<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11618
HPSC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2560004
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 720-3600
NONE
(Former name, former address, and former fiscal year if changed since last
report)
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 and 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: COMMON STOCK, PAR VALUE $.01 PER
SHARE. SHARES OUTSTANDING AT August 4, 1999, 4,212,530.
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HPSC, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31,
1998............................................................................ 3
Condensed Consolidated Statements of Income for Each of the Three and Six
Months Ended June 30, 1999 and June 30, 1998..................................... 4
Condensed Consolidated Statements of Cash Flows for Each of the Six Months
Ended June 30, 1999 and June 30, 1998............................................ 5
Notes to Condensed Consolidated Financial Statements............................. 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 9
PART II -- OTHER INFORMATION
Other Information................................................................ 13
Signatures....................................................................... 14
</TABLE>
2
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HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(UNAUDITED)
ASSETS
<S> <C> <C>
CASH AND CASH EQUIVALENTS........................................... $ 4,440 $ 4,583
RESTRICTED CASH..................................................... 13,125 9,588
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments....... 327,416 293,211
Notes receivable............................................... 33,733 35,863
Retained interest in leases and notes sold..................... 14,795 14,500
Estimated residual value of equipment at end of lease term..... 16,749 14,830
Less unearned income........................................... (80,426) (73,019)
Less allowance for losses...................................... (8,117) (7,350)
Less security deposits......................................... (6,879) (6,756)
Deferred origination costs..................................... 7,719 6,696
--------- ---------
Net investment in leases and notes.................................. 304,990 277,975
--------- ---------
OTHER ASSETS:
Other assets................................................... 6,045 5,682
Refundable income taxes........................................ 743 774
--------- ---------
TOTAL ASSETS........................................................ $ 329,343 $ 298,602
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS......................................... $ 41,000 $ 49,000
SENIOR NOTES........................................................ 210,458 174,541
SENIOR SUBORDINATED NOTES........................................... 20,000 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES............................ 8,218 7,030
ACCRUED INTEREST.................................................... 1,212 1,285
INCOME TAXES:
Currently payable.............................................. 40 84
Deferred....................................................... 9,731 9,096
--------- ---------
TOTAL LIABILITIES................................................... 290,659 261,036
--------- ---------
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;
issued and outstanding 4,679,530 shares in 1999 and 4,618,530
in 1998...................................................... 47 46
Additional paid-in capital..................................... 13,367 12,941
Retained earnings.............................................. 29,690 28,448
Less: Treasury Stock (at cost) 467,500 shares in 1999 and 368,000 (3,087) (2,230)
in 1998.............................................................
Deferred compensation.......................................... (872) (1,141)
Notes receivable from officers and employees................... (461) (498)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.......................................... 38,684 37,566
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $ 329,343 $ 298,602
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3
<PAGE> 4
HPSC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(In thousands, except per share and share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Earned income on leases and notes.................. $ 9,578 $ 8,033 $ 18,838 $ 15,527
Gain on sales of leases and notes.................. 887 1,225 2,052 1,750
Provision for losses............................... (1,034) (681) (1,783) (1,265)
---------- ---------- ---------- ----------
Net Revenues............................................ 9,431 8,577 19,107 16,012
---------- ---------- ---------- ----------
EXPENSES:
Selling, general and administrative................ 4,044 3,991 8,629 7,202
Interest expense................................... 4,391 3,796 8,575 7,312
Interest income.................................... (103) (40) (206) (68)
---------- ---------- ---------- ----------
Net operating expenses.................................. 8,332 7,747 16,998 14,446
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 1,099 830 2,109 1,566
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current....................................... 71 30 143 56
Deferred...................................... 317 338 635 637
Additional paid-in capital from exercise of
non-qualified stock options............. 63 -- 89 --
---------- ---------- ---------- ----------
TOTAL INCOME TAXES...................................... 451 368 867 693
---------- ---------- ---------- ----------
NET INCOME.............................................. $ 648 $ 462 $ 1,242 $ 873
========== ========== ========== ==========
BASIC NET INCOME PER SHARE.............................. $ 0.17 $ 0.12 $ 0.33 $ 0.24
========== ========== ========== ==========
SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE...................................... 3,778,684 3,714,784 3,772,101 3,683,117
DILUTED NET INCOME PER SHARE............................ $ 0.15 $ 0.11 $ 0.29 $ 0.21
========== ========== ========== ==========
SHARES USED TO COMPUTE DILUTED
NET INCOME PER SHARE.................................. 4,351,858 4,245,374 4,350,406 4,125,698
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
4
<PAGE> 5
HPSC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................. $ 1,242 $ 873
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 2,342 1,974
Deferred income taxes...................................... 635 636
Restricted stock and option compensation................... 232 973
Gain on sales of lease contracts and notes receivable...... (2,052) (1,750)
Provision for losses on lease contracts and notes receivable 1,783 1,265
Increase (decrease) in accrued interest.................... (73) 108
Increase in accounts payable and accrued liabilities....... (426) (1,909)
Decrease in accrued income taxes........................... (44) (66)
Decrease in refundable income taxes........................ 31 2,386
(Increase) decrease in other assets........................ (135) 80
--------- --------
Cash provided by (used in) operating activities................. 3,535 4,570
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due in
installments.............................................. (91,465) (77,500)
Portfolio receipts, net of amounts included in income...... 36,159 27,535
Proceeds from sales of lease contracts and notes receivable
due in installments....................................... 18,891 14,317
Net decrease in notes receivable........................... 2,020 1,750
Net increase in security deposits.......................... 123 445
Net increase in other assets............................... (298) (223)
Net (increase) decrease in loans to employees.............. 37 (139)
--------- --------
Cash (used in) investing activities............................. (34,533) (33,815)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes.................................. (36,300) (24,543)
Proceeds from issuance of senior notes, net of debt issue 72,217 44,337
costs.....................................................
