -- 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 (3)........... $25,161 $14,152 $32,609 $68,554 $96,982
Number of leases and notes originated during period (3)............ 1,575 745 1,590 2,800 3,740
Average amount financed per contract originated during period
(3)............................................................. $ 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 (4)............................. 1.30x -- 1.21x 1.01x 1.19x
Pro forma ratio of earnings to fixed charges....................... 1.07x
EBITDA (5)......................................................... $14,889 $ (396) $ 6,136 $ 7,758 $12,587
Ratio of EBITDA to interest expense (6)............................ 1.40x -- 1.75x 1.45x 1.55x
Pro forma ratio of EBITDA to interest expense (5) (7).............. 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........................ 158,857 130,437 103,148 130,769 163,217 164,717
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 33,359 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) Reflects a one-time, non-cash loss on write-off of cumulative foreign
currency translation adjustments related to the Company's discontinued
Canadian operations.
(3) 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.
(4) 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
6
<PAGE>
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.
(5) 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.
(6) 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.
(7) 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
$3.80 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, $14.0
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 1995 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
STATEMENT OF INCOME 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 (2).................................... -- -- -- 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
(3)............................................... $25,161 $14,152 $32,609 $68,554 $96,982
Number of leases and notes originated during period
(3)............................................... 1,575 745 1,590 2,800 3,740
Average amount financed per contract originated
during period (3)................................. $ 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 (4)............... 1.30x -- 1.21x 1.01x 1.19x
Pro forma ratio of earnings to fixed charges......... 1.07x
EBITDA (5)........................................... $14,889 $ (396) $ 6,136 $ 7,758 $12,587
Ratio of EBITDA to interest expense (6).............. 1.40x -- 1.75x 1.45x 1.55x
Pro forma ratio of EBITDA to interest expense (5)
(7)............................................... 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........................ 158,857 130,437 103,148 130,769 163,217 164,717
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 33,359 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) Reflects a one-time, non-cash loss on write-off of cumulative foreign
currency translation adjustments related to the Company's discontinued
Canadian operations.
(3) 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.
(4) 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
15
<PAGE>
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.
(5) 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.
(6) 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.
(7) 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."
SUMMARY QUARTERLY FINANCIAL INFORMATION AND OTHER DATA
The following table sets forth certain unaudited quarterly income statement
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 INCOME 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 4,067,236
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.
16
<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
17
<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
18
<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
19
<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
20
<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 $1.6 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
21
<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.
22
<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
23
<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.
24
<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.
25
<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 $ 14,000 $ 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 $36.6 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.
26
<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"
27
<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
28
<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
29
<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
30
<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
31
<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 $36.6 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 $14.0 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
32
<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).
33
<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.
34
<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
35
<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
36
<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
37
<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
38
<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.
39
<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.
40
<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.
41
<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, and Dairy Mart Convenience Stores, Inc.
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.
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
42
<PAGE>
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.
43
<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.
44
<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
45
<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.
46
<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; all of such options 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
47
<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
2,000 shares of Common Stock outstanding to key employees and options
exercisable for an aggregate of 5,000 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
48
<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.
49
<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%; 31,372 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,
50
<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.
51
<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>
52
<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.
53
<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.
54
<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 , 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 1 and 1 of each year, commencing 1, 1997,
to the Persons in whose names such Notes are registered at the close of business
on the 15 or 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
55
<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 , 2002, the Company is required to redeem on 1,
1, 1 and 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 100% of
56
<PAGE>
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 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 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
57
<PAGE>
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.
58
<PAGE>
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
59
<PAGE>
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
60
<PAGE>
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."
61
<PAGE>
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
62
<PAGE>
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.
63
<PAGE>
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
64
<PAGE>
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.
65
<PAGE>
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
66
<PAGE>
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
67
<PAGE>
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)
68
<PAGE>
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.
69
<PAGE>
"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
70
<PAGE>
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
71
<PAGE>
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.
72
<PAGE>
"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
73
<PAGE>
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
74
<PAGE>
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 , 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 (including the
Initial Purchasers), banks and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either
75
<PAGE>
directly or indirectly. Beneficial 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,
76
<PAGE>
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.
77
<PAGE>
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.
78
<PAGE>
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."
79
<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.
80
<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.
81
<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 Income 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 income, 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 income, 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 3,294
Refundable income taxes............................................................ 1,203 1,088
------------ ------------
Total Assets................................................................... $ 163,217 $ 130,769
------------ ------------
------------ ------------
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 and receivables........................................... (2,785) (2,066)
------------ ------------
Total Stockholders' Equity..................................................... 34,332 33,359
------------ ------------
Total Liabilities and Stockholder's Equity........................................... $ 163,217 $ 130,769
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(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>
CUMULATIVE
DEFERRED FOREIGN
COMMON STOCK ADDITIONAL COMPENSATION CURRENCY
-------------------- PAID-IN RETAINED TREASURY AND TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS STOCK RECEIVABLES ADJUSTMENT TOTAL
---------- ------- -------- -------- -------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 25,
1993........................ 4,923,571 $ 49 $13,645 $24,151 $ -- $-- $(224) $ 37,621
Issuance of Common Stock...... 824 -- 3 -- -- -- -- 3
Net Income.................... -- -- -- 450 -- -- -- 450
Purchase of Treasury Stock.... -- -- -- -- (5,023) -- -- (5,023)
Issuance of Common Stock to
ESOP & SESOP................ 650,000 7 2,268 -- -- (2,275) -- --
ESOP Compensation............. -- -- -- -- -- 99 -- 99
Foreign currency translation
adjustments................. -- -- -- -- -- -- (328) (328)
---------- ------- -------- -------- -------- ------------ ----- --------
Balance at December 31,
1994........................ 5,574,395 56 15,916 24,601 (5,023) (2,176) (552) 32,822
Issuance of Common Stock...... 317 -- -- -- -- -- -- --
Net Loss...................... -- -- -- (125) -- -- -- (125)
Retirement of Treasury
Stock....................... (1,125,182) (12) (4,601) -- 4,613 -- -- --
Restricted Stock Awards....... 337,000 4 (4) -- -- -- -- --
ESOP Compensation............. -- -- -- -- -- 110 -- 110
Foreign currency translation
adjustments................. -- -- -- -- -- -- (49) (49)
Recognized in current period
upon liquidation of foreign
subsidiary.................. -- -- -- -- -- -- 601 601
---------- ------- -------- -------- -------- ------------ ----- --------
Balance at December 31,1995... 4,786,530 48 11,311 24,476 (410) (2,066) -- 33,359
Net Income.................... -- -- -- 875 -- -- -- 875
Restricted Stock Awards....... -- -- 994 -- -- (994) -- --
Purchase of Treasury Stock.... -- -- -- -- (177) -- -- (177)
Restricted Stock
Compensation................ -- -- 365 365
ESOP Compensation............. -- -- -- -- -- 105 -- 105
Notes Receivable from Officers
and Employees............... -- -- -- -- -- (195) -- (195)
---------- ------- -------- -------- -------- ------------ ----- --------
Balance at December 31,
1996........................ 4,786,530 $ 48 $12,305 $25,351 $ (587) $(2,785) $-- $ 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 37,524 43,727
Proceeds from sales of lease contracts and notes receivable due in
installments.............................................................. 24,344 1,630 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 income statement 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 AND RECEIVABLES--Deferred compensation includes notes
receivable from the Company's Employee Stock Ownership Plan ("ESOP") and
Supplemental Employee Stock Ownership Plan ("SESOP"), deferred compensation
related to restricted stock awards and, at December 31, 1996, receivables from
officers and employees under the Stock Loan Program (see Note G). Deferred
compensation and receivables consist 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 -- --
Receivables from Officers and Employees.......................... 195 -- --
--------- --------- ---------
Total.......................................................... $ 2,785 $ 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).
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, the Company has not had any
charge offs of commercial notes receivable. The provision for losses related
F-11
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE B. LEASES AND NOTES RECEIVABLE (CONTINUED)
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>
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
F-12
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE C. SALES OF LEASE AND NOTES RECEIVABLE (CONTINUED)
$16,696,000 at December 31, 1996. In addition, under the sales agreements the
Company continues to service the assets sold. The Company deferred approximately
$395,000 and $20,000 in service fee income from 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 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
F-13
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. REVOLVING CREDIT BORROWINGS AND OTHER DEBT (CONTINUED)
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 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.
F-14
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE D. REVOLVING CREDIT BORROWINGS AND OTHER DEBT (CONTINUED)
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.
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>
F-15
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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>
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>
F-16
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE F. INCOME TAXES (CONTINUED)
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>
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
F-17
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. STOCK OPTION AND STOCK INCENTIVE PLANS (CONTINUED)
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 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.
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 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
F-18
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. STOCK OPTION AND STOCK INCENTIVE PLANS (CONTINUED)
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 10,000 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.
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>
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 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.
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>
F-20
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE G. STOCK OPTION AND STOCK INCENTIVE PLANS (CONTINUED)
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 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
F-21
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE H. EMPLOYEE BENEFIT PLANS (CONTINUED)
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 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.
F-22
<PAGE>
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE J. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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>
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-23
<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............ 17
Business......................................... 25
Management....................................... 41
Certain Transactions............................. 51
Principal Stockholders........................... 52
Description of Notes............................. 55
Description of Certain Indebtedness.............. 78
Underwriting..................................... 80
Legal Matters.................................... 80
Experts.......................................... 81
Additional Information........................... 81
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 Filed herewith
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 Filed herewith
4.3 Form of Senior Subordinated Note Included in Exhibit 4.2
5.1 Opinion of Hill & Barlow regarding legality of Filed herewith
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. Filed herewith
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 Filed herewith
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 Filed herewith
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
23.2 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. 1 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 10th 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. 1 to the Registration Statement has been signed by the following
persons in the capacities indicated below on the 10th 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 Filed herewith
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 Filed herewith
4.3 Form of Senior Subordinated Note Included in Exhibit 4.2
5.1 Opinion of Hill & Barlow regarding legality of Filed herewith
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. Filed herewith
Everets, dated as of July 19, 1996
10.4 Employment Agreement between HPSC, Inc. and Raymond Filed herewith
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 Filed herewith
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
23.2 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>
Effective May 16, 1996
AMENDED AND RESTATED BY-LAWS
OF
HPSC, INC.
ARTICLE I
Stockholders
SECTION 1. ANNUAL MEETING. An annual meeting of the stockholders
of the corporation, for the election of the Directors to succeed those whose
terms expire and for the transaction of such other business as may properly
come before the meeting, shall be held on the third Tuesday of March in each
year (or if that be a legal holiday in the place where the meeting is to be
held, on the next succeeding full business day) at the hour stated in the
notice of the meeting. If the annual meeting of the stockholders is not held
on such date, the Directors shall cause the meeting to be held as soon
thereafter as convenient.
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders
may be called by the President or by order of the Board of Directors, and
shall be called by the Secretary (or in the case of the death, absence,
incapacity or refusal of the Secretary, by any other officer) upon written
application by one or more stockholders who together hold at least 50 percent
in interest of the capital stock entitled to vote at the meeting.
SECTION 3. PLACE AND HOUR OF MEETINGS. All meetings of
stockholders shall be held at the principal office of the corporation at
10:00 a.m. local time unless a different place or hour is fixed by the person
or persons calling the meeting and stated in the notice of the meeting.
SECTION 4. NOTICES OF MEETINGS AND ADJOURNED MEETINGS. A written
notice of each annual or special meeting of the stockholders stating the
place, date, and hour thereof, shall be given by the Secretary (or the person
or persons calling the meeting), not less than 10 nor more than 60 days
before the date of the meeting, to each stockholder entitled to vote thereat,
by leaving such notice with him or at his residence or usual place of
business, or by depositing it postage prepaid in the United States mail,
directed to each stockholder at his address as it appears on the records of
the corporation. The notice of a special meeting of the stockholders shall
state the purpose or purposes for which the meeting is called. An affidavit
of the Secretary, Assistant Secretary, or transfer agent of the corporation
that the notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
<PAGE>
No notice need be given to any person with whom communication is unlawful or
to any person who has waived such notice (a) in writing (which writing need
not specify the business to be transacted at, or the purpose of, the meeting)
signed by such person before or after the time of the meeting or (b) by
attending the meeting except for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. When a meeting is adjourned to
another time and place, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the
adjournment is taken except that, if the adjournment is for more than thirty
days or if, after the adjournment, a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given in the
manner provided in this Section 4.
SECTION 5. QUORUM. At any meeting of the stockholders, a quorum
for the transaction of business shall consist of one or more individuals
appearing in person or represented by proxy and owning or representing a
majority of the shares of the corporation then outstanding and entitled to
vote, provided that less than such quorum shall have power to adjourn the
meeting from time to time.
SECTION 6. VOTING. Unless otherwise provided in the Certificate
of Incorporation and subject to the provisions of Section 10 of this Article
I, each stockholder shall have one vote for each share of stock entitled to
vote held by him of record according to the records of the corporation.
Persons holding stock in a fiduciary capacity shall be entitled to vote the
shares so held. Persons whose stock is pledged shall be entitled to vote
unless in the transfer by the pledgor on the books of the corporation he has
expressly empowered the pledgee to vote the pledged shares, in which case
only the pledgee or his proxy shall be entitled to vote. If shares stand of
record in the names of two or more persons or if two or more persons have the
same fiduciary relationship respecting the shares then, unless the Secretary
is given written notice to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it
is so provided to the contrary: (a) if only one votes, his act binds all;
(b) if more than one vote, the act of the majority so voting binds all; and
(c) if more than one vote and the vote is evenly split, the effect shall be
as provided by law.
SECTION 7. PROXIES. Each stockholder entitled to vote at a
meeting of stockholders or to express consent or dissent to corporate action
in writing without a meeting may authorize another person or any group of not
more than three persons to act for him by proxy, but no such proxy shall be
voted or acted upon after three years from its date, unless the proxy
provides for a longer period.
SECTION 8. ACTION AT MEETING. When a quorum is present at any
meeting, action of the stockholders on any matter properly brought before
such meeting shall require, and may be effected by, the affirmative vote of
the holders of a majority in interest of the stock present or represented and
entitled to vote and voting on such matter, except where a
-2-
<PAGE>
different vote is required by law, the Certificate of Incorporation or these
By-Laws. If the Certificate of Incorporation so provides, no ballot shall be
required for any election unless requested by a stockholder present or
represented at the meeting and entitled to vote in the election.
SECTION 9. STOCKHOLDER LISTS. The officer who has charge of the
stock ledger of the corporation shall prepare and make, at least ten days
before every meeting of stockholders, a complete list of stockholders
entitled to vote at the meeting, arranged in alphabetical order, and showing
the address of each stockholder and the number of shares registered in the
name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at
the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present. The stock ledger shall be the
only evidence as to who are the stockholders entitled to examine the stock
ledger, the list required by this section or the books of the corporation, or
to vote in person or by proxy at any meeting of stockholders.
SECTION 10. RECORD DATE.
In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the purpose
of any other lawful action, the Board of Directors may fix a record date
which shall not precede the date such record date is fixed and shall not be
more than 60 nor less than ten days before the date of such meeting, nor more
than 60 days prior to any such other action. If no record is fixed, the
record date for determining stockholders entitled to notice of or to vote at
a meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given. The record date for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the
adjourned meeting.
SECTION 11. ACTION BY WRITTEN CONSENT. All actions taken by
stockholders shall be taken at an annual or special meeting of stockholders
in accordance with the provisions of this Article I. No action by
stockholders may be taken by written consent or otherwise without a meeting.
SECTION 12. NOTIFICATION OF NOMINATIONS. Subject to the
provisions of Section 5 of Article II of these by-laws which permit a vacancy
in the board of directors to be filled by
-3-
<PAGE>
directors, only a stockholder of record entitled to vote in the election of
directors generally may nominate one or more persons for election as
directors at a meeting of stockholders and only if written notice of such
stockholder's intent to make such nomination or nominations has been timely
given, either by personal delivery or by United States mail, postage prepaid,
to the Secretary of the corporation. To be timely, a stockholder's notice
shall be delivered to the Secretary at the principal executive offices of the
corporation (i) in the case of an annual meeting or a special meeting in lieu
of annual meeting, not later than the close of business on the 60th day nor
earlier than the close of business on the 90th day prior to the first
anniversary of the preceding year's annual meeting, regardless of any
postponements, deferrals or adjournments of that meeting to a later date;
provided, however, that in the event that the date of the annual meeting or
special meeting in lieu of an annual meeting is more than 30 days before or
more than 60 days after such anniversary date, notice by the stockholder to
be timely must be so delivered not earlier than the close of business on the
90th day prior to such meeting and not later than the later of the 60th day
prior to such meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by the corporation and
(ii) in the case of a special meeting (other than a special meeting in lieu
of an annual meeting), not earlier than the close of business on the 90th day
prior to such meeting and not later than the close of business on the later
of the 60th day prior to such meeting or the 10th day following the day on
which public announcement of the date of such meeting is first made by the
corporation. In no event shall the public announcement of an adjournment of
a meeting commence a new time period for the giving of a stockholder's notice
as described above. For purposes of this Section 12, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News
Service, Associated Press or comparable national news service or in a
document publicly filed by the corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act
of 1934, as amended.
Each such notice shall set forth:
(a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated;
(b) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person and
persons specified in the notice;
(c) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which the nomination or nominations are to be
made by the stockholder; and
(d) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of
-4-
<PAGE>
the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors.
To be effective, each notice of intent to make a nomination given
hereunder shall be accompanied by the written consent of each nominee to
serve as a director of the corporation if elected.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not properly brought before the
meeting in accordance with the provisions hereof and, if he should so
determine, he shall declare to the meeting that such nomination was not
properly brought before the meeting and shall not be considered.
SECTION 13. ADVANCE NOTICE OF STOCKHOLDER BUSINESS.
At any special meeting of stockholders only such business shall be
conducted as shall have been set forth in the notice of special meeting. At
an annual meeting of stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before an annual meeting, business must be (i) specified in the notice of
meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (ii) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (iii) otherwise (a) properly
requested to be brought before the meeting by a stockholder of record
entitled to vote in the election of directors generally and (b) constitute a
proper subject to be brought before such meeting.
For business (other than the election of directors, which is addressed
by Section 12 of this Article I) to be properly brought before an annual
meeting or a special meeting in lieu of annual meeting by a stockholder, the
stockholder must give timely notice in writing to the Secretary of the
corporation. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the corporation, not later
than the close of business on the 60th day nor earlier than the close of
business on the 90th day prior to the first anniversary of the preceding
year's annual meeting, regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, that in the
event that the date of the annual meeting or special meeting in lieu of an
annual meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the 90th day prior to such meeting
and not later than the close of business on the later of the 60th day prior
to such meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by the corporation.
In no event shall the public announcement of an adjournment of a meeting
commence a new time period for the giving of a stockholder's notice as
described above. A stockholder's notice to the Secretary shall set forth as
to each matter (other than the election of directors, which is addressed by
Section 12 of this Article I) the stockholder proposes to bring before the
annual meeting: (a) a brief description of the business desired to be brought
before the annual meeting and the reasons
-5-
<PAGE>
for conducting such business at the annual meeting, (b) the name and address,
as they appear on the corporation's books, of the stockholder intending to
propose such business, (c) the class and number of shares of capital stock of
the corporation which are beneficially owned by the stockholder, (d) a
representation that the stockholder is a holder of record of capital stock of
the corporation entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to present such business, and (e) any
material interests of the stockholder in such business.
Notwithstanding anything in the By-Laws to the contrary, no business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in Section 12 and this Section 13. The chairman of the
annual meeting shall, if the facts warrant, determine and declare to the
meeting that (i) the business proposed to be brought before the meeting was
not a proper subject therefor and/or (ii) such business was not properly
brought before the meeting in accordance with the provisions of this Section
13, and, if he should so determine, he shall so declare to the meeting and
any such business not properly brought before the meeting or not a proper
subject therefor shall not be transacted.
Notwithstanding the foregoing provisions of this Section 13, a
stockholder shall also comply with all applicable requirements of the
Securities Exchange Act of 1934, as amended, and the rules and regulations
thereunder with respect to the matters set forth in this Section.
For purposes of this Section, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934,
as amended.
ARTICLE II
Directors
SECTION 1. POWERS. The business and affairs of the corporation
shall be managed by or under the direction of the Board of Directors.
SECTION 2. NUMBER OF DIRECTORS. The Board of Directors shall
consist of a number within the limits set forth in Article 10 of the
corporation's Certificate of Incorporation. The number of Directors shall be
fixed by the vote of a majority of the entire Board of Directors in each case
within the limits set forth in Article 10 of the corporation's Certificate of
Incorporation. Any increase or decrease in the authorized number of
Directors shall be governed by the provisions of Section 5 below.
SECTION 3. ELECTION, CLASSES AND TENURE. The Board of Directors
shall be and is divided into three classes: Class I, Class II and Class III,
which shall be as nearly equal in
-6-
<PAGE>
number as possible; provided, however, that the number of Directors in any
one class shall not exceed the number of Directors in any other class by more
than one. Each Director shall serve for a term ending on the date of the
third annual meeting of stockholders following the annual meeting at which
the Director was elected; provided, however, that each initial Director in
Class I shall hold office until the annual meeting of stockholders in 1996;
and each initial Director in Class II shall hold office until the annual
meeting of stockholders in 1997; and each initial Director in Class III shall
hold office until the annual meeting of stockholders in 1998.
Notwithstanding the foregoing provisions of this Section 3, each Director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. Notwithstanding the provisions of Sections 2,
3, 5 and 6 of this Article II, whenever the holders of any one or more
classes or series of stock issued by the corporation having a preference over
the common stock as to dividends or upon liquidation shall have the right,
voting separately by class or series, to elect Directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies, terms of removal and other features of such directorships shall be
governed by the terms of Article 4 of the Corporation's Certificate of
Incorporation and the resolution or resolutions establishing such class or
series adopted pursuant thereto and such Directors so elected shall not be
divided into classes pursuant to this Article II unless expressly provided by
such terms.
SECTION 4. QUALIFICATION. No Director must be a stockholder.
SECTION 5. VACANCIES AND NEWLY CREATED DIRECTORSHIPS. In the
event of any increase or decrease in the authorized number of Directors, the
newly created or eliminated directorships resulting from such increase or
decrease shall be apportioned by the Board of Directors among the three
classes of Directors so as to maintain such classes as nearly equal in number
as possible. No decrease in the number of Directors constituting the Board
of Directors shall shorten the term of any incumbent Director. Newly created
directorships resulting from any increase in the number of Directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled exclusively by the
affirmative vote of a majority of the remaining Directors then in office (and
not by stockholders), even if such remaining Directors constitute less than a
quorum of the Board of Directors, or by a sole remaining Director. Any
Director elected in accordance with the preceding sentence shall hold office
for the remainder of the full term of the class of Directors in which the new
directorship was created or the vacancy occurred and until such Director's
successor is duly elected and qualified or until his death, resignation or
removal.
SECTION 6. REMOVAL. Any Director may be removed from office only
for cause, and only upon the affirmative vote of the holders of at least
seventy-five (75%) of the voting power of the corporation's stock.
-7-
<PAGE>
SECTION 7. RESIGNATION. Any Director of the corporation may
resign at any time by giving written notice to the Board of Directors, to the
Chairman of the Board, if any, to the President, or to the Secretary, and any
member of a committee may resign therefrom at any time by giving notice as
aforesaid or to the Chairman or Secretary of such committee. Any such
resignation shall take effect at the time specified therein, or, if the time
be not specified, upon receipt thereof; and unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
SECTION 8. ANNUAL MEETING. Immediately after each annual meeting
of stockholders and at the place thereof, if a quorum of the Directors is
present, there shall be a meeting of the Directors without notice.
SECTION 9. REGULAR MEETINGS. Regular meetings of the Directors
may be held at such times and places as shall from time to time be fixed by
resolution of the Board, and no notice need be given of regular meetings held
at times and places so fixed, PROVIDED, HOWEVER, that any resolution relating
to the holding of regular meetings shall remain in force only until the next
annual meeting of stockholders and that, if at any meeting of Directors at
which a resolution is adopted fixing the times or place or places for any
regular meetings any Director is absent, no meeting shall be held pursuant to
such resolution without notice to or waiver by such absent Director pursuant
to Section 11 of this Article II.
SECTION 10. SPECIAL MEETINGS. Special meetings of the Directors
may be called by the Chairman of the Board (if any), the President, or by any
two Directors, and shall be held at the place and on the date and hour
designated in the call thereof.
SECTION 11. NOTICES. Notices of any special meeting of the
Directors shall be given by the Secretary or an Assistant Secretary to each
Director, by mailing to him, postage prepaid, and addressed to him at his
address as registered on the books of the corporation, or if not so
registered at his last known home or business address, a written notice of
such meeting at least four days before the meeting or by delivering such
notice to him at least 48 hours before the meeting or by sending to him at
least 48 hours before the meeting, by prepaid telegram addressed to him at
such address, notice of such meeting. In the absence of all such officers,
such notice may be given by the officer or one of the Directors calling the
meeting. Notice need not be given to any Director who has waived notice (a)
in writing executed by him before or after the meeting and filed with the
records of the meeting, or (b) by attending the meeting except for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. A notice or waiver of notice of a meeting of the Directors need
not specify the business to be transacted at or the purpose of the meeting.
SECTION 12. QUORUM. At any meeting of the Directors a majority of
the total number of Directors shall constitute a quorum for the transaction
of business; provided always that any number of Directors (whether one or
more and whether or not constituting a quorum)
-8-
<PAGE>
present at any meeting or at any adjourned meeting may adjourn such meeting,
provided that all absent Directors receive or waive notice pursuant to
Section 11 of Article II of any such adjournment that exceeds four business
days.
SECTION 13. ACTION AT MEETING. At any meeting of the Directors at
which a quorum is present, the action of the Directors on any matter brought
before the meeting shall be decided by vote of a majority of those present
and voting, unless a different vote is required by law, the Certificate of
Incorporation, or these By-Laws.
SECTION 14. ACTION BY WRITTEN CONSENT. Any action required or
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board
or committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or
committee.
SECTION 15. TELEPHONE MEETINGS. Members of the Board of
Directors, or any committee thereof, may participate in a meeting of such
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 15 shall
constitute presence in person at such meeting.
SECTION 16. PLACE OF MEETINGS. The Board of Directors may hold
its meetings, and have an office or offices, within or without the State of
Delaware.
SECTION 17. COMPENSATION. The Board of Directors shall have the
authority to fix the compensation of Directors.
SECTION 18. COMMITTEES. (a) The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the Directors of the
corporation. The Board may designate one or more Directors as alternate
members of any committee, who may replace any absent or disqualified member
at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether or not he or they constitute a
quorum, may unanimously appoint another member of the Board of Directors to
act at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the Board of
Directors, shall have and may exercise all the powers and authority of the
Board of Directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to
all papers which may require it; but no such committee shall have the power
or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property or assets, recommending to the stockholders a
dissolution of the
-9-
<PAGE>
corporation or a revocation of a dissolution, or amending the By-Laws of the
corporation. Such a committee may, to the extent expressly provided in the
resolution of the Board of Directors, have the power or authority to declare
a dividend or to authorize the issuance of stock.
(b) At any meeting of any committee, a majority of the whole
committee shall constitute a quorum and, except as otherwise provided by
statute, by the Certificate of Incorporation, or by these By-Laws, the
affirmative vote of at least a majority of the members present at a meeting
at which there is a quorum shall be the act of the committee.
(c) Each committee, except as otherwise provided by resolution of
the Board of Directors, shall fix the time and place of its meetings within
or without the State of Delaware, shall adopt its own rules and procedures,
and shall keep a record of its acts and proceedings and report the same from
time to time to the Board of Directors.
ARTICLE III
Officers
SECTION 1. OFFICERS AND THEIR ELECTION. The officers of the
corporation shall be a President, a Secretary, a Treasurer and such Vice
Presidents, Assistant Secretaries, Assistant Treasurers and other officers as
the Board of Directors may from time to time determine and elect or appoint.
The Board of Directors may appoint one of its members to the office of
Chairman of the Board and another of its members to the office of
Vice-Chairman of the Board and from time to time define the powers and duties
of these offices notwithstanding any other provisions of these By-Laws. The
President, the Secretary and the Treasurer shall be elected by the Board of
directors at its annual meeting or at the first meeting of the Board after
the date fixed by these By-Laws therefor and may, but need not, be members of
the Board of Directors. Two or more offices may be held by the same person.
SECTION 2. TERM OF OFFICE. The President, the Treasurer and the
Secretary shall, unless sooner removed under the provisions of these By-Laws,
hold office until the next annual election of officers and thereafter until
their respective successors are elected and qualified or until their earlier
resignation or removal. All other officers shall hold office for such term
as shall be determined from time to time by the Board of Directors.
SECTION 3. VACANCIES. Any vacancy at any time existing in any
office may be filled by the Directors.
SECTION 4. PRESIDENT. The President shall be the chief executive
officer of the corporation except as the Board of Directors may otherwise
provide. It shall be his duty and he shall have the power to see that all
orders and resolutions of the Board of Directors are carried into effect. He
shall from time to time report to the Board of Directors all matters
-10-
<PAGE>
within his knowledge which the interests of the corporation may require to be
brought to its notice. The President, when present, shall preside at all
meetings of the stockholders and of the Board of Directors, unless otherwise
provided by the Board of Directors. The President shall perform such duties
and have such powers additional to the foregoing as the Board of Directors
shall designate.
SECTION 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall
have the powers and duties expressly designated in these By-Laws and shall
perform such duties and have such powers additional thereto as the Board of
Directors shall designate.
SECTION 6. VICE PRESIDENTS. In the absence or disability of the
President, his powers and duties shall be performed by the Vice President, if
only one, or, if more than one, by the one designated for the purpose by the
Board of Directors. Each Vice President shall perform such duties and have
such powers additional to the foregoing as the Board of Directors shall
designate.
SECTION 7. TREASURER. The Treasurer shall keep full and accurate
accounts of receipts and disbursements in books belonging to the corporation
and shall deposit all monies and other valuable effects in the name and to
the credit of the corporation in such depositories as shall be designated by
the Board of Directors or in the absence of such designation in such
depositories as he shall from time to time deem proper. He shall disburse the
funds of the corporation as shall be ordered by the Board of Directors,
taking proper vouchers for such disbursements. He shall promptly render to
the President and to the Board of Directors such statements of his
transactions and accounts as the President and Board of Directors
respectively may from time to time require. The Treasurer shall Perform such
duties and have such powers additional to the foregoing as the Board of
Directors may designate.
SECTION 8. ASSISTANT TREASURERS. In the absence or disability of
the Treasurer, his powers and duties shall be performed by the Assistant
Treasurer, if only one, or if more than one, by the one designated for the
purpose by the Board of Directors. Each Assistant Treasurer shall perform
such duties and have such powers additional to the foregoing as the Board of
Directors shall designate.
SECTION 9. SECRETARY. The Secretary shall issue notices of all
meetings of stockholders, of the Board of Directors and of committees thereof
where notices of such meetings are required by law or these By-Laws. He
shall record the proceedings of the meetings of the stockholders and of the
Board of Directors and shall be responsible for the custody thereof in a book
to be kept for that purpose. He shall also record the Proceedings of the
committees of the Board of Directors unless such committees appoint their own
respective secretaries. Unless the Board of Directors shall appoint a
transfer agent and/or registrar, the Secretary shall be charged with the duty
of keeping, or causing to be kept, accurate records of all stock outstanding,
stock certificates issued and stock transfers. He shall sign such instruments
as require his signature. The Secretary shall have custody of the corporate
seal
-11-
<PAGE>
and shall affix and attest such seal on all documents whose execution under
seal is duly authorized. In his absence at any meeting, an Assistant
Secretary or the Secretary pro tempore shall Perform his duties thereat. He
shall perform such duties and have such powers additional to the foregoing as
the Board of Directors shall designate.
SECTION 10. ASSISTANT SECRETARIES. In the absence or disability
of the Secretary, his powers and duties shall be performed by the Assistant
Secretary, if only one, or, if more than one, by the one designated for the
purpose by the Board of Directors. Each Assistant Secretary shall perform
such duties and have such powers additional to the foregoing as the Board of
Directors shall designate.
