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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended DECEMBER 31, 1997
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES
EXCHANGE ACT OF 1934
Commission file number 0-11618
HPSC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2560004
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 720-3600
Securities registered pursuant to section 12(b) of the Act:
NONE
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Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK-PAR VALUE $.01 PER SHARE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K.
YES NO X
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The aggregate market value of the voting stock held by non-affiliates of the
registrant was $18,119,012 at February 27, 1998, representing 3,535,417 shares.
The number of shares of common stock, par value $.01 per share, outstanding as
of February 27, 1998 was 4,638,130.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held April 23, 1998 (the "1998 Proxy Statement") are incorporated by reference
into Part III of this annual report on Form 10-K.
Portions of the 1997 Annual Report to Stockholders (the "1997 Annual
Report") are incorporated by reference into Part I of this annual report on Form
10-K.
The 1998 Proxy Statement and the 1997 Annual Report, except for the parts
therein which have been specifically incorporated by reference, shall not be
deemed "filed" as part of this report on Form 10-K.
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PART I
Item 1. BUSINESS
GENERAL
The Company is a specialty finance company engaged primarily in
financing healthcare providers throughout the United States. 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. The Company
has over 20 years of experience as a provider of financing to healthcare
professionals in the United States. Through its subsidiary, ACFC, the Company
also provides asset-based lending to a variety of businesses, principally 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% of the Company's
business arises from equipment financing, approximately 30% 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, generally, $250,000 or less, sometimes referred
to as the "small-ticket" market. The average size of the Company's financing
transactions in 1997 has been approximately $27,000. In connection with its
equipment financings, the Company enters into noncancellable finance agreements
and lease contracts, 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 16
offices in nine states and through cooperative arrangements with equipment
vendors.
At December 31, 1997, HPSC's outstanding leases and notes receivable
owned and managed were approximately $283 million, consisting of approximately
13,000 active contracts. HPSC's financing contract originations in 1997 were
approximately $129 million compared to approximately $87 million in 1996, an
increase of 48%, which compared to financing contract originations of
approximately $61 million in 1995.
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. ACFC's
financing originations in 1997 were approximately $14 million compared to
approximately $10 million in 1996, an increase of 40%, which compared to
financing contract originations of approximately $8 million in 1995.
The continuing increase in the Company's originations of financing
contracts and ACFC lines of credit resulted in a 41% increase in the Company's
net revenues for fiscal year 1997, as compared with fiscal year 1996, and a 51%
increase in the Company's net revenues for fiscal year 1996 compared with
fiscal year 1995. 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.
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.
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 generally does not
compete, is financing of equipment priced at over $250,000, which is typically
sold to larger group practices, hospitals and other institutional purchasers.
Because of the size of
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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, finance 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 continues to expand into practice finance. Practice finance is a
specialized segment of the finance industry, in 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. HPSC may finance up to 100% of the cost of the practice being
purchased. 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.
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 Company provides its leasing
customers with an option to purchase the equipment at the end of the lease for
10% of its original cost. Historically, approximately 99% of lessees have
exercised this option. 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.
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 the legal
proceeding 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.
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 84 months.
Customers
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The primary customers for the Company's financing contracts are
healthcare providers, including dentists, ophthalmologists, other physicians,
chiropractors and veterinarians.
As of December 31, 1997, 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.
Realization of Residual Values on Equipment Leases
Historically, 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, 1997 are attributable to leases
which will expire by the end of 2002. 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, 1997, the Company has originated a total of approximately
400 practice finance loans aggregating approximately $40 million. In 1997,
practice finance generated approximately 12% 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 offices, 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 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.
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.
ASSET-BASED LENDING
ACFC makes asset-based loans of $5 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 healthcare related). ACFC takes
a security interest in all of the borrowers' assets and monitors collection of
their 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 equipment, which is secured by the machinery and equipment of
the borrower. Each of
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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 generally two years. 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 tracks the
changes to its borrowers' accounts receivable on a daily basis. ACFC requires
that all collections be deposited to an ACFC account. Availability under
borrowers' 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 1994 through December 31, 1997, ACFC has provided 38 lines of
credit totaling approximately $57 million and currently has approximately $33
million of loans outstanding to 32 borrowers. The annual dollar volume of
originations of lines of credit by ACFC has grown from $5 million in 1994 to
$12 million in 1995 to $17.6 million in 1996 to $22 million in 1997.
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. 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.
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
its clients' debtors. ACFC may also require its customers to obtain credit
insurance on certain or all of its debtors. 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 monthly.
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 85% of
the Company's net investment in leases and notes at December 31, 1997 (87% at
December 31, 1996). 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 15% of the Company's net investment in
leases and notes at December 31, 1997 (13% at December 31, 1996). These notes
receivable are 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, 1997, the Company has not had any
charge-offs of commercial notes receivable.
ALLOWANCE FOR LOSSES AND 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
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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, 1997, this allowance for losses was 2.5% 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 were 0.7% of
the Company's average net investment in leases and notes (before allowance) for
the year ended December 31, 1997, 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.
The Company's receivables are subject to credit risk. To reduce this
risk, the Company has stringent underwriting policies in approving leases and
notes that are closely monitored by management. Additionally, certain of the
Company's leases and notes receivable, which have been sold under certain sales
agreements, are subject to recourse and estimated losses are provided for by the
Company.
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.
CHARGE-OFFS AND ALLOWANCE FOR LOSSES
Year Ended December 31,
(in thousands) 1997 1996 1995
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Beginning balance....................... $(4,562) $(4,512) $(4,595)
Provision for losses.................... (2,194) (1,564) (1,296)
Charge-offs............................. 1,304 1,609 1,504
Recoveries.............................. (89) (95) (125)
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Balance, end of year.................... $(5,541) $(4,562) $(4,512)
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The total contractual balances of delinquent lease contracts and notes
receivable due in installments, both owned by the Company and owned by others
and managed by the Company, over 90 days past due amounted to $6,806,000 at
December 31, 1997 compared to $5,763,000 at December 31, 1996.
The above table includes a provision for losses related to the
commercial notes receivable of $236,000, $146,000 and $95,000 in 1997, 1996 and
1995, respectively. The amount of the allowance for losses related to the
commercial notes receivable was $520,000 and $284,000 at December 31, 1997 and
1996, respectively.
FUNDING SOURCES
The Company's principal sources of funding for its financing
transactions are: (i) a revolving loan arrangement with BankBoston as managing
agent providing borrowing availability of up to $100 million (the "Revolver"),
(ii) securitized limited recourse revolving credit facilities with wholly
owned, special-purpose subsidiaries of the Company, HPSC Bravo Funding Corp.
("Bravo") and HPSC Capital Funding, Inc. ("Capital"), currently in the amounts
of $100 million each, (iii) defined recourse fixed-term loans from, and sales
of financing contracts to, savings banks and other purchasers and (iv) 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 agreement under which the Company may
borrow up to $100 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 Note C of the "Notes to
Consolidated Financial Statements" in the 1997 Annual Report.
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
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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
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 borrowings 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 in income for accounting
purposes 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.
See Note C of the "Notes to Consolidated Financial Statements" in the
1997 Annual Report incorporated by reference in Item 8 of this annual report on
Form 10-K and "Management's Discussion and Analysis of Financial
Condition-Liquidity and Capital Resources" in this report on Form 10-K for a
more complete description of the funding sources referred to above.
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 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 the many advanced features of
its system provide 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
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 sources to purchasers of
their equipment. The Company's sales representatives support the equipment
manufacturer or vendor or their representatives in their sales efforts by
providing (i) timely, convenient and competitive financing for their equipment
sales and (ii) 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; training the vendors' 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 complete the equipment financing transaction.
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HPSC currently has 30 field sales and marketing personnel located in 16
offices throughout the United States, including 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
management is located in West Hartford, Connecticut. It business is presently
conducted primarily in the northeastern United States with all sales and
marketing efforts managed from its West Hartford office.
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 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.
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. In addition, the Company may face greater
competition with its expansion into the practice finance and asset-based lending
markets.
EMPLOYEES
At December 31, 1997, the Company had 82 full-time employees, 11 of
whom work for ACFC, and none of whom was represented by a labor union.
Approximately 12 of the Company's employees are engaged in credit, collections
and lease documentation, approximately 35 are in sales, marketing and customer
service, and 35 are engaged in general administration, tax and accounting.
Management believes that the Company's employee relations are good.
Item 2. PROPERTIES
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
1997 under all operating leases was $448,000. 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.
Item 3. 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of HPSC is traded on the NASDAQ National Market
System. The high and low prices for the Common Stock as reported by NASDAQ for
each quarter in the last two fiscal years, as well as the approximate number of
record holders and information with respect to dividend restrictions, are
incorporated by reference from the section captioned "Market Information" on
page 23 of the 1997 Annual Report.
RECENT SALES OF UNREGISTERED STOCK
Not applicable.
Item 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1997 is
incorporated by reference from the section captioned "Selected Financial Data"
on page 24 of the 1997 Annual Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This annual report on Form 10-K 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 below
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and under the section captioned "Business," as well as within the
annual report generally. When used in this annual report, 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 considerations set forth below under the caption "Certain Factors" and
the matters set forth in this annual report generally.
Results of Operations
Fiscal Years Ended December 31, 1997 and December 31, 1996:
Earned income from leases and notes for 1997 was $23,691,000 (including
$4,036,000 from ACFC) as compared to $17,515,000 (including $2,643,000 for ACFC)
for 1996. This increase of approximately 35.3% was due primarily to the increase
in the net investment in leases and notes from 1996 to 1997. The increase in net
investment in leases and notes resulted from an increase of approximately 47.4%
in the Company's financing contract originations for fiscal 1997 to
approximately $143,000,000 (including approximately $14,000,000 in ACFC
originations, and excluding approximately $4,500,000 of initial direct costs)
from approximately $97,000,000 (including approximately $10,000,000 in ACFC
originations, and excluding approximately $3,800,000 of initial direct costs)
for 1996. Gains on sales of leases and notes increased to $3,123,000 in 1997
compared to $1,572,000 in 1996. This increase was caused by higher levels of
sales activity in 1997. 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 1997 was
$10,288,000 (43.4% of earned income) compared to $7,885,000 (45.0% of earned
income) for 1996, an increase in amount of 30.5%. The increase in net interest
expense was due primarily to a 56.7% increase in debt levels from 1996 to 1997,
which resulted primarily from increased borrowings to finance the company's
financing contract originations. The decrease as a percentage of earned income
was due to lower interest rates on debt in 1997 as compared to 1996.
Net financing margin (earned income less net interest expense) for fiscal 1997
was $13,403,000 (56.6% of earned income) as compared to $9,630,000 (55.0% of
earned income) for 1996. The increase in amount was due to higher earnings on a
higher balance of earning assets. The increase in percentage of earned income
was due to higher debt during 1997 at lower rates as compared to 1996.
The provision for losses for fiscal 1997 was $2,194,000 (9.3% of earned income)
compared to $1,564,000 (8.9% of earned income) for 1996. This increase in amount
resulted from higher levels of new financings
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in 1997 and the Company's continuing evaluation of its allowance for losses. The
allowance for losses at December 31, 1997 was $5,541,000 (2.6% of net investment
in leases and notes) as compared to $4,562,000 (3.1% of net investment in leases
and notes) at December 31, 1996. Net charge-offs were approximately $1,200,000
in 1997 compared to $1,500,000 in 1996.
Selling, general and administrative expenses for fiscal 1997 were $12,330,000
(52.0% of earned income) as compared to $8,059,000 (46.0% of earned income) for
1996. This increase resulted from increased staffing and systems and support
costs required by higher volumes of financing activity in 1997 and to permit
anticipated near-term growth in financing activity.
The Company's income before income taxes for fiscal 1997 was $2,002,000 compared
to $1,579,000 for 1996. The provision for income taxes was $881,000 (44.0% of
income before tax) in 1997 compared to $704,000 (44.6%) in 1996.
The Company's net income for fiscal 1997 was $1,121,000 or $0.30 per basic share
and $0.26 per diluted share, compared to $875,000 or $0.23 per basic share and
$0.20 per diluted share for 1996. The increase in 1997 over 1996 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, and higher average debt levels in 1997.
At December 31, 1997, the Company had approximately $59,000,000 of customer
applications which had been approved but had not yet resulted in a completed
transaction, compared to approximately $47,500,000 of such customer applications
at December 31, 1996. Not all approved applications will result in completed
financing transactions with the Company.
The Company has reviewed all significant areas within its operations, including
the application, underwriting and accounting management systems, for date
sensitive issues after December 31, 1999 ("Year 2000 Issues"). The Company is
also monitoring the progress of its major service providers. Based on this
review, the Company does not anticipate any material adverse impact from Year
2000 Issues.
Fiscal Years Ended December 31, 1996 and December 31, 1995:
Earned income from leases and notes for 1996 was $17,515,000 (including
$2,643,000 from ACFC) as compared to $12,871,000 (including $1,316,000 for 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 $97,000,000 (including approximately $10,000,000 in ACFC
originations, and excluding approximately $3,800,000 of initial direct costs)
from approximately $68,600,000 (including approximately $7,600,000 in ACFC
originations, and excluding approximately $3,000,000 of initial direct costs)
for 1995. Gains on sales of leases and notes increased to $1,572,000 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 $7,885,000
(45.0% of earned income) compared to $4,964,000 (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 $9,630,000 (55.0% of earned income) as compared to $7,907,000 (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 $1,564,000 (8.9% of earned income)
compared to $1,296,000 (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 $4,562,000 (3.1% of net investment in leases and notes) as
compared to $4,512,000 (3.8% of net investment in leases and notes) at December
31, 1995. Net charge-offs were approximately $1,500,000 in 1996 compared to
$1,400,000 in 1995.
Selling, general and administrative expenses for fiscal 1996 were $8,059,000
(46.0% of earned income) as compared to $5,984,000 (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.
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The Company's income before income taxes for fiscal 1996 was $1,579,000 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 a $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 $0.23 per basic share
and $0.20 per diluted share, compared to $(125,000) or $(0.03) per basic and
diluted 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, approximately $47,500,000 of customer applications which
had been approved but had not yet resulted in a completed transaction were
outstanding, compared to approximately $39,900,000 of such customer applications
at December 31, 1995. Not all approved applications will result in completed
financing transactions with the Company.
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 Capital, and
loans secured by financing contracts. The Company obtains cash from sales of its
financing contracts under its securitization facilities and from lease and note
payments received. 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 retained
interest, if any, that 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, 1997, the Company had $9,137,000 in cash, cash equivalents and
restricted cash as compared to $8,945,000 at the end of 1996. As described in
Note C to the Company's Consolidated Financial Statements in the 1997 Annual
Report, $7,000,000 of such cash was restricted pursuant to financing agreements
as of December 31, 1997, compared to $6,769,000 at December 31, 1996.
Cash provided by operating activities was $5,278,000 for the year ended
December 31, 1997 compared to $6,680,000 in 1996 and $4,514,000 in 1995. The
significant components of cash provided by operating activities for 1997 as
compared to 1996 were an increase in net income in 1997 to $1,121,000 from
$875,000 in 1996; an increase in the gain on sales of leases and notes to
$3,123,000 in 1997 from $1,572,000 in 1996, which was caused by a higher level
of sales activity in 1997; and an increase in accounts payable and accrued
expenses, including accrued interest, of $1,025,000 as compared to 1996, which
was caused primarily by the issuance of subordinated debt and higher senior
note balances in 1997.
Cash used in investing activities was $69,298,000 for the year ended December
31, 1997, compared to $34,406,000 in 1996 and $32,615,000 in 1995. The primary
components of cash used in investing activities for 1997 as compared to 1996
were an increase in originations of lease contracts and notes receivable to
$135,625,000 in 1997 from $90,729,000 in 1996, offset by an increase in
proceeds from sales of lease contracts and notes receivable to $33,039,000 in
1997 from $24,344,000 in 1996.
Cash provided by financing activities was $63,981,000 for the year ended
December 31, 1997 compared to cash provided by financing activities of
$29,041,000 for December 31, 1996 and $28,543,000 in 1995. The significant
components of cash provided by financing activities in 1997 as compared to 1996
were proceeds from the issuance of subordinated debt of $18,306,000 in 1997 and
an increase in the proceeds from senior notes in 1997 to $100,087,000 from
$52,973,000 in 1996, offset by repayments of senior notes in 1997 of $53,125,000
compared to $26,019,000 in 1996.
On December 27, 1993, the Company raised $70,000,000 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 were 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 $50,000,000 of 10.125% senior notes due December 28, 1993,
and $20,000,000 of 10% subordinated notes due January 15,1994. The Funding I
Notes had an outstanding balance of $6,861,000 at December 31, 1996 and were
fully paid in June of 1997.
The Revolving Loan Agreement was extended on December 10, 1997 until March 31,
1998 with availability of $60,000,000. The Revolver was amended and restated on
March 16,1998 to increase the availability to $100,000,000 and to extend its
term to March 1999. Under the Revolver, 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, 1997, the Company had $39,000,000 outstanding under
this facility and $21,000,000 available for borrowing, subject to borrowing base
limitations. The Revolver Agreement is not currently 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 $50,000,000 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 facility. The Company had $57,295,000 outstanding under the
Bravo facility at December 31, 1997, and in connection
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with this facility, had 16 separate interest rate swap agreements with
BankBoston with a total notional value of $60,432,000. Effective November 5,
1996, the Bravo facility was increased to $100,000,000 and amended to provide up
to $30,000,000 of such facility to be used as sales of receivables from Bravo
for accounting purposes.
The Company had $29,162,000 outstanding from sales of receivables under this
portion of the facility, and in connection with this portion of the facility,
had six separate interest rate swap agreements with BankBoston with a total
notional value of $30,129,000 at December 31, 1997.
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 $3,500,000 at 9.5% subject to certain recourse and
performance covenants. In July 1997, the Company entered into another fixed
rate, fixed term loan agreement with SIS under which the Company borrowed an
additional $3,984,000 at 8% subject to the same conditions as the first loan.
The Company had $4,913,000 outstanding under these agreements at December 31,
1997.
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, 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.
In March 1997, the Company issued $20,000,000 of unsecured senior subordinated
notes due 2007 ("Senior Subordinated Note") bearing interest at a fixed rate of
11% (the "Note Offering"). The Company received approximately $18,300,000 in net
proceeds from the Note Offering and used such proceeds to repay amounts
outstanding under the Revolver Agreement.
In June 1997, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), established a $100,000,000
Lease Receivable Purchase Agreement with EagleFunding Capital Corporation
("Eagle"). Under the terms of the facility (the "Capital Facility"), Capital, to
which the Company may sell certain of its portfolio assets from time to time,
pledges or sells its interests in these assets to Eagle, a commercial paper
conduit entity. Capital may borrow at variable rates in the commercial paper
market and may enter into interest rate swap agreements to assure fixed rate
funding. Monthly settlements of the borrowing base and any applicable principal
and interest payments will be made from collections of Capital's portfolio. The
Company will be the servicer of the Capital portfolio subject to certain
covenants. The agreement originally expired in September 2000. Effective January
1, 1998 the agreement was amended to extend the expiration date to September
2002. The Company had $61,744,000 of indebtedness outstanding under this
facility at December 31, 1997, and in connection with this facility had six
separate swap agreements with a total national value of $59,373,000.
In 1997, the Company repurchased an aggregate of 108,300 shares of its Common
Stock for approximately $623,000. The Company may repurchase its Common Stock
from time to time at prices favorable to the Company, although it has no
specific repurchase plan in place at this time.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo facility, the
Capital facility and loans from savings banks, along with cash obtained from the
sales of its financing contracts and from internally generated revenues 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 1998 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 CONSIDERATIONS
The following important factors, among others, could cause actual
results to differ materially from those described in the forward-looking
statements made in this annual report on Form 10-K and presented elsewhere by
management from time to time. HPSC cautions the reader that such list of
considerations 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.
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. The Company's principal sources of funding for its financing
transactions are (i) the Revolver, providing up to $100 million of borrowing
availability, (ii) $200.0 million in limited resource resolving credit
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facilities with Bravo and Capital, (iii) fixed-rate, full recourse term loans
from a savings bank, (iv) specific recourse sales of financing contracts to
savings banks and other purchasers, and (v) the Company's internally generated
revenues. There can be no assurance that the Company will be able to renew or
extend the Revolver at its expiration in March 1999, 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.
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 if the portfolio
failed to perform within the specified guidelines, its performance would return
to acceptable levels or that the payment restrictions would be removed.
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 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 Company has stringent underwriting
policies in approving financing contracts and the net charge-offs on the
contracts originated by the Company have been approximately 0.7% of the
Company's average net investment in leases and notes for 1997, any increase in
such net charge-offs 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.
Competition. Healthcare provider financing and asset-based lending 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 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.
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.
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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.
Interest Rate Risk. Except for approximately $33 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 $39 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 its financing
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.
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 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, 1997, the estimated residual value of equipment at
the end of the lease term was approximately $11 million, representing
approximately 4.9% 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.
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
number 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 in income for
accounting purposes 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.
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, 1997, the Company had 14 field sales representatives and eight
in-house sales personnel. Although the Company is not materially
15
<PAGE> 16
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.
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.
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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item together with Independent
Auditors Report is incorporated by reference from pages 2 through 22 of the
1997 Annual Report. (See also the Report of Coopers & Lybrand L.L.P. filed
under Item 14 of this Form 10-K.)
16
<PAGE> 17
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item has been filed on Form 8-K, dated
June 19, 1996.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
sections captioned "PROPOSAL ONE -- ELECTION OF DIRECTORS -- Nominees for Class
III Directors," " - Members of the Board of Directors Continuing in Office" and
" - Other Executive Officers" and "VOTING SECURITIES - Section 16(a) Beneficial
Ownership Reporting Compliance" in the 1998 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
sections captioned "EXECUTIVE COMPENSATION - Summary Compensation Table," " -
Stock Loan Program," " - Supplemental Executive Retirement Plan," " - Option
Grants in Last Fiscal Year," " - Aggregated Option Exercises and Year-End Option
Values," - Employment Agreements" and " - Compensation of Directors" in the 1998
Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "VOTING SECURITIES -- Share Ownership of Certain Beneficial
Owners and Management" in the 1998 Proxy Statement .
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
--------------------
The following financial statements of HPSC, Inc. and report of independent
accountants included in the 1997 Annual Report are incorporated herein by
reference as a part of this Form 10-K
Page Number In
1997 Annual Report
------------------
Consolidated Balance Sheets at December 31,
1997 and December 31, 1996 2
Consolidated Statements of Operations for each
of the three years in the period ended
December 31, 1997 3
Consolidated Statements of Changes in Stock-
holders' Equity for each of the three years in
the period ended December 31, 1997 4
Consolidated Statements of Cash Flows for
each of the three years in the period ended
December 31, 1997 5
Notes to Consolidated Financial Statements 6-21
Report of Deloitte & Touche LLP 22
17
<PAGE> 18
Page Number in
Form 10-K
---------
(a) 2. Financial Statement Schedules
-----------------------------
Report of Coopers & Lybrand LLP F-1
All other Financial Statement Schedules are omitted because the information
required is inapplicable or is included in the Financial Statements or the
Notes thereto.
18
<PAGE> 19
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
and Stockholders of HPSC, Inc.:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of HPSC, Inc. for the year 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 included 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 results of operations and cash flows of
HPSC, Inc. for the year ended December 31, 1995, in connformity 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.
/s/ Coopers & Lybrand L.L.P.
---------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 25, 1998
F-1
<PAGE> 20
(a) 3 Exhibits
Management contracts or compensatory plans or arrangements required to be filed
as exhibits are identified by an asterisk.
<TABLE>
<CAPTION>
No. Title Method of Filing
--- ----- ----------------
<S> <C> <C>
3.1 Restated Certificate of Incorporated by reference to Exhibit 3.1
Incorporation of HPSC, Inc. to HPSC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995.
3.2 Certificate of Amendment to Incorporated by reference to Exhibit 3.2
Restated Certificate of to HPSC's Annual Report on Form 10-K for
Incorporation of HPSC, Inc. filed the fiscal year ended December 31, 1995.
in Delaware on September 14,
1987
3.3 Certificate of Amendment to Restated Incorporated by reference to Exhibit 3.3
Certificate of December 31, 1995. to HPSC's Annual Report on Form 10-K for
Incorporation of HPSC, Inc. filed the fiscal year ended December 31, 1995.
in Delaware on May 22, 1995
3.4 Amended and Restated By-Laws Incorporated by reference to Exhibit 3.4
to HPSC's Amendment No. 1 to Registration
Statement on Form S-1 filed March 10, 1997
4.1 Rights Agreement dated as of Incorporated by reference to Exhibit 4 to
August 3, 1993 between the HPSC's Amendment No. 1 to its Current Report
Company and The First National on Form 8-K filed August 11, 1993.
Bank of Boston, N.A., including
as Exhibit B thereto the form of
Rights Certificate
10.1 Lease dated as of March 8, Incorporated by reference to
1994 between the Trustees of Exhibit 10.1 to HPSC's Annual
60 State Street Trust and Report on Form 10-K for the
HPSC, Inc., dated September fiscal year ended December 31,
10, 1970 and relating to the 1994
principal executive offices of
HPSC, Inc. at 60 State Street,
Boston, Massachusetts
*10.2 HPSC, Inc. Stock Option Plan, Incorporated by reference to
dated March 5, 1986 Exhibit 10.6 to HPSC's Annual
Report on Form 10-K for the
fiscal year ended December 30,
1989
*10.3 Employment Agreement Incorporated by reference to
between the Company and Exhibit 10.3 to HPSC's Amendment No. 1
John W. Everets, dated as of to Registration Statement on Form S-1
July 19, 1996 filed March 10, 1997
*10.4 Employment Agreement Incorporated by reference to
between the Company and Exhibit 10.4 to HPSC's Amendment No. 1
Raymond R. Doherty dated to Registration Statement on Form S-1
as of August 2, 1996 filed March 10, 1997
*10.5 Employment Agreement Incorporated by reference to
between HPSC, Inc. and Rene Exhibit 10.5 to HPSC's Quarterly
Lefebvre dated April 6, 1994 Report on Form 10-Q for the
quarter ended June 25, 1994
*10.6 HPSC, Inc. Employee Stock Incorporated by reference to
Ownership Plan Agreement Exhibit 10.9 to HPSC's Annual
dated December 22, 1993 Report on Form 10-K for the
between HPSC, Inc. and John fiscal year ended December 25,
W. Everets and Raymond R. 1993
Doherty, as trustees
*10.7 First Amendment effective Incorporated by reference to
January 1, 1993 to HPSC, Inc. Exhibit 10.2 to HPSC's Quarterly
Employee Stock Ownership Plan Report on Form 10-Q for the
quarter ended June 25, 1994
*10.8 Second Amendment effective Incorporated by reference to
January 1, 1994 to HPSC, Inc. Exhibit 10.11 to HPSC's Annual
Employee Stock Ownership Plan Report on Form 10-K for the fiscal
year ended December 31, 1994
*10.9 Third Amendment effective Incorporated by reference to
January 1, 1993 to HPSC, Inc. Exhibit 10.12 to HPSC's Annual
Employee Stock Ownership Plan Report on Form 10-K for the
fiscal year ended December 31, 1994
*10.10 HPSC, Inc. Supplemental Incorporated by reference to
Employee Stock Ownership Plan Exhibit 10.3 to HPSC's Quarterly
and Trust dated July 25, 1994 Report on Form 10-Q for the
quarter ended June 25, 1994
</TABLE>
19
<PAGE> 21
<TABLE>
<S> <C> <C>
*10.11 HPSC, Inc. 1994 Stock Plan Incorporated by reference to
dated as of March 23, 1994 and Exhibit 10.4 to HPSC's Quarterly
related forms of Nonqualified Report on Form 10-Q for the
Option Grant and Option quarter ended June 25, 1994
Exercise Form
*10.12 HPSC, Inc. Supplemental Filed herewith
Executive Retirement Plan
dated as of January 1, 1997
*10.13 HPSC, Inc. 401(k) Plan dated Incorporated by reference to
February, 1993 between HPSC, Exhibit 10.15 to HPSC's Annual
Inc. and Metropolitan Life Report on Form 10-K for the
Insurance Company fiscal year ended December 25,
1993
10.14 Third Amended and Restated Credit Filed herewith
Agreement dated as of March 16, 1998,
among HPSC, Inc., BankBoston, NA,
individually and as Agent and the
Banks named therein
10.15 Purchase and Contribution Incorporated by reference to
Agreement dated as of Exhibit 10.31 to HPSC's Annual
January 31, 1995 between Report on Form 10-K for the fiscal
HPSC, Inc. and HPSC Bravo year ended December 31, 1994
Funding Corp.
10.16 Credit Agreement dated as of Incorporated by reference to
January 31, 1995 among Exhibit 10.32 to HPSC's Annual
HPSC Bravo Funding Corp., Report on Form 10-K for the fiscal
Triple-A One Funding year ended December 31, 1994
Corporation, as lender, and
CapMAC, as Administrative
Agent and as Collateral Agent
10.17 Agreement to furnish copies of Incorporated by reference to
Omitted Exhibits to Certain Exhibit 10.33 to HPSC's Annual
Agreements with HPSC Bravo Report on Form 10-K for the
Funding Corp. fiscal year ended December 31,
1994
10.18 Amendment documents, effective Incorporated by reference to
November 5, 1996 to Credit Exhibit 10.26 to HPSC's Registration
Agreement dated as of January 31, Statement on Form S-1 filed
1995 among HPSC Bravo Funding January 30, 1997
Corp., Triple-A Funding Corporation,
as Lender, and CapMAC, as
Administrative Agent and as
Collateral Agent
10.19 Lease Receivables Purchase Incorporated by reference to Exhibit 10.1
Agreement dated as of June 27, to HPSC's Quarterly Report on Form 10-Q for
1997 among HPSC Capital the quarter ended September 30, 1997.
Funding, Inc., as Seller, HPSC,
Inc. as Servicer and Custodian,
EagleFunding Capital
Corporation as Purchaser and
BankBoston Securities, Inc. as
Deal Agent.
10.20 Appendix A to EagleFunding Incorporated by reference to Exhibit 10.2
Purchase Agreement (Definitions to HPSC's Quarterly Report on Form 10-Q for
List Attached). the quarter ended September 30, 1997
10.21 Purchase and Contribution Incorporated by reference to Exhibit 10.3
Agreement dated as of June 27, to HPSC's Quarterly Report on Form 10-Q for
1997 Between HPSC Capital the quarter ended September 30, 1997
Funding, Inc. as the Buyer, and
HPSC, Inc. as the Originator and
the Servicer.
10.22 Undertaking to Furnish Certain Incorporated by reference to Exhibit 10.4
Copies of Omitted Exhibits to to HPSC's Quarterly Report on Form 10-Q for
Exhibit 10.19 and 10.21 hereof. the quarter ended September 30, 1997
10.23 Indenture dated as of March 20, Incorporated by reference to Exhibit 10.28
1997 between HPSC, Inc. and to HPSC's Annual Report on Form 10-K for the
State Street Bank and Trust fiscal year ended December 31, 1997
Company, as Trustee
*10.24 Amended and Restated HPSC, Incorporated by reference to Exhibit 10.27
Inc. 1995 Stock Incentive Plan to HPSC's Annual Report on Form 10-K for
the fiscal year ended December 31, 1995
*10.25 Stock Option grant to Lowell P. Incorporated by reference to Exhibit 10.28
Weicker effective December 7, to HPSC's Annual Report on Form 10-K for
1995. the fiscal year ended
</TABLE>
20
<PAGE> 22
December 31, 1995
*10.26 Amended and Restated Stock Filed herewith
Loan Program
13.1 1997 Annual Report to Filed herewith
Stockholders
21.1 Subsidiaries of HPSC, Inc. Filed herewith
23.1 Consent of Deloitte & Touche Filed herewith
LLP
23.2 Consent of Coopers & Lybrand Filed herewith
L.L.P.
27.1 HPSC, Inc. Financial Data Filed herewith
Schedule
Copies of Exhibits may be obtained for a nominal charge by writing to:
INVESTOR RELATIONS
HPSC, INC.
60 STATE STREET
BOSTON, MASSACHUSETTS 02019
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the fiscal year
covered by this report.
21
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, HPSC, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HPSC, Inc.
By: /s/ John W. Everets
-------------------------------
Dated: March 27, 1998 John W. Everets
Chairman, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of HPSC, Inc.
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Dated
- ---- ----- -----
<S> <C> <C>
By: /s/ John W. Everets Chairman, Chief Executive March 27, 1998
--------------------------------- Officer and Director (Principal
John W. Everets Executive Officer)
By: /s/ Rene Lefebvre Vice President, Chief March 27, 1998
--------------------------------- Financial Officer and
Rene Lefebvre Treasurer (Principal Financial
Officer)
By: /s/ Raymond R. Doherty President and Director March 27, 1998
---------------------------------
Raymond R. Doherty
By: /s/ Dennis J. McMahon Vice President, Administration March 27, 1998
--------------------------------- (Principal Accounting Officer)
Dennis J. McMahon
By: /s/ Dollie A. Cole Director March 27, 1998
---------------------------------
Dollie A. Cole
By: /s/ Thomas M. McDougal Director March 24, 1998
---------------------------------
Thomas M. McDougal
By: /s/ Samuel P. Cooley Director March 23, 1998
---------------------------------
Samuel P. Cooley
By: /s/ Joseph A. Biernat Director March 27, 1998
---------------------------------
Joseph A. Biernat
By: /s/ J. Kermit Birchfield Director March 27, 1998
---------------------------------
J. Kermit Birchfield
By: /s/ Lowell P. Weicker, Jr. Director March 27, 1998
---------------------------------
Lowell P. Weicker, Jr.
</TABLE>
22
<PAGE> 1
9/29/97
HPSC, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE JANUARY 1, 1997
<PAGE> 2
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.
<PAGE> 3
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.
(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 Plan Years of Service,
provided that the Participant's Compensation during his or her final Plan 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 Plan 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:
-2-
<PAGE> 4
(a) The acquisition by any individual, entity or group (within the
meaning of Sections 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934
(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 Company's common stock (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 Effective Date, 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 Effective
Date 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
-3-
<PAGE> 5
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)
-4-
<PAGE> 6
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 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
-5-
<PAGE> 7
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. and, in the event of a Change in Control, each
successor to and assign of HPSC, Inc.
2.11 Compensation. The total salary plus bonuses and similar types of
remuneration earned by a Participant for personal services rendered to an
Employing Company for any Plan
-6-
<PAGE> 8
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 (a) employer contributions to any employee
benefit plan (including without limitation this Plan) and all benefits provided
under any such plan and (b) the value of or any income from any types of
equity-based compensation programs (including without limitation stock options,
stock appreciation rights and restricted stock).
2.12 Compensation Committee. The compensation committee of the Board.
2.13 Disability. A Participant's inability, on account of a physical or
mental impairment or condition, substantially to perform the material duties of
his position as an Executive Employee despite reasonable accommodations made or
proposed by his Employing Company; provided that such inability and impairment
or condition (a) are established to the satisfaction of the Board and (b) have
been (or are expected by the Board to be) of long or indefinite duration.
2.14 Early Retirement Date. The first of any month following a
Participant's 62nd birthday and prior to his or her Normal Retirement Date.
2.15 Effective Date. The date specified as such in Section 1.2 above.
2.16 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
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<PAGE> 9
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.
2.17 Entry Date. The date that an Executive Employee becomes a Participant
in the Plan as provided in Article III.
2.18 ERISA. Public Law No. 93-406, the Employee Retirement Income
Security Act of 1974, as amended, and including all regulations thereunder.
2.19 Executive Employee. An Employee who has been designated by his
Employing Company as an officer with senior management responsibilities.
2.20 Good Cause. A Participant's (a) willful and continuing failure
substantially to perform duties assigned in good faith from time to time by his
Employing Company (provided that such failure is not solely the result of (i) a
Disability or (ii) a leave of absence either granted in writing by his Employing
Company or guaranteed by applicable law or (iii) some other reason agreed to in
advance by the Board); or (b) willful conduct which is demonstrably and
materially injurious to any Employing Company; or (c) conviction of a felony or
a misdemeanor involving the theft, misappropriation or embezzlement of property
of any Employing Company.
For purposes of this definition, the term Board shall include the board of
directors (or body with a similar function) of the Company's successor following
a Change in Control.
2.21 Gross-Up Payment. A payment made to or on behalf of a Participant
pursuant to Section 4.2 of this Plan.
2.22 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.
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<PAGE> 10
2.23 Normal Retirement Date. The first day of the next month following a
Participant's 65th birthday.
2.24 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 which could have been obtained by the Participant
pursuant to the terms of the 401(k) Plan and applicable law
(including without limitation operational contribution limits
resulting from application of the rules of Code Sections 401(k),
401(m) and 415), regardless of the amount of such contributions
actually made, AND ADDING deemed interest at a rate of seven
percent compounded annually (but prorated for
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<PAGE> 11
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 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
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<PAGE> 12
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.
2.25 Participant. Any Executive Employee who is covered by this Plan in
accordance with the provisions of Article III.
2.26 Plan. The HPSC, Inc. Supplemental Executive Retirement Plan, as
stated herein and as amended or supplemented from time to time.
2.27 Plan Administrator. The committee appointed to administer the plan
pursuant to Section 10.1 of this Plan.
2.28 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.
2.29 Separation from Service. The termination of a Participant's Service
for any reason, including the death of the Participant.
2.30 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.
2.31 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.
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<PAGE> 13
2.32 Trust. The trust created under the HPSC, Inc. Supplemental Executive
Retirement Plan Trust Agreement in the event of a Change in Control.
2.33 Vested Benefit. The portion of a Participant's Accrued Benefit
calculated in accordance with Section 5.2 of this Plan.
2.34 Vesting Percentage. The percentage determined in accordance with
Section 5.1 of this Plan.
2.35 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 designation as a Participant on
Schedule 3.1. If a Participant's Service is subsequently broken and he is later
reemployed as an Executive Employee, he shall resume his participation in the
Plan only if he is again designated as a
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<PAGE> 14
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.
4.2 Gross-Up Payments.
(a) Calculation. In the event that any payment or benefit received or to
be received by or on behalf of a Participant pursuant to the terms of this Plan
(the "Plan Payments") or to be received by or on behalf of the Participant in
connection with his or her Separation from Service pursuant to any plan or
arrangement or other agreement with the Company (or any affiliate that would be
an Employing Company upon adoption of this Plan) ("Other Payments" and, together
with the Plan Payments, the "Payments") would be subject to the excise tax (the
"Excise tax") imposed by Code Section 4999, as determined below, the Company
shall pay to or on behalf of the Participant at the time specified in paragraph
(b) of this Section 4.2, an additional amount (the "Gross-Up Payment") such that
the net amount retained by the Participant or other recipient (the "Payee"),
after deduction of the Excise Tax on all Payments and any federal, state and
local income tax and Excise Tax upon the payment provided for by this paragraph
(a), and any interest, penalties or additions to tax payable by him or her with
respect thereto, shall be equal to the total present value (determined at a
discount rate of seven percent compounded annually) of
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<PAGE> 15
all of the Payments at the time such Payments are to be made. For purposes of
determining whether any of the Payments will be subject to the Excise Tax and
the amounts of such Excise Tax, (i)(I) the total amount of the Payments shall be
treated as "parachute payments" within the meaning of Code Section 280G(b)(2),
and (II) all "excess parachute payments" within the meaning of Code Section
280G(b)(1) shall be treated as subject to the Excise Tax, except to the extent
that, in the opinion of independent tax counsel selected by the Company's
independent auditors and reasonably acceptable to the Payee ("Tax Counsel"), a
Payment (in whole or in part) does not constitute a "parachute payment" within
the meaning of Code Section 280(b)(2), or such "excess parachute payments" (in
whole or in part) are not subject to the Excise Tax, (ii) the amount of the
Payments that shall be treated as subject to the Excise Tax shall be equal to
the lesser of (I) the total amount of the Payments or (II) the amount of "excess
parachute payments" within the meaning of Code Section 280(b)(1) (after applying
clause (i) hereof), and (iii) the value of any noncash benefits or any deferred
payment or benefit shall be determined by Tax Counsel in accordance with the
principles of Code Sections 280G(d)(3) and (4). For purposes of determining the
amount of the Gross-Up Payment, the Payee shall be deemed to pay federal income
tax at the highest marginal rates of federal income taxation applicable to
individuals in the calendar year in which the Gross-Up Payment is to be made and
state and local income taxes at the highest marginal rates of taxation
applicable to individuals as are in effect in the state and locality of his or
her residence in the calendar year in which the Gross-Up Payment is to be made,
net of the maximum reduction in federal income taxes that can be obtained from
deduction of such state and local taxes, taking into account any limitations
applicable to individuals subject to federal income tax at the highest marginal
rates.
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<PAGE> 16
(b) Payment. The Gross-Up Payments provided for in paragraph (a) of this
Section 4.2 shall be made upon the earlier of (i) the payment to the Payee of
any Payment or (ii) the imposition upon him or her or payment by him or her of
any Excise Tax.
(c) Adjustment. If it is established pursuant to a final determination of
a court or an Internal Revenue Service proceeding or the opinion of Tax Counsel
that the Excise Tax is less than the amount taken into account under paragraph
(a) of this Section 4.2, the Payee shall repay to the Company within five days
of his or her receipt of notice of such final determination or opinion the
portion of the Gross-Up Payment attributable to such reduction (plus the portion
of the Gross-Up Payment attributable to the excise tax and federal, state and
local income tax imposed on the Gross-Up Payment being repaid by him or her if
such repayment results in a reduction in Excise Tax or a federal, state and
local income tax deduction) plus any interest received by him or her on the
amount of such repayment. If it is established pursuant to a final determination
of a court or an Internal Revenue Service proceeding or the opinion of Tax
Counsel that the Excise Tax exceeds the amount taken into account under
paragraph (a) of this Section 4.2 (including by reason of any payment the
existence or amount of which cannot be determined at the time of the Gross-Up
Payment), the Company shall make an additional Gross-Up Payment in respect of
such excess within five days of the Company's receipt of notice of such final
determination or opinion.