Net proceeds (repayments) of revolving credit borrowings... (8,000) 8,000
Purchase of treasury stock................................. (857) (203)
Increase in restricted cash................................ 3,537 1,303
Repayment of employee stock ownership plan promissory note. 105 105
Exercise of employee stock options......................... 153 315
-------- --------
Cash provided by financing activities........................... 30,855 29,314
-------- --------
Net increase (decrease) in cash and cash equivalents............ (143) 69
Cash and cash equivalents at beginning of period................ 4,583 2,137
-------- --------
Cash and cash equivalents at end of period...................... $ 4,440 $ 2,206
======== ========
Supplemental disclosures of cash flow information:
Interest paid.............................................. $ 7,328 $ 6,964
Income taxes paid.......................................... 119 35
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
5
<PAGE> 6
HPSC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The information presented for the interim periods is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of HPSC, Inc. (the "Company"), are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The results for interim periods are not necessarily
indicative of results to be expected for the full fiscal year. Certain 1998
account balances have been reclassified to conform with 1999 presentation. Such
financial statements have been prepared in accordance with the instructions of
Form 10-Q pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations. As a result, these financial statements
should be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's latest annual report on Form 10-K.
2. The Company computes and presents its earnings per share data in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". 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 Employee Stock Ownership
Plan, Supplemental Employee Stock Ownership Plan (see Note 3), restricted shares
issued under the Company's Incentive Stock Plans, 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 restricted shares under the Company's Incentive Stock Plans outstanding
as calculated under the treasury stock method, but not unallocated shares under
the Company's ESOP and SESOP.
3. In April 1998, the Company canceled its Supplemental Employee Stock
Ownership Plan ("SESOP"). The Company had originally issued 350,000 shares of
common stock to this plan in July 1994 in consideration of a promissory note in
the principal amount of $1,225,000. No contributions or allocations had been
made to any participant accounts. The shares issued to the SESOP were retired
and the promissory note canceled.
4. In February 1999, the Company extended certain 5-year options which were
scheduled to expire. As a result, the Company recognized additional compensation
expense of $68,000 in the six months ended June 30, 1999.
5. Pursuant to the terms of the HPSC Bravo Funding Corp. ("Bravo")
revolving credit facility, as amended, Bravo had Senior Notes of $95,422,000
outstanding at June 30, 1999. Bravo incurs interest at various rates in the
commercial paper market and enters into interest rate swap agreements to assure
fixed rate funding. At June 30, 1999, Bravo had 23 separate interest rate swap
contracts with BankBoston with a total notional value of $92,557,000. These
interest rate swaps are matched swaps, and as such, are accounted for using
settlement accounting. Monthly cash settlements on the swap agreements are
recognized in income as they accrue. 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 through income until
new borrowings are incurred which would be subject to such swap agreements. All
interest rate swap agreements entered into by the Company are for other than
trading purposes.
6. In April 1999, the HPSC Capital Funding, Inc. ("Capital") revolving
credit facility was renewed under the same terms and conditions, providing
available borrowings up to $125,000,000. Pursuant to the terms of the Lease
Receivable Purchase Agreement, as amended, Capital had Senior Notes outstanding
of $102,751,000 at June 30, 1999, and in connection with this facility had 15
separate interest rate swap agreements with BankBoston with a total notional
value of $102,661,000. These interest rate swaps are matched swaps, and as such,
are accounted for using settlement accounting. Monthly cash settlements on the
swap agreements are recognized in income as they accrue. 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 through income until new borrowings are incurred which would be
subject to such swap agreements. All interest rate swap agreements entered into
by the Company are for other than trading purposes.
7. On June 30, 1999, the Company had restricted cash of $6,801,000 under
the Bravo facility and $6,324,000 under the Capital facility. All such
restricted cash is reserved for debt service.
6
<PAGE> 7
8. In May 1999, an amended Revolving Loan Agreement was executed with
BankBoston as Managing Agent (the "Revolving Loan Agreement") on the same terms
and conditions through May 2000, providing availability to the Company of up to
$90,000,000.
9. In March 1999, the Company entered into an additional secured, fixed
rate, fixed term loan agreement with Springfield Institution for Savings. The
Company borrowed $5,011,000, subject to certain recourse and performance
covenants.
10. In April 1999, the Company entered into a secured, fixed rate, fixed
term loan agreement with Cambridge Savings Bank. The Company borrowed
$5,861,000, subject to certain recourse and performance covenants.