SECTION 11. SALARIES. The salaries and other compensation of
officers, agents and employees shall be fixed from time to time by or under
authority from the Board of Directors. No officer shall be prevented from
receiving a salary or other compensation by reason of the fact that he is
also a Director of the corporation.
SECTION 12. REMOVAL. The Board of Directors may remove any
officer, either with or without cause, at any time.
SECTION 13. BOND. The corporation may secure the fidelity of any
or all of its officers or agents by bond or otherwise.
SECTION 14. RESIGNATIONS. Any officer, agent or employee of the
corporation may resign at any time by giving written notice to the Board of
Directors, to the Chairman of the Board, if any, to the President or to the
Secretary of the corporation. Any such resignation shall take effect at the
time specified therein, or, if the time be not specified, upon receipt
thereof; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
ARTICLE IV
Capital Stock
SECTION 1. STOCK CERTIFICATES. Each stockholder shall be entitled
to have a certificate signed by, or in the name of the corporation by the
Chairman or Vice-Chairman of the Board or the President or a Vice President,
and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed
or whose facsimile signature has been placed upon a certificate shall have
ceased to be such officer, transfer agent or registrar before the certificate
is issued, such certificate may nevertheless be issued by the corporation
with the same effect as if he were such officer, transfer agent or registrar
at the date of issue.
-12-
<PAGE>
SECTION 2. CLASSES OF STOCK. If the corporation shall be
authorized to issue more than one class of stock or more than one series of
any class, the face or back of each certificate issued by the corporation to
represent such class or series shall either (a) set forth in full or
summarize the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions thereof, or (b) contain a
statement that the corporation will furnish a statement of the same without
charge to each stockholder who so requests.
SECTION 3. TRANSFER OF STOCK. Shares of stock shall be
transferable on the books of the corporation pursuant to applicable law and
such rules and regulations as the Board of Directors shall from time to time
prescribe. The Board of Directors may at any time or from time to time
appoint a transfer agent or agents or a registrar or registrars for the
transfer or registration of shares of stock.
SECTION 4. HOLDERS OF RECORD. Prior to due presentment for
registration of transfer the corporation may treat the holder of record of a
share of its stock as the complete owner thereof exclusively entitled to
vote, to receive notifications and otherwise entitled to all the rights and
powers of a complete owner thereof, notwithstanding notice to the contrary.
SECTION 5. LOST, STOLEN, OR DESTROYED STOCK CERTIFICATES. The
Board of Directors may direct a new stock certificate or certificates to be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed upon the making
of an affidavit of that fact by the person claiming the certificate of stock
to be lost, stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of
such lost, stolen or destroyed certificate or certificates or his legal
representative, to give the corporation a bond sufficient to indemnify it
against any claim that may be made against the corporation on account of the
alleged loss, theft, or destruction, of such certificates or the issuance of
such new certificate.
ARTICLE V
Miscellaneous Provisions
SECTION 1. INTERESTED DIRECTORS AND OFFICERS. (a) No contract or
transaction between the corporation and one or more of its Directors or
officers, or between the corporation and any other corporation, partnership,
association, or other organization in which one or more of its Directors or
officers are Directors or officers, or have a financial interest, shall be
void or voidable solely for this reason, or solely because the Director or
officer is present at or participates in the meeting of the Board or
committee thereof which authorizes the contract or transaction, or solely
because his or their votes are counted for such purpose, if:
-13-
<PAGE>
(1) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative vote of a majority
of the disinterested Directors, even though the disinterested Directors be
less than a quorum; or
(2) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the shareholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the shareholders; or
(3) The contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the shareholders.
(b) Common or interested Directors may be counted in determining
the presence of a quorum at a meeting of the Board of Directors or of a
committee which authorizes the contract or transaction.
SECTION 2. INDEMNIFICATION. To the maximum extent permitted by
the Delaware General Corporation Law, as the same may be in effect from time
to time, the corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he is or was a Director or officer
of the corporation, or is or was a Director or officer of the corporation
serving at the request of the corporation as a Director or officer of another
entity, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement in connection with such action, suit, or
proceeding. Nothing herein shall be deemed to limit the power of the
corporation to similarly indemnify employees or agents of the corporation or
persons who are serving at the request of the corporation as a Director or
officer of another entity but who are not Directors or officers of the
corporation.
SECTION 3. STOCK IN OTHER CORPORATIONS. Subject to any
limitations that may be imposed by the Board of Directors, the President or
any person or persons authorized by the Board of Directors may, in the name
and on behalf of the corporation, (a) call meetings of the holders of stock
or other securities of any corporation or other organization, stock or other
securities of which are held by this corporation, (b) act, or appoint any
other person or persons (with or without powers of substitution) to act in
the name and on behalf of the corporation, or (c) express consent or dissent,
as a holder of such securities, to corporate or other action by such other
corporation or organization.
SECTION 4. CHECKS, NOTES, DRAFTS AND OTHER INSTRUMENTS. Checks,
notes, drafts and other instruments for the payment of money drawn or
endorsed in the name of the corporation may be signed by any officer or
officers or person or persons authorized by the
-14-
<PAGE>
Board of Directors to sign the same. No officer or person shall sign any
such instrument as aforesaid unless authorized by the Board of Directors to
do so.
SECTION 5. CORPORATE SEAL. The seal of the corporation shall be
circular in form, bearing the name of the corporation, the word "Delaware",
and the year of incorporation, and the same may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner
reproduced.
SECTION 6. FISCAL YEAR. The fiscal year of the corporation shall
be the year ending with the 31st day of December.
SECTION 7. BOOKS AND RECORDS. The books, accounts and records of
the corporation, except as may be otherwise required by the laws of the State
of Delaware, may be kept outside of the State of Delaware, at such place or
places as the Board of Directors may from time to time appoint. Except as
may otherwise be provided by law, the Board of Directors shall determine
whether and to what extent the books, accounts, records and documents of the
corporation, or any of them, shall be open to the inspection of the
stockholders.
SECTION 8. SEPARABILITY. If any term or provision of the By-Laws,
or the application thereof to any person or circumstances or period of time,
shall to any extent be invalid or unenforceable, the remainder of the By-Laws
shall be valid and enforced to the fullest extent permitted by law.
SECTION 9. AMENDMENTS. The By-Laws may be amended or repealed by
the stockholders or, if such power is conferred by the Certificate of
Incorporation, by the Board of Directors, except that any By-law added or
amended by the stockholders may be altered or repealed only by the
stockholders if such By-law expressly so provides.
-15-
<PAGE>
- -------------------------------------------------------------------------------
HPSC, INC.,
ISSUER,
AND
STATE STREET BANK AND TRUST COMPANY,
TRUSTEE
-----------------------------
INDENTURE
DATED AS OF MARCH __, 1997
-----------------------------
$23,000,000
_____% SENIOR SUBORDINATED NOTES DUE 2007
- -------------------------------------------------------------------------------
<PAGE>
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE 1
SECTION 1.1 Definitions. 1
SECTION 1.2 Incorporation by Reference of TIA. 21
SECTION 1.3 Rules of Construction. 21
ARTICLE II THE SECURITIES 22
SECTION 2.1 Form and Dating. 22
SECTION 2.2 Execution and Authentication. 22
SECTION 2.3 Registrar and Paying Agent. 23
SECTION 2.4 Paying Agent to Hold Assets in Trust. 24
SECTION 2.5 Securityholder Lists. 24
SECTION 2.6 Transfer and Exchange. 24
SECTION 2.7 Replacement Securities. 27
SECTION 2.8 Outstanding Securities. 28
SECTION 2.9 Treasury Securities. 28
SECTION 2.10 Temporary Securities. 29
SECTION 2.11 Cancellation. 29
SECTION 2.12 Defaulted Interest. 29
ARTICLE III REDEMPTIONS; SINKING FUND 30
SECTION 3.1 Right of Redemption. 30
SECTION 3.2 Notices to Trustee. 31
SECTION 3.3 Selection of Securities to Be Redeemed. 31
SECTION 3.4 Notice of Redemption. 31
SECTION 3.5 Effect of Notice of Redemption. 33
SECTION 3.6 Deposit of Redemption Price. 33
SECTION 3.7 Securities Redeemed in Part. 34
SECTION 3.8 Sinking Fund. 34
ARTICLE IV COVENANTS 35
SECTION 4.1 Payment of Securities. 35
SECTION 4.2 Maintenance of Office or Agency. 35
SECTION 4.3 Limitation on Restricted Payments. 36
SECTION 4.4 Corporate Existence. 37
SECTION 4.5 Payment of Taxes and Other Claims. 37
SECTION 4.6 Maintenance of Properties and Insurance. 38
SECTION 4.7 Compliance Certificate; Notice of Default. 38
SECTION 4.8 Reports and Other Information. 39
SECTION 4.9 Limitation on Status as Investment Company. 39
SECTION 4.10 Limitation on Transactions with Affiliates. 39
SECTION 4.11 Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock. 40
i
<PAGE>
SECTION 4.12 Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries. 41
SECTION 4.13 Limitation on Liens. 42
SECTION 4.14 Waiver of Stay, Extension or Usury Laws. 42
SECTION 4.15 Limitation on Lines of Business. 42
SECTION 4.16 Repurchase of Securities Upon Death of Holder. 43
ARTICLE V SUCCESSOR CORPORATION 46
SECTION 5.1 Limitation on Merger, Sale or Consolidation. 46
SECTION 5.2 Successor Corporation Substituted. 46
ARTICLE VI EVENTS OF DEFAULT AND REMEDIES 47
SECTION 6.1 Events of Default. 47
SECTION 6.2 Acceleration of Maturity Date; Rescission and Annulment. 49
SECTION 6.3 Collection of Indebtedness and Suits for Enforcement by
Trustee. 50
SECTION 6.4 Trustee May File Proofs of Claim. 51
SECTION 6.5 Trustee May Enforce Claims Without Possession of Securities. 52
SECTION 6.6 Priorities. 52
SECTION 6.7 Limitation on Suits. 53
SECTION 6.8 Unconditional Right of Holders to Receive Principal,
Premium and Interest. 53
SECTION 6.9 Rights and Remedies Cumulative. 54
SECTION 6.10 Delay or Omission Not Waiver. 54
SECTION 6.11 Control by Holders. 54
SECTION 6.12 Waiver of Past Default. 55
SECTION 6.13 Undertaking for Costs. 55
SECTION 6.14 Restoration of Rights and Remedies. 55
ARTICLE VII TRUSTEE 56
SECTION 7.1 Duties of Trustee. 56
SECTION 7.2 Rights of Trustee. 57
SECTION 7.3 Individual Rights of Trustee. 58
SECTION 7.4 Trustee's Disclaimer. 58
SECTION 7.5 Notice of Default. 59
SECTION 7.6 Reports by Trustee to Holders. 59
SECTION 7.7 Compensation and Indemnity. 59
SECTION 7.8 Replacement of Trustee. 60
SECTION 7.9 Successor Trustee by Merger, Etc. 61
SECTION 7.10 Eligibility; Disqualification. 62
SECTION 7.11 Preferential Collection of Claims Against Company. 62
ii
<PAGE>
ARTICLE VIII LEGAL DEFEASANCE AND COVENANT DEFEASANCE;
SATISFACTION AND DISCHARGE 62
SECTION 8.1 Option to Effect Legal Defeasance and Discharge. 62
SECTION 8.2 Legal Defeasance and Discharge. 62
SECTION 8.3 Covenant Defeasance. 63
SECTION 8.4 Conditions to Legal or Covenant Defeasance. 63
SECTION 8.5 Deposited Cash and U.S. Government Obligations to be
Held in Trust; Other Miscellaneous Provisions. 65
SECTION 8.6 Repurchase to the Company. 65
SECTION 8.7 Reinstatement. 66
SECTION 8.8 Satisfaction and Discharge. 66
ARTICLE IX AMENDMENTS, SUPPLEMENTS AND WAIVERS 67
SECTION 9.1 Supplemental Indentures Without Consent of Holders. 67
SECTION 9.2 Amendments, Supplemental Indentures and Waivers with Consent
of Holders. 68
SECTION 9.3 Compliance with TIA. 69
SECTION 9.4 Revocation and Effect of Consents. 70
SECTION 9.5 Notation on or Exchange of Securities. 70
SECTION 9.6 Trustee to Sign Amendments, Etc. 71
ARTICLE X RIGHT TO REQUIRE REPURCHASE UPON CHANGE OF CONTROL 71
SECTION 10.1 Repurchase of Securities at Option of the Holder
Upon a Change of Control. 71
ARTICLE XI SUBORDINATION OF SECURITIES 74
SECTION 11.1. Securities Subordinated to Secured Portfolio Debt. 74
SECTION 11.2. No Payment on Securities in Certain Circumstances. 74
SECTION 11.3. Securities Subordinated to Prior Payment of All
Secured Portfolio Debt on Dissolution, Liquidation
or Reorganization. 75
SECTION. 11.4. Securityholders to Be Subrogated to Rights of Holders
of Secured Portfolio Debt. 76
SECTION 11.5. Obligations of the Company Unconditional. 76
SECTION 11.6. Trustee Entitled to Assume Payments Not Prohibited in
Absence of Notice. 77
iii
<PAGE>
SECTION 11.7. Application by Trustee of Assets Deposited with It. 77
SECTION 11.8. Subordination Rights Not Impaired by Acts or Omissions
of the Company or Holders of Secured Portfolio Debt. 78
SECTION 11.9. Securityholders Authorize Trustee to Effectuate
Subordination of Securities. 78
SECTION 11.10. Right of Trustee to Hold Secured Portfolio Debt. 79
SECTION 11.11. Article XI Not to Prevent Events of Default. 79
SECTION 11.12. No Fiduciary Duty of Trustee to Holders of Secured
Portfolio Debt. 79
SECTION 11.13. Acceleration of Payment of Securities. 79
ARTICLE XII MISCELLANEOUS 80
SECTION 12.1 TIA Controls. 80
SECTION 12.2 Notices. 80
SECTION 12.3 Communications by Holders with Other Holders. 81
SECTION 12.4 Certificate and Opinion as to Conditions Precedent. 81
SECTION 12.5 Statements Required in Certificate or Opinion. 81
SECTION 12.6 Rules by Trustee, Paying Agent, Registrar. 82
SECTION 12.7 Non-Business Days. 82
SECTION 12.8 Governing Law. 82
SECTION 12.9 No Adverse Interpretation of Other Agreements. 83
SECTION 12.10 No Recourse Against Others. 83
SECTION 12.11 Successors. 83
SECTION 12.12 Duplicate Originals. 83
SECTION 12.13 Severability. 83
SECTION 12.14 Table of Contents, Headings, Etc. 84
SECTION 12.15 Qualification of Indenture. 84
iv
<PAGE>
INDENTURE, dated as of March __, 1997, between HPSC, Inc., a Delaware
corporation (the "Company") and State Street Bank and Trust Company, as Trustee.
Each party hereto agrees as follows for the benefit of each other party
and for the equal and ratable benefit of the Holders of the Company's ____%
Senior Subordinated Notes due 2007 (the "Securities").
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1 Definitions.
-----------
"Acceleration Notice" shall have the meaning specified in Section 6.2.
"Acquired Recourse Debt" means Funded Recourse Debt or Disqualified
Capital Stock of any Person existing at the time such Person becomes a
Subsidiary of the Company or is merged or consolidated into or with the
Company 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 the Company.
For purposes of this definition, the term "control" means the power 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.
"Affiliate Transaction" shall have the meaning specified in Section 4.10.
"Agent" means any Registrar, Paying Agent or co-Registrar.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount
of rent required to be paid by such Person under the lease during the primary
term thereof, without giving effect to any renewals at the option of the
lessee, discounted from the respective due dates thereof to
<PAGE>
such date at the rate of interest per annum implicit in the terms of the
lease. As used in the preceding sentence, the net amount of rent under any
lease for any such period shall mean the sum of rental and other payments
required to be paid with respect to such period by the lessee thereunder
excluding any amounts required to be paid by such lessee on account of
maintenance and repairs, insurance, taxes, assessments, water rates or
similar charges. In the case of any lease which is terminable by the lessee
upon payment of a penalty, such net amount of rent shall also include the
amount of such penalty, but no rent shall be considered as required to be
paid under such lease subsequent to the first date upon which it may be so
terminated.
"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 and (b) the amount of each such respective
principal (or redemption) payment by (ii) the sum of all such principal (or
redemption) payments.
"Bankruptcy Law" means Title 11, U.S. Code, or any similar Federal, state
or foreign law for the relief of debtors.
"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" (as such term is used for purposes of such Rules) shall be deemed
to have "beneficial ownership" of all shares that such person has the right
to acquire, whether such right is exercisable immediately or only after the
passage of time.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee of the Board of Directors of such
Person authorized, with respect to any particular matter, to exercise the
power of the Board of Directors of such Person. With respect to any Person
that is not organized as a corporation, "Board of Directors" shall refer to
the entity or entities having similar powers.
"Board Resolution" means, with respect to any Person, a duly adopted
resolution of the Board of Directors of such Person.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York or the
city in which the principal office of the Trustee is located 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
2
<PAGE>
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" means such coin or currency of the United States of America as at
the time of payment shall be legal tender for the payment of public and
private debts.
"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 is rated in the case of commercial paper which matures
one year or more after the date of acquisition, 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.
"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 the Company, 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)
3
<PAGE>
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 the Company 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 the Company
(together with any new directors whose election by such Board or whose
nomination for election by the shareholders of the Company 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 the Company then in
office.
"Change of Control Offer" shall have the meaning specified in Section
10.1.
"Change of Control Offer Period" shall have the meaning specified in
Section 10.1.
"Change of Control Purchase Date" shall have the meaning specified in
Section 10.1.
"Change of Control Purchase Price" shall have the meaning specified in
Section 10.1.
"Change of Control Put Date" shall have the meaning specified in Section
10.1.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means HPSC, Inc., a Delaware corporation, until a successor
replaces it pursuant to this Indenture, and thereafter means such successor.
"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 (i) 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 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
4
<PAGE>
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 the Company to be the
rate of interest implicit in such Capitalized Lease
5
<PAGE>
Obligation in accordance with GAAP, (y) interest expense attributable to any
Indebtedness represented by the guaranty by 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 the Company 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, (i) 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 dispositions of
assets or property not in the ordinary course of business; (b) net gains (but
not net losses) 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; and (ii) adjusted to include
the amount of any dividends or distributions actually paid in cash to such
Person or a Consolidated Subsidiary of such Person by an Unrestricted
Subsidiary in an amount not to exceed such Person's pro rata share of such
Unrestricted Subsidiary's net income.
"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
6
<PAGE>
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 the Company or any of its
Subsidiaries finances property, equipment, goods, leasehold improvements or
working capital requirements.
"Customer Receivable" means any obligation of any kind or nature, however
denominated, to the Company or any of its Subsidiaries (i) incurred by
Customers in the ordinary course of the respective business of the Company
and its Subsidiaries or (ii) arising from the purchase or acquisition by the
Company 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.
"Covenant Defeasance" shall have the meaning specified in Section 8.3.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means any event or condition that is, or after notice or
passage of time or both would be, an Event of Default.
"Defaulted Interest" shall have the meaning specified in Section 2.12.
"Definitive Securities" means Securities that are in the form of Security
attached hereto as Exhibit A that do not include the information called for
by footnotes 1 and 2 thereof.
"Depository" means, with respect to the Securities issuable or issued in
whole or in part in global form, the Person specified in Section 2.3 as the
Depository with respect to the Securities, until a successor shall have been
appointed and become such pursuant to the applicable provision of this
Indenture, and, thereafter, "Depository" shall mean or include such successor.
"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
7
<PAGE>
date of determination the holders thereof are committed to lend up to, at
least $10,000,000 and (ii) is specifically designated by the Company in the
instrument governing such Secured Portfolio Debt as "Designated Secured
Portfolio Debt" for purposes of this 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 Securities and (b) with
respect to any Subsidiary of any Person (including with respect to any
Subsidiary of the Company), any Capital Stock of such Subsidiary other than
any common stock with no preference, privileges, or redemption or repayment
provisions.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any successor statute.
"ESOP" means, collectively, the HPSC, Inc. Employee Stock Ownership Plan
and the Supplemental HPSC, Inc. 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 the Company or a duly authorized committee thereof.
"Event of Default" shall have the meaning specified in Section 6.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Exempted Affiliate Transaction" means (a) transactions solely between
the Company and any of its Wholly-Owned Subsidiaries or solely among
Wholly-Owned Subsidiaries of the Company, (b) transactions permitted under
Section 4.3 hereof, (c) customary employee compensation arrangements approved
by a majority of independent (as to such transactions) members of the Board
of Directors of the Company, (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 the Company 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 the Company and (e) any
guaranty by the Company or any of its Subsidiaries of any Indebtedness of the
Company and/or any Wholly-Owned Subsidiary of the Company (but not of any
other Person).
8
<PAGE>
"Funded Recourse Debt" means, without duplication, any Indebtedness of
the Company or any Subsidiary of the Company which by its terms matures at or
is extendible 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 that Funded
Recourse Debt shall not include any Non-Recourse Indebtedness of the Company
or any Subsidiary of the Company.
"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.
"Global Security" means a Security that contains the paragraph referred
to in footnote 1 and the additional schedule referred to in footnote 2 to the
form of Security attached hereto as Exhibit A.
"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.
"Holder" or "Securityholder" means the Person in whose name a Security is
registered on the Registrar's books or, for purposes of Section 4.16, the
beneficial owner of Securities held in global form.
"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
9
<PAGE>
purchase, redeem or acquire any Capital Stock of such Person (other than, in
the case of the Company or any of its Subsidiaries, obligations under the
Restricted Stock Plans or the Stock Option Plans).
"Indenture" means this Indenture, as amended or supplemented from time to
time in accordance with the terms hereof.
"Independent Committee" shall have the meaning set forth in Section 4.10.
"Interest Payment Date" means the stated due date of an installment of
interest on the Securities.
"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 the Company to the
extent permitted by Section 4.11 hereof, 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 Securities under
this Indenture.
"Legal Defeasance" shall have the meaning specified in Section 8.2.
"Lien" means any mortgage, lien, pledge, charge, security interest, or
other encumbrance of any kind, whether or not filed, recorded or otherwise
perfected under applicable law (including any conditional sale or other title
retention agreement and any lease deemed to constitute a security interest
and any option or other agreement to give any security interest).
"Maturity Date" means, when used with respect to any Security, the date
specified on such Security as the fixed date on which the final installment
of principal of such Security is due and payable (in the absence of any
acceleration thereof pursuant to the provisions of this Indenture regarding
acceleration of Indebtedness or any redemption
10
<PAGE>
thereof pursuant to Article III of this Indenture, or any Change of Control
Offer or repurchase upon the death of the Holder of such Security).
"Net Cash Proceeds" means the aggregate amount of Cash and Cash
Equivalents received by the Company in the case of a sale of Qualified
Capital Stock plus, in the case of an issuance of Qualified Capital Stock
upon any exercise, exchange or conversion of securities (including options,
warrants, rights and convertible or exchangeable debt) of the Company that
were issued for cash on or after the Issue Date, the amount of cash
originally received by the Company 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 the Company
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 the Company 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 the Company 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.
"Notice of Default" shall have the meaning specified in Section 6.1(4).
"Obligation" means any principal, premium, interest, penalties, fees,
reimbursements, damages, indemnification and other liabilities relating to
obligations of the Company under the Securities or this Indenture.
"Officer" means, with respect to the Company, the Chief Executive
Officer, the President, any Executive or Senior Vice President, the Chief
Financial Officer, the Treasurer, the Controller, or the Secretary of the
Company.
"Officers' Certificate" means, with respect to the Company, a certificate
signed by two Officers or by an Officer and an Assistant Secretary of the
Company and otherwise complying with the requirements of Sections 12.4 and
12.5.
11
<PAGE>
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee complying with the requirements of
Sections 12.4 and 12.5.
"Outstanding," as used with reference to the Securities shall have the
meaning specified in Section 2.8.
"Paying Agent" shall have the meaning specified in Section 2.3.
"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
the Company 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 the Company 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 the Company or
any of its Subsidiaries) or interfere with the ordinary conduct of the
business of the Company 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;
12
<PAGE>
(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 the
Company or a Subsidiary, provided in each case that such Liens were 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 the Company 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 Securities 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 the Company or any Subsidiary of the Company; and
(n) Liens securing the Securities.
"Permitted Recourse Debt" means any of the following:
(a) Indebtedness of the Company evidenced by the Securities
pursuant to this Indenture up to the amounts specified herein as of the
Issue Date;
(b) Indebtedness of the Company 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 the Company and its Subsidiaries (in addition to
Indebtedness permitted by any other clause of this definition) in an
aggregate amount outstanding at any time (including any Indebtedness
13
<PAGE>
issued to refinance, replace or refund such Indebtedness in whole or in
part) of up to $1,500,000;
(d) Refinancing Indebtedness of the Company and its Subsidiaries
incurred with respect to any Indebtedness or Disqualified Capital
Stock, as applicable, described in clause (ii) of the proviso
contained in Section 4.11 or described in clause (e) of this
definition of "Permitted Recourse Debt";
(e) Indebtedness of the Company owed to any Wholly-Owned
Subsidiary, and Indebtedness of any Subsidiary of the Company owed to
any other Wholly-Owned Subsidiary or to the Company; provided that any
such obligations of the Company owed to any Wholly-Owned Subsidiary of
the Company shall be unsecured and subordinated in all respects to the
Company's obligations pursuant to the Securities; and, provided,
further, that if any Wholly-Owned Subsidiary ceases to be a
Wholly-Owned Subsidiary of the Company or if the Company or any
Wholly-Owned Subsidiary transfers such Indebtedness to any Person
(other than to the Company or another Wholly-Owned Subsidiary), such
events, in each case, shall constitute the incurrence of such
Indebtedness by the Company or such Wholly-Owned Subsidiary, as the
case may be, at the time of such event;
(f) Indebtedness of the Company and its Subsidiaries existing on the Issue
Date;
(g) Indebtedness of the Company 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 the Company 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 the Company and its Subsidiaries otherwise permitted to
be incurred pursuant to the Indenture; and
(i) Secured Portfolio Debt.
"Person" or "person" means any corporation, individual, limited liability
company, joint stock company, joint venture, partnership, unincorporated
association, governmental
14
<PAGE>
regulatory entity, country, state or political subdivision thereof,
trust, municipality or other entity.
"Principal" of any Indebtedness means the principal of such Indebtedness
plus, without duplication, any applicable premium, if any, on such
Indebtedness.
"Pro Rata Portion" shall have the meaning set forth in Section 11.1(d).
"Property" means any right or interest in or to property or assets of any
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Purchase Money Indebtedness" means Indebtedness of the Company 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 the Company or its 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 the Company 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 the Company issued on or after the Issue Date with the Net Cash Proceeds
received by the Company from the substantially concurrent (i.e., within 60
days) sale (other than to a Subsidiary of the Company 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.
"Record Date" means a Record Date specified in the Securities whether or
not such Record Date is a Business Day.
"Redemption Date," when used with respect to any Security to be redeemed,
means the date fixed for such redemption pursuant to Article III of this
Indenture and Paragraph 5 of such Security.
"Redemption Price," when used with respect to any Security to be
redeemed, means the redemption price for such redemption pursuant to
Paragraph 5 of such Security, which shall include, without duplication, in
each case, accrued and unpaid interest to the Redemption 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) of such Person
15
<PAGE>
ended immediately preceding any date upon which any determination is to be
made pursuant to the terms of the Securities or this 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 the Company 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 Securities 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.
"Registrar" shall have the meaning specified in Section 2.3.
"Related Business" means the business conducted by the Company 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 the Company are materially
related businesses.
"Representative" means the trustee, agent or representative (if any) of
Secured Portfolio Debt.
"Repurchase Date," when used with respect to any Security to be
repurchased pursuant to the provisions of Section 4.16, means the date fixed
for the repurchase of such Security pursuant to Section 4.16.
"Repurchase Price," when used with respect to any Security to be
repurchased pursuant to the provisions of Section 4.16, means an amount equal
to 100% of the
16
<PAGE>
principal amount thereof and shall include, without duplication, in each
case, accrued and unpaid interest to the Repurchase Date of such Security.
"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 the Company 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 of the Company or (ii) such Person is merged,
consolidated or amalgamated with or into, or conveys substantially all
of its assets to the Company or a Wholly-Owned Subsidiary of the
Company;
(f) Investments consisting of loans or advances to employees of
the Company 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 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 $1,000,000 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.
"Responsible Officer" means an officer of the Trustee in the department
or other group administering the trust established hereby.
17
<PAGE>
"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 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 the Company or to any of its Wholly-Owned Subsidiaries by
the Company or any of its Subsidiaries.
"Restricted Stock Plans" shall mean collectively, (i) the Company's 1995
Stock Incentive Plan and (ii) comparable plans providing for the issuance of
Capital Stock of the Company to officers, directors and employees of the
Company 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 the
Company 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 the Company and ACFC,
certain financial institutions, and The First National Bank of Boston, as
agent, providing for an aggregate $95,000,000 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 the Company 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 the Company and all refundings, refinancings and replacements of
any such Revolver Agreement, 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 the Company 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.
18
<PAGE>
"Savings Bank Indebtedness" of the Company or any Subsidiary means any
Indebtedness owed to a savings bank or other financial institution, which
Indebtedness is (i) created, incurred, assumed or guaranteed by the Company
or such Subsidiary of the Company in order to finance one or more Customer
Receivables created in the ordinary course of business of the Company or such
Subsidiary and (ii) secured by a Lien on such Customer Receivable(s).
"Secured Portfolio Debt" of the Company or any Subsidiary means 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 expenses and enforcement costs, of the Company or
such Subsidiary under the Revolver Agreement, Savings Bank Indebtedness and
any other Indebtedness of the Company or such Subsidiary, whether outstanding
on the Issue Date or thereafter created, incurred, assumed or guaranteed by
the Company or such Subsidiary, which Indebtedness is (i) created, incurred,
assumed or guaranteed by the Company or such Subsidiary of the Company in
order to finance one or more Customer Receivables created in the ordinary
course of business of the Company or such Subsidiary and (ii) secured by a
Lien on such Customer Receivable(s).
"SEC" means the Securities and Exchange Commission.
"Securities" means the ___% Senior Subordinated Notes due 2007, as
amended or supplemented from time to time pursuant to the terms of this
Indenture, that are issued under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Securities Custodian" means the Trustee, as custodian with respect to
the Securities in global form, or any successor entity thereto.
"Securityholder" or "Holder" means the Person in whose name a Security is
registered on the Registrar's books.
"Senior Indebtedness" of the Company or any of its Subsidiaries means any
Indebtedness of the Company or such Subsidiary, whether outstanding on the
Issue Date or thereafter created, incurred, assumed or guaranteed by the
Company 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 Securities. Notwithstanding the foregoing, however, in no event shall
Senior Indebtedness include (a) Indebtedness owed to any Subsidiary of the
19
<PAGE>
Company or any officer, director or employee of the Company or any Subsidiary
of the Company or (b) Indebtedness incurred in violation of the terms of this
Indenture.
"Sinking Fund" means the method provided in this Indenture and the
Securities for amortizing the aggregate principal amount of the Securities.
"Sinking Fund Payment Date" means the first day of each ____, ____, ____,
and ___, commencing ____ 1, ___ and continuing through ____ 1, 200__.
"Special Record Date" for payment of any Defaulted Interest means a date
fixed by the Trustee pursuant to Section 2.12.
"Stated Maturity," when used with respect to any Security, means _______,
2007.
"Stock Option Plans" shall mean collectively, (i) the Company's 1987
Stock Option Plan, (ii) the HPSC, Inc. 1988 Director's Stock Option Plan, and
(iii) comparable plans providing for the issuance of options to purchase
Capital Stock of the Company to officers, directors and/or employees of the
Company 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 the
Company or a duly authorized committee thereof.
"Subordinated Indebtedness" means Indebtedness of the Company that is (i)
subordinated in right of payment to the Securities 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 the Company or of any of the Company's
Subsidiaries.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Sections
77aaa-77bbbb) as in effect on the date of the execution of this Indenture.