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 any of the following events occurs: (i) a Change in
Control unless such Change in Control was approved by a resolution adopted by at
least two-thirds of the members of the Incumbent Board
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<PAGE> 17
(as defined in Section 2.8), or (ii) the Participant's Separation from Service
either involuntarily without Good Cause or on account of death or Disability and
(b) otherwise the percentage specified in the following table for the number of
Years of Benefit Service credited to the Participant as of such date:
<TABLE>
<CAPTION>
Years of Years of
Benefit Service Vesting Percentage Benefit Service Vesting Percentage
--------------- ------------------ --------------- ------------------
<S> <C> <C> <C>
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
</TABLE>
5.2 Vested Benefit. A Participant's Vested Benefit under this Plan shall
be the product of his Accrued Benefit multiplied by his 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
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<PAGE> 18
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.
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.
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<PAGE> 19
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.
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<PAGE> 20
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 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.
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<PAGE> 21
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.
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
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<PAGE> 22
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.
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<PAGE> 23
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
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,
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<PAGE> 24
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) 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.
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<PAGE> 25
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.
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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 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
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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
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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
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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.
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.
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IN WITNESS WHEREOF, the Company has caused this Plan to be executed under
seal by its duly authorized representative this ______ day of
__________________, 1997.
HPSC, INC.
By: ______________________________
Title:
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<PAGE> 31
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 OF RETROACTIVE CREDIT FOR YEARS OF BENEFIT
PARTICIPANT PARTICIPATION 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> 32
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 Restricted Coverage....................................................1
1.5 Plan Unfunded..........................................................1
ARTICLE II- DEFINITIONS......................................................1
2.1 Accrued Benefit........................................................2
2.2 Actuarial Equivalent...................................................2
2.3 Actuary................................................................2
2.4 Average Final Compensation.............................................2
2.5 Beneficiary............................................................3
2.6 Benefit Commencement Date..............................................3
2.7 Board..................................................................3
2.8 Change in Control......................................................3
2.9 Code...................................................................7
2.10 Company...............................................................7
2.11 Compensation..........................................................7
2.12 Compensation Committee................................................7
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2.13 Disability............................................................8
2.14 Early Retirement Date.................................................8
2.15 Effective Date........................................................8
2.16 Employing Company.....................................................8
2.17 Entry Date............................................................8
2.18 ERISA.................................................................9
2.19 Executive Employee....................................................9
2.20 Good Cause............................................................9
2.21 Gross-Up Payment......................................................9
2.22 Net Worth Condition...................................................9
2.23 Normal Retirement Date...............................................10
2.24 Other Retirement Benefits............................................10
2.25 Participant..........................................................12
2.26 Plan.................................................................12
2.27 Plan Administrator...................................................12
2.28 Plan Year............................................................12
2.29 Separation from Service..............................................12
2.30 Service..............................................................12
2.31 Target Retirement Benefit............................................12
2.32 Trust................................................................13
2.33 Vested Benefit.......................................................13
2.34 Vesting Percentage...................................................13
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2.35 Year of Benefit Service..............................................13
ARTICLE III - PARTICIPATION.................................................13
3.1 Eligibility Requirements..............................................13
3.2 Entry and Re-entry Into the Plan......................................14
ARTICLE IV - RETIREMENT BENEFITS............................................14
4.1 Amount, Timing and Form of Benefits...................................14
4.2 Gross-Up Payments.....................................................14
(a) Calculation.........................................................14
(b) Payment.............................................................16
(c) Adjustment..........................................................16
ARTICLE V - VESTING AND FORFEITURES.........................................17
5.1 Vesting Percentage....................................................17
5.2 Vested Benefit........................................................18
5.3 Forfeitures...........................................................18
5.4 Amendment of Vesting Provisions.......................................18
ARTICLE VI - ACCRUED BENEFITS...............................................18
6.1 Determination of Accrued Benefit......................................18
6.2 Adjustment for Early or Postponed Retirement..........................19
ARTICLE VII - BENEFIT COMMENCEMENT DATE.....................................19
7.1 Eligibility for Payment...............................................19
7.2 Benefit Commencement Date............................................19
(a) Time of Commencement................................................19
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(b) Benefit Commencement Election.......................................20
7.3 Hardship Withdrawals..................................................20
(a) Definition..........................................................20
(b) Procedure...........................................................21
ARTICLE VIII - BENEFIT FORMS AVAILABLE......................................22
8.1 Forms of Benefit for Participants.....................................22
(a) Normal Form of Benefits.............................................22
(b) Installment Benefit Election........................................22
8.2 Forms of Benefit for Surviving Spouse Beneficiaries...................23
(a) Normal Form of Benefit..............................................23
(b) Installment Benefit Election........................................23
8.3 Form of Benefit for Other Beneficiaries...............................23
ARTICLE IX - BENEFICIARIES..................................................24
9.1 Designation..........................................................24
9.2 Failure to Designate a Beneficiary....................................24
ARTICLE X - PLAN ADMINISTRATION.............................................24
10.1 Administrative Committee.............................................24
10.2 Indemnification......................................................25
10.3 Ownership of Assets..................................................25
10.4 Expenses.............................................................26
ARTICLE XI - TRUST AGREEMENT; LIQUIDITY FUND................................26
11.1 Trust Fund...........................................................26
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11.2 Liquidity Fund.......................................................26
ARTICLE XII - AMENDMENT OF THE PLAN.........................................26
12.1 Amendment............................................................27
12.2 Effect of Amendments on Vesting......................................27
ARTICLE XIII - TERMINATION OF THE PLAN......................................27
13.1 Termination..........................................................27
13.2 Benefits After Plan Termination......................................27
ARTICLE XIV - MISCELLANEOUS.................................................28
14.1 Limitations of Rights; Employment Relationship.......................28
14.2 Determination of Benefits, Claims, Procedure and Administration......28
(a) Claim...............................................................28
(b) Decision on Claim...................................................28
(c) Request for Review..................................................29
(d) Review of Decisions.................................................29
14.3 Arbitration..........................................................30
14.4 Non-Assignability of Benefits........................................30
14.5 Facility of Payments.................................................30
14.6 Obligations to Withhold and Pay Taxes................................31
14.7 Representations......................................................31
14.8 Severability.........................................................31
14.9 Applicable Law.......................................................31
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- --------------------------------------------------------------------------------
THIRD
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of March 16, 1998
among
HPSC, INC.
and
BANKBOSTON, N.A.,
individually and as Agent
and
THE BANKS NAMED HEREIN
with
BANCBOSTON SECURITIES INC.
as Arranger
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C>
1. DEFINITIONS AND RULES OF INTERPRETATION.......................................................... 1
1.1. Definitions........................................................................... 1
1.2. Rules of Interpretation............................................................... 18
2. THE REVOLVING CREDIT FACILITY.................................................................... 20
2.1. Commitment to Lend.................................................................... 20
2.2. Commitment Fee........................................................................ 20
2.3. Reduction of Total Commitment......................................................... 20
2.4. The Revolving Credit Notes............................................................ 21
2.5. Interest on Revolving Credit Loans.................................................... 21
2.6. Requests for Revolving Credit Loans................................................... 23
2.7. Conversion Options.................................................................... 23
2.7.1. Conversion to Different Type of Revolving Credit Loan...................... 23
2.7.2. Continuation of Type of Revolving Credit Loan.............................. 24
2.7.3. Eurodollar Rate Loans...................................................... 24
2.8. Funds for Revolving Credit Loans...................................................... 24
2.8.1. Funding Procedures......................................................... 24
2.8.2. Advances by Agent.......................................................... 25
2.9. Change in Borrowing Base.............................................................. 25
3. REPAYMENT OF THE REVOLVING CREDIT LOANS.......................................................... 25
3.1. Maturity.............................................................................. 25
3.2. Mandatory Repayments of Revolving Credit Loans........................................ 25
3.3. Optional Prepayments of Revolving Credit Loans........................................ 26
4. THE TERM LOAN.................................................................................... 26
4.1. Conversion of Revolving Credit Loans; the Term Loan................................... 26
4.2. The Term Notes........................................................................ 27
4.3. Repayments of the Term Loan........................................................... 27
4.4. Optional Prepayment of Term Loan...................................................... 27
4.5. Interest on Term Loan................................................................. 28
4.5.1. Notification by Borrower................................................... 28
4.5.2. Amounts, etc. ............................................................. 28
5. LETTERS OF CREDIT................................................................................ 28
5.1. Letter of Credit Commitments.......................................................... 28
5.1.1. Commitment to Issue Letters of Credit...................................... 28
5.1.2. Letter of Credit Applications.............................................. 28
5.1.3. Terms of Letters of Credit................................................. 29
5.1.4. Reimbursement Obligations of Banks......................................... 29
5.1.5. Participations of Banks.................................................... 29
5.2. Reimbursement Obligation of the Borrower.............................................. 29
5.3. Letter of Credit Payments............................................................. 30
5.4. Obligations Absolute.................................................................. 30
5.5. Reliance by Issuer.................................................................... 31
5.6. Letter of Credit Fee.................................................................. 31
6. CERTAIN GENERAL PROVISIONS....................................................................... 32
</TABLE>
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6.1. Fees.................................................................................. 32
6.2. Funds for Payments.................................................................... 32
6.2.1. Payments to Agent.......................................................... 32
6.2.2. No Offset, Etc. ........................................................... 32
6.3. Computations.......................................................................... 32
6.4. Inability to Determine Eurodollar Rate................................................ 33
6.5. Illegality............................................................................ 33
6.6. Additional Costs, etc. ............................................................... 33
6.7. Capital Adequacy...................................................................... 35
6.8. Certificate........................................................................... 35
6.9. Indemnity............................................................................. 35
6.10. Overdue Amounts...................................................................... 36
7. SECURITY AND GUARANTIES.......................................................................... 36
7.1. Security of Borrower.................................................................. 36
7.2. Guaranty and Security of ACFC......................................................... 36
8. REPRESENTATIONS AND WARRANTIES................................................................... 36
8.1. Corporate Authority................................................................... 36
8.1.1. Incorporation; Good Standing............................................... 36
8.1.2. Authorization.............................................................. 36
8.1.3. Enforceability............................................................. 37
8.2. Governmental Approvals................................................................ 37
8.3. Title to Properties; Leases........................................................... 37
8.4. Financial Statements and Projections.................................................. 37
8.4.1. Financial Statements....................................................... 37
8.4.2. Projections................................................................ 38
8.5. No Material Adverse Changes, etc. .................................................... 38
8.6. Franchises, Patents, Copyrights, etc. ................................................ 38
8.7. Litigation............................................................................ 38
8.8. No Materially Adverse Contracts, etc.................................................. 39
8.9. Compliance With Other Instruments, Laws, etc. ........................................ 39
8.10. Tax Status........................................................................... 39
8.11. No Event of Default.................................................................. 39
8.12. Holding Company and Investment Company Acts. ........................................ 39
8.13. Absence of Financing Statements, etc. ............................................... 39
8.14. Perfection of Security Interest...................................................... 40
8.15. Certain Transactions................................................................. 40
8.16. Employee Benefit Plans............................................................... 40
8.16.1. In General................................................................ 40
8.16.2. Terminability of Welfare Plans............................................ 40
8.16.3. Guaranteed Pension Plans.................................................. 41
8.16.4. Multiemployer Plans....................................................... 41
8.17. Regulations U and X. ................................................................ 41
8.18. Environmental Compliance............................................................. 41
8.19. Subsidiaries, etc. .................................................................. 43
8.20. Bank Accounts........................................................................ 43
8.21. Eligible Accounts Receivable, Equipment and Contracts................................ 43
8.22. Subordinated Debt.................................................................... 46
</TABLE>
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8.23. Year 2000 Compliance................................................................. 46
9. AFFIRMATIVE COVENANTS OF THE BORROWER............................................................ 47
9.1. Punctual Payment...................................................................... 47
9.2. Maintenance of Office................................................................. 47
9.3. Records and Accounts.................................................................. 47
9.4. Financial Statements, Certificates and Information.................................... 47
9.5. Notices............................................................................... 49
9.5.1. Defaults................................................................... 49
9.5.2. Environmental Events....................................................... 49
9.5.3. Notification of Claims Against Collateral.................................. 50
9.5.4. Notice of Litigation and Judgments......................................... 50
9.6. Corporate Existence; Maintenance of Properties........................................ 50
9.7. Insurance............................................................................. 50
9.8. Taxes................................................................................. 51
9.9. Inspection of Properties and Books, etc. ............................................. 51
9.9.1. General.................................................................... 51
9.9.2. Collateral Reports......................................................... 51
9.9.3. Communication with Accountants............................................. 52
9.10. Compliance with Laws, Contracts, Licenses, and Permits............................... 52
9.11. Employee Benefit Plans............................................................... 52
9.12. Use of Proceeds...................................................................... 53
9.13. Bank Accounts........................................................................ 53
9.14. Credit Policies...................................................................... 53
9.15. Perfected Security Interest under Contracts.......................................... 53
9.16. Performance and Compliance with Receivables and Contracts............................ 53
9.17. Further Assurances................................................................... 53
10. CERTAIN NEGATIVE COVENANTS OF THE BORROWER...................................................... 54
10.1. Restrictions on Indebtedness......................................................... 54
10.2. Restrictions on Liens................................................................ 55
10.3. Restrictions on Investments.......................................................... 57
10.4. Distributions........................................................................ 58
10.5. Merger, Consolidation and Disposition of Assets...................................... 58
10.5.1. Mergers and Acquisitions.................................................. 58
10.5.2. Disposition of Assets..................................................... 58
10.6. Sale and Leaseback................................................................... 59
10.7. Compliance with Environmental Laws................................................... 59
10.8. Other Debt........................................................................... 59
10.9. Employee Benefit Plans............................................................... 59
10.10. Bank Accounts....................................................................... 60
10.11. Securitization Subsidiaries Stock................................................... 60
10.12. Change in Credit Policy............................................................. 60
11. FINANCIAL COVENANTS OF THE BORROWER............................................................. 60
11.1. Debt Ratio........................................................................... 60
11.2. Consolidated Tangible Net Worth...................................................... 60
11.3. Interest Coverage.................................................................... 61
11.4. Capital Expenditures................................................................. 61
</TABLE>
<PAGE> 5
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11.5. Reissued Customer Receivables to Gross Customer Receivables.......................... 61
11.6. Contractually Delinquent Customer Receivables to Gross Customer Receivables Ratio.... 61
11.7. Reserves to Contractually Delinquent Customer Receivables............................ 61
11.8. Allowance for Doubtful Accounts...................................................... 61
11.9. Collections to Billings.............................................................. 61
11.10. Leases.............................................................................. 61
11.11. Equipment Supplier Concentration.................................................... 62
12. CLOSING CONDITIONS.............................................................................. 62
12.1. Loan Documents....................................................................... 62
12.2. Certified Copies of Charter Documents................................................ 62
12.3. Corporate Action..................................................................... 62
12.4. Incumbency Certificate............................................................... 62
12.5. Validity of Liens.................................................................... 63
12.6. Perfection Certificates and UCC Search Results....................................... 63
12.7. Certificates of Insurance............................................................ 63
12.8. Bank Agency Agreements............................................................... 63
12.9. Borrowing Base Report................................................................ 63
12.10. Accounts Receivable Aging Report.................................................... 63
12.11. Solvency Certificate................................................................ 64
12.12. Opinion of Counsel.................................................................. 64
13. CONDITIONS TO ALL BORROWINGS.................................................................... 64
13.1. Representations True; No Event of Default............................................ 64
13.2. No Legal Impediment.................................................................. 64
13.3. Governmental Regulation.............................................................. 64
13.4. Proceedings and Documents............................................................ 64
13.5. Borrowing Base Report................................................................ 65
14. EVENTS OF DEFAULT; ACCELERATION; ETC. .......................................................... 65
14.1. Events of Default and Acceleration................................................... 65
14.2. Termination of Commitments........................................................... 69
14.3. Remedies............................................................................. 69
14.4. Distribution of Collateral Proceeds.................................................. 70
15. SETOFF.......................................................................................... 70
16. THE AGENT....................................................................................... 71
16.1. Authorization........................................................................ 71
16.2. Employees and Agents................................................................. 72
16.3. No Liability......................................................................... 72
16.4. No Representations................................................................... 72
16.5. Payments............................................................................. 73
16.5.1. Payments to Agent......................................................... 73
16.5.2. Distribution by Agent..................................................... 73
16.5.3. Delinquent Banks.......................................................... 74
16.6. Holders of Notes..................................................................... 74
16.7. Indemnity............................................................................ 74
16.8. Agent as Bank........................................................................ 75
</TABLE>
<PAGE> 6
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16.9. Resignation.......................................................................... 75
16.10. Notification of Defaults and Events of Default...................................... 75
16.11. Duties in the Case of Enforcement................................................... 75
17. EXPENSES........................................................................................ 76
18. INDEMNIFICATION................................................................................. 76
19. SURVIVAL OF COVENANTS, ETC...................................................................... 77
20. ASSIGNMENT AND PARTICIPATION.................................................................... 77
20.1. Conditions to Assignment............................................................. 77
20.2. Certain Representations and Warranties; Limitations; Covenants....................... 78
20.3. Register............................................................................. 79
20.4. New Notes............................................................................ 79
20.5. Participations....................................................................... 80
20.6. Disclosure........................................................................... 80
20.7. Assignee or Participant Affiliated with the Borrower................................. 80
20.8. Miscellaneous Assignment Provisions.................................................. 81
20.9. Assignment by Borrower............................................................... 81
21. NOTICES, ETC. .................................................................................. 81
22. GOVERNING LAW................................................................................... 82
23. HEADINGS........................................................................................ 82
24. COUNTERPARTS.................................................................................... 83
25. ENTIRE AGREEMENT, ETC. ......................................................................... 83
26. WAIVER OF JURY TRIAL............................................................................ 83
27. CONSENTS, AMENDMENTS, WAIVERS, ETC. ............................................................ 83
28. SEVERABILITY.................................................................................... 84
29. TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION................................................... 84
29.1. Sharing of Information with Section 20 Subsidiary.................................... 84
29.2. Confidentiality...................................................................... 84
29.3. Prior Notification................................................................... 85
29.4. Other................................................................................ 85
30. TRANSITIONAL ARRANGEMENTS....................................................................... 85
30.1. Prior Loan Agreement Superseded...................................................... 85
30.2. Return and Cancellation of Notes..................................................... 85
30.3. Interest and Fees Under Superseded Agreement......................................... 85
30.4. No Claims Under Prior Loan Agreement................................................. 86
30.5. Interbank Settlements................................................................ 86
</TABLE>
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SCHEDULES
Schedule 1 Banks
Schedule 8.3 Leases
Schedule 8.4.1 Contingent Liabilities
Schedule 8.7 Litigation
Schedule 8.18 Environmental Matters
Schedule 8.19 Subsidiaries
Schedule 8.20 Bank Accounts
Schedule 10.1 Existing Indebtedness
Schedule 10.2(g) Existing Liens
Schedule 10.3 Existing Investments
EXHIBITS
Exhibit A Form of Borrowing Base Report
Exhibit B-1 Form of Revolving Credit Note
Exhibit B-2 Form of Term Note
Exhibit C Form of Loan Request
Exhibit D Form of Compliance Certificate
Exhibit E Form of Security Agreement
Exhibit F Form of Assignment and Acceptance
Exhibit G Form of Guaranty
Exhibit H Form of Stock Pledge Agreement
Exhibit I Form of Agency Agreement
Exhibit J ACFC Credit Policy
<PAGE> 8
THIRD AMENDED AND RESTATED
CREDIT AGREEMENT
This THIRD AMENDED AND RESTATED CREDIT AGREEMENT is made as of March 16,
1998, by and among HPSC, INC. (the "Borrower" or "HPSC"), a Delaware corporation
having its principal place of business at 60 State Street, Boston, Massachusetts
02109, AMERICAN COMMERCIAL FINANCE COMPANY (the "Guarantor" or "ACFC"), a
Delaware corporation (solely for the specific purposes herein set forth),
BANKBOSTON, N.A. (f/k/a The First National Bank of Boston), a national banking
association, and the other lending institutions listed on SCHEDULE 1, and
BANKBOSTON, N.A. in its capacity as Agent for itself and such other lending
institutions.
1. DEFINITIONS AND RULES OF INTERPRETATION.
1.1. DEFINITIONS. The following terms shall have the meanings set forth in
this ss.1 or elsewhere in the provisions of this Credit Agreement referred to
below:
ACFC. American Commercial Finance Corporation, a Delaware corporation and
wholly-owned Subsidiary of the Borrower.
ACFC CREDIT POLICY. ACFC's criteria for the extension of credit for
receivables and contracts as set forth on EXHIBIT J attached hereto and made a
part hereof.
ACFC RECEIVABLE. An Account Receivable originated by ACFC pursuant to
ACFC's Credit Policy.
ACCOUNTS RECEIVABLE. All rights of the Borrower or ACFC to payment for and
under a Customer Receivable or a Practice Receivable, except for that portion of
the sum of money or other proceeds due thereon that relate to sales, use or
property taxes in conjunction with such transactions, recorded on books of
account in accordance with generally accepted accounting principles.
ADJUSTMENT DATE. See ss.2.5.
AFFILIATE. Any Person that would be considered to be an affiliate of the
Borrower under Rule 144(a) of the Rules and Regulations of the Securities and
Exchange Commission, as in effect on the date hereof, if the Borrower were
issuing securities.
AGENT. BankBoston, N.A. acting as agent for the Banks.
AGENT'S SPECIAL COUNSEL. Bingham Dana LLP or such other counsel as may be
approved by the Agent.
APPLICABLE BASE RATE MARGIN. See ss.2.5.
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APPLICABLE COMMITMENT FEE RATE. The commitment fee rate determined pursuant
to ss.2.5.
APPLICABLE EURODOLLAR RATE MARGIN. See ss.2.5.
APPLICABLE MARGIN. See ss.2.5.
APPLICABLE RATE. See ss.5.6.
ASSIGNMENT AND ACCEPTANCE. See ss.20.1.
BALANCE SHEET DATE. December 31, 1996.
BANKS. BKB and the other lending institutions listed on SCHEDULE 1 hereto
and any other Person who becomes an assignee of any rights and obligations of a
Bank pursuant to ss.20.
BASE RATE. The higher of (i) the annual rate of interest announced from
time to time by BKB at its head office in Boston, Massachusetts, as its "base
rate" or (ii) one-half of one percent (1/2%) above the Federal Funds Effective
Rate. For the purposes of this definition, "Federal Funds Effective Rate" shall
mean, for any day, the rate per annum equal to the weighted average of the rates
on overnight federal funds transactions with members of the Federal Reserve
System arranged by federal funds brokers, as published for such day (or if such
day is not a Business Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York, or, if such rate is not so published for any day that
is a Business Day, the average of the quotations for such day on such
transactions received by the Agent from three funds brokers of recognized
standing selected by the Agent.
BASE RATE LOANS. Loans bearing interest calculated by reference to the Base
Rate.
BILLINGS. The aggregate amount of invoices rendered by the Borrower or any
of its Subsidiaries (other than the Securitization Subsidiaries and Credident)
to any Customer during the relevant period.
BKB. BankBoston, N.A., a national banking association, in its individual
capacity.
BORROWER. As defined in the preamble hereto.
BORROWING BASE. At the relevant time of reference thereto, an amount
determined by the Agent by reference to the most recent Borrowing Base Report
delivered to the Banks and the Agent pursuant to ss.9.4(e), which is equal to
the sum of the following:
(i) 80% of Eligible Accounts Receivable; plus
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(ii) 50% of the Residual Value of Equipment, provided, that the amount
included in the Borrowing Base pursuant to this clause (ii) shall
not exceed $2,000,000; minus
(iii) the Reserve Amount;
PROVIDED, HOWEVER, that (x) ACFC Receivables included in the Borrowing Base
shall not comprise more than 50% of the Borrowing Base and (y) the sum of (A)
preapproved specific use personally guaranteed line of credit receivables
included in the Borrowing Base and (B) Practice Receivables shall not exceed
$20,000,000.
BORROWING BASE REPORT. A Borrowing Base Report signed by the chief
financial officer of the Borrower and in substantially the form of EXHIBIT A
hereto.
BRAVO. HPSC Bravo Funding Corp., a Delaware corporation and wholly-owned
subsidiary of the Borrower.
BRAVO CREDIT AGREEMENT. The lease receivables-backed credit agreement dated
as of January 31, 1995 by and among Bravo, Triple-A One Funding Corporation, a
Delaware corporation and Capital Markets Assurance Corporation, a New York stock
insurance company, as amended by Amendment No. 1 dated as of December 18, 1995
and Amendment No. 2 dated as of October 18, 1996.
BRAVO EVENT OF TERMINATION. Any event or condition identified as an "Event
of Termination" in Section 7.01 of the Bravo Purchase Agreement.
BRAVO FACILITY DOCUMENTS. Collectively, the Bravo Purchase Agreement, the
Bravo Credit Agreement and all other agreements, documents and instruments
entered into pursuant thereto or in connection therewith.
BRAVO PURCHASE AGREEMENT. The Purchase and Contribution Agreement dated as
of January 31, 1995 by and between Bravo and the Borrower, as amended by
Amendment No. 1 dated as of December 18, 1995 and Amendment No. 2 dated as of
October 18, 1996.
BRAVO TRANSFERRED ASSETS. The accounts, chattel paper, instruments, and
other assets related thereto, comprised in the Collateral which are sold or
otherwise transferred to Bravo pursuant to the Bravo Purchase Agreement.
BRAVO WIND-DOWN EVENT. Any event or condition identified as a "Wind-Down
Event" in Section 7.01 of the Bravo Credit Agreement.
BUSINESS DAY. Any day on which banking institutions in Boston,
Massachusetts are open for the transaction of commercial banking business and,
in the case of Eurodollar Rate Loans, also a day which is a Eurodollar Business
Day.
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CAPITAL. HPSC Capital Funding, Inc., a Delaware corporation and
wholly-owned subsidiary of the Borrower.
CAPITAL ASSETS. Fixed assets, both tangible (such as land, buildings,
fixtures, machinery and equipment) and intangible (such as patents, copyrights,
trademarks, franchises and good will); PROVIDED that Capital Assets shall not
include any item customarily charged directly to expense or depreciated over a
useful life of twelve (12) months or less in accordance with generally accepted
accounting principles as in effect as of the date of this Credit Agreement.
CAPITAL EVENT OF TERMINATION. Any event or condition identified as an
"Event of Termination" in Section 7.01 of the Capital Purchase Agreement.
CAPITAL EXPENDITURES. Amounts paid or indebtedness incurred by the Borrower
or any of its Subsidiaries in connection with the purchase or lease by the
Borrower or any of its Subsidiaries of Capital Assets (other than the purchase
of computer software) that would be required to be capitalized and shown on the
balance sheet of such Person in accordance with generally accepted accounting
principles as in effect as of the date of this Credit Agreement.
CAPITAL FACILITY DOCUMENTS. Collectively, the Capital Purchase Agreement,
the Capital Lease-Receivables Purchase Agreement and all other agreements,
documents and instruments entered into pursuant thereto or in connection
therewith.
CAPITALIZED LEASES. Leases (other than vehicle leases) under which the
Borrower or any of its Subsidiaries is the lessee or obligor, the discounted
future rental payment obligations under which are required to be capitalized on
the balance sheet of the lessee or obligor in accordance with generally accepted
accounting principles as in effect as of the date of this Credit Agreement.
CAPITAL LEASE-RECEIVABLES PURCHASE AGREEMENT. The lease receivables
purchase agreement dated as of June 27, 1997 by and among Capital, Borrower,
EagleFunding Capital Corporation, a Delaware corporation and BancBoston
Securities Inc., a Massachusetts corporation.
CAPITAL PURCHASE AGREEMENT. The Purchase and Contribution Agreement dated
as of June 27, 1997 by and between Capital and the Borrower.
CAPITAL TRANSFERRED ASSETS. The accounts, chattel paper, instruments, and
other assets related thereto, comprised in the Collateral which are sold or
otherwise transferred to Capital pursuant to the Capital Purchase Agreement.
CAPITAL WIND-DOWN EVENT. Any event or condition identified as a "Wind-Down
Event" in Section 7.01 of the Capital Lease-Receivables Purchase Agreement.
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CAPITAL SERVICING TERMINATION EVENT. Any event or condition identified as a
"Servicing Event of Default" under the Capital Facility Documents.
CERCLA. See ss.8.18.
CLOSING DATE. The first date on which the conditions set forth in ss.12
have been satisfied and any Loans are to be made.
CODE. The Internal Revenue Code of 1986.
COLLATERAL. All of the property, rights and interests of the Borrower and
ACFC that are or are intended to be subject to the security interests created by
the Security Documents.
COLLECTIONS. The aggregate amount of all payments in cash actually received
by the Borrower or ACFC on Accounts Receivable during the relevant period.
COMMITMENT. With respect to each Bank, the amount set forth on SCHEDULE 1
hereto as the amount of such Bank's commitment to make Loans to, and participate
in the issuance, extension and renewal of Letters of Credit for the account of,
the Borrower, as the same may be modified pursuant to ss.20.1 hereof, and as the
same may be reduced from time to time; or if such commitment is terminated
pursuant to the provisions hereof, zero.
COMMITMENT PERCENTAGE. With respect to each Bank, the percentage set forth
on SCHEDULE 1 hereto as such Bank's percentage of the aggregate Commitments of
all of the Banks, as the same may be modified pursuant to ss.20.1.
CONSOLIDATED or CONSOLIDATED. With reference to any term defined herein,
shall mean that term as applied to the accounts of the Borrower and certain of
its Subsidiaries, consolidated in accordance with generally accepted accounting
principles.
CONSOLIDATED EARNINGS BEFORE INTEREST AND TAXES. Consolidated Net Income
(or Deficit) for any period, after all expenses and other proper charges but
before payment or provision for any income taxes or interest expense for such
period, determined in accordance with generally accepted accounting principles.
CONSOLIDATED NET INCOME (OR DEFICIT). The consolidated net income (or
deficit) of the Borrower and its Subsidiaries (other than Credident) for any
period, after deduction of all expenses, taxes, and other proper charges,
determined in accordance with generally accepted accounting principles as in
effect on the date of this Credit Agreement, after eliminating therefrom all
extraordinary nonrecurring items of income.
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CONSOLIDATED TANGIBLE CAPITAL FUNDS. The sum of (a) Consolidated Tangible
Net Worth PLUS (b) Subordinated Debt.
CONSOLIDATED TANGIBLE NET WORTH. The excess of Consolidated Total Assets
over Consolidated Total Liabilities, and LESS the sum of:
(a) the total book value of all assets of the Borrower and its
Subsidiaries (other than Credident) properly classified as intangible
assets under generally accepted accounting principles, including such items
as good will, the purchase price of acquired assets in excess of the fair
market value thereof, trademarks, trade names, service marks, brand names,
copyrights, patents and licenses, and rights with respect to the foregoing;
PLUS
(b) all amounts representing any write-up in the book value of any
assets of the Borrower or its Subsidiaries (other than Credident) resulting
from a revaluation thereof subsequent to the Balance Sheet Date, excluding
adjustments to translate foreign assets and liabilities for changes in
foreign exchange rates made in accordance with Financial Accounting
Standards Board Statement No. 52; PLUS
(c) to the extent otherwise includable in the computation of
Consolidated Tangible Net Worth, any subscriptions receivable; PLUS
(d) deferred underwriting expenses and deferred origination costs.
CONSOLIDATED TOTAL ASSETS. All assets of the Borrower and its Subsidiaries
(other than Credident) determined on a consolidated basis in accordance with
generally accepted accounting principles.
CONSOLIDATED TOTAL INTEREST EXPENSE. For any period, the aggregate amount
of interest required to be paid or accrued by the Borrower and its Subsidiaries
(other than Credident) during such period on all Indebtedness of the Borrower
and its Subsidiaries (other than Credident) outstanding during all or any part
of such period, whether such interest was or is required to be reflected as an
item of expense or capitalized, including payments consisting of interest in
respect of Capitalized Leases and including commitment fees, agency fees,
facility fees, balance deficiency fees and similar fees or expenses in
connection with the borrowing of money.
CONSOLIDATED TOTAL LIABILITIES. All liabilities of the Borrower and its
Subsidiaries determined on a consolidated basis in accordance with generally
accepted accounting principles and all Indebtedness of the Borrower and its
Subsidiaries (other than Credident or Indebtedness of the Borrower with respect
to Credident), whether or not so classified.
CONTRACT. Each lease, finance agreement, note, agreement or instrument
which evidences any Customer Receivable or Practice Receivable relating to any
Account Receivable included in Eligible Accounts Receivable at any time.
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CONTRACT FILE. With respect to each Contract, the executed original
counterpart of the Contract that constitutes an "instrument" for purposes of
9-105(1)(i) of the UCC, together with a duly executed allonge transferring such
instrument to the Agent.
CONTRACTUALLY DELINQUENT CUSTOMER RECEIVABLES. All Customer Receivables
owing from any particular Customer in respect of any Contract if any Customer
Receivable owing from such Customer in respect of such Contract is Delinquent.
CONVERSION REQUEST. A notice given by the Borrower to the Agent of the
Borrower's election to convert or continue a Loan in accordance with ss.2.7.
CREDIT AGREEMENT. This Third Amended and Restated Credit Agreement,
including the Schedules and Exhibits hereto.
CREDIT POLICY. The criteria for the extension of credit for receivables and
contracts of the Borrower including, without limitation, the criteria for
preapproved specific use personally guaranteed line of credit receivables.
CREDIDENT. Credident, Inc., a Canadian corporation and wholly-owned
Subsidiary of the Borrower.
CUSTOMER. A Person for whom the Borrower finances property, goods, or
leasehold improvements or for whom the Borrower provides a preapproved specific
use personally guaranteed line of credit, or, in the case of ACFC, a Person for
whom ACFC finances inventory, accounts receivable or working capital
requirements.
CUSTOMER RECEIVABLE. Obligations of any kind or nature to the Borrower or
ACFC (i) incurred by Customers in the ordinary course of their respective
businesses or (ii) arising from the purchase by the Borrower or ACFC of
promissory notes, leases payable or accounts receivable from a third party
obligee.
DEBT RATIO. As of any date of determination, the ratio of (i) Indebtedness
for borrowed money of the Borrower and its Subsidiaries (other than Credident)
PLUS security deposits received by the Borrower and its Subsidiaries (other than
Credident) with respect to Accounts Receivable to (ii) Consolidated Tangible
Capital Funds.
DEFAULT. See ss.14.
DELINQUENT. As to any Customer Receivable, a default thereunder (with
respect to payment or otherwise) which at the end of any calendar month has
remained uncured for more than ninety days (on a billed and uncollected
delinquency basis), PROVIDED that during each year of the original contract term
remaining on such Customer Receivable, the Borrower may (without rendering such
Customer Receivable Delinquent) extend one full or partial payment for a
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period not to exceed one month beyond the then scheduled payment date, so long
as no more than two such extensions are granted in any year.
DISTRIBUTION. The declaration or payment of any dividend on or in respect
of any shares of any class of capital stock of the Borrower, other than
dividends payable solely in shares of common stock of the Borrower; the
purchase, redemption, or other retirement of any shares of any class of capital
stock of the Borrower, directly or indirectly through a Subsidiary of the
Borrower or otherwise; the return of capital by the Borrower to its shareholders
as such; or any other distribution on or in respect of any shares of any class
of capital stock of the Borrower.
DOLLARS or $. Dollars in lawful currency of the United States of America.
DOMESTIC LENDING OFFICE. Initially, the office of each Bank designated as
such in SCHEDULE 1 hereto; thereafter, such other office of such Bank, if any,
located within the United States that will be making or maintaining Base Rate
Loans.
DRAWDOWN DATE. The date on which any Loan is made or is to be made, and the
date on which any Loan is converted or continued in accordance with ss.2.7.
ELIGIBLE ACCOUNTS RECEIVABLE. The aggregate of the unpaid portions of
Accounts Receivable (net of any credits, rebates, offsets, holdbacks or other
adjustments or commissions payable to third parties that are adjustments to such
Accounts Receivable) (i) that the Borrower reasonably and in good faith
determines to be collectible; (ii) that are with Customers that (A) are not
Affiliates of the Borrower, (B) are Customers in an arm's length transaction;
(C) are not insolvent or involved, whether voluntary or involuntary, in any case
or proceeding under any bankruptcy, reorganization, arrangement, insolvency,
adjustment of debt, dissolution, liquidation or similar law of any jurisdiction;
(D) which, from time to time, at the election of the Agent, have been reviewed
by the Agent and found in the Agent's reasonable judgment to be collectible;
(iii) that are in payment of obligations that have been fully performed and are
not subject to dispute or any other similar claims that would reduce the cash
amount payable therefor; (iv) that are not subject to any pledge, restriction,
security interest or other lien or encumbrance other than those created by the
Loan Documents; (v) in which the Agent has a valid and perfected first priority
security interest; (vi) that are not outstanding for more than ninety (90) days
past the date such Accounts Receivable are due, but in no event outstanding for
more than 120 days from date of invoice; (vii) that are not due from any single
Customer if more than fifteen percent (15%) of the aggregate amount of all
Accounts Receivable owing from such Customer would otherwise not be Eligible
Accounts Receivable; (viii) that are payable in Dollars; (ix) that are not
payable from an office outside of the United States; (x) that are not secured by
a letter of credit unless the Agent has a prior, perfected security interest in
such letter of credit; (xi) that originated in the ordinary course of business
of the Borrower or ACFC; (xii) that are not due from any single Customer if,
after including such
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Accounts Receivable, the Borrowing Base will be comprised of more than
$1,000,000 of Accounts Receivable owing from such Customer PROVIDED, HOWEVER
that Practice Receivables and ACFC Receivables shall not be included when
calculating this $1,000,000 Customer concentration limitation; (xiii) that are
not due from any single Customer if, after including such Accounts Receivable,
the Borrowing Base will be comprised of more than $1,000,000 of Practice
Receivables owing from such Customer; (xiv) that have not been transferred to
Bravo pursuant to the Bravo Purchase Agreement or Capital pursuant to the
Capital Purchase Agreement; (xv) that are not subject to any lien or negative
pledge pursuant to the Bravo Credit Agreement or the Capital Lease-Receivables
Purchase Agreement; (xvi) that if an ACFC Receivable, the Contract Files with
respect to the Contracts relating thereto have been delivered to the Agent;
(xvii) that with respect to which all the representations and warranties set
forth in ss.8.21 of this Credit Agreement are true and correct in all material
respects on and as of the date hereof except to the extent that any of such
representations and warranties relate, by the express terms thereof, solely to a
date prior to the relevant date; (xvii) that with respect to which the Borrower
or ACFC has filed and maintained the effectiveness of UCC financing statements
against the Obligor in order to perfect any security interest granted in such
Contract in the related collateral of the Obligor; (xix) that satisfies all
applicable requirements of the Borrower's Credit Policy or if an ACFC
Receivable, the ACFC Credit Policy; (xx) that is freely assignable and arose
under a Contract which is also freely assignable; and (xxi) that if an ACFC
Receivable, (A) are not due from any single customer if, after including such
Accounts Receivable, the Borrowing Base will be comprised of more than
$5,000,000 of Accounts Receivable owing from such Customer, (B) are subject to a
maximum advance rate pursuant to the ACFC Credit Policy not exceeding the sum of
80% of eligible accounts receivable outstanding for 90 days or less plus 50% of
eligible inventory plus 75% of the orderly liquidation value of machinery as
determined by an acceptable equipment appraiser and (C) that has been documented
by experienced counsel in a manner consistent with sound industry standards.
Notwithstanding the foregoing, (i) Accounts Receivable of the Borrower that have
balances outstanding for more than 120 days from date of invoice and less than
150 days from date of invoice may be treated as Eligible Accounts Receivable so
long as not more than five and one-quarter percent (5.25%) of the Borrowing Base
is comprised of such Accounts Receivable, and (ii) the maximum aggregate
combined amount of (A) pre-approved specific use personally guaranteed lines of
credit and (B) Practice Receivables which may be treated as Eligible Accounts
Receivable is $20,000,000.
ELIGIBLE ASSIGNEE. Any of (i) a commercial bank or finance company
organized under the laws of the United States, or any State thereof or the
District of Columbia, and having total assets in excess of $1,000,000,000; (ii)
a savings and loan association or savings bank organized under the laws of the
United States, or any State thereof or the District of Columbia, and having a
net worth of at least $100,000,000, calculated in accordance with generally
accepted accounting principles; (iii) a commercial bank organized under the laws
of any other country which is a member of the Organization for Economic
Cooperation
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and Development (the "OECD"), or a political subdivision of any such country,
and having total assets in excess of $1,000,000,000, PROVIDED that such bank is
acting through a branch or agency located in the country in which it is
organized or another country which is also a member of the OECD; (iv) the
central bank of any country which is a member of the OECD; and (v) if, but only
if, an Event of Default has occurred and is continuing, any other bank,
insurance company, commercial finance company or other financial institution or
other Person approved by the Agent, such approval not to be unreasonably
withheld.
EMPLOYEE BENEFIT PLAN. Any employee benefit plan within the meaning of
ss.3(3) of ERISA maintained or contributed to by the Borrower or any ERISA
Affiliate, other than a Multiemployer Plan.
ENVIRONMENTAL LAWS. See ss.8.18(a).
EQUIPMENT. Each item of equipment that is the subject of any Contract,
including all parts, accessions and modifications thereto and all replacements
thereof.
EQUIPMENT SUPPLIER. A Person (other than the Borrower) who supplies
Equipment to Customers.
ERISA. The Employee Retirement Income Security Act of 1974.
ERISA AFFILIATE. Any Person which is treated as a single employer with the
Borrower under ss.414 of the Code.
ERISA REPORTABLE EVENT. A reportable event with respect to a Guaranteed
Pension Plan within the meaning of ss.4043 of ERISA and the regulations
promulgated thereunder as to which the requirement of notice has not been
waived.
EUROCURRENCY RESERVE RATE. For any day with respect to a Eurodollar Rate
Loan, the maximum rate (expressed as a decimal) at which any lender subject
thereto would be required to maintain reserves under Regulation D of the Board
of Governors of the Federal Reserve System (or any successor or similar
regulations relating to such reserve requirements) against "Eurocurrency
Liabilities" (as that term is used in Regulation D), if such liabilities were
outstanding. The Eurocurrency Reserve Rate shall be adjusted automatically on
and as of the effective date of any change in the Eurocurrency Reserve Rate.