11. The Financial Accounting Standards Board ("FASB") has issued SFAS No.
130, "Reporting Comprehensive Income". This statement, adopted January 1, 1998,
establishes standards for reporting and presenting comprehensive income and its
components. Comprehensive income equals net income for each of the six month
periods ended June 30, 1999 and June 30, 1998.
12. A summary of information about the Company's operations by segment for
each of the three and six month periods ended June 30, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------------------
COMMERCIAL COMMERCIAL
LICENSED AND LICENSED AND
(in thousands) PROFESSIONAL INDUSTRIAL PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL FINANCING FINANCING TOTAL
------------ ---------- ----- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
1999
- ----
Earned income on leases and notes.............. $ 8,473 $ 1,105 $ 9,578 $ 16,560 $ 2,278 $ 18,838
Gain on sales of leases and notes.............. 887 -- 887 2,052 -- 2,052
Provision for losses........................... (1,021) (13) (1,034) (1,741) (42) (1,783)
Selling, general and administrative expenses... (3,619) (425) (4,044) (7,808) (821) (8,629)
------- ------- ------- -------- ------- --------
Net profit contribution........................ 4,720 667 5,387 9,063 1,415 10,478
Total assets................................... 295,942 33,401 329,343
1998
- ----
Earned income on leases and notes.............. 6,816 1,217 8,033 13,053 2,474 15,527
Gain on sales of leases and notes.............. 1,225 -- 1,225 1,750 -- 1,750
Provision for losses........................... (641) (40) (681) (1,190) (75) (1,265)
Selling, general and administrative expenses... (3,607) (384) (3,991) (6,437) (765) (7,202)
------- ------- ------- -------- ------- --------
Net profit contribution........................ 3,793 793 4,586 7,176 1,634 8,810
Total assets................................... 228,488 31,330 259,818
</TABLE>
The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net segment profit contribution................. $ 5,387 $ 4,586 $10,478 $ 8,810
Interest expense................................ (4,391) (3,796) (8,575) (7,312)
Interest income on cash balances................ 103 40 206 68
------- ------- ------- -------
Income before income taxes...................... $ 1,099 $ 830 $ 2,109 $ 1,566
</TABLE>
Other Segment Information - The Company derives substantially all of its
revenues from domestic customers. As of June 30, 1999, no single customer within
the licensed professional financing segment accounted for greater than 1% of the
total owned and serviced portfolio of that segment. Within the commercial and
industrial financing segment, no single customer accounted for greater than 10%
of the total portfolio of that segment. The licensed professional financing
segment relies on certain vendors to provide referrals to the company, but for
the six months ended June 30, 1999, no one vendor accounted for greater than 11%
of the Company's lease originations.
7
<PAGE> 8
13. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This Statement establishes new accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement will be effective for the first quarter of the
Company's year ended December 31, 2001. The Company is evaluating the impact of
this statement on its consolidated results of operations.
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earned income from leases and notes for the three months ended June 30,
1999 was $9,578,000 (including approximately $1,105,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $8,033,000 (including approximately $1,217,000 from ACFC) for the
three months ended June 30, 1998. Earned income for the six months ended June
30, 1999 was $18,838,000 (including approximately $2,278,000 from ACFC) compared
to $15,527,000 (including approximately $2,474,000 from ACFC) for the comparable
period in 1998. The increase of 19% for the three month period and 21% for the
six month period was due principally to increases in net investment in leases
and notes in 1999 over 1998. The increase in net investment in both periods
resulted in part from a higher level of originations in the second quarter of
1999 of $49,810,000 compared to $41,818,000 for the second quarter of 1998 and
$90,087,000 for the first six months ended June 30, 1999 compared to $81,003,000
in the corresponding 1998 period. Gains on sales of leases and notes were
$887,000 in the three months ended June 30, 1999 compared to $1,225,000 for the
comparable 1998 quarter. The decrease in gains on sales of leases and notes was
due to a lower level of asset sales activity in the second quarter of 1999 as
compared to the second quarter of 1998. For the six months ended June 30, 1999,
gains on sales of leases and notes were $2,052,000 compared to $1,750,000 for
the six months ended June 30, 1998. The increase for the six month period was
caused by a higher level of asset sales activity in the first quarter of 1999
compared to the first quarter of 1998.
Interest expense (net of interest income) for the second quarter of 1999
was $4,288,000 (45% of earned income) compared to $3,756,000 (47% of earned
income) in the comparable 1998 period. For the first six months ended June 30,
1999, net interest expense was $8,369,000 (44% of earned income) compared to
$7,244,000 (47% of earned income) in the six months ended June 30, 1998. The
increase in net interest expense was primarily due to a 29% increase in debt
levels from June 30, 1998 to June 30, 1999. These higher debt levels resulted
primarily from borrowings to finance a higher level of contract originations.
Net financing margin (earned income less net interest expense) for the
second quarter of 1999 was $5,290,000 (55% of earned income) compared to
$4,277,000 (53% of earned income) for the second quarter of 1998. For the six
month period ended June 30, 1999, net financing margin increased to $10,469,000
(56% of earned income) from $8,283,000 (53% of earned income) in 1998. 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 lower interest
rate debt in 1999 as compared to the same period in 1998.