"Trustee" means the party named as such in this Indenture until a
successor replaces it in accordance with the provisions of this Indenture and
thereafter means such successor.
20
<PAGE>
"U.S. Government Obligations" means direct non-callable obligations of,
or noncallable obligations guaranteed by, the United States of America for
the payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
"Voting Stock" means Capital Stock of the Company having generally the
right to vote in the election of a majority of the directors of the Company
or having generally the right to vote with respect to the organizational
matters of the Company.
"Wholly-Owned" or "wholly-owned" with respect to a Subsidiary of any
Person means a Subsidiary of such Person of which all of the outstanding
Capital Stock or other ownership interests (other than directors' qualifying
shares) shall at the time be owned by such Person or by one or more
Wholly-Owned Subsidiaries of such Person or by such Person and one or more
Wholly-Owned Subsidiaries of such Person.
SECTION 1.2 Incorporation by Reference of TIA.
Whenever this Indenture refers to a provision of the TIA, such provision
is incorporated by reference in and made a part of this Indenture. The
following TIA terms used in this Indenture have the following meanings:
"Commission" means the SEC.
"Indenture security" means any of the Securities.
"Indenture securityholder" means a Holder or a Securityholder.
"Indenture to be qualified" means this Indenture.
"Indenture trustee" or "institutional trustee" means the Trustee.
"Obligor" on the indenture securities means the Company and any other
obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule and not
otherwise defined herein have the meanings assigned to them thereby.
SECTION 1.3 Rules of Construction.
21
<PAGE>
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to
it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and words in the plural
include the singular;
(5) provisions apply to successive events and transactions;
(6) "herein," "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision; and
(7) references to Sections or Articles means reference to such Section or
Article in this Indenture, unless stated otherwise.
ARTICLE II
THE SECURITIES
SECTION 2.1 Form and Dating.
The Securities and the Trustee's certificate of authentication, in
respect thereof, shall be substantially in the form of Exhibit A hereto,
which Exhibit is part of this Indenture. The Securities may have notations,
legends or endorsements required by law, stock exchange rule or usage. The
Company shall approve the form of the Securities and any notation, legend or
endorsement on them. Any such notations, legends or endorsements not
contained in the form of Security attached as Exhibit A hereto shall be
delivered in writing to the Trustee. Each Security shall be dated the date of
its authentication.
The terms and provisions contained in the forms of Securities shall
constitute, and are hereby expressly made, a part of this Indenture and, to
the extent applicable, the Company and the Trustee, by their execution and
delivery of this Indenture, expressly agree to such terms and provisions and
to be bound thereby.
SECTION 2.2 Execution and Authentication.
22
<PAGE>
Two Officers shall sign, or one Officer shall sign and one Officer shall
attest to, the Security for the Company by manual or facsimile signature.
The Company's seal shall be impressed, affixed, imprinted or reproduced on
the Securities and may be in facsimile form.
If an Officer whose signature is on a Security was an Officer at the time
of such execution but no longer holds that office at the time the Trustee
authenticates the Security, the Security shall be valid nevertheless and the
Company shall nevertheless be bound by the terms of the Securities and this
Indenture.
A Security shall not be valid until an authorized signatory of the
Trustee manually signs the certificate of authentication on the Security but
such signature shall be conclusive evidence that the Security has been
authenticated pursuant to the terms of this Indenture.
The Trustee shall authenticate Securities for original issue in the
aggregate principal amount of up to $23,000,000, upon a written order of the
Company in the form of an Officers' Certificate. The Officers' Certificate
shall specify the amount of Securities to be authenticated and the date on
which the Securities are to be authenticated. The aggregate principal amount
of Securities outstanding at any time may not exceed $23,000,000, except as
provided in Section 2.7. Upon the written order of the Company in the form
of an Officers' Certificate, the Trustee shall authenticate Securities in
substitution of Securities originally issued to reflect any name change of
the Company.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Securities. Unless otherwise provided in the appointment, an
authenticating agent may authenticate Securities whenever the Trustee may do
so. Each reference in this Indenture to authentication by the Trustee
includes authentication by such agent. An authenticating agent has the same
rights as an Agent to deal with the Company, any Affiliate of the Company, or
any of their respective Subsidiaries.
Securities shall be issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof.
SECTION 2.3 Registrar and Paying Agent.
The Company shall maintain an office or agency in the City of Boston, in
the Commonwealth of Massachusetts, where Securities may be presented or
surrendered for payment ("Paying Agent"), where Securities may be surrendered
for registration of transfer or exchange ("Registrar") and where notices and
demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Company may act as Registrar or Paying Agent,
except that, for the purposes of Articles III, VIII, X
23
<PAGE>
and Section 4.14 and as otherwise specified in this Indenture, neither the
Company nor any Affiliate of the Company shall act as Paying Agent. The
Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may have one or more co-Registrars and one or more
additional Paying Agents. The term "Paying Agent" includes any additional
Paying Agent. The Company hereby initially appoints the Trustee as Registrar
and Paying Agent, and the Trustee hereby initially agrees so to act.
The Company shall enter into an appropriate written agency agreement with
any Agent not a party to this Indenture, which agreement shall implement the
provisions of this Indenture that relate to such Agent, and shall furnish a
copy of each such agreement to the Trustee. The Company shall promptly
notify the Trustee in writing of the name and address of any such Agent. If
the Company fails to maintain a Registrar or Paying Agent, the Trustee shall
act as such.
The Company initially appoints The Depository Trust Company ("DTC") to
act as Depository with respect to the Global Securities.
The Company initially appoints the Trustee to act as Securities Custodian
with respect to the Global Securities.
SECTION 2.4 Paying Agent to Hold Assets in Trust.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that such Paying Agent shall hold in trust for the benefit
of Holders or the Trustee all assets held by the Paying Agent for the payment
of principal of, premium, if any, or interest on, the Securities (whether
such assets have been distributed to it by the Company or any other obligor
on the Securities), and shall notify the Trustee in writing of any Default in
making any such payment. If either of the Company or a Subsidiary of the
Company acts as Paying Agent, it shall segregate such assets and hold them as
a separate trust fund for the benefit of the Holders or the Trustee. The
Company at any time may require a Paying Agent to distribute all assets held
by it to the Trustee and account for any assets disbursed and the Trustee may
at any time during the continuance of any payment Default or any Event of
Default, upon written request to a Paying Agent, require such Paying Agent to
distribute all assets held by it to the Trustee and to account for any assets
distributed. Upon distribution to the Trustee of all assets that shall have
been delivered by the Company to the Paying Agent, the Paying Agent (if other
than the Company) shall have no further liability for such assets.
SECTION 2.5 Securityholder Lists.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses
of Holders and shall otherwise
24
<PAGE>
comply with TIA Section 312(a). If the Trustee is not the Registrar, the
Company shall furnish to the Trustee on or before the third Business Day
preceding each Interest Payment Date and at such other times as the Trustee
may request in writing a list in such form and as of such date as the Trustee
reasonably may require of the names and addresses of Holders and shall
otherwise comply with TIA Section 312(a).
SECTION 2.6 Transfer and Exchange.
(a) Transfer and Exchange of Definitive Securities. When Definitive
Securities are presented to the Registrar or a co-Registrar with a request:
(x) to register the transfer of such Definitive Securities; or
(y) to exchange such Definitive Securities for an equal principal amount of
Definitive Securities of other authorized denominations,
the Registrar or co-Registrar shall register the transfer or make the
exchange as requested if its reasonable requirements for such transaction are
met; provided that the definitive securities surrendered for transfer or
exchange shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Registrar or
co-Registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing.
(b) Restrictions on Transfer of a Definitive Security for a Beneficial
Interest in a Global Security. A Definitive Security may not be exchanged
for a beneficial interest in a Global Security except upon satisfaction of
the requirements set forth below. Upon receipt by the Trustee of a
Definitive Security, duly endorsed or accompanied by appropriate instruments
of transfer, in form satisfactory to the Trustee, together with written
instructions directing the Trustee to make, or to direct the Securities
Custodian to make, an endorsement on the Global Security to reflect an
increase in the aggregate principal amount of the Securities represented by
the Global Security, then the Trustee shall cancel such Definitive Security
and cause, or direct the Securities Custodian to cause, in accordance with
the standing instructions and procedures existing between the Depository and
the Securities Custodian, the aggregate principal amount of Securities
represented by the Global Security to be increased accordingly. If no Global
Securities are then outstanding, the Company shall issue and the Trustee
shall authenticate a new Global Security in the appropriate principal amount.
(c) Transfer and Exchange of Global Securities. The transfer and
exchange of Global Securities or beneficial interests therein shall be
effected through the Depository, in accordance with this Indenture (including
applicable restrictions on transfer set forth herein, if any) and the
procedures of the Depository therefor.
25
<PAGE>
(d) Transfer of a Beneficial Interest in a Global Security for a Definitive
Security.
(i) Any Person having a beneficial interest in a Global
Security may upon request exchange such beneficial interest for a
Definitive Security. Upon receipt by the Trustee of (A) written
instructions or such other form of instructions as is customary for
the Depository from the Depository or its nominee on behalf of any
Person having a beneficial interest in a Global Security and (B) if
such beneficial interest is being transferred to the Person
designated by the Depository as being the beneficial owner, a
certification (which may be submitted by facsimile) from such
Person to that effect (in substantially the form set forth on the
reverse of the Security), then the Trustee or the Securities
Custodian, at the direction of the Trustee, will cause, in
accordance with the standing instructions and procedures existing
between the Depository and the Securities Custodian, the aggregate
principal amount of the Global Security to be reduced and,
following such reduction, the Company will execute and, upon
receipt of an authentication order in the form of an Officers'
Certificate, the Trustee will authenticate and deliver to the
transferee a Definitive Security.
(ii) Definitive Securities issued in exchange for a beneficial
interest in a Global Security pursuant to this Section 2.6(d) shall be
registered in such names and in such authorized denominations as the
Depository, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Trustee. The Trustee
shall deliver such Definitive Securities to the persons in whose names
such Securities are so registered.
(e) Restrictions on Transfer and Exchange of Global Securities.
Not-withstanding any other provisions of this Indenture (other than the
provisions set forth in subsection (f) of this Section 2.6), a Global
Security may not be transferred as a whole except by the Depository to a
nominee of the Depository or by a nominee of the Depository to the Depository
or another nominee of the Depository or by the Depository or any such nominee
to a successor Depository or a nominee of such successor Depository.
(f) Authentication of Definitive Securities in Absence of Depository. If
at any time (i) the Depository for the Securities notifies the Company that
the Depository is unwilling or unable to continue as Depository for the
Global Securities and a successor Depository for the Global Securities is
not appointed by the Company within 90 days after delivery of such notice or
(ii) the Company, in its sole discretion, notifies the Trustee in writing
that it elects to cause the issuance of Definitive Securities under this
Indenture, then, in either event, the Company will execute, and the Trustee,
upon receipt of an Offi-
26
<PAGE>
cers' Certificate requesting the authentication and delivery of Definitive
Securities, will authenticate and deliver Definitive Securities, in an
aggregate principal amount equal to the principal amount of the Global
Securities, in exchange for such Global Securities.
(g) Cancellation and/or Adjustment of Global Security. At such time as
all beneficial interests in a Global Security have either been exchanged for
Definitive Securities, redeemed, repurchased or canceled, such Global
Security shall be returned to or retained and canceled by the Trustee. At
any time prior to such cancellation, if any beneficial interest in a Global
Security is exchanged for Definitive Securities, redeemed, repurchased or
canceled, the principal amount of Securities represented by such Global
Security shall be reduced and an endorsement shall be made on such Global
Security, by the Trustee or the Securities Custodian, at the direction of the
Trustee, to reflect such reduction.
(h) Obligations with respect to Transfers and Exchanges of Definitive
Securities.
(i) To permit registrations of transfers and exchanges,
the Company shall execute and the Trustee shall authenticate
Definitive Securities and Global Securities at the Registrar's or
co-Registrar's request.
(ii) No service charge shall be made for any registration
of transfer or exchange, but the Company may require payment of a
sum sufficient to cover any transfer tax, assessments, or similar
governmental charge payable in connection therewith (other than any
such transfer taxes, assessments, or similar governmental charge
payable upon exchanges not involving any transfer pursuant to
Section 2.2 (fourth paragraph), 2.10, 3.7, 4.16(e), 9.5 or 10.1
(final paragraph)).
(iii) The Registrar or co-Registrar shall not be required
to register the transfer of or exchange of (a) any Definitive
Security selected for redemption in whole or in part pursuant to
Article III, except the unredeemed portion of any Definitive
Security being redeemed in part, (b) any Security for a period
beginning 15 Business Days before the mailing of a notice of an
offer to repurchase pursuant to Article X hereof or redeem
Securities pursuant to Article III hereof and ending at the close
of business on the day of such mailing or (c) any Security which
has been surrendered for repurchase at the option of the Holder
pursuant to Article X or Section 4.16 hereof, except the portion,
if any, of such Security not to be so repurchased.
(iv) Prior to due presentment for registration or transfer
of any Security, the Trustee, any Agent and the Company may deem
and treat the Person in
27
<PAGE>
whose name the Security is registered as the absolute owner of such
Security, and none of the Trustee, Agent or the Company shall be
affected by notice to the contrary.
SECTION 2.7 Replacement Securities.
If a mutilated Security is surrendered to the Trustee or if the Holder of
a Security claims and submits an affidavit or other evidence, satisfactory to
the Trustee, to the effect that the Security has been lost, destroyed or
wrongfully taken, the Company shall issue and the Trustee shall authenticate
a replacement Security if the Trustee's requirements are met. If required by
the Trustee or the Company, such Holder must provide an indemnity bond or
other indemnity, sufficient in the judgment of both the Company and the
Trustee, to protect the Company, the Trustee or any Agent from any loss which
any of them may suffer if a Security is replaced. The Company may charge such
Holder for its reasonable, out-of-pocket expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company.
SECTION 2.8 Outstanding Securities.
Securities outstanding at any time are all the Securities that have been
authenticated by the Trustee (including any Security represented by a Global
Security) except those canceled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Security effected
by the Trustee hereunder and those described in this Section 2.8 as not
outstanding. A Security does not cease to be outstanding because the Company
or an Affiliate of the Company holds the Security, except as provided in
Section 2.9.
If a Security is replaced pursuant to Section 2.7 (other than a mutilated
Security surrendered for replacement), it ceases to be outstanding unless the
Trustee receives proof satisfactory to it that the replaced Security is held
by a bona fide purchaser. A mutilated Security ceases to be outstanding upon
surrender of such Security and replacement thereof pursuant to Section 2.7.
If on a Redemption Date or the Maturity Date the Paying Agent (other than
an Company or an Affiliate of the Company) holds Cash or U.S. Government
Obligations sufficient to pay all of the principal of, premium, if any, and
interest due on the Securities payable on that date and payment of the
Securities called for redemption is not otherwise prohibited pursuant to this
Indenture, then on and after that date such Securities shall cease to be
outstanding and interest on them shall cease to accrue.
28
<PAGE>
SECTION 2.9 Treasury Securities.
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, amendment, supplement, waiver or
consent, Securities owned by the Company or Affiliates of the Company shall
be disregarded, except that, for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, amendment,
supplement, waiver or consent, only Securities that a Responsible Officer of
the Trustee actually knows are so owned shall be disregarded.
SECTION 2.10 Temporary Securities.
Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but
may have variations that the Company reasonably and in good faith considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities in
exchange for temporary Securities. Until so exchanged, the temporary
Securities shall in all respects be entitled to the same benefits under this
Indenture as permanent Securities authenticated and delivered hereunder.
SECTION 2.11 Cancellation.
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Securities surrendered to them for transfer, exchange or payment. The
Trustee, or at the direction of the Trustee, the Registrar or the Paying
Agent (other than the Company or an Affiliate of the Company), and no one
else, shall cancel and, at the written direction of the Company or in
accordance with its records disposal policies, shall dispose of all
Securities surrendered for transfer, exchange, payment or cancellation.
Except as set forth in Section 2.7, the Company may not issue new Securities
to replace Securities that have been paid or delivered to the Trustee for
cancellation. No Securities shall be authenticated in lieu of or in exchange
for any Securities canceled as provided in this Section 2.11, except as
expressly permitted in the form of Securities and as permitted by this
Indenture.
SECTION 2.12 Defaulted Interest.
Interest on any Security which is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in
whose name that Security
29
<PAGE>
(or one or more predecessor Securities) is registered at the close of
business on the record date for such interest or liquidated damages.
Any interest on any Security which is payable, but is not punctually paid
or duly provided for, on any Interest Payment Date plus, to the extent
lawful, any interest payable on the defaulted interest (herein called
"Defaulted Interest") shall forthwith cease to be payable to the registered
holder on the relevant Record Date, and such Defaulted Interest may be paid
by the Company, at its election in each case, as provided in clause (1) or
(2) below:
(1) The Company may elect to make payment of any Defaulted Interest to
the persons in whose names the Securities (or their respective predecessor
Securities) are registered at the close of business on a Special Record Date
for the payment of such Defaulted Interest, which shall be fixed in the
following manner. The Company shall notify the Trustee in writing of the
amount of Defaulted Interest proposed to be paid on each Security and the
date of the proposed payment, and at the same time the Company shall deposit
with the Trustee an amount of Cash equal to the aggregate amount proposed to
be paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such Cash when deposited to be held in trust for the
benefit of the persons entitled to such Defaulted Interest as provided in
this clause (1). Thereupon the Trustee shall fix a Special Record Date for
the payment of such Defaulted Interest which shall be not more than 15 days
and not less than 10 days prior to the date of the proposed payment and not
less than 10 days after the receipt by the Trustee of the notice of the
proposed payment. The Trustee shall promptly notify the Company of such
Special Record Date and, in the name and at the expense of the Company, shall
cause notice of the proposed payment of such Defaulted Interest and the
Special Record Date therefor to be mailed, first-class postage prepaid, to
each Holder at his address as it appears in the Security register not less
than 10 days prior to such Special Record Date. Notice of the proposed
payment of such Defaulted Interest and the Special Record Date therefor
having been mailed as aforesaid, such Defaulted Interest shall be paid to the
persons in whose names the Securities (or their respective predecessor
Securities) are registered on such Special Record Date and shall no longer be
payable pursuant to the following clause (2).
(2) The Company may make payment of any Defaulted Interest in any other
lawful manner not inconsistent with the requirements of any securities
exchange on which the Securities may be listed, if any, and upon such notice
as may be required by such exchange, if, after notice given by the Company to
the Trustee of the proposed payment pursuant to this clause, such manner
shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each Security
delivered under this Indenture upon transfer of or in exchange for or in lieu
of any other Security shall
30
<PAGE>
carry the rights to interest accrued and unpaid, and to accrue, which were
carried by such other Security.
ARTICLE III
REDEMPTIONS; SINKING FUND
SECTION 3.1 Right of Redemption.
Redemption of Securities, as permitted by any provision of this
Indenture, shall be made in accordance with such provision and this Article
III. On or after _____, 2002, the Company will have the right to redeem all
or any part of the Securities, other than through the operation of the
Sinking Fund provided for in Section 3.8, at the Redemption Prices specified
in Paragraph 5 of the Securities, in each case (subject to the right of the
Holders of record on a Record Date to receive interest due on an Interest
Payment Date that is on or prior to such Redemption Date), including accrued
and unpaid interest thereon to the Redemption Date.
SECTION 3.2 Notices to Trustee.
If the Company elects to redeem Securities pursuant to Paragraph 5 of the
Securities, or is required to redeem Securities pursuant to the operation of
the Sinking Fund provided for in Section 3.8, it shall notify the Trustee in
writing of the Redemption Date and the principal amount of Securities to be
redeemed and whether it wants the Trustee to give notice of redemption to the
Holders. In the event that, with respect to a redemption of Securities
pursuant to the operation of the Sinking Fund provided for in Section 3.8,
the Company elects to reduce the amount of any Sinking Fund Payment pursuant
to the provisions of Section 3.8(a), the notice to the Trustee shall also
state the amount of such reduction and the basis for such reduction as set
forth in Section 3.8.
The Company shall give each notice to the Trustee provided for in this
Section 3.2 at least five days prior to the date on which notice is to be
given (or such shorter period as the Trustee shall permit), as set forth in
Section 3.4. Any such notice may be canceled at any time prior to notice of
such redemption being mailed to any Holder and shall thereby be void and of
no effect.
SECTION 3.3 Selection of Securities to Be Redeemed.
If less than all outstanding Securities are to be redeemed, the Trustee
shall select the Securities to be redeemed by lot or by such other method as
the Trustee shall
31
<PAGE>
determine to be fair and appropriate and in such manner as complies with any
applicable Depository, legal or stock exchange requirements.
The Trustee shall make the selection from the Securities outstanding and
not previously called for redemption and shall promptly notify the Company in
writing of the Securities selected for redemption and, in the case of any
Security selected for partial redemption, the principal amount thereof to be
redeemed. Securities in denominations of $1,000 may be redeemed only in
whole. The Trustee may select for redemption portions (equal to $1,000 or
any integral multiple thereof) of the principal of Securities that have
denominations larger than $1,000. Provisions of this Indenture that apply to
Securities called for redemption also apply to portions of Securities called
for redemption.
SECTION 3.4 Notice of Redemption.
At the Company's written request made at least five days prior to the
date on which notice is to be given (or such shorter period as the Trustee
shall permit), the Trustee shall, at least 30 days but not more than 60 days
before a Redemption Date, whether through operation of the Sinking Fund or
otherwise, mail a notice of redemption by first class mail, postage prepaid,
to each Holder whose Securities are to be redeemed to such Holder's last
address as then shown on the registry books of the Registrar. Each notice
for redemption shall identify the Securities to be redeemed and shall state:
(1) the Redemption Date;
(2) the Redemption Price, including the amount of accrued and
unpaid interest to be paid upon such redemption;
(3) the name, address and telephone number of the Paying Agent;
(4) that Securities called for redemption must be surrendered to
the Paying Agent at the address specified in such notice to collect the
Redemption Price;
(5) that, unless (a) the Company defaults in its obligation to
deposit Cash or U.S. Government Obligations which through the scheduled
payment of principal and interest in respect thereof in accordance with
their terms will provide, not later than one day before the due date of
any payment, Cash in an amount to fund the Redemption Price with the
Paying Agent in accordance with Section 3.6 hereof or (b) such redemption
payment is otherwise prohibited, interest on Securities called for
redemption ceases to accrue on and after the Redemption Date and the only
remaining right of the Holders of such Securities shall be to receive
payment of the Redemption Price, including accrued and unpaid interest to
32
<PAGE>
the Redemption Date, upon surrender to the Paying Agent of the Securities
called for redemption and to be redeemed;
(6) if any Security is being redeemed in part, the portion of the
principal amount equal to $1,000 or any integral multiple thereof, of such
Security to be redeemed and that, after the Redemption Date, and upon
surrender of such Security, a new Security or Securities in aggregate
principal amount equal to the unredeemed portion thereof will be issued;
(7) if less than all the Securities are to be redeemed, the
identification of the particular Securities (or portion thereof) to be
redeemed, as well as the aggregate principal amount of such Securities to
be redeemed and the aggregate principal amount of Securities to be
outstanding after such partial redemption;
(8) the CUSIP number of the Securities to be redeemed; and
(9) whether the redemption notice is being sent pursuant to the
optional redemption provisions of Paragraph 5 of the Securities or
pursuant to the operation of the Sinking Fund provided for in Section 3.8.
SECTION 3.5 Effect of Notice of Redemption.
Once notice of redemption is mailed in accordance with Section 3.4,
Securities called for redemption shall become due and payable on the
Redemption Date and at the Redemption Price, including accrued and unpaid
interest to the Redemption Date. Upon surrender to the Trustee or Paying
Agent, such Securities called for redemption shall be paid at the Redemption
Price, including interest accrued and unpaid to the Redemption Date; provided
that if the Redemption Date is after a regular Record Date and on or prior to
the Interest Payment Date to which such Record Date relates, the accrued
interest shall be payable to the Holder of the redeemed Securities registered
on the relevant Record Date; provided, further, that if a Redemption Date is
not a Business Day, payment shall be made on the next succeeding Business Day
and no interest shall accrue for the period from such Redemption Date to such
succeeding Business Day.
SECTION 3.6 Deposit of Redemption Price.
Prior to 10:00 A.M. on the Redemption Date, the Company shall deposit
with the Paying Agent (other than the Company or an Affiliate of the Company)
Cash or U.S. Government Obligations sufficient to pay the Redemption Price
of, including accrued and unpaid interest on, all Securities to be redeemed
on such Redemption Date (other than Securities or portions thereof called for
redemption on that date that have been delivered
33
<PAGE>
by the Company to the Trustee for cancellation). The Paying Agent shall
promptly return to the Company any Cash or U.S. Government Obligations so
deposited which is not required for that purpose upon the written request of
the Company.
If the Company complies with the preceding paragraph and the other
provisions of this Article III and payment of the Securities called for
redemption is not prohibited under this Indenture, interest on the Securities
to be redeemed will cease to accrue on the applicable Redemption Date,
whether or not such Securities are presented for payment. Notwithstanding
anything herein to the contrary, if any Security surrendered for redemption
in the manner provided in the Securities shall not be so paid upon surrender
for redemption because of the failure of the Company to comply with the
preceding paragraph, interest shall continue to accrue and be paid from the
Redemption Date until such payment is made on the unpaid principal, and, to
the extent lawful, on any interest not paid on such unpaid principal, in each
case at the rate and in the manner provided in Section 4.1 hereof and the
Security.
SECTION 3.7 Securities Redeemed in Part.
Upon surrender of a Security that is to be redeemed in part, the Company
shall execute and the Trustee shall authenticate and deliver to the Holder,
without service charge to the Holder, a new Security or Securities equal in
principal amount to the unredeemed portion of the Security surrendered. If a
Global Security is so surrendered, such new Security so issued shall be a new
Global Security.
SECTION 3.8 Sinking Fund.
(a) As and for a Sinking Fund for the retirement of the Securities, the
Company will, until all the Securities are paid or payment thereof provided
for, deposit in accordance with Section 3.6 on or prior to each Sinking Fund
Payment Date an amount in Cash sufficient to redeem on such Sinking Fund
Payment Date, at a Redemption Price equal to 100% of the aggregate principal
amount of the Securities so redeemed, such principal amount of Securities as
shall be set forth below or such lesser amount as may be outstanding, plus
all accrued and unpaid interest thereon; provided that such principal amount
of Securities to be redeemed may, at the option of the Company, be reduced in
inverse order of maturity by an amount equal to the sum of (i) the principal
amount of Securities theretofore issued and acquired at any time by the
Company and delivered to the Trustee for cancellation, and not theretofore
made the basis of a Sinking Fund payment and (ii) the principal amount of
Securities at any time redeemed and paid pursuant to the provisions of
Paragraph 5 of the Securities and this Article III, or which shall at any
time have been duly called for redemption (other than through operation of
the Sinking Fund) and the Redemption Price of which shall have been deposited
in trust for
34
<PAGE>
that purpose and which have not been theretofore made the basis of a Sinking
Fund Payment:
____________, 200_ $___________
____________, 200_ $___________
____________, 200_ $___________
____________, 200_ $___________
____________, 200_ $___________
____________, 200_ $___________
____________, 200_ $___________
____________, 200_ $___________
____________, 200_ $___________
(b) Each Sinking Fund payment shall be applied to the redemption of
Securities on the related Sinking Fund Payment Date.
(c) In the event that the Company elects to reduce the amount of any
Sinking Fund Payment pursuant to the provisions of Section 3.8(a), the notice
to the Trustee shall also state the amount of such reduction and the basis
for such reduction as provided in Section 3.8(a). Notice of redemption of
the Securities to redeemed on a Sinking Fund Payment Date, selection of such
Securities and the redemption of such Securities shall be made on the terms
and in the manner described in Sections 3.2, 3.3, 3.4, 3.5, 3.6 and 3.7
ARTICLE IV
COVENANTS
SECTION 4.1 Payment of Securities.
The Company shall pay the principal of, premium, if any, and interest on
the Securities on the dates and in the manner provided herein and in the
Securities. An installment of principal of, premium, if any, or interest on
the Securities shall be considered paid on the date it is due if the Trustee
or Paying Agent (other than the Company, a Subsidiary of the Company or an
Affiliate of the Company) holds for the benefit of the Holders, on or before
10:00 A.M., New York City time on that date, Cash deposited and designated
for and sufficient to pay such installment.
The Company shall pay interest on overdue principal and premium, if any,
and on overdue installments of interest, at the rates specified in the
Securities compounded semi-annually, to the extent lawful.
35
<PAGE>
SECTION 4.2 Maintenance of Office or Agency.
The Company shall maintain in the City of Boston, the Commonwealth of
Massachusetts, an office or agency where Securities may be presented or
surrendered for payment, where Securities may be surrendered for registration
of transfer or exchange and where notices and demands to or upon the Company
in respect of the Securities and this Indenture may be served. The Company
shall give prompt written notice to the Trustee of the location, and any
change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee with the address thereof, such presentations, surrenders,
notices and demands may be made or served at the address of the Trustee set
forth in Section 12.2.
The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided that no such designation or rescission shall in any manner relieve
the Company of its obligation to maintain an office or agency in the City of
Boston, the Commonwealth of Massachusetts, for such purposes. The Company
shall give prompt written notice to the Trustee of any such designation or
rescission and of any change in the location of any such other office or
agency. The Company hereby initially designates the Corporate Trust Office
of the Trustee located at ____________ Street, Boston, Massachusetts _____.
SECTION 4.3 Limitation on Restricted Payments.
The Company shall not, and shall not permit any of their Subsidiaries to,
directly or indirectly, make any Restricted Payment, if, after giving effect
thereto on a pro forma basis, (a) a Default or an Event of Default shall have
occurred and be continuing, (b) the Company is not permitted to incur at
least $1.00 of additional Indebtedness pursuant to the Consolidated Interest
Coverage Ratio in Section 4.11(a) or (c) the aggregate amount of all
Restricted Payments made by the Company and its Subsidiaries, including after
giving effect to such proposed Restricted Payment, from and after the Issue
Date, would exceed the sum of (i) $2,500,000, plus (ii) 50% of the aggregate
Consolidated Net Income of the Company 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 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 (iii) 100% of the aggregate Net Cash
Proceeds received by the Company and not applied in connection with a
Qualified Exchange from the issue or sale 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 the
36
<PAGE>
Company), including the Net Cash Proceeds received by the Company upon the
exercise, exchange or conversion of such securities into Qualified Capital
Stock), plus (iv) the Net Cash Proceeds received by the Company or any of its
Subsidiaries from its investment in, and the sale, disposition or other
liquidation of, any Restricted Investment.
The foregoing clauses (b) and (c) 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 the Company required
to be made under (i) the Restricted Stock Plans or (ii) the Stock Option
Plans, in an amount equal to the sum of the exercise prices paid to the
Company by the holder of such Capital Stock upon the exercise of such stock
options, (y) (i) any redemption or repurchase by the Company of its Capital
Stock, (ii) any contribution or dividend paid by the Company to the ESOP or
(iii) any loan made by the Company 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 the Company 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 (c) of the immediately preceding paragraph.
Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this Section 4.3 were computed, which calculations
may be based upon the Company's latest available internal financial
statements; provided that a failure to so deliver such Officers' Certificate
shall not constitute a Default if the Company provides the Officers'
Certificate within 30 days of the date of making such Restricted Payment and
conclusively demonstrates therein that the Restricted Payment was permitted
to be made on the date made. The Trustee may rely on such Officers'
Certificate without further inquiry.
SECTION 4.4 Corporate Existence.
Subject to Article V, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate
existence and the corporate existence of its Subsidiaries in accordance with
the respective organizational documents of each of them (as the same may be
amended from time to time) and the rights
37
<PAGE>
(charter and statutory) and corporate franchises of the Company and each of
its Subsidiaries; provided that the Company shall not be required to
preserve, with respect to any of its Subsidiaries, any such existence, right
or franchise, if (a) the Board of Directors of the Company shall determine
that the preservation thereof is no longer desirable in the conduct of the
business of such entity and (b) the loss thereof is not disadvantageous in
any material respect to the Holders.