EURODOLLAR BUSINESS DAY. Any Business Day on which commercial banks are
open for international business (including dealings in Dollar deposits) in
London or such other eurodollar interbank market as may be selected by the Agent
in its sole discretion acting in good faith.
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EURODOLLAR LENDING OFFICE. Initially, the office of each Bank designated as
such in SCHEDULE 1 hereto; thereafter, such other office of such Bank, if any,
that shall be making or maintaining Eurodollar Rate Loans.
EURODOLLAR RATE. For any Interest Period with respect to a Eurodollar Rate
Loan, the rate of interest equal to (i) the arithmetic average of the rates per
annum for each Reference Bank (rounded upwards to the nearest 1/16 of one
percent) of the rate at which such Reference Bank's Eurodollar Lending Office is
offered Dollar deposits two Eurodollar Business Days prior to the beginning of
such Interest Period in the interbank eurodollar market where the eurodollar and
foreign currency and exchange operations of such Eurodollar Lending Office are
customarily conducted at or about 10:00 a.m., Boston time, for delivery on the
first day of such Interest Period for the number of days comprised therein and
in an amount comparable to the amount of the Eurodollar Rate Loan of such
Reference Bank to which such Interest Period applies, divided by (ii) a number
equal to 1.00 minus the Eurocurrency Reserve Rate, if applicable.
EURODOLLAR RATE LOANS. Loans bearing interest calculated by reference to
the Eurodollar Rate.
EVENT OF DEFAULT. See ss.14.
FINANCE AGREEMENT. Each finance agreement which evidences any Accounts
Receivable.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. (i) When used in ss.11, whether
directly or indirectly through reference to a capitalized term used therein,
means (A) principles that are consistent with the principles promulgated or
adopted by the Financial Accounting Standards Board and its predecessors, in
effect for the fiscal year ended on the Balance Sheet Date, and (B) to the
extent consistent with such principles, the accounting practice of the Borrower
reflected in its financial statements for the year ended on the Balance Sheet
Date, and (ii) when used in general, other than as provided above, means
principles that are (A) consistent with the principles promulgated or adopted by
the Financial Accounting Standards Board and its predecessors, as in effect from
time to time and (B) consistently applied with past financial statements of the
Borrower adopting the same principles, PROVIDED that in each case referred to in
this definition of "generally accepted accounting principles" a certified public
accountant would, insofar as the use of such accounting principles is pertinent,
be in a position to deliver an unqualified opinion (other than a qualification
regarding changes in generally accepted accounting principles) as to financial
statements in which such principles have been properly applied.
GROSS CUSTOMER RECEIVABLES. The aggregate amount at any time of all amounts
due or to become due in cash on Customer Receivables which amount shall include
the aggregate Residual Value of Equipment.
GUARANTEED PENSION PLAN. Any employee pension benefit plan within the
meaning of ss.3(2) of ERISA maintained or contributed to by the Borrower or any
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ERISA Affiliate the benefits of which are guaranteed on termination in full or
in part by the PBGC pursuant to Title IV of ERISA, other than a Multiemployer
Plan.
GUARANTY. The Guaranty in the form of EXHIBIT G attached hereto dated as of
June 23, 1994, and ratified and confirmed as of the date hereof, made by ACFC in
favor of the Banks and the Agent pursuant to which ACFC guaranties to the Banks
and the Agent the payment and performance of the Obligations and otherwise in
form and substance satisfactory to the Banks and the Agent.
HAZARDOUS SUBSTANCES. See ss.8.18(b).
HEAD OFFICE. The Agent's head office located at 100 Federal Street, Boston,
Massachusetts 02110, or at such other location as the Agent may designate from
time to time.
INDEBTEDNESS. All obligations, contingent and otherwise, that in accordance
with generally accepted accounting principles should be classified upon the
obligor's balance sheet as liabilities, or to which reference should be made by
footnotes thereto, including in any event and whether or not so classified: (i)
all debt and similar monetary obligations, whether direct or indirect; (ii) all
liabilities secured by any mortgage, pledge, security interest, lien, charge, or
other encumbrance existing on property owned or acquired subject thereto,
whether or not the liability secured thereby shall have been assumed; and (iii)
all guarantees, endorsements and other contingent obligations whether direct or
indirect in respect of indebtedness of others, including any obligation to
supply funds to or in any manner to invest in, directly or indirectly, the
debtor, to purchase indebtedness, or to assure the owner of indebtedness against
loss, through an agreement to purchase goods, supplies, or services for the
purpose of enabling the debtor to make payment of the indebtedness held by such
owner or otherwise, and the obligations to reimburse the issuer in respect of
any letters of credit.
INELIGIBLE SECURITIES. Securities which may not be underwritten or dealt in
by member banks of the Federal Reserve System under Section 16 of the Banking
Act of 1993 (12 U.S.C. ss.24, Seventh), as amended.
INTEREST PAYMENT DATE. (i) As to any Base Rate Loan, the last day of the
calendar quarter which includes the Drawdown Date thereof; and (ii) as to any
Eurodollar Rate Loan in respect of which the Interest Period is (A) 3 months or
less, the last day of such Interest Period and (B) more than 3 months, the date
that is 3 months from the first day of such Interest Period and, in addition,
the last day of such Interest Period.
INTEREST PERIOD. With respect to each Loan, (i) initially, the period
commencing on the Drawdown Date of such Loan and ending on the last day of one
of the periods set forth below, as selected by the Borrower in a Loan Request
(A) for any Base Rate Loan, the last day of the calendar quarter; and (B) for
any Eurodollar Rate Loan, 1, 2, 3 or 6 months; and (ii) thereafter, each period
<PAGE> 20
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commencing on the last day of the next preceding Interest Period applicable to
such Loan and ending on the last day of one of the periods set forth above, as
selected by the Borrower in a Conversion Request; PROVIDED that all of the
foregoing provisions relating to Interest Periods are subject to the following:
(a) if any Interest Period with respect to a Eurodollar Rate Loan
would otherwise end on a day that is not a Eurodollar Business Day, that
Interest Period shall be extended to the next succeeding Eurodollar
Business Day unless the result of such extension would be to carry such
Interest Period into another calendar month, in which event such Interest
Period shall end on the immediately preceding Eurodollar Business Day;
(b) if any Interest Period with respect to a Base Rate Loan would end
on a day that is not a Business Day, that Interest Period shall end on the
next succeeding Business Day;
(c) if the Borrower shall fail to give notice as provided in ss.2.7,
the Borrower shall be deemed to have requested a conversion of the affected
Eurodollar Rate Loan to a Base Rate Loan and the continuance of all Base
Rate Loans as Base Rate Loans on the last day of the then current Interest
Period with respect thereto;
(d) any Interest Period that begins on the last Eurodollar Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest Period)
shall end on the last Eurodollar Business Day of a calendar month; and
(e) any Interest Period relating to any Eurodollar Rate Loan that
would otherwise extend beyond the Maturity Date shall end on the Maturity
Date.
INVESTMENTS. All expenditures made and all liabilities incurred
(contingently or otherwise) for the acquisition of stock or Indebtedness of, or
for loans, advances, capital contributions or transfers of property to, or in
respect of any guaranties (or other commitments as described under
Indebtedness), or obligations of, any Person. In determining the aggregate
amount of Investments outstanding at any particular time: (i) the amount of any
Investment represented by a guaranty shall be taken at not less than the
principal amount of the obligations guaranteed and still outstanding; (ii) there
shall be included as an Investment all interest accrued with respect to
Indebtedness constituting an Investment unless and until such interest is paid;
(iii) there shall be deducted in respect of each such Investment any amount
received as a return of capital (but only by repurchase, redemption, retirement,
repayment, liquidating dividend or liquidating distribution); (iv) there shall
not be deducted in respect of any Investment any amounts received as earnings on
such Investment, whether as dividends, interest or otherwise, except that
accrued interest included as provided in the foregoing clause (ii) may be
deducted when paid; and
<PAGE> 21
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(v) there shall not be deducted from the aggregate amount of Investments any
decrease in the value thereof.
LEASE. Each lease which evidences any Account Receivable included in
Eligible Accounts Receivable.
LETTER OF CREDIT. See ss.5.1.
LETTER OF CREDIT APPLICATION. See ss.5.1.1.
LETTER OF CREDIT FEE. See ss.5.6.
LETTER OF CREDIT PARTICIPATION. See ss.5.1.4.
LOAN DOCUMENTS. This Credit Agreement, the Notes, the Letter of Credit
Applications, the Letters of Credit and the Security Documents.
LOAN REQUEST. See ss.2.6.
LOANS. Collectively, the Revolving Credit Loans made or to be made by the
Banks to the Borrower pursuant to ss.2 and the Term Loan.
MAJORITY BANKS. As of any date, the Banks holding at least sixty-six and
two-thirds percent (66-2/3%) of the outstanding principal amount of the Notes on
such date; and if no such principal is outstanding, the Banks whose aggregate
Commitments constitute at least sixty-six and two-thirds percent (66-2/3%) of
the Total Commitment.
MAXIMUM DRAWING AMOUNT. The maximum aggregate amount from time to time that
the beneficiaries may draw under outstanding Letters of Credit, as such
aggregate amount may be reduced from time to time pursuant to the terms of the
Letters of Credit.
MULTIEMPLOYER PLAN. Any multiemployer plan within the meaning of ss.3(37)
of ERISA maintained or contributed to by the Borrower or any ERISA Affiliate.
NET INVESTMENT IN LEASES AND NOTES. (i) Gross Customer Receivables, MINUS
(ii) the sum of (A) Unearned Income PLUS (B) allowances for losses PLUS (C)
security deposits, PLUS (iii) deferred origination costs.
NOTES. Revolving Credit Notes or Term Notes.
OBLIGATIONS. All indebtedness, obligations and liabilities of any of the
Borrower and its Subsidiaries to any of the Banks and the Agent, individually or
collectively, existing on the date of this Credit Agreement or arising
thereafter, direct or indirect, joint or several, absolute or contingent,
matured or unmatured, liquidated or unliquidated, secured or unsecured, arising
or incurred under this Credit Agreement or any of the other Loan Documents or in
respect of any of the Loans made or Reimbursement Obligations incurred or
<PAGE> 22
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any of the Notes, Letter of Credit Applications, Letters of Credit or other
instruments at any time evidencing any thereof.
OBLIGOR. Each Person obligated to make payments under a Contract.
OUTSTANDING. With respect to the Loans, the aggregate unpaid principal
thereof as of any date of determination.
PBGC. The Pension Benefit Guaranty Corporation created by ss.4002 of ERISA
and any successor entity or entities having similar responsibilities.
PERFECTION CERTIFICATES. The Perfection Certificates as defined in the
Security Agreements.
PERMITTED LIENS. Liens, security interests and other encumbrances permitted
by ss.10.2.
PERSON. Any individual, corporation, partnership, trust, unincorporated
association, business, or other legal entity, and any government or any
governmental agency or political subdivision thereof.
PRACTICE RECEIVABLES. Obligations of any kind or nature to the Borrower
incurred by Customers in connection with the acquisition of a medical practice
or in connection with the re-financing of an existing practice.
PRIOR LOAN AGREEMENT. The Second Amended and Restated Revolving Credit
Agreement dated as of December 12, 1996 by and among the Borrower, BKB, and the
other banks named therein (as heretofore amended and in effect prior to the date
hereof).
RATIO CALCULATION DATE. See ss.2.5.
REAL ESTATE. All real property at any time owned or leased (as lessee or
sublessee) by the Borrower or any of its Subsidiaries; PROVIDED HOWEVER that the
definition of Real Estate shall not include office space leased by the Borrower
or any of its Subsidiaries in buildings where the Borrower or any of its
Subsidiaries do not occupy more than fifty percent (50%) of such building.
RECORD. The grid attached to a Note, or the continuation of such grid, or
any other similar record, including computer records, maintained by any Bank
with respect to any Loan referred to in such Note.
REFERENCE BANK. BKB.
REIMBURSEMENT OBLIGATION. The Borrower's obligation to reimburse the Agent
and the Banks on account of any drawing under any Letter of Credit as provided
in ss.5.2.
REISSUED CUSTOMER RECEIVABLES. Customer Receivables that are issued by the
Borrower with respect to Customer Receivables (i) which have previously
<PAGE> 23
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been referred to a collection agency or attorney for collection, (ii) with
respect to which enforcement action against the Customer has previously been
commenced or (iii) the original terms of which have been altered to extend the
time for payment or reduce the interest rate or total indebtedness thereon if
such Customer Receivables are Delinquent at the time of such alteration of
terms; provided that Reissued Customer Receivables shall not include any
Customer Receivable which shall not have been Delinquent at any time within the
immediately preceding twelve months.
RENTAL OBLIGATIONS. All present or future obligations of the Borrower or
any of its Subsidiaries (other than Credident) under any rental agreements or
leases of real or personal property, other than (i) obligations that can be
terminated by the giving of notice without liability to the Borrower or such
Subsidiary in excess of the liability for rent due as of the date on which such
notice is given and under which no penalty or premium is paid as a result of any
such termination, and (ii) obligations in respect of Capitalized Leases.
RESERVE AMOUNT. $1,000,000.
RESERVES. With respect to any fiscal quarter, the ending allowance for
doubtful accounts (excluding the Securitization Subsidiaries) on the Borrower's
balance sheet at the end of such fiscal quarter, prepared in accordance with
generally accepted accounting principles.
RESIDUAL VALUE OF EQUIPMENT. The aggregate estimated residual value of
equipment at end of lease term of the Borrower and the Subsidiaries (other than
the Securitization Subsidiaries and Credident) as determined in accordance with
generally accepted accounting principles.
REVOLVING CREDIT LOAN MATURITY DATE. March 15, 1999.
REVOLVING CREDIT LOANS. Revolving credit loans made or to be made by the
Banks to the Borrower pursuant to ss.2.
REVOLVING CREDIT NOTES. See ss.2.4.
SALE AGREEMENTS. Collectively, (i) the dental practice receivables-backed
credit agreement dated as of April 13, 1995 by and between the Borrower and SIS;
(ii) the sale agreement dated as of November 16, 1995 by and between the
Borrower and SIS; (iii) the sale agreement dated as of March 29, 1996 by and
between the Borrower and SIS; (iv) the sale agreement dated as of June 26, 1996
by and between the Borrower and SIS; (v) the sale agreement dated as of
September 30, 1996 by and between the Borrower and First Essex Bank, FSB; (vi)
the sale agreement dated as of September 26, 1996 by and between the Borrower
and Cambridge Savings Bank; (vii) the sale agreement by and between the Borrower
and Century Bank and Trust Company dated June 13, 1996; and (viii) any other
similar sale or credit agreements entered into from time to time by and between
the Borrower and a financial institution PROVIDED THAT (A) no Event of Default
has occurred and is continuing at the time the Borrower enters
<PAGE> 24
-17-
into any such sale or credit agreement or would result therefrom; (B) such
agreement is substantially in the form of one of the Sale Agreements enumerated
in subsections (i) through (viii) of this definition and (C) such agreements are
otherwise in form and substance approved by the Agent in writing.
SECTION 20 SUBSIDIARY. A Subsidiary of the bank holding company controlling
any Bank, which Subsidiary has been granted authority by the Federal Reserve
Board to underwrite and deal in certain Ineligible Securities.
SECURITIZATION SUBSIDIARIES. Together, Bravo and Capital.
SECURITY AGREEMENTS. The (i) Security Agreement dated as of June 23, 1994,
and ratified and confirmed as of the date hereof, between the Borrower and the
Agent and (ii) the Security Agreement dated June 23, 1994, and ratified and
confirmed as of the date hereof, between ACFC and the Agent, each in the form of
EXHIBIT E hereto attached hereto and otherwise in form and substance
satisfactory to the Banks and the Agent.
SECURITY DOCUMENTS. The Guaranty, the Security Agreements and the Stock
Pledge Agreement.
SENIOR SUBORDINATED NOTE INDENTURE. The Indenture between HPSC, Inc. as
Issuer and State Street Bank and Trust Company, as Trustee entered into at the
time of issuance of up to $23,000,000 of Senior Subordinated Notes.
SIS. The Springfield Institution for Savings.
STOCK PLEDGE AGREEMENT. The Stock Pledge Agreement dated June 23, 1994, and
ratified and confirmed as of the date hereof, between the Borrower and the Agent
and in form and substance satisfactory to the Banks and the Agent.
SUBORDINATED DEBT. The Senior Subordinated Notes Due 2007 issued by the
Borrower in an aggregate principal amount not exceeding $23,000,000 which are
expressly subordinated and made junior to the payment and performance in full of
the Obligations, and evidenced as such by the Senior Subordinated Note
Indenture.
SUBSIDIARY. Any corporation, association, trust, or other business entity
of which the designated parent shall at any time own directly or indirectly
through a Subsidiary or Subsidiaries at least a majority (by number of votes) of
the outstanding Voting Stock.
TERM LOAN. The term loan made or to be made by the Banks to the Borrower on
the Revolving Credit Loan Maturity Date as contemplated by ss.4.
TERM LOAN MATURITY DATE. March 15, 2000.
<PAGE> 25
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TERM NOTES. See ss.4.2.
TOTAL COMMITMENT. The sum of the Commitments of the Banks, as in effect
from time to time.
TRANSFERRED ASSETS. Collectively, the Bravo Transferred Assets and the
Capital Transferred Assets.
TYPE. As to any Loan, its nature as a Base Rate Loan or a Eurodollar Rate
Loan.
UCC. The Uniform Commercial Code as enacted and in effect from time to time
in the Commonwealth of Massachusetts.
UNEARNED INCOME. With respect to Customer Receivables any interest
component to be paid by the Customer in the future in connection with such
Customer Receivable which is accounted for by the Borrower as unearned income
under generally accepted accounting practices.
UNIFORM CUSTOMS. With respect to any Letter of Credit, the Uniform Customs
and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500, or any successor version thereto adopted by the
Agent in the ordinary course of its business as a letter of credit issuer and in
effect at the time of issuance of such Letter of Credit.
UNPAID REIMBURSEMENT OBLIGATION. Any Reimbursement Obligation for which the
Borrower does not reimburse the Agent and the Banks on the date specified in,
and in accordance with, ss.5.2.
VOTING STOCK. Stock or similar interests, of any class or classes (however
designated), the holders of which are at the time entitled, as such holders, to
vote for the election of a majority of the directors (or persons performing
similar functions) of the corporation, association, trust or other business
entity involved, whether or not the right so to vote exists by reason of the
happening of a contingency.
YEAR 2000 COMPLIANCE. The risk that computer applications used by the
Borrower and its Subsidiaries may be unable to recognize and properly perform
date-sensitive functions involving certain dates prior to, and any date after,
December 31, 1999.
1.2. RULES OF INTERPRETATION.
(a) A reference to any document or agreement shall include such
document or agreement as amended, modified or supplemented from time to
time in accordance with its terms and the terms of this Credit Agreement.
<PAGE> 26
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(b) The singular includes the plural and the plural includes the
singular.
(c) A reference to any law includes any amendment or modification to
such law.
(d) A reference to any Person includes its permitted successors and
permitted assigns.
(e) Accounting terms not otherwise defined herein have the meanings
assigned to them by generally accepted accounting principles applied on a
consistent basis by the accounting entity to which they refer.
(f) The words "include", "includes" and "including" are not limiting.
(g) All terms not specifically defined herein or by generally accepted
accounting principles, which terms are defined in the Uniform Commercial
Code as in effect in the Commonwealth of Massachusetts, have the meanings
assigned to them therein, with the term "instrument" being that defined
under Article 9 of the Uniform Commercial Code.
(h) Reference to a particular "ss." refers to that section of this
Credit Agreement unless otherwise indicated.
(i) The words "herein", "hereof", "hereunder" and words of like import
shall refer to this Credit Agreement as a whole and not to any particular
section or subdivision of this Credit Agreement.
(j) Each reference in the Credit Agreement to the exclusion "(other
than Credident)" or "(other than the Securitization Subsidiaries or
Credident)" shall be deemed to cover, without limitation, any foreign
currency translation adjustment related to Credident or to the Borrower's
investment in Credident, with the result that such adjustments not be
reflected in the Borrower's financial reporting for purposes of the Credit
Agreement.
(k) This Credit Agreement and the other Loan Documents may use several
different limitations, tests or measurements to regulate the same or
similar matters. All such limitations, tests and measurements are, however,
cumulative and are to be performed in accordance with the terms thereof.
(l) This Credit Agreement and the other Loan Documents are the result
of negotiation among, and have been reviewed by counsel to, among others,
the Agent and the Borrower and are the product of discussions and
negotiations among all parties. Accordingly, this Credit Agreement and the
other Loan Documents are not intended to be construed against
<PAGE> 27
-20-
the Agent or any of the Banks merely on account of the Agent's or any
Bank's involvement in the preparation of such documents.
2. THE REVOLVING CREDIT FACILITY.
2.1. COMMITMENT TO LEND. Subject to the terms and conditions set forth in
this Credit Agreement, each of the Banks severally agrees to lend to the
Borrower and the Borrower may borrow, repay, and reborrow from time to time
between the Closing Date and the Revolving Credit Loan Maturity Date upon notice
by the Borrower to the Agent given in accordance with ss.2.6, such sums as are
requested by the Borrower up to a maximum aggregate principal amount outstanding
(after giving effect to all amounts requested) at any one time equal to such
Bank's Commitment MINUS such Bank's Commitment Percentage of the sum of the
Maximum Drawing Amount and all Unpaid Reimbursement Obligations, PROVIDED that
the sum of the outstanding amount of the Revolving Credit Loans (after giving
effect to all amounts requested) PLUS the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations shall not at any time exceed the lesser of (i) the
Total Commitment and (ii) the Borrowing Base. The Revolving Credit Loans shall
be made PRO RATA in accordance with each Bank's Commitment Percentage. Each
request for a Revolving Credit Loan hereunder shall constitute a representation
and warranty by the Borrower that the conditions set forth in ss.12 and ss.13,
in the case of the initial Revolving Credit Loans to be made on the Closing
Date, and ss.13, in the case of all other Revolving Credit Loans, have been
satisfied on the date of such request.
2.2. COMMITMENT FEE. The Borrower agrees to pay to the Agent for the
accounts of the Banks in accordance with their respective Commitment Percentages
a commitment fee calculated at the Applicable Commitment Fee Rate per annum on
the average daily amount during each calendar quarter or portion thereof from
the Closing Date to the Revolving Credit Loan Maturity Date by which the Total
Commitment MINUS the sum of the Maximum Drawing Amount and all Unpaid
Reimbursement Obligations exceeds the outstanding amount of Loans during such
calendar quarter. The commitment fee shall be payable quarterly in arrears on
the first day of each calendar quarter for the immediately preceding calendar
quarter commencing on the first such date following the date hereof, with a
final payment on the Revolving Credit Loan Maturity Date or any earlier date on
which the Commitments shall terminate.
2.3. REDUCTION OF TOTAL COMMITMENT. The Borrower shall have the right at
any time and from time to time upon five (5) Business Days prior written notice
to the Agent to reduce by $500,000 or an integral multiple thereof or terminate
entirely the unborrowed portion of the Total Commitment, whereupon the
Commitments of the Banks shall be reduced PRO RATA in accordance with their
respective Commitment Percentages of the amount specified in such notice or, as
the case may be, terminated. Promptly after receiving any notice of the Borrower
delivered pursuant to this ss.2.3, the Agent will notify the Banks of the
substance thereof. Upon the effective date of any such reduction or termination,
the Borrower shall pay to the Agent for the respective accounts of the Banks the
full amount of any commitment fee then
<PAGE> 28
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accrued on the amount of the reduction. No reduction of the Commitments may be
reinstated.
2.4. THE REVOLVING CREDIT NOTES. The Revolving Credit Loans shall be
evidenced by separate promissory notes of the Borrower in substantially the form
of EXHIBIT B hereto (each a "Revolving Credit Note" and collectively, the
"Revolving Credit Notes"), dated as of the Closing Date and completed with
appropriate insertions. One Revolving Credit Note shall be payable to the order
of each Bank in a principal amount equal to such Bank's Commitment or, if less,
the outstanding amount of all Revolving Credit Loans made by such Bank, plus
interest accrued thereon, as set forth below. The Borrower irrevocably
authorizes each Bank to make or cause to be made, at or about the time of the
Drawdown Date of any Revolving Credit Loan or at the time of receipt of any
payment of principal on such Bank's Revolving Credit Note, an appropriate
notation on such Bank's Revolving Credit Note Record reflecting the making of
such Revolving Credit Loan or (as the case may be) the receipt of such payment.
The outstanding amount of the Revolving Credit Loans set forth on such Bank's
Revolving Credit Note Record shall be PRIMA FACIE evidence of the principal
amount thereof owing and unpaid to such Bank, but the failure to record, or any
error in so recording, any such amount on such Bank's Revolving Credit Note
Record shall not limit or otherwise affect the obligations of the Borrower
hereunder or under any Revolving Credit Note to make payments of principal of or
interest on any Revolving Credit Note when due.
2.5. INTEREST ON REVOLVING CREDIT LOANS. Except as otherwise provided in
ss.6.10,
(a) The Borrower shall pay interest on the unpaid principal amount of
each Revolving Credit Loan made by the Banks to the Borrower from the
Drawdown Date, until such principal amount is paid in full, at an annual
rate equal to, (i) with respect to any Base Rate Loan, the Base Rate in
effect from time to time PLUS the Applicable Base Rate Margin (as set forth
in ss.2.5(b) (the "Applicable Base Rate Margin")), and (ii) with respect to
any Eurodollar Rate Loan, the Eurodollar Rate in effect for the applicable
Interest Period PLUS the Applicable Eurodollar Rate Margin (as set forth in
ss.2.5(b) (the "Applicable Eurodollar Rate Margin")) (the Applicable Base
Rate Margin or the Applicable Eurodollar Rate Margin, whichever is
applicable, is sometimes referred to herein as the "Applicable Margin").
(b) The Applicable Margin and the Applicable Commitment Fee Rate shall
be the annual percentage rates in effect from time to time determined in
accordance with the following provisions of this ss.2.5. The Agent shall
give notice of the Applicable Margin and the Applicable Commitment Fee Rate
to the Borrower and the Banks five (5) Business Days after the delivery to
the Agent of the required quarterly financial statements and compliance
certificate pursuant to secs.9.4(b) and (c) which quarterly financial
statements shall include, in reasonable detail, a calculation of the Debt
Ratio as of the date (the "Ratio
<PAGE> 29
-22-
Calculation Date") which is the end of the quarterly period covered by such
quarterly financial statements, based on the Debt Ratio as of such Ratio
Calculation Date, with such determination of the Applicable Margin and the
Applicable Commitment Fee Rate to be made in accordance with the following
table:
<TABLE>
<CAPTION>
Applicable
Applicable Base Applicable Commitment
Rate Margin Eurodollar Rate Margin Fee Rate
Debt Ratio (per annum) (per annum) (per annum)
---------- --------------- ---------------------- -----------
<S> <C> <C> <C>
greater than or equal 0% 1.50% 0.375%
to 5.00:1.00
less than 5.00:1.00 0% 1.35% 0.30%
</TABLE>
(c) The Applicable Margin and the Applicable Commitment Fee Rate so
determined pursuant to the foregoing table shall become effective as of the
date (the "Adjustment Date") which is the first day of the month which
immediately follows the date of receipt by the Agent of the applicable
quarterly financial statements and Compliance Certificates delivered
pursuant to secs.4(b) and (c). The Applicable Margin and the Applicable
Commitment Fee Rate which becomes effective on each such Adjustment Date
shall remain in effect (subject to the other provisions of this ss.2.5 and
except as otherwise provided in ss.6.10 hereof) until the next Adjustment
Date; PROVIDED, HOWEVER, in the event the Borrower fails to deliver to the
Agent and the Banks the quarterly financial statements and Compliance
Certificate in accordance with secs.9.4(b) and (c) prior to any scheduled
Adjustment Date, the Applicable Margin and the Applicable Commitment Fee
Rate shall automatically be the highest Applicable Margin and the highest
Applicable Commitment Fee Rate set forth above commencing on the date which
would have otherwise been the next Adjustment Date had such financial
statement and Compliance Certificate been delivered in accordance with
secs.9.4(b) and (c) and continuing until the next scheduled delivery of
financial statements and Compliance Certificate. Notwithstanding the
provisions of the preceding two sentences, if at any time the Debt Ratio as
of any applicable Ratio Calculation Date was actually a ratio other than
that ratio on the basis of which the Agent determined the rate of interest
in effect hereunder on any date, then such interest rate and commitment fee
determination shall be adjusted retroactively to the appropriate Adjustment
Date on the basis of such corrected determination of the actual Debt Ratio
for the four (4) quarter
<PAGE> 30
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period ended on such Ratio Calculation Date, and within ten (10) Business
Days after notice thereof in reasonable detail requesting a retroactive
adjustment of interest and commitment fees previously paid given by the
Borrower, the Agent or any Bank, the Borrower shall pay to the Banks, or
the Banks severally, on a ratable basis, shall credit the Borrower with, as
the case may be, the amount of the appropriate retroactive adjustment in
respect of such adjusted interest rate and commitment fee for any portion
of any period as to which interest has been paid.
(d) The Borrower promises to pay interest on each Revolving Credit
Loan in arrears on each Interest Payment Date with respect thereto and at
maturity of such Loan.
2.6. REQUESTS FOR REVOLVING CREDIT LOANS. The Borrower shall give to the
Agent written notice in the form of EXHIBIT C hereto (or telephonic notice
confirmed in a writing in the form of EXHIBIT C hereto) of each Revolving Credit
Loan requested hereunder (a "Loan Request") no less than (i) 12:00 noon (Boston
time) one (1) Business Day prior to the proposed Drawdown Date of any Base Rate
Loan and (ii) three (3) Eurodollar Business Days prior to the proposed Drawdown
Date of any Eurodollar Rate Loan. Each such notice shall specify (A) the
principal amount of the Revolving Credit Loan requested, (B) the proposed
Drawdown Date of such Revolving Credit Loan, (C) the Interest Period for such
Revolving Credit Loan and (D) the Type of such Loan. Promptly upon receipt of
any such notice, the Agent shall notify each of the Banks thereof. Each such
notice shall be irrevocable and binding on the Borrower and shall obligate the
Borrower to accept the Revolving Credit Loan requested from the Banks on the
proposed Drawdown Date. Each Loan Request shall be in a minimum aggregate amount
of $100,000 or an integral multiple thereof.
2.7. CONVERSION OPTIONS.
2.7.1. CONVERSION TO DIFFERENT TYPE OF REVOLVING CREDIT LOAN. The
Borrower may elect from time to time to convert any outstanding Revolving
Credit Loan to a Revolving Credit Loan of another Type, PROVIDED that (i)
with respect to any such conversion of a Revolving Credit Loan to a Base
Rate Loan, the Borrower shall give the Agent written notice prior to 1:00
p.m. one (1) Business Day prior to the date of such election; (ii) with
respect to any such conversion of a Eurodollar Rate Loan into a Revolving
Credit Loan of another Type, such conversion shall only be made on the last
day of the Interest Period with respect thereto; (iii) with respect to any
such conversion of a Base Rate Loan to a Eurodollar Rate Loan, the Borrower
shall give the Agent at least three (3) Eurodollar Business Days prior
written notice of such election and (iv) no Revolving Credit Loan may be
converted into a Eurodollar Rate Loan when any Default or Event of Default
has occurred and is continuing. On the date on which such conversion is
being made each Bank shall take such action as is necessary to transfer its
Commitment Percentage of such Loans to its Domestic Lending Office or its
Eurodollar Lending
<PAGE> 31
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Office, as the case may be. All or any part of outstanding Revolving Credit
Loans of any Type may be converted as provided herein, PROVIDED that
partial conversions shall be in an aggregate principal amount of $1,000,000
or a whole multiple thereof. Each Conversion Request relating to the
conversion of a Revolving Credit Loan to a Eurodollar Rate Loan shall be
irrevocable by the Borrower.
2.7.2. CONTINUATION OF TYPE OF REVOLVING CREDIT LOAN. Any Revolving
Credit Loans of any Type may be continued as such upon the expiration of an
Interest Period with respect thereto by compliance by the Borrower with the
notice provisions contained in ss.2.7.1; PROVIDED that no Eurodollar Rate
Loan may be continued as such when any Default or Event of Default has
occurred and is continuing, but shall be automatically converted to a Base
Rate Loan on the last day of the first Interest Period relating thereto
ending during the continuance of any Default or Event of Default of which
the officers of the Agent active upon the Borrower's account have actual
knowledge. In the event that the Borrower fails to provide any such notice
with respect to the continuation of any Eurodollar Rate Loan as such, then
such Eurodollar Rate Loan shall be automatically converted to a Base Rate
Loan on the last day of the first Interest Period relating thereto. The
Agent shall notify the Banks promptly when any such automatic conversion
contemplated by this ss.2.7.2 is scheduled to occur.
2.7.3. EURODOLLAR RATE LOANS. Any conversion to or from Eurodollar
Rate Loans shall be in such amounts and be made pursuant to such elections
so that, after giving effect thereto, the aggregate principal amount of all
Eurodollar Rate Loans having the same Interest Period shall not be less
than $1,000,000 or a whole multiple of $100,000.
2.8. FUNDS FOR REVOLVING CREDIT LOANS.
2.8.1. FUNDING PROCEDURES. Not later than 2:00 p.m. (Boston time) on
the proposed Drawdown Date of any Revolving Credit Loans, each of the Banks
will make available to the Agent, at its Head Office, in immediately
available funds, the amount of such Bank's Commitment Percentage of the
amount of the requested Revolving Credit Loans. Upon receipt from each Bank
of such amount, and upon receipt of the documents required by secs.12 and
13 and the satisfaction of the other conditions set forth therein, to the
extent applicable, the Agent will make available to the Borrower the
aggregate amount of such Revolving Credit Loans made available to the Agent
by the Banks. The failure or refusal of any Bank to make available to the
Agent at the aforesaid time and place on any Drawdown Date the amount of
its Commitment Percentage of the requested Revolving Credit Loans shall not
relieve any other Bank from its several obligation hereunder to make
available to the Agent the amount of such other Bank's Commitment
Percentage of any requested Revolving Credit Loans. As an alternative to
the foregoing, advances
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may be made pursuant to cash management arrangements satisfactory to the
Agent and the Banks.
2.8.2. ADVANCES BY AGENT. The Agent may, unless notified to the
contrary by any Bank prior to a Drawdown Date, assume that such Bank has
made available to the Agent on such Drawdown Date the amount of such Bank's
Commitment Percentage of the Loans to be made on such Drawdown Date, and
the Agent may (but it shall not be required to), in reliance upon such
assumption, make available to the Borrower a corresponding amount. If any
Bank makes available to the Agent such amount on a date after such Drawdown
Date, such Bank shall pay to the Agent on demand an amount equal to the
product of (i) the average computed for the period referred to in clause
(iii) below, of the weighted average interest rate paid by the Agent for
federal funds acquired by the Agent during each day included in such
period, TIMES (ii) the amount of such Bank's Commitment Percentage of such
Revolving Credit Loans, TIMES (iii) a fraction, the numerator of which is
the number of days that elapse from and including such Drawdown Date to the
date on which the amount of such Bank's Commitment Percentage of such Loans
shall become immediately available to the Agent, and the denominator of
which is 365. A statement of the Agent submitted to such Bank with respect
to any amounts owing under this paragraph shall be PRIMA FACIE evidence of
the amount due and owing to the Agent by such Bank. If the amount of such
Bank's Commitment Percentage of such Loans is not made available to the
Agent by such Bank within three (3) Business Days following such Drawdown
Date, the Agent shall be entitled to recover such amount from the Borrower
on demand, with interest thereon at the rate per annum applicable to the
Loans made on such Drawdown Date.
2.9. CHANGE IN BORROWING BASE. The Borrowing Base shall be determined
monthly (or at such other interval as may be specified pursuant to ss.9.4(e)) by
the Agent by reference to the Borrowing Base Report delivered to the Banks and
the Agent pursuant to ss.9.4(e).
3. REPAYMENT OF THE REVOLVING CREDIT LOANS.
3.1. MATURITY. The Borrower promises to pay on the Revolving Credit Loan
Maturity Date, and there shall become absolutely due and payable on the
Revolving Credit Loan Maturity Date, all of the Revolving Credit Loans
outstanding on such date, together with any and all accrued and unpaid interest
thereon.
3.2. MANDATORY REPAYMENTS OF REVOLVING CREDIT LOANS. If at any time the sum
of the outstanding amount of the Revolving Credit Loans, the Maximum Drawing
Amount and all Unpaid Reimbursement Obligations exceeds the lesser of (i) the
Total Commitment and (ii) the Borrowing Base, for more than five (5) consecutive
Business Days, then the Borrower shall immediately pay the amount of such excess
to the Agent for the respective accounts of the Banks for application: first, to
any Unpaid Reimbursement Obligations; second,
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to the Revolving Credit Loans; and third, to provide to the Agent cash
collateral for Reimbursement Obligations as contemplated by ss.5.2(b) and (c).
Each payment of any Unpaid Reimbursement Obligations or prepayment of the
Revolving Credit Loans shall be allocated among the Banks, in proportion, as
nearly as practicable, to the Reimbursement Obligation owing to each such Bank
or (as the case may be) the respective unpaid principal amount of each Bank's
Note, with adjustments to the extent practicable to equalize any prior payments
or repayments not exactly in proportion. In addition, collections of Accounts
Receivable shall be applied to the Revolving Credit Loans pursuant to cash
management arrangements satisfactory to the Agent and the Banks.
3.3. OPTIONAL PREPAYMENTS OF REVOLVING CREDIT LOANS. The Borrower shall
have the right, at its election, to prepay the outstanding amount of the
Revolving Credit Loans, as a whole or in part, at any time without penalty or
premium, PROVIDED that the full or partial prepayment of the outstanding amount
of any Eurodollar Rate Loans pursuant to this ss.3.3 may be made only on the
last day of the Interest Period relating thereto. The Borrower shall give the
Agent, no later than 1:00 p.m., Boston time, one (1) Business Day prior to the
date of any proposed prepayment written notice, of any proposed prepayment
pursuant to this ss.3.3 of Base Rate Loans, and three (3) Eurodollar Business
Days notice of any proposed prepayment pursuant to this ss.3.3 of Eurodollar
Rate Loans, in each case, specifying the proposed date of payment of Revolving
Credit Loans and the principal amount to be paid. Each such partial prepayment
of the Revolving Credit Loans shall be in an integral multiple of $100,000,
shall be accompanied by the payment of accrued interest on the principal prepaid
to the date of payment and shall be applied first to the principal of Base Rate
Loans and then to the principal of Eurodollar Rate Loans, at the Borrower's
option. Each partial prepayment shall be allocated among the Banks, in
proportion, as nearly as practicable, to the respective unpaid principal amount
of each Bank's Note, with adjustments to the extent practicable to equalize any
prior prepayments not exactly in proportion.
4. THE TERM LOAN.
4.1. CONVERSION OF REVOLVING CREDIT LOANS; THE TERM LOAN. Subject to the
terms and conditions set forth in this Credit Agreement, including, without
limitation, the satisfaction of the conditions set forth in ss.13 hereof and the
execution and delivery by the Borrower of the Term Notes to the Banks, on the
Revolving Credit Loan Maturity Date the aggregate amount of the outstanding
Revolving Credit Loans shall be converted into a Term Loan in the aggregate
principal amount equal to the aggregate outstanding principal balance of the
Revolving Credit Loans on such date, held severally by the Banks in accordance
with their Commitment Percentages. The Term Loan outstanding after conversion
shall be evidenced by the separate Term Notes (the "Term Notes") of the Borrower
payable to the order of each Bank, each dated as of the Revolving Credit Loan
Maturity Date and in substantially the form of EXHIBIT B-2 hereto, completed
with appropriate insertions. On the Revolving Credit Loan Maturity Date, the
Borrower shall pay to the Agent for the PRO RATA accounts of
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the Banks, all interest accrued to such date on the Revolving Credit Loans,
together with any Unpaid Reimbursement Obligations, any commitment fees and
other fees payable to the Agent and the Banks hereunder and, as soon as
reasonably practicable after such payment, each Bank shall surrender to the
Borrower its Revolving Credit Note against receipt of its Term Note evidencing
the amount of the outstanding Revolving Credit Loans so converted.
4.2. THE TERM NOTES. Each Term Note shall represent the obligation of the
Borrower to pay to such Bank the principal amount of the Term Loan evidenced by
the Term Note plus interest accrued thereon, as set forth below. The Borrower
irrevocably authorizes each Bank to make or cause to be made a notation on such
Bank's Term Note Record reflecting the original principal amount of such Bank's
Commitment Percentage of the Term Loan and, at or about the time of such Bank's
receipt of any principal payment on such Bank's Term Note, an appropriate
notation on such Bank's Term Note Record reflecting such payment. The aggregate
unpaid amount set forth on such Bank's Term Note Record shall be prima facie
evidence of the principal amount thereof owing and unpaid to such Bank, but the
failure to record, or any error in so recording, any such amount on such Bank's
Term Note Record shall not affect the obligations of the Borrower hereunder or
under any Term Note to make payments of principal of and interest on any Term
Note when due.
4.3. REPAYMENTS OF THE TERM LOAN. The Borrower promises to pay to the Agent
for the account of the Banks the principal amount of the Term Loan in four (4)
consecutive quarterly installments, each equal as near as possible to 1/4th of
the principal amount of the Term Loan outstanding on the Revolving Credit Loan
Maturity Date, such installments to be due and payable on the last day of each
fiscal quarter of the Borrower, commencing with the fiscal quarter ending June
30, 1999, with a final payment on the Term Loan Maturity Date in an amount equal
to the unpaid balance of the Term Loan.