The provision for losses for the second quarter of 1999 was $1,034,000 (11%
of earned income) compared to $681,000 (8% of earned income) in the second
quarter of 1998. The provision for losses for the six months ended June 30, 1999
was $1,783,000 (9% of earned income) compared to $1,265,000 (8% of earned
income) in the comparable period in 1998. The increase is due to growth in the
portfolio along with the Company's continuing evaluation of its portfolio
quality, loss history and allowance for losses.
The allowance for losses at June 30, 1999 was $8,117,000 (2.7% of net
investment in leases and notes) compared to $5,858,000 (2.4% of net investment
in leases and notes) at June 30, 1998. Net charge offs for the six months ended
June 30, 1999 were $1,019,000 compared to $941,000 for the same period ended
June 30, 1998.
Selling, general and administrative expenses for the three months ended
June 30, 1999 were $4,044,000 (42% of earned income) compared to $3,991,000 (50%
of earned income) in the comparable 1998 period. For the six month period ended
June 30, 1999, selling, general and administrative expenses were $8,629,000 (46%
of earned income) compared to $7,202,000 (46% of earned income) for the same
period in 1998. The increase was caused by increased staffing and sales,
advertising, and marketing related costs required to support higher levels of
owned and managed assets, offset by increased capitalization of initial direct
costs due to a higher level of contract originations in the second quarter 1999
as compared to 1998.
The Company's income before income taxes for the quarter ended June 30,
1999 was $1,099,000 compared to $830,000 in the same period in 1998. For the six
months ended June 30, 1999, income before income taxes was $2,109,000 compared
to $1,566,000 in the 1998 period. For the quarter ended June 30, 1999, the
provision for income taxes was $451,000 (41% of income before income taxes)
compared to $368,000 (44% of income before income taxes) in the second quarter
of 1998. For the six months ended June 30, 1999, the provision for income taxes
was $867,000 (41% of income before income taxes) compared to $693,000 (44% of
income
9
<PAGE> 10
before income taxes) in the 1998 period. The decrease in the income tax rate
from 1998 to 1999 was due to approximately $117,000 in expenses incurred by the
Company in the first six months of 1998 ($0 in 1999) related to the continuing
wind-down of the Company's Canadian operation which were not deductible in
computing the income tax provision.
The Company's net income for the three months ended June 30, 1999 was
$648,000 ($0.15 diluted net income per share) compared to $462,000 ($0.11
diluted net income per share) for the three months ended June 30, 1998. For the
six months ended June 30, 1999, the Company's net income was $1,242,000 ($0.29
diluted net income per share) compared to $873,000 ($0.21 diluted net income per
share) for the six months ended June 30, 1998. The increase for the six month
period resulted from higher earned income on leases and notes and higher gains
on asset sales, offset by higher selling, general and administrative costs,
higher net interest costs, and a higher provision for losses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had $17,565,000 in cash, cash equivalents and
restricted cash as compared to $14,171,000 at December 31, 1998. As described in
Note 7 to the Company's condensed consolidated financial statements included in
this report on Form 10-Q, $13,125,000 was restricted pursuant to financing
agreements as of June 30, 1999, compared to $9,588,000 at December 31, 1998.
Cash provided by operating activities was $3,535,000 for the six months
ended June 30, 1999 compared to $4,570,000 for the six months ended June 30,
1998. The significant components of cash provided by operating activities for
the six months ended June 30, 1999 as compared to the same period in 1998 were
an increase in accounts payable and accrued liabilities of $426,000 as compared
to an increase of $1,909,000 for the same period in 1998, as well as a decrease
in refundable income taxes of $31,000 in 1999 compared to $2,386,000 for the
same period in 1998.
Cash used in investing activities was $34,533,000 for the six months ended
June 30, 1999 compared to $33,815,000 for the six months ended June 30, 1998.
The significant components of cash used in investing activities for the first
six months of 1999 compared to the same period in 1998 were an increase in
originations of lease contracts and notes receivable to $91,465,000 from
$77,500,000, offset by an increase in portfolio receipts to $36,159,000 from
$27,535,000, along with an increase in proceeds from sales of lease contracts
and notes receivable of $18,891,000 in 1999 compared to $14,317,000 in the
comparable period ended June 30, 1998.
Cash provided by financing activities for the six months ended June 30,
1999 was $30,855,000 compared to $29,314,000 for the six months ended June 30,
1998. The significant components of cash provided by financing activities for
the first six months of 1999 as compared to 1998 were an increase in proceeds
from issuance of senior notes, net of debt issuance costs, to $72,217,000 from
$44,337,000, and an increase in restricted cash balances of $3,537,000 compared
to $1,303,000, offset by higher repayments of senior notes of $36,300,000 for
the six months ended June 30, 1999 compared to $24,543,000 for the six months
ended June 30, 1998 as well as net repayments of revolving credit borrowings of
$8,000,000 in the first six months of 1999 compared to net proceeds from
revolving credit borrowings of $8,000,000 in the same period in 1998.
The Company executed a Third Amended and Restated Revolving Credit
Agreement with BankBoston as the Agent Bank (the "Revolver Agreement") on March
16, 1998 providing the Company with availability up to $100,000,000 through
March 16, 1999. In March 1999, the agreement was extended through May 1999,
providing availability up to $86,000,000. In May 1999, the Company executed the
Third Amendment to the Third Amended and Restated Revolving Credit Agreement.