SECTION 4.5 Payment of Taxes and Other Claims.
Except with respect to immaterial items, the Company shall, and shall
cause each of its Subsidiaries to, pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (i) all taxes,
assessments and governmental charges (including withholding taxes and any
penalties, interest and additions to taxes) levied or imposed upon the
Company or any of its Subsidiaries or any of their respective properties and
assets and (ii) all lawful claims, whether for labor, materials, supplies,
services or anything else, which have become due and payable and which by law
have or may become a Lien upon the property and assets of the Company or any
of its Subsidiaries; provided that the Company shall not be required to pay
or discharge or cause to be paid or discharged any such tax, assessment,
charge or claim whose amount, applicability or validity is being contested in
good faith by appropriate proceedings and for which disputed amounts adequate
reserves with respect thereto are maintained on the books of the Company in
accordance with GAAP.
SECTION 4.6 Maintenance of Properties and Insurance.
The Company shall cause all material properties used or useful to the
conduct of its business and the business of each of its Subsidiaries to be
maintained and kept in good condition, repair and working order (reasonable
wear and tear excepted) and supplied with all necessary equipment and shall
cause to be made all necessary repairs, renewals, replacements, betterments
and improvements thereof, all as in their reasonable judgment may be
necessary, so that the business carried on in connection therewith may be
properly conducted at all times; provided that nothing in this Section 4.6
shall prevent the Company from discontinuing any operation or maintenance of
any of such properties, or disposing of any of them, if such discontinuance
or disposal is (a) in the judgment of the Board of Directors of the Company,
desirable in the conduct of the business of such entity and (b) not
disadvantageous in any material respect to the Holders.
The Company shall provide, or cause to be provided, for itself and each
of its Subsidiaries, insurance (including appropriate self-insurance) against
loss or damage of the kinds that, in the reasonable, good faith opinion of
the Company is adequate and appropriate for the conduct of the business of
the Company and such Subsidiaries.
38
<PAGE>
SECTION 4.7 Compliance Certificate; Notice of Default.
(a) The Company shall deliver to the Trustee within 120 days after the
end of its fiscal year (commencing with the Company's 1997 fiscal year) an
Officers' Certificate complying with Section 314(a)(4) of the TIA and stating
that a review of its activities and the activities of its Subsidiaries during
the preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Indenture and further
stating, as to each such Officer signing such certificate, whether or not the
signer knows of any failure by the Company or any Subsidiary of the Company
to comply with any conditions or covenants in this Indenture and, if such
signer does know of such a failure to comply, the certificate shall describe
such failure with particularity. The Officers' Certificate shall also notify
the Trustee should the relevant fiscal year end on any date other than the
current fiscal year end date.
(b) The Company shall, so long as any of the Securities are outstanding,
deliver to the Trustee, promptly upon becoming aware of any Default or Event
of Default, an Officers' Certificate specifying such Default or Event of
Default and what action the Company is taking or proposes to take with
respect thereto. The Trustee shall not be deemed to have knowledge of any
Default, any Event of Default or any such fact unless one of its Responsible
Officers receives written notice thereof from the Company or any of the
Holders.
SECTION 4.8 Reports and Other Information.
Whether or not the Company is subject to the reporting requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall deliver to the
Trustee and to each Holder within 10 days after it is or would have been
required to file them with the SEC, annual and quarterly financial statements
substantially equivalent to financial statements that would have been
included in reports filed with the SEC, if the Company 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 the Company's
certified independent public accountants as such would be required in such
reports to the SEC, and, in each case, together with management's discussion
and analysis of financial condition and results of operations which would be
so required. Whether or not required by the rules and regulations of the
SEC, the Company shall file a copy of all such information and reports with
the SEC for public availability (unless the SEC will not accept such a
filing).
SECTION 4.9 Limitation on Status as Investment Company.
39
<PAGE>
Neither the Company nor any of its Subsidiaries shall be required to
register as an "investment company" (as that term is defined in the
Investment Company Act of 1940, as amended), or otherwise become subject to
regulation as an investment company under the Investment Company Act.
SECTION 4.10 Limitation on Transactions with Affiliates.
The Company shall not, and shall 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 the Company or
such Subsidiary, as the case may be, and are on terms at least as favorable
as the terms which could be obtained by the Company 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 that the foregoing restrictions
shall 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 $2,000,000, must be evidenced by a resolution of a committee of
non-employee directors of the Company 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 the Company or
such Subsidiary, as the case may be, and no less favorable to the Company 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
$5,000,000 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 the Company or such Subsidiary, as the case may be, from a financial point
of view from an independent investment banking firm of national reputation;
provided that the foregoing restrictions shall not apply to Exempted
Affiliate Transactions.
SECTION 4.11 Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock.
(a) The Company shall not, and shall 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
40
<PAGE>
for, contingently or otherwise (individually and collectively, to "incur" or,
as appropriate, an "incurrence"), any Funded Recourse Debt (including
Acquired Indebtedness) or any Disqualified Capital Stock; provided that,
notwithstanding the foregoing, (i) the Company may, and may permit any of its
Subsidiaries to, incur Funded Recourse Debt (including Acquired Recourse
Debt) or 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 the proceeds
therefrom and (B) on the date of such incurrence (the "Incurrence Date"), the
Consolidated Interest Coverage Ratio of the Company 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) the Company may, and may permit any of its Subsidiaries to, incur
any Permitted Recourse Debt (including, without limitation, Secured Portfolio
Debt).
(b) The Company shall 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 Securities upon terms and
conditions no less favorable to the Holders that the subordination provisions
contained in Article XI of this Indenture.
(c) The Company shall not, and shall 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 covering such Funded Recourse
Debt) is subordinated to any other Indebtedness of the Company unless such
unsecured Funded Recourse Debt is also by its terms (or by the terms of any
agreement covering such Funded Recourse Debt) made expressly subordinate to
the Securities 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 the
Company. 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 the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company shall be deemed
to have been incurred at the time such Person becomes such a Subsidiary of
the Company or is merged with or into or consolidated with the Company or a
Subsidiary of the Company, as applicable.
41
<PAGE>
SECTION 4.12 Limitations on Dividends and Other Payment Restrictions
Affecting Subsidiaries.
The Company shall not, and shall 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 the Company to pay dividends
or make other distributions 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,
the Company or any Subsidiary of the Company, except (a) restrictions imposed
by the Securities or this Indenture, (b) restrictions imposed by applicable
law, (c) existing restrictions under specified Indebtedness outstanding on
the Issue Date or under any Acquired Indebtedness not incurred in violation
of this Indenture or any agreement relating to any property, asset, or
business acquired by the Company 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
the Company 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 that 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 the
Company 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 that 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 "special
purpose" Subsidiary of the Company which was or is incurred solely in
connection with the securitization of Customer Receivables in the ordinary
course of business consistent with past practice and (h) any Lien permitted
by the provisions of Section 4.13 hereof.
SECTION 4.13 Limitation on Liens.
The Company shall not, and shall 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 the Company unless
the Securities are equally and ratably secured; provided that (i) the
foregoing restrictions shall not prohibit the Company or its
42
<PAGE>
Subsidiaries from incurring Permitted Liens and (ii) if such Funded Recourse
Debt is by its terms expressly subordinate to the Securities, the Lien
securing such Funded Recourse Debt shall be subordinate and junior to the
Lien securing the Securities or the Guarantees, with the same relative
priority as such subordinated Funded Recourse Debt shall have with respect to
the Securities.
SECTION 4.14 Waiver of Stay, Extension or Usury Laws.
The Company hereby covenants (to the extent that it may lawfully do so)
that it will not at any time insist upon, plead, or in any manner whatsoever
claim or take the benefit or advantage of, any stay or extension law or any
usury law or other law which would prohibit or forgive the Company from
paying all or any portion of the principal of, premium, if any, or interest
on the Securities as contemplated herein, wherever enacted, now or at any
time hereafter in force, or which may affect the covenants or the performance
of this Indenture; and (to the extent that it may lawfully do so) the Company
hereby expressly waives all benefit or advantage of any such law, and
covenants that it will not hinder, delay or impede the execution of any power
herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.
SECTION 4.15 Limitation on Lines of Business.
Neither the Company 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 the Company, is a Related Business.
SECTION 4.16 Repurchase of Securities Upon Death of Holder.
(a) Option Upon Death Of Holders. Upon the death of any Holder of
Securities, and upon the further receipt by the Company of a written request
for repurchase and the other documents referred to in clauses (i), (ii) and
(iii) below, and satisfaction of the conditions set forth in subsection (b)
below, the Company shall be required to pay, in accordance with the terms of
this Section 4.16, the Repurchase Price of, and (except if the Repurchase
Date shall be an Interest Payment Date) any accrued interest on all or such
portion (which portion shall be an integral multiple of $1,000 in excess of
the minimum authorized denomination) of the Security or Securities held by
the deceased Holder at the date of such Holder's death as requested, provided
that the Company shall not be required to make repurchase payments
aggregating more than (i) $25,000 in principal amount (plus accrued interest)
in any calendar year on a Security or Securities held by any one deceased
43
<PAGE>
Holder or (ii) $250,000 in principal amount (plus accrued interest) in any
calendar year on Securities held by any number of deceased Holders (the
"Maximum Annual Repurchase Amount"). Subject to subsection (b) below, the
repurchase of such Securities shall be made in the order in which requests
therefor are received (subject to the aforesaid Maximum Annual Repurchase
Amount limitation) within 30 days following receipt by the Company or the
Trustee of the following:
(i) a written request for repurchase of the Security or Securities
signed by a duly authorized representative of the Holder, which request
shall set forth the name of the deceased Holder, the date of death of the
deceased Holder, and the principal amount of the Security or Securities
to be repaid;
(ii) the certificates (if any other than with respect to a global
Security) representing the Security or Securities to be repaid; and
(iii) evidence satisfactory to the Company and the Trustee of the
death of such deceased Holder and the authority of the representative to
such extent as may be required by the Trustee.
Securities not repaid in any calendar year because of the Maximum Annual
Repurchase Amount limitation may be held by the Trustee at the request of the
authorized representative of the deceased Holder and repaid in subsequent
years in the order in which such Securities are received.
Authorized representatives of a Holder shall include the following:
executors, administrators or other legal representatives of an estate;
trustees of a trust; joint owners of Securities 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 another. For purposes of this Section 4.16,
the death of a Person owning a Security or Securities in joint tenancy or
tenancy by the entirety with another or others shall be deemed the death of
the Holder of the Security or Securities, and the entire principal amount of
the Security or Securities so held shall be subject to repurchase, together
with accrued interest thereon to the Repurchase Date, in accordance with the
provisions of this Section 4.16, the death of a Person owning a Security or
Securities by tenancy in common shall be deemed the death of a Holder of
Security or Securities only with respect to the deceased Holder's interest in
the Security or Securities so held by tenancy in common; except that in the
event a Security or Securities are held by husband and wife as tenants in
common, the death of either shall be deemed the death of the Holder of the
Security or Securities, and the entire principal amount of the Security or
Securities so held shall be subject to repurchase in accordance with the
provisions of this Section. A Person who, during such Person's lifetime, was
entitled to substantially all of the beneficial interests of ownership of
Securities will, upon such Person's death, be deemed the Holder thereof for
purposes of this Section, regardless of the registered
44
<PAGE>
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 Securities during
such Person's lifetime. Beneficial interests shall include the power to
sell, transfer or otherwise dispose of Securities and the right to receive
the proceeds therefrom, as well as principal thereof and interest thereon.
If Securities are then issued in global form, the Company or the Trustee
may adopt appropriate procedures to allow beneficial owners of Securities to
obtain payment in accordance with the requirements of the Depository in the
event of a request for repurchase of the Securities pursuant to this Section
4.16.
(b) Conditions to Repurchase. A Security or Securities held by the
deceased Holder shall not be entitled to repurchase pursuant to this Section
unless all of the following conditions are met:
(i) the Securities to be repaid shall have been registered on the
Security register in the name of the deceased Holder (or, in the case of
a Security in global form, there is evidence that the deceased was the
Holder) since the issue date of such Securities or for a period of at
least six months prior to the date of the deceased Holder's death,
whichever is less;
(ii) the Company or the Trustee shall have received a written
request for repurchase within one year after the date of the deceased
Holder's death or, in the case of requests for a subsequent repurchase of
a Security or Securities held by such deceased Holder, within one year
after any such preceding request;
(iii) the Company shall not, after giving effect to such repurchase,
have made repurchase payments aggregating more than the Maximum Annual
Repurchase Amount in principal amount (plus accrued interest) of
Securities within the then current calendar year;
(iv) the Company shall not, after giving effect to such repurchase,
be in default with respect to any Funded Recourse Debt; and
(v) the Company shall not be subject to any law, regulation,
agreement or administrative directive preventing such repurchase.
(c) Deposit of Repurchase Price. Within 30 days after the receipt by
the Company or the Trustee of any request for repurchase of a Security or
Securities or any portion thereof duly made pursuant to this Section 4.16,
the Company shall deposit with
45
<PAGE>
the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust) an amount of Cash sufficient to
pay the Repurchase Price of, and (except if the Repurchase Date shall be an
Interest Payment Date) any accrued interest on all the Securities or portions
thereof which are to be repaid on that date.
(d) Securities Payable on Repurchase Date. A written request having
been made as described above, the Security or Securities so to be repurchased
shall, on the Repurchase Date, become due and payable at the Repurchase
Price, and from and after such date (unless the Company shall default in the
payment of the Repurchase Price and accrued interest) such Securities shall
cease to bear interest. Upon surrender of any such Security for repurchase
in accordance with said request, such Security shall be paid by the Company
at the Repurchase Price, together with any accrued interest to the Repurchase
Date; provided that installments of interest on Securities whose stated
maturity is on or prior to the Repurchase Date shall be payable to the
Holders of such Securities, registered as such at the close of business on
the record dates therefor according to their terms. If any Security to be
repurchased shall not be so repurchased upon surrender thereof for
repurchase, the principal, until paid, shall bear interest from the
Repurchase Date at the rate prescribed therefor in the Security.
(e) Securities Repurchased in Part. Any Security which is to be repaid
only in part shall be surrendered at any office or agency for such Security
(with, if the Company or the Trustee so requires, due endorsement by, or a
written instrument of transfer in form satisfactory to the Company and the
Trustee duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing), and the Company shall execute and the Trustee shall
authenticate and deliver to the Holder of such Security, without service
charge, a new Security or Securities, containing identical terms and
provisions, of any authorized denomination (in integral multiples of $1,000)
as requested by such Holder in aggregate principal amount equal to and in
exchange for the unpaid portion of the principal of the Security so
surrendered. If a Security in global form is so surrendered, the Company
shall execute, and the Trustee shall authenticate and deliver to the
Depository for such Security in global form as shall be specified in the
Officers Certificate with respect thereto to the Trustee, without service
charge, a new Security in global form in a denomination equal to and in
exchange for the unpaid portion of the principal of the Security in global
form so surrendered.
ARTICLE V
SUCCESSOR CORPORATION
SECTION 5.1 Limitation on Merger, Sale or Consolidation.
46
<PAGE>
(a) The Company shall 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) the Company 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 the Company in connection with the
Securities and this Indenture; (ii) no Default or Event of Default shall
exist or shall occur immediately before or 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 the Company 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 Indebtedness pursuant to the Consolidated Interest Coverage Ratio
set forth in Section 4.11(a) hereof.
(b) For purposes of clause (a), the sale, lease, conveyance, assignment,
transfer or other disposition of all or substantially all of the properties
and assets of one or more Subsidiaries of the Company, which properties and
assets, if held by the Company instead of such Subsidiaries, would constitute
all or substantially all of the properties and assets of the Company on a
consolidated basis, shall be deemed to be the transfer of all or
substantially all of the properties and assets of the Company.
SECTION 5.2 Successor Corporation Substituted.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with Section 5.1 hereof, the
successor corporation formed by such consolidation or into which the Company
is merged or to which such transfer is made, shall succeed to, and be
substituted for, and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor corporation had been
named herein as the Company, and when a successor corporation duly assumes
all of the obligations of the Company pursuant hereto and pursuant to the
Securities, the Company shall be released from such obligations (except with
respect to any obligations that arise from, or are related to, such
transaction).
ARTICLE VI
EVENTS OF DEFAULT AND REMEDIES
47
<PAGE>
SECTION 6.1 Events of Default.
"Event of Default," wherever used herein, means any one of the following
events (whatever the reason for such Event of Default and whether it shall be
caused voluntarily or involuntarily or effected, without limitation, by
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(1) failure by the Company to pay any installment of interest upon the
Securities as and when the same becomes due and payable, and the continuance
of such default for a period of 15 days;
(2) failure by the Company to pay all or any part of the principal of,
or premium, if any, on the Securities 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 in accordance with Article X;
(3) failure by the Company to comply with the provisions of Article V;
(4) failure by the Company to observe or perform any covenant or
agreement contained in the Securities or this Indenture (other than a default
in the performance of any covenant or agreement which is specifically dealt
with elsewhere in this Section 6.1), and continuance of such failure for a
period of 30 days after there has been given, by registered or certified
mail, to the Company by the Trustee, or to the Company and the Trustee by
Holders of at least 25% in aggregate principal amount of the outstanding
Securities, a written notice specifying such default or breach, requiring it
to be remedied and stating that such notice is a "Notice of Default"
hereunder;
(5) a default under Indebtedness of the Company or any of its
Subsidiaries with an aggregate principal amount in excess of $1,000,000 (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;
(6) the failure by the Company or any of its Subsidiaries to pay
final judgments aggregating in excess of $1,000,000 if (A) any creditor has
commenced an enforcement proceeding with respect to such final judgments or
(B) such final judgments remain undischarged for a period (during which
execution shall not be effectively stayed) of 30 days after their entry;
(7) a decree, judgment or order by a court of competent
jurisdiction shall have been entered adjudicating the Company or any of its
Subsidiaries as bankrupt or
48
<PAGE>
insolvent, or approving as properly filed a petition seeking reorganization
of the Company or any of its Subsidiaries under any bankruptcy or similar
law, and such decree or order shall have continued undischarged and unstayed
for a period of 60 days; or a decree or order of a court of competent
jurisdiction over the appointment of a Custodian of the Company or any of its
Subsidiaries, or of the property of any such Person, or for the winding up or
liquidation of the affairs of any such Person, shall have been entered, and
such decree, judgment or order shall have remained in force undischarged and
unstayed for a period of 60 days; or
(8) the Company or any of its Subsidiaries shall institute
proceedings to be adjudicated a voluntary bankrupt, or shall consent to the
filing of a bankruptcy proceeding against it, or shall file a petition or
answer or consent seeking reorganization under any bankruptcy or similar law
or similar statute, or shall consent to the filing of any such petition, or
shall consent to the appointment of a Custodian of it or any of its assets or
property, or shall make a general assignment for the benefit of creditors, or
shall admit in writing its inability to pay its debts generally as they
become due, or shall, within the meaning of any Bankruptcy Law, become
insolvent, fail generally to pay its debts as they become due, or take any
corporate action in furtherance of or to facilitate, conditionally or
otherwise, any of the foregoing.
Notwithstanding the 30-day period and notice requirement contained in
Section 6.1(4) above, (i) with respect to a default under Article X the
30-day period referred to in Section 6.1(4) shall be deemed to have begun as
of the date the Change of Control notice is required to be sent in the event
that the Company has not complied with the provisions of Section 10.1, and
the Trustee or Holders of at least 25% in principal amount of the outstanding
Securities thereafter give the Notice of Default referred to in Section
6.1(4) to the Company and, if applicable, the Trustee; provided that if the
breach or default is a result of a default in the payment when due of the
Change of Control Purchase Price, such default shall be deemed, for purposes
of this Section 6.1, to arise no later than on such due date.
If a Default occurs and is continuing, the Trustee must, within 90 days
after the occurrence of such Default, give to the Holders notice of such
default.
SECTION 6.2 Acceleration of Maturity Date; Rescission and Annulment.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in Section 6.1(7) or (8) relating to the Company or any of
its Subsidiaries), then, and in every such case, unless the principal of all
of the Securities shall have already become due and payable, either the
Trustee or the Holders of not less than 25% in aggregate principal amount of
then outstanding Securities, by notice in writing to the Company (and to the
Trustee if given by Holders) (an "Acceleration Notice"), may declare
49
<PAGE>
all principal (and premium, if any) and accrued interest thereon of the
Securities (or the Change of Control Payment if the Event of Default includes
failure to pay the Change of Control Payment), determined as set forth below,
to be due and payable immediately; provided that in the event a declaration
of acceleration (or a Default which, after the giving of notice, the lapse of
time or both) resulting from an Event of Default described in Section 6.1(5)
or (6) above has occurred and is continuing, such declaration of acceleration
or such Default, as the case may be, shall be automatically annulled if such
default is cured or waived or the holders of the Indebtedness which is the
subject of such default have rescinded their declaration of acceleration in
respect of such Indebtedness within 30 days thereof (in the case of an Event
of Default under Section 6.1(5) above) or 45 days thereof (in the case of an
Event of Default under Section 6.1(6) above) and the Trustee has received
written notice of such cure, waiver or rescission and no other Event of
Default described in Section 6.1(5) or (6) as applicable, has occurred that
has not been cured or waived, or as to which the declaration has not been
rescinded, within such specified number of days of the declaration of such
acceleration in respect of such Indebtedness. If an Event of Default
specified in Section 6.1(7) or (8) relating to the Company or any Subsidiary
occurs, all principal (and premium, if any) and accrued interest thereon will
be immediately due and payable on all outstanding Securities without any
declaration or other act on the part of Trustee or the Holders.
At any time after such a declaration of acceleration being made and
before a judgment or decree for payment of the money due has been obtained by
the Trustee as hereinafter provided in this Article VI, the Holders of a
majority in aggregate principal amount of then outstanding Securities, by
written notice to the Company and the Trustee, may rescind, on behalf of all
Holders, any such declaration of acceleration if:
(1) the Company has paid or deposited with the Trustee Cash sufficient
to pay:
(A) all overdue interest on all Securities,
(B) the principal of, and premium, if any, payable with respect to
any Securities which would become due other than by reason of such
declaration of acceleration, and interest thereon at the rate borne by
the Securities,
(C) to the extent that payment of such interest is lawful, interest
upon overdue interest at the rates set forth in the Securities,
(D) all sums paid or advanced by the Trustee hereunder and the
compensation, expenses, disbursements and advances of the Trustee and its
agents and counsel and any other amounts due the Trustee under Section
7.7, and
(2) all Events of Default, other than the non-payment of the principal
of, premium, if any, and interest on Securities which have become due solely
by such
50
<PAGE>
declaration of acceleration, have been cured or waived as provided in Section
6.12, including, if applicable, any Event of Default relating to the
covenants contained in Section 10.1.
Notwithstanding the previous sentence of this Section 6.2, no waiver
shall be effective against any Holder for any Event of Default or event which
with notice or lapse of time or both would be an Event of Default with
respect to any covenant or provision which cannot be modified or amended
without the consent of the Holder of each outstanding Security affected
thereby, unless all such affected Holders agree, in writing, to waive such
Event of Default or other event. No such waiver shall cure or waive any
subsequent default or impair any right consequent thereon.
SECTION 6.3 Collection of Indebtedness and Suits for Enforcement by
Trustee.
The Company covenants that if an Event of Default in payment of
principal, premium or interest specified in clause (1) or (2) of Section 6.1
occurs and is continuing, the Company shall, upon demand of the Trustee, pay
to it, for the benefit of the Holders of such Securities, the whole amount
then due and payable on such Securities for principal, premium, if any, and
interest and, to the extent that payment of such interest shall be legally
enforceable, interest on any overdue principal, premium, if any, or interest
at the rates set forth in the Securities, and, in addition thereto, such
further amount as shall be sufficient to cover the costs and expenses of
collection, including compensation to, and expenses, disbursements and
advances of the Trustee and its agents and counsel and all other amounts due
to the Trustee under Section 7.7.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust in favor of the
Holders, may institute a judicial proceeding for the collection of the sums
so due and unpaid, may prosecute such proceeding to judgment or final decree
and may enforce the same against the Company or any other obligor upon the
Securities and collect the moneys adjudged or decreed to be payable in the
manner provided by law out of the property of the Company or any other
obligor upon the Securities, wherever situated.
If an Event of Default occurs and is continuing, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders by such appropriate judicial proceedings as the Trustee shall deem
most effective to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid
of the exercise of any power granted herein, or to enforce any other proper
remedy.
51
<PAGE>
SECTION 6.4 Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the
Securities shall then be due and payable as therein expressed or by
declaration or otherwise and irrespective of whether the Trustee shall have
made any demand on the Company for the payment of overdue principal, premium,
if any, or interest) shall be entitled and empowered, by intervention in such
proceeding or otherwise to take any and all actions under the TIA, including:
(1) to file and prove a claim for the whole amount of principal,
premium, if any, or interest owing and unpaid in respect of the Securities
and to file such other papers or documents and take such other actions,
including participating in a meeting of any committee of creditors appointed
in the matter, as the Trustee may deem necessary or advisable in order to
have the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee and its
agent and counsel and all other amounts due the Trustee under Section 7.7)
and of the Holders allowed in such judicial proceeding, and
(2) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same;
and any Custodian is hereby authorized by each Holder to make such payments
to the Trustee and, in the event that the Trustee shall consent to the making
of such payments directly to the Holders, to pay to the Trustee any amount
due it for the reasonable compensation, expenses, disbursements and advances
of the Trustee and its agents and counsel, and any other amounts due the
Trustee under Section 7.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan
of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.5 Trustee May Enforce Claims Without Possession of Securities.
All rights of action and claims under this Indenture or the Securities
may be prosecuted and enforced by the Trustee without the possession of any
of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding
52
<PAGE>
instituted by the Trustee shall be brought in its own name as trustee of an
express trust in favor of the Holders, and any recovery of judgment shall,
after provision for the payment of compensation to, and expenses,
disbursements and advances of the Trustee and its agents and counsel and all
other amounts due the Trustee under Section 7.7, be for the ratable benefit
of the Holders of the Securities in respect of which such judgment has been
recovered.
SECTION 6.6 Priorities.
Any money collected by the Trustee pursuant to this Article VI shall be
applied in the following order, at the date or dates fixed by the Trustee
and, in case of the distribution of such money on account of principal,
premium, if any, or interest upon presentation of the Securities and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
FIRST: To the Trustee in payment of all amounts due pursuant to Section
7.7;
SECOND: To the Holders in payment of the amounts then due and unpaid for
principal of, premium, if any, and interest on the Securities in respect of
which or for the benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the amounts due and
payable on such Securities for principal, premium, if any, or interest,
respectively; and
THIRD: To the Company or such other Person as may be lawfully entitled
thereto, the remainder, if any.
The Trustee may, but shall not be obligated to, fix a record date and
payment date for any payment to the Holders under this Section 6.6.
SECTION 6.7 Limitation on Suits.
No Holder or Holders of any Security or Securities shall have any right
to order or direct the Trustee to institute any proceeding, judicial or
otherwise, with respect to this Indenture, or for the appointment of a
receiver or trustee, or for any other remedy hereunder, unless:
(A) such Holder or Holders have previously given written notice to the
Trustee of a continuing Event of Default;
53
<PAGE>
(B) the Holders of not less than 25% in aggregate principal amount of
then outstanding Securities shall have made written request to the Trustee to
institute proceedings in respect of such Event of Default in its own name as
Trustee hereunder;
(C) such Holder or Holders have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities to be
incurred or reasonably probable to be incurred in compliance with such
request;
(D) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
(E) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
aggregate principal amount of the outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatsoever by virtue of, or by availing of, any provision
of this Indenture or the Securities to affect, disturb or prejudice the
rights of any other Holders, or to obtain or to seek to obtain priority or
preference over any other Holders or to enforce any right under this
Indenture or the Securities, except in the manner herein provided and for the
equal and ratable benefit of all the Holders.
SECTION 6.8 Unconditional Right of Holders to Receive Principal, Premium
and Interest.
Notwithstanding any other provision of this Indenture, the Holder of any
Security shall have the right, which is absolute and unconditional, to
receive payment of the principal of, and premium, if any, and interest on
such Security on the dates such payments are required to be made, as set
forth in such Security (in the case of redemption, the Redemption Price on
the applicable Redemption Date and in the case of the Change of Control
Purchase Price, on the applicable Change of Control Payment Date) and to
institute suit for the enforcement of any such payment after such respective
dates, and such rights shall not be impaired without the consent of such
Holder.
SECTION 6.9 Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement or payment
of mutilated, destroyed, lost or stolen Securities in Section 2.7, no right
or remedy herein conferred upon or reserved to the Trustee or to the Holders
is intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition
to every other right and remedy given hereunder or
54
<PAGE>
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent
the concurrent assertion or employment of any other appropriate right or
remedy.
SECTION 6.10 Delay or Omission Not Waiver.
No delay or omission by the Trustee or by any Holder of any Security to
exercise any right or remedy arising upon any Event of Default shall impair
the exercise of any such right or remedy or constitute a waiver of any such
Event of Default. Every right and remedy given by this Article VI or by law
to the Trustee or to the Holders may be exercised from time to time, and as
often as may be deemed expedient, by the Trustee or by the Holders, as the
case may be.
SECTION 6.11 Control by Holders.
The Holder or Holders of a majority in aggregate principal amount of then
outstanding Securities shall 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 upon the Trustee; provided that:
(1) such direction shall not be in conflict with any applicable law
(including the TIA) or with this Indenture,
(2) the Trustee shall not determine that the action so directed
would be unjustly prejudicial to the Holders not taking part in such
direction or may subject the Trustee to personal liability, and
(3) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction.
The record date for purposes of determining the identity of the Holders
of the Securities entitled to vote or consent to any action pursuant to this
Section 6.11 shall be determined as provided for in TIA Section 3.16(c).
SECTION 6.12 Waiver of Past Default.
Subject to Section 6.8, prior to the declaration of acceleration of the
maturity of the Securities, the Holder or Holders of not less than a majority
in aggregate principal amount of the outstanding Securities may, on behalf of
all Holders, waive any past default hereunder and its consequences, except a
default:
55
<PAGE>
(A) in the payment of the principal of, premium, if any, or interest on
any Security as specified in clauses (1) and (2) of Section 6.1 which has not
yet been cured; or
(B) in respect of a covenant or provision hereof which, under Article
IX, cannot be modified or amended without the consent of the Holder of each
outstanding Security affected thereby.
Upon any such waiver, such default shall cease to exist, and any Event of
Default arising therefrom shall be deemed to have been cured, for every
purpose of this Indenture, but no such waiver shall extend to any subsequent
or other default or impair the exercise of any right arising therefrom.
SECTION 6.13 Undertaking for Costs.
All parties to this Indenture agree, and each Holder of any Security by
his acceptance thereof shall be deemed to have agreed, that in any suit for
the enforcement of any right or remedy under this Indenture, or in any suit
against the Trustee for any action taken, suffered or omitted to be taken by
it as Trustee, any court may in its discretion require the filing by any
party to such suit of an undertaking to pay the costs of such suit, and that
such court may in its discretion assess reasonable costs, including
reasonable attorneys' fees, against any party to such suit, having due regard
to the merits and good faith of the claims or defenses made by such party;
provided that the provisions of this Section 6.13 shall not apply to any suit
instituted by the Company, to any suit instituted by the Trustee, to any suit
instituted by any Holder, or group of Holders, holding in the aggregate more
than 10% of the aggregate principal amount of the outstanding Securities, or
to any suit instituted by any Holder for enforcement of the payment of
principal of, premium, if any, or interest on any Security on or after the
respective Maturity Date set forth in such Security (including, in the case
of redemption, on or after the Redemption Date).
SECTION 6.14 Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders
shall be restored severally and respectively to their former positions
hereunder and thereafter all rights and remedies of the Trustee and the
Holders shall continue as though no such proceeding had been instituted.