4.4. OPTIONAL PREPAYMENT OF TERM LOAN. The Borrower shall have the right at
any time to prepay the Term Notes on or before the Term Loan Maturity Date, as a
whole, or in part, upon not less than seven (7) Business Days prior written
notice to the Agent, without premium or penalty, PROVIDED that (a) each partial
prepayment shall be in the principal amount of $5,000,000 or an integral
multiple thereof, (b) any portion of any Eurodollar Rate Loan which has been
prepaid on any day other than the last day of the Interest Period relating
thereto shall be subject to the payment by the Borrower of any applicable costs
associated with such prepayment as set forth in ss.6.9 hereof, and (c) each
partial prepayment shall be allocated among the Banks, in proportion, as nearly
as practicable, to the respective outstanding amount of each Bank's Term Note,
with adjustments to the extent practicable to equalize any prior prepayments not
exactly in proportion. Any prepayment of principal of the Term Loan shall
include all interest accrued to the date of prepayment and shall be applied
against the scheduled installments of principal due on the Term Loan in the
inverse order of maturity. No amount repaid with respect to the Term Loan may be
reborrowed.
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4.5. INTEREST ON TERM LOAN.
4.5.1. NOTIFICATION BY BORROWER. The Borrower shall notify the Agent,
such notice to be irrevocable, at least four (4) Eurodollar Business Days
prior to the Drawdown Date of the Term Loan if all or any portion of the
Term Loan is to be a Eurodollar Rate Loan. After the Term Loan has been
made, the provisions of ss.2 shall apply MUTATIS MUTANDIS with respect to
all or any portion of the Term Loan so that the Borrower may have the same
interest rate options with respect to all or any portion of the Term Loan
as it would be entitled to with respect to the Revolving Credit Loans.
4.5.2. AMOUNTS, ETC. Any portion of the Term Loan which is a
Eurodollar Rate Loan relating to any Interest Period shall be in the amount
of $5,000,000 or a whole multiple or $1,000,000 in excess thereof. No
Interest Period relating to the Term Loan or any portion thereof which is a
Eurodollar Rate Loan shall extend beyond the date on which a regularly
scheduled installment payment of the principal of the Term Loan is to be
made unless a portion of the Term Loan at least equal to such installment
payment is a Base Rate Loan.
5. LETTERS OF CREDIT.
5.1. LETTER OF CREDIT COMMITMENTS.
5.1.1. COMMITMENT TO ISSUE LETTERS OF CREDIT. Subject to the terms and
conditions hereof and the execution and delivery by the Borrower of a
letter of credit application on the Agent's customary form (a "Letter of
Credit Application"), the Agent on behalf of the Banks and in reliance upon
the agreement of the Banks set forth in ss.5.1.4 and upon the
representations and warranties of the Borrower contained herein, agrees, in
its individual capacity, to issue, extend and renew for the account of the
Borrower one or more letters of credit prior to the Revolving Credit Loan
Maturity Date (individually, a "Letter of Credit"), in such form as may be
requested by the Borrower and agreed to by the Agent; PROVIDED, HOWEVER,
that, after giving effect to such request, (a) the sum of the aggregate
Maximum Drawing Amount and all Unpaid Reimbursement Obligations shall not
exceed Two Million Dollars ($2,000,000) at any one time and (b) the sum of
(i) the Maximum Drawing Amount on all Letters of Credit, (ii) all Unpaid
Reimbursement Obligations, and (iii) the amount of all Loans outstanding
shall not exceed the lesser of (A) the Total Commitment and (B) the
Borrowing Base.
5.1.2. LETTER OF CREDIT APPLICATIONS. Each Letter of Credit
Application shall be completed to the satisfaction of the Agent. In the
event that any provision of any Letter of Credit Application shall be
inconsistent with any provision of this Credit Agreement, then the
provisions of this Credit Agreement shall, to the extent of any such
inconsistency, govern.
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5.1.3. TERMS OF LETTERS OF CREDIT. Each Letter of Credit issued,
extended or renewed hereunder shall, among other things, (i) provide for
the payment of sight drafts for honor thereunder when presented in
accordance with the terms thereof and when accompanied by the documents
described therein and (ii) have an expiry date no later than the date which
is fourteen (14) Business Days prior to the Revolving Credit Loan Maturity
Date. Each Letter of Credit so issued, extended or renewed shall be subject
to the Uniform Customs.
5.1.4. REIMBURSEMENT OBLIGATIONS OF BANKS. Each Bank severally agrees
that it shall be absolutely liable, without regard to the occurrence of any
Default or Event of Default or any other condition precedent whatsoever, to
the extent of such Bank's Commitment Percentage, to reimburse the Agent on
demand for the amount of each draft paid by the Agent under each Letter of
Credit to the extent that such amount is not reimbursed by the Borrower
pursuant to ss.5.2 (such agreement for a Bank being called herein the
"Letter of Credit Participation" of such Bank).
5.1.5. PARTICIPATIONS OF BANKS. Each such payment made by a Bank shall
be treated as the purchase by such Bank of a participating interest in the
Borrower's Reimbursement Obligation under ss.5.2 in an amount equal to such
payment. Each Bank shall share in accordance with its participating
interest in any interest which accrues pursuant to ss.5.2.
5.2. REIMBURSEMENT OBLIGATION OF THE BORROWER. In order to induce the Agent
to issue, extend and renew each Letter of Credit and the Banks to participate
therein, the Borrower hereby agrees to reimburse or pay to the Agent, for the
account of the Agent or (as the case may be) the Banks, with respect to each
Letter of Credit issued, extended or renewed by the Agent hereunder,
(a) except as otherwise expressly provided in ss.5.2(b) and (c), on
each date that any draft presented under such Letter of Credit is honored
by the Agent, or the Agent otherwise makes a payment under or pursuant to
such Letter of Credit, (i) the amount paid by the Agent under or pursuant
to such Letter of Credit, and (ii) the amount of any customary taxes, fees,
charges or other reasonable costs and expenses whatsoever incurred by the
Agent or any Bank in connection with any payment made by the Agent or any
Bank under, or pursuant to, such Letter of Credit,
(b) upon the reduction (but not termination) of the Total Commitment
to an amount less than the Maximum Drawing Amount, an amount equal to such
difference, which amount shall be held by the Agent for the benefit of the
Banks and the Agent as cash collateral for all Reimbursement Obligations,
and
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(c) upon the termination of the Total Commitment or the acceleration
of the Reimbursement Obligations with respect to all Letters of Credit in
accordance with ss.14, an amount equal to the then Maximum Drawing Amount
of all Letters of Credit, which amount shall be held by the Agent for the
benefit of the Banks and the Agent as cash collateral for all Reimbursement
Obligations.
Each such payment shall be made to the Agent at the Agent's Head Office in
immediately available funds. Interest on any and all amounts remaining unpaid by
the Borrower under this ss.5.2 at any time from the date such amounts become due
and payable (whether as stated in this ss.5.2, by acceleration or otherwise)
until payment in full (whether before or after judgment) shall be payable to the
Agent on demand at the rate specified in ss.6.10 for overdue principal of the
Loans.
5.3. LETTER OF CREDIT PAYMENTS. If any draft shall be presented or other
demand for payment shall be made under any Letter of Credit, the Agent shall
notify the Borrower of the date and amount of the draft presented or demand for
payment and of the date and time when it expects to pay such draft or honor such
demand for payment. If the Borrower fails to reimburse the Agent as provided in
ss.5.2 on or before the date that such draft is paid or other payment is made by
the Agent, the Agent may at any time thereafter notify the Banks of the amount
of any such Unpaid Reimbursement Obligation. No later than 3:00 p.m. (Boston
time) on the Business Day next following the receipt of such notice, each Bank
shall make available to the Agent, at its Head Office, in immediately available
funds, such Bank's Commitment Percentage of such Unpaid Reimbursement
Obligation, together with an amount equal to the product of (i) the average,
computed for the period referred to in clause (iii) below, of the weighted
average interest rate paid by the Agent for federal funds acquired by the Agent
during each day included in such period, TIMES (ii) the amount equal to such
Bank's Commitment Percentage of such Unpaid Reimbursement Obligation, TIMES
(iii) a fraction, the numerator of which is the number of days that elapse from
and including the date the Agent paid the draft presented for honor or otherwise
made payment up to but excluding the date on which such Bank's Commitment
Percentage of such Unpaid Reimbursement Obligation shall become immediately
available to the Agent, and the denominator of which is 365. The responsibility
of the Agent to the Borrower and the Banks shall be only to determine that the
documents (including each draft) delivered under each Letter of Credit in
connection with such presentment shall be in conformity in all material respects
with such Letter of Credit.
5.4. OBLIGATIONS ABSOLUTE. The Borrower's obligations under this ss.5 shall
be absolute and unconditional under any and all circumstances and irrespective
of the occurrence of any Default or Event of Default or any condition precedent
whatsoever or any setoff, counterclaim or defense to payment which the Borrower
may have or have had against the Agent, any Bank or any beneficiary of a Letter
of Credit. The Borrower further agrees with the Agent
<PAGE> 38
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and the Banks that the Agent and the Banks shall not be responsible for, and the
Borrower's Reimbursement Obligations under ss.5.2 shall not be affected by,
among other things, the validity or genuineness of documents or of any
endorsements thereon, even if such documents should in fact prove to be in any
or all respects invalid, fraudulent or forged, or any dispute between or among
the Borrower, the beneficiary of any Letter of Credit or any financing
institution or other party to which any Letter of Credit may be transferred or
any claims or defenses whatsoever of the Borrower against the beneficiary of any
Letter of Credit or any such transferee. The Agent and the Banks shall not be
liable for any error, omission, interruption or delay in transmission, dispatch
or delivery of any message or advice, however transmitted, in connection with
any Letter of Credit. The Borrower agrees that any action taken or omitted by
the Agent or any Bank under or in connection with each Letter of Credit and the
related drafts and documents, if done in good faith, shall be binding upon the
Borrower and shall not result in any liability on the part of the Agent or any
Bank to the Borrower.
5.5. RELIANCE BY ISSUER. To the extent not inconsistent with ss.5.4, the
Agent shall be entitled to rely, and shall be fully protected in relying upon,
any Letter of Credit, draft, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, telex or teletype message,
statement, order or other document believed by it to be genuine and correct and
to have been signed, sent or made by the proper Person or Persons and upon
advice and statements of legal counsel, independent accountants and other
experts selected by the Agent. The Agent shall be fully justified in failing or
refusing to take any action requested by the Majority Banks unless it shall
first have received such advice or concurrence of the Majority Banks as it
reasonably deems appropriate or it shall first be indemnified to its reasonable
satisfaction by the Banks against any and all liability and expense which may be
incurred by it by reason of taking or continuing to take any such action. The
Agent shall in all cases be fully protected in acting, or in refraining from
acting, under this Credit Agreement in accordance with a request of the Majority
Banks, and such request and any action taken or failure to act pursuant thereto
shall be binding upon the Banks and all future holders of the Notes or of a
Letter of Credit Participation.
5.6. LETTER OF CREDIT FEE. The Borrower shall, on the date of issuance or
any extension or renewal of any Letter of Credit and at such other time or times
as such charges are customarily made by the Agent, pay a fee (in each case, a
"Letter of Credit Fee") to the Agent for the accounts of the Banks in respect of
each Letter of Credit equal to the Applicable Rate (as defined below) per annum
of the face amount of such Letter of Credit, PLUS the Agent's customary issuance
fee (which fee shall be solely for the account of the Agent). For the purposes
of this ss.5.6, "Applicable Rate" shall mean the percentage rate per annum then
in effect that the Borrower would pay with respect to Eurodollar Rate Loans as
the Applicable Eurodollar Rate Margin as set forth in ss.2.5 of this Credit
Agreement.
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6. CERTAIN GENERAL PROVISIONS.
6.1. FEES. The Borrower shall pay to the Agent on the Closing Date certain
fees as previously agreed to in writing by and between the Borrower and the
Agent. The Borrower shall pay to the Agent annually in advance, for the Agent's
own account, a non refundable Agent's fee in the amount previously agreed to in
writing by and between the Borrower and the Agent.
6.2. FUNDS FOR PAYMENTS.
6.2.1. PAYMENTS TO AGENT. All payments of principal, interest,
Reimbursement Obligations, Letter of Credit Fees, commitment fees and any
other amounts due hereunder or under any of the other Loan Documents shall
be made to the Agent, for the respective accounts of the Banks and the
Agent, at the Agent's Head Office or at such other location in the Boston,
Massachusetts, area that the Agent may from time to time designate, in each
case in immediately available funds.
6.2.2. NO OFFSET, ETC. All payments by the Borrower hereunder and
under any of the other Loan Documents shall be made without setoff or
counterclaim and free and clear of and without deduction for any taxes,
levies, imposts, duties, charges, fees, deductions, withholdings,
compulsory loans, restrictions or conditions of any nature now or hereafter
imposed or levied by any jurisdiction or any political subdivision thereof
or taxing or other authority therein unless the Borrower is compelled by
law to make such deduction or withholding. If any such obligation is
imposed upon the Borrower with respect to any amount payable by it
hereunder or under any of the other Loan Documents, the Borrower will pay
to the Agent, for the account of the Banks or (as the case may be) the
Agent, on the date on which such amount is due and payable hereunder or
under such other Loan Document, such additional amount in Dollars as shall
be necessary to enable the Banks or the Agent to receive the same net
amount which the Banks or the Agent would have received on such due date
had no such obligation been imposed upon the Borrower. The Borrower will
deliver promptly to the Agent certificates or other valid vouchers for all
taxes or other charges deducted from or paid with respect to payments made
by the Borrower hereunder or under such other Loan Document.
6.3. COMPUTATIONS. All computations of interest on the Loans and of
commitment fees and Letter of Credit Fees shall, unless otherwise expressly
provided herein, be based on a 365-day year and paid for the actual number of
days elapsed; PROVIDED, HOWEVER that interest on Eurodollar Rate Loans shall be
based on a 360-day year. Except as otherwise provided in the definition of the
term "Interest Period" with respect to Eurodollar Rate Loans, whenever a payment
hereunder or under any of the other Loan Documents becomes due on a day that is
not a Business Day, the due date for such payment shall be extended to the next
succeeding Business Day, and interest shall accrue during such extension. The
outstanding amount of the Loans as reflected on the Note
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Records from time to time shall be considered correct and binding on the
Borrower unless within five (5) Business Days after receipt of any notice by the
Agent or any of the Banks of such outstanding amount, the Borrower shall notify
the Agent or such Bank to the contrary.
6.4. INABILITY TO DETERMINE EURODOLLAR RATE. In the event, prior to the
commencement of any Interest Period relating to any Eurodollar Rate Loan, the
Agent shall determine that adequate and reasonable methods do not exist for
ascertaining the Eurodollar Rate that would otherwise determine the rate of
interest to be applicable to any Eurodollar Rate Loan during any Interest
Period, the Agent shall forthwith give notice of such determination (which shall
be conclusive and binding on the Borrower and the Banks) to the Borrower and the
Banks. In such event (i) any Loan Request or Conversion Request with respect to
Eurodollar Rate Loans shall be automatically withdrawn and shall be deemed a
request for Base Rate Loans, (ii) each Eurodollar Rate Loan will automatically,
on the last day of the then current Interest Period thereof, become a Base Rate
Loan, and (iii) the obligations of the Banks to make Eurodollar Rate Loans shall
be suspended until the Agent determines that the circumstances giving rise to
such suspension no longer exist, whereupon the Agent shall so notify the
Borrower and the Banks.
6.5. ILLEGALITY. Notwithstanding any other provisions herein, if any
present or future law, regulation, treaty or directive or change in the
interpretation or application thereof shall make it unlawful for any Bank to
make or maintain Eurodollar Rate Loans, such Bank shall forthwith give notice of
such circumstances to the Borrower and the other Banks and thereupon (i) the
commitment of such Bank to make Eurodollar Rate Loans or convert Loans of
another Type to Eurodollar Rate Loans shall forthwith be suspended and (ii) such
Bank's Loans then outstanding as Eurodollar Rate Loans, if any, shall be
converted automatically to Base Rate Loans on the last day of each Interest
Period applicable to such Eurodollar Rate Loans or within such earlier period as
may be required by law. The Borrower hereby agrees promptly to pay the Agent for
the account of such Bank, upon demand by such Bank, any additional amounts
necessary to compensate such Bank for any costs incurred by such Bank in making
any conversion in accordance with this ss.6.5, including any interest or fees
payable by such Bank to lenders of funds obtained by it in order to make or
maintain its Eurodollar Rate Loans hereunder.
6.6. ADDITIONAL COSTS, ETC. If any present or future applicable law, which
expression, as used herein, includes statutes, rules and regulations thereunder
and interpretations thereof by any competent court or by any governmental or
other regulatory body or official charged with the administration or the
interpretation thereof and requests, directives, instructions and notices at any
time or from time to time hereafter made upon or otherwise issued to any Bank or
the Agent by any central bank or other fiscal, monetary or other authority
(whether or not having the force of law), shall:
(a) subject any Bank or the Agent to any tax, levy, impost, duty,
charge, fee, deduction or withholding of any nature with respect to
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this Credit Agreement, the other Loan Documents, any Letters of Credit,
such Bank's Commitment or the Loans or deposits obtained to fund Loans or
Letters of Credit (other than taxes based upon or measured by the net
profit or income of such Bank or the Agent); or
(b) materially change the basis of taxation (except for changes in
taxes on income or profits) of payments to any Bank of the principal of or
the interest on the Loans or any other amounts payable to any Bank or the
Agent under this Credit Agreement or the other Loan Documents; or
(c) impose or increase or render applicable (other than to the extent
specifically provided for elsewhere in this Credit Agreement) any special
deposit, assessment, liquidity, capital adequacy, or reserve or other
similar requirement (whether or not having the force of law) against assets
held by, or deposits in or for the account of, or loans by, or letters of
credit issued by, or commitments of an office of any Bank; or
(d) impose on any Bank or the Agent any other conditions or
requirements with respect to this Credit Agreement, the other Loan
Documents, the Letters of Credit, the Loans, such Bank's Commitment, or any
class of loans, letters of credit or commitments of which any of the Loans,
the Letters of Credit, or such Bank's Commitment forms a part, and the
result of any of the foregoing is
(i) to increase the cost to any Bank of making, funding, issuing,
renewing, extending or maintaining any of the Loans or such Bank's
Commitment or any Letter of Credit, or
(ii) to reduce the amount of principal, interest, Reimbursement
Obligation or other amount payable to such Bank or the Agent hereunder
on account of such Bank's Commitment, any Letter of Credit or any of
the Loans, or
(iii) to require such Bank or the Agent to make any payment or to
forego any interest or Reimbursement Obligation or other sum payable
hereunder, the amount of which payment or foregone interest or
Reimbursement Obligation or other sum is calculated by reference to
the gross amount of any sum receivable or deemed received by such Bank
or the Agent from the Borrower hereunder,
then, and in each such case, the Borrower will, upon written demand
made by such Bank or (as the case may be) the Agent at any time and from
time to time and as often as the occasion therefor may arise, pay to such
Bank or the Agent such additional amounts as will be sufficient to
compensate the Bank or the Agent for such additional cost, reduction,
payment or foregone interest, Reimbursement Obligation or other sum.
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6.7. CAPITAL ADEQUACY. If after the date hereof any Bank or the Agent
determines that (i) the adoption of or change in any law, governmental rule,
regulation, policy, guideline or directive (whether or not having the force of
law) regarding capital requirements for banks or bank holding companies or any
change in the interpretation or application thereof by a court or governmental
authority with appropriate jurisdiction, or (ii) compliance by such Bank or the
Agent or any corporation controlling such Bank or the Agent with any law,
governmental rule, regulation, policy, guideline or directive (whether or not
having the force of law and including any determination by such central bank or
other governmental authority that for purposes of capital adequacy requirements
the Commitments hereunder do not constitute commitments with an original
maturity of one year or less) of any such entity regarding capital adequacy, has
the effect of reducing the return on such Bank's or the Agent's commitment with
respect to any Loans to a level below that which such Bank or the Agent could
have achieved but for such adoption, change or compliance (taking into
consideration such Bank's or the Agent's then existing policies with respect to
capital adequacy and assuming full utilization of such entity's capital) by any
amount deemed by such Bank or (as the case may be) the Agent to be material,
then such Bank or the Agent may notify the Borrower of such fact. To the extent
that the amount of such reduction in the return on capital is not reflected in
the Base Rate, the Borrower agrees to pay such Bank or (as the case may be) the
Agent for the amount of such reduction in the return on capital as and when such
reduction is determined upon presentation by such Bank or (as the case may be)
the Agent of a certificate in accordance with ss.6.8 hereof. Each Bank shall
allocate such cost increases among its customers in good faith and on an
equitable basis.
6.8. CERTIFICATE. A certificate setting forth any additional amounts
payable pursuant to ss.6.6 or 6.7 and a brief explanation of such amounts which
are due, submitted by any Bank or the Agent to the Borrower, shall be
conclusive, absent manifest error, that such amounts are due and owing.
6.9. INDEMNITY. The Borrower agrees to indemnify each Bank and to hold each
Bank harmless from and against any loss, cost or expense (including loss of
anticipated profits) that such Bank may sustain or incur as a consequence of (i)
default by the Borrower in payment of the principal amount of or any interest on
any Eurodollar Rate Loans as and when due and payable, including any such loss
or expense arising from interest or fees payable by such Bank to lenders of
funds obtained by it in order to maintain its Eurodollar Rate Loans, (ii)
default by the Borrower in making a borrowing after the Borrower has given (or
is deemed to have given) a Loan Request or a Conversion Request relating thereto
in accordance with ss.2.6 or ss.2.7 or (iii) the making of any payment of a
Eurodollar Rate Loan or the making of any conversion of any such Loan to a Base
Rate Loan on a day that is not the last day of the applicable Interest Period
with respect thereto, including interest or fees payable by such Bank to lenders
of funds obtained by it in order to maintain any such Loans.
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6.10. OVERDUE AMOUNTS. Overdue principal and (to the extent permitted by
applicable law) interest on the Loans and all other overdue amounts payable
hereunder or under any of the other Loan Documents shall bear interest
compounded monthly and payable on demand at a rate per annum equal to two
percent (2%) above the Base Rate until such amount shall be paid in full (after
as well as before judgment).
7. SECURITY AND GUARANTIES.
7.1. SECURITY OF BORROWER. The Obligations shall be secured by a perfected
first priority security interest (subject only to Permitted Liens entitled to
priority under applicable law) in all of the assets of the Borrower (other than
Transferred Assets and the assets which have been transferred pursuant to, or
are subject to a security interest under, any Sale Agreements existing as of the
Closing Date) whether now owned or hereafter acquired, and a pledge of and
perfected first priority lien on all of the issued and outstanding shares of
ACFC pursuant to the terms of the Security Documents to which the Borrower is a
party.
7.2. GUARANTY AND SECURITY OF ACFC. The Obligations shall also be
guaranteed pursuant to the terms of the Guaranty. The obligations of ACFC under
the Guaranty shall be in turn secured by a perfected first priority security
interest (subject only to Permitted Liens entitled to priority under applicable
law) in all of the assets of ACFC, whether now owned or hereafter acquired,
pursuant to the terms of the Security Documents to which ACFC is a party.
8. REPRESENTATIONS AND WARRANTIES.
The Borrower and ACFC each represents and warrants to the Banks and the
Agent as follows:
8.1. CORPORATE AUTHORITY.
8.1.1. INCORPORATION; GOOD STANDING. Each of the Borrower and its
Subsidiaries (i) is a corporation duly organized, validly existing and in
good standing under the laws of its state of incorporation, (ii) has all
requisite corporate power to own its property and conduct its business as
now conducted and as presently contemplated, and (iii) is in good standing
as a foreign corporation and is duly authorized to do business in each
jurisdiction where such qualification is necessary except where a failure
to be so qualified would not have a materially adverse effect on the
business, assets or financial condition of the Borrower or its Subsidiaries
taken as a whole.
8.1.2. AUTHORIZATION. The execution, delivery and performance of this
Credit Agreement and the other Loan Documents to which the Borrower or any
of its Subsidiaries is or is to become a party and the transactions
contemplated hereby and thereby (i) are within the corporate authority of
such Person, (ii) have been duly authorized by all
<PAGE> 44
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necessary corporate proceedings, (iii) do not conflict with or result in
any breach or contravention of any provision of law, statute, rule or
regulation to which the Borrower or any of its Subsidiaries is subject or
any judgment, order, writ, injunction, license or permit applicable to the
Borrower or any of its Subsidiaries and (iv) do not conflict with any
provision of the corporate charter or bylaws of, or any agreement or other
instrument binding upon, the Borrower or any of its Subsidiaries.
8.1.3. ENFORCEABILITY. The execution and delivery of this Credit
Agreement and the other Loan Documents to which the Borrower or any of its
Subsidiaries is or is to become a party will result in valid and legally
binding obligations of such Person enforceable against it in accordance
with the respective terms and provisions hereof and thereof, except as
enforceability is limited by bankruptcy, insolvency, reorganization,
moratorium or other laws relating to or affecting generally the enforcement
of creditors' rights and except to the extent that availability of the
remedy of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding therefor may be
brought.
8.2. GOVERNMENTAL APPROVALS. The execution, delivery and performance by the
Borrower and any of its Subsidiaries of this Credit Agreement and the other Loan
Documents to which the Borrower or any of its Subsidiaries is or is to become a
party and the transactions contemplated hereby and thereby do not require the
approval or consent of, or filing with, any governmental agency or authority
other than those already obtained except to the extent financing statements are
required to be filed to perfect the security interest granted pursuant to the
Security Documents.
8.3. TITLE TO PROPERTIES; LEASES. Except as indicated on SCHEDULE 8.3
hereto, the Borrower and its Subsidiaries own all of the assets reflected in the
consolidated balance sheet of the Borrower and its Subsidiaries as at the
Balance Sheet Date or acquired since that date (except property and assets sold
or otherwise disposed of in the ordinary course of business since that date),
subject to no rights of others, including any mortgages, leases, conditional
sales agreements, title retention agreements, liens or other encumbrances except
Permitted Liens.
8.4. FINANCIAL STATEMENTS AND PROJECTIONS.
8.4.1. FINANCIAL STATEMENTS. There has been furnished to the Agent a
consolidated balance sheet of the Borrower and its Subsidiaries as at the
Balance Sheet Date, and a consolidated statement of income for the fiscal
year then ended, certified by the Borrower's independent certified public
accountants. Such balance sheet and statement of income have been prepared
in accordance with generally accepted accounting principles and fairly
present the financial condition of the Borrower as at the close of business
on the date thereof and the results of operations for the fiscal year then
ended. Other than as set forth on SCHEDULE 8.4.1,
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there are no contingent liabilities of the Borrower or any of its
Subsidiaries as of such date involving material amounts and of a nature
customarily reflected on a balance sheet in accordance with generally
accepted accounting principles consistently applied, known to the officers
of the Borrower not disclosed in said balance sheet and the related notes
thereto.
8.4.2. PROJECTIONS. The projections of the annual operating budgets of
the Borrower and its Subsidiaries (other than Credident) on a consolidated
basis, balance sheets and cash flow statements for the 1998 and 1999 fiscal
years, copies of which have been delivered to each Bank, disclose all
assumptions made with respect to general economic, financial and market
conditions used in formulating such projections. To the knowledge of the
Borrower or any of its Subsidiaries, no facts exist that (individually or
in the aggregate) would result in any material change in any of such
projections. The projections are based upon reasonable estimates and
assumptions, have been prepared on the basis of the assumptions stated
therein and reflect the reasonable estimates of the Borrower and its
Subsidiaries of the results of operations and other information projected
therein.
8.5. NO MATERIAL ADVERSE CHANGES, ETC. Since the Balance Sheet Date there
has occurred no materially adverse change in the financial condition or business
of the Borrower and its Subsidiaries as shown on or reflected in the
consolidated balance sheet of the Borrower and its Subsidiaries as at the
Balance Sheet Date, or the consolidated statement of income for the fiscal year
then ended, other than changes in the ordinary course of business that have not
had any materially adverse effect in the aggregate on the business or financial
condition of the Borrower and its Subsidiaries. Since the Balance Sheet Date,
the Borrower has not made any Distribution.
8.6. FRANCHISES, PATENTS, COPYRIGHTS, ETC. Each of the Borrower and its
Subsidiaries possesses all franchises, patents, copyrights, trademarks, trade
names, licenses and permits, and rights in respect of the foregoing, adequate
for the conduct of its business substantially as now conducted without known
conflict with any rights of others.
8.7. LITIGATION. Other than as set forth on SCHEDULE 8.7, there are no
actions, suits, proceedings or investigations of any kind pending, or to the
knowledge of the Borrower, threatened against the Borrower or any of its
Subsidiaries before any court, tribunal or administrative agency or board that,
if adversely determined, might, either in any case or in the aggregate,
materially adversely affect the properties, assets, financial condition or
business of the Borrower and its Subsidiaries, taken as a whole, or materially
impair the right of the Borrower and its Subsidiaries, considered as a whole, to
carry on business substantially as now conducted by them, or result in any
substantial liability not adequately covered by insurance, or for which adequate
reserves are not maintained on the consolidated balance sheet of the Borrower,
or which question the validity of this Credit Agreement or any of the other Loan
Documents, or
<PAGE> 46
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any action taken or to be taken pursuant hereto or thereto. For purposes of this
ss.8.7, any counterclaim by a Customer in response to a collection action shall
not be deemed to be material unless such counterclaim is reasonably likely to
result in an uninsured liability in excess of $500,000.
8.8. NO MATERIALLY ADVERSE CONTRACTS, ETC. Neither the Borrower nor any of
its Subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation that has or is
expected in the future to have a materially adverse effect on the business,
assets or financial condition of the Borrower and its Subsidiaries, taken as a
whole. Neither the Borrower nor its Subsidiaries is a party to any contract or
agreement that has or is expected, in the judgment of the Borrower's officers,
to have any materially adverse effect on the business of the Borrower and its
Subsidiaries, taken as a whole.
8.9. COMPLIANCE WITH OTHER INSTRUMENTS, LAWS, ETC. Neither the Borrower nor
any of its Subsidiaries is in violation of any provision of its charter
documents, bylaws, or any agreement or instrument to which it may be subject or
by which it or any of its properties may be bound or any decree, order,
judgment, statute, license, rule or regulation, in any of the foregoing cases in
a manner that could materially and adversely affect the financial condition,
properties or business of the Borrower or any of its Subsidiaries.
8.10. TAX STATUS. The Borrower and its Subsidiaries (i) have made or filed
(or timely filed an extension to file) all federal and state income and all
other tax returns, reports and declarations required by any jurisdiction to
which any of them is subject or an extension to file has been timely filed, (ii)
have paid all taxes and other governmental assessments and charges shown or
determined to be due on such returns, reports and declarations, except those
being contested in good faith and by appropriate proceedings and (iii) have set
aside on their books provisions reasonably adequate for the payment of all taxes
for periods subsequent to the periods to which such returns, reports or
declarations apply. There are no unpaid taxes in any material amount claimed to
be due by the taxing authority of any jurisdiction, and the officers of the
Borrower know of no basis for any such claim.
8.11. NO EVENT OF DEFAULT. No Default or Event of Default has occurred and
is continuing.
8.12. HOLDING COMPANY AND INVESTMENT COMPANY ACTS. Neither the Borrower nor
any of its Subsidiaries is a "holding company", or a "subsidiary company" of a
"holding company", or an affiliate" of a "holding company", as such terms are
defined in the Public Utility Holding Company Act of 1935; nor is it an
"investment company", or an "affiliated company" or a "principal underwriter" of
an "investment company", as such terms are defined in the Investment Company Act
of 1940.
8.13. ABSENCE OF FINANCING STATEMENTS, ETC. Except with respect to
Permitted Liens, there is no financing statement, security agreement, chattel
<PAGE> 47
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mortgage, real estate mortgage or other document filed or recorded with any
filing records, registry, or other public office, that purports to cover, affect
or give notice of any present or possible future lien on, or security interest
in, any assets or property of the Borrower or any of its Subsidiaries or rights
thereunder.
8.14. PERFECTION OF SECURITY INTEREST. All filings, assignments, pledges
and deposits of documents or instruments have been made and all other actions
have been taken that are necessary or advisable, under applicable law, to
establish and perfect the Agent's security interest in the Collateral. The
Collateral and the Agent's rights with respect to the Collateral are not subject
to any setoff, claims, withholdings or other defenses other than Permitted
Liens. The Borrower and ACFC are the owners of the Collateral free from any
lien, security interest, encumbrance and any other claim or demand, except for
Permitted Liens.
8.15. CERTAIN TRANSACTIONS. Except for arm's length transactions pursuant
to which the Borrower or any of its Subsidiaries makes payments in the ordinary
course of business upon terms no less favorable than the Borrower or such
Subsidiary could obtain from third parties, none of the officers, directors, or
employees of the Borrower or any of its Subsidiaries is presently a party to any
transaction with the Borrower or any of its Subsidiaries (other than for
services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or otherwise
requiring payments to or from any officer, director or such employee or, to the
knowledge of the Borrower, any corporation, partnership, trust or other entity
in which any officer, director, or any such employee has a substantial interest
or is an officer, director, trustee or partner.
8.16. EMPLOYEE BENEFIT PLANS.
8.16.1. IN GENERAL. Each Employee Benefit Plan has been maintained and
operated in compliance in all material respects with the provisions of
ERISA and, to the extent applicable, the Code, including but not limited to
the provisions thereunder respecting prohibited transactions. Neither the
Borrower nor any ERISA Affiliate maintains or contributes to any Guaranteed
Pension Plan.
8.16.2. TERMINABILITY OF WELFARE PLANS. Under each Employee Benefit
Plan which is an employee welfare benefit plan within the meaning of
ss.3(1) or ss.3(2)(B) of ERISA, no benefits are due unless the event giving
rise to the benefit entitlement occurs prior to plan termination (except as
required by Title I, Part 6 of ERISA). The Borrower or an ERISA Affiliate,
as appropriate, may terminate each such Plan at any time (or at any time
subsequent to the expiration of any applicable bargaining agreement) in the
discretion of the Borrower or such ERISA Affiliate without liability to any
Person.
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8.16.3. GUARANTEED PENSION PLANS. Neither the Borrower or any ERISA
Affiliate maintains or contributes to any Guaranteed Pension Plan.
8.16.4. MULTIEMPLOYER PLANS. Neither the Borrower nor any ERISA
Affiliate has incurred any material liability (including secondary
liability) to any Multiemployer Plan as a result of a complete or partial
withdrawal from such Multiemployer Plan under ss.4201 of ERISA or as a
result of a sale of assets described in ss.4204 of ERISA. Neither the
Borrower nor any ERISA Affiliate has been notified that any Multiemployer
Plan is in reorganization or insolvent under and within the meaning of
ss.4241 or ss.4245 of ERISA or that any Multiemployer Plan intends to
terminate or has been terminated under ss.4041A of ERISA.
8.17. REGULATIONS U AND X. The proceeds of the Loans shall be used for
working capital purposes. No portion of any Loan which is to be used for the
purpose of purchasing or carrying any "margin security" or "margin stock" will
be secured directly or indirectly by "margin security" or "margin stock" as such
terms are used in Regulations U and X of the Board of Governors of the Federal
Reserve System, 12 C.F.R. Parts 221 and 224. No portion of the proceeds of any
Loans is to be used, and no portion of any Letter of Credit is to be obtained,
for the purpose of (a) knowingly purchasing, or providing credit support for the
purchase of, Ineligible Securities from a Section 20 Subsidiary during any
period in which such Section 20 Subsidiary makes a market in such Ineligible
Securities, (b) knowingly purchasing, or providing credit support for the
purchase of, during the underwriting or placement period, any Ineligible
Securities being underwritten or privately placed by a Section 20 Subsidiary, or
(c) making, or providing credit support for the making of, payments of principal
or interest on Ineligible Securities underwritten or privately placed by a
Section 20 Subsidiary and issued by or for the benefit of the Borrower or any
Subsidiary or other Affiliate of the Borrower.
8.18. ENVIRONMENTAL COMPLIANCE. The Borrower has taken all necessary steps
to investigate the past and present condition and usage of the Real Estate and
the operations conducted thereon and, based upon such diligent investigation,
has determined that:
(a) none of the Borrower or any of its Subsidiaries is in violation,
or alleged violation, of any judgment, decree, order, law, license, rule or
regulation pertaining to environmental matters, including without
limitation, those arising under the Resource Conservation and Recovery Act
("RCRA"), the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 as amended ("CERCLA"), the Superfund Amendments and
Reauthorization Act of 1986 ("SARA"), the Federal Clean Water Act, the
Federal Clean Air Act, the Toxic Substances Control Act, or any state or
local statute, regulation, ordinance, order or decree relating to health,
safety or the environment (hereinafter "Environmental Laws"), which
violation would have a
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material adverse effect on the environment or the business, assets or
financial condition of the Borrower or any of its Subsidiaries;
(b) neither the Borrower nor any of its Subsidiaries has received
notice from any third party including, without limitation: any federal,
state or local governmental authority, (i) that any one of them has been
identified by the United States Environmental Protection Agency ("EPA) as a
potentially responsible party under CERCLA with respect to a site listed on
the National Priorities List, 40 C.F.R. Part 300 Appendix B; (ii) that any
hazardous waste, as defined by 42 U.S.C. ss.6903(5), any hazardous
substances as defined by 42 U.S.C. ss.9601(14), any pollutant or
contaminant as defined by 42 U.S.C. ss.9601(33) and any toxic substances,
oil or hazardous materials or other chemicals or substances regulated by
any Environmental Laws ("Hazardous Substances") which any one of them has
generated, transported or disposed of has been found at any site at which a
federal, state or local agency or other third party has conducted or has
ordered that the Borrower or any of its Subsidiaries conduct a remedial
investigation, removal or other response action pursuant to any
Environmental Law; or (iii) that it is or shall be a named party to any
claim, action, cause of action, complaint, or legal or administrative
proceeding (in each case, contingent or otherwise) arising out of any third
party's incurrence of costs, expenses, losses or damages of any kind
whatsoever in connection with the release of Hazardous Substances;
(c) except as set forth on SCHEDULE 8.18 attached hereto: (i) no
portion of the Real Estate has been used for the handling, processing,
storage or disposal of Hazardous Substances except in accordance with
applicable Environmental Laws; and no underground tank or other underground
storage receptacle for Hazardous Substances is located on any portion of
the Real Estate; (ii) in the course of any activities conducted by the
Borrower or any of its Subsidiaries, no Hazardous Substances have been
generated or are being used on the Real Estate except in accordance with
applicable Environmental Laws; (iii) there have been no releases (i.e. any
past or present releasing, spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, disposing or dumping) or
threatened releases of Hazardous Substances on, upon, into or from the
properties of the Borrower or its Subsidiaries, which releases would have a
material adverse effect on the value of any of the Real Estate or adjacent
properties or the environment; (iv) to the best of the Borrower's
knowledge, there have been no releases on, upon, from or into any real
property in the vicinity of any of the Real Estate which, through soil or
groundwater contamination, may have come to be located on, and which would
have a material adverse effect on the value of, the Real Estate; and (v) in
addition, any Hazardous Substances that have been generated on any of the
Real Estate have been transported offsite only by carriers having an
identification number issued by the EPA, treated or disposed of only by
treatment or disposal facilities maintaining
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valid permits as required under applicable Environmental Laws, which
transporters and facilities have been and are, to the best of the
Borrower's knowledge, operating in compliance with such permits and
applicable Environmental Laws; and
(d) none of the Borrower and its Subsidiaries, or any of the Real
Estate is subject to any applicable environmental law requiring the
performance of Hazardous Substances site assessments, or the removal or
remediation of Hazardous Substances, or the giving of notice to any
governmental agency or the recording or delivery to other Persons of an
environmental disclosure document or statement by virtue of the
transactions set forth herein and contemplated hereby or to the
effectiveness of any other transactions contemplated hereby.
8.19. SUBSIDIARIES, ETC. The Securitization Subsidiaries, Credident and
ACFC are the only Subsidiaries of the Borrower. Except as set forth on SCHEDULE
8.19 hereto, neither the Borrower nor any Subsidiary of the Borrower is engaged
in any joint venture or partnership with any other person. Each of the
Securitization Subsidiaries, Credident and ACFC have no Subsidiaries.
8.20. BANK ACCOUNTS. SCHEDULE 8.20 sets forth the account numbers and
location of all bank accounts of the Borrower or any of its Subsidiaries;
PROVIDED, HOWEVER, that the Borrower, ACFC and the Securitization Subsidiaries
may maintain bank accounts not listed on SCHEDULE 8.20 so long as the aggregate
amount contained in such accounts does not at any time exceed $200,000.
8.21. ELIGIBLE ACCOUNTS RECEIVABLE, EQUIPMENT AND CONTRACTS. Each Account
Receivable included in Eligible Accounts Receivable meets the following
criteria:
(a) Either the Borrower or ACFC is the sole legal owner of the Account
Receivable, the Contracts and the Equipment (or will have a first priority
security interest in the Equipment), free and clear of all liens other than
Permitted Liens.
(b) Each of the Contracts is a legal, valid and binding full recourse
obligation of the Obligor thereunder, enforceable by the Borrower or ACFC
and their respective assigns against such Obligor in accordance with the
terms thereof, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization or similar laws relating to or affecting the
enforcement of creditors' rights generally and by any and all applicable
requirements of any federal, state or local law including, without
limitation, usury, truth-in-lending and equal credit opportunity laws
applicable to each Contract have been complied with.
(c) The Borrower and ACFC, and to the best of their respective
knowledge, the other parties to such Contract, had all requisite authority
and capacity to enter into such Contract; and no Obligor has been
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released, in whole or in part, from any of its obligations in respect of
any Contract.
(d) Except as enforcement may be limited by bankruptcy, insolvency,
reorganization or similar laws relating to or affecting the enforcement of
creditors' rights generally and by equitable principles, the obligation of
each Obligor to pay all amounts owed under each of the Contracts to which
such Obligor is a party throughout the term thereof is and will be
unconditional, without any right of set-off or counterclaim or any defense
by such Obligor, and without regard to any event affecting the Equipment,
if any, subject to such Contract, any claim of such Obligor against the
Borrower or ACFC or any change in circumstance of such Obligor or any other
circumstance whatsoever.