The Third Amendment to the Revolver Agreement provides availability to the
Company of $90,000,000 under substantially the same terms and conditions,
through May 2000. Under the Revolver Agreement, the Company may borrow at
variable rates of prime and at LIBOR plus 1.35% to 1.50%, depending upon certain
performance covenants. At June 30, 1999, the Company had $41,000,000 outstanding
under this facility and $49,000,000 available for borrowing, subject to
borrowing base limitations. The outstanding borrowings under the Revolver
Agreement are not hedged and, therefore, are exposed to upward movements in
interest rates.
In March 1997, the Company completed a $20,000,000 offering of unsecured
senior subordinated notes due 2007 bearing interest at a fixed rate of 11% (the
"Note Offering"). The Note Offering was completed on the terms and conditions
described in Amendment No. 2 to the Company's Registration Statement No.
333-20733 on Form S-1. The Company received approximately $18,300,000 in net
proceeds from the Note Offering and used such proceeds to repay, in part,
amounts outstanding under the Revolver Agreement.
10
<PAGE> 11
In April 1998, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), signed an amended Lease
Receivable Purchase Agreement with EagleFunding Capital Corporation ("Eagle").
The revolving credit facility (the "Capital Facility") provided the Company with
available borrowings up to $150,000,000. In April 1999, this revolving credit
facility was renewed under the same terms and conditions, providing available
borrowings up to $125,000,000. Under the terms of the Capital Facility, Capital,
to which the Company may sell or contribute 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 are made from collections of
Capital's portfolio. The Company is the servicer of the Capital portfolio
subject to certain covenants. At June 30, 1999, the Company had $13,895,000
outstanding from sales of receivables and $102,751,000 of borrowings outstanding
from loans under the Capital Facility. In connection with this facility, the
Company had 17 separate interest rate swap agreements with BankBoston with a
total notional value of $115,712,000.
In June 1998, the Company, along with its wholly-owned, special-purpose
subsidiary HPSC Bravo Funding Corp. ("Bravo"), signed an amended revolving
credit facility (the "Bravo Facility") structured and guaranteed by Capital
Markets Assurance Corporation ("CapMAC", acquired by MBIA in February 1998). The
Bravo Facility provides the Company with available borrowings up to
$225,000,000, of which $67,500,000 may be utilized for sales of financing
contracts. Under the terms of the Bravo 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 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. The Company is the
servicer of the Bravo portfolio, subject to the Company 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. At June 30, 1999, Bravo had $56,505,000 outstanding from sales of
receivables under the sale accounting portion of the Bravo Facility and
$95,422,000 of indebtedness outstanding under the loan portion of the Bravo
Facility. In connection with this facility, the Company had 34 separate interest
rate swap agreements with BankBoston with a total notional value of
$150,413,000.
In March 1999, the Company entered into an additional fixed rate, fixed
term loan agreement with Springfield Institution for Savings ("SIS"). The
Company borrowed $5,011,000, subject to certain recourse and performance
covenants. The Company had $6,537,000 outstanding under all loan agreements with
SIS at June 30, 1999.
In April 1999, the Company entered into a fixed rate, fixed term loan
agreement with Cambridge Savings Bank ("CSB"). The Company borrowed $5,861,000,
subject to certain recourse and performance covenants. The Company had
$5,748,000 outstanding under the loan obligation with CSB at June 30, 1999.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo Facility, the
Capital Facility, the Note Offering, and the loans from SIS and CSB, along with
cash obtained 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 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.
YEAR 2000 ISSUES
The year 2000 issue relates to the inability of computer applications to
distinguish between years with the same last two digits in different centuries
such as 1900 and 2000. In 1996, the Company, along with its subsidiary, ACFC,
began a review to assess the year 2000 readiness of all of its information
technology (IT) systems. In 1998, the Company expanded this review to include
non-IT systems, including embedded software such as the Company's telephone
system, as well as the systems of third parties who are important business
partners with the Company.
The Company is heavily reliant on integrated IT systems for providing much
of its day-to-day operations, including application processing, underwriting,
billing and collections, as well as much of the financial and operational
reporting to management. The Company has performed a complete review of all
relevant computer systems. Based on its internal review, the Company believes
that substantially all of its internal IT systems are year 2000 compliant. The
Company has also obtained written assurances from all
11
<PAGE> 12
providers of its IT software and systems as to the year 2000 compliance of each
of these systems. The Company believes that the loss of any ancillary systems as
to which the Company is not assured of year 2000 compliance would not cause
major business disruption.
The Company is monitoring the year 2000 progress of its major service
providers of non-IT systems, including embedded systems and software, as well as
of its third party business partners such as banking institutions and customers.
In 1998, the Company's subsidiary, ACFC, began a review of the systems of its
major customers. Based on this review, ACFC does not anticipate any major
issues, however, in the event of a failure of a customers system, ACFC believes
it has adequate contingency plans and systems in place to ensure a continuity of
its business operations.
The Company does not separately track the internal costs associated with
the year 2000 project. All such costs, which primarily consist of payroll and IT
related consulting costs, have been expensed as incurred. Expenses incurred to
date associated with implementing the year 2000 review process have not been
material. The Company does not anticipate that any remaining costs will have a
material impact on the future financial position or results of operations of the
Company.
FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act. When used in this Form 10-Q, 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, or its subsidiaries, are 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; the risk that the Company's or its customers' computer systems
will not be fully year 2000 compliant; 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, 1998,
contain additional information concerning such risk factors. Actual results in
the future could differ materially from those described in any forward-looking
statements as a result of the risk factors set forth above, and the risk factors
described in the Annual Report. 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.
12
<PAGE> 13
HPSC, INC.
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, AND 5 ARE OMITTED BECAUSE THEY ARE INAPPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS:
a) The Annual Meeting of Stockholders was held on April 26, 1999
b) Not Applicable
c) The stockholders elected the following two persons to serve as Class I
Directors:
FOR WITHHELD
--- --------
Lowell P. Weicker, Jr...................3,904,162 19,649
Thomas M. McDougal......................3,919,162 4,649
The stockholders ratified the appointment of Deloitte & Touche LLP as
the independent auditors of the Company for the fiscal year ending
December 31, 1999:
FOR AGAINST ABSTAIN
--- ------- -------
3,916,162 5,149 2,500
d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 HPSC, Inc. Amended and Restated 1998 Stock Incentive Plan, dated
as of April 26, 1999.
10.2 First Amendment, dated as of April 26, 1999 to HPSC, Inc. Amended
and Restated 1995 Stock Incentive Plan
10.3 Second Amendment, dated as of April 26, 1999, to HPSC, Inc.
Supplemental Executive Retirement Plan dated as of January 1,
1997
10.4 Third Amendment to Third Amended and Restated Credit Agreement by
and among American Commercial Finance Corporation, HPSC, Inc.,
BankBoston, N.A. individually and as Agent, and each of the
lenders referred to therein, dated as of May 14, 1999.
27 Financial Data Schedule
b) Reports on Form 8-K:
During the period for which this report is filed, the Company filed
with the Commission the following report on Form 8-K:
The Company reported on May 24, 1999 the adoption of a First Amendment
to Rights Agreement as described in the Form 8-K.
13
<PAGE> 14
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.
------------
(REGISTRANT)
By: /s/ JOHN W. EVERETS
--------------------------------
JOHN W. EVERETS
CHIEF EXECUTIVE OFFICER
CHAIRMAN OF THE BOARD
By: /s/ RENE LEFEBVRE
--------------------------------
RENE LEFEBVRE
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
Dated: August 12, 1999
14
<PAGE> 1
EXHIBIT 10.1
HPSC, INC.
AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
ADOPTED FEBRUARY 23, 1998
AMENDED AND RESTATED
APRIL 26, 1999
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
1. PURPOSE; RESTRICTIONS..........................................................................................1
2. EFFECTIVE DATE.................................................................................................1
3. STOCK COVERED BY THE PLAN......................................................................................1
4. ADMINISTRATION.................................................................................................2
5. ELIGIBLE RECIPIENTS; AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS................................................2
(a) KEY EMPLOYEES, CONSULTANTS AND OTHER INDIVIDUAL CONTRIBUTORS...............................................2
(b) NON-EMPLOYEE DIRECTORS.....................................................................................2
(i) PRICE...................................................................................................3
(ii) EXERCISE...............................................................................................3
(iii) EXPIRATION............................................................................................3
(iv) OTHER TERMS............................................................................................3
6. DURATION OF THE PLAN...........................................................................................3
7. TERMS AND CONDITIONS OF OPTIONS AND RESTRICTED STOCK AWARDS....................................................3
(a) PRICE......................................................................................................3
(b) NUMBER OF SHARES...........................................................................................4
(c) VESTING AND OTHER TERMS OF RESTRICTED STOCK AWARDS.........................................................4
(i)VESTING..................................................................................................4
(ii) FORFEITURE OF UNVESTED SHARES..........................................................................5
(iii) ESCROW OF UNVESTED SHARES.............................................................................5
(iv) STOCKHOLDER RIGHTS.....................................................................................6
(v) OTHER TERMS.............................................................................................6
(d) EXERCISE OF OPTIONS........................................................................................6
(e) PAYMENT....................................................................................................6
(f) WITHHOLDING TAXES; DELIVERY OF SHARES......................................................................7
(g) TRANSFERABILITY............................................................................................7
(h) TERMINATION OF RESTRICTED STOCK AWARDS AND OPTIONS.........................................................8
(i) RIGHTS AS STOCKHOLDER......................................................................................8
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(j) FORFEITURE.................................................................................................9
(k) 10% STOCKHOLDER............................................................................................9
(l) CONFIDENTIALITY AGREEMENTS.................................................................................9
(m) AGGREGATE LIMITATION.......................................................................................9
(n) RIGHT TO TERMINATE.........................................................................................9
(o) DEFERRAL..................................................................................................10
8. RESTRICTIONS ON INCENTIVE OPTIONS.............................................................................11
9. SUSPENSION OF RIGHTS PRIOR TO A DISSOLUTION, REORGANIZATION, ETC..............................................11
10. ADJUSTMENT IN SHARES.........................................................................................11
11. INVESTMENT REPRESENTATIONS; TRANSFER RESTRICTIONS............................................................12