56
<PAGE>
ARTICLE VII
TRUSTEE
The Trustee hereby accepts the trust imposed upon it by this Indenture
and covenants and agrees to perform the same, as herein expressed.
SECTION 7.1 Duties of Trustee.
(a) If a Default or an Event of Default actually known to the Trustee
has occurred and is continuing, the Trustee shall exercise such of the rights
and powers vested in it by this Indenture and use the same degree of care and
skill in their exercise as a prudent Person would exercise or use under the
circumstances in the conduct of his own affairs.
(b) Except during the continuance of a Default or an Event of Default:
(1) The Trustee need perform only those duties as are specifically
set forth in this Indenture and no others, and no covenants or obligations
shall be implied in or read into this Indenture which are adverse to the
Trustee, and
(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture.
However, in the case of any such certificates or opinions which by any
provision hereof are specifically required to be furnished to the Trustee,
the Trustee shall examine the certificates and opinions to determine
whether or not they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act, or its own willful misconduct,
except that:
(1) This paragraph does not limit the effect of paragraph (b) of this
Section 7.1,
(2) The Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts, and
(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.11.
57
<PAGE>
(d) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or to take or omit to take any
action under this Indenture or at the request, order or direction of the
Holders or in the exercise of any of its rights or powers if it shall have
reasonable grounds for believing that repurchase of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c), (d) and (f) of this Section
7.1.
(f) The Trustee shall not be liable for interest on any assets received
by it except as the Trustee may agree in writing with the Company. Assets
held in trust by the Trustee need not be segregated from other assets except
to the extent required by law.
SECTION 7.2 Rights of Trustee.
Subject to Section 7.1:
(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper Person. The Trustee need
not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may consult with
counsel and may require an Officers' Certificate or an Opinion of Counsel,
which shall conform to Sections 12.4 and 12.5. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such certificate or advice of counsel.
(c) The Trustee may act through its attorneys and agents and shall not
be responsible for the misconduct or negligence of any agent (other than any
agent who is an employee of the Trustee) appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers conferred upon it by this Indenture, nor for any action permitted to
be taken or omitted hereunder by any Agent.
(e) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, notice, request, direction, consent, order, bond,
debenture or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters as it
may see fit.
58
<PAGE>
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request, order or
direction of any of the Holders, pursuant to the provisions of this
Indenture, unless such Holders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities which may
be incurred therein or thereby.
(g) Unless otherwise specifically provided for in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an officer of the Company.
(h) The Trustee shall have no duty to inquire as to the performance of
the Company's covenants in Article IV hereof. In addition, the Trustee shall
not be deemed to have knowledge of any Default or Event of Default except (i)
any Event of Default occurring pursuant to Sections 5.1, 6.1(1), 6.1(2) or
(ii) any Default or Event of Default of which the Trustee shall have received
written notification or obtained actual knowledge.
(i) Whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad faith
on its part, rely upon an Officers' Certificate.
SECTION 7.3 Individual Rights of Trustee.
The Trustee, in its individual or any other capacity, may become the
owner or pledgee of Securities and may otherwise deal with the Company, any
of its Subsidiaries or their respective Affiliates with the same rights it
would have if it were not Trustee. Any Agent may do the same with like
rights. Notwithstanding the foregoing, the Trustee must comply with Sections
7.10 and 7.11 at all times.
SECTION 7.4 Trustee's Disclaimer.
The Trustee makes no representation as to the validity or adequacy of
this Indenture or the Securities and it shall not be accountable for the
Company's use of the proceeds from the Securities, and it shall not be
responsible for any statement in the Securities, other than the Trustee's
certificate of authentication (if executed by the Trustee), or the use or
application of any funds received by a Paying Agent other than the Trustee.
59
<PAGE>
SECTION 7.5 Notice of Default.
If a Default or an Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail at the Company's expense to each
Securityholder notice of the uncured Default or Event of Default within 90
days after such Default or Event of Default occurs. Except in the case of a
Default or an Event of Default in payment of, principal of or premium, if
any, or interest on any Security (including the payment of the Change of
Control Purchase Price on the Change of Control Payment Date and the payment
of the Redemption Price on the Redemption Date), the Trustee may withhold the
notice if and so long as a Responsible Officer in good faith determines that
withholding the notice is in the interest of the Securityholders.
SECTION 7.6 Reports by Trustee to Holders.
Within 60 days after each [May 15] beginning with the [May 15] following
the date of this Indenture, the Trustee shall, if required by law, mail to
each Securityholder a brief report dated as of such [May 15] that complies
with TIA Section 313(a). The Trustee shall also comply with TIA Sections
313(b) and 313(c).
The Company shall promptly notify the Trustee in writing if the
Securities become listed on any stock exchange or automatic quotation system.
A copy of each report at the time of its mailing to Securityholders shall
be mailed to the Trustee and filed with the SEC and each stock exchange, if
any, on which the Securities are listed.
SECTION 7.7 Compensation and Indemnity.
The Company agrees to pay to the Trustee from time to time reasonable
compensation for its services. The Trustee's compensation shall not be
limited by any law concerning the compensation of a trustee of an express
trust. The Company shall reimburse the Trustee upon request for all
reasonable disbursements, expenses and advances incurred or made by it in
accordance with this Indenture. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents,
accountants, experts and counsel.
The Company agrees to indemnify the Trustee (in its capacity as Trustee)
and each of its officers, directors, attorneys-in-fact and agents for, and
hold it harmless against, any claim, demand, expense (including but not
limited to reasonable compensation, disbursements and expenses of the
Trustee's agents and counsel), loss or liability incurred by it without
negligence or bad faith on the part of the Trustee, arising out of or in
60
<PAGE>
connection with the administration of this trust and its rights or duties
hereunder, including the reasonable costs and expenses of defending itself
against any claim or liability in connection with the exercise or performance
of any of its powers or duties hereunder. The Trustee shall notify the
Company promptly of any claim asserted against the Trustee for which it may
seek indemnity. The Company shall defend the claim and the Trustee shall
provide reasonable cooperation at the Company's expense in the defense. The
Trustee may have separate counsel and the Company shall pay the reasonable
fees and expenses of such counsel; PROVIDED that the Company will not be
required to pay such fees and expenses if it assumes the Trustee's defense
and there is no conflict of interest between the Company and the Trustee in
connection with such defense. The Company need not pay for any settlement
made without its written consent. The Company need not reimburse any expense
or indemnify against any loss or liability to the extent incurred by the
Trustee through its negligence, bad faith or willful misconduct.
To secure the Company's payment obligations in this Section 7.7, the
Trustee shall have a claim prior to the Securities on all assets held or
collected by the Trustee in its capacity as Trustee, except assets held in
trust to pay principal of, premium, if any, or interest on the Securities.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(7) or (8) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
The Company's obligations under this Section 7.7 and any lien arising
hereunder shall survive the resignation or removal of the Trustee, the
discharge of the Company's obligations pursuant to Article VIII of this
Indenture and any rejection or termination of this Indenture under any
Bankruptcy Law.
SECTION 7.8 Replacement of Trustee.
The Trustee may resign by so notifying the Company in writing, to become
effective upon the appointment of a successor trustee. The Holder or Holders
of a majority in aggregate principal amount of the outstanding Securities may
remove the Trustee by so notifying the Company and the Trustee in writing and
may appoint a successor trustee with the Company's consent. The Company may
remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10;
(b) the Trustee is adjudged bankrupt or insolvent;
(c) a receiver, Custodian or other public officer takes charge of the
Trustee or its property; or
61
<PAGE>
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holder
or Holders of a majority in aggregate principal amount of the Securities may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Immediately after that and
provided that all sums owing to the retiring Trustee provided for in Section
7.7 have been paid, the retiring Trustee shall transfer all property held by
it as trustee to the successor Trustee, subject to the lien provided in
Section 7.7, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have all the rights, powers and
duties of the Trustee under this Indenture. A successor Trustee shall mail
notice of its succession to each Holder.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or
the Holder or Holders of at least 10% in aggregate principal amount of the
outstanding Securities may petition any court of competent jurisdiction for
the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
Notwithstanding replacement of the Trustee pursuant to this Section 7.8,
the Company's obligations under Section 7.7 shall continue for the benefit of
the retiring Trustee.
SECTION 7.9 Successor Trustee by Merger, Etc.
If the Trustee consolidates with, merges or converts into, or transfers
all or substantially all of its corporate trust business to, another
corporation, the resulting, surviving or transferee corporation without any
further act shall, if such resulting, surviving or transferee corporation is
otherwise eligible hereunder, be the successor Trustee.
62
<PAGE>
SECTION 7.10 Eligibility; Disqualification.
The Trustee shall at all times satisfy the requirements of TIA Section
310(a)(1), (2) and (5). The Trustee shall have a combined capital and
surplus of at least $25,000,000 as set forth in its most recent published
annual report of condition. The Trustee shall comply with TIA Section 310(b).
SECTION 7.11 Preferential Collection of Claims Against Company.
The Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or
been removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE VIII
LEGAL DEFEASANCE AND COVENANT DEFEASANCE;
SATISFACTION AND DISCHARGE
SECTION 8.1 Option to Effect Legal Defeasance and Discharge.
The Company may, at its option and at any time, elect to have Section 8.2
or Section 8.3 applied to all outstanding Securities upon compliance with the
conditions set forth below in this Article VIII.
SECTION 8.2 Legal Defeasance and Discharge.
Upon the Company's exercise under Section 8.1 of the option applicable to
this Section 8.2, the Company shall be deemed to have been discharged from
their respective obligations with respect to all outstanding Securities on
the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, such Legal Defeasance means that the Company
shall be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding Securities, which shall thereafter be deemed
to be "outstanding" only for the purposes of Section 8.5 and the other
Sections of this Indenture referred to in (a) and (b) below, and the Company
shall be deemed to have satisfied all of its other obligations under such
Securities and this Indenture (and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments acknowledging the
same), except for the following which shall survive until otherwise
terminated or discharged hereunder: (a) the rights of Holders of outstanding
Securities to receive solely from the trust fund described in Section 8.4,
and as more fully
63
<PAGE>
set forth in such Section, payments in respect of the principal of, premium,
if any, and interest on such Securities when such payments are due, (b) the
Company's obligations with respect to such Securities under Sections 2.4,
2.6, 2.7, 2.10 and 4.2, (c) the rights, powers, trusts, duties and immunities
of the Trustee hereunder and the obligations of the Company in connection
therewith and (d) this Article VIII. Subject to compliance with this Article
VIII, the Company may exercise its option under this Section 8.2
notwithstanding the prior exercise of its option under Section 8.3 with
respect to the Securities.
SECTION 8.3 Covenant Defeasance.
Upon the Company's exercise under Section 8.1 of the option applicable to
this Section 8.3, the Company shall be released from its obligations under
the covenants contained in Sections 4.3, 4.5, 4.6, 4.7, 4.10, 4.11, 4.12,
4.13, 4.14, 4.15 and 4.16 and Article V with respect to the outstanding
Securities on and after the date the conditions set forth below are satisfied
(hereinafter, "Covenant Defeasance"), and the Securities shall thereafter be
deemed not "outstanding" for the purposes of any direction, waiver, consent
or declaration or act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "outstanding"
for all other purposes hereunder. For this purpose, such Covenant Defeasance
means that, with respect to the outstanding Securities, the Company need not
comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any
other document (and Sections 6.1(3) and (4) shall not apply to any such
covenant), but, except as specified above, the remainder of this Indenture
and such Securities shall be unaffected thereby. In addition, upon the
Company's exercise under Section 8.1 of the option applicable to this Section
8.3, Sections 6.1(5) and 6.1(6) shall not constitute Events of Default.
SECTION 8.4 Conditions to Legal or Covenant Defeasance.
The following shall be the conditions to the application of either
Section 8.2 or Section 8.3 to the outstanding Securities:
(a) The Company shall irrevocably have deposited or caused to be
deposited with the Trustee (or another trustee satisfying the requirements of
Section 7.10 who shall agree to comply with the provisions of this Article
VIII applicable to it) as trust funds in trust for the purpose of making the
following payments, specifically pledged as security for, and dedicated
solely to, the benefit of the Holders of such Securities, (i) Cash in an
amount, or (ii) U.S. Government Obligations which through the scheduled
payment of
64
<PAGE>
principal and interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment, Cash in
an amount, or (iii) a combination thereof, in such amounts, as in each case
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay and discharge, and which shall be applied by
the Trustee (or other qualifying trustee) to pay and discharge, the principal
of, premium, if any, and interest on the outstanding Securities on the stated
maturity or on the applicable Redemption Date, as the case may be, of such
principal or installment of principal, premium, or interest; provided that
the Trustee shall have been irrevocably instructed to apply such Cash and the
proceeds of such U.S. Government Obligations to said payments with respect to
the Securities and the Holders of Securities must have a valid, perfected,
fist priority security interest in such trust.
(b) In the case of an election under Section 8.2, the Company shall have
delivered to the Trustee an Opinion of Counsel confirming that (i) the
Company has received from, or there has been published by, the Internal
Revenue Service, a ruling or (ii) since the date hereof, there has been a
change in the applicable Federal income tax law, in either case to the effect
that, and based thereon such opinion shall confirm that, the Holders of the
outstanding Securities 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;
(c) In the case of an election under Section 8.3, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the Holders
of the outstanding Securities 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 in 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;
(d) No Default or Event of Default with respect to the Securities shall
have occurred and be continuing on the date of such deposit or, insofar as
Section 6.1(7) or 6.1(8) is concerned, at any time in the period ending on
the 91st day after the date of such deposit (it being understood that this
condition is a condition subsequent which shall not be deemed satisfied until
the expiration of such period, but in the case of Covenant Defeasance, the
covenants which are defeased under Section 8.3 will cease to be in effect
unless an Event of Default under Section 6.1(7) or 6.1(8) occurs during such
period);
(e) Such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under, this Indenture or any
other material agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which any of them is bound;
65
<PAGE>
(f) The Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit made by the Company pursuant to its
election under Section 8.2 or 8.3 was not made by the Company with the intent
of preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; and
(g) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for in, in the case of the Officers' Certificate, (a)
through (f) and, in the case of the Opinion of Counsel, clauses (a) (with
respect to the validity and perfection of the security interest), (b) (if
applicable), (c) and (e) of this Section 8.4 have been complied with.
SECTION 8.5 Deposited Cash and U.S. Government Obligations to be Held in
Trust; Other Miscellaneous Provisions.
Subject to Section 8.6, all Cash and U.S. Government Obligations
(including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.5, the
"Trustee") pursuant to Section 8.4 in respect of the outstanding Securities
shall be held in trust and applied by the Trustee, in accordance with the
provisions of such Securities and this Indenture, to the payment, either
directly or through any Paying Agent as the Trustee may determine, to the
Holders of such Securities of all sums due and to become due thereon in
respect of principal, premium, if any, and interest, but such money need not
be segregated from other funds except to the extent required by law.
SECTION 8.6 Repayment to the Company.
(a) Anything in this Article VIII to the contrary notwithstanding, the
Trustee or the Paying Agent, as applicable, shall deliver or pay to the
Company from time to time, upon the request of the Company, any Cash or U.S.
Government Obligations held by it as provided in Section 8.4 hereof which in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee (which
may be the opinion delivered under Section 8.4(a) hereof), are in excess of
the amount thereof that would then be required to be deposited to effect an
equivalent Legal Defeasance or Covenant Defeasance.
(b) Any Cash and U.S. Government Obligations (including the proceeds
thereof) deposited with the Trustee or any Paying Agent, or then held by the
Company, in trust for the payment of the principal of, premium, if any, or
interest on any Security and remaining unclaimed for two years after such
principal, premium or interest have become due and payable shall be paid to
the Company on its request, and the Holder of such
66
<PAGE>
Security shall thereafter look only to the Company for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money shall thereupon cease; PROVIDED that the Trustee or such Paying Agent,
before being required to make any such repurchase, may at the expense of the
Company cause to be published once, in The New York Times and The Wall Street
Journal (national edition), notice that such money remains unclaimed and
that, after a date specified therein, which shall not be less than 30 days
from the date of such notification or publication, any unclaimed balance of
such money then remaining will be repaid to the Company.
SECTION 8.7 Reinstatement.
If the Trustee or Paying Agent is unable to apply any Cash or U.S.
Government Obligations in accordance with Section 8.2 or 8.3, as the case may
be, by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, then the
obligations of the Company under this Indenture and the Securities shall be
revived and reinstated as though no deposit had occurred pursuant to Section
8.2 or 8.3 until such time as the Trustee or Paying Agent is permitted to
apply such money in accordance with Section 8.2 and 8.3, as the case may be;
PROVIDED that if the Company makes any payment of principal of, premium, if
any, or interest on any Security following the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the Cash or U.S. Government
Obligations held by the Trustee or Paying Agent.
SECTION 8.8 Satisfaction and Discharge.
In addition to the Company's rights under Section 8.1, the Company may
terminate all of its obligations under this Indenture when:
(1) all Securities theretofore authenticated and delivered (other
than Securities which have been destroyed, lost or stolen and which have
been replaced or paid as provided in Section 2.7) have been delivered to
the Trustee for cancellation;
(2) the Company has paid or caused to be paid all other sums payable
hereunder and under the Securities; and
(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent specified herein relating to the satisfaction and discharge of
this Indenture have been complied with.
67
<PAGE>
ARTICLE IX
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 9.1 Supplemental Indentures Without Consent of Holders.
Without the consent of any Holder, the Company (when authorized by Board
Resolutions) and the Trustee, at any time and from time to time, may enter
into one or more indentures supplemental hereto, in form satisfactory to the
Trustee, for any of the following purposes:
(1) to cure any ambiguity, defect, typographical error or inconsistency,
or to make any other provisions with respect to matters or questions arising
under this Indenture which shall not be inconsistent with the provisions of
this Indenture, provided such action pursuant to this clause (1) shall not
adversely affect the interests of any Holder in any respect;
(2) to provide for uncertificated Securities in addition to or in place
of certificated Securities;
(3) to add to the covenants of the Company for the benefit of the
Holders, or to surrender any right or power herein conferred upon the Company
or to make any other change that does not adversely affect the legal rights
of any Holder under this Indenture, provided, that the Company has delivered
to the Trustee an Opinion of Counsel stating that such change does not
adversely affect the rights of any Holder;
(4) to provide collateral for the Securities or additional obligors
upon, or guarantors of payment of, the Securities;
(5) to evidence the succession of another Person to the Company, and the
assumption by any such successor of the obligations of the Company herein and
in the Securities in accordance with Article V;
(6) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA; or
(7) to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee with respect to the Securities.
68
<PAGE>
SECTION 9.2 Amendments, Supplemental Indentures and Waivers with Consent
of Holders.
Subject to Section 6.8, with the consent of the Holders of not less than a
majority in aggregate principal amount of then outstanding Securities
(including consents obtained in connection with a tender offer or exchange
offer for Securities), by written act of said Holders delivered to the
Company and the Trustee, the Company (when authorized by a Board Resolution)
and the Trustee may amend or supplement this Indenture or the Securities or
enter into an indenture or indentures supplemental hereto for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of this Indenture or the Securities or of modifying in any manner
the rights of the Holders under this Indenture or the Securities; PROVIDED
that no such amendment or supplement to Article XI of this Indenture, or
indenture or indentures supplemental which add any provision to or change in
any manner or eliminate any of the provisions of Article XI of this Indenture
or which modify in any manner the rights of the Holders under Article XI of
this Indenture shall be effective unless such amendment, supplement or
indenture or indentures supplemental has been approved in writing by the
Representative or Representatives of all Designated Secured Portfolio Debt
then outstanding. Subject to Section 6.8, the Holder or Holders of not less
than a majority in aggregate principal amount of then outstanding Securities
may waive compliance by the Company with any provision of this Indenture or
the Securities; PROVIDED that no waiver of compliance by the Company with any
provision of Article XI of this Indenture shall be effective unless such
waiver has been approved in writing by the Representative or Representatives
of all Designated Secured Portfolio Debt then outstanding. Notwithstanding
any of the above, however, no such amendment, supplemental indenture or
waiver shall, without the consent of the Holder of each outstanding Security
affected thereby (and, in the case of any amendment, supplemental indenture
or waiver of any provision of Article XI of this Indenture, without the
written consent of each Representative of any Designated Secured Portfolio
Debt then outstanding):
(1) reduce the percentage of principal amount of the outstanding
Securities whose Holders must consent to an amendment, supplement or waiver
of any provision of this Indenture or the Securities;
(2) reduce the rate or extend the time for payment of interest on any
Security;
(3) reduce the principal amount of any Security, or reduce the Change of
Control Purchase Price or the Redemption Price;
(4) change the Stated Maturity or the Change of Control Purchase Date of
any Security;
69
<PAGE>
(5) alter the redemption provisions of Article III or the provisions of
Section 4.16 or Article X in a manner adverse to any Holder;
(6) make any changes in the provisions concerning waivers of Defaults or
Events of Default by Holders of the Securities or the rights of Holders to
recover the principal of, premium, if any, or interest on, or redemption
payment with respect to, any Security, including without limitation any
changes in Section 6.8, 6.12 or this third sentence of this Section 9.2;
(7) reduce the principal of, premium, if any, or interest on any
Security payable as provided for in this Indenture and the Securities (or
change the place of payment where, or the coin, currency or manner in which,
any Security or any principal, premium, or interest is payable); or
(8) make any change to this Indenture that would adversely affect the
contractual ranking of the Securities.
It shall not be necessary for the consent of the Holders under this
Section 9.2 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section becomes
effective, the Company shall mail to the Holders affected thereby a notice
briefly describing the amendment, supplement or waiver. Any failure of the
Company to mail such notice, or any defect therein, shall not in any way
impair or affect the validity of any such supplemental indenture or waiver.
After an amendment, supplement or waiver under this Section 9.2 or
Section 9.4 becomes effective, it shall bind each Holder.
The Company shall not, and shall not permit any of its Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration, whether by
way of interest, fee or otherwise, to any Holder of any outstanding
Securities for or as an inducement to any consent, waiver or amendment of any
terms or provisions of the outstanding Securities unless such consideration
is offered to be paid or agreed to be paid to all Holders of the Securities
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.
SECTION 9.3 Compliance with TIA.
Every amendment, waiver or supplement of this Indenture or the Securities
shall comply with the TIA as then in effect.
70
<PAGE>
SECTION 9.4 Revocation and Effect of Consents.
Until an amendment, waiver or supplement becomes effective, a consent to
it by a Holder is a continuing consent by the Holder and every subsequent
Holder of a Security or portion of a Security that evidences the same debt as
the consenting Holder's Security, even if notation of the consent is not made
on any Security. However, any such Holder or subsequent Holder may revoke the
consent as to his Security or portion of his Security by written notice to
the Company or the Person designated by the Company as the Person to whom
consents should be sent if such revocation is received by the Company or such
Person before the date on which the Trustee receives an Officers' Certificate
certifying that the Holders of the requisite principal amount of Securities
have consented (and have not theretofore revoked such consent) to the
amendment, supplement or waiver.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which record date shall be the date so fixed by the
Company notwithstanding the provisions of the TIA. If a record date is
fixed, then notwithstanding the last sentence of the immediately preceding
paragraph, those Persons who were Holders at such record date, and only those
Persons (or their duly designated proxies), shall be entitled to revoke any
consent previously given, whether or not such Persons continue to be Holders
after such record date. No such consent shall be valid or effective for more
than 90 days after such record date.
After an amendment, supplement or waiver becomes effective, it shall bind
every Securityholder, unless it makes a change described in any of clauses
(1) through (8) of Section 9.2, in which case, the amendment, supplement or
waiver shall bind only each Holder of a Security who has consented to it and
every subsequent Holder of a Security or portion of a Security that evidences
the same debt as the consenting Holder's Security; PROVIDED that any such
waiver shall not impair or affect the right of any Holder to receive payment
of principal of, premium, if any, and interest on a Security, on or after the
respective dates set for such amounts to become due and payable expressed in
such Security, or to bring suit for the enforcement of any such payment on or
after such respective dates.
SECTION 9.5 Notation on or Exchange of Securities.
If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the
Trustee or require the Holder to put an appropriate notation on the Security.
The Trustee may place an appropriate notation on the Security briefly
describing the changed terms and return it to
71
<PAGE>
the Holder. Alternatively, if the Company or the Trustee so determines, the
Company, in exchange for the Security, shall issue and the Trustee shall
authenticate a new Security that reflects the changed terms. Any failure to
make the appropriate notation or to issue a new Security shall not affect the
validity of such amendment, supplement or waiver.
SECTION 9.6 Trustee to Sign Amendments, Etc.
The Trustee shall execute any amendment, supplement or waiver authorized
pursuant to this Article IX; PROVIDED that the Trustee may, but shall not be
obligated to, execute any such amendment, supplement or waiver which affects
the Trustee's own rights, duties or immunities under this Indenture. The
Trustee shall be entitled to receive, and shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of any amendment,
supplement or waiver authorized pursuant to this Article IX is authorized or
permitted by this Indenture.
ARTICLE X
RIGHT TO REQUIRE REPURCHASE UPON CHANGE OF CONTROL
SECTION 10.1 Repurchase of Securities at Option of the Holder Upon a
Change of Control.
(a) In the event that a Change of Control occurs, each Holder shall have
the right, at such Holder's option, pursuant to an irrevocable and
unconditional offer by the Company (the "Change of Control Offer") subject to
the terms and conditions of this Indenture, to require the Company to
repurchase all or any part of such Holder's Securities (provided, that the
principal amount of such Securities at maturity must be $1,000 or an integral
multiple thereof) on a date selected by the Company that is no later than 45
Business Days after the occurrence of such Change of Control (the "Change of
Control Purchase Date"), at a cash price (the "Change of Control Purchase
Price") equal to 101% of the principal amount thereof, plus (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 repurchase date and subject
to clause (b)(4) below) accrued and unpaid interest to and including the
Change of Control Purchase Date.
(b) In the event of a Change of Control, the Company shall be required
to commence an offer to purchase Securities (a "Change of Control Offer") as
follows:
(1) the Change of Control Offer shall commence within 15 Business Days
following the occurrence of the Change of Control;
72
<PAGE>
(2) the Change of Control Offer shall remain open for 20 Business
Days, except to the extent that a longer period is required by applicable
law, rule or regulation (the "Change of Control Offer Period");
(3) upon the expiration of a Change of Control Offer, the Company
shall purchase all of the properly tendered Securities at the Change of
Control Purchase Price;
(4) if the Change of Control Purchase Date is on or after a Record
Date and on or before the related Interest Payment Date, any accrued
interest will be paid to the Person in whose name a Security is
registered at the close of business on such Record Date, and no
additional interest will be payable to Securityholders who tender
Securities pursuant to the Change of Control Offer;
(5) the Company shall provide the Trustee and the Paying Agent
with notice of the Change of Control Offer at least three Business Days
before the commencement of any Change of Control Offer; and
(6) on or before the commencement of any Change of Control Offer,
the Company or the Registrar (upon the request and at the expense of the
Company) shall send, by first-class mail, a notice to each of the
Securityholders, which (to the extent consistent with this Indenture)
shall govern the terms of the Change of Control Offer and shall state:
(i) that the Change of Control Offer is being made pursuant
to such notice and this Section 10.1 and that all Securities, or
portions thereof, tendered will be accepted for payment;
(ii) the Change of Control Purchase Price (including the
amount of accrued and unpaid interest, subject to clause (b)(4)
above), the Change of Control Purchase Date and the Change of
Control Put Date (as defined below);
(iii) that any Security, or portion thereof, not tendered or
accepted for payment will continue to accrue interest;
(iv) that, unless the Company defaults in depositing Cash with
the Paying Agent in accordance with the last paragraph of this
Article X or such payment is prevented, any Security, or portion
thereof, accepted for payment pursuant to the Change of Control
Offer shall cease to accrue interest after the Change of Control
Purchase Date;
73
<PAGE>
(v) that Holders electing to have a Security, or portion
thereof, purchased pursuant to a Change of Control Offer will be
required to surrender the Security, with the section entitled
"Option of Holder to Elect Purchase" on the reverse of the Security
completed, to the Paying Agent (which may not for purposes of this
Section 10.1, notwithstanding anything in this Indenture to the
contrary, be the Company or any Affiliate of the Company) at the
address specified in the notice prior to the close of business on
the earlier of (a) the third Business Day prior to the Change of
Control Purchase Date and (b) the third Business Day following the
expiration of the Change of Control Offer (such earlier date being
the "Change of Control Put Date");
(vi) that Holders will be entitled to withdraw their election,
in whole or in part, if the Paying Agent (which may not for
purposes of this Section 10.1, notwithstanding anything in this
Indenture to the contrary, be the Company or any Affiliate of the
Company) receives, up to the close of business on the Change of
Control Put Date, a telegram, telex, facsimile transmission or
letter setting forth the name of the Holder, the principal amount
of the Securities the Holder is withdrawing and a statement that
such Holder is withdrawing his election to have such principal
amount of Securities purchased; and
(vii) a brief description of the events resulting in such Change
of Control.
Any such Change of Control Offer shall comply with all applicable
provisions of Federal and state laws, including those regulating tender
offers, if applicable, and any provisions of this Indenture which conflict
with such laws (A) shall be deemed to be superseded by the provisions of such
laws and (B) shall not be deemed to have been breached by virtue thereof.
On or before the Change of Control Purchase Date, the Company shall (i)
accept for payment Securities 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
and unpaid interest subject to clause (b)(4) above) for all Securities or
portions thereof so tendered. Promptly following the Change of Control
Purchase Date the Company shall deliver to the Registrar Securities so
accepted, together with an Officers' Certificate listing the Securities or
portions thereof being purchased by the Company. The Paying Agent shall on
the Change of Control Purchase Date or promptly thereafter mail to Holders of
Securities so accepted payment in an amount equal to the Change of Control
Purchase Price (together with accrued and unpaid interest and Liquidated
Damages, if any, subject to clause (b)(4) above), for such Securities
(subject to clause (b)(4) above), and the Trustee or its authenticating agent
shall
74
<PAGE>
promptly authenticate and the Registrar shall mail or deliver (or cause to be
transferred by book entry) to such Holders a new Security equal in principal
amount to any unpurchased portion of the Security surrendered; PROVIDED that
each such new Security will be in a principal amount of $1,000 or an integral
multiple thereof. Any Securities not so accepted shall be promptly mailed or
delivered by the Company to the Holder thereof. The Company shall publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date.
ARTICLE XI
SUBORDINATION OF SECURITIES
SECTION 11.1. Securities Subordinated to Secured Portfolio Debt.
The Company and each Securityholder, by its acceptance of Securities,
agree that (a) the payment of the principal of and interest on the Securities
and (b) any other payment or obligations in respect of the Securities,
including on account of the acquisition or redemption of the Securities by
the Company (including, without limitation, pursuant to Articles III or X) is
subordinated, to the extent and in the manner provided in this Article XI, to
the prior payment in full in Cash or Cash Equivalents of all Secured
Portfolio Debt of the Company and that these subordination provisions are for
the benefit of the holders of Secured Portfolio Debt.
This Article XI shall constitute a continuing offer to all Persons who,
in reliance upon such provisions, become holders of, or continue to hold,
Secured Portfolio Debt, and such provisions are made for the benefit of the
holders of Secured Portfolio Debt, and such holders are made obligees
hereunder and any one or more of them may enforce such provisions.
The Securities shall in all respects rank (i) PARI PASSU with all other
unsecured Funded Recourse Debt of the Company outstanding on the Issue Date
and (ii) senior to any Funded Recourse Debt of the Company issued after the
Issue Date, and only Indebtedness of the Company which is Secured Portfolio
Debt shall rank senior to the Securities in accordance with the provisions
set forth herein.
SECTION 11.2. No Payment on Securities in Certain Circumstances.