(e) There will be no facts or circumstances existing as of the
relevant time which give rise to any right of rescission, offset,
counterclaim or defense, including the defense of usury, to the obligations
of any Obligor, including the obligation of such Obligor to pay all amounts
due thereunder, with respect to any Contract to which such Obligor is a
party; and neither the operation of any of the terms of any Contract nor
the exercise of any right thereunder will render such Contract
unenforceable in whole or in part or subject to any right of rescission,
offset, counterclaim or defense, including the defense of usury (other than
limitations on enforcement as a result of bankruptcy, insolvency,
reorganization or similar laws relating to or affecting the enforcement of
creditors' rights generally and by general equitable principles), and no
such right of rescission, offset, counterclaim or defense has been asserted
with respect thereto.
(f) No Contract, and no provision of any Contract, has been amended,
terminated, altered, waived or modified since inception in any respect that
is adverse to the interests of the Borrower or ACFC except for reissues
that are consistent with Borrower's past practices, no Contract has been
satisfied, canceled or subordinated, in whole or in part, or rescinded, nor
has any instrument been executed that would effect any such satisfaction,
cancellation, subordination or rescission, except for Contracts that have
been prepaid in full.
(g) No Obligor has been released by the Borrower or ACFC from the
terms of the related Contract.
(h) Each Contract was originated or acquired in (1) in the Borrower's
ordinary course of business, in accordance with the Borrower's Credit
Policy or (2) in ACFC's ordinary course of business, in accordance with
ACFC's Credit Policy. Each Contract is of a type customarily in use in the
leasing or financing business and has not been found, in the Agent's
reasonable judgment, to be unacceptable.
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(i) Each Obligor is a resident of the United States of America and is
not the Borrower or ACFC or an Affiliate of the Borrower or ACFC.
(j) Each Contract requires the Obligor to assume all risk of loss or
malfunction of the related Equipment, if any. Each Contract requires the
Obligor to pay all sales, use, property, excise and other similar taxes
imposed on or with respect to the related Equipment, if any. No Contract
permits early termination or prepayment, unless the amount required to be
paid by or on behalf of Obligor in respect thereof is equal to or greater
than the applicable termination amount as set forth in such Contract. No
Contract provides for the substitution, exchange or addition of any
Equipment subject thereto, if any, which would result in any reduction of
the amount of payments or change the timing of payments due under such
Contract.
(k) There are no proceedings or investigations pending against the
Borrower or ACFC or, to the best of their respective knowledge, threatened
or otherwise pending before any court, regulatory body, administrative
agency or other tribunal or government instrumentality (A) asserting the
invalidity or unenforceability of any Contract, (B) seeking to prevent
payment and performance of any Contract, or (C) seeking any determination
or ruling that might, in the aggregate, adversely and materially affect the
validity or enforceability of any Contract.
(l) Each of the Borrower and ACFC has duly performed all material
obligations on its part required to be performed by it under or in
connection with each Contract, and has done nothing to materially impair
its rights thereunder.
(m) Each Contract is either an "account" (as defined in Section 9-106
of the UCC) or "chattel paper" (as defined in Section 9-105 of the UCC) or
an "instrument" (as defined in Section 9-105 of the UCC). If the Contract
is chattel paper, then (i) there is only one counterpart of the Contract
that constitutes "chattel paper" for purposes of Section 9-105(b) and 9-308
of the UCC and (ii) either the Borrower or ACFC, as applicable, has a first
priority security interest in the Equipment that is the subject of the
Contract.
(n) Each Contract requires the related Obligor to maintain the related
Equipment, if any, in good and workable order. Each Contract requires the
related Obligor to obtain and maintain physical damage insurance on the
Equipment subject thereto, if any, and to name the lessor or lender
thereunder as loss payee and an additional insured with respect thereto.
The Agent is named as loss payee under all of the Borrower's or ACFC's
physical damage insurance on the Equipment, if any (other than insurance of
the Borrower or ACFC maintained under Borrower's or ACFC's lessee insurance
program, as the case may be, pursuant to equipment leases with its
lessees). To the best of the
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Borrower's and ACFC's knowledge, the Equipment, if any, was properly
delivered to each Obligor in good repair, without defects and in
satisfactory order and the related Equipment, if any, is in good operating
condition and repair. To the best of the Borrower's and ACFC's knowledge,
the related Equipment, if any was accepted by the Obligor after reasonable
opportunity to inspect and test the same and no Obligor has informed the
Borrower or ACFC of any defects therein.
(o) No Contract constitutes a "consumer lease" under the UCC.
(p) The Borrower and ACFC have marked their computer records, to
reflect the interest granted to the Agent hereunder.
(q) Each Contract permits the rights with respect to such Contract,
and all collateral related thereto, to be assigned by either the Borrower
or ACFC, as applicable, without the consent of any Person.
(r) The Borrower or ACFC, as applicable, shall have taken actions with
respect to the collateral in respect of each Contract related to any
Account Receivable which has an outstanding balance equal to or greater
than $5,000 as is necessary to insure that the Borrower or ACFC, as
applicable, maintains, as against the Obligor thereunder a perfected
security interest in any collateral of the Obligor relating thereto free
and clear of adverse claims, or in the case of any Lease, to ensure that
the Borrower or ACFC, as the case may be, would maintain such a perfected
security interest in the event that a court or other Person were to
determine that such Lease purported to transfer to the Obligor an ownership
(rather than a leasehold) interest in the Equipment subject thereto.
(s) The Borrower or ACFC, as applicable, shall have taken actions with
respect to the Accounts Receivable to ensure that the Agent, for the
benefit of itself and the Banks, has a priority perfected security interest
in such Accounts Receivable free and clear of any adverse claims,
including, without limitation, delivery of any applicable Contract Files.
8.22. SUBORDINATED DEBT. The Obligations constitute "Secured Portfolio
Debt" under the terms of the Indenture and are entitled to the full benefit of
the subordination provisions contained in Article XI of the Indenture.
8.23. YEAR 2000 COMPLIANCE. The Borrower has reviewed all material areas
within its business and operations which could be adversely affected by, and has
developed or is developing a program to address on a timely basis, the Year 2000
Compliance. Based on such review and program, the Year 2000 Compliance should
not have a material adverse effect on its business and operations.
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9. AFFIRMATIVE COVENANTS OF THE BORROWER.
The Borrower and ACFC each covenants and agrees that, so long as any Loan,
Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any
Bank has any obligation to make any Loans or the Agent has any obligation to
issue, extend or renew any Letters of Credit hereunder:
9.1. PUNCTUAL PAYMENT. The Borrower will duly and punctually pay or cause
to be paid the principal and interest on the Loans and the commitment fees, the
Letter of Credit Fees and the Agent's fee provided for in this Credit Agreement,
all in accordance with the terms of this Credit Agreement and the Notes.
9.2. MAINTENANCE OF OFFICE. The Borrower will, and will cause each of its
Subsidiaries (other than Credident and ACFC) to maintain its chief executive
office in Boston, Massachusetts or at such other place in the United States of
America as the Borrower shall designate upon written notice to the Agent, where
notices, presentations and demands to or upon the Borrower and its Subsidiaries
in respect of the Loan Documents may be given or made. ACFC will maintain its
chief executive office in West Hartford, Connecticut, or at such other place in
the United States of America as ACFC shall designate upon written notice to the
Agent, where notices, presentations and demands to or upon ACFC in respect of
the Loan Documents may be given or made.
9.3. RECORDS AND ACCOUNTS. The Borrower will (i) keep, and cause each of
its Subsidiaries to keep, true and accurate records and books of account in
which full, true and correct entries will be made in accordance with generally
accepted accounting principles and (ii) maintain adequate accounts and reserves
for all taxes (including income taxes), depreciation, depletion, obsolescence
and amortization of its properties and the properties of its Subsidiaries,
contingencies, and other reserves in accordance with generally accepted
accounting principles.
9.4. FINANCIAL STATEMENTS, CERTIFICATES AND INFORMATION. The Borrower will
deliver to each of the Banks:
(a) as soon as practicable, but in any event not later than one
hundred (100) days after the end of each fiscal year of the Borrower, the
consolidated balance sheet of the Borrower and its Subsidiaries and the
consolidating balance sheet of the Borrower and its Subsidiaries, each as
at the end of such year, and the related consolidated statement of income
and consolidated statement of cash flow and consolidating statement of
income and consolidating statement of cash flow for such year, each setting
forth in comparative form the figures for the previous fiscal year and all
such consolidated and consolidating statements to be in reasonable detail,
prepared in accordance with generally accepted accounting principles, the
consolidated statements certified without qualification by Deloitte &
Touche or by other independent certified public accountants satisfactory to
the Agent;
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(b) as soon as practicable, but in any event not later than
forty-eight (48) days after the end of each of the first three (3) fiscal
quarters of the fiscal year of the Borrower, copies of the unaudited
consolidated balance sheet of the Borrower and its Subsidiaries and the
unaudited consolidating balance sheet of the Borrower and its Subsidiaries,
each as at the end of such quarter, and the related consolidated statement
of income and consolidated statement of cash flow and consolidating
statement of income and consolidating statement of cash flow for the
portion of the Borrower's fiscal year then elapsed, all in reasonable
detail and prepared in accordance with generally accepted accounting
principles, together with a certification by the principal financial or
accounting officer of the Borrower that the information contained in such
financial statements fairly presents the financial position of the Borrower
and its Subsidiaries on the date thereof (subject to year-end adjustments);
(c) simultaneously with the delivery of the financial statements
referred to in subsections (a) and (b) above, a statement certified by the
principal financial or accounting officer of the Borrower in substantially
the form of EXHIBIT D hereto and setting forth in reasonable detail
computations evidencing compliance with the applicable covenants contained
in ss.9 and (if applicable) reconciliations to reflect changes in generally
accepted accounting principles since the Balance Sheet Date;
(d) contemporaneously with the filing or mailing thereof, copies of
all material of a financial nature filed with the Securities and Exchange
Commission or sent to the stockholders of the Borrower;
(e) within three (3) Business Days after the end of each calendar
month, a Borrowing Base Report setting forth the Borrowing Base as at the
end of such month; PROVIDED, HOWEVER, that either the Borrower or the Agent
may elect to convert to weekly reporting by giving the Agent or the
Borrower, as the case may be, thirty (30) days prior written notice and may
re-convert to monthly reporting by giving the Agent or the Borrower, as the
case may be, thirty (30) days prior written notice;
(f) within fifteen (15) days after the end of each calendar month, an
Accounts Receivable aging report;
(g) from time to time upon request of the Agent, projections of the
Borrower and its Subsidiaries updating those projections delivered to the
Banks and referred to in ss.8.4.2 or, if applicable, updating any later
such projections delivered in response to a request pursuant to this
ss.9.4(g);
(h) within 5 days of receipt of the same by the Borrower copies of the
monthly settlement reports under the Bravo Facility Documents or the
Capital Facility Documents and from time to time if the Agent or any Bank
so requests copies of (i) other reports delivered under the Bravo Facility
Documents or the Capital Facility Documents and (ii) other
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financial data and information with respect to the Borrower or any of its
Subsidiaries;
(i) within fifteen (15) days after the Agent's request, the monthly
management report for ACFC;
(j) as soon as practicable, but in any event not later than one
hundred (100) days after the end of each fiscal year of ACFC, copies of any
reports prepared by management with respect to the financial conditions and
results of operation of ACFC;
(k) as soon as practicable, but in any event not later than
forty-eight (48) days after the end of each of the first three fiscal
quarters of the fiscal year of ACFC, copies of any reports prepared by
management with respect to the financial condition and results of operation
of ACFC; and
(l) from time to time, such other information regarding the financial
condition and results of operation of the Borrower or ACFC as any of the
Banks or the Agent shall reasonably request.
9.5. NOTICES.
9.5.1. DEFAULTS. The Borrower will promptly notify the Agent and each
of the Banks in writing of the occurrence of any Default or Event of
Default. If any Person shall give any notice or take any other action in
respect of a claimed default (whether or not constituting an Event of
Default) under this Credit Agreement or in respect of a claimed default
under any other note, evidence of indebtedness, indenture or other
obligation to which or with respect to which the Borrower or any of its
Subsidiaries is a party or obligor, whether as principal or surety, if such
claimed default is material to the business or the financial condition of
the Borrower, the Borrower shall forthwith give written notice thereof to
each of the Banks, describing the notice or action and the nature of the
claimed default.
9.5.2. ENVIRONMENTAL EVENTS. The Borrower will promptly give notice to
the Agent (i) of any violation of any Environmental Law that the Borrower
or any of its Subsidiaries reports in writing or is reportable by such
Person in writing (or for which any written report supplemental to any oral
report is made) to any federal, state or local environmental agency and
(ii) upon becoming aware thereof, of any inquiry, proceeding,
investigation, or other action, including a notice from any agency of
potential environmental liability, or any federal, state or local
environmental agency or board, that has the potential to materially affect
the assets, liabilities, financial conditions or operations of the Borrower
or any of its Subsidiaries or the Agent's security interests pursuant to
the Security Documents.
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9.5.3. NOTIFICATION OF CLAIMS AGAINST COLLATERAL. The Borrower will,
immediately upon becoming aware thereof, notify the Agent in writing of any
setoff, claims, withholdings or other defenses in excess of $500,000 in the
aggregate to which any of the Collateral, or the Agent's rights with
respect to the Collateral, are subject.
9.5.4. NOTICE OF LITIGATION AND JUDGMENTS. The Borrower will, and will
cause each of its Subsidiaries to, give notice to the Agent in writing
within fifteen (15) days of becoming aware of any litigation or proceedings
threatened in writing or any pending litigation and proceedings affecting
the Borrower or any of its Subsidiaries or to which the Borrower or any of
its Subsidiaries is or becomes a party involving an uninsured claim against
the Borrower or any of its Subsidiaries that could reasonably be expected
to have a materially adverse effect on the Borrower or any of its
Subsidiaries and stating the nature and status of such litigation or
proceedings. The Borrower will, and will cause each of its Subsidiaries to,
give notice to the Agent, in writing, in form and detail satisfactory to
the Agent, within ten (10) days of any judgment not covered by insurance,
final or otherwise, against the Borrower or any of its Subsidiaries in an
amount in excess of $500,000.
9.6. CORPORATE EXISTENCE; MAINTENANCE OF PROPERTIES. The Borrower will do
or cause to be done all things necessary to preserve and keep in full force and
effect its corporate existence, rights and franchises and those of its
Subsidiaries. It (i) will cause all of its properties and those of its
Subsidiaries used or useful in the conduct of its business or the business 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, (ii) will cause to be made all necessary repairs, renewals,
replacements, betterments and improvements thereof, all as in the judgment of
the Borrower may be necessary so that the business carried on in connection
therewith may be properly and advantageously conducted at all times, and (iii)
will, and will cause each of its Subsidiaries to, continue to engage primarily
in the businesses now conducted by them and in related businesses; PROVIDED that
nothing in this ss.9.6 shall prevent the Borrower from discontinuing the
operation and maintenance of any of its properties or those of its Subsidiaries
if such discontinuance is, in the judgment of the Borrower, desirable in the
conduct of its or their business and that do not in the aggregate materially
adversely affect the business of the Borrower and its Subsidiaries on a
consolidated basis.
9.7. INSURANCE. The Borrower will, and will cause each of its Subsidiaries
to, maintain with financially sound and reputable insurers insurance with
respect to its properties and business against such casualties and contingencies
as shall be in accordance with the general practices of businesses engaged in
similar activities in similar geographic areas; PROVIDED, HOWEVER, that the
Borrower shall not be required to maintain such insurance with respect to
Equipment which it leases or transfers to third parties pursuant to an equipment
lease or a conditional sales agreement to the extent that the
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lessee thereon maintains such insurance pursuant to the terms of its equipment
lease or conditional sales agreement with the Borrower. Such insurance shall be
in amounts, containing such terms, in such forms and for such periods as may be
reasonable and prudent and in accordance with the terms of ss.10.1 of the
Security Agreements.
9.8. TAXES. The Borrower will, and will cause each of its Subsidiaries to,
duly pay and discharge, or cause to be paid and discharged, before the same
shall become overdue, all taxes, assessments and other governmental charges
(other than taxes, assessments and other governmental charges imposed by foreign
jurisdictions that in the aggregate are not material to the business or assets
of the Borrower on an individual basis or of the Borrower and its Subsidiaries
on a consolidated basis) imposed upon it and its real properties, sales and
activities, or any part thereof, or upon the income or profits therefrom, as
well as all claims for labor, materials, or supplies that if unpaid might by law
become a lien or charge upon any of its property; PROVIDED that any such tax,
assessment, charge, levy or claim need not be paid if the validity or amount
thereof shall currently be contested in good faith by appropriate proceedings
and if the Borrower or such Subsidiary shall have set aside on its books
adequate reserves with respect thereto; and PROVIDED FURTHER that the Borrower
and each Subsidiary of the Borrower will pay all such taxes, assessments,
charges, levies or claims forthwith upon the commencement of proceedings to
foreclose any lien that may have attached as security therefor.
9.9. INSPECTION OF PROPERTIES AND BOOKS, ETC.
9.9.1. GENERAL. The Borrower shall permit the Banks, through the Agent
or any of the Banks' other designated representatives, to visit and inspect
any of the properties of the Borrower or any of its Subsidiaries to examine
the books of account of the Borrower and its Subsidiaries (and to make
copies thereof and extracts therefrom), and to discuss the affairs,
finances and accounts of the Borrower and its Subsidiaries with, and to be
advised as to the same by, its and their officers, all at such reasonable
times and intervals as the Agent or any Bank may reasonably request.
9.9.2. COLLATERAL REPORTS. No more frequently than once each calendar
quarter, or more frequently as determined by the Agent if an Event of
Default shall have occurred and be continuing, upon the request of the
Agent, the Borrower will obtain and deliver to the Agent a report of an
independent collateral auditor satisfactory to the Agent (which may be
affiliated with any of the Banks) with respect to the Accounts Receivable
included in the Borrowing Base, which report shall indicate whether or not
the information set forth in the Borrowing Base Report most recently
delivered is accurate and complete in all material respects based upon a
review by such auditors of the Accounts Receivable (including verification
with respect to the amount, aging, identity and credit of the respective
Customers and the billing practices of the Borrower or its applicable
Subsidiary) and inventory (including verification as to the value, location
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and respective types). All such collateral value reports shall be conducted
and made at the expense of the Borrower; PROVIDED, HOWEVER, that the
liability of the Borrower for such expenses shall be limited to $25,000
during any fiscal year of the Borrower so long as no Event of Default has
occurred and is continuing.
9.9.3. COMMUNICATION WITH ACCOUNTANTS. The Borrower authorizes the
Agent and, if accompanied by the Agent, the Banks to communicate directly
with the Borrower's independent certified public accountants and authorizes
such accountants to disclose to the Agent and the Banks any and all
financial statements and other supporting financial documents and schedules
including copies of any management letter with respect to the business,
financial condition and other affairs of the Borrower or any of its
Subsidiaries, PROVIDED, HOWEVER, that a representative of Borrower shall be
entitled to be present at any meeting between or among the Agent, the Banks
and the Borrower's independent certified accountants. At the request of the
Agent, the Borrower shall deliver a letter addressed to such accountants
instructing them to comply with the provisions of this ss.9.9.3.
9.10. COMPLIANCE WITH LAWS, CONTRACTS, LICENSES, AND PERMITS. The Borrower
will, and will cause each of its Subsidiaries to, comply with (i) the applicable
laws and regulations wherever its business is conducted, including all
Environmental Laws, (ii) the provisions of its charter documents and by-laws,
(iii) all agreements and instruments by which it or any of its properties may be
bound and (iv) all applicable decrees, orders, and judgments; PROVIDED, HOWEVER,
that a failure to do so shall not be deemed a Default or an Event of Default to
the extent that it would not be reasonably likely to have a material adverse
effect on the business or financial condition of the Borrower and its
Subsidiaries, taken as a whole. If at any time while any Loan or Note is
outstanding or either Bank has any obligation to make Loans hereunder, any
authorization, consent, approval, permit or license from any officer, agency or
instrumentality of any government shall become necessary or required in order
that the Borrower may fulfill any of its obligations hereunder, the Borrower
will immediately take or cause to be taken all reasonable steps within the power
of the Borrower to obtain such authorization, consent, approval, permit or
license and furnish the Banks with evidence thereof.
9.11. EMPLOYEE BENEFIT PLANS. The Borrower will (i) promptly upon request
of the Agent, furnish to the Agent a copy of the most recent actuarial statement
required to be submitted under ss.103(d) of ERISA and Annual Report, Form 5500,
with all required attachments, in respect of each Guaranteed Pension Plan and
(ii) promptly upon receipt or dispatch, furnish to the Agent any notice, report
or demand sent or received in respect of a Guaranteed Pension Plan under
secs.302, 4041, 4042, 4043, 4063, 4065, 4066 and 4068 of ERISA, or in respect
of a Multiemployer Plan, under secs.4041A, 4202, 4219, 4242, or 4245 of ERISA.
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9.12. USE OF PROCEEDS. The Borrower will use the proceeds of the Loans
solely for working capital purposes.
9.13. BANK ACCOUNTS. The Borrower will, and will cause each of its
Subsidiaries (other than the Securitization Subsidiaries and Credident) to,
together with the employees, agents and other Persons acting on behalf of the
Borrower or such Subsidiary, to cause all payments constituting proceeds of
Accounts Receivable or other Collateral to be paid into a lockbox designated by
the Agent and, in the event any such proceeds are received, by any of them to
receive and hold in trust for the Agent and the Banks all payments constituting
proceeds of Accounts Receivable or other Collateral which come into their
possession or under their control and, immediately upon receipt thereof, deposit
such payments in the form received, with any appropriate endorsements, in one of
the accounts designated as a central depository account on SCHEDULE 8.20.
9.14. CREDIT POLICIES. The Borrower will, and will cause ACFC to furnish to
the Agent a copy of the most recent Credit Policy of the Borrower and of ACFC
and to promptly furnish to the Agent any amendments to such Credit Policies. The
Borrower and ACFC shall comply in all material respects with the Credit Policy
and the ACFC Credit Policy, as applicable, in regard to each Account Receivable
and any related Contracts.
9.15. PERFECTED SECURITY INTEREST UNDER CONTRACTS. The Borrower or ACFC, as
applicable, shall take such actions with respect to the Equipment related to
each Contract with respect to any Account Receivable where such Equipment has a
fair market value equal to or greater than $5,000 as is necessary to ensure that
the Borrower or ACFC, as applicable, maintains against the Obligor thereunder a
perfected security interest in any collateral of the Obligor relating thereto
free and clear of adverse claims, or in the case of any Lease, to ensure that
the Borrower or ACFC, as the case may be, would maintain such a perfected
security interest in the event that a court or other Person were to determine
that such Lease purported to transfer to the Obligor an ownership (rather than a
leasehold) interest in the Equipment subject thereto.
9.16. PERFORMANCE AND COMPLIANCE WITH RECEIVABLES AND CONTRACTS. The
Borrower and ACFC, as applicable, shall at its own expense timely and fully
perform and comply in all material respects, with all material provisions,
covenants and other promises required to be observed by it under the Contracts.
9.17. FURTHER ASSURANCES. The Borrower will, and will cause each of its
Subsidiaries to, cooperate with the Banks and the Agent and execute such further
instruments and documents as the Banks or the Agent shall reasonably request to
carry out to their satisfaction the transactions contemplated by this Credit
Agreement and the other Loan Documents.
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10. CERTAIN NEGATIVE COVENANTS OF THE BORROWER.
The Borrower and ACFC each covenants and agrees that, so long as any Loan,
Unpaid Reimbursement Obligation, Letter of Credit or Note is outstanding or any
Bank has any obligation to make any Loans or the Agent has any obligations to
issue, extend or renew any Letters of Credit hereunder:
10.1. RESTRICTIONS ON INDEBTEDNESS. The Borrower will not, and will not
permit any of its Subsidiaries to, create, incur, assume, guarantee or be or
remain liable, contingently or otherwise, with respect to any Indebtedness other
than:
(a) Indebtedness to the Banks and the Agent arising under any of the
Loan Documents;
(b) current liabilities of the Borrower incurred in the ordinary
course of business not incurred through (i) the borrowing of money, or (ii)
the obtaining of credit except for credit on an open account basis
customarily extended and in fact extended in connection with normal
purchases of goods and services;
(c) Indebtedness in respect of taxes, assessments, governmental
charges or levies and claims for labor, materials and supplies to the
extent that payment therefor shall not at the time be required to be made
in accordance with the provisions of ss.9.8;
(d) Indebtedness in respect of judgments or awards that have been in
force for less than the applicable period for taking an appeal so long as
execution is not levied thereunder or in respect of which the Borrower
shall at the time in good faith be prosecuting an appeal or proceedings for
review and in respect of which a stay of execution shall have been obtained
pending such appeal or review;
(e) endorsements for collection, deposit or negotiation and warranties
of products or services, in each case incurred in the ordinary course of
business;
(f) Subordinated Debt;
(g) obligations under Capitalized Leases not exceeding $1,000,000 in
aggregate amount at any time outstanding;
(h) Indebtedness incurred in connection with the acquisition after the
date hereof of any real or personal property by the Borrower or any
Subsidiary of the Borrower, PROVIDED that the aggregate principal amount of
such Indebtedness of the Borrower and its Subsidiaries shall not exceed the
aggregate amount of $1,000,000 at any one time;
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(i) Indebtedness existing on the date of this Credit Agreement and
listed and described on SCHEDULE 10.1 hereto;
(j) Indebtedness of Subsidiaries of the Borrower to the Borrower so
long as (a) such Subsidiary has made a guaranty in favor of the Banks and
the Agent pursuant to which such Subsidiary guaranties to the Banks and the
Agent the payment and performance of the Obligations in form and substance
satisfactory to the Banks and the Agent and (b) the obligations of such
Subsidiary (other than the Securitization Subsidiaries and Credident) under
such guaranty are in turn secured by a perfected first priority security
interest (subject only to the Permitted Liens entitled to priority under
applicable law) in all the assets of such Subsidiary, whether now owned or
hereafter acquired, pursuant to the terms of the Security Documents to
which such Subsidiary is a party;
(k) Indebtedness incurred by Capital pursuant to the Capital
Lease-Receivables Purchase Agreement;
(l) Indebtedness incurred by Bravo pursuant to the Bravo Credit
Agreement; and
(m) Indebtedness incurred by the Borrower pursuant to the Sale
Agreements, PROVIDED THAT no Event of Default has occurred and is
continuing at the time such Indebtedness is incurred and PROVIDED FURTHER
that the sum of (i) aggregate outstanding principal amount of such
Indebtedness of the Borrower under such Sale Agreements and (ii) other
proceeds received by the Borrower under such Sale Agreements and not
characterized as Indebtedness shall not exceed $50,000,000 at any time.
10.2. RESTRICTIONS ON LIENS. The Borrower will not, and will not permit any
of its Subsidiaries to, (i) create or incur or suffer to be created or incurred
or to exist any lien, encumbrance, mortgage, pledge, charge, restriction or
other security interest of any kind upon any of its property or assets of any
character (including the capital stock of the Securitization Subsidiaries)
whether now owned or hereafter acquired, or upon the income or profits
therefrom; (ii) transfer any of such property or assets or the income or profits
therefrom for the purpose of subjecting the same to the payment of Indebtedness
or performance of any other obligation in priority to payment of its general
creditors; (iii) acquire, or agree or have an option to acquire, any property or
assets upon conditional sale or other title retention or purchase money security
agreement, device or arrangement; (iv) suffer to exist for a period of more than
thirty (30) days after the same shall have been incurred any Indebtedness or
claim or demand against it that if unpaid might by law or upon bankruptcy or
insolvency, or otherwise, be given any priority whatsoever over its general
creditors; or (v) sell, assign, pledge or otherwise transfer any accounts,
contract rights, general intangibles, chattel paper or instruments, with or
without recourse; PROVIDED that the Borrower and any Subsidiary of the Borrower
may create or incur or suffer to be created or incurred or to exist:
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(a) liens in favor of the Borrower on all or part of the assets of
Subsidiaries of the Borrower securing Indebtedness owing by Subsidiaries of
the Borrower to the Borrower;
(b) liens to secure taxes, assessments and other government charges in
respect of obligations not overdue or liens on properties to secure claims
for labor, material or supplies in respect of obligations not overdue;
(c) deposits or pledges made in connection with, or to secure payment
of, workmen's compensation, unemployment insurance, old age pensions or
other social security obligations;
(d) liens on properties in respect of judgments or awards, the
Indebtedness with respect to which is permitted by ss.10.1(d);
(e) liens of carriers, warehousemen, mechanics and materialmen, and
other like liens on properties, in existence less than 120 days from the
date of creation thereof in respect of obligations not overdue;
(f) encumbrances consisting of easements, rights of way, zoning
restrictions, restrictions on the use of real property and defects and
irregularities in the title thereto, landlord's or lessor's liens under
leases to which the Borrower or a Subsidiary of the Borrower is a party,
and other minor liens or encumbrances none of which in the opinion of the
Borrower interferes materially with the use of the property affected in the
ordinary conduct of the business of the Borrower and its Subsidiaries,
which defects do not individually or in the aggregate have a materially
adverse effect on the business of the Borrower individually or of the
Borrower and its Subsidiaries on a consolidated basis;
(g) presently outstanding liens listed on SCHEDULE 10.2(G) hereto;
(h) purchase money security interests in or purchase money mortgages
on real or personal property, incurred in connection with the acquisition
of such property, which security interests or mortgages cover only the real
or personal property so acquired and secure Indebtedness permitted under
ss.10.1(h) hereof;
(i) liens in favor of the Agent for the benefit of the Banks and the
Agent under the Loan Documents;
(j) liens on "margin security" or "margin stock" as such terms are
used in Regulations U and X of the Board of Governors of the Federal
Reserve System, 12 C.F.R. Parts 221 and 224;
(k) liens granted by Capital in connection with the Capital
Lease-Receivables Purchase Agreement;
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(l) liens granted by Bravo in connection with the Bravo Facility
Documents; and
(m) liens granted by the Borrower to financial institutions on assets
which are sold or otherwise transferred pursuant to the Sale Agreements.
10.3. RESTRICTIONS ON INVESTMENTS. The Borrower will not, and will not
permit any of its Subsidiaries to, make or permit to exist or to remain
outstanding any Investment except Investments in:
(a) marketable direct or guaranteed obligations of the United States
of America that mature within one (1) year from the date of purchase by the
Borrower;
(b) demand deposits, certificates of deposit, bankers acceptances and
time deposits of United States banks having total assets in excess of
$1,000,000,000;
(c) (i) securities commonly known as "commercial paper" issued by a
corporation organized and existing under the laws of the United States of
America or any state thereof that at the time of purchase have been rated
and the ratings for which are not less than "P 1" if rated by Moody's
Investors Services, Inc., and not less than "A 1" if rated by Standard and
Poor's Ratings Group, and (ii) securities commonly known as "short-term
bank notes" issued by any Bank denominated in Dollars which at the time of
purchase have been rated and the ratings for which are not less than "P 2"
if rated by Moody's Investors Services, Inc., and not less than "A 2" if
rated by Standard and Poor's Ratings Group;
(d) Investments existing on the date hereof and listed on SCHEDULE
10.3 hereto;
(e) Investments with respect to Indebtedness permitted by ss.10.1(j)
so long as (i) such entities remain Subsidiaries of the Borrower, (ii) the
aggregate amount of incremental Investments made by the Borrower and its
subsidiaries in ACFC does not exceed $20,000,000 during the period of
twelve consecutive months commencing on the Closing Date and (iii) the
aggregate amount of incremental investments by the Borrower and its
Subsidiaries in Credident does not exceed $100,000 during any fiscal year.
(f) Investments consisting of the Guaranty or Investments by the
Borrower in Subsidiaries of the Borrower existing on the Closing Date;
(g) Investments consisting of promissory notes received as proceeds of
asset dispositions permitted by ss.10.5.2;
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(h) Investments consisting of loans and advances to employees for
moving, entertainment, travel and other similar expenses in the ordinary
course of business not to exceed $750,000 in the aggregate at any time
outstanding;
(i) Investments not otherwise permitted by this ss.10.3, PROVIDED,
THAT the aggregate amount of such Investments shall not exceed $1,000,000;
and
(j) Investments consisting of purchase by the Borrower of the
Borrower's Common Stock, $0.01 par value, to the extent permitted pursuant
to Section 10.4.
PROVIDED, HOWEVER, that, with the exception of demand deposits referred to in
ss.10.3(b) and loans and advances referred to in ss.10.3(h), such Investments
will be considered Investments permitted by this ss.10.3 only if all actions
have been taken to the satisfaction of the Agent to provide to the Agent, for
the benefit of the Banks and the Agent, a first priority perfected security
interest in all of such Investments free of all encumbrances other than
Permitted Liens.
10.4. DISTRIBUTIONS. The Borrower will not make any Distributions; provided
that so long as no Default or Event of Default has occurred and is continuing or
would result therefrom, the Borrower may purchase shares of the Borrower's
Common Stock, $0.01 par value, for an aggregate consideration for all such
purchases after December 1, 1996 not exceeding $3,000,000. The Borrower will not
permit ACFC to make any Distributions if a Default or Event of Default has
occurred and is continuing at the time of the proposed Distribution or would
result therefrom.
10.5. MERGER, CONSOLIDATION AND DISPOSITION OF ASSETS.
10.5.1. MERGERS AND ACQUISITIONS. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to any merger or
consolidation, or agree to or effect any asset acquisition or stock
acquisition (other than the acquisition of assets in the ordinary course of
business consistent with industry practices).
10.5.2. DISPOSITION OF ASSETS. The Borrower will not, and will not
permit any of its Subsidiaries to, become a party to or agree to or effect
any disposition of assets, other than the disposition of assets in the
ordinary course of business, consistent with industry practices, PROVIDED,
HOWEVER, that such disposition of assets in the ordinary course of business
shall not include a transfer of a material amount of Customer Receivables
without the prior written approval of the Banks. Notwithstanding the
foregoing provisions of this ss.10.5.2 and so long as no Event of Default
has occurred and is continuing, the Borrower and its Subsidiaries may
dispose of assets pursuant to the Purchase Agreement, the Capital
Lease-Receivables Purchase Agreement and the Sale Agreements; PROVIDED that
the sum of (i) aggregate principal amount of
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Indebtedness outstanding under the Sale Agreements plus (ii) all other
proceeds received by the Borrower under such Sale Agreements and not
characterized as Indebtedness shall not in any event exceed $50,000,000.
10.6. SALE AND LEASEBACK. The Borrower will not, and will not permit any of
its Subsidiaries to, enter into any arrangement, directly or indirectly, whereby
the Borrower or any Subsidiary of the Borrower shall sell or transfer any
property owned by it in order then or thereafter to lease such property or lease
other property that the Borrower or any Subsidiary of the Borrower intends to
use for substantially the same purpose as the property being sold or
transferred.
10.7. COMPLIANCE WITH ENVIRONMENTAL LAWS. The Borrower will not, and will
not permit any of its Subsidiaries to, (i) use any of the Real Estate or any
portion thereof for the handling, processing, storage or disposal of Hazardous
Substances, (ii) cause or permit to be located on any of the Real Estate any
underground tank or other underground storage receptacle for Hazardous
Substances, (iii) generate any Hazardous Substances on any of the Real Estate,
(iv) conduct any activity at any Real Estate or use any Real Estate in any
manner so as to cause a release (i.e. releasing, spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching,
disposing or dumping) or threatened release of Hazardous Substances on, upon or
into the Real Estate or (v) otherwise conduct any activity at any Real Estate or
use any Real Estate in any manner that would violate any Environmental Law or
bring such Real Estate in violation of any Environmental Law, in any case in a
manner which could reasonably be expected to have a material adverse effect on
the business or financial condition of the Borrower and its Subsidiaries, taken
as a whole.
10.8. OTHER DEBT. The Borrower will not, and will not permit any of its
Subsidiaries to, (a) amend, supplement or otherwise modify the terms of any
Subordinated Debt or prepay, redeem or repurchase any Subordinated Debt (other
than, so long as no Default or Event of Default exists or would result from any
such repurchase, repurchases of Subordinated Debt pursuant to Section 4.16 of
the Senior Subordinated Note Indenture that do not exceed (i) $250,000 in
principal amount (plus accrued interest), in the aggregate with respect to all
holders of Subordinated Debt, in any calendar year or (ii) $25,000 in principal
amount (plus accrued interest), in the aggregate with respect to any single
holder of Subordinated Debt, in any calendar year) or (b) other than the
Securitization Subsidiaries, prepay, redeem or repurchase Indebtedness
outstanding under the Bravo Credit Agreement, the Capital Purchase Agreement or
the Sale Agreements.
10.9. EMPLOYEE BENEFIT PLANS. Neither the Borrower nor any ERISA Affiliate
will:
(a) engage in any "prohibited transaction" within the meaning of
ss.406 of ERISA or ss.4975 of the Code which could result in a material
liability for the Borrower or any of its Subsidiaries; or
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(b) permit any Guaranteed Pension Plan to incur a material
"accumulated funding deficiency", as such term is defined in ss.302 of
ERISA, whether or not such deficiency is or may be waived; or
(c) fail to contribute to any Guaranteed Pension Plan to an extent
which, or terminate any Guaranteed Pension Plan in a manner which, could
result in the imposition of a lien or encumbrance of a material amount on
the assets of the Borrower or any of its Subsidiaries pursuant to ss.302(f)
or ss.4068 of ERISA; or
(d) permit or take any action which would result in the aggregate
benefit liabilities (with the meaning of ss.4001 of ERISA) of all
Guaranteed Pension Plans exceeding the value of the aggregate assets of
such Plans, disregarding for this purpose the benefit liabilities and
assets of any such Plan with assets in excess of benefit liabilities.
10.10. BANK ACCOUNTS. The Borrower will not, and will not permit any of its
Subsidiaries to, (i) establish any bank accounts other than those listed on
SCHEDULE 8.20 without the Agent's prior written consent, (ii) violate directly
or indirectly any bank agency or lock box agreement in favor of the Agent for
the benefit of the Banks and the Agent with respect to such account, or (iii)
deposit into any of the payroll accounts listed on SCHEDULE 8.20 any amounts in
excess of amounts necessary to pay current payroll obligations from such
accounts.
10.11. SECURITIZATION SUBSIDIARIES STOCK. The Borrower will not sell,
assign (by operation of law or otherwise) or otherwise dispose of, or grant any
option with respect to any shares of stock of the Securitization Subsidiaries.
10.12. CHANGE IN CREDIT POLICY. The Borrower shall not make any change in
the character of its business or in its Credit Policy, which change would, in
either case, impair the collectibility of any Contract. ACFC shall not make any
change in the character of its business or in the ACFC Credit Policy, which
change would, in either case, impair the collectibility of any Contract.
11. FINANCIAL COVENANTS OF THE BORROWER.
The Borrower covenants and agrees that, so long as any Loan, Unpaid
Reimbursement Obligation, Letter of Credit or Note is outstanding or any Bank
has any obligation to make any Loans or the Agent has any obligation to issue,
extend or renew any Letters of Credit:
11.1. DEBT RATIO. The Borrower will not permit at any time the Debt Ratio
to be greater than 6.00:1.00.
11.2. CONSOLIDATED TANGIBLE NET WORTH. The Borrower will not permit
Consolidated Tangible Net Worth at any time to be less than the sum of (i)
$26,500,000 PLUS (ii) on a cumulative basis, 75% of positive Consolidated Net
Income for each fiscal quarter beginning with the fiscal quarter commencing on
or after April 1, 1997, PLUS (iii) 100% of the proceeds of any sale by the
Borrower
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or any of its Subsidiaries (other than Credident) of (A) equity securities
issued by the Borrower or any of its Subsidiaries (other than Credident), or (B)
warrants or subscription rights for equity securities issued by the Borrower or
any of its Subsidiaries (other than Credident).
11.3. INTEREST COVERAGE. The Borrower will not permit the ratio of (i)
Consolidated Earnings Before Interest and Taxes for any period of four
consecutive fiscal quarters (treated as a single accounting period), to (ii)
Consolidated Total Interest Expense for such period, to be less than 1.15 to
1.00 at any time.
11.4. CAPITAL EXPENDITURES. The Borrower will not make, or permit any
Subsidiary of the Borrower to make, Capital Expenditures during any fiscal year
that exceed, in the aggregate, $1,000,000.
11.5. REISSUED CUSTOMER RECEIVABLES TO GROSS CUSTOMER RECEIVABLES. The
Borrower will not permit Borrower's Reissued Customer Receivables (originated
and calculated after June 23, 1994) to exceed 10% of Borrower's Gross Customer
Receivables, at any time.
11.6. CONTRACTUALLY DELINQUENT CUSTOMER RECEIVABLES TO GROSS CUSTOMER
RECEIVABLES RATIO. The Borrower will not permit the sum of Borrower's
Contractually Delinquent Customer Receivables to exceed 9% of Borrower's Gross
Customer Receivables, at any time.
11.7. RESERVES TO CONTRACTUALLY DELINQUENT CUSTOMER RECEIVABLES. The
Borrower will not, at the end of any fiscal quarter, permit Reserves with
respect to the Borrower and its Subsidiaries to be less than 50% of the sum of
Contractually Delinquent Customer Receivables of the Borrower and its
Securitization Subsidiaries.
11.8. ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Borrower will not permit the
allowance for doubtful accounts for the Borrower and its Subsidiaries (as
determined in accordance with generally accepted accounting practices), to be
less than 2% of the Net Investment in Leases and Notes for the Borrower and its
Subsidiaries, at any time. ACFC will not permit ACFC's allowance for doubtful
accounts (as determined in accordance with generally accepted accounting
practices), to be less than 1% of ACFC's Net Investment in Leases and Notes, at
any time.
11.9. COLLECTIONS TO BILLINGS. The Borrower will not permit, at the end of
any calendar month with respect to the preceding three month period, the average
Collections of the Borrower and its Subsidiaries to be less than 94% of Billings
of the Borrower and its Subsidiaries.
11.10. LEASES. The Borrower will not, and will not permit any of its
Subsidiaries to, as lessee, enter into, permit to exist, or renew any agreements
to rent or lease any real or personal property if the aggregate amount of Rental
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Obligations accrued and to accrue under all such agreements will exceed
$5,000,000.
11.11. EQUIPMENT SUPPLIER CONCENTRATION. The aggregate of Accounts
Receivable of the Borrower and its Subsidiaries generated after June 23, 1994
through the financing of Equipment supplied by any single Equipment Supplier
shall not exceed 50% of total Accounts Receivable of the Borrower and its
Subsidiaries.