12. DEFINITIONS..................................................................................................12
(a) "BOARD"...................................................................................................12
(b) "CHANGE IN CONTROL".......................................................................................12
(c) "CODE"....................................................................................................12
(d) "COMMITTEE"...............................................................................................12
(e) "COMMON STOCK"............................................................................................12
(f) "COMPANY"AND "COMPANY GROUP"..............................................................................12
(g) "DEFERRED COMPENSATION ACCOUNT"...........................................................................12
(h) "DIRECTOR OPTION".........................................................................................12
(i) "DISABILITY"..............................................................................................12
(j) "EFFECTIVE DATE"..........................................................................................12
(k) "EMPLOYEE"................................................................................................13
(l) "EVENT"...................................................................................................13
(m) "EXCHANGE ACT"............................................................................................13
(n) "INCENTIVE OPTION"........................................................................................13
(o) "MARKET PRICE"............................................................................................13
(p) "1995 PLAN"...............................................................................................13
(q) "NON-EMPLOYEE DIRECTOR"...................................................................................13
(r) "NONQUALIFIED OPTION".....................................................................................13
(s) "OPTION"..................................................................................................13
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
(t) "PARTICIPANT".............................................................................................13
(u) "PERFORMANCE CONDITIONS"..................................................................................13
(v) "PERFORMANCE PERIOD"......................................................................................13
(w) "PHANTOM STOCK"...........................................................................................13
(x) "PLAN"....................................................................................................13
(y) "RESTRICTED STOCK AWARD"..................................................................................13
(z) "SERVICE".................................................................................................14
(aa)"SERVICE REQUIREMENT".....................................................................................14
(bb) "SHARES".................................................................................................14
(cc) "SUBSIDIARY".............................................................................................14
13. TERMINATION OR AMENDMENT OF PLAN.............................................................................14
14. CHANGE IN CONTROL............................................................................................14
</TABLE>
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<PAGE> 5
AS AMENDED AND RESTATED 4/26//99
HPSC, INC.
AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
1. PURPOSE; RESTRICTIONS. The purpose of this Amended and Restated HPSC,
Inc. 1998 Stock Incentive Plan (the "Plan") is to advance the interests of HPSC,
Inc., a Delaware corporation (the "Company"), and of its shareholders by
strengthening the ability of the Company to attract, retain and motivate key
employees, directors, consultants and other individual contributors of or to the
Company or any present or future Subsidiary(1) of the Company (the Company and
all such Subsidiaries shall be collectively referred to as the "Company Group")
by providing such employees, directors, consultants and other individual
contributors with an opportunity to purchase or receive as bonuses stock of the
Company, thereby permitting such persons to share in the Company's success while
aligning their interests with those of the Company's shareholders. It is
intended that this purpose will be effected by granting (i) incentive stock
options ("Incentive Options"), which are intended to qualify under the
provisions of Section 422 of the Code, and non-statutory stock options
("Nonqualified Options"), which are not intended to meet the requirements of
Section 422 of the Code and which are intended to be taxed upon exercise under
Section 83 of the Code (both Incentive Options and Nonqualified Options shall be
collectively referred to as "Options") and (ii) restricted stock awards that are
subject to performance-vesting requirements ("Restricted Stock Awards").
Notwithstanding the foregoing, no Incentive Options shall be granted under
this Plan unless this Plan shall have been approved by the stockholders of the
Company within twelve (12) months after the Effective Date.
2. EFFECTIVE DATE. This Plan was adopted on February 23, 1998, which is
also the Effective Date of the Plan. This Plan was amended as of March 11, 1999,
and was amended and restated on April 26, 1999.
3. STOCK COVERED BY THE PLAN. Subject to adjustment as provided in Sections
9 and 10 below, the shares that may be made subject to Options or Restricted
Stock Awards under this Plan ("Shares") shall not exceed in the aggregate
550,000 shares of the common stock, $.01 par value, of the Company ("Common
Stock"). Notwithstanding the foregoing, additional shares of Common Stock may be
issued and sold pursuant to Restricted Stock Awards and Nonqualified Options in
amounts up to the number of shares of Common Stock (i) underlying any restricted
stock award or option granted under the 1995 Plan which shall terminate or
expire without being fully exercised, but only to the extent such shares
remained available for purchase or award at the time of such termination or
expiration, or (ii) withheld or reacquired by the Company pursuant to
withholding, payment, forfeiture or repurchase rights under the 1995 Plan. Any
Shares subject to an Option or Restricted Stock Award which for any reason
expires or is terminated unexercised as to such Shares and any Shares withheld
or reacquired by the Company pursuant to
- ----------------------------
(1) Capitalized terms not otherwise herein are defined in Section 12 below.
<PAGE> 6
withholding, payment, forfeiture or a repurchase right hereunder may again be
the subject of an Option or Restricted Stock Award under the Plan. The Shares
purchased or issued under the Plan may, in whole or in part, be either
authorized but unissued Shares or issued Shares reacquired by the Company.