(a) No payment (by set-off or otherwise) shall be made by or on
behalf of the Company, as applicable, on account of the principal of,
premium, if any, or interest on the Securities (including any repurchases of
Securities), or on account of the redemption
75
<PAGE>
provisions of the Securities or any obligation in respect of the Securities,
for Cash or property, (i) upon the maturity of any Secured Portfolio Debt of
the Company, as applicable, by lapse of time, acceleration (unless waived) or
otherwise, unless and until all principal of and the interest on such Secured
Portfolio Debt are first paid in full in Cash or Cash Equivalents, or (ii) in
the event of default in the payment of any principal or interest on or fee in
respect of Secured Portfolio Debt of the Company when it becomes due and
payable, whether at maturity or at a date fixed for prepayment or by
declaration or otherwise (a "Payment Default"), unless and until such Payment
Default has been cured or waived or otherwise has ceased to exist; PROVIDED
that the Company may pay the Securities without regard to the foregoing if
the Company and the Trustee receive written notice approving such payment
from the Representative of the Designated Secured Portfolio Debt with respect
to which such payment default has occurred and is continuing.
(b) In furtherance of the provisions of Section 11.1, in the event
that, notwithstanding the foregoing provisions of this Section 11.2, any
payment or distribution of assets of the Company shall be received by the
Trustee or the Securityholders at a time when such payment or distribution is
prohibited by the provisions of this Section 11.2, such payment or
distribution shall be held in trust for the benefit of the holders of such
Secured Portfolio Debt, and shall be paid or delivered by the Trustee or such
Securityholders, as the case may be, to the holders of such Secured Portfolio
Debt remaining unpaid or to their Representative or Representatives, ratably
according to the aggregate principal amounts remaining unpaid on account of
such Secured Portfolio Debt held or represented by each, for application to
the payment of all such Secured Portfolio Debt remaining unpaid, to the
extent necessary to pay all such Secured Portfolio Debt in full in Cash or
Cash Equivalents after giving effect to any concurrent payment or
distribution to the holders of such Secured Portfolio Debt.
SECTION 11.3. Securities Subordinated to Prior Payment of All Secured
Portfolio Debt on Dissolution, Liquidation or Reorganization.
Upon any distribution of assets of the Company or upon any dissolution,
winding up, total or partial liquidation or reorganization of the Company,
whether voluntary or involuntary, in bankruptcy, insolvency, receivership or
a similar proceeding or upon assignment for the benefit of creditors or any
marshalling of assets or liabilities:
(a) the holders of all Secured Portfolio Debt of the Company, as
applicable, will first be entitled to receive payment in full in Cash or Cash
Equivalents before the Securityholders are entitled to receive any payment on
account of the principal of, premium, if any, and interest on the Securities
or any obligation in respect of the Securities;
(b) any payment or distribution of assets of the Company of any
kind or character from any source, whether in Cash, property or securities to
which the Securityholders
76
<PAGE>
or the Trustee on behalf of the Securityholders would be entitled (by set-off
or otherwise), except for the provisions of this Article XI, shall be paid by
the liquidating trustee or agent or other person making such a payment or
distribution directly to the holders of such Secured Portfolio Debt or their
Representative to the extent necessary to make payment in full on all such
Secured Portfolio Debt remaining unpaid, after giving effect to any
concurrent payment or distribution to the holders of such Secured Portfolio
Debt; and
(c) in the event that, notwithstanding the foregoing, any payment
or distribution of assets of the Company shall be received by the Trustee or
the Securityholders at a time when such payment or distribution is prohibited
by the foregoing provisions, such payment or distribution shall be held in
trust for the benefit of the holders of such Secured Portfolio Debt, and
shall be paid or delivered by the Trustee or such Securityholders, as the
case may be, to the holders of such Secured Portfolio Debt remaining unpaid
or to their Representative or Representatives ratably according to the
aggregate principal amounts remaining unpaid on account of such Secured
Portfolio Debt held or represented by each, for application to the payment of
all such Secured Portfolio Debt remaining unpaid, to the extent necessary to
pay all such Secured Portfolio Debt in full in Cash or Cash Equivalents after
giving effect to any concurrent payment or distribution to the holders of
such Secured Portfolio Debt.
SECTION. 11.4. Securityholders to Be Subrogated to Rights of Holders of
Secured Portfolio Debt.
Subject to the payment in full in Cash or Cash Equivalents of all Secured
Portfolio Debt of the Company as provided herein, the Securityholders shall
be subrogated to the rights of the holders of such Secured Portfolio Debt to
receive payments or distributions of assets of the Company applicable to the
Secured Portfolio Debt until all amounts owing on the Securities shall be
paid in full, and for the purpose of such subrogation no such payments or
distributions to the holders of such Secured Portfolio Debt by or on behalf
of the Company, or by or on behalf of the Securityholders by virtue of this
Article XI, which otherwise would have been made to the Securityholders
shall, as between the Company and the Securityholders, be deemed to be
payment by the Company or on account of such Secured Portfolio Debt, it being
understood that the provisions of this Article XI are and are intended solely
for the purpose of defining the relative rights of the Securityholders, on
the one hand, and the holders of such Senior Debt, on the other hand.
If any payment or distribution to which the Securityholders would
otherwise have been entitled but for the provisions of this Article XI shall
have been applied, pursuant to the provisions of this Article XI, to the
payment of amounts payable under Secured Portfolio Debt of the Company, then
the Securityholders shall be entitled to receive from the holders of such
Secured Portfolio Debt any payments or distributions received by such holders
of Secured Portfolio Debt in excess of the amount sufficient to pay all
amounts
77
<PAGE>
payable under or in respect of such Secured Portfolio Debt in full in Cash or
Cash Equivalents.
SECTION 11.5. Obligations of the Company Unconditional.
Nothing contained in this Article XI or elsewhere in this Indenture or in
the Securities is intended to or shall impair, as between the Company and the
Securityholders, the obligation of the Company, which is absolute and
unconditional, to pay to the Securityholders the principal of, premium, if
any, and interest on the Securities as and when the same shall become due and
payable in accordance with their terms, or is intended to or shall affect the
relative rights of the Securityholders and creditors of the Company other
than the holders of the Secured Portfolio Debt, nor shall anything herein or
therein prevent the Trustee or any Securityholder from exercising all
remedies otherwise permitted by applicable law upon default under this
Indenture, subject to the rights, if any, under this Article XI, of the
holders of Secured Portfolio Debt in respect of Cash, property or securities
of the Company received upon the exercise of any such remedy.
Notwithstanding anything to the contrary in this Article XI or elsewhere in
this Indenture or in the Securities, upon any distribution of assets of the
Company referred to in this Article XI, the Trustee, subject to the
provisions of Sections 7.1 and 7.2, and the Securityholders shall be entitled
to rely upon any order or decree made by any court of competent jurisdiction
in which such dissolution, winding up, liquidation or reorganization
proceedings are pending, or a certificate of the liquidating Trustee or agent
or other Person making any distribution to the Trustee or the Securityholders
for the purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Secured Portfolio Debt and other
Indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article XI so long as such court has been apprised of the
provisions of, or the order, decree or certificate makes reference to, the
provisions of this Article XI. Nothing in this Section 11.5 shall apply to
the claims of, or payments to, the Trustee under or pursuant to Section 7.7.
SECTION 11.6. Trustee Entitled to Assume Payments Not Prohibited in
Absence of Notice.
The Trustee shall not at any time be charged with knowledge of the
existence of any facts which would prohibit the making of any payment to or
by the Trustee unless and until a Trust Officer of the Trustee or any Paying
Agent shall have received, no later than one Business Day prior to such
payment, written notice thereof from the Company or from one or more holders
of Secured Portfolio Debt or from any Representative therefor and, prior to
the receipt of any such written notice, the Trustee, subject to the
provisions of Sections 7.1 and 7.2, shall be entitled in all respects
conclusively to assume that no such fact exists.
78
<PAGE>
SECTION 11.7. Application by Trustee of Assets Deposited with It.
Amounts deposited by the Company in trust with the Trustee pursuant to
and in accordance with Article VIII shall be for the sole benefit of
Securityholders and, to the extent (i) the making of such deposit did not, or
after giving effect to such deposit does not, result in any contravention of
any term or provision of the Revolver Agreement and (ii) allocated for the
payment of Securities, shall not be subject to the subordination provisions
of this Article XI. Otherwise, any deposit of assets with the Trustee or the
Paying Agent (whether or not in trust) for the payment of principal of or
interest on any Securities shall be subject to the provisions of Sections
11.1, 11.2, 11.3 and 11.4; PROVIDED that, if prior to one Business Day
preceding the date on which by the terms of this Indenture any such assets
may become distributable for any purpose (including without limitation, the
payment of either principal of or interest on any Security) the Trustee or
such Paying Agent shall not have received with respect to such assets the
written notice provided for in Section 11.6, then the Trustee or such Paying
Agent shall have full power and authority to receive such assets and to apply
the same to the purpose for which they were received, and shall not be
affected by any notice to the contrary which may be received by it on or
after such date.
SECTION 11.8. Subordination Rights Not Impaired by Acts or Omissions of
the Company or Holders of Secured Portfolio Debt.
No right of any present or future holders of any Secured Portfolio Debt
to enforce subordination provisions contained in this Article XI shall at any
time in any way be prejudiced or impaired by any act or failure to act on the
part of the Company or by any act or failure to act, in good faith, by any
such holder, or by any noncompliance by the Company with the terms of this
Indenture, regardless of any knowledge thereof which any such holder may have
or be otherwise charged with. The holders of Secured Portfolio Debt may
extend, renew, modify or amend the terms of the Secured Portfolio Debt or any
security therefor and release; sell or exchange such security and otherwise
deal freely with the Company, all without affecting the liabilities and
obligations of the parties to this Indenture of the Securityholders.
SECTION 11.9. Securityholders Authorize Trustee to Effectuate
Subordination of Securities.
Each Securityholder by his acceptance thereof authorizes and expressly
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to effectuate the subordination provisions contained in this
Article XI and to protect the rights of the Securityholders pursuant to this
Indenture, and appoints the Trustee his attorney-in-fact for such purpose,
including, in the event of any dissolution, winding up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency or
receivership proceedings or upon an assignment for the benefit of creditors
or any other marshalling of
79
<PAGE>
assets and liabilities of the Company), the immediate filing of a claim for
the unpaid balance of his Securities in the form required in said proceedings
and cause said claim to be approved. If the Trustee does not file a proper
claim or proof of debt in the form required in such proceeding prior to 30
days before the expiration of the time to file such claim or claims, then the
holders of the Secured Portfolio Debt or their representative are or is
hereby authorized to have the right to file and are or is hereby authorized
to file an appropriate claim for and on behalf of the Securityholders.
Nothing herein contained shall be deemed to authorize the Trustee or the
holders of Secured Portfolio Debt or their Representative to authorize or
consent to or accept or adopt on behalf of any Securityholder any plan of
reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Securityholder thereof, or to authorize the
Trustee or the holders of Secured Portfolio Debt or their Representative to
vote in respect of the claim of any Securityholder in any such proceeding.
SECTION 11.10. Right of Trustee to Hold Secured Portfolio Debt.
The Trustee shall be entitled to all of the rights set forth in this
Article XI in respect of any Secured Portfolio Debt at any time held by it to
the same extent as any other holder of Secured Portfolio Debt, and nothing in
this Indenture shall be construed to deprive the Trustee of any of its rights
as such holder.
SECTION 11.11. Article XI Not to Prevent Events of Default.
This failure to make a payment on account of principal of, premium, if
any, or interest on the Securities by reason of any provision of this Article
XI shall not be construed as preventing the occurrence of a Default or an
Event of Default under Section 6.1 or in any way limit the rights of the
Trustee or any Securityholder to pursue any other rights or remedies with
respect to the Securities.
SECTION 11.12. No Fiduciary Duty of Trustee to Holders of Secured
Portfolio Debt.
The Trustee shall not be deemed to owe any fiduciary duty to the holders
of Secured Portfolio Debt, and shall not be liable to any such holders (other
than for its willful misconduct or negligence) if it shall in good faith
mistakenly pay over or distribute to the Securityholders of the Securities or
the Company or any other Person, Cash, property or securities to which any
holders of Secured Portfolio Debt shall be entitled by virtue of this Article
XI or otherwise. Nothing in this Section 11.12 shall affect the obligation
of any other such Person to hold such payment for the benefit of, and to pay
such payment over to, the holders of Secured Portfolio Debt or their
representative. In the event of any conflict between the fiduciary duty of
the Trustee to the Holders of Securities and to the holders of Secured
Portfolio Debt, the Trustee is expressly authorized to resolve such conflict
in favor of the Securityholders.
80
<PAGE>
SECTION 11.13. Acceleration of Payment of Securities.
If payment of the Securities is accelerated because of an Event of
Default, the Company 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, the Company may not pay the
Securities 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 Securities only if this Article XI otherwise permits
payment at that time.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 TIA Controls.
If any provision of this Indenture limits, qualifies, or conflicts with
the duties imposed by operation of the TIA, the imposed duties, upon
qualification of this Indenture under the TIA, shall control.
SECTION 12.2 Notices.
Any notices or other communications to the Company or the Trustee
required or permitted hereunder shall be in writing, and shall be
sufficiently given if made by hand delivery, by telecopier or registered or
certified mail, postage prepaid, return receipt requested, addressed as
follows:
IF TO THE COMPANY:
HPSC, INC.
60 STATE STREET, 35TH FLOOR
BOSTON, MASSACHUSETTS 02109-1803
ATTENTION: PRESIDENT
TELECOPY: (617) 720-7299
IF TO THE TRUSTEE:
STATE STREET BANK AND TRUST COMPANY
-------------------------------------
-------------------------------------
81
<PAGE>
ATTENTION:
----------------------------
TELECOPY:
----------------------------
Any party by notice to each other party may designate additional or
different addresses as shall be furnished in writing by such party. Any
notice or communication to any party shall be deemed to have been given or
made as of the date so delivered, if personally delivered; when receipt is
acknowledged, if telecopied; and five Business Days after mailing if sent by
registered or certified mail, postage prepaid (except that a notice of change
of address shall not be deemed to have been given until actually received by
the addressee).
Any notice or communication mailed to a Securityholder shall be mailed to
him or her by first class mail or other equivalent means at his or her
address as it appears on the registration books of the Registrar and shall be
sufficiently given to him or her if so mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner
provided above, it is duly given, whether or not the addressee receives it.
SECTION 12.3 Communications by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other Person
shall have the protection of TIA Section 312(c).
SECTION 12.4 Certificate and Opinion as to Conditions Precedent.
Upon any request or application by the Company to the Trustee to take any
action under this Indenture, such Person shall furnish to the Trustee:
(1) an Officers' Certificate (in form and substance reasonably
satisfactory to the Trustee) stating that, in the opinion of the signers, all
conditions precedent, if any, provided for in this Indenture relating to the
proposed action have been met; and
(2) an Opinion of Counsel (in form and substance reasonably satisfactory
to the Trustee) stating that, in the opinion of such counsel, all such
conditions precedent have been met;
82
<PAGE>
provided, however, that in the case of any such request or application as to
which the furnishing of particular documents is specifically required by any
provision of this Indenture, no additional certificate or opinion need be
furnished under this Section.
SECTION 12.5 Statements Required in Certificate or Opinion.
Each Officers' Certificate or Opinion of Counsel with respect to
compliance with a condition or covenant provided for in this Indenture shall
include:
(1) a statement that the Person making such Officers' Certificate or
Opinion of Counsel has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
Officers' Certificate or Opinion of Counsel are based;
(3) a statement that, in the opinion of such Person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
met; and
(4) a statement as to whether or not, in the opinion of each such
Person, such condition or covenant has been met; provided, however, that with
respect to matters of fact an Opinion of Counsel may rely on an Officers'
Certificate or certificates of public officials.
SECTION 12.6 Rules by Trustee, Paying Agent, Registrar.
The Trustee may make reasonable rules for action by or at a meeting of
Securityholders. The Paying Agent or Registrar may make reasonable rules for
its functions.
SECTION 12.7 Non-Business Days.
If a payment date is not a Business Day, any payment required to be paid
to Holders may be made on the next succeeding day that is a Business Day, and
no interest shall accrue for the intervening period.
SECTION 12.8 Governing Law.
83
<PAGE>
THIS INDENTURE AND THE SECURITIES SHALL 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. THE COMPANY HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING
IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT
SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY
SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND
THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID
COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY
EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW OR
HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION
OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT
FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY
SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY
OTHER JURISDICTION.
SECTION 12.9 No Adverse Interpretation of Other Agreements.
This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or any of its Subsidiaries. Any such indenture,
loan or debt agreement may not be used to interpret this Indenture.
SECTION 12.10 No Recourse Against Others.
No direct or indirect , incorporator, stockholder, director, officer or
employee, as such, past, present or future, of the Company, or any successor
entity, shall have any personal liability in respect of the obligations of
the Company under the Securities or this Indenture by reason of his, her or
its status as such incorporator, stockholder, director, officer or employee.
Each Securityholder by accepting a Security waives and releases all such
liability. Such waiver and release are part of the consideration for the
issuance of the Securities.
84
<PAGE>
SECTION 12.11 Successors.
All agreements of the Company in this Indenture and the Securities shall
bind its successor. All agreements of the Trustee in this Indenture shall
bind its successor.
SECTION 12.12 Duplicate Originals.
All parties may sign any number of copies or counterparts of this
Indenture. Each signed copy or counterpart shall be an original, but all of
them together shall represent the same agreement.
SECTION 12.13 Severability.
In case any one or more of the provisions in this Indenture or in the
Securities shall be held invalid, illegal or unenforceable, in any respect
for any reason, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions shall not in
any way be affected or impaired thereby, it being intended that all of the
provisions hereof shall be enforceable to the full extent permitted by law.
SECTION 12.14 Table of Contents, Headings, Etc.
The Table of Contents, Cross-Reference Table and headings of the Articles
and the Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof and shall in no way
modify or restrict any of the terms or provisions hereof.
SECTION 12.15 Qualification of Indenture.
The Trustee shall be entitled to receive from the Company any such
Officers' Certificates, Opinions of Counsel or other documentation as it may
reasonably request in connection with any qualification of this Indenture
under the TIA.
85
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the date first written above.
HPSC , INC.,
By: ______________________________
Name: John W. Everets
Title: Chief Executive Officer
Attest: _________________
Secretary
STATE STREET BANK AND
TRUST COMPANY,
as Trustee
By: _______________________________
Name:
Title: Vice President
86
<PAGE>
EXHIBIT A
[FORM OF SECURITY]
HPSC , INC.
_____% SENIOR SUBORDINATED NOTE DUE 2007
CUSIP NO._______
NO.____________ $ ____________
HPSC , Inc., a Delaware corporation (hereinafter called the "Company",
which term includes any successors under the Indenture hereinafter referred
to), for value received, hereby promises to pay to _______________________,
or registered assigns, the principal sum of ____________ Dollars, on ______,
2007.
Interest Payment Dates: _____ 1 and ______ 1, commencing ________1, 1997.
Record Dates: ________ 15 and __________ 15.
Reference is made to the further provisions of this Security on the
reverse side, which will, for all purposes, have the same effect as if set
forth at this place.
IN WITNESS WHEREOF, the Company has caused this Security to be duly
executed under its corporate seal.
DATED: __________________, 1997 .
HPSC , INC.,
[Seal]
By: ___________________________
Name:
Title:
Attest: ________________________
Name:
Title: Secretary
A-1
<PAGE>
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This is one of the Securities described in the within-mentioned Indenture.
STATE STREET BANK AND TRUST COMPANY
As Trustee
By: _____________________________
Authorized Signatory
HPSC , INC.
_____% SENIOR SUBORDINATED NOTE DUE 2007
Unless and until it is exchanged in whole or in part for Securities in
definitive form, this Security may not be transferred except as a whole by
the Depository to a nominee of the Depository or by a nominee of the
Depository to the Depository or another nominee of the Depository or by the
Depository or any such nominee to a successor Depository or a nominee of such
successor Depository. Unless this certificate is presented by an authorized
representative of The Depository Trust Company (55 Water Street, New York,
New York) ("DTC"), to the Company or its agent for registration of transfer,
exchange or payment, and any certificate issued is registered in the name of
Cede & Co. or such other name as requested by an authorized representative of
DTC (and any payment is made to Cede & Co. or such other entity as is
requested by an authorized representative of DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
inasmuch as the registered owner hereof, Cede & Co., has an interest
herein. (1)
- ------------------
(1) This paragraph should only be added if the Security is issued in global
form.
A-2
<PAGE>
(BACK OF SECURITY)
1. INTEREST.
HPSC , Inc., a Delaware corporation (hereinafter called the "Company,"
which term includes any successors of the Company under the Indenture
hereinafter referred to), promises to pay interest on the principal amount of
this Security at the rate of _____% per annum To the extent it is lawful,
the Company promises to pay interest on overdue installments of interest
(without regard to applicable grace periods) at the rate of _____% per annum
compounded semi-annually.
The Company will pay interest semi-annually on ____ 1 and _____ 1 of
each year (each, an "Interest Payment Date"), commencing ______ 1, 1997.
Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid on the Securities,
from _______, 1997. Interest will be computed on the basis of a 360-day year
consisting of twelve 30-day months.
2. METHOD OF PAYMENT.
The Company shall pay interest on the Securities (except defaulted interest
)to the Persons who are the registered Holders at the close of business on
the Record Date immediately preceding the Interest Payment Date. Holders
must surrender Securities to a Paying Agent to collect principal payments.
Except as provided below, the Company shall pay principal, premium, if any,
and interest in such coin or currency of the United States of America as at
the time of payment shall be legal tender for payment of public and private
debts ("U.S. Legal Tender"). The Securities will be payable as to principal,
premium, if any, and interest, and the Securities may be presented for
registration of transfer or exchange, at the office or agency of the Company
maintained for such purpose within or without the City of Boston, the
Commonwealth of Massachusetts or, at the option of the Company, such payments
may be made by check mailed to the Holders at their addresses set forth in
the register of Holders, and provided that payment by wire transfer of
immediately available funds will be required with respect to principal of,
premium, if any, and interest on all Global Securities and all other
Securities the Holders of which shall have provided wire transfer
instructions to the Company or the Paying Agent. Until otherwise designated
by the Company, the Company's office or agency will be the corporate trust
office of the Trustee.
A-3
<PAGE>
3. PAYING AGENT AND REGISTRAR.
Initially, State Street Bank and Trust Company (the "Trustee"), will act as
Paying Agent and Registrar. The Company may change any Paying Agent,
Registrar or co- Registrar without notice to the Holders. The Company or any
of its Subsidiaries may, subject to certain exceptions, act as Paying Agent,
Registrar or co-Registrar.
4. INDENTURE.
The Company issued the Securities under an Indenture, dated as of _____,
1997 (the "Indenture"), between the Company and the Trustee. Capitalized
terms herein have the meanings set forth in the Indenture unless otherwise
defined herein. The terms of the Securities include those stated in the
Indenture and those made part of the Indenture by reference to the TIA, as in
effect on the date of the Indenture. The Securities are subject to all such
terms, and Holders of Securities are referred to the Indenture and the TIA
for a statement of them. The Securities are general unsecured obligations of
the Company limited in aggregate principal amount to $23,000,000.
5. REDEMPTION.
The Securities may be redeemed in whole or from time to time in part at any
time on and after ____ 1, 2002, at the option of the Company, at the
Redemption Price (expressed as a percentage of principal amount) set forth
below with respect to the indicated Redemption Date, in each case, plus any
accrued but unpaid interest, if any, to the Redemption Date. The Securities
may not be so redeemed prior to ______ 1, 2002.
If redeemed during
the 12-month period
beginning Redemption Price
[2002 ________%
2003 ________%
2004 ________%
2005 AND THEREAFTER 100.0000%]
Any such redemption will comply with Article III of the Indenture.
6. SINKING FUND.
As more fully set forth in the Indenture, the Company is required to redeem
on ____ 1, ____ 1, ____ 1, and ___1 of each year, commencing ____ 1, 200 _
and continuing through ____ 1, 200__., a portion of the principal amount of
the Securities at a Redemption Price equal to
A-4
<PAGE>
100% of the aggregate principal amount of the Securities so redeemed, plus
accrued and unpaid interest to the Redemption Date.
7. NOTICE OF REDEMPTION.
Notice of redemption will be sent by first class mail, at least 30 days and
not more than 60 days prior to the Redemption Date to the Holder of each
Security to be redeemed at such Holder's last address as then shown upon the
registry books of the Registrar. Securities may be redeemed in part in
integral multiples of $1,000 only.
Except as set forth in the Indenture, from and after any Redemption Date,
if monies for the redemption of the Securities called for redemption shall
have been deposited with the Paying Agent on such Redemption Date and payment
of the Securities called for redemption is not prohibited under the
Indenture, the Securities called for redemption will cease to bear interest
and the only right of the Holders of such Securities will be to receive
payment of the Redemption Price, plus any accrued and unpaid interest if any,
to the Redemption Date.
8. DENOMINATIONS; TRANSFER; EXCHANGE.
The Securities are in registered form, without coupons, in denominations of
$1,000 and integral multiples thereof. A Holder may register the transfer
of, or exchange Securities in accordance with, the Indenture. No service
charge will be made for any registration of transfer or exchange of the
Securities, but the Company may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes
and fees required by law or permitted by the Indenture. The Registrar need
not register the transfer of or exchange any Securities selected for
redemption.
9. PERSONS DEEMED OWNERS.
The registered Holder of a Security may be treated as the owner of it for
all purposes.
10. UNCLAIMED MONEY.
If money for the payment of principal, premium, if any, and interest
remains unclaimed for two years, the Trustee and the Paying Agent(s) will pay
the money back to the Company at its written request. After that, all
liability of the Trustee and such Paying Agent(s) with respect to such money
shall cease.
11. DISCHARGE PRIOR TO REDEMPTION OR MATURITY.
Except as set forth in the Indenture, if the Company irrevocably deposits
with the Trustee, in trust, for the benefit of the Holders, Cash, U.S.
Government Obligations or a combination thereof, in such amounts as will be
sufficient in the opinion of a nationally recognized firm of independent
A-5
<PAGE>
public accountants selected by the Trustee, to pay the principal of, premium,
if any, and interest , on the Securities to redemption or maturity and
complies with the other provisions of the Indenture relating thereto, the
Company will be discharged from certain provisions of the Indenture and the
Securities (including the restrictive covenants described below, but
excluding their obligation to pay the principal of, premium, if any, and
interest on the Securities). Upon satisfaction of certain additional
conditions set forth in the Indenture, the Company may elect to have its
obligations discharged with respect to outstanding Securities.
12. AMENDMENT; SUPPLEMENT; WAIVER.
Subject to certain exceptions, the Indenture or the Securities may be
amended or supplemented with the written consent of the Holders of at least a
majority in aggregate principal amount of the Securities then outstanding,
and any existing Default or Event of Default or compliance with any provision
may be waived with the consent of the Holders of a majority in aggregate
principal amount of the Securities then outstanding. Without notice to or
consent of any Holder, the parties thereto may under certain circumstances
amend or supplement the Indenture or the Securities to, among other things,
cure any ambiguity, defect, typographical error or inconsistency, or make any
other change that does not adversely affect the rights of any Holder of a
Security.
13. RESTRICTIVE COVENANTS.
The Indenture imposes certain limitations on the ability of the Company and
its Subsidiaries to, among other things, incur additional Funded Recourse
Debt and Disqualified Capital Stock, pay dividends or make certain other
Restricted Payments, enter into certain transactions with Affiliates, incur
Liens, sell assets, merge or consolidate with any other Person or transfer
(by lease, assignment or otherwise) substantially all of the properties and
assets of the Company. The limitations are subject to a number of important
qualifications and exceptions. The Company must periodically report to the
Trustee on compliance with such limitations.
14. RANKING; SUBORDINATION.
Payment of principal of, premium, if any, and interest on the Securities is
subordinated in the manner and to the extent set forth in the Indenture, in
right of payment to the prior payment in full of all Secured Portfolio Debt.
Payment of principal of, premium, if any, and interest on the Securities will
rank pari passu in right of payment with all existing unsecured Funded
Recourse Debt and senior in right of payment to all future unsecured Funded
Recourse Debt of the Company.
15. REPURCHASE AT OPTION OF HOLDER.
If there is a Change of Control, the Company shall be required to offer to
purchase on the Change of Control Payment Date all outstanding Securities at
a purchase price equal to 101% of
A-6
<PAGE>
the principal amount thereof, plus accrued and unpaid interest, to the Change
of Control Payment Date. Holders of Securities will receive a Change of
Control Offer from the Company prior to any related Change of Control Payment
Date and may elect to have such Securities purchased by completing the form
entitled "Option of Holder to Elect Purchase" appearing below.
16. REPURCHASE AT OPTION OF HOLDER UPON DEATH.
Upon the death of any Holder of Securities, and upon the further receipt
by the Company or the Trustee of a written request for repurchase and
satisfaction of the conditions set forth in the Indenture, the Company shall
be required to pay the Repurchase Price of, and (except if the Repurchase
Date shall be an Interest Payment Date) any accrued interest on all or such
portion (which portion shall be an integral multiple of $1,000 in excess of
the minimum authorized denomination) of the Security or Securities held by
the deceased Holder at the date of such Holder's death as requested, provided
that the Company shall not be required to make repurchase payments
aggregating more than (i) $25,000 in principal amount (plus accrued interest)
in any calendar year on a Security or Securities held by any one deceased
Holder or (ii) $250,000 in principal amount (plus accrued interest) in any
calendar year on Securities held by any number of deceased Holders.
17. SUCCESSORS.
When a successor assumes all the obligations of its predecessor under the
Securities and the Indenture, the predecessor will be released from those
obligations.
18. DEFAULTS AND REMEDIES.
If an Event of Default occurs and is continuing (other than an Event of
Default relating to certain events of bankruptcy, insolvency or
reorganization), then in every such case, unless the principal of all of the
securities shall have already become due and payable, either the Trustee or
the Holders of 25% in aggregate principal amount of Securities then
outstanding may declare all the Securities to be due and payable immediately
in the manner and with the effect provided in the Indenture. Holders of
Securities may not enforce the Indenture or the Securities except as provided
in the Indenture. The Trustee may require indemnity satisfactory to it
before it enforces the Indenture or the Securities. Subject to certain
limitations, Holders of a majority in aggregate principal amount of the
Securities then outstanding may direct the Trustee in its exercise of any
trust or power. The Trustee may withhold from Holders of Securities notice
of any continuing Default or Event of Default (except a Default in payment of
principal, premium, if any, or interest if it determines in good faith that
withholding notice is in their interest.
19. TRUSTEE OR AGENT DEALINGS WITH COMPANY.
Subject to certain limitations, the Trustee and each Agent under the
Indenture, in its individual or any other capacity, may make loans to, accept
deposits from, and perform services
A-7
<PAGE>
for the Company or its Affiliates, and may otherwise deal with the Company or
its Affiliates as if it were not the Trustee or such Agent.
20. NO RECOURSE AGAINST OTHERS.
No direct or indirect incorporator, stockholder, director, officer or
employee, as such, past, present or future, of the Company, or any successor
entity, shall have any personal liability in respect of the obligations of
the Company under the Securities or the Indenture by reason of his, her or
its status as such incorporator, stockholder, director, officer or employee.
Each Holder of a Security by accepting a Security waives and releases all
such liability. The waiver and release are part of the consideration for the
issuance of the Securities.
21. AUTHENTICATION.
This Security shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Security.
22. ABBREVIATIONS AND DEFINED TERMS.
Customary abbreviations may be used in the name of a Holder of a Security or
an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by
the entireties), JT TEN (= joint tenants with right of survivorship and not
as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to
Minors Act).
23. CUSIP NUMBERS.
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to
be printed on the Securities as a convenience to the Holders of the
Securities. No representation is made as to the accuracy of such numbers as
printed on the Securities and reliance may be placed only on the other
identification numbers printed hereon.