12. CLOSING CONDITIONS.
The obligations of the Banks to make the initial Loans and of the Agent to
issue any initial Letters of Credit shall be subject to the satisfaction of the
following conditions precedent on or prior to the date hereof:
12.1. LOAN DOCUMENTS. Each of the Loan Documents shall have been duly
executed and delivered by the respective parties thereto, shall be in full force
and effect and shall be in form and substance satisfactory to each of the Banks.
Each Bank shall have received a fully executed copy of each such document.
12.2. CERTIFIED COPIES OF CHARTER DOCUMENTS. Each of the Banks shall have
received from the Borrower and ACFC, (i) a copy, certified by a duly authorized
officer of such Person to be true and complete on the Closing Date, of each of
(A) its charter or other incorporation documents as in effect on such date of
certification, and (B) its by-laws as in effect on such date, or (ii) a
certificate executed by a duly authorized officer of such Person certifying that
there have been no changes to such charter documents or by-laws since May 15,
1995 and that the copies of such documents delivered to the Banks on May 15,
1995, were, as of the date of original delivery, and are, as of the date hereof,
true and correct copies of such documents as in effect at such time, and (iii)
certificates of good standing or authorization to do business from the secretary
of state of each of Delaware and Massachusetts with respect to the Borrower and
Delaware and Connecticut with respect to ACFC.
12.3. CORPORATE ACTION. All corporate action necessary for the valid
execution, delivery and performance by the Borrower and ACFC of this Credit
Agreement and the other Loan Documents to which it is or is to become a party
shall have been duly and effectively taken, and evidence thereof satisfactory to
the Banks shall have been provided to each of the Banks.
12.4. INCUMBENCY CERTIFICATE. Each of the Banks shall have received from
the Borrower and ACFC an incumbency certificate, dated as of the Closing Date,
signed by a duly authorized officer of the Borrower or such Subsidiary, and
giving the name and bearing a specimen signature of each individual who shall be
authorized: (i) to sign, in the name and on behalf of each of the Borrower of
such Subsidiary, each of the Loan Documents to which the Borrower or such
Subsidiary is or is to become a party; (ii) in the case of the Borrower, to
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make Loan Requests and Conversion Requests; and (iii) to give notices and to
take other action on its behalf under the Loan Documents.
12.5. VALIDITY OF LIENS. The Security Documents shall be effective to
create in favor of the Agent a legal, valid and enforceable first (except for
Permitted Liens entitled to priority under applicable law) security interest in
the Collateral. All filings, recordings, deliveries of instruments and other
actions necessary or desirable in the opinion of the Agent to protect and
preserve such security interests shall have been duly effected. The Agent shall
have received evidence thereof in form and substance satisfactory to the Agent.
12.6. PERFECTION CERTIFICATES AND UCC SEARCH RESULTS. The Agent shall have
received from each of the Borrower and ACFC, a completed and fully executed
Perfection Certificate or a certificate of the Secretary or Assistant Secretary
of the Borrower and ACFC, as the case may be, certifying that the information
set forth in the Perfection Certificates delivered to the Agent on May 15, 1995
remains true and complete in all respects as of the Closing Date (other than
with respect to Schedules 6(A), 6(B) and 9 thereto, copies of which changed
Schedules shall have been received by each of the Banks) and the results of UCC
searches with respect to its Collateral, indicating no liens other than
Permitted Liens and otherwise in form and substance satisfactory to the Agent.
12.7. CERTIFICATES OF INSURANCE. The Agent shall have received (i) a
certificate of insurance from an independent insurance broker dated as of the
Closing Date, identifying insurers, types of insurance, insurance limits, and
policy terms, and otherwise describing the insurance obtained in accordance with
the provisions of the Security Agreements and (ii) certified copies of all
policies evidencing such insurance (or certificates therefore signed by the
insurer or an agent authorized to bind the insurer).
12.8. BANK AGENCY AGREEMENTS. The Agent shall have received an agreement,
in form and substance satisfactory to the Agent, from each bank at which the
Borrower or ACFC maintains depository accounts at which the Borrower or ACFC at
any time has a balance of $100,000 or more (including bank agency or lock box
agreements but excluding accounts for which availability is swept daily into
accounts maintained by the Borrower or ACFC at BKB) concerning the Agent's
security interest for the benefit of the Banks and the Agent in such accounts.
12.9. BORROWING BASE REPORT. The Agent shall have received from the
Borrower the initial Borrowing Base Report dated as of the Closing Date.
12.10. ACCOUNTS RECEIVABLE AGING REPORT. The Agent shall have received from
the Borrower the most recent Accounts Receivable aging report of the Borrower
and its Subsidiaries dated as of a date which shall be no more than fifteen (15)
days prior to the Closing Date and the Borrower shall notify the Agent in
writing on the Closing Date of any material deviation from the Accounts
Receivable values reflected in such Accounts Receivable aging report
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and shall provide the Agent with such supplementary documentation as the Agent
may reasonably request.
12.11. SOLVENCY CERTIFICATE Each of the Banks shall have received an
officer's certificate of the Borrower dated as of the Closing Date as to the
solvency of the Borrower and its Subsidiaries following the consummation of the
transactions contemplated herein and in form and substance satisfactory to the
Banks.
12.12. OPINION OF COUNSEL. Each of the Banks and the Agent shall have
received a favorable opinion addressed to the Banks and the Agent, dated as of
the Closing Date, in form and substance satisfactory to the Banks and the Agent,
from Hill & Barlow counsel to the Borrower and its Subsidiaries.
13. CONDITIONS TO ALL BORROWINGS.
The obligation of the Banks to make any Loans and of the Agent to issue,
extend or renew any Letters of Credit whether on or after the Closing Date shall
be subject to the satisfaction of each of the following conditions precedent:
13.1. REPRESENTATIONS TRUE; NO EVENT OF DEFAULT. Each of the
representations and warranties of any of the Borrower and its Subsidiaries
contained in this Credit Agreement, the other Loan Documents or in any document
or instrument delivered pursuant to or in connection with this Credit Agreement
shall be true as of the date as of which they were made and shall also be true
at and as of the time of the making of such Loan or the issuance, extension or
renewal of such Letter of Credit, with the same effect as if made at and as of
that time (except to the extent of changes resulting from transactions
contemplated or permitted by this Credit Agreement and the other Loan Documents
and changes occurring in the ordinary course of business that singly or in the
aggregate are not materially adverse, and to the extent that such
representations and warranties relate expressly to an earlier date) and no
Default or Event of Default shall have occurred and be continuing.
13.2. NO LEGAL IMPEDIMENT. No change shall have occurred in any law or
regulations thereunder or interpretations thereof that in the reasonable opinion
of any Bank would make it illegal for such Bank to make such Loan or to
participate in the issuance, extension or renewal of such Letter of Credit or in
the reasonable opinion of the Agent would make it illegal for the Agent to
issue, extend or renew such Letter of Credit.
13.3. GOVERNMENTAL REGULATION. Each Bank shall have received such
statements in substance and form reasonably satisfactory to such Bank as such
Bank shall require for the purpose of compliance with any applicable regulations
of the Comptroller of the Currency or the Board of Governors of the Federal
Reserve System.
13.4. PROCEEDINGS AND DOCUMENTS. All proceedings in connection with the
transactions contemplated by this Credit Agreement, the other Loan
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Documents and all other documents incident thereto shall be satisfactory in
substance and in form to the Banks and to the Agent and the Agent's Special
Counsel, and the Banks, the Agent and such counsel shall have received all
information and such counterpart originals or certified or other copies of such
documents as the Agent may reasonably request.
13.5. BORROWING BASE REPORT. The Agent shall have received the most recent
Borrowing Base Report required to be delivered to the Agent in accordance with
ss.9.4(e) and, if requested by the Agent, a Borrowing Base Report dated within
one (1) day of the Drawdown Date of the requested Loan or the issuance,
extension or renewal of the requested Letter of Credit.
14. EVENTS OF DEFAULT; ACCELERATION; ETC.
14.1. EVENTS OF DEFAULT AND ACCELERATION. If any of the following events
("Events of Default" or, if the giving of notice or the lapse of time or both is
required, then, prior to such notice or lapse of time, "Defaults") shall occur:
(a) the Borrower shall fail to pay any principal of the Loans when the
same shall become due and payable, whether at the stated date of maturity
or any accelerated date of maturity or at any other date fixed for payment;
(b) the Borrower shall fail to pay any interest on the Loans, the
commitment fee, any Letter of Credit Fee, the Agent's fee, or other sums
due hereunder or under any of the other Loan Documents, when the same shall
become due and payable, whether at the stated date of maturity or any
accelerated date of maturity or at any other date fixed for payment;
(c) the Borrower shall (i) fail to comply with any of its covenants
contained in (i) secs.9.4, 10.1 through 10.6, or 11 or (ii) fail to comply
with any of its covenants contained in secs.9.1 through 9.3, secs.9.5
through 9.17 and secs.10.7 through 10.12 for a period exceeding ten (10)
days;
(d) the Borrower or any of its Subsidiaries shall fail to perform any
term, covenant or agreement contained herein or in any of the other Loan
Documents (other than those specified elsewhere in this ss.14.1) for
fifteen (15) days after written notice of such failure has been given to
the Borrower by the Agent;
(e) any representation or warranty of the Borrower or any of its
Subsidiaries in this Credit Agreement or any of the other Loan Documents or
in any other document or instrument delivered pursuant to or in connection
with this Credit Agreement shall prove to have been false in any material
respect upon the date when made or deemed to have been made or repeated;
(f) the Borrower or any of its Subsidiaries shall fail to pay at
maturity, or within any applicable period of grace, any obligation for
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borrowed money or credit received or in respect of any Capitalized Leases,
or fail to observe or perform any material term, covenant or agreement
contained in any agreement by which it is bound, evidencing or securing
borrowed money or credit received or in respect of any Capitalized Leases
for such period of time as would permit (assuming the giving of appropriate
notice if required) the holder or holders thereof or of any obligations
issued thereunder to accelerate the maturity thereof and which default is
not waived by the parties thereto;
(g) the Borrower or any of its Subsidiaries shall make an assignment
for the benefit of creditors, or admit in writing its inability to pay or
generally fail to pay its debts as they mature or become due, or shall
petition or apply for the appointment of a trustee or other custodian,
liquidator or receiver of the Borrower or any of its Subsidiaries or of any
substantial part of the assets of the Borrower or any of its Subsidiaries
or shall commence any case or other proceeding relating to the Borrower or
any of its Subsidiaries under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or similar law
of any jurisdiction, now or hereafter in effect, or shall take any action
to authorize or in furtherance of any of the foregoing, or if any such
petition or application shall be filed or any such case or other proceeding
shall be commenced against the Borrower or any of its Subsidiaries and the
Borrower or any of its Subsidiaries shall indicate its approval thereof,
consent thereto or acquiescence therein;
(h) a decree or order is entered appointing any such trustee,
custodian, liquidator or receiver or adjudicating the Borrower or any of
its Subsidiaries bankrupt or insolvent, or approving a petition in any such
case or other proceeding, or a decree or order for relief is entered in
respect of the Borrower or any Subsidiary of the Borrower in an involuntary
case under federal bankruptcy laws as now or hereafter constituted;
(i) there shall remain in force, undischarged, unsatisfied and
unstayed, for more than thirty days, whether or not consecutive, any final
judgment against the Borrower or any of its Subsidiaries that, with other
outstanding final judgments, undischarged, against the Borrower or any of
its Subsidiaries exceeds in the aggregate $500,000;
(j) the holders of all or any part of the Subordinated Debt or
Indebtedness under the Bravo Facility Documents shall accelerate the
maturity of all or any part of such debt or such debt shall be prepaid,
redeemed or repurchased in whole or in part; PROVIDED, HOWEVER, that (A)
early termination of the Bravo Credit Agreement by Bravo pursuant to the
terms thereof shall not constitute an acceleration by such holders; (B)
payments by Bravo pursuant to Sections 2.05(b) and 2.05(c) of the Bravo
Purchase Agreement shall not constitute prepayment of Indebtedness under
the Bravo Credit Agreement; and (C) repurchases of Subordinated
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Debt pursuant to Section 4.16 of the Senior Subordinated Note Indenture
that do not exceed (i) $250,000 in principal amount (plus accrued interest)
in the aggregate with respect to all holders of Subordinated Debt in any
calendar year or (ii) $25,000 in principal amount (plus accrued interest)
in the aggregate with respect to any single holder of Subordinated Debt in
any calendar year, shall not constitute a Default or Event of Default
pursuant to this subsection 14.1(j);
(k) if any of the Loan Documents shall be canceled, terminated,
revoked or rescinded or the Agent's security interests, mortgages or liens
in substantially all of the Collateral shall cease to be perfected, or
shall cease to have the priority contemplated by the Security Documents, in
each case otherwise than in accordance with the terms thereof or with the
express prior written agreement, consent or approval of the Banks, or any
action at law, suit or in equity or other legal proceeding to cancel,
revoke or rescind any of the loan documents shall be commenced by or on
behalf of the Borrower or any of its Subsidiaries party thereto or any of
their respective stockholders, or any court or any other governmental or
regulatory authority or agency of competent jurisdiction shall make a
determination that, or issue a judgment, order, decree or ruling to the
effect that, any one or more of the Loan Documents is illegal, invalid or
unenforceable in accordance with the terms thereof;
(l) with respect to any Guaranteed Pension Plan, an ERISA Reportable
Event shall have occurred and the Majority Banks shall have determined in
their reasonable discretion that such event reasonably could be expected to
result in liability of the Borrower or any of its Subsidiaries to the PBGC
or such Guaranteed Pension Plan in an aggregate amount exceeding $100,000
and such event in the circumstances occurring reasonably could constitute
grounds for the termination of such Guaranteed Pension Plan by the PBGC or
for the appointment by the appropriate United States District Court of a
trustee to administer such Guaranteed Pension Plan; or a trustee shall have
been appointed by the United States District Court to administer such
Guaranteed Pension Plan; or the PBGC shall have instituted proceedings to
terminate such Guaranteed Pension Plan;
(m) the Borrower or any of its Subsidiaries shall be enjoined,
restrained or in any way prevented by the order of any court or any
administrative or regulatory agency from conducting any material part of
its business and such order shall continue in effect for more than thirty
(30) days;
(n) there shall occur any material damage to, or loss, theft or
destruction of, any Collateral, whether or not insured, or any strike,
lockout, labor dispute, embargo, condemnation, act of God or public enemy,
or other casualty, which in any such case causes, for more than fifteen
(15) consecutive days, the cessation or substantial curtailment of revenue
producing activities at any facility of the Borrower or any of its
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Subsidiaries if such event or circumstance is not covered by business
interruption insurance and would have a material adverse effect on the
business or financial condition of the Borrower and its Subsidiaries, taken
as a whole;
(o) there shall occur the loss, suspension or revocation of, or
failure to renew, any license or permit now held or hereafter acquired by
the Borrower or any of its Subsidiaries if such loss, suspension,
revocation or failure to renew would have a material adverse effect on the
business or financial condition of the Borrower and its Subsidiaries, taken
as a whole;
(p) the Borrower or any of its Subsidiaries shall be indicted for a
state or federal crime, or any civil or criminal action shall otherwise
have been brought against the Borrower or any of its Subsidiaries, a
punishment for which in any such case could include the forfeiture of any
assets of the Borrower or such Subsidiary included in the Borrowing Base or
any assets of the Borrower or such Subsidiary not included in the Borrowing
Base but having a fair market value in excess of $100,000;
(q) any person or group of persons (within the meaning of Section 13
or 14 of the Securities Exchange Act of 1934, as amended) shall have
acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated
by the Securities and Exchange Commission under said Act) of fifty-one
percent (51%) or more of the outstanding shares of common stock of the
Borrower or any "Change in Control" shall occur under the terms of the
Indenture;
(r) the occurrence of a Bravo Event of Termination and the expiration
of any applicable cure period available to Bravo under the Purchase
Agreement or a Wind-Down Event and the expiration of any applicable cure
period available to Bravo under the Bravo Facility Documents;
(s) the occurrence of any default or any event of default under any of
the Sale Agreements;
(t) the Borrower shall cease to own one hundred percent (100%) of the
outstanding shares of common stock of ACFC; or
(u) the occurrence of a Capital Event of Termination and the
expiration of any applicable cure period available to Capital under the
Capital Purchase Agreement or a Capital Wind-Down Event and the expiration
of any applicable cure period available to Capital under the Capital
Lease-Receivables Purchase Agreement or a Capital Servicing Termination
Event and the expiration of any applicable cure period available to Capital
under the Capital Facility Documents;
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then, and in any such event, so long as the same may be continuing, the Agent
may, and upon the request of the Majority Banks shall, by notice in writing to
the Borrower declare all amounts owing with respect to this Credit Agreement,
the Notes, the other Loan Documents, and all Reimbursement Obligations to be,
and they shall thereupon forthwith become, immediately due and payable without
presentment, demand, protest or other notice of any kind, all of which are
hereby expressly waived by the Borrower; PROVIDED that in the event of any Event
of Default specified in ss.14.1(g), 14.1(h), 14.1(j) or 14.1(q), all such
amounts shall become immediately due and payable automatically and without any
requirement of notice from the Agent or any Bank.
14.2. TERMINATION OF COMMITMENTS. If any one or more of the Events of
Default specified in ss.14.1(g), ss.14.1(h), ss.14.1(j) or 14.1(q) shall occur,
any unused portion of the credit hereunder shall forthwith terminate and each of
the Banks shall be relieved of all obligations to make Loans to the Borrower and
the Agent shall be relieved of all further obligations to issue, extend or renew
Letters of Credit. If any other Event of Default shall have occurred and be
continuing, or if on any Drawdown Date the conditions precedent to the making of
the Loans to be made on such Drawdown Date or (as the case may be) to issuing,
extending or renewing such Letters of Credit on such date are not satisfied, the
Agent may and, upon the request of the Majority Banks, shall, by notice to the
Borrower, terminate the unused portion of the credit hereunder, and upon such
notice being given such unused portion of the credit hereunder shall terminate
immediately and each of the Banks shall be relieved of all further obligations
to make Loans and the Agent shall be relieved of all further obligations to
issue, extend or renew Letters of Credit. If any such notice is given to the
Borrower the Agent will forthwith furnish a copy thereof to each of the Banks.
No termination of the credit hereunder shall relieve the Borrower of any of the
Obligations or any of its existing obligations to any of the Banks arising under
other agreements or instruments.
14.3. REMEDIES. In case any one or more of the Events of Default shall have
occurred and be continuing, and whether or not the Banks shall have accelerated
the maturity of the Loans pursuant to ss.14.1, each Bank, if owed any amount
with respect to the Loans or the Reimbursement Obligations, may proceed to
protect and enforce its rights by suit in equity, action at law or other
appropriate proceeding, whether for the specific performance of any covenant or
agreement contained in this Credit Agreement and the other Loan Documents or any
instrument pursuant to which the Obligations to such Bank are evidenced,
including as permitted by applicable law the obtaining of the EX PARTE
appointment of a receiver, and, if such amount shall have become due, by
declaration or otherwise, proceed to enforce the payment thereof or any other
legal or equitable right of such Bank. No remedy herein conferred upon any Bank
or the Agent or the holder of any Note or purchaser of any Letter of Credit
Participation is intended to be exclusive of any other remedy and each and every
remedy shall be cumulative and shall be in addition to every other remedy given
hereunder or now or hereafter existing at law or in equity or by statute or any
other provision of law.
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14.4. DISTRIBUTION OF COLLATERAL PROCEEDS. In the event that following the
occurrence or during the continuance of any Default or Event of Default, the
Agent or any Bank, as the case may be, receives any monies in connection with
the enforcement of any the security documents, or otherwise with respect to the
realization upon any of the Collateral, such monies shall be distributed for
application as follows:
(a) First, to the payment of, or (as the case may be) the
reimbursement of the Agent or any of the Banks for or in respect of all
reasonable costs, expenses, disbursements and losses which shall have been
incurred or sustained by the Agent or any of the Banks in connection with
the collection of such monies by the Agent or any of the Banks, for the
exercise, protection or enforcement by the Agent or any of the Banks of all
or any of the rights, remedies, powers and privileges of the Agent or any
of the Banks under this Credit Agreement or any of the other loan documents
or in respect of the collateral and supports the provision of adequate
indemnity to the Agent or any of the Banks against all taxes or liens which
by law shall have, or may have, priority over the rights of the Agent or
any of the Banks to such monies;
(b) Second, to all other Obligations in such order or preference as
the Majority Banks may determine; PROVIDED, HOWEVER, that distributions in
respect of such Obligations shall be made (i) PARI PASSU among Obligations
with respect to the Agent's fee payable under ss.4.1 and all other
Obligations and (ii) with respect to each type of Obligation owing to the
Banks such as interest, principal, fees and expenses, among the Banks PRO
RATA; and PROVIDED, FURTHER, that the Agent may in its discretion make
proper allowance to take into account any Obligations not then due and
payable;
(c) Third, upon payment and satisfaction in full or other provisions
for payment in full satisfactory to the Banks and the Agent of all of the
Obligations, to the payment of any obligations required to be paid pursuant
to ss.9-504(1)(c) of the Uniform Commercial Code of the Commonwealth of
Massachusetts; and
(d) Fourth, the excess, if any, shall be returned to the Borrower or
to such other Persons as are entitled thereto.
15. SETOFF.
Regardless of the adequacy of any collateral, during the continuance of any
Event of Default, any deposits or other sums credited by or due from any of the
Banks to the Borrower and any securities or other property of the Borrower in
the possession of such Bank may be applied to or set off by such Bank against
the payment of Obligations and any and all other liabilities, direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, of the Borrower to such Bank. Each of the Banks agrees with
each other Bank that (i) if an amount to be set off is to be applied to
Indebtedness of the
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Borrower to such Bank, other than Indebtedness evidenced by the Notes held by
such Bank or constituting Reimbursement Obligations owed to such Bank, such
amount shall be applied ratably to such other Indebtedness and to the
Indebtedness evidenced by all such Notes held by such Bank or constituting
Reimbursement Obligations owed to such Bank, and (ii) if such Bank shall receive
from the Borrower, whether by voluntary payment, exercise of the right of
setoff, counterclaim, cross action, enforcement of the claim evidenced by the
Notes held by, or constituting Reimbursement Obligations owed to, such Bank, by
proceedings against the Borrower at law or in equity or by proof thereof in
bankruptcy, reorganization, liquidation, receivership or similar proceedings, or
otherwise, and shall retain and apply to the payment of the Note or Notes held
by, or Reimbursement Obligations owed to, such Bank any amount in excess of its
ratable portion of the payments received by all of the Banks with respect to the
Notes held by, and Reimbursement Obligations owed to, all of the Banks, such
Bank will make such disposition and arrangements with the other Banks with
respect to such excess, either by way of distribution, PRO TANTO assignment of
claims, subrogation or otherwise as shall result in each Bank receiving in
respect of the Notes held by it or Reimbursement Obligations owed it, its
proportionate payment as contemplated by this Credit Agreement; PROVIDED that if
all or any part of such excess payment is thereafter recovered from such Bank,
such disposition and arrangements shall be rescinded and the amount restored to
the extent of such recovery, but without interest.
16. THE AGENT.
16.1. AUTHORIZATION. (a) The Agent is authorized to take such action on
behalf of each of the Banks and to exercise all such powers as are hereunder and
under any of the other Loan Documents and any related documents delegated to the
Agent, together with such powers as are reasonably incident thereto, PROVIDED
that no duties or responsibilities not expressly assumed herein or therein shall
be implied to have been assumed by the Agent.
(b) The relationship between the Agent and each of the Banks is that of an
independent contractor. The use of the term "Agent" is for convenience only and
is used to describe, as a form of convention, the independent contractual
relationship between the Agent and each of the Banks. Nothing contained in this
Credit Agreement nor the other Loan Documents shall be construed to create an
agency, trust or other fiduciary relationship between the Agent and any of the
Banks. As an independent contractor empowered by the Banks to exercise certain
rights and perform certain duties and responsibilities hereunder and under the
other Loan Documents, the Agent is nevertheless a "representative" of the Banks,
as that term is defined in Article 1 of the Uniform Commercial Code, for
purposes of actions for the benefit of the Banks and the Agent with respect to
all collateral security and guaranties contemplated by the Loan Documents. Such
actions include the designation of the Agent as "secured party", "mortgagee" or
the like on all financing statements and other documents and instruments,
whether recorded or otherwise, relating to the attachment, perfection, priority
or enforcement of any security interests, mortgages or deeds
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of trust in collateral security intended to secure the payment or performance of
any of the Obligations, all for the benefit of the Banks and the Agent.
(c) Each of the Banks and the Agent acknowledge and agree that (i) the
Agent is authorized to release the security interest created by the Security
Documents in the Bravo Transferred Assets and that (ii) the Agent is authorized
to execute and deliver, on behalf of the Banks and the Agent, such partial
releases under the Uniform Commercial Code as may be necessary or desirable to
accomplish a release of the security interest created by the Security Documents
in the Bravo Transferred Assets. Each of the Banks and the Agent further
acknowledge and agree that (i) the Agent is authorized, from time to time, to
release the security interest created by the Security Documents in any assets
sold or otherwise transferred by the Borrower pursuant to the Sale Agreements
and that (ii) the Agent is authorized to execute and deliver, on behalf of the
Banks and the Agent, such partial releases under the Uniform Commercial Code as
may be necessary or desirable to accomplish a release of the security interest
created by the Security Documents in the assets sold or otherwise transferred by
the Borrower pursuant to the Sale Agreements. Each of the Banks and the Agent
acknowledge and agree that (i) the Agent is authorized to release the security
interest created by the Security Documents in the Capital Transferred Assets and
that (ii) the Agent is authorized to execute and deliver, on behalf of the Banks
and the Agent, such partial releases under the Uniform Commercial Code as may be
necessary or desirable to accomplish a release of the security interest created
by the Security Documents in the Capital Transferred Assets.
16.2. EMPLOYEES AND AGENTS. The Agent may exercise its powers and execute
its duties by or through employees or agents and shall be entitled to take, and
to rely on, advice of counsel concerning all matters pertaining to its rights
and duties under this Credit Agreement and the other Loan Documents. The Agent
may utilize the services of such Persons as the Agent in its sole discretion may
reasonably determine, and all reasonable fees and expenses of any such Persons
shall be paid by the Borrower.
16.3. NO LIABILITY. Neither the Agent nor any of its shareholders,
directors, officers or employees nor any other Person assisting them in their
duties nor any agent or employee thereof, shall be liable for any waiver,
consent or approval given or any action taken, or omitted to be taken, in good
faith by it or them hereunder or under any of the other Loan Documents, or in
connection herewith or therewith, or be responsible for the consequences of any
oversight or error of judgment whatsoever, except that the Agent or such other
Person, as the case may be, may be liable for losses due to its willful
misconduct or gross negligence.
16.4. NO REPRESENTATIONS. The Agent shall not be responsible for the
execution or validity or enforceability of this Credit Agreement, the Notes, any
of the other Loan Documents or any instrument at anytime constituting, or
intended to constitute, collateral security for the Notes, or for the value of
any such collateral security or for the validity, enforceability or
collectibility of any
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such amounts owing with respect to the Notes, or for any recitals or statements,
warranties or representations made herein or in any of the other Loan Documents
or in any certificate or instrument hereafter furnished to it by or on behalf of
the Borrower, or be bound to ascertain or inquire as to the performance or
observance of any of the terms, conditions, covenants or agreements herein or in
any instrument at any time constituting, or intended to constitute, collateral
security for the Notes or to inspect any of the properties, books or records of
the Borrower or any of its Subsidiaries. The Agent shall not be bound to
ascertain whether any notice, consent, waiver or request delivered to it by the
Borrower or any holder of any of the Notes shall have been duly authorized or is
true, accurate and complete. The Agent has not made nor does it now make any
representations or warranties, express or implied, nor does it assume any
liability to the Banks, with respect to the credit worthiness or financial
conditions of the Borrower or any of its Subsidiaries. Each Bank acknowledges
that it has, independently and without reliance upon the Agent or any other
Bank, and based upon such information and documents as it has deemed
appropriate, made its own credit analysis and decision to enter into this Credit
Agreement. For purposes of determining compliance with the conditions set forth
in ss.12, each Bank that has executed this Credit Agreement shall be deemed to
have consented to, approved or accepted, or to be satisfied with, each document
and matter either sent, or made available, by the Agent to such Bank for
consent, approval, acceptance or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to such Bank, unless
an officer of the Agent active upon the Borrower's account shall have received
notice from such Bank prior to the Closing Date specifying such Bank's objection
thereto and such objection shall not have been withdrawn by notice to the Agent
to such effect on or prior to the Closing Date.
16.5. PAYMENTS.
16.5.1. PAYMENTS TO AGENT. A payment by the Borrower to the Agent
hereunder or any of the other Loan Documents for the account of any Bank
shall constitute a payment to such Bank. The Agent agrees promptly to
distribute to each Bank such Bank's PRO RATA share of payments received by
the Agent for the account of the Banks except as otherwise expressly
provided herein or in any of the other Loan Documents.
16.5.2. DISTRIBUTION BY AGENT. If in the opinion of the Agent the
distribution of any amount received by it in such capacity hereunder, under
the Notes or under any of the other Loan Documents might involve it in
liability, it may refrain from making distribution until its right to make
distribution shall have been adjudicated by a court of competent
jurisdiction. If a court of competent jurisdiction shall adjudge that any
amount received and distributed by the Agent is to be repaid, each Person
to whom any such distribution shall have been made shall either repay to
the Agent its proportionate share of the amount so adjudged to be repaid
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or shall pay over the same in such manner and to such Persons as shall be
determined by such court.
16.5.3. DELINQUENT BANKS. Notwithstanding anything to the contrary
contained in this Credit Agreement or any of the other Loan Documents, any
Bank that fails (i) to make available to the Agent its PRO RATA share of
any Loan or to purchase any Letter of Credit Participation or (ii) to
comply with the provisions of ss.15 with respect to making dispositions and
arrangements with the other Banks, where such Bank's share of any payment
received, whether by setoff or otherwise, is in excess of its PRO rata
share of such payments due and payable to all of the Banks, in each case
as, when and to the full extent required by the provisions of this Credit
Agreement, shall be deemed delinquent (a "Delinquent Bank") and shall be
deemed a Delinquent Bank until such time as such delinquency is satisfied.
A Delinquent Bank shall be deemed to have assigned any and all payments due
to it from the Borrower, whether on account of outstanding Loans, Unpaid
Reimbursement Obligations, interest, fees or otherwise, to the remaining
nondelinquent Banks for application to, and reduction of, their respective
PRO RATA shares of all outstanding Loans and Unpaid Reimbursement
Obligations. The Delinquent Bank hereby authorizes the Agent to distribute
such payments to the nondelinquent Banks in proportion to their respective
PRO RATA shares of all outstanding Loans and Unpaid Reimbursement
Obligations. A Delinquent Bank shall be deemed to have satisfied in full a
delinquency when and if, as a result of application of the assigned
payments to all outstanding Loans and Unpaid Reimbursement Obligations of
the nondelinquent Banks, the Banks' respective PRO RATA shares of all
outstanding Loans and Unpaid Reimbursement Obligations have returned to
those in effect immediately prior to such delinquency and without giving
effect to the nonpayment causing such delinquency.
16.6. HOLDERS OF NOTES. The Agent may deem and treat the payee of any Note
or the purchaser of any Letter of Credit Participation as the absolute owner
thereof for all purposes hereof until it shall have been furnished in writing
with a different name by such payee or by a subsequent holder.
16.7. INDEMNITY. The Banks ratably agree hereby to indemnify and hold
harmless the Agent and its affiliates from and against any and all claims,
actions and suits (whether groundless or otherwise), losses, damages, costs,
expenses (including any expenses for which the Agent or such affiliate has not
been reimbursed by the Borrower as required by ss.17), and liabilities of every
nature and character arising out of or related to this Credit Agreement, the
Notes, or any of the other Loan Documents or the transactions contemplated or
evidenced hereby or thereby, or the Agent's or such affiliate's actions taken
hereunder or thereunder, except to the extent that any of the same shall be
directly caused by the Agent's willful misconduct or gross negligence.
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16.8. AGENT AS BANK. In its individual capacity, BKB shall have the same
obligations and the same rights, powers and privileges in respect to its
Commitment and the Loans made by it, and as the holder of any of the Notes, as
it would have were it not also the Agent.
16.9. RESIGNATION. The Agent may resign at any time by giving sixty (60)
days prior written notice thereof to the Banks and the Borrower. Upon any such
resignation, the Majority Banks shall have the right to appoint a successor
Agent. Unless a Default or Event of Default shall have occurred and be
continuing, such successor Agent shall be reasonably acceptable to the Borrower.
If no successor Agent shall have been so appointed by the Majority Banks and
shall have accepted such appointment within thirty (30) days after the retiring
Agent's giving of notice of resignation, then the retiring Agent may, on behalf
of the Banks, appoint a successor Agent, which shall be a financial institution
having a rating of not less than A or its equivalent by Standard & Poor's
Corporation. Upon the acceptance of any appointment as Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations
hereunder. After any retiring Agent's resignation, the provisions of this Credit
Agreement and the other Loan Documents shall continue in effect for its benefit
in respect of any actions taken or omitted to be taken by it while it was acting
as Agent.
16.10. NOTIFICATION OF DEFAULTS AND EVENTS OF DEFAULT. Each Bank hereby
agrees that, upon learning of the existence of a Default or an Event of Default,
it shall promptly notify the Agent thereof. The Agent hereby agrees that upon
receipt of any notice under this ss.16.10 it shall promptly notify the other
Banks of the existence of such Default or Event of Default.
16.11. DUTIES IN THE CASE OF ENFORCEMENT. In case one of more Events of
Default have occurred and shall be continuing, and whether or not acceleration
of the Obligations shall have occurred, the Agent shall, if (i) so requested by
the Majority Banks and (ii) the Banks have provided to the Agent such additional
indemnities and assurances against expenses and liabilities as the Agent may
reasonably request, proceed to enforce the provisions of the Security Documents
authorizing the sale or other disposition of all or any part of the Collateral
and exercise all or any such other legal and equitable and other rights or
remedies as it may have in respect of such Collateral. The Majority Banks may
direct the Agent in writing as to the method and the extent of any such sale or
other disposition, the Banks hereby agreeing to indemnify and hold the Agent
harmless from all liabilities incurred in respect of all actions taken or
omitted in accordance with such directions, PROVIDED that the Agent need not
comply with any such direction to the extent that the Agent reasonably believes
the Agent's compliance with such direction to be unlawful or commercially
unreasonable in any applicable jurisdiction.
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17. EXPENSES.
The Borrower agrees to pay (i) the reasonable costs of producing and
reproducing this Credit Agreement, the other Loan Documents and the other
agreements and instruments mentioned herein, (ii) any taxes (including any
interest and penalties in respect thereto) payable by the Agent or any of the
Banks (other than taxes based upon the Agent's or any Bank's net income) on or
with respect to the transactions contemplated by this Credit Agreement (the
Borrower hereby agreeing to indemnify the Agent and each Bank with respect
thereto), (iii) the reasonable fees, expenses and disbursements of the Agent's
Special Counsel or any local counsel to the Agent incurred in connection with
the preparation, administration or interpretation of the Loan Documents and
other instruments mentioned herein, each closing hereunder, and amendments,
modifications, approvals, consents or waivers hereto or hereunder, (iv) the
reasonable fees, expenses and disbursements of the Agent or any of its
affiliates incurred by the Agent in connection with the preparation,
syndication, administration or interpretation of the Loan Documents and other
instruments mentioned herein, including all title insurance premiums and
surveyor, engineering and appraisal charges, (v) any fees, costs, expenses and
bank charges, including bank charges for returned checks, incurred by the Agent
in establishing, maintaining or handling agency accounts, lock box accounts and
other accounts for the collection of any of the Collateral; (vi) all reasonable
out-of-pocket expenses (including without limitation reasonable attorneys' fees
and costs, which attorneys may be employees of any Bank or the Agent, and
reasonable consulting, accounting, appraisal, investment banking and similar
professional fees and charges) incurred by any Bank or the Agent in connection
with (A) the enforcement of or preservation of rights under any of the Loan
Documents against the Borrower or any of its Subsidiaries or the administration
thereof after the occurrence of a Default or Event of Default and (B) any
litigation, proceeding or dispute whether arising hereunder or otherwise, in any
way related to any Bank's or the Agent's relationship with the Borrower or any
of its Subsidiaries and (vii) all reasonable fees, expenses and disbursements of
any Bank or the Agent incurred in connection with UCC searches, UCC filings or
mortgage recordings. The covenants of this ss.17 shall survive payment or
satisfaction of payment of amounts owing with respect to the Notes.
18. INDEMNIFICATION.
The Borrower agrees to indemnify and hold harmless the Agent, its
affiliates and the Banks from and against any and all claims, actions and suits
whether groundless or otherwise, and from and against any and all liabilities,
losses, damages and expenses of every nature and character arising out of this
Credit Agreement or any of the other Loan Documents or the transactions
contemplated hereby including, without limitation, (i) any actual or proposed
use by the Borrower or any of its Subsidiaries of the proceeds of any of the
Loans, (ii) the reversal or withdrawal of any provisional credits granted by the
Agent upon the transfer of funds from bank agency or lock box accounts or in
connection with the provisional honoring of checks or other items, (iii) any
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actual or alleged infringement of any patent, copyright, trademark, service mark
or similar right of the Borrower or any of its Subsidiaries comprised in the
Collateral, (iv) the Borrower or any of its Subsidiaries entering into or
performing this Credit Agreement or any of the other Loan Documents or (v) with
respect to the Borrower and its Subsidiaries and their respective properties and
assets, the violation of any Environmental Law, the presence, disposal, escape,
seepage, leakage, spillage, discharge, emission, release or threatened release
of any Hazardous Substances or any action, suit, proceeding or investigation
brought or threatened with respect to any Hazardous Substances (including, but
not limited to claims with respect to wrongful death, personal injury or damage
to property), in each case including, without limitation, the reasonable fees
and disbursements of counsel and allocated costs of internal counsel incurred in
connection with any such investigation, litigation or other proceeding. In
litigation, or the preparation therefor, the Banks, the Agent and its affiliates
shall be entitled to select their own counsel and, in addition to the foregoing
indemnity, the Borrower agrees to pay promptly the reasonable fees and expenses
of such counsel. If, and to the extent that the obligations of the Borrower
under this ss.18 are unenforceable for any reason, the Borrower hereby agrees to
make the maximum contribution to the payment in satisfaction of such obligations
which is permissible under applicable law. The covenants contained in this ss.18
shall survive payment of satisfaction in full of all other obligations.
19. SURVIVAL OF COVENANTS, ETC.
All covenants, agreements, representations and warranties made herein, in
the Notes, in any of the other Loan Documents or in any documents or other
papers delivered by or on behalf of the Borrower or any of its Subsidiaries
pursuant hereto shall be deemed to have been relied upon by the Banks and the
Agent, notwithstanding any investigation heretofore or hereafter made by any of
them, and shall survive the making by the Banks of the Loans, as herein
contemplated, and shall continue in full force and effect so long as any amount
due under this Credit Agreement or the Notes or any of the other Loan Documents
remains outstanding or any Bank has any obligation to make any Loans, and for
such further time as may be otherwise expressly specified in this Credit
Agreement. All statements contained in any certificate or other paper delivered
to any Bank or the Agent at any time by or on behalf of the Borrower or any of
its Subsidiaries pursuant hereto or in connection with the transactions
contemplated hereby shall constitute representations and warranties by the
Borrower or such Subsidiary hereunder.
20. ASSIGNMENT AND PARTICIPATION.
20.1. CONDITIONS TO ASSIGNMENT. Except as provided herein, each Bank may
assign to one or more Eligible Assignees all or a portion of its interests,
rights and obligations under this Credit Agreement (including all or a portion
of its Commitment Percentage and Commitment and the same portion of the Loans at
the time owing to it, its participating interest in the risk relating to any
Letters of Credit and the Notes held by it); PROVIDED that (i) unless such
assignment is to an affiliate of the assigning Bank, the Agent shall have given
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its prior written consent to such assignment, which consent shall not be
unreasonably withheld, (ii) each such assignment shall be of a constant, and not
a varying, percentage of all the assigning Bank's rights and obligations under
this Credit Agreement, (iii) each assignment shall be in an amount that is not
less than $5,000,000 or a greater whole multiple of $1,000,000, and (iv) the
parties to such assignment shall execute and deliver to the Agent, for recording
in the Register (as hereinafter defined), an Assignment and Acceptance,
substantially in the form of EXHIBIT F hereto (an "Assignment and Acceptance"),
together with any Notes subject to such assignment. Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least five
(5) Business Days after the execution thereof, (i) the assignee thereunder shall
be a party hereto and, to the extent provided in such Assignment and Acceptance,
have the rights and obligations of a Bank hereunder, and (ii) the assigning Bank
shall, to the extent provided in such assignment and upon payment to the Agent
of the registration fee referred to in ss.20.3, be released from its obligations
under this Credit Agreement.