4. ADMINISTRATION. This Plan shall be administered by the Compensation
Committee of the Board (the "Committee"); provided that each of the members of
the Committee shall be a person who in the opinion of counsel to the Company is
(i) a "disinterested person" as such term is used in Rule 16b-3 promulgated
under the Exchange Act and (ii) an "outside director" as such term is used in
proposed regulation Section 1.162.27(e)(3) under Section 162(m) of the Code. The
Committee shall have authority, subject to the express provisions of the Plan,
to construe the Plan and the respective Options, Restricted Stock Awards, and
related agreements, to prescribe, amend and rescind rules and regulations
relating to the Plan, to determine, within the limits of the Plan, the amounts,
times, forms, terms, conditions and status (as Incentive or Nonqualified
Options) of the respective Options, Restricted Stock Awards, and related
agreements, and to make all other determinations in the judgment of the
Committee necessary or desirable for the administration of the Plan. The
Committee may correct any defect or supply any omission or reconcile any
inconsistency in the Plan or in any Option, Restricted Stock Award, or related
agreement in the manner and to the extent it shall deem expedient to carry the
Plan into effect, and it shall be the sole and final judge of such expediency.
The Committee shall have authority to establish guidelines for the grant of
Options and Restricted Stock Awards to key employees of the Company Group who
are not executive officers of the Company and to authorize the Company's chief
executive officer to recommend the award of Options and Restricted Stock Awards,
within such guidelines, to such eligible non-executive key employees; PROVIDED,
HOWEVER, that such recommendation must be submitted to the Committee for final
approval.
No member of the Committee and no delegate of the Committee shall be liable
for any action or determination under the Plan taken or made in good faith.
5. ELIGIBLE RECIPIENTS; AUTOMATIC GRANTS TO NON-EMPLOYEE DIRECTORS.
(a) KEY EMPLOYEES, CONSULTANTS AND OTHER INDIVIDUAL CONTRIBUTORS.
Subject to the restrictions of this Plan, Options and Restricted Stock Awards
may be granted to such key employees, consultants or other individual
contributors of or to the Company Group, including, without limitation,
directors of the Company (whether or not any such director is also an Employee),
as are selected by the Committee or (except as to employees who are Company
executive officers) by the Company's Chief Executive Officer pursuant to Section
4 above (a "Participant"); provided, however, that only Employees shall be
eligible for grant of an Incentive Option.
(b) NON-EMPLOYEE DIRECTORS. Subject to the restrictions of this Plan,
Nonqualified Options will be granted annually pursuant to this Section 5(b) to
each director of the Company who is a director on the date of grant and who is
not an Employee ("Non-Employee Directors").
-2-
<PAGE> 7
Each Non-Employee Director who is such at the conclusion of any regular annual
meeting of the Company's stockholders while this Plan is in effect and who will
continue to serve on the Board thereafter (a "Director Participant" or, unless
the context otherwise requires, a "Participant") shall receive on such date a
Nonqualified Option to purchase 1,000 Shares (a "Director Option"). Further,
each Non-Employee Director who was not such at the conclusion of the last
regular annual meeting of the Company's stockholders will, on the date that such
Non-Employee Director is elected a director of the Company, automatically be
granted a Director Option to purchase the same number of Shares covered by the
last Director Option granted by the Board. All Director Options granted pursuant
to this Section are subject to adjustment as provided in Section 10 below. Each
Director Option shall be subject to the following terms and conditions:
(i) PRICE. The purchase price per Share payable upon the exercise
of a Director Option shall be one hundred percent (100%) of the Market Price per
Share on the date of grant of the Director Option.
(ii) EXERCISE. Each Director Option shall be exercisable for the
full amount or for any part thereof immediately on the date of grant. Any
unexercised portion of a Director Option may be subsequently exercised for the
full amount or for any part thereof at any time and from time to time (until
exhausted) prior to the expiration or other termination of the Option.
(iii) EXPIRATION. Each Director Option shall terminate and may no
longer be exercised upon the earliest of (1) ten years after the date of grant,
(2) six months after termination of the Participant's Service due to death or
Disability, (3) three months after termination of the Participant's Service for
any other reason except termination for cause, and (4) immediately upon
termination of the Participant's Service for cause. The Board's good faith
determination of whether the termination of a Director Participant's Service was
for cause shall be binding for purposes of the Plan.
(iv) OTHER TERMS. Each Director Option shall be subject to all
other terms of the Plan (including without limitation the terms of Sections 7,
9, 10 and 11) except to the extent that such terms are inconsistent with the
express provisions of this Section 5(b).
6. DURATION OF THE PLAN. This Plan shall terminate ten years from the
Effective Date hereof, unless terminated earlier pursuant to Section 13 below,
and no Options or Restricted Stock Awards may be granted or made thereafter.
7. TERMS AND CONDITIONS OF OPTIONS AND RESTRICTED STOCK AWARDS. Options and
Restricted Stock Awards granted or made under this Plan shall be evidenced by
grant forms or agreements in such form and containing such terms and conditions
as the Committee or (except as to grants and awards to employees who are Company
executive officers) the Committee's delegate shall determine; provided, however,
that such grant forms and agreements shall evidence among their terms and
conditions the following:
(a) PRICE. The purchase price per Share payable upon the exercise of
each Option (other than a Director Option) or the consideration (if any) in
addition to services of the
-3-
<PAGE> 8
Participant required pursuant to each Restricted Stock Award granted or made
hereunder