A-8
<PAGE>
[FORM OF] ASSIGNMENT
I or we assign this security to
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
(Print or type name, address and zip code of assignee)
Please insert Social Security or other identifying number of assignee
_____________________ and irrevocably appoint agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
DATED: ____________________ SIGNED: _____________________
(Sign exactly as name
appears on the other side
of this Security)
A-13
A-9
<PAGE>
OPTION OF HOLDER TO ELECT REPURCHASE
If you want to elect to have this Security repurchased by the Company
pursuant to Section 4.16 (upon the death of the Holder of this Note) or
Article X of the Indenture, check the appropriate box:
/ / Section 4.16 / / Article X
If you want to elect to have only part of this Security purchased by the
Company pursuant to Section 4.16 or Article X of the Indenture, as the case
may be, state the amount you want to be purchased (in an amount which must be
$1,000 or an integral multiple thereof): $_________
Date: ______________________ Signature: _________________________
(Sign exactly as name appears on
the other side of this Security)
A-10
<PAGE>
SCHEDULE OF EXCHANGES OF DEFINITIVE SECURITIES(2/)
The following exchanges of a part of this Global Security for Definitive
Securities have been made:
Signature
Amount Amount Principal Amount of Authorized
of Decrease in of Increase in of this Officer or
Principal Amount Principal Amount Global Security Trustee or
Date of this Global of this Global following such Securities
of Exchange Security Security decrease/increase Custodian
- ----------- ---------------- ---------------- ----------------- --------------
___________________________
(2/) This schedule should only be added if the Security is issued in global
form.
A-11
<PAGE>
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF
TRANSFER OF SECURITIES(3/)
Re: _____% SENIOR SUBORDINATED NOTES DUE 2007 OF HPSC , INC.
This Certificate relates to $____________ principal amount of Securities
held in (check applicable space) _______ book-entry or __________ definitive
form by (the "Transferor").
The Transferor (check applicable box):
/ / has requested the Trustee by written order to deliver in exchange for
its beneficial interest in the Global Security held by the Depository a
Security or Securities in definitive, registered form of authorized
denominations and an aggregate principal amount equal to its beneficial
interest in such Global Security (or the portion thereof indicated above); or
/ / has requested the Trustee by written order to exchange or register the
transfer of a Security or Securities.
___________________________________________
[INSERT NAME OF TRANSFEROR]
By: ______________________________________
DATE: ___________________________________
___________________________
(3/) The following should be included only for Initial Securities.
A-12
<PAGE>
HILL & BARLOW
A PROFESSIONAL CORPORATION
One International Place
Boston, Massachusetts 02110-2607
Telephone (617) 428-3000 -- Facsimile (617) 428-3500
DENNIS W. TOWNLEY
DIRECT LINE: 617-428-3537
[email protected]
March 10, 1997
HPSC, Inc.
60 State Street
35th Floor
Boston, MA 02109-1803
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration Statement
on Form S-1 dated January 30, 1997, as amended on March 10, 1997 (S.E.C. File
No. 333-20733) (the "Registration Statement"), filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), relating to the public offering (the "Offering") of an
aggregate of $23,000,000 of % Senior Subordinated Notes (the "Notes") of
HPSC, Inc., a Delaware corporation (the "Company"), including $3,000,0000 of
Notes subject to an over-allotment option granted by the Company to the
Underwriters (as defined below). The Notes are to be sold by the Company
pursuant to an underwriting agreement (the "Underwriting Agreement") among the
Company and each of Advest, Inc. and Legg Mason Wood Walker, Incorporated
(the "Underwriters") and subject to an indenture (the "Indenture") between the
Company and State Street Bank and Trust Company as trustee.
We have acted as counsel for the Company in connection with the sale by the
Company of the Notes. We have examined and relied upon (i) signed copies of the
Registration Statement and all exhibits thereto, all as filed with the
Commission, (ii) the Underwriting Agreement in the form filed as Exhibit 1.1
to the Registration Statement, (iii) the Indenture in the form filed as Exhibit
4.2 to the Registration Statement, (iv) copies of the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Company, and all
amendments thereto, and (v) originals, or copies certified to our satisfaction,
of such records of meetings of the directors and stockholders of the Company,
documents and other instruments as in our judgment are necessary or appropriate
to enable us to render the opinion expressed below.
<PAGE>
HPSC, Inc.
March 10, 1997
Page 2
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as certified or photostatic copies, and the authenticity of the
originals of such latter documents.
Based upon the foregoing, we are of the opinion that the Notes to be issued
and sold by the Company have been duly authorized by all necessary corporate
action of the Company, and, when issued and sold by the Company in accordance
with the terms of the Underwriting Agreement, will be validly issued and
binding obligations of the Company, except as such obligations may be limited
by bankruptcy, insolvency, reorganization, moratorium, usury, fraudulent
conveyance and transfer, and other similar laws relating to or affecting
creditors' rights generally.
We hereby consent to the filing of this opinion as part of the Registration
Statement and to the use of our name therein and in the related Prospectus
under the caption "Legal Matters." We also hereby consent to the incorporation
by reference of this opinion in any subsequent registration statement for the
same Offering that may be filed under Rule 462(b) of the Act.
It is understood that this opinion is to be used only in connection with the
offer and sale of the Notes while the Registration Statement is in effect.
Very truly yours,
HILL & BARLOW,
a Professional Corporation
By: /s/ Dennis W. Townley
---------------------------
Dennis W. Townley, a member
of the firm
<PAGE>
Exhibit 10.3
HPSC, Inc.
60 State Street
Boston, Massachusetts 02109
As of July 19, 1996
John W. Everets
HPSC, Inc.
60 State Street
Boston, MA 02109
Dear John:
On behalf of the Board of Directors, I am pleased that you have accepted
our offer to continue to serve as Chairman and Chief Executive Officer of
HPSC, Inc. (the "Company"). This agreement will formally record the
arrangements to which we agreed. I would appreciate your noting your
acceptance of these terms and returning a copy to me as soon as possible.
1. You have served as the Company's Chairman of the Board of Directors
and Chief Executive Officer since July 19, 1993, having been re-elected most
recently on May 16, 1996. You will adhere to policies established by the
Board and devote your full working time and best efforts to the Company,
provided that the Company recognizes that you will continue to serve as a
director of other corporations.
2. Your annual base salary will be established by the Compensation
Committee of the Board of Directors (the "Compensation Committee") on an
annual basis but it shall be not less than Two Hundred Fifty Thousand Dollars
($250,000) per annum, paid in accordance with our normal payroll practices.
You and the Compensation Committee have developed a performance-based
incentive compensation plan ("Incentive Plan") for key management based on
earnings, working capital management and achieving strategic objectives. The
Incentive Plan is designed to pay members of key management up to One Hundred
Percent (100%) of their annual base salary for achieving superior results.
You shall be eligible to receive awards under the Incentive Plan, as
determined annually by the Compensation Committee.
3. You will be eligible for the fringe benefit plans applicable to the
Company's key employees, including the Company's Employee Stock Ownership
Plan and Supplemental Stock Ownership Plan. The Company will provide you
with an appropriate automobile. You will be entitled to take four (4) weeks'
vacation annually.
<PAGE>
4. You will be eligible for awards under the Company's 1995 Stock
Incentive Plan, as it may be amended from time to time, and under any
subsequent similar plans, as determined by the Compensation Committee.
5. This agreement will begin on July 19, 1996 and continue until July
18, 1999. Thereafter, it will automatically renew from year to year unless
you or the Company give notice of your intention to terminate this agreement
six (6) months in advance of any anniversary. You or the Company may
terminate your employment and this agreement at any time for any reason
whatsoever. Except as provided in paragraph 6, if you terminate, or if the
termination is by the Company and is not "for cause" (as defined in Exhibit
A), you will receive your base monthly salary for the next twelve (12) months
plus an additional monthly payment equal to one-twelfth (1/12) of the maximum
incentive compensation you would have earned for the next twelve (12) months.
You will also be entitled to your normal employee benefits during that
period. Upon a termination by the Company which is not "for cause" your
stock options and restricted stock awards will entirely vest. If, at the end
of an agreement period, you or the Company choose not to renew the agreement,
the Company will make the termination payments to you described above in this
Paragraph 5 in the same manner as if you had been terminated by the Company
not "for cause". You agree that you will not in any manner compete with the
business of the Company or be employed by a competitor of the Company while
you are receiving termination payments. In addition, you will maintain in
confidence all of the Company's confidential information. If your
termination is by reason of your death or disability (as defined in the
Company's long-term disability insurance policies) you or your estate will
receive your base monthly salary for six (6) months from the date of your
death or disability. You (and/or your family) will also be entitled to your
normal employee benefits during that six (6) month period. If your
termination is "for cause" (as defined in Exhibit A), the Company's only
liability to you will be to pay any arrearages of salary or bonus as of the
date of termination.
6. A. In the event a "Change of Control" (as defined in Exhibit A)
occurs and during the three (3) year period thereafter:
(x) your employment is terminated by the Company for any reason
other than "for cause" (as defined in Exhibit A); or
(y) you terminate your employment due to a Change in Your
Employment (as defined in Exhibit A) made by the Company,
the following will apply as of the date that the termination described in
either (x) or (y) above occurs:
(i) you will receive an amount equal to the average of your total
compensation from the Company which was includable in your
gross income for federal income tax purposes (as reported on
IRS Form W-2) for each of the preceding five (5) calendar
years ending before the date of the Change of Control (or if
you have not been employed for five (5) years for such lesser
period as you have been
-2-
<PAGE>
employed, with your compensation to be annualized for any
portion of a calendar year of your employment that is shorter
than twelve months) multiplied by 2.99, provided, however,
that you may choose, in your discretion, to receive a lesser
amount than you are entitled to receive under this Section
6A(i) if after consultation with the Compensation Committee
you determine that it is in your best interests to accept a
lesser amount;
(ii) the non-compete provisions of paragraph 5 will no longer
apply to you;
(iii) your stock options will entirely vest; and
(iv) your normal employee benefits will be payable for the next
twelve (12) months.
B. In the event a "Change of Control" (as defined in Exhibit A)
occurs and during the three (3) year period thereafter you terminate your
employment for any reason other than a "Change in Your Employment" (as
defined in Exhibit A) by the Company, the following will apply as of the date
of termination:
(i) you will receive your base monthly pay for the next twelve
(12) months plus an additional monthly payment equal to the
maximum incentive compensation you would have earned for the
next twelve (12) months; and
(ii) your normal employee benefits will be payable for the next
twelve (12) months.
C. In the event a "Change of Control" (as defined in Exhibit A)
occurs and during the three (3) year period thereafter your employment is
terminated by the Company "for cause" (as defined in Exhibit A), the
Company's only liability to you will be to pay any arrearages of salary or
bonus as of the date of termination.
7. This Agreement may be changed only by a written agreement signed
by you and an authorized representative of the Company.
8. The Company shall (a) indemnify you for fees and expenses
incurred in successfully enforcing against the Company your rights under this
Agreement, and (b) pay your expenses incurred in enforcing your rights under
this Agreement, in advance of a
-3-
<PAGE>
final disposition of the action relating to such enforcement, upon receipt of
your undertaking to repay the amount advanced if the Company prevails upon
the final disposition of such action.
Sincerely,
HPSC, Inc.
By: /s/ Dollie Cole
------------------------------------
Dollie Cole, Director
By: /s/ Thomas M. McDougal
------------------------------------
Thomas M. McDougal, Director
By: /s/ J. Kermit Birchfield
------------------------------------
J. Kermit Birchfield, Director
ACCEPTED:
/s/ John W. Everets
- ------------------------------
John W. Everets
-4-
<PAGE>
EXHIBIT A
DEFINITIONS
1. DEFINITION OF "CHANGE IN CONTROL"
A "Change in Control" has the meaning set forth in the Company's 1995
Stock Incentive Plan, as amended to the date hereof.
2. DEFINITION OF "CHANGE IN YOUR EMPLOYMENT"
A "Change in Your Employment" by the Company which would entitle you to
terminate and receive benefits in accordance with Section 6 hereof would be:
(i) Diminution in your duties and responsibilities so that you are
no longer Chairman or CEO of the Company; or
(ii) reduction in pay or benefits; or
(iii) forced relocation outside of the greater Boston area.
3. DEFINITION OF "CAUSE"
"Cause" which would entitle the Company to terminate you would be:
(i) Your conviction of a crime involving moral turpitude; or
(ii) Any act of dishonesty which is material to the business of the
Company.
-5-
<PAGE>
Exhibit 10.4
HPSC, Inc.
60 State Street
Boston, Massachusetts 02109
As of August 2, 1996
Raymond Doherty, President
HPSC, Inc.
60 State Street
Boston, Massachusetts 02109
Dear Ray:
On behalf of the Board of Directors, I am pleased that you have accepted
our offer to continue to serve as President and Chief Operating Officer of
HPSC, Inc. (the "Company"). This agreement will formally record the
arrangements to which we have agreed. I would appreciate your noting your
acceptance of these terms and returning a copy of this agreement to me as
soon as possible.
1. You have served as the Company's President and Chief Operating
Officer since August 2, 1993, reporting to the Chairman and Chief Executive
Officer. You will adhere to policies established by the Board and devote your
full working time and best efforts to the Company.
2. Your annual base salary will be established by the Compensation
Committee of the Board of Directors (the "Compensation Committee") on an
annual basis but it shall not be less than Two Hundred Thousand Dollars
($200,000), paid in accordance with our normal payroll practices. The
Compensation Committee has developed a performance-based incentive
compensation plan ("Incentive Plan") for key management based on earnings,
working capital management and achieving strategic objectives. The Incentive
Plan is designed to pay members of key management up to One Hundred Percent
(100%) of their annual base salary for achieving superior results. You shall
be eligible to receive awards under the Incentive Plan, as determined
annually by the Compensation Committee.
3. You will be eligible for the fringe benefit plans applicable to the
Company's key employees, including the Company's Employee Stock Ownership
Plan and Supplemental Stock Ownership Plan. The Company will provide you
with an appropriate automobile. You will be entitled to take four (4) weeks'
vacation annually.
4. You will be eligible for awards under the Company's 1995 Stock
Incentive Plan, as it may be amended from time to time, and under any
subsequent similar plans, as determined by the Compensation Committee.
<PAGE>
5. This agreement will begin on August 2, 1996 and continue for three
(3) years from that date. Thereafter, it will automatically renew from year
to year unless you or the Company give notice of your intention to terminate
this agreement six (6) months in advance of any anniversary. You or the
Company may terminate your employment and this agreement at any time for any
reason whatsoever. Except as provided in paragraph 6, if the termination is
by the Company and is not "for cause" (as defined in Exhibit A), you will
receive your base monthly salary for twelve (12) months plus an additional
monthly payment equal to one-twelfth (1/12) of the maximum incentive
compensation you would have earned for the next twelve (12) months. You will
also be entitled to your normal employee benefits during that period. If, at
the end of an agreement period, you or the Company choose not to renew the
agreement, the Company will make the termination payments to you described
above in this Paragraph 5 in the same manner as if you had been terminated by
the Company not "for cause." You agree that you will not in any manner
compete with the business of the Company or be employed by a competitor of
the Company while you are receiving termination payments. In addition, you
will maintain in confidence all of the Company's confidential information.
If your termination is by reason of your death or disability (as defined in
the Company's long-term disability insurance policies) you or your estate
will receive your base monthly salary for six (6) months from the date of
your death or disability. You (and/or your family) will also be entitled to
your normal employee benefits during that six (6) month period. If you
terminate this agreement or your termination is "for cause" (as defined in
Exhibit A), the Company's only liability to you will be to pay any arrearages
of salary or bonus as of the date of termination.
6. A. In the event a "Change of Control" (as defined in Exhibit A)
occurs and during the three (3) year period thereafter:
(x) your employment is terminated by the Company for any reason
other than "for cause" (as defined in Exhibit A); or
(y) you terminate your employment due to a "Change in Your
Employment" (as defined in Exhibit A) made by the Company,
the following will apply as of the date that the termination described in
either (x) or (y) above occurs:
(i) you will receive an amount equal to the average of your
total compensation from the Company which was includable
in your gross income for federal income tax purposes (as
reported on IRS Form W-2) for each of the preceding five
(5) calendar years ending before the date of the Change of
Control (or if you have not been employed for five (5) years
for such lesser period as you have been employed, with your
compensation to be annualized for any portion of a calendar
year of your employment that is shorter than twelve months)
multiplied by 2.99, provided, however, that you may choose,
in your discretion, to receive a lesser amount than you are
entitled to receive under this
<PAGE>
Section 6A(i) if after consultation with the Compensation
Committee you determine that it is in your best interests to
accept a lesser amount;
(ii) the non-compete provisions of paragraph 5 will no longer
apply to you;
(iii) your stock options will entirely vest; and
(iv) your normal employee benefits will be payable for the next
twelve (12) months.
B. In the event a "Change of Control" (as defined in Exhibit A)
occurs and during the three (3) year period thereafter you terminate your
employment for any reason other than a "Change in Your Employment" (as
defined in Exhibit A) by the Company, the following will apply as of the date
of termination:
(i) you will receive your base monthly pay for the next twelve
(12) months plus an additional monthly payment equal to one-
twelfth (1/12) the maximum incentive compensation you would
have earned for the next twelve (12) months; and
(ii) your normal employee benefits will be payable for the next
twelve (12) months.
C. In the event a "Change of Control" (as defined in Exhibit A)
occurs and during the three (3) year period thereafter your employment is
terminated by the Company "for cause" (as defined in Exhibit A), the
Company's only liability to you will be to pay any arrearages of salary or
bonus as of the date of termination.
7. This Agreement may be changed only by a written agreement signed by
you and an authorized representative of the Company.
<PAGE>
8. The Company shall (a) indemnify you for fees and expenses incurred
in successfully enforcing against the Company your rights under this
Agreement, and (b) pay your expenses incurred in enforcing your rights under
this Agreement, in advance of a final disposition of the action relating to
such enforcement, upon receipt of your undertaking to repay the amount
advanced if the Company prevails upon the final disposition of such action.
Sincerely,
HPSC, Inc.
By: /s/ John W. Everets
-----------------------------
John W. Everets
Chairman and Chief Executive
Officer
ACCEPTED:
/s/ Raymond Doherty
- ------------------------------
Raymond Doherty
<PAGE>
EXHIBIT A
DEFINITIONS
1. DEFINITION OF CHANGE IN CONTROL
A "Change in Control" has the meaning set forth in the Company's
1995 Stock Incentive Plan, as amended to the date hereof.
2. DEFINITION OF "CHANGE IN YOUR EMPLOYMENT"
A "Change in Your Employment" by the Company which would entitle you to
terminate and receive benefits in accordance with Section 6 hereof would be:
(i) Diminution in your duties and responsibilities so that you
are no longer President or Chief Operating Officer of the
Company; or
(ii) reduction in pay or benefits; or
(iii) forced relocation outside of the greater Boston area.
3. DEFINITION OF "CAUSE"
"Cause" which would entitle the Company to terminate you would be:
(i) Your conviction of a crime involving moral turpitude; or
(ii) Any act of dishonesty which is material to the business of the
Company.
<PAGE>
HPSC, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE JANUARY 1, 1997
<PAGE>
HPSC, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
TABLE OF CONTENTS
ARTICLE I - ESTABLISHMENT OF PLAN...........................................1
1.1 Name of Plan.........................................................1
1.2 Effective Date.......................................................1
1.3 Purpose..............................................................1
1.4 Retricted Coverage...................................................1
1.5 Plan Unfunded........................................................1
ARTICLE II- DEFINITIONS.....................................................1
2.1 Accrued Benefit......................................................1
2.2 Actuarial Equivalent.................................................1
2.3 Actuary..............................................................2
2.4 Average Final Compensation...........................................2
2.5 Beneficiary..........................................................2
2.6 Benefit Commencement Date............................................2
2.7 Board................................................................2
2.8 Change in Control....................................................2
2.9 Code.................................................................4
2.10 Company..............................................................4
2.11 Compensation.........................................................4
2.12 Compensation Committee...............................................4
2.13 Early Retirement Date................................................4
2.14 Effective Date.......................................................4
2.15 Employing Company....................................................4
2.16 Entry Date...........................................................5
2.17 ERISA................................................................5
2.18 Executive Employee...................................................5
2.19 Net Worth Condition..................................................5
2.20 Normal Retirement Date...............................................5
2.21 Other Retirement Benefits............................................5
2.22 Participant..........................................................6
2.23 Plan.................................................................6
2.24 Plan Administrator..................................................6
2.25 Plan Year............................................................6
2.26 Separation from Service..............................................6
2.27 Service..............................................................6
2.28 Target Retirement Benefit............................................6
2.29 Trust................................................................6
2.30 Vested Benefit.......................................................6
-i-
<PAGE>
2.31 Vesting Percentage...................................................7
2.32 Year of Benefit Service..............................................7
ARTICLE III - PARTICIPATION.................................................7
3.1 Eligibility Requirements.............................................7
3.2 Entry and Re-entry Into the Plan.....................................7
ARTICLE IV - RETIREMENT BENEFITS............................................7
4.1 Amount, Timing and Form of Benefits..................................7
ARTICLE V - VESTING AND FORFEITURES.........................................7
5.1 Vesting Percentage...................................................7
5.2 Vested Benefit.......................................................8
5.3 Forfeitures..........................................................8
5.4 Amendment of Vesting Provisions......................................8
ARTICLE VI - ACCRUED BENEFITS...............................................8
6.1 Determination of Accrued Benefit.....................................8
6.2 Adjustment for Early or Postponed Retirement.........................8
ARTICLE VII - BENEFIT COMMENCEMENT DATE.....................................9
7.1 Eligibility for Payment..............................................9
7.2 Benefit Commencement Date............................................9
(a) Time of Commencement.............................................9
(b) Benefit Commencement Election....................................9
7.3 Hardship Withdrawals.................................................9
(a) Definition.......................................................9
(b) Procedure.......................................................10
ARTICLE VIII - BENEFIT FORMS AVAILABLE.....................................10
8.1 Forms of Benefit for Participants...................................10
(a) Normal Form of Benefits.........................................10
(b) Installment Benefit Election....................................10
8.2 Forms of Benefit for Surviving Spouse Beneficiaries.................11
(a) Normal Form of Benefit..........................................11
(b) Installment Benefit Election....................................11
8.3 Form of Benefit for Other Beneficiaries.............................11
ARTICLE IX - BENEFICIARIES.................................................11
9.1 Designation.........................................................11
9.2 Failure to Designate a Beneficiary..................................11
ARTICLE X - PLAN ADMINISTRATION............................................12
10.1 Administrative Committee............................................12
10.2 Indemnification.....................................................12
10.3 Ownership of Assets.................................................12
10.4 Expenses............................................................12
ARTICLE XI - TRUST AGREEMENT; LIQUIDITY FUND...............................13
11.1 Trust Fund..........................................................13
11.2 Liquidity Fund......................................................13
ARTICLE XII - AMENDMENT OF THE PLAN........................................13
12.1 Amendment...........................................................13
12.2 Effect of Amendments on Vesting.....................................13
-ii-
<PAGE>
ARTICLE XIII - TERMINATION OF THE PLAN.....................................13
13.1 Termination.........................................................13
13.2 Benefits After Plan Termination.....................................13
ARTICLE XIV - MISCELLANEOUS................................................14
14.1 Limitations of Rights; Employment Relationship......................14
14.2 Determination of Benefits, Claims, Procedure and Administration.....14
(a) Claim...........................................................14
(b) Decision on Claim...............................................14
(c) Request for Review..............................................14
(d) Review of Decisions.............................................15
14.3 Arbitration.........................................................15
14.4 Non-Assignability of Benefits.......................................15
14.5 Facility of Payments................................................15
14.6 Obligations to Withhold and Pay Taxes...............................15
14.7 Representations.....................................................16
14.8 Severability........................................................16
14.9 Applicable Law......................................................16
-iii-
<PAGE>
HPSC, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ARTICLE I - ESTABLISHMENT OF PLAN
1.1 NAME OF PLAN. The Plan shall be known as the HPSC, Inc. Supplemental
Executive Retirement Plan.
1.2 EFFECTIVE DATE. The Effective Date of the Plan is January 1, 1997.
1.3 PURPOSE. The Company intends this Plan to provide certain retirement
income benefits (as defined herein) to certain Executive Employees (as
identified from time to time on Schedule 3.1 to the Plan) of the Employing
Companies. Such benefits are intended to supplement the retirement income
benefits provided to a Participant by his or her Employing Company through its
other broad-based retirement programs and Social Security benefit taxes.
1.4 RESTRICTED COVERAGE. Participation in this Plan shall be limited to
Executive Employees, so that for purposes of Title I of ERISA the Plan will at
all times cover only employees who make up a select group of management or
highly compensated employees whose positions with an Employing Company allow
them to have a significant effect on the Employing Company's results of
operations by the performance of services of major importance in the management,
operation and development of the Employing Company's business.
1.5 PLAN UNFUNDED. This Plan is intended to be unfunded for purposes of
(i) Title I of ERISA and (ii) taxation of vested, accrued benefits pursuant to
the Code.
ARTICLE II- DEFINITIONS
The following terms shall have the meanings specified below unless the
context otherwise requires:
2.1 ACCRUED BENEFIT. The portion of a Participant's Target Retirement
Benefit that has accrued as of any date pursuant to Section 6.1.
2.2 ACTUARIAL EQUIVALENT. The lump sum equivalent value of an immediate
life annuity benefit or the immediate life annuity equivalence of a lump sum
benefit, determined in each case by applying the following assumptions:
(a) Interest, pre- and post-retirement, equal to seven percent
compounded annually.
<PAGE>
(b) Mortality, pre-and post-retirement, as determined under a 50/50
blend of the male and female mortality rates from the 1983 Group Annuity
Mortality Table as published in IRS Revenue Ruling 95-6.
2.3 ACTUARY. The actuarial consultant designated by the Company from time
to time to make all actuarial computations required in connection with the Plan.
2.4 AVERAGE FINAL COMPENSATION. The average of a Participant's
Compensation for the three calendar years in which the Participant's greatest
Compensation is received during his or her final five calendar years of Service,
provided that the Participant's Compensation during his or her final calendar
year of Service shall be deemed to equal (a) the Participant's annual base
salary at the time of his or her Separation from Service plus (b) any bonus
received during that calendar year.
2.5 BENEFICIARY. The individual(s), trust(s), or estate entitled to
receive benefits under this Plan after the death of a Participant or another
Beneficiary.
2.6 BENEFIT COMMENCEMENT DATE. The date as of which benefits hereunder
first become payable, in accordance with the provisions of Article VII, to or in
respect of a Participant.
2.7 BOARD. The Board of Directors of the Company.
2.8 CHANGE IN CONTROL. A change in control of the Company will occur
upon:
(a) The acquisition by any individual, entity or group (within the
meaning of Sections 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20 percent or more of either (i) the then outstanding shares of
the Common Stock or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
the directors (the "Outstanding Company Voting Securities"); provided, however,
that the following acquisitions shall not constitute a Change in Control: (A)
any acquisition directly from the Company (excluding an acquisition by virtue of
the exercise of a conversion privilege); (B) any acquisition by the Company or
by any corporation controlled by the Company; (C) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any corporation controlled by the Company; or (D) any acquisition by any
corporation pursuant to a consolidation or merger, if, following such
consolidation or merger, the conditions described in clauses (i), (ii), and
(iii) of paragraph (c) of this definition are satisfied; or
(b) Individuals who, as of the date of this Agreement, constitute the
Board (the "Incumbent Board") ceasing for any reason to constitute at least
two-thirds of the Board over any period of 24 consecutive months or less;
provided, however, that any individual becoming a director subsequent to the
date of this Agreement whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote or resolution of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
-2-
<PAGE>
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board.
(c) Adoption by the Board of a resolution approving an agreement of
consolidation of the Company with or merger of the Company into another
corporation or business entity in each case, unless, following such
consolidation or merger, (i) more than 60 percent of, respectively, the then
outstanding shares of common stock of the corporation resulting from such
consolidation or merger and/or the combined voting power of the then outstanding
voting securities of such corporation or business entity entitled to vote
generally in the election of directors (or other persons having the general
power to direct the affairs of such entity) is then beneficially owned, directly
or indirectly, by all or substantially all of the individuals and entities who
were the beneficial owners, respectively, of the Common Stock and Outstanding
Company Voting Securities immediately prior to such consolidation or merger in
substantially the same proportions as their ownership, immediately prior to such
consolidation or merger, of the Common Stock and/or Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding the Company, any
employee benefit plan (or related trust) of the Company or such corporation or
other business entity resulting from such consolidation or merger and any Person
beneficially owning, immediately prior to such consolidation or merger, directly
or indirectly, 35 percent or more of the Common Stock and/or Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 35 percent or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such consolidation or merger or
the combined voting power of the then outstanding voting securities of such
corporation or business entity entitled to vote generally in the election of its
directors (or other persons having the general power to direct the affairs of
such entity) and (iii) at least two-thirds of the members of the board of
directors (or other group of persons having the general power to direct the
affairs of the corporation or other business entity) resulting from such
consolidation or merger were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such consolidation or merger;
provided that any right which shall vest by reason of the action of the Board
pursuant to this paragraph (c) shall be divested, with respect to any such right
not already exercised, upon (A) the rejection of such agreement of consolidation
or merger by the stockholders of the Company or (B) its abandonment by either
party thereto in accordance with its terms; or
(d) Adoption by the requisite majority of the whole Board, or by the
holders of such majority of stock of the Company as is required by law or by the
Certificate of Incorporation or By-Laws of the Company as then in effect, of a
resolution or consent authorizing (i) the dissolution of the Company or (ii) the
sale or other disposition of all or substantially all of the assets of the
Company, other than to a corporation or other business entity with respect to
which, following such sale or other disposition, (A) more than 60 percent of,
respectively, the then outstanding shares of common stock of such corporation
and/or the combined voting power of the outstanding voting securities of such
corporation or other business entity entitled to vote generally in the election
of directors (or other persons having the general power to direct the affairs of
such entity) is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Common Stock and Outstanding Company Voting
Securities immediately prior to such
-3-
<PAGE>
sale or other disposition in substantially the same proportions as their
ownership, immediately prior to such sale or other disposition, of the Common
Stock and/or Outstanding Company Voting securities, as the case may be, (B) no
Person (excluding the Company and any employee benefit plan (or related trust)
of the Company or such corporation or other business entity and any Person
beneficially owning, immediately prior to such sale or other disposition,
directly or indirectly, 35 percent or more of the Common Stock and/or
Outstanding Company Voting Securities, as the case may be) beneficially owns,
directly or indirectly, 35 percent or more of, respectively, the then
outstanding shares of common stock of such corporation and/or the combined
voting power of the then outstanding voting securities of such corporation or
other business entity entitled to vote generally in the election of directors
(or other persons having the general power to direct the affairs of such
entity) and (C) at least two-thirds of the members of the board of directors
(or other group of persons having the general power to direct the affairs of
such corporation or other entity) were members of the Incumbent Board at the
time of the execution of the initial agreement or action of the Board providing
for such sale or other disposition of assets of the Company; provided that any
right which shall vest by reason of the action of the Board or the stockholders
pursuant to this paragraph (d) shall be divested, with respect to any such
right not already exercised, upon the abandonment by the Company of such
dissolution, or such sale or other disposition of assets, as the case may be.
A Change in Control shall not occur upon the mere reincorporation of the
Company in another state.
2.9 CODE. The Internal Revenue Code of 1986, as amended, and including
all regulations thereunder.
2.10 COMPANY. HPSC, Inc.
2.11 COMPENSATION. The total remuneration earned by a Participant for
personal services rendered to an Employing Company for any Plan Year, regardless
of when such remuneration is actually paid (or would be paid if not deferred
pursuant to any deferred compensation plan). Compensation shall include (a)
amounts deferred under any deferred compensation plan and (b) amounts
contributed from the Participant's remuneration under any plan maintained by an
Employing Company pursuant to Code Sections 125 or 401(k). Compensation shall
not include employer contributions to any employee benefit plan (including
without limitation this Plan) and all benefits provided under any such plan.
2.12 COMPENSATION COMMITTEE. The compensation committee of the Board.
2.13 EARLY RETIREMENT DATE. The first of any month following a
Participant's 62nd birthday and prior to his or her Normal Retirement Date.
2.14 EFFECTIVE DATE. The date specified as such in Section 1.2 above.
2.15 EMPLOYING COMPANY. The Company and any present or future direct or
indirect subsidiary of the Company, provided that (a) any executive officer of
the Company approves the subsidiary's participation and (b) the board of
directors of such subsidiary accepts this Plan. For this purpose, the term
"subsidiary" shall include (a) any corporation if more than 50% of its
-4-
<PAGE>
capital stock is owned by the Company (either directly or through any one or
more such subsidiaries) and (b) any other corporation designated as such by the
Board.