20.2. CERTAIN REPRESENTATIONS AND WARRANTIES; LIMITATIONS; COVENANTS. By
executing and delivering an Assignment and Acceptance, the parties to the
assignment thereunder confirm to and agree with each other and the other parties
hereto as follows:
(a) other than the representation and warranty that it is the legal
and beneficial owner of the interest being assigned thereby free and clear
of any adverse claim, the assigning Bank makes no representation or
warranty, express or implied, and assumes no responsibility with respect to
any statements, warranties or representations made in or in connection with
this Credit Agreement or the execution, legality, validity, enforceability,
genuineness, sufficiency or value of this Credit Agreement, the other Loan
Documents or any other instrument or document furnished pursuant hereto or
the attachment, perfection or priority of any security interest or
mortgage;
(b) the assigning Bank makes no representation or warranty and assumes
no responsibility with respect to the financial condition of the Borrower
and its Subsidiaries or any other Person primarily or secondarily liable in
respect of any of the Obligations, or the performance or observance by the
Borrower and its Subsidiaries or any other Person primarily or secondarily
liable in respect of any of the Obligations of any of their obligations
under this Credit Agreement or any of the other Loan Documents or any other
instrument or document furnished pursuant hereto or thereto;
(c) such assignee confirms that it has received a copy of this Credit
Agreement, together with copies of the most recent financial statements
referred to in ss.8.4 and ss.9.4 and such other documents and information
as it has deemed appropriate to make its own credit analysis and decision
to enter into such Assignment and Acceptance;
<PAGE> 86
-79-
(d) such assignee will, independently and without reliance upon the
assigning Bank, the Agent or any other Bank and based on such documents and
information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Credit
Agreement;
(e) such assignee represents and warrants that it is an Eligible
Assignee;
(f) such assignee appoints and authorizes the Agent to take such
action as agent on its behalf and to exercise such powers under this Credit
Agreement and the other Loan Documents as are delegated to the Agent by the
terms hereof or thereof, together with such powers as are reasonably
incidental thereto;
(g) such assignee agrees that it will perform in accordance with their
terms all of the obligations that by the terms of this Credit Agreement are
required to be performed by it as a Bank;
(h) such assignee represents and warrants that it is legally
authorized to enter into such Assignment and Acceptance or Instrument of
Accession; and
(i) such assignee acknowledges that it has made arrangements with the
assigning Bank satisfactory to such assignee with respect to its PRO RATA
share of Letter of Credit Fees in respect of outstanding Letters of Credit.
20.3. REGISTER. The Agent shall maintain a copy of each Assignment and
Acceptance delivered to it and a register or similar list (the "Register") for
the recordation of the names and addresses of the Banks and the Commitment
Percentage of, and principal amount of the Loans owing to and Letter of Credit
Participations purchased by the Banks from time to time. The entries in the
Register shall be conclusive, in the absence of manifest error, and the
Borrower, the Agent and the Banks may treat each Person whose name is recorded
in the Register as a Bank hereunder for all purposes of this Credit Agreement.
The Register shall be available for inspection by the Borrower and the Banks at
any reasonable time and from time to time upon reasonable prior notice. Upon
each such recordation, the assigning Bank agrees to pay to the Agent a
registration fee in the sum of $3,500.
20.4. NEW NOTES. Upon its receipt of an Assignment and Acceptance executed
by the parties to such assignment, together with each Note subject to such
assignment, the Agent shall (i) record the information contained therein in the
Register, and (ii) give prompt notice thereof to the Borrower and the Banks
(other than the assigning Bank). Within five (5) Business Days after receipt of
such notice, the Borrower, at its own expense, shall execute and deliver to the
Agent, in exchange for each surrendered Note in the case of an assignment, a new
Note to the order of such Eligible Assignee in an amount equal to the
<PAGE> 87
-80-
amount assumed by such Eligible Assignee pursuant to such Assignment and
Acceptance and, if the assigning Bank has retained some portion of its
obligations hereunder in the case of an assignment, a new Note to the order of
the assigning Bank in an amount equal to the amount retained by it hereunder.
Such new Notes shall provide that they are replacements for the surrendered
Notes, shall be in an aggregate principal amount equal to the aggregate
principal amount of the surrendered Notes, shall be dated the effective date of
such Assignment and Acceptance and shall otherwise be in substantially the form
of the assigned Notes. Within five (5) days of issuance of any new Notes
pursuant to this ss.20.4, the Borrower shall deliver an opinion of counsel,
addressed to the Banks and the Agent, relating to the due authorization,
execution and delivery of such new Notes and the legality, validity and binding
effect thereof, in form and substance satisfactory to the Banks. The surrendered
Notes shall be canceled and returned to the Borrower.
20.5. PARTICIPATIONS. Each Bank may sell participations to one or more
banks or other entities in all or a portion of such Bank's rights and
obligations under this Credit Agreement and the other Loan Documents; PROVIDED
that (i) each such participation shall be in an amount of not less than
$1,000,000 (ii) any such sale or participation shall not affect the rights and
duties of the selling Bank hereunder to the Borrower and (iii) the only rights
granted to the participant pursuant to such participation arrangements with
respect to waivers, amendments or modifications of the Loan Documents shall be
the rights to approve waivers, amendments or modifications that would reduce the
principal of or the interest rate on any Loans, extend the term or increase the
amount of the Commitment of such Bank as it relates to such participant, reduce
the amount of any commitment fees or Letter of Credit Fees to which such
participant is entitled or extend any regularly scheduled payment date for
principal or interest.
20.6. DISCLOSURE. The Borrower agrees that in addition to disclosures made
in accordance with standard and customary banking practices any Bank may
disclose information obtained by such Bank pursuant to this Credit Agreement to
assignees or participants and potential assignees or participants hereunder;
PROVIDED that such assignees or participants or potential assignees or
participants shall agree (i) to treat in confidence such information unless such
information otherwise becomes public knowledge, (ii) not to disclose such
information to a third party, except as required by law or legal process and
(iii) not to make use of such information for purposes of transactions unrelated
to such contemplated assignment or participation.
20.7. ASSIGNEE OR PARTICIPANT AFFILIATED WITH THE BORROWER. If any assignee
Bank is an Affiliate of the Borrower, then any such assignee Bank shall have no
right to vote as a Bank hereunder or under any of the other Loan Documents for
purposes of granting consents or waivers or for purposes of agreeing to
amendments or other modifications to any of the Loan Documents or for purposes
of making requests to the Agent pursuant to ss.14.1 or ss.14.2, and the
determination of the Majority Banks shall for all purposes of this Agreement
<PAGE> 88
-81-
and the other Loan Documents be made without regard to such assignee Bank's
interest in any of the Loans or Reimbursement Obligations. If any Bank sells a
participating interest in any of the Loans or Reimbursement Obligations to a
participant, and such participant is the Borrower or an Affiliate of the
Borrower, then such transferor Bank shall promptly notify the Agent of the sale
of such participation. A transferor Bank shall have no right to vote as a Bank
hereunder or under any of the other Loan Documents for purposes of granting
consents or waivers or for purposes of agreeing to amendments or modifications
to any of the Loan Documents or for purposes of making requests to the Agent
pursuant to ss.14.1 or ss.14.2 to the extent that such participation is
beneficially owned by the Borrower or any Affiliate of the Borrower, and the
determination of the Majority Banks shall for all purposes of this Agreement and
the other Loan Documents be made without regard to the interest of such
transferor Bank in the Loans to the extent of such participation.
20.8. MISCELLANEOUS ASSIGNMENT PROVISIONS. Any assigning Bank shall retain
its rights to be indemnified pursuant to ss.18 with respect to any claims or
actions arising prior to the date of such assignment. If any assignee Bank is
not incorporated under the laws of the United States of America or any state
thereof, it shall, prior to the date on which any interest or fees are payable
hereunder or under any of the other Loan Documents for its account, deliver to
the Borrower and the Agent certification as to its exemption from deduction or
withholding of any United States federal income taxes. If any Reference Bank
transfers all of its interest, rights and obligations under this Credit
Agreement, the Agent shall, in consultation with the Borrower and with the
consent of the Borrower and the Majority Banks, appoint another Bank to act as a
Reference Bank hereunder. Anything contained in this ss.18 to the contrary
notwithstanding, any Bank may at any time pledge all or any portion of its
interest and rights under this Credit Agreement (including all or any portion of
its Notes) to any of the twelve Federal Reserve Banks organized under ss.4 of
the Federal Reserve Act, 12 U.S.C. ss.341. No such pledge or the enforcement
thereof shall release the pledgor Bank from its obligations hereunder or under
any of the other Loan Documents.
20.9. ASSIGNMENT BY BORROWER. The Borrower shall not assign or transfer any
of its rights or obligations under any of the Loan Documents without the prior
written consent of each of the Banks.
21. NOTICES, ETC.
Except as otherwise expressly provided in this Credit Agreement, all
notices and other communications made or required to be given pursuant to this
Credit Agreement or the Notes shall be in writing and shall be delivered in
hand, mailed by United States registered or certified first class mail, postage
prepaid, sent by overnight courier, or sent by telegraph, telecopy, telefax or
telex and confirmed by delivery via courier or postal service, addressed as
follows:
<PAGE> 89
-82-
(a) if to the Borrower, at 60 State Street, Boston, Massachusetts
02110, Attention: Rene Lefebvre, Chief Financial Officer, or at such other
address for notice as the Borrower shall last have furnished in writing to
the Person giving the notice;
(b) if to the Agent, at 100 Federal Street, Boston, Massachusetts
02110, USA, Attention: Large Corporate Division - Robin F. Keeler,
Director, or such other address for notice as the Agent shall last have
furnished in writing to the Person giving the notice; and
(c) if to any Bank, at such Bank's address set forth on SCHEDULE 1
hereto, or such other address for notice as such Bank shall have last
furnished in writing to the Person giving the notice.
Any such notice or demand shall be deemed to have been duly given or made
and to have become effective (i) if delivered by hand, overnight courier or
facsimile to a responsible officer of the party to which it is directed, at the
time of the receipt thereof by such officer or the sending of such facsimile and
(ii) if sent by registered or certified first-class mail, postage prepaid, on
the third Business Day following the mailing thereof.
22. GOVERNING LAW.
THIS CREDIT AGREEMENT AND EACH OF THE OTHER LOAN DOCUMENTS, EXCEPT AS
OTHERWISE SPECIFICALLY PROVIDED THEREIN, ARE CONTRACTS UNDER THE LAWS OF THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL FOR ALL PURPOSES BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF SAID COMMONWEALTH OF MASSACHUSETTS
(EXCLUDING THE LAWS APPLICABLE TO CONFLICTS OR CHOICE OF LAW). THE BORROWER
AGREES THAT ANY SUIT FOR THE ENFORCEMENT OF THIS CREDIT AGREEMENT OR ANY OF THE
OTHER LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF
MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN AND CONSENT TO THE
NONEXCLUSIVE JURISDICTION OF SUCH COURT AND THE SERVICE OF PROCESS IN ANY SUCH
SUIT BEING MADE UPON THE BORROWER BY MAIL AT THE ADDRESS SPECIFIED IN SS.21. THE
BORROWER HEREBY WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE
VENUE OF ANY SUCH SUIT OR ANY SUCH COURT OR THAT SUCH SUIT IS BROUGHT IN AN
INCONVENIENT COURT.
23. HEADINGS.
The captions in this Credit Agreement are for convenience of reference only
and shall not define or limit the provisions hereof.
<PAGE> 90
-83-
24. COUNTERPARTS.
This Credit Agreement and any amendment hereof may be executed in several
counterparts and by each party on a separate counterpart, each of which when so
executed and delivered shall be an original, and all of which together shall
constitute one instrument. In proving this Credit Agreement it shall not be
necessary to produce or account for more than one such counterpart signed by the
party against whom enforcement is sought.
25. ENTIRE AGREEMENT, ETC.
The Loan Documents and any other documents executed in connection herewith
or therewith express the entire understanding of the parties with respect to the
transactions contemplated hereby. Neither this Credit Agreement nor any term
hereof may be changed, waived, discharged or terminated, except as provided in
ss.27.
26. WAIVER OF JURY TRIAL.
The Borrower hereby waives its right to a jury trial with respect to any
action or claim arising out of any dispute in connection with this Credit
Agreement, the Notes or any of the other Loan Documents, any rights or
obligations hereunder or thereunder or the performance of such rights and
obligations. Except as prohibited by law, the Borrower hereby waives any right
it may have to claim or recover in any litigation referred to in the preceding
sentence any special, exemplary, punitive or consequential damages or any
damages other than, or in addition to, actual damages. The Borrower (i)
certifies that no representative, agent or attorney of any Bank or the Agent has
represented, expressly or otherwise, that such Bank or the Agent would not, in
the event of litigation, seek to enforce the foregoing waivers and (ii)
acknowledges that the Agent and the Banks have been induced to enter into this
Credit Agreement, the other Loan Documents to which it is a party by, among
other things, the waivers and certifications contained herein.
27. CONSENTS, AMENDMENTS, WAIVERS, ETC.
Except as otherwise expressly provided in this Credit Agreement, any
consent or approval required or permitted by this Credit Agreement to be given
by one or more or all of the Banks may be given, and any term of this Credit
Agreement or of any other instrument related hereto or mentioned herein may be
amended, and the performance or observance by the Borrower of any terms of this
Credit Agreement or such other instrument or the continuance of any Default or
Event of Default (other than Defaults of Events of Default set forth in
secs.14.1(a) and (b)) may be waived (either generally or in a particular
instance and eitHer retroactively or prospectively) with, but only with, the
written consent of the Borrower and the written consent of the Majority Banks.
Notwithstanding the foregoing, (i) the rate of interest on the Notes, the term
of the Notes, the amount of the Commitments of the Banks, and the amount of
Commitment Fee or Letter of Credit Fees hereunder may not be changed
<PAGE> 91
-84-
without the written consent of the Borrower and the written consent of each Bank
directly or indirectly affected thereby; (ii) the definition of Majority Banks
may not be amended, Collateral may not be released, the Guaranty may not be
released, the Defaults or Events of Default set forth in secs.14.1(a) and (b)
may not be waived (either generally or in a particular instance and either
retroactively or prospectively) and this ss.27 may not be amended, without the
written consent of all of the Banks; (iii) and the amount of thE Agent's fee or
Letter of Credit Fees and ss.16 may not be amended without the written consent
of the Agent. No waiver shall extenD to or affect any obligation not expressly
waived or impair any right consequent thereon. No course of dealing or delay or
omission on the part of any Bank in exercising any right shall operate as a
waiver thereof or otherwise be prejudicial thereto. No notice to or demand upon
the Borrower shall entitle the Borrower to other or further notice or demand in
similar or other circumstances.
28. SEVERABILITY.
The provisions of this Credit Agreement are severable and if any one clause
or provision hereof shall be held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such clause or provision, or part thereof, in such jurisdiction, and shall not
in any manner affect such clause or provision in any other jurisdiction, or any
other clause or provision of this Credit Agreement in any jurisdiction.
29. TREATMENT OF CERTAIN CONFIDENTIAL INFORMATION.
29.1. SHARING OF INFORMATION WITH SECTION 20 SUBSIDIARY. The Borrower
acknowledges that from time to time financial advisory, investment banking and
other services may be offered or provided to the Borrower or one or more of its
Subsidiaries, in connection with this Credit Agreement or otherwise, by a
Section 20 Subsidiary. The Borrower, for itself and each of its Subsidiaries,
hereby authorizes (a) such Section 20 Subsidiary to share with the Agent and
each Bank any information delivered to such Section 20 Subsidiary by the
Borrower or any of its Subsidiaries, and (b) the Agent and each Bank to share
with such Section 20 Subsidiary any information delivered to the Agent or such
Bank by the Borrower or any of its Subsidiaries pursuant to this Credit
Agreement, or in connection with the decision of such Bank to enter into this
Credit Agreement; it being understood, in each case, that any such Section 20
Subsidiary receiving such information shall be bound by the confidentiality
provisions of this Credit Agreement. Such authorization shall survive the
payment and satisfaction in full of all of Obligations.
29.2. CONFIDENTIALITY. Each of the Banks and the Agent agrees, on behalf of
itself and each of its affiliates, directors, officers, employees and
representatives, to use reasonable precautions to keep confidential, in
accordance with its customary procedures for handling confidential information
of the same nature and in accordance with safe and sound banking practices, any
non-public information supplied to it by the Borrower or any of its Subsidiaries
pursuant to this Credit Agreement that is identified by such Person
<PAGE> 92
-85-
as being confidential at the time the same is delivered to the Banks or the
Agent, PROVIDED that nothing herein shall limit the disclosure of any such
information (a) after such information shall have become public other than
through a violation of this ss.29, (b) to the extent required by statute, rule,
regulation or judicial process, (c) to counsel for any of the Banks or the
Agent, (d) to bank examiners or any other regulatory authority having
jurisdiction over any Bank or the Agent, or to auditors or accountants, (e) to
the Agent, any Bank or any Section 20 Subsidiary, (f) in connection with any
litigation to which any one or more of the Banks, the Agent or any Section 20
Subsidiary is a party, or in connection with the enforcement of rights or
remedies hereunder or under any other Loan Document, (g) to a Subsidiary or
affiliate of such Bank as provided in ss.29.1 or (h) to any assignee oR
participant (or prospective assignee or participant) so long as such assignee or
participant agrees to be bound by the provisions of ss.20.6.
29.3. PRIOR NOTIFICATION. Unless specifically prohibited by applicable law
or court order, each of the Banks and the Agent shall, prior to disclosure
thereof, notify the Borrower of any request for disclosure of any such
non-public information by any governmental agency or representative thereof
(other than any such request in connection with an examination of the financial
condition of such Bank by such governmental agency) or pursuant to legal
process.
29.4. OTHER. In no event shall any Bank or the Agent be obligated or
required to return any materials furnished to it or any Section 20 Subsidiary by
the Borrower or any of its Subsidiaries. The obligations of each Bank under this
ss.29 shall supersede and replacE the obligations of such Bank under any
confidentiality letter in respect of this financing signed and delivered by such
Bank to the Borrower prior to the date hereof and shall be binding upon any
assignee of, or purchaser of any participation in, any interest in any of the
Loans or Reimbursement Obligations from any Bank.
30. TRANSITIONAL ARRANGEMENTS.
30.1. PRIOR LOAN AGREEMENT SUPERSEDED. This Credit Agreement shall
supersede the Prior Loan Agreement in its entirety, except as provided in this
ss.30. On thE Closing Date, the rights and obligations of the parties under the
Prior Loan Agreement and the "Notes" as defined therein shall be subsumed within
and be governed by this Credit Agreement and the Notes; PROVIDED, HOWEVER, that
each of the " Loans" (as defined in the Prior Loan Agreement) outstanding under
the Prior Loan Agreement on the Closing Date shall, for purposes of this Credit
Agreement, be Loans.
30.2. RETURN AND CANCELLATION OF NOTES. Upon its receipt of the Notes to be
delivered hereunder on the Closing Date, each Bank will promptly return to the
Borrower, marked "Canceled", the notes of the Borrower held by such Bank
pursuant to the Prior Loan Agreement, if any.
30.3. INTEREST AND FEES UNDER SUPERSEDED AGREEMENT. All interest and all
commitment, facility and other fees and expenses owing or accruing
<PAGE> 93
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under or in respect of the Prior Loan Agreement shall be calculated as of the
Closing Date (prorated in the case of any fractional periods), and shall be paid
on the Closing Date in accordance with the method specified in the Prior Loan
Agreement, as if the Prior Loan Agreement were still in effect.
30.4. NO CLAIMS UNDER PRIOR LOAN AGREEMENT. Each Bank wishes (and the
Borrower agrees) to eliminate any possibility that any past conditions, acts,
omissions, events, circumstances or matters would impair or otherwise adversely
affect such Bank's rights, interests, contracts, collateral security or
remedies. Therefore, the Borrower unconditionally releases, waives and forever
discharges (i) any and all liabilities, obligations, duties, promises or
indebtedness of any kind of such Bank to the Borrower regarding the execution,
delivery or performance of the Prior Loan Agreement or any of the other Loan
Documents (as defined in the Prior Loan Agreement), except the obligations to be
performed by such Bank for the Borrower as expressly stated in this Credit
Agreement and the other Loan Documents (as defined in this Credit Agreement),
and (ii) all claims, offsets, causes of action, suits or defenses of any kind
whatsoever (if any), whether known or unknown, which the Borrower might
otherwise have against such Bank or any of its directors, offices, employees or
agents, in either case (i) or (ii), on account of any condition, act, omission,
event, contract, liability, obligation, indebtedness, claim cause of action,
defense, circumstance or matter of any kind whatsoever which existed, arose or
occurred at any time prior to the date hereof regarding the execution, delivery
or performance of the Prior Loan Agreement or any of the Loan Documents (as
defined in the Prior Loan Agreement).
30.5. INTERBANK SETTLEMENTS. On the Closing Date, each of the Banks shall
pay to each of the other Banks such amounts as may be necessary so as to result
in the outstanding amount of Loans made by each Bank being equal to such Bank's
Commitment Percentage of the aggregate amount of Loans outstanding as of the
Closing Date. The Borrower and the Banks hereby agree that all amounts paid to
any Bank by any other Bank in connection with interbank settlements with respect
to Loans outstanding immediately prior to the date hereof shall be deemed to
constitute Loans under the Credit Agreement.
<PAGE> 94
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IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first set forth above.
HPSC, INC.
By: /s/ Rene Lefebvre
---------------------------------------
Name: Rene Lefebvre
Title: VP/CFO
BANKBOSTON, N.A., individually and as Agent
By: /s/ Roberta F. Keeler
---------------------------------------
Name: Roberta F. Keeler
Title: Vice President
THE SUMITOMO BANK, LIMITED
By: /s/ Jean Robert
---------------------------------------
Name: Jean Robert
Title: AVP
By: /s/ Alfred DeGemmis
---------------------------------------
Name: Alfred DeGemmis
Title: Vice President
CORESTATES BANK, N.A.
By: /s/ Theresa M. Smith
---------------------------------------
Name: Theresa M. Smith
Title: Vice President
<PAGE> 95
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MELLON BANK, N.A.
By: /s/ Gregory R. Schultz
---------------------------------------
Name: Gregory R. Schultz
Title: Vice President
NATIONAL BANK OF CANADA
By: /s/ Edward T. Paslawski
---------------------------------------
Name: Edward T. Paslawski
Title: Vice President
By: /s/ Leonard J. Pellecchia
---------------------------------------
Name: Leonard J. Pellecchia
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Alison Mason
---------------------------------------
Name: Alison Mason
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Noel B. Gradon
---------------------------------------
Name: Noel B. Gradon
Title: Vice President
<PAGE> 96
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JOINDER BY GUARANTOR
The Guarantor is hereby joined to the Credit Agreement for the purpose of making
the representations and warranties set forth in Section 8 and being bound by the
covenants set forth in Sections 9, 10 and 11.
AMERICAN COMMERCIAL
FINANCE CORPORATION
By: /s/ John W. Everets
----------------------------------------
Name: John W. Everets
Title: Chairman
<PAGE> 97
<TABLE>
THIRD AMENDED AND RESTATED
REVOLVING CREDIT AGREEMENT
SCHEDULE 1
Banks; Addresses; Commitments; Commitment Percentages
<CAPTION>
-------------------------------------------------------------------------------------------------------------
BANK'S NAME AND ADDRESS COMMITMENT PERCENTAGE
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BankBoston, N.A. $20,000,000 20.00%
100 Federal Street
Boston, MA 02110
Attn: Robin F. Keeler
Phone: 617-434-7028
Fax: 617-434-0637
-------------------------------------------------------------------------------------------------------------
CoreStates Bank, N.A. $14,000,000 14.00%
1339 Chestnut Street
Philadelphia, PA 09101
Attn: Theresa Smith
Phone: 215-973-2368
Fax: 215-786-7704
-------------------------------------------------------------------------------------------------------------
Mellon Bank, N.A. $14,000,000 14.00%
One Mellon Bank Center
Pittsburgh, PA 15259
Attn: Gregory R. Schultz
Phone: 412-236-0314
Fax: 412-234-9047
-------------------------------------------------------------------------------------------------------------
National Bank of Canada $14,000,000 14.00%
One Federal Street
27th Floor
Boston, MA 02110
Attn: Leonard J. Pellecchia
Phone: 617-350-7130
Fax: 617-350-7677
-------------------------------------------------------------------------------------------------------------
Union Bank of California, N.A. $14,000,000 14.00%
350 California Street
6th Floor
San Francisco, CA 94104
Attn: Alison Mason
Phone: 415-705-7452
Fax: 415-705-7566
-------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 98
-2-
<TABLE>
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
KeyBank National Association $14,000,000 14.00%
One Canal Plaza
Portland, ME 04101
Attn: Noel Graydon
Phone: 207-874-7021
Fax: 207-874-7070
-------------------------------------------------------------------------------------------------------------
The Sumitomo Bank, Limited $10,000,000 10.00%
One Post Office Square
Suite 3820
Boston, MA 02109
Attn: Alfred DeGemmis
Phone: 617-451-3200
Fax: 617-423-4884
-------------------------------------------------------------------------------------------------------------
TOTAL $100,000,000 100%
-------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
Exhibit 10.26
DESCRIPTION OF
HPSC, INC.
STOCK LOAN PROGRAM
HPSC, Inc.'s Stock Loan Program (the Program) is designed both to
encourage eligible employees of HPSC, Inc., to acquire and hold HPSC stock and
to provide liquidity for HPSC stock. Eligibility requirements for the Program
have been determined by the Compensation Committee of the Board of Directors of
HPSC, based upon the compensation level of employees of HPSC.
Under the Program, HPSC may loan each eligible employee who purchases
stock of HPSC on the Nasdaq national market or who exercises options to acquire
HPSC stock up to an amount equal to the then market price of the shares of HPSC
stock acquired; provided however, that the proceeds of the loan may be used only
for (i) the purchase of HPSC stock on the Nasdaq national market or through the
exercise of options or (ii) the payment of taxes due upon the exercise of
options to acquire HPSC stock. The maximum amount of all loans under the Program
shall be less than $500,000, provided, however, that only an aggregate of less
than $200,000 of loans under the Program shall be made in any single fiscal
quarter of the Company. Once the maximum amount has been loaned under the
Program, HPSC shall make no further loans under the Program, except that
additional loans may be made under the Program to the extent that the principal
amount of loans previously made is repaid. Each loan under the Program shall be
approved by the Chief Executive Officer of the
<PAGE> 2
Company, except that all loans to the Chief Executive Officer of the Company
shall be approved by the President of the Company.
Each participant in the Program shall be required to execute an Investment
Agreement, Promissory Note and Pledge Agreement.
Every loan offered to an eligible employee under this Program shall be a
full recourse loan evidenced by the Promissory Note. The loan and Promissory
Note shall be secured, pursuant to the Pledge Agreement, by the shares of HPSC
stock acquired by the employee with funds advanced by HPSC. The principal amount
of a loan made under this Program shall be due and payable no later than sixty
(60) months after the date of the loan. In addition, in order to defray the
costs to HPSC of administering the Program, each loan shall bear interest at a
rate equal to 50 basis points above the cost to HPSC of borrowing the amounts
advanced to the employee. Interest on each loan shall be due and payable monthly
and shall be deductible by HPSC from payroll checks issued by HPSC to the
eligible employee. Periodic principal payments on the loan shall be made by HPSC
deducting an amount equal to twenty percent (20%) of the borrower's after-tax
bonus, except that if the aggregate market value of the shares of HPSC stock
purchased under the Program is less than the employee's outstanding loan amount,
an amount equal to thirty percent (30%) of the employee's after-tax bonus shall
be deducted and applied to make principal payments on the loan.
If an employee who has purchased HPSC stock with funds loaned under this
Program sells any stock purchased with funds provided under this Program, the
2
<PAGE> 3
employee shall apply all proceeds from the sale of the stock to the payment of
the loan until the loan is paid in full. An employee must repay any outstanding
loan to him or her under the Program if the employee is no longer employed by
HPSC.
Disbursement of loans under the Program shall be made (i) in the case of
stock acquired by purchase on the Nasdaq national market, to the broker handling
the stock purchase for the employee, against presentation to HPSC of a
confirmation of the purchase, (ii) in the case of stock acquired by an option
exercise, to HPSC upon presentation of an option exercise form or (iii) in the
case of a loan to cover income tax liability upon the exercise of HPSC stock
options, to the employee upon HPSC's withholding of the required tax as a result
of the option exercise. In the case of a purchase on the Nasdaq National Market,
the broker shall be instructed to deliver to HPSC the stock certificates for the
stock purchased with a loan under the Program. HPSC shall retain the stock
certificates for stock acquired by employee by option exercise with proceeds of
a loan under the Program. The employee shall execute such stock powers regarding
those stock certificates as HPSC shall request.
This Program may be amended or terminated at any time by HPSC, except with
respect to the outstanding loans.
NOTICE
PARTICIPATION IN THIS PROGRAM HAS RISKS. ALL LOANS MADE UNDER THIS PROGRAM
ARE FULL RECOURSE LOANS AND WILL BE REPAYABLE IN FULL BY THE EMPLOYEE FROM HIS
OWN FUNDS EVEN IF THE STOCK PURCHASED UNDER THIS PROGRAM DECLINES IN VALUE
3
<PAGE> 4
AND IS WORTH LESS THAN THE AMOUNT OF THE LOAN. THE LOAN WILL ALSO BE PAYABLE IN
FULL IF THE EMPLOYEE CEASES TO BE AN EMPLOYEE OF HPSC.
4
<PAGE> 1
EXHIBIT 13
TO OUR SHAREHOLDERS
For HPSC, 1997 was a year that required management to preserve our growth
pattern while investing in and strengthening the Company's foundation for
long-term success. In short, our goal was to maintain momentum as we fortified
our position in a changing and challenging marketplace.
Specialty finance, and particularly healthcare finance, has become fiercely
competitive as the healthcare industry seeks to find its future while reacting
to unprecedented change. Despite these challenges, our net investment in finance
contracts grew by 45% and our volume of lease contracts and notes receivable
originations grew by 47%.
Our basic net income per share of $0.30 ($0.26 diluted) for 1997 (1996 $0.23
basic, $0.20 diluted) reflects the Company's continued adherence to its
strategic plan as we continue to invest in training, information systems and
increased support for our sales and marketing efforts. We believe that careful
attention to these critical areas today will hone HPSC's competitive edge to
meet the challenges of tomorrow.
HPSC continues to build on its leadership position in the dental profession
while expanding its efforts to diversify sales and marketing to include numerous
other healthcare professions. Today, HPSC provides financing for equipment used
by healthcare providers in 50 states distributed by almost 1,000 vendors and
offers practice acquisition financing nationwide. Customers, new and old,
regularly tell us how much they value our services. The quotations on the inside
front and back covers of this annual report are just samples of recent letters
from satisfied customers; however, we must continue our efforts to improve.
American Commercial Finance Corporation ("ACFC"), our asset-based lending
subsidiary, provides financing to manufacturing and distribution companies whose
borrowing requirements are generally less than $5,000,000. We believe that
asset-based lending provides valuable diversification to our Company and
represents an attractive potential growth business opportunity for HPSC.
Today HPSC serves its customer base of over 13,000 accounts in fifty states from
its 16 offices nationwide. We are proud of our record of providing financing to
healthcare professionals over the last twenty-four years. As we strive to be
"The finance company of choice in the markets we serve," we will continue to
draw on the experience of our board of directors, our management and our
employee/shareholders to grow and improve HPSC.
/s/ John W. Everets
- -----------------------------
John W. Everets
Chairman of the Board and
Chief Executive Officer
1
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
HPSC, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
---------------------------
(in thousands, except per share and share amounts) 1997 1996
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ 2,137 $ 2,176
Restricted Cash 7,000 6,769
Investment in Leases and Notes:
Lease contracts and notes receivable due in installments 219,147 155,771
Notes receivable 33,245 18,688
Retained interest in leases and notes sold 11,895 4,278
Estimated residual value of equipment at end of lease term 11,342 9,259
Less unearned income (53,868) (34,482)
Less allowance for losses (5,541) (4,562)
Less security deposits (5,801) (4,522)
Deferred origination costs 5,300 4,312
----------------------
Net investment in leases and notes 215,719 148,742
----------------------
Other assets:
Other assets 5,502 3,847
Refundable income taxes 2,770 1,203
----------------------
Total Assets $233,128 $162,737
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving Credit Borrowings $ 39,000 $ 40,000
Senior Notes 123,952 76,737
Subordinated Debt 20,000 --
Accounts Payable and Accrued Liabilities 6,254 5,916
Accrued Interest 1,129 450
Income Taxes:
Currently payable 66 300
Deferred 7,553 5,002
-----------------------
Total Liabilities 197,954 128,405
-----------------------
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 4,912,530 shares in 1997 and 4,786,530 shares in 1996 49 48
Additional paid-in capital 12,304 12,305
Retained earnings 26,472 25,351
Less: Treasury Stock, at cost (236,900 shares in 1997 and 128,600 in
1996) (1,210) (587)
Deferred compensation (2,286) (2,590)
Notes receivable from officers and employees (155) (195)
------------------------
Total Stockholders' Equity 35,174 34,332
------------------------
Total Liabilities and Stockholders' Equity $233,128 $162,737
========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 3
CONSOLIDATED STATEMENTS OF OPERATIONS
HPSC, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
(in thousands, except per share and share amounts) 1997 1996 1995
- --------------------------------------------------------------- ---------------------------------------------
<S> <C> <C> <C>
REVENUES
Earned income on leases and notes $ 23,691 $ 17,515 $ 12,871
Gain on sales of leases and notes 3,123 1,572 53
Provision for losses (2,194) (1,564) (1,296)
-------------------------------------------
Net Revenues 24,620 17,523 11,628
-------------------------------------------
OPERATING AND OTHER (INCOME) EXPENSES
Selling, general and administrative 12,330 8,059 5,984
Interest expense 10,649 8,146 5,339
Interest income on cash balances (361) (261) (375)
Loss on write-off of foreign currency translation adjustment -- -- 601
-------------------------------------------
Income before Income Taxes 2,002 1,579 79
Provision for Income Taxes 881 704 204
-------------------------------------------
Net Income (Loss) $ 1,121 $ 875 $ (125)
-------------------------------------------
Basic Net Income (Loss) per Share $ .30 $ .23 (.03)
-------------------------------------------
Shares Used to Compute Basic Net Income (Loss) per Share 3,732,576 3,786,799 4,575,970
===========================================
Diluted Net Income (Loss) per Share $ .26 $ .20 $ (.03)
-------------------------------------------
Shares Used to Compute Diluted Net Income (Loss) per Share 4,315,370 4,326,604 4,575,970
===========================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
HPSC, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Notes
Receivable
from
Common Stock Additional Officers
(in thousands, ---------------------- Paid-in Retained Treasury Deferred and
except share amounts) Shares Amount Capital Earnings Stock Compensation Employees
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1995 5,574,395 $ 56 $15,916 $24,601 $(5,023) $(2,176) $ --
Issuance of Common Stock 317 -- -- -- -- -- --
Net Income -- -- -- (125) -- -- --
Retirement of Treasury Stock (1,125,182) (12) (4,601) -- 4,163 -- --
Restricted Stock Awards 337,000 4 (4) -- -- -- --
ESOP Compensation -- -- -- -- -- 110 --
Foreign currency translation
adjustments -- -- -- -- -- -- --
Recognized in current period
upon liquidation of foreign
subsidiary -- -- -- -- -- -- --
Notes Receivable from
Officers and Employees -- -- -- -- -- -- (198)
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 4,786,530 48 11,311 24,476 (410) (2,066) (198)
Net Income -- -- -- 875 -- -- --
Restricted Stock Awards -- -- 994 -- -- (994) --
Purchase of Treasury Stock -- -- -- -- (177) -- --
Restricted Stock Compensation -- -- -- -- -- 365 --
ESOP Compensation -- -- -- -- -- 105 --
Notes Receivable from Officers
and Employees -- -- -- -- -- -- 3
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 4,786,530 48 12,305 25,351 (587) (2,590) (195)
Net Income -- -- -- 1,121 -- -- --
Restricted Stock Awards 126,000 1 (1) -- -- -- --
Purchase of Treasury StockN -- -- -- -- (623) -- --
Restricted Stock Compensation -- -- -- -- -- 199 --
ESOP Compensation -- -- -- -- -- 105 --
Notes Receivable from Officers
and Employees -- -- -- -- -- -- 40
- -------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 4,912,530 $ 49 $12,304 $26,472 $(1,210) $(2,286) $(155)
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Foreign
Currency
(in thousands, Translation
except share amounts) Adjustment Total
- -----------------------------------------------------------------------
<S> <C> <C>
BALANCE AT JANUARY 1, 1995 $(552) $32,822
Issuance of Common Stock -- --
Net Income -- (125)
Retirement of Treasury Stock -- --
Restricted Stock Awards -- --
ESOP Compensation -- 110
Foreign currency translation
adjustments (49) (49)
Recognized in current period
upon liquidation of foreign
subsidiary 601 601
Notes Receivable from
Officers and Employees -- (198)
- ------------------------------ -----------------------
BALANCE AT DECEMBER 31, 1995 -- 33,161
Net Income -- 875
Restricted Stock Awards -- --
Purchase of Treasury Stock -- (177)
Restricted Stock Compensation -- 365
ESOP Compensation -- 105
Notes Receivable from Officers
and Employees -- 3
- ------------------------------ -----------------------
BALANCE AT DECEMBER 31, 1996 -- 34,332
Net Income -- 1,121
Restricted Stock Awards -- --
Purchase of Treasury StockN -- (623)
Restricted Stock Compensation -- 199
ESOP Compensation -- 105
Notes Receivable from Officers
and Employees -- 40
- -----------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ -- $35,174
=======================================================================
</TABLE>
The accompanying notes are an interal part of the consolidated financial
statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
HPSC, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------------
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 1,121 $ 875 $ (125)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Foreign currency translation adjustment -- -- 601
Depreciation and amortization 3,558 2,862 2,340
Deferred income taxes 2,551 389 (926)
Restricted stock compensation 199 365 --
Gain on sales of leases and notes (3,123) (1,572) (53)
Provision for losses 2,194 1,564 1,296
Increase in accrued interest 679 111 46
Increase in accounts payable and accrued liabilities 346 2,379 1,087
Increase (decrease) in accrued income taxes (234) (68) 348
(Increase) decrease in refundable income taxes (1,567) (115) 358
(Increase) decrease in other assets (446) (110) (458)
---------------------------------------------
Cash provided by operating activities 5,278 6,680 4,514
---------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of lease contracts and notes receivable due in installments (135,625) (90,729) (63,945)
Portfolio receipts, net of amounts included in income 46,594 38,445 37,524
Proceeds from sales of lease contracts and notes
receivable due in installments 33,039 24,344 1,630
Net increase in notes receivable (14,434) (6,730) (7,570)
Net increase in security deposits 1,279 1,095 788
Net increase in other assets (191) (834) (844)
Loans to employees 40 3 (198)
---------------------------------------------
Cash used in investing activities (69,298) (34,406) (32,615)
---------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes,
net of debt issue costs 18,306 -- --
Repayment of senior notes (53,125) (26,019) (23,385)
Proceeds from issuance of senior notes, net of debt issue costs 100,087 52,973 28,422
Net proceeds (repayments) from demand and
revolving notes payable to banks (1,000) 1,000 25,570
Repayment of notes payable-treasury stock purchase -- -- (4,500)
Purchase of treasury stock (623) (177) --
Increase in restricted cash 231 1,159 2,326
Repayment of employee stock ownership plan promissory note 105 105 110
--------------------------------------------
Cash provided by financing activities 63,981 29,041 28,543
--------------------------------------------
Net increase (decrease) in cash and cash equivalents (39) 1,315 442
Cash and cash equivalents at beginning of year 2,176 861 419
--------------------------------------------
Cash and cash equivalents at end of year $ 2,137 $ 2,176 $ 861
============================================
Supplemental disclosures of cash flow information:
Interest paid $ 9,835 $ 7,719 $ 4,510
Income taxes paid 616 765 1,423
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HPSC, INC. AND SUBSIDIARIES
NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
HPSC, Inc. ("HPSC") and its consolidated subsidiaries (the "Company") provide
financing to healthcare professionals and small and medium-sized manufacturing
and distribution companies throughout the United States.
The Company leases dental, ophthalmic, chiropractic, veterinary 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.
Through its wholly-owned subsidiary, American Commercial Finance Corporation
("ACFC"), the Company also provides asset-based financing to manufacturing and
distribution companies whose borrowing requirements are generally less than
$5,000,000.
CONSOLIDATION
The accompanying consolidated financial statements include HPSC,
Inc. and the following wholly-owned subsidiaries: Credident, Inc. ("Credident"),
the Company's Canadian subsidiary; ACFC, an asset-based lender focused primarily
on accounts receivable and inventory financing at variable rates; HPSC Funding
Corp. I ("Funding I"), HPSC Bravo Funding Corp. ("Bravo") and HPSC Capital
Funding Inc. ("Capital"), special purpose corporations formed in connection with
securitizations. 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 leases and notes receivable. 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. Recognition of revenue on these assets is suspended
no later than when a transaction enters the legal collection phase. 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. Generally, the Company
retains the servicing of lease receivables sold. Servicing fees specified in the
sale agreements, which approximate market-rate servicing fees, are deferred and
recognized as revenue in proportion to the estimated periodic servicing costs.
Effective January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" for recording
the net gains and
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
retained interests from such sales. The adoption of SFAS No. 125, which
superseded SFAS No. 77, "Reporting by Transferors for Transfers of Financial
Assets and Extinguishments of Liabilities," did not have a material effect on
the Company's consolidated financial position or results of operations.
DEFERRED ORIGINATION COSTS
The Company capitalizes initial direct costs that relate to the origination of
leases and notes receivable in accordance with SFAS No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and
Initial Direct Costs of Leases." These initial direct costs are comprised of
certain specific activities related to processing requests for financing.
Deferred origination costs are amortized on the interest method 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 historical loss experiences, delinquencies and a specific
analysis of potential loss accounts. 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 resale
at December 31, 1997 or December 31, 1996.
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 Company's 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, 1997 or 1996.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective January 1, 1996, the Company elected to continue to account for
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25 (APB No. 25), "Accounting for Stock Issued to Employees." The Company
continues to apply the intrinsic value method under APB No. 25, and has
disclosed the pro forma information required by SFAS No. 123, "Accounting for
Stock-Based Compensation."
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.
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
FOREIGN CURRENCY TRANSLATION
The Company accounts for translation of foreign currency in accordance with SFAS
No. 52, "Foreign Currency Translation." Over a number of years, the accounts of
the Company's Canadian subsidiary, Credident, when translated into U.S. 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when acquired to be cash equivalents.
RESTRICTED CASH
As part of its servicing obligation under its securitization and sales
agreements (Note D), the Company collects certain cash receipts on the leases
pledged or sold. These collections are segregated in separate accounts for the
benefit of the third parties to whom the related lease contracts and notes
receivable were pledged or sold, and are remitted to the third parties on a
monthly basis.
INTEREST RATE SWAP CONTRACTS
Pursuant to the terms of its securitization agreements (Notes C and
D), the Company is required to enter into interest rate swap contracts. These
interest rate swaps are matched swaps, and as such, are accounted for using
settlement accounting. In the case where the notional value of the interest rate
swap agreements significantly exceeds the outstanding underlying debt, the
excess swap agreements would be marked-to-market. All interest rate swap
agreements entered into by the Company are for other than trading purposes. 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.
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, 1997 and 1996.
DEFERRED COMPENSATION
Deferred compensation includes notes receivable from the Company's Employee
Stock Ownership Plan ("ESOP") and Supplemental Employee Stock Ownership Plan
("SESOP"), and deferred compensation related to restricted stock awards.
Deferred compensation consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
(in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ESOP $ 631 $ 736 $ 841
SESOP 1,225 1,225 1,225
Restricted Stock 430 629 --
-----------------------------------------------------
Total $ 2,286 $ 2,590 $ 2,066
=====================================================
</TABLE>
8
<PAGE> 9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 130, "Reporting Comprehensive Income" establishes standards for
presenting comprehensive income. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" provides new standards for public companies
to report information about business segments, products and services, geographic
concentrations, and major customers. SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits" provides new standards for
disclosures related to pension plans and other post retirement benefits. SFAS
Nos. 130, 131 and 132 will be effective for the Company for the year ending
December 31, 1998. It is not expected that the adoption of these standards will
have a material impact on the Company's consolidated operating results or
financial condition.
RECLASSIFICATIONS
Certain amounts in the 1996 and 1995 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 85% of the
Company's net investment in leases and notes at December 31, 1997 (87% at
December 31, 1996). 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 receivable
due in installments.
The second category of assets consists of the Company's notes receivable, which
comprise approximately 15% of the Company's net investment in leases and notes
at December 31, 1997 (13% at December 31, 1996). These notes are 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, 1997, the Company has not had any charge offs of commercial notes
receivable. The provision for losses related to the commercial notes receivable
was $236,000, $146,000, and $95,000 in 1997, 1996, and 1995, respectively. The
amount of the allowance for losses related to the commercial notes receivable
was $520,000 and $284,000 at December 31, 1997 and 1996, respectively.
A summary of activity in the Company's allowance for losses for each of the
years in the three-year period ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $(4,562) $(4,512) $(4,595)
Provision for losses (2,194) (1,564) (1,296)
Charge offs 1,304 1,609 1,504
Recoveries (89) (95) (125)
-----------------------------------
Balance, end of year $(5,541) $(4,562) $(4,512)
===================================
</TABLE>
The Company's receivables are subject to credit risk. To reduce this risk, the
Company has adopted stringent underwriting policies in approving leases and
notes that are closely monitored by management. Additionally, certain of the
Company's leases and not es receivable, which have been sold under certain sales
agreements (Note D), are subject to recourse and estimated losses are provided
for by the Company.
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
The total contractual balances of delinquent lease contracts and notes
receivable due in installments, both owned by the Company and owned by others
and managed by the Company, over 90 days past due amounted to $6,806,000 at
December 31, 1997 compared to $5,763,000 at December 31, 1996. An account is
considered delinquent when not paid within thirty days of the billing due date.
The Company's agreements with its customers, except for ACFC notes receivable of
approximately $33,245,000 in 1997 and $18,688,000 in 1996, are non-cancelable
and provide for a full payout at a fixed financing rate with a fixed payment
schedule over a term of one to seven years. Scheduled future receipts on lease
contracts and notes receivable due in installments, plus retained interest on
leases and notes sold, including interest and excluding the residual value of
the equipment and ACFC receivables, at December 31, 1997 are as follows:
<TABLE>
(in thousands):
- -------------------------------------------------------
<S> <C>
1998 $ 62,658
1999 56,160
2000 46,454
2001 34,115
2002 22,308
2003 and thereafter 9,347
</TABLE>
NOTE C. REVOLVING CREDIT BORROWINGS AND OTHER DEBT
Debt of the Company as of December 31, 1997 and December 31, 1996 is summarized
below.
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving Credit Arrangement, due March 31, 1998 $ 39,000 $ 40,000
Senior Notes:
Senior Notes (Funding I) -- 6,861
Senior Notes (Bravo), due November, 2000 through August, 2001 57,295 67,524
Senior Notes (Capital), due September, 2000 through January 2004 61,744 --
Senior Notes (SIS), due March, 2001 4,913 2,352
Total Senior Notes 123,952 76,737
Unsecured Senior Subordinated Notes, due 2007 20,000 --
---------------------------
Total $ 182,952 $ 116,737
===========================
</TABLE>
REVOLVING CREDIT ARRANGEMENT
In December, 1996, the Company executed an Amended and Restated Revolving Loan
Agreement with BankBoston as Managing Agent (the "Revolving Loan Agreement," or
"Revolver"), providing availability up to $95,000,000. On December 10, 1997 this
agreement was extended on the same terms and conditions until March 31, 1998
providing availability of $60,000,000. Subsequent to December 31, 1997, the
Company has received written commitments to further amend its Revolving Loan
Agreement to provide availability of up to $100,000,000 through March 1999.
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. The weighted average rates on the outstanding
borrowings were 7.4% and 7.5% at December 31, 1997 and 1996, 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 historically not been hedged, and
is not hedged at December 31, 1997, 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.
10
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
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.
At December 31, 1996, Funding I had gross receivables of approximately
$9,758,000, which were pledged as Collateral. The agreement governing the
Funding I securitization provided for restrictions on the Company's use of cash
balances under certain conditions relating to default and delinquency ratios
applicable to the Collateral. At December 31, 1996, restricted cash amounted to
approximately $4,014,000. The agreement also contained a provision that required
early termination of the securitization and payment to noteholders when there
was restricted cash equal to noteholders balances. This event occurred during
1997, at which time the remaining outstanding debt obligation was paid in its
entirety.
SENIOR NOTES (BRAVO)
As of January 31, 1995, the Company, along with its wholly-owned,
special-purpose subsidiary, HPSC Bravo Funding Corp. ("Bravo") established a
$50,000,000 revolving credit facility structured and guaranteed by Capital
Markets Assurance Corporation ("CapMAC", subsequently acquired by MBIA in
February, 1998). Under the terms of the facility, Bravo, to which the Company
sells and may continue to sell or contribute certain of its portfolio assets
subject to certain covenants regarding Bravo's portfolio performance and
borrowing base calculations, pledges its interests in these assets to a
commercial-paper conduit entity. Bravo incurs interest at variable rates based
on 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 borrowings to $100,000,000 and to allow up to
$30,000,000 of the facility to be used to finance sales of financing contracts.
Monthly settlements of principal and interest payments are made from payments on
portfolio assets held by Bravo. The terms of the Bravo securitization facility
restrict the use of certain collected cash. This restricted cash amounted to
approximately $5,359,000 and $2,755,000 at December 31, 1997 and 1996,
respectively. The required monthly payments of principal and interest to
purchasers of commercial paper issued pursuant to the facility are guaranteed by
CapMAC.
In the normal course of securitization transactions, Bravo enters into interest
rate swap contracts to hedge its interest rate risk related to its variable rate
obligation to the commercial paper conduit. Under such interest rate swap
contracts, Bravo pays a fixed rate of interest and receives a variable rate from
the counterparty. At the time of entering into the interest rate swap contract,
Bravo may assign its right, title, and interest in such contracts to the
assignee or purchaser of the assets. There is credit risk to the extent 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, 1997, the Company had approximately $57,295,000 outstanding
under the loan portion of this facility and, in connection with these
borrowings, had interest rate swap contracts with BankBoston with a total
notional value of approximately $60,432,000 at an effective interest rate of
6.24%. 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 interest rate swap contracts with BankBoston with a total
notional value of approximately $65,231,000 at an effective interest rate of
6.29%.
SENIOR NOTES (CAPITAL)
In June 1997, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), established a $100,000,000
Lease Receivable Purchase Agreement with EagleFunding Capital Corporation
("Eagle"). Under the terms of the facility (the "Capital Facility"), Capital, to
which the Company
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
may sell certain of its portfolio assets from time to time, subject to certain
covenants regarding Capital's portfolio performance and borrowing base
calculations, pledges or sells its interests in these assets to a commercial
paper conduit entity. Capital incurs interest at variable rates based on rates
in the commercial paper market and enters into interest rate swap agreements to
assure fixed rate funding.
Monthly settlements of the borrowing base and any applicable principal and
interest payments are made from collections of Capital's portfolio. The terms of
the facility restrict the use of certain collected cash. This restricted cash
equaled approximately $1,641,000 at December 31, 1997. The required monthly
payments of principal and interest to the purchasers of the commercial paper are
guaranteed by BankBoston pursuant to the terms of the facility.
In the normal course of securitization transactions, Capital enters into
interest rate swap contracts to hedge its interest rate risk related to its
variable rate obligation to the commercial paper conduit. Under such interest
rate swap contracts, Capital pays a fixed rate of interest and receives a
variable rate from the counterparty. At the time of entering into the interest
rate swap contract, Capital may assign its right, title, and interest in such
contracts to the assignee or purchaser of the assets. There is credit risk to
the extent 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, 1997, the Company had approximately $61,744,000 of indebtedness
outstanding under this facility, and in connection with this facility had swap
contracts with BankBoston with a total notional value of $59,373,000 at an
effective interest rate of 6.12%.
The total amount of loans outstanding under both the Bravo and Capital
facilities, 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, 1998 $ 84,974 $ 84,893 6.16%
December 31, 1999 52,894 52,561 6.13%
December 31, 2000 27,485 26,883 6.12%
December 31, 2001 11,745 11,360 6.11%
December 31, 2002 2,425 2,320 6.07%
</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. In July, 1997, the Company entered into an additional secured, fixed
term loan agreement borrowing $4,000,000 at a fixed rate of 8.0%. Both loans are
subject to certain recourse and performance covenants.
SENIOR SUBORDINATED NOTES
In March 1997, the Company issued $20,000,000 of unsecured senior subordinated
notes (the "Notes") due in 2007. The notes bear interest at a fixed rate of 11%,
payable semi-annually on April 1 and October 1, beginning October 1, 1997. The
Notes are redeemable at the option of the Company, in whole or in part, other
than through the operation of a sinking fund, after April 1, 2002 at established
redemption prices, plus accrued but unpaid interest to the date of repurchase.
Beginning July 1, 2002, the Company is required to redeem through sinking fund
payments, on January 1, April 1, July 1, and October 1 of each year, a portion
of the aggregate principal amount of the Notes at a redemption price equal to
$1,000,000 plus accrued but unpaid interest to the redemption date.
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, 1997, the
Company was in compliance with the provisions of its debt covenants.
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
The scheduled maturities of the Company's revolving credit borrowings and all
other debt at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(in thousands)
- --------------------------------------------
<S> <C>
1998 $ 74,081
1999 33,230
2000 26,275
2001 16,474
2002 11,952
Thereafter 20,940
</TABLE>
NOTE D. SALES OF LEASES AND NOTES RECEIVABLE
The Company sells lease contracts and notes receivable due in installments under
certain sales and securitization agreements. In 1997, 1996 and 1995, the Company
received cash proceeds of approximately $33,039,000, $24,344,000, and
$1,630,000, respectively, and recognized gains of approximately $3,123,000,
$1,572,000, and $53,000, respectively, in connection with these sales.
In conjunction with the Company's two securitization facilities, the Company may
sell certain of its portfolio assets to one of its two wholly-owned, special
purpose subsidiaries, Bravo and Capital (Note C). Under the terms of the
agreements for these facilities, the special purpose entities in turn sell the
assets to a commercial paper conduit. Sales by the Company to either of its
subsidiaries are subject to certain asset performance and asset base
calculations. Proceeds from sales consist of cash, representing a portion of the
net present value of the future scheduled payments for the assets sold, and a
non-certificated, undivided interest in the assets sold. In recording the net
gain on the sale of the assets and the fair value of the net receivables due,
the Company assumes a loss rate on its retained interest approximating its
historical loss rates, and present values its receivable stream at discount
rates defined in the agreements at the time of the sale. At December 31, 1997
and 1996, the Company had approximately $33,610,000 and $8,123,000,
respectively, outstanding under such securitization agreements. As a hedge
against fluctuations in interest rates associated with commercial paper markets,
both Bravo and Capital enter into interest rate swap agreements. At December 31,
1997 and 1996, interest rate swap agreements, with a total notional value of
approximately $33,129,000 and $6,713,000, respectively, were in place in
connection with such sales.
Certain sales agreements from 1996 and 1995 are subject to 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 make payments when due. The total outstanding balances of lease
contracts and notes due in installments which are subject to repurchase
obligations by the Company were approximately $13,105,000 at December 31, 1997
and $16,696,000 at December 31, 1996.
Under the sales and securitization agreements, the Company may continue to
service the assets sold, subject to the maintenance of certain covenants. The
Company deferred approximately $522,000, $395,000 and $20,000 in service fee
income from sale transactions in 1997, 1996 and 1995, respectively, which will
be recognized as revenue in proportion to the estimated future periodic
servicing costs. The Company recognized approximately $171,000 and $15,000 of
such revenue in 1997 and 1996, respectively.
NOTE E. LEASE COMMITMENTS
The Company leases various office locations under noncancelable lease
arrangements that have initial 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 $448,000, $391,000, and $318,000, for 1997, 1996, and 1995,
respectively.
13
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
Future minimum lease payments for commitments exceeding twelve months under
non-cancelable operating leases as of December 31, 1997 are as follows:
<TABLE>
(in thousands)
- -----------------------------------------------------
<S> <C>
1998 $ 354
1999 176
2000 17
2001 --
2002 and thereafter --
</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:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 2,072 $ 1,699 $ 154
Foreign (70) (120) (75)
----------------------------------------------------
Income before income taxes $ 2,002 $ 1,579 $ 79
====================================================
</TABLE>
Income taxes consist of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal Current $ (1,347) $ 251 $ 832
Deferred 2,050 310 (569)
State Current (346) 64 426
Deferred 524 79 (357)
Foreign Current -- -- (128)
Deferred -- -- --
----------------------------------------------------
Provision for income taxes $ 881 $ 704 $ 204
====================================================
</TABLE>
Deferred income taxes arise from the following:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
(in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating method $ 2,785 $ 142 $ (2,501)
Alternative minimum tax credit -- -- 609
Other (211) 247 966
----------------------------------------------------
$ 2,574 $ 389 $ (926)
====================================================
</TABLE>
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
A reconciliation of the statutory federal income tax rate and the effective tax
rate as a percentage of pretax income for each year is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State taxes net of US federal income tax benefit 5.9 6.0 55.7
Effect of prior year foreign tax recovery -- -- (162.0)
Foreign loss not benefited 1.2 2.6 22.7
Non-deductible write-off of foreign currency
translation adjustment -- -- 258.5
Other 2.9 2.0 49.3
-------------------------------------------------------
44.0% 44.6% 258.2%
=======================================================
</TABLE>
The items which comprise a significant portion of deferred tax liabilities are
as follows at December 31:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Operating method $ 7,906 $ 5,146
Other (354) (144)
---------------------------------
Deferred income taxes $ 7,552 $ 5,002
=================================
</TABLE>
At December 31, 1997 consolidated retained earnings included $191,000 of
unremitted earnings from the Company's foreign subsidiary (Credident). In the
event of repatriation, the Company does not anticipate any significant
additional income taxes.
NOTE G. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
COMMON STOCK
The Company has 15,000,000 shares authorized and 4,912,530 shares outstanding at
December 31, 1997. Of the outstanding shares, 650,000 shares have been issued to
the Company's ESOP and SESOP (Note I), 463,000 shares have been issued to
certain employees under the Restricted Stock Plan (Note H), and 236,900 shares
are held in treasury.
PREFERRED STOCK
The Company has 5,000,000 shares of $1.00 par value preferred stock authorized
with no shares outstanding at December 31, 1997. (Note J. Preferred Stock
Purchase Rights Plan.)
EARNINGS PER SHARE
In February 1997, SFAS No. 128, "Earnings per Share" was issued and became
effective for the Company for the year ended December 31, 1997. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share," b y
establishing new requirements for calculating and reporting earnings per share.
Net income per share data for 1996 and 1995 has been restated to conform to the
provisions of SFAS No. 128. The Company's basic net income per share calculation
is based on the weighted average number of common shares outstanding, which does
not include unallocated shares under the Company's ESOP and SESOP (Note I),
shares issued under the Restricted Stock Plan (Note H), treasury stock, or any
shares issuable upon the exercise of outstanding stock options. Diluted net
income per share includes the weighted average number of stock options and
contingently issuable common shares under the Restricted Stock Plan outstanding
as calculated under the treasury stock method, but not unallocated shares under
the Company's ESOP and SESOP.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share. For the year ended December 31, 1995,
stock option and restricted stock plan shares of 279,909 were excluded from the
diluted net income per share calculation due to their antidilutive effect.
15
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
(in thousands, except per share and share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Net Income/(Loss) per Share:
Net income $ 1,121 $ 875 $ (125)
Weighted average common shares outstanding 3,732,576 3,786,799 4,575,970
--------------------------------------------------
Basic net income/(loss) per share $ 0.30 $ 0.23 $ (0.03)
==================================================
Diluted Net Income/(Loss) per Share:
Net income $ 1,121 $ 875 $ (125)
Denominator:
Weighted average common shares outstanding 3,732,576 3,786,799 4,575,970
Stock options and restricted shares 582,794 539,805 --
--------------------------------------------------
4,315,370 4,326,604 4,575,970
--------------------------------------------------
Diluted net income/(loss) per share $ 0.26 $ 0.20 $ (0.03)
==================================================
</TABLE>
NOTE H. STOCK OPTION AND STOCK INCENTIVE PLANS
STOCK OPTION PLANS
The Company had three stock option plans in place which provided for the
granting of options to purchase up to 801,875 shares of common stock: the
Employee Stock Option Plan dated March 23, 1983, as amended (the "1983 Plan"),
the Stock Option Plan dated March 5, 1986 (the "1986 Plan") and the 1994 Stock
Plan dated March 23, 1994 (the "1994 Plan"). These three plans were terminated
in May 1995 upon the approval of the 1995 Stock Incentive Plan discussed below.
Options granted under the 1983 Plan are either incentive stock options or
non-qualified options and were granted at no less than 85% of the fair market
value of the Common Stock on the date of grant. Officers and directors of the
Company and its subsidiaries were eligible to participate under the 1986 Plan
and only non-qualified stock options were granted under the 1986 Plan. Options
under the Plan were granted at an exercise price equal to the market price on
the date of grant. Key employees, directors of and consultants to the Company
were eligible to participate in the 1994 Plan. Only non-qualified options were
granted under the 1994 Plan and the option exercise price was in each case at
fair market value of the Common Stock on the date of grant. Options generally
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.
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").
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
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 to 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 partial performance criteria was
achieved with respect to 50% of the restricted shares in June 1996. In May 1997,
an additional 126,000 restricted shares were awarded. As of December 31, 1997,
neither of the performance conditions had been met for the May 1997 awards. In
1997, 1996, and 1995, the Company recognized approximately $199,000, $365,000
and $0, respectively, in compensation expense related to restricted stock awards
under its 1995 Stock Incentive Plan.
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 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 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, 1997, there were options exercisable for an aggregate of 4,000
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.
17
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
The following table summarizes stock option and restricted stock activity:
<TABLE>
<CAPTION>
Options
-------------------------------
Number of Weighted Average Restricted
Options Exercise Price Stock
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Outstanding at January 1, 1995 636,875 $3.17 --
Granted 25,000 4.33 337,000
Forfeited (50,000) 3.56 --
------------------------------------------
Outstanding at December 31, 1995 611,875 3.19 337,000
Granted 60,000 5.15 --
Forfeited (30,000) 3.31 --
------------------------------------------
Outstanding at December 31, 1996 641,875 3.36 337,000
Granted 16,000 6.08 126,000
Forfeited (5,000) 4.75 --
------------------------------------------
Outstanding at December 31, 1997 652,875 $3.43 463,000
==========================================
</TABLE>
The following table sets forth information regarding options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------- --------------------------------------
Weighted Average Weighted Average Weighted Average
Range of Number of Remaining Contractual Exercise Number Exercise
Exercise Prices Options Life (Years) Price of Options Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.63 - 3.25 391,875 2.04 $2.87 391,875 $2.87
$3.38 - 4.00 170,000 2.89 3.75 126,834 3.77
$4.50 - 4.88 59,000 7.76 4.70 23,000 4.71
$6.13 - 6.75 32,000 8.93 6.24 15,000 6.14
- -----------------------------------------------------------------------------------------------------------------------------
$2.63 - 6.75 652,875 3.08 $3.43 556,709 $3.24
=============================================================================================================================
</TABLE>
The weighted average grant date fair values of options granted for the years
ending December 31, 1997, 1996, and 1995 were $3.29, $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 was terminated upon the approval of the Stock Incentive Plan
in May, 1995. During 1995, 317 shares were issued under the Stock Purchase Plan.
NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES (STOCK LOAN PROGRAM)
On January 5, 1995 (as amended July 28, 1997), the Compensation Committee
approved a Stock Loan Program whereby eligible executive officers and other
senior personnel of the Company 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 or $500,000 in the aggregate at any time 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, with periodic
principal prepayments equal to between 20% and 30% of the participant's
after-tax bonus.
18
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
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 basic and diluted earnings per share would have been as
follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 1,981 $ 1,598 $ (64)
Provision for income taxes 898 735 204
-----------------------------------
Net income (loss) $ 1,083 $ 863 $(140)
===================================
Basic net income (loss) per share $ .29 $ .23 $(.03)
Diluted net income (loss) per share $ .25 $ .20 $(.03)
==================================
</TABLE>
For purposes of determining the above disclosure required by SFAS 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>
1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate 5.7% 6.0% 6.7%
Expected life of option grants 5-10 years 5-10 years 5-10 years
Expected volatility of underlying stock 29.7% 36.4% 46.6%
</TABLE>
The pro forma presentation only includes the effects of grants made subsequent
to January 1, 1995. The pro forma amounts may not be indicative of the future
benefit, if any, to be received by the option holder.
NOTE I. 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 1997 and 1996, and $110,000 in 1995.
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, 1997, 119,654 shares of Common Stock have been
allocated to participant accounts under the ESOP and 180,346 shares remain
unallocated. The market value of unallocated shares at December 31, 1997 was
$946,817.
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
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
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 and are determined annually. No
contributions have been made nor have any allocations yet been made to
participant accounts.
SAVINGS PLAN
The Company has established a Savings Plan covering substantially all full-time
employees, which allows participants to make contributions by salary deductions
pursuant to Section 401(k) of the Internal Revenue Code. The Company matches
employee contributions up to a maximum of 2% of the employee's salary. Both
employee and employer contributions are vested immediately. The Company's
contributions to the Savings Plan were $71,772 in 1997, $62,841 in 1996, and
$49,419 in 1995.
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
In 1997, the Company introduced an unfunded Supplemental Executive Retirement
Plan ("SERP") effective January 1, 1997. The SERP provides certain executives
retirement income benefits in addition to certain other retirement programs
received by the executives. Benefits under the plan, based on an actuarial
equivalent of a life annuity, are based on age, length of service and average
earnings and vest over 15 years, assuming five years of service.
Benefits are payable upon separation of service. The expense under this plan was
approximately $147,000 for the year ended December 31, 1997. The related
liability of approximately $147,000 at December 31, 1997, is included in accrued
liabilities.
NOTE J. PREFERRED STOCK PURCHASE RIGHTS PLAN
Pursuant to a rights agreement between the Company and BankBoston, 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 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 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 K. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," 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.
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
HPSC, INC. AND SUBSIDIARIES
Fair value of a financial instrument is the amount at which the instrument could
be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale.
Quoted market prices are used when available; otherwise, management estimates
fair value based on prices of financial instruments with similar characteristics
or using valuation techniques such as discounted cash flow models. Valuation
techniques involve uncertainties and require assumptions and judgments regarding
prepayments, credit risk and discount rates. Changes in these assumptions will
result in different valuation estimates. The fair values presented would not
necessarily be realized in an immediate sale, nor are there plans to settle
liabilities prior to contractual maturity. Additionally, SFAS No. 107 allows
companies to use a wide range of valuation techniques; therefore, it may be
difficult to compare the Company's fair value information to other companies'
fair value information.
The following table presents a comparison of the carrying value and estimated
fair value of the Company's financial instruments at December 31, 1997:
<TABLE>
<CAPTION>
Carrying Estimated
(in thousands) Value Fair Value
- ---------------------------------------------------------------------------
Financial assets:
<S> <C> <C>
Cash and cash equivalents $ 2,137 $ 2,137
Restricted cash 7,000 7,000
Net investment in leases and notes 215,719 215,719
Financial liabilities:
Notes payable and subordinated debt $ 182,952 $ 182,952
Interest rate swap contracts -- 1,060
</TABLE>
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
- ---------------------------------------------------------------------------
Financial assets:
<S> <C> <C>
Cash and cash equivalents $ 2,176 $ 2,176
Restricted cash 6,769 6,769
Net investment in leases and notes 148,742 148,742
Financial liabilities:
Notes payable $ 116,737 $116,737
Interest rate swap contracts -- 336
</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 and subordinated debt: The fair market value of the Company's
senior and subordinated notes is estimated based on the quoted market prices for
similar issues or on the current rates offered to the Company for debt of the
same maturity.
Interest rate swap contracts: The fair value of interest rate swap contracts is
estimated based on the estimated amount necessary to terminate the agreements.
21
<PAGE> 22
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of HPSC, Inc.:
We have audited the accompanying consolidated balance sheets of HPSC, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years 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 audits. The consolidated financial statements
of HPSC, Inc. and subsidiaries for the year ended December 31, 1995 were audited
by other auditors whose report, dated March 25, 1996, expressed an unqualified
opinion on those statements and included an explanatory paragraph that described
the Company's adoption of 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.
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, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of HPSC, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 6, 1998
22
<PAGE> 23
MARKET INFORMATION
The table below sets forth the representative high and low close prices for
shares of the Common Stock in the over-the-counter market as reported by the
NASDAQ National Market System (Symbol: "HPSC") for the fiscal years 1997 and
1996:
<TABLE>
<CAPTION>
1997 Fiscal Year High Low 1996 Fiscal Year High Low
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
First Quarter $ 6 3/8 $ 5 3/4 First Quarter $ 5 3/4 $ 4 5/8
Second Quarter 6 1/8 5 1/8 Second Quarter 7 3/8 4 5/8
Third Quarter 6 7/8 5 1/4 Third Quarter 7 5 3/4
Fourth Quarter 7 5 1/4 Fourth Quarter 6 5/8 5 7/8
</TABLE>
The foregoing quotations represent prices between dealers, and do not include
retail markups, markdowns, or commissions.
HOLDERS
Approximate Number of Record
Title of Class Holders (as of February 27, 1998)
- -------------------------------------------------------------------------------
Common Stock, par value $.01 per share 88(1)
DIVIDENDS
The Company has never paid any dividends and anticipates that for the
foreseeable future its earnings will be retained for use in its business.
(1) This number does not reflect beneficial ownership of shares held in
"nominee" or "street name."
23
<PAGE> 24
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------------------------------------
(in thousands, except Dec. 31, Dec. 31, Dec. 31, Dec. 25, Dec. 26,
share and per share data) 1997 1996 1995(3) 1994(2) 1993(1)
- -------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Revenues:
<S> <C> <C> <C> <C> <C>
Earned income on
leases and notes 23,691 17,515 12,871 11,630 17,095
Gains on sales of
leases and notes 3,123 1,572 53 -- --
Provision for losses (2,194) (1,564) (1,296) (754) (15,104)
- -------------------------------------------------------------------------------------------------------------------
Net Revenues 24,620 17,523 11,628 10,876 1,991
===================================================================================================================
Net Income (Loss) 1,121 875 (125) 450 (7,278)
===================================================================================================================
Income (Loss) per Share:
Basic(4) 0.30 0.23 (0.03) 0.09 (1.48)
Diluted(4) 0.26 0.20 (0.03) 0.09 (1.48)
===================================================================================================================
Shares Used to Compute
Earnings per Share:
Basic 3,732,576 3,786,799 4,575,970 4,952,532 4,923,281
Diluted 4,315,370 4,326,604 4,575,970 5,044,754 4,923,281
===================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Dec. 31, Dec. 31, Dec. 31, Dec. 25, Dec. 26,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
<S> <C> <C> <C> <C> <C>
Cash and Cash Equivalents $ 2,137 $ 2,176 $ 861 $ 419 $ 16,600
Restricted Cash $ 7,000 6,769 5,610 7,936 --
Lease Contracts Receivable
and Notes Receivable $ 264,287 178,737 140,689 103,531 126,369
Unearned Income $ 53,868 34,482 25,875 16,924 21,803
Total Assets $ 233,128 162,737 130,571 103,148 130,437
Revolving Credit Borrowings $ 39,000 40,000 39,000 16,500 7,130
Senior Notes $ 123,952 76,737 46,523 41,024 50,000
Subordinated Debt $ 20,000 -- -- -- 19,962
Stockholders' Equity $ 35,174 34,332 33,161 32,822 37,621
</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 all of the Company's business.
(2) For 1994 and prior years, the Company's fiscal year was the 52 or 53 week
period ending on the last Saturday of the calendar year. The 1994 fiscal
year covers the 53 week period from December 26, 1993 to December 31, 1994.
In fiscal year 1995, the Company changed its fiscal year end to December
31.
(3) Net loss reflects a one-time, non-cash loss on write-off of cumulative
foreign currency translation adjustment of $601,000 related to the
Company's discontinued Canadian operations.
(4) Net income (loss) per share for periods prior to December 31, 1997 have
been restated to conform to the provisions of Statement of Financial
Accounting Standards No. 128, "Earnings per Share."
24
<PAGE> 25
Management's Discussion and Analysis of Financial Condition
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996
Earned income from leases and notes for 1997 was $23,691,000 (including
$4,036,000 from ACFC) as compared to $17,515,000 (including $2,643,000 for ACFC)
for 1996. This increase of approximately 35.3% was due primarily to the increase
in the net investment in leases and notes from 1996 to 1997. The increase in net
investment in leases and notes resulted from an increase of approximately 47.4%
in the Company's financing contract originations for fiscal 1997 to
approximately $143,000,000 (including approximately $14,000,000 in ACFC
originations, and excluding approximately $4,500,000 of initial direct costs)
from approximately $97,000,000 (including approximately $10,000,000 in ACFC
originations, and excluding approximately $3,800,000 of initial direct costs)
for 1996. Gains on sales of leases and notes increased to $3,123,000 in 1997
compared to $1,572,000 in 1996. This increase was caused by higher levels of
sales activity in 1997. 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 1997 was
$10,288,000 (43.4% of earned income) compared to $7,885,000 (45.0% of earned
income) for 1996, an increase in amount of 30.5%. The increase in net interest
expense was due primarily to a 56.7% increase in debt levels from 1996 to 1997,
which resulted primarily from increased borrowings to finance the company's
financing contract originations. The decrease as a percentage of earned income
was due to lower interest rates on debt in 1997 as compared to 1996.
Net financing margin (earned income less net interest expense) for fiscal 1997
was $13,403,000 (56.6% of earned income) as compared to $9,630,000 (55.0% of
earned income) for 1996. The increase in amount was due to higher earnings on a
higher balance of earning assets. The increase in percentage of earned income
was due to higher debt during 1997 at lower rates as compared to 1996.
The provision for losses for fiscal 1997 was $2,194,000 (9.3% of earned income)
compared to $1,564,000 (8.9% of earned income) for 1996. This increase in amount
resulted from higher levels of new financings in 1997 and the Company's
continuing evaluation of its allowance for losses. The allowance for losses at
December 31, 1997 was $5,541,000 (2.6% of net investment in leases and notes) as
compared to $4,562,000 (3.0% of net investment in leases and notes) at December
31, 1996. Net charge-offs were approximately $1,200,000 in 1997 compared to
$1,500,000 in 1996.
Selling, general and administrative expenses for fiscal 1997 were $12,330,000
(52.0% of earned income) as compared to $8,059,000 (46.0% of earned income) for
1996. This increase resulted from increased staffing and systems and support
costs required by higher volumes of financing activity in 1997 and to permit
anticipated near-term growth in financing activity.
The Company's income before income taxes for fiscal 1997 was $2,002,000 compared
to $1,579,000 for 1996. The provision for income taxes was $881,000 (44.0% of
income before tax) in 1997 compared to $704,000 (44.6%) in 1996.
The Company's net income for fiscal 1997 was $1,121,000 or $0.30 per basic
share and $0.26 per diluted share, compared to $875,000 or $0.23 per basic share
and $0.20 per diluted share for 1996. The increase in 1997 over 1996 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, and higher average debt levels in 1997.
At December 31, 1997, the Company had approximately $59,000,000 of customer
applications which had been approved but had not yet resulted in a completed
transaction, compared to approximately $47,500,000 of such customer applications
at December 31, 1996. Not all approved applications will result in completed
financing transactions with the Company.
The Company has reviewed all significant areas within its operations, including
the application, underwriting and accounting management systems, for date
sensitive issues after December 31, 1999 ("Year 2000 Issues"). The Company is
also monitoring the progress of its major service providers. Based on this
review, the Company does not anticipate any material adverse impact from Year
2000 Issues.
25
<PAGE> 26
FISCAL YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995
Earned income from leases and notes for 1996 was $17,515,000 (including
$2,643,000 from ACFC) as compared to $12,871,000 (including $1,316,000 for 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 $97,000,000 (including approximately $10,000,000 in ACFC
originations, and excluding approximately $3,800,000 of initial direct costs)
from approximately $68,600,000 (including approximately $7,600,000 in ACFC
originations, and excluding approximately $3,000,000 of initial direct costs)
for 1995. Gains on sales of leases and notes increased to $1,572,000 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 $7,885,000
(45.0% of earned income) compared to $4,964,000 (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 $9,630,000 (55.0% of earned income) as compared to $7,907,000 (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 $1,564,000 (8.9% of earned income)
compared to $1,296,000 (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 $4,562,000 (3.0% of net investment in leases and notes) as
compared to $4,512,000 (3.6% of net investment in leases and notes) at December
31, 1995. Net charge-offs were approximately $1,500,000 in 1996 compared to
$1,400,000 in 1995.
Selling, general and administrative expenses for fiscal 1996 were $8,059,000
(46.0% of earned income) as compared to $5,984,000 (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 $1,579,000 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 a $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 $0.23 per basic share
and $0.20 per diluted share, compared to ($125,000) or $(0.03) per basic and
diluted 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, approximately $47,500,000 of customer applications which
had been approved but had not yet resulted in a completed transaction were
outstanding, compared to approximately $39,900,000 of such customer applications
at December 31, 1995. Not all approved applications will result in completed
financing transactions with the Company.
26
<PAGE> 27
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 Capital, and
loans secured by financing contracts. The Company obtains cash from sales of its
financing contracts under its securitization facilities and from lease and note
payments received. 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, that 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 limit ed recourse
financings and cash flow from the Company's financing transactions.
At December 31, 1997, the Company had $9,137,000 in cash, cash equivalents and
restricted cash as compared to $8,945,000 at the end of 1996. As described in
Note C to the Company's Consolidated Financial Statements, $7,000,000 of such
cash was restricted pursuant to financing agreements as of December 31, 1997,
compared to $6,769,000 at December 31, 1996.
Cash provided by operating activities was $5,278,000 for the year ended December
31, 1997 compared to $6,680,000 in 1996 and $4,514,000 in 1995. The significant
components of cash provided for 1997 as compared to 1996 were an increase in net
income in 1997 to $1,121,000 from $875,000 in 1996; an increase in the gain on
sales of leases and notes to $3,123,000 in 1997 from $1,572,000 in 1996, which
was caused by a higher level of sales activity in 1997; and an increase in
accounts payable and accrued expenses, including accrued interest, of
$1,025,000 as compared to 1996, which was caused primarily by the issuance of
subordinated debt and higher senior note balances in 1997.
Cash used in investing activities was $69,298,000 for the year ended December
31, 1997, compared to $34,406,000 in 1996 and $32,615,000 in 1995. The primary
components of cash used in investing activity for 1997 as compared to 1996 were
an increase in originations of lease contracts and notes receivable to
$135,625,000 in 1997 from $90,729,000 in 1996, offset by an increase in proceeds
from sales of lease contracts and notes receivable to $33,039,000 in 1997 from
$24,344,000 in 1996.
Cash provided by financing activities was $63,981,000 for the year ended
December 31, 1997 compared to cash provided by financing activities of
$29,041,000 for December 31, 1996 and $28,543,000 in 1995. The significant
components of cash provided by financing activity in 1997 as compared to 1996
were proceeds from the issuance of subordinated debt of $18,306,000 in 1997 and
an increase in the proceeds from senior notes in 1997 to $100,087,000 from
$52,973,000 in 1996, offset by repayments of senior notes in 1997 of $53,125,000
compared to $26,019,000 in 1996.
On December 27, 1993, the Company raised $70,000,000 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 were 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 $50,000,000 of 10.125% senior notes due December 28, 1993,
and $20,000,000 of 10% subordinated notes due January 15,1994. The Funding I
Notes had an outstanding balance of $6,861,000 at December 31, 1996 and were
fully paid out in June of 1997.
27
<PAGE> 28
The Revolving Loan Agreement was extended on December 10, 1997 until March 31,
1998 with availability of $60,000,000. The Company has received commitments from
a group of banks to amend and restate the Revolver increasing the availability
to $100,000,000, expiring in March 1999. Under the Revolver, 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, 1997, the Company had $39,000,000
outstanding under this facility and $21,000,000 available for borrowing, subject
to borrowing base limitations. The Revolver Agreement is not currently 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 $50,000,000 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 facility. The Company had $57,295,000 outstanding under the
Bravo facility at December 31, 1997, and in connection with this facility, had
16 separate interest rate swap agreements with BankBoston with a total notional
value of $60,432,000. Effective November 5, 1996, the Bravo facility was
increased to $100,000,000 and amended to provide up to $30,000,000 of such
facility to be used as sales of receivables from Bravo for accounting purposes.
The Company had $29,162,000 outstanding from sales of receivables under this
portion of the facility, and in connection with this portion of the facility,
had six separate interest rate swap agreements with BankBoston with a total
notional value of $30,129,000 at December 31, 1997.
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 $3,500,000 at 9.5% subject to certain recourse and
performance covenants. In July 1997, the Company entered into another fixed
rate, fixed term loan agreement with SIS under which the Company borrowed an
additional $3,984,000 at 8% subject to the same conditions as the first loan.
The Company had $4,913,000 outstanding under these agreements at December 31,
1997.
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, 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.
In March 1997, the Company issued $20,000,000 of unsecured senior subordinated
notes due 2007 ("Senior Subordinated Note") bearing interest at a fixed rate of
11% (the "Note Offering"). The Company received approximately $18,300,000 in net
proceeds from the Note Offering and used such proceeds to repay amounts
outstanding under the Revolver Agreement.
In June 1997, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), established a $100,000,000
Lease Receivable Purchase Agreement with EagleFunding Capital Corporation
("Eagle"). Under the terms of the facility (the "Capital Facility"), Capital, to
which the Company may sell certain of its portfolio assets from time to time,
pledges or sells its interests in these assets to Eagle, a commercial paper
conduit entity. Capital may borrow at variable rates in the commercial paper
market and may enter into interest rate swap agreements to assure fixed rate
funding. Monthly settlements of the borrowing base and any applicable principal
and interest payments will be made from collections of Capital's portfolio. The
Company will be the servicer of the Capital portfolio subject to certain
covenants. The agreement originally expired in September 2000. Effective January
1, 1998 the agreement was amended to extend the expiration date to September
2002. The Company had $61,744,000 of indebtedness outstanding under this
facility at December 31, 1997, and in connection with this facility had six
separate swap agreements with a total national value of $59,373,000.
28
<PAGE> 29
In 1997, the Company repurchased an aggregate of 108,300 shares of its Common
Stock for approximately $623,000. The Company may repurchase its Common Stock
from time to time at prices favorable to the Company, although it has no
specific repurchase plan in place at this time.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo facility, the
Capital facility and loans from savings banks, along with cash obtained from the
sales of its financing contracts and from internally generated revenues 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 1998 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.
29
<PAGE> 30
FORWARD-LOOKING STATEMENTS
This Annual Report 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 "Management's Discussion
and Analysis of Financial Condition and Results of Operations," as well as
within the Annual Report generally. When used in this Annual Report, the words
"believes," "anticipates," "expects," "plans," "intends," "estimates,"
"continue," "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, including but not limited to
the following: the Company's dependence on funding sources; restrictive
covenants in funding documents; payment restrictions and default risks in asset
securitization transactions to which the Company is a party; customer credit
risks; competition for customers and for capital funding at favorable rates
relative to the capital costs of the Company's competitors; changes in
healthcare payment policies; interest rate risk; the risk that the Company may
not be able to realize the residual value on financed equipment at the end of
its lease term; risks associated with the sale of certain receivable pools by
the Company; dependence on sales representatives and the current management
team; and fluctuations in quarterly operating results. The Company's filings
with the Securities and Exchange Commission, including its Annual Report on Form
10-K for the year ended December 31, 1997 to be filed on or before March 31,
1998, contain additional information concerning such risk factors. 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 above, the
risk factors described in the Annual Report on Form 10-K for the year ended
December 31, 1997, and the matters set forth in this Annual Report 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.
30
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF HPSC, INC.
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
Credident, Inc. Canada
American Commercial Finance Delaware
Corporation
HPSC Funding Corp. I Delaware
HPSC Brave Funding Corp. Delaware
HPSC Capital Funding Inc. Delaware
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-28983, 33-60077, 33-60073, 33-10796, and 33-6075 of HPSC, Inc. on Form S-8
of our report dated March 6, 1998 and incorporated by reference in this Annual
Report on Form 10-K of HPSC, Inc. for the fiscal year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Boston, Massachusetts
March 27, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
HPSC, Inc. on Form S-8 (file Nos. 333-28983, 33-60073, 33-60077, 33-10796 and
33-6075) of our report dated March 25, 1996, on our audit of the consolidated
financial statements and financial statement schedules of HPSC, Inc. for the
year ended December 31, 1995, which report is included in this Annual Report on
Form 10-K.
/s/ Coopers & Lybrand L.L.P.
---------------------------------
Coopers & Lybrand L.L.P.
Boston, Massachusetts
March 25, 1998
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