2.16 ENTRY DATE. The date that an Executive Employee becomes a Participant
in the Plan as provided in Article III.
2.17 ERISA. Public Law No. 93-406, the Employee Retirement Income Security
Act of 1974, as amended, and including all regulations thereunder.
2.18 EXECUTIVE EMPLOYEE. An Employee who has been designated by his
Employing Company as an officer with senior management responsibilities.
2.19 NET WORTH CONDITION. A decrease in the Company's net worth (as
determined by the Company's independent accountants in accordance with the
methodology used in preparation of the Company's financial statements) below $25
million as of the end of any fiscal quarter.
2.20 NORMAL RETIREMENT DATE. The first day of the next month following a
Participant's 65th birthday.
2.21 OTHER RETIREMENT BENEFITS. The Actuarial Equivalent of the sum of the
following amounts paid or payable to or on behalf of a Participant upon or after
his or her Separation from Service: (a) one-half of the Social Security
retirement, survivorship and disability benefits available to or on behalf of
the Participant as of the later of his or her Normal Retirement Date or
Separation from Service (or as projected to be available on the Participant's
Normal Retirement Date if payment under this Plan is made or commences before
the Participant's Normal Retirement Date), as payable pursuant to Title II of
the Social Security Act, as amended, or successor legislation, PLUS (b) the lump
sum benefits available to or on behalf of the Participant as of the first day of
the next month following his or her Separation from Service: (i) under each of
the benefit plans specified below, (ii) attributable to Employing Company
contributions, and (iii) calculated as specified for each such benefit plan:
- HPSC, INC. 401(K) PLAN (and any successor thereto) ("401(k) plan")--the
benefit attributable to Employing Company contributions only
(including without limitation employer matching contributions), as
determined by aggregating all such contributions AND ADDING deemed
interest at a rate of seven percent compounded annually (but prorated
for partial years) over the periods of time between the date of each
contribution and the date of the determination of the Participant's
Other Retirement Benefits, and without reduction for any hardship
withdrawal or other benefit distribution taken by the Participant
under the 401(k) plan.
- HPSC, INC. EMPLOYEE STOCK OWNERSHIP PLAN (and any successor thereto)
("ESOP")--the benefit determined by MULTIPLYING all shares of Company
stock allocated to the Participant's ESOP account through the date of
the determination of his or her Other Retirement Benefits TIMES the
share value of such stock on the date of the Participant's initial
participation in the ESOP (but adjusted for any stock dividends, stock
splits, stock combinations or other recapitalization after such date)
AND ADDING deemed interest on such product
-5-
<PAGE>
at a rate of seven percent compounded annually (but prorated for
partial years) over the period of time between the date of the
Participant's initial participation in the ESOP and the date of the
determination of the Participant's Other Retirement Benefits, and
without reduction for any benefit distribution taken by the
Participant under the ESOP.
- HPSC, INC. SUPPLEMENTAL EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST (and
any successor thereto) ("SESOP")--the Participant's SESOP benefit, as
determined pursuant to the principles specified above for the ESOP.
- OTHER PLANS--the benefits determined pursuant to the principles
specified above for the 401(k) plan that are attributable to Employing
Company contributions or allocations on the Participant's behalf to or
under any other deferred compensation or retirement-type plan, whether
or not such plan is tax qualified pursuant to the Code or is deemed to
be a "pension plan" pursuant to ERISA.
2.22 PARTICIPANT. Any Executive Employee who is covered by this Plan in
accordance with the provisions of Article III.
2.23 PLAN. The HPSC, Inc. Supplemental Executive Retirement Plan, as
stated herein and as amended or supplemented from time to time.
2.24 PLAN ADMINISTRATOR. The committee appointed to administer the plan
pursuant to Section 10.1 of this Plan.
2.25 PLAN YEAR. The fiscal year, ending on each December 31 following the
Effective Date while this Plan remains in effect, provided that for purposes of
the definitions of Average Final Compensation and Year of Benefit Service, "Plan
Year" shall include all such periods before or after the Effective Date of the
Plan.
2.26 SEPARATION FROM SERVICE. The termination of a Participant's Service
for any reason, including the death of the Participant.
2.27 SERVICE. A Participant's period of employment with an Employing
Company and (for periods prior to the Effective Date only) any period of service
by such Participant as a member of the Board.
2.28 TARGET RETIREMENT BENEFIT. The Actuarial Equivalent of a retirement
benefit payable on a Participant's Normal Retirement Date and continuing for the
Participant's life in an amount equal to the excess, if any, of (a) sixty-five
percent of the Participant's Average Final Compensation OVER (b) his or her
Other Retirement Benefits.
2.29 TRUST. The trust created under the HPSC, Inc. Supplemental Executive
Retirement Plan Trust Agreement in the event of a Change in Control.
2.30 VESTED BENEFIT. The portion of a Participant's Accrued Benefit
calculated in accordance with Section 5.2 of this Plan.
-6-
<PAGE>
2.31 VESTING PERCENTAGE. The percentage determined in accordance with
Section 5.1 of this Plan.
2.32 YEAR OF BENEFIT SERVICE. Except as otherwise specified in Schedule
3.1 to the Plan, a Participant shall be credited with (a) one Year of Benefit
Service for each Plan Year beginning on or after January 1, 1993 during which
the Participant has any Service and (b) one quarter of a Year of Benefit Service
for each Plan Year that ended prior to January 1, 1993 during which the
Participant had any Service. Notwithstanding the foregoing, no Participant
shall receive credit under clause (b) of the preceding sentence for more than
three (3) Years of Benefit Service.
ARTICLE III - PARTICIPATION
3.1 ELIGIBILITY REQUIREMENTS. Only Executive Employees shall be eligible
to become and remain Participants of the Plan. An Executive Employee shall
become a Participant only upon designation as a Participant on Schedule 3.1 to
the Plan by the Board after recommendation by the Chairman of the Board. A
Participant shall continue as a Participant for the purpose of accruing
additional benefits under the Plan only so long as he remains in Service as an
Executive Employee.
3.2 ENTRY AND RE-ENTRY INTO THE PLAN. An Executive Employee shall
become a Participant on the effective date of his or her designation as a
Participant on Schedule 3.1. If a Participant's Service is subsequently
broken and he or she is later reemployed as an Executive Employee, he or she
shall resume his of her participation in the Plan only if he or she is again
designated as a Participant by the Board on an amended Schedule 3.1 and only
on the effective date of such new designation.
ARTICLE IV - RETIREMENT BENEFITS
4.1 AMOUNT, TIMING AND FORM OF BENEFITS. A Participant who has a
Separation from Service after his or her Entry Date shall be entitled to receive
the Actuarial Equivalent of his or her Vested Benefit, as determined in
accordance with Articles V and VI, commencing on the Participant's Benefit
Commencement Date as determined in Article VII, and payable in the form provided
in Article VIII.
ARTICLE V - VESTING AND FORFEITURES
5.1 VESTING PERCENTAGE. A Participant's Vesting Percentage as of any date
shall be the greater of (a) one hundred percent (100%) if such date is on or
after the date on which a Change in Control occurs, unless such Change in
Control was approved by a resolution adopted by at least two-thirds of the
members of the Incumbent Board (as defined in Section 2.8), and (b) the
percentage specified in the following table for the number of Years of Benefit
Service credited to the Participant as of such date:
-7-
<PAGE>
YEARS OF YEARS OF
BENEFIT SERVICE VESTING PERCENTAGE BENEFIT SERVICE VESTING PERCENTAGE
0-5 0.00% 11 81.82%
6 25.00 12 87.50
7 42.86 13 92.31
8 56.25 14 96.43
9 66.67 15 100.00
10 75.00
5.2 VESTED BENEFIT. A Participant's Vested Benefit under this Plan
shall be the product of his or her Accrued Benefit multiplied by his or her
Vesting Percentage.
5.3 FORFEITURES. Any portion of a Participant's Accrued Benefit that is
not included in his or her Vested Benefit at the time of his or her Separation
from Service shall be immediately forfeited. Any amounts forfeited by a
Participant shall remain the sole and exclusive property of the Participant's
Employing Company and shall not increase the benefits of any other Participant.
5.4 AMENDMENT OF VESTING PROVISIONS. No amendment made to the Plan shall
reduce a Participant's Vested Benefit under the Plan. However, an amendment may
increase the Service required and impose or change any other requirements or
conditions that a Participant must meet in order to become vested or further
vested in any Accrued Benefit to the extent not already vested as of the date
that the amendment is adopted.
ARTICLE VI - ACCRUED BENEFITS
6.1 DETERMINATION OF ACCRUED BENEFIT. A Participant's Accrued Benefit as
of any date shall be the greater of (a) one hundred percent (100%) of his or her
Target Retirement Benefit if such date is on or after the date on which a Change
in Control occurs, unless such Change in Control was approved by a resolution
adopted by at least two-thirds of the members of the Incumbent Board (as defined
in Section 2.8), and (b) six and two-thirds percent (6.667%) of his or her
Target Retirement Benefit for each of the first fifteen (15) Years of Benefit
Service credited to the Participant under this Plan.
6.2 ADJUSTMENT FOR EARLY OR POSTPONED RETIREMENT. Any benefit that is
paid or begun prior to a Participant's Normal Retirement Date or on account of
the Participant's death or is postponed beyond the Participant's Normal
Retirement Date shall equal the Actuarial Equivalent of the amount that would
have been payable if the same benefit were paid on his or her Normal Retirement
Date.
-8-
<PAGE>
ARTICLE VII - BENEFIT COMMENCEMENT DATE
7.1 ELIGIBILITY FOR PAYMENT. A Participant's benefits shall be paid from
the Plan only after both of the following conditions are met: (a) the
occurrence of the Participant's Separation from Service and (b) the first to
occur of (i) the Participant's attainment of his or her Early Retirement Date,
(ii) the Participant's death, (iii) a Change in Control, or (iv) the Net Worth
Condition.
7.2 BENEFIT COMMENCEMENT DATE.
(a) TIME OF COMMENCEMENT. Unless a Participant or Beneficiary (as the
case may be) has made a timely election to defer payment with the approval of
the Administrative Committee pursuant to paragraph (b) of this Section 7.2, the
Participant's Vested Benefit under this Plan shall be paid or begin 60 days
after the date on which the conditions of Section 7.1 are first met.
Notwithstanding the foregoing, at any time after a Participant's Separation from
Service and prior to the earlier of (i) payment or commencement of the
Participant's Benefit pursuant to this Section 7.2 and (ii) the date on which a
Change in Control occurs, the Company may elect unilaterally to defer payment or
commencement of all or any portion of the Participant's Benefit until the next
January following the Participant's Separation from Service if the Participant
was a "covered employee" within the meaning of Code Section 162(m) at the time
of his or her Separation from Service. Any such election by the Company may be
made by either the Board, the Compensation Committee, the Administrative
Committee or the Company's chief executive officer, and shall be evidenced in
writing and sent to the Participant (at his or her last known address).
(b) BENEFIT COMMENCEMENT ELECTION. Subject to the Administrative
Committee's approval, a Participant or Beneficiary may make a one-time
irrevocable election to defer payment of benefits to a postponed Benefit
Commencement Date on any determinable date beyond the Participant's initial
Benefit Commencement Date determined pursuant to paragraph (a) of this Section
7.2, provided that such election is made on the form prescribed by the
Administrative Committee and is received by the Administrative Committee not
later than 30 days before such initial Benefit Commencement Date. The
Administrative Committee shall have absolute discretion to approve, disapprove
or modify before approving any such election to defer benefits. Notwithstanding
the foregoing, the Participant's benefits shall be paid immediately in one lump
sum if the Net Worth Condition ever occurs and the Participant fails to confirm
his or her election, subject to the Administrative Committee's approval, before
payment is made.
7.3 HARDSHIP WITHDRAWALS.
(a) DEFINITION. A Hardship exists when a Participant has suffered a severe
financial setback resulting from any of the following: (i) a sudden and
unexpected illness or accident of the Participant or of a dependent (within the
meaning of Code Section 152(a)) of the Participant, (ii) loss of or to the
Participant's property due to casualty, or (iii) other similar extraordinary and
unforeseeable circumstances, arising in each case from events beyond the
Participant's control. Whether circumstances constitute an unforeseeable
emergency depends upon the facts of each case. Moreover, in any event, no
amount may be paid to a Participant pursuant to this Section
-9-
<PAGE>
7.3 to the extent that any claimed Hardship is or may be relieved (i) through
reimbursement or compensation by insurance or otherwise or (ii) by liquidation
of the Participant's assets, to the extent that such liquidation would not
itself cause severe financial hardship. Hardship shall not include payment of
college expenses or the purchase of a home.
(b) PROCEDURE. A Participant who has had a Separation from Service or the
Beneficiary of a deceased Participant may request withdrawal of a necessary
portion of the Participant's Vested Benefit under the Plan on account of
Hardship if the Participant or Beneficiary is awaiting payment under Section 7.2
or installment payments under Sections 8.2 or 8.3. Such request must be in
writing to the Administrative Committee and shall be accompanied by evidence of
the existence of all applicable Hardship conditions specified in paragraph (a)
of this Section 7.3. The Administrative Committee shall review each such
request and determine whether payment of any amount is justified. If payment is
justified, the amount shall be limited to an amount reasonably needed to meet
the demonstrated financial Hardship, but including any income and employment
taxes reasonably expected to result from the Hardship distribution itself. The
Administrative Committee shall also determine the form of any payment to be made
to a Participant on account of a demonstrated Hardship. Any remaining amount of
the Participant's Vested Benefit after any such Hardship withdrawal shall
continue to be held subject to the Plan for later distribution in accordance
with the provisions of this Section 7 and of Section 8 of the Plan.
ARTICLE VIII - BENEFIT FORMS AVAILABLE
8.1 FORMS OF BENEFIT FOR PARTICIPANTS.
(a) NORMAL FORM OF BENEFITS. Unless a Participant has made a timely
election to receive installment payments with the approval of the Administrative
Committee pursuant to paragraph (b) below, the Participant's Vested Benefit
shall be paid in one lump sum.
(b) INSTALLMENT BENEFIT ELECTION. Subject to the Administrative
Committee's approval, a Participant who has had no Separation from Service
before attaining his or her Early Retirement Date may make a one-time
irrevocable election to receive the Actuarial Equivalent of his or her Vested
Benefit in substantially equal annual installments over a period of years not to
exceed the Participant's life expectancy or the joint life expectancies of the
Participant and his or her spouse, in each case determined as of the date that
the installment payments begin. Any such election shall be made on the form
prescribed by the Administrative Committee and must be received by the
Administrative Committee no later than 30 days before the Benefit is to be paid
pursuant to Section 7.2 of the Plan (after taking into account any election made
by the Participant under paragraph (b) of Section 7.2). The Administrative
Committee shall have absolute discretion to approve, disapprove or modify
(including but not limited to changing the number of installments) before
approving any such election to receive installment payments. Notwithstanding
the foregoing, the Actuarial Equivalent value of the Participant's remaining
installment benefits shall be paid immediately in one lump sum if the Net Worth
Condition ever occurs and the Participant fails to confirm his or her election,
subject to the Administrative Committee's approval, before payment is made.
-10-
<PAGE>
8.2 FORMS OF BENEFIT FOR SURVIVING SPOUSE BENEFICIARIES.
(a) NORMAL FORM OF BENEFIT. Unless a surviving spouse Beneficiary of a
deceased Participant has made a timely election to receive installment payments
with the approval of the Administrative Committee pursuant to paragraph (b)
below, the Vested Benefit of such surviving spouse Beneficiary shall be paid in
one lump sum.
(b) INSTALLMENT BENEFIT ELECTION. Subject to the Administrative
Committee's approval, a surviving spouse Beneficiary may make a one-time
irrevocable election to receive the Actuarial Equivalent of the Participant's
Vested Benefit in substantially equal annual installments over a period of years
not to exceed the surviving spouse's life expectancy, as determined on the date
that the installment payments begin. Any such election shall be made on the
applicable form prescribed by the Administrative Committee and must be received
by the Administrative Committee no later than 30 days before the Benefit is to
be paid pursuant to Section 7.2 of the Plan (after taking into account any
election made by the surviving spouse Beneficiary under paragraph (b) of Section
7.2). The Administrative Committee shall have absolute discretion to approve,
disapprove or modify (including but not limited to changing the number of
installments) before approving any such election to receive installment
payments. Notwithstanding the foregoing, the Actuarial Equivalent value of the
Beneficiary's remaining installment benefits shall be paid immediately in one
lump sum if the Net Worth Condition ever occurs and the Beneficiary fails to
confirm his or her election, subject to the Administrative Committee's approval,
before payment is made.
8.3 FORM OF BENEFIT FOR OTHER BENEFICIARIES. Death benefits to any
Beneficiary who is not the surviving spouse of the Participant shall be paid in
one lump sum.
ARTICLE IX - BENEFICIARIES
9.1 DESIGNATION. Each Participant (and each surviving Beneficiary who is
awaiting or receiving payment of a Vested Benefit under the Plan) shall have the
right to designate a Beneficiary, and to amend or revoke such designation at any
time. Each such designation, amendment or revocation shall be made on the form
prescribed by the Administrative Committee, and shall be effective only upon
receipt by the Administrative Committee.
9.2 FAILURE TO DESIGNATE A BENEFICIARY. If no designated Beneficiary
survives the Participant (or a surviving Beneficiary) and any Vested Benefit is
payable following the Participant's (or surviving Beneficiary's) death, the
Administrative Committee shall direct that payment of such Vested Benefit be
made to the person or persons in the first of the following classes of
successive preference Beneficiaries:
(a) Spouse
(b) Descendants, Per Stirpes
(c) Parents
(d) Siblings
(e) Estate
-11-
<PAGE>
ARTICLE X - PLAN ADMINISTRATION
10.1 ADMINISTRATIVE COMMITTEE. The Plan shall be administered by an
Administrative Committee of one or more members appointed by the Board, and
shall be the Compensation Committee unless a different appointment is then in
effect under this Plan. Each member shall serve at the pleasure of the Board.
The Administrative Committee shall act by majority decision of its members. The
Committee shall have responsibility for the operation and administration of the
Plan and shall have the power and authority to adopt, interpret, alter, amend or
revoke all forms, rules and regulations necessary to administer the Plan, to
interpret all provisions of the Plan and determine all questions of eligibility
for participation in and benefits under the Plan and all other issues of
administration, and to delegate ministerial duties and employ such outside
professionals as may be required for prudent administration of the Plan. The
Administrative Committee shall also have the authority to enter into agreements
on behalf of any Participating Employer as necessary to implement this Plan.
The members of the Administrative Committee, if otherwise eligible, may
participate in the Plan, but shall not make decisions of the Committee solely
with respect to their own benefits or Hardship withdrawals.
10.2 INDEMNIFICATION. Each Employing Company shall jointly and severally
indemnify and save harmless any individual acting as a member of the
Administrative Committee or in any other fiduciary capacity from, against, for
and in respect of any and all damages, losses, obligations, liabilities, liens,
deficiencies, attorneys' fees, costs and expenses incident to the performance of
such person's duties unless resulting from the gross negligence, willful
misconduct, or lack of good faith of such individual. Such indemnification
shall apply to any such individual even though at the time liability is imposed
the individual was no longer acting in a fiduciary capacity or as a member of
the Administrative Committee.
10.3 OWNERSHIP OF ASSETS. All amounts accrued under this Plan, all property
and rights purchased with such amounts, and all income attributable to such
amounts, property or rights shall remain (until made available to the
Participant or Beneficiary) solely the property and rights of the relevant
Employing Company (without being restricted to the provision of benefits under
this Plan) and shall be subject to the claims of the general creditors of the
Company and of each Employing Company. Except after a Change in Control, no
trust is created under this Plan and it is not otherwise funded in any manner.
No Participant or Beneficiary shall have any preferred claim on, or any
beneficial ownership interest in, any assets of any Employing Company or any
Accrued Benefit under the Plan prior to the time such assets are distributed as
a Vested Benefit, and all rights created under the Plan shall be mere unsecured
contractual rights. Notwithstanding the foregoing, nothing in this Plan shall
be construed to prohibit any one or more Participants or Beneficiaries from
purchasing insurance to protect against loss on account of the provisions of
this Section 10.3, and the Employing Companies shall reasonably cooperate in any
effort to obtain such insurance; provided that any such insurance shall be
obtained, owned and paid for solely by the insured persons and not by any
Employing Company.
10.4 EXPENSES. Each Employing Company shall pay (a) its share of all fees
and expenses incurred in administering the Plan, (b) all taxes imposed on such
Employing Company in connection with the Plan, and (c) all costs and expenses
(including reasonable attorneys' fees)
-12-
<PAGE>
incurred by each Participant and Beneficiary to enforce the terms of the Plan
against the Employing Company or to collect a Vested Benefit under the Plan
from the Employing Company.
ARTICLE XI - TRUST AGREEMENT; LIQUIDITY FUND
11.1 TRUST FUND. Except after a Change in Control, no assets of any
Employing Company shall be held in trust for any purposes under the Plan. Upon
the occurrence of a Change in Control, and from time to time (but at least once
each Plan Year) thereafter, the Company shall cause each Employing Company to
contribute to the Trust assets sufficient to actuarially meet the Employing
Company's liability for all Vested Benefits under the Plan at each time that
assets are contributed.
11.2 LIQUIDITY FUND. Any Employing Company at its sole option may from
time to time maintain liquid assets representing all or any portion of the value
of its Participants' Accrued Benefits. Any such liquidity fund shall be
invested at the discretion of the Administrative Committee, shall not be held in
trust for any Participant or Beneficiary, and shall in all respects remain
subject to the provisions of Section 10.3.
ARTICLE XII - AMENDMENT OF THE PLAN
12.1 AMENDMENT. The Company reserves the right to amend the Plan at any
time and from time to time. Each amendment shall be approved by the
Compensation Committee. No amendment shall diminish or deprive a Participant of
any benefit already accrued. The Company may amend the Plan, and may do so
retroactively if necessary, to conform the Plan to mandatory provisions of
applicable laws or regulations or as permitted by the Internal Revenue Service
or the Department of Labor.
12.2 EFFECT OF AMENDMENTS ON VESTING. Notwithstanding the provisions of
the preceding Section 12.1, no amendment to the Plan's vesting provisions shall
reduce any Participant's Vested Benefit, determined as of the later of (a) the
date of execution of such amendment or (b) the effective date of such amendment.
ARTICLE XIII - TERMINATION OF THE PLAN
13.1 TERMINATION. The Company (for itself and each Employing Company)
intends to continue the Plan indefinitely, but it does not assume a contractual
obligation to do so, and the Company may terminate the Plan at any time (or
terminate the participation of one or more Employing Companies), provided that
no such action of the Company shall reduce any Participant's Vested Benefit.
Each Employing Company reserves the right by action of its board of directors to
withdraw from the Plan, provided that no such withdrawal shall reduce any
Participant's Vested Benefit.
13.2 BENEFITS AFTER PLAN TERMINATION. In the event that the Company shall
terminate the Plan, in whole or in part, the rights of nonvested Participants to
benefits accrued under the Plan as of the date of such termination shall remain
unvested unless the Plan is specifically amended to provide for additional
partial or full vesting. In no event shall any person have
-13-
<PAGE>
recourse against any Employing Company for any reason upon termination of the
Plan other than for non-payment of Vested Benefits.
ARTICLE XIV - MISCELLANEOUS
14.1 LIMITATIONS OF RIGHTS; EMPLOYMENT RELATIONSHIP. Neither the
establishment of this Plan nor any modification thereof, nor the accrual or
vesting of any benefits, nor the creation of any fund or account, nor the
payment of any benefits, shall be construed as giving a Participant or any other
person any legal or equitable right against any Employing Company except as
provided in this Plan. In no event shall the terms of employment of any
employee be modified or in any way be affected by the Plan.
14.2 DETERMINATION OF BENEFITS, CLAIMS, PROCEDURE AND ADMINISTRATION.
(a) CLAIM. A person who believes that he or she is being denied a benefit
to which he or she is entitled under the Plan (hereinafter referred to as a
"Claimant") may file a written request for such benefit with the Company,
setting forth his or her claim. The request must be addressed to the
Administrative Committee in care of the Company at its then principal place of
business.
(b) DECISION ON CLAIM. Upon receipt of a claim, the Administrative
Committee shall advise the Claimant that a reply will be forthcoming within 90
days and shall, in fact, deliver such reply within such period. The
Administrative Committee may, however, extend the reply period for an additional
90 days for a reasonable cause.
If the claim is denied in whole or in part, the Administrative Committee
shall adopt a written opinion, using language calculated to be understood by the
Claimant, setting forth:
(i) The specific reason or reasons for such denial
(ii) The specific reference to pertinent provisions of the Plan on which
such denial is based
(iii) A description of any additional material or information necessary
for the Claimant to perfect his or her claim and an explanation of why such
material or such information is necessary
(iv) Appropriate information as to the steps to be taken if the Claimant
wishes to submit the claim for review
(v) The time limits for requesting a review and for completing any such
review.
(c) REQUEST FOR REVIEW. Within 60 days after the receipt by the Claimant
of the written opinion described above, the Claimant may request in writing that
the chief executive officer of the Company (or his designee) review the
determination of the Administrative Committee. Such request must be addressed to
the chief executive officer of the Company, at the Company's then principal
place of business. The Claimant or his or her duly authorized representative
may, but need not, review the pertinent documents and submit issues and comments
in writing for consideration by the chief executive officer or his designee. If
the Claimant does not request a review of the Administrative Committee's
determination by the chief
-14-
<PAGE>
executive officer of the Company within such 60-day period, he or she shall be
barred and estopped from challenging the Administrative Committee's
determination.
(d) REVIEW OF DECISIONS. Within 60 days after receipt of a request for
review, the chief executive officer of the Company or his designee shall review
the Administrative Committee's determination. After considering all materials
presented by the Claimant the chief executive officer or his designee shall
render a written opinion, written in a manner calculated to be understood by the
Claimant, setting forth the specific reasons for a decision and containing
specific references to the pertinent provisions of the Plan on which the
decision is based. If special circumstances require that the 60-day time period
be extended, the chief executive officer or his designee shall so notify the
Claimant and shall render the decision as soon as possible, but not later than
120 days after receipt of the request for review.
14.3 ARBITRATION. Any dispute between any person claiming benefits or any
other rights under the Plan and the relevant Employing Company as to the
interpretation or application of the provisions of the Plan and amounts payable
hereunder that is not finally resolved under the claims procedure in Section
14.2 of the Plan shall be determined exclusively by binding arbitration in the
City of Boston, Massachusetts in accordance with the rules of the American
Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court of competent jurisdiction. Except as provided
in Section 10.4 after a Change in Control, all fees and expenses of such
arbitration shall be paid as determined by the arbitrator.
14.4 NON-ASSIGNABILITY OF BENEFITS. Neither the Participant nor his or her
Beneficiary nor any other beneficiary under the Plan shall have any power or
right to transfer, assign, anticipate, hypothecate or otherwise encumber any
part or all of the amounts payable hereunder, which are expressly declared to be
nonassignable and non-transferable. Any such attempted assignment or transfer
shall be void. No amount payable under the Plan shall, prior to actual payment
thereof, be subject to seizure by any creditor of any such person for the
payment of any debt, judgment or other obligation, by a proceeding at law or in
equity, or be transferable by operation of law in the event of the bankruptcy,
insolvency, divorce or death of the Participant, his or her designated
Beneficiary or any other beneficiary under this Plan.
14.5 FACILITY OF PAYMENTS. In the event that the Administrative Committee
shall determine that any person to whom a benefit is payable under the Plan is
unable to care for his or her affairs because of illness or accident, or is
otherwise mentally or physically incompetent, or unable to give a valid receipt,
the Committee may cause the payment becoming due to be paid to the person's
spouse, child, grandchild, parent, brother or sister, or to any appropriate
individual appointed by a court of competent jurisdiction, or to any person
deemed by the Committee to have incurred expense for such person otherwise
entitled to payment.
14.6 OBLIGATIONS TO WITHHOLD AND PAY TAXES. Each Participant or other
recipient of benefits under the Plan shall be liable for all tax obligations, if
any, with respect to any sum received pursuant to the Plan and for accurately
reporting and paying in full all such taxes to the appropriate federal, state
and local authorities. The relevant Employing Company shall have the right to
deduct and withhold from any payment due under the Plan or from other amounts
owed to or with respect to the Participant all withholding taxes and other
amounts required by law or as necessary to set off amounts owed by the
Participant to such Employing Company.
-15-
<PAGE>
14.7 REPRESENTATIONS. No Employing Company hereby represents or guarantees
that any particular federal or state income, payroll, personal property or other
tax consequence will result from participation in this Plan. A Participant
should consult with professional tax advisors to determine the tax consequences
of his or her participation.
14.8 SEVERABILITY. If a court of competent jurisdiction holds any provision
of this Plan to be invalid or unenforceable, the remaining provisions of the
Plan shall continue to be fully effective.
14.9 APPLICABLE LAW. This Plan shall be governed by and construed in
accordance with applicable federal law and, to the extent not preempted by such
federal law, the laws of the Commonwealth of Massachusetts applicable to
contracts that are made and to be wholly performed in such Commonwealth.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed under
seal by its duly authorized representative as of the 1st day of January, 1997.
HPSC, INC.
By: /s/ John W. Everets
-------------------------
Title: Chairman and CEO
-16-
<PAGE>
SCHEDULE 3.1 TO THE HPSC, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Designation of Participants and Retroactive Benefit Service Credits
Effective as of January 1, 1997)
______________________________________________________________________________
EFFECTIVE DATE RETROACTIVE CREDIT FOR YEARS OF
PARTICIPANT OF PARTICIPATION BENEFIT SERVICE PRIOR TO ENTRY DATE
- ----------- ---------------- -----------------------------------
John W. Everets January 1, 1997 As specified in the Plan document
Raymond Doherty January 1, 1997 As specified in the Plan document
Rene Lefebvre January 1, 1997 As specified in the Plan document
<PAGE>
EXHIBIT 11.1
HPSC, INC.
CALCULATION OF EARNINGS PER SHARE
OUTSTANDING SHARE RECONCILIATION
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
---- ---- ----
Weighted Average Shares Outstanding 5,565,461 4,696,376 4,684,147
LESS:
Unissued ESOP/SESOP (621,720) (590,348) (560,348)
Restricted Stock -- (224,667) (278,108)
ADD:
Option Effect 45,650 -- 221,545
--------- --------- --------
SHARES USED TO COMPUTE NET
INCOME/(LOSS) PER SHARE 4,989,391 3,881,361 4,067,236
--------- --------- ---------
--------- --------- ---------
<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 26, DECEMBER 25, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1996
<S> <C> <C> <C> <C> <C> <C>
Excess (deficiency) of earnings
available to cover fixed charges (1)
Earnings:
Income (loss) before income taxes $ 3,244 $(12,148) $ 750 $ 79 $1,579 $ 653
Add: Fixed charges 10,663 9,057 3,514 5,339 8,146 9,072
-------------------------------------------------------------------- ------------
Earnings, as adjusted 13,907 (3,091) 4,264 5,418 9,725 9,725
-------------------------------------------------------------------- ------------
Fixed charges:
Interest on indebtedness 9,900 8,185 3,476 5,339 8,146 8,922
Amortization of debt issue costs 763 872 38 - - 150
-------------------------------------------------------------------- ------------
Fixed charges 10,663 9,057 3,514 5,339 8,146 9,072
-------------------------------------------------------------------- ------------
Excess (deficiency) of earnings to fixed
charges $ 3,244 $(12,148) $ 750 $ 79 $1,579 $ 653
-------------------------------------------------------------------- ------------
-------------------------------------------------------------------- ------------
Ratio of earnings to fixed charges 1.30 N/A(2) 1.21 1.01 1.19 1.07
-------------------------------------------------------------------- ------------
-------------------------------------------------------------------- ------------
</TABLE>
(1) 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.
(2) 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. 1 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 10, 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 10, 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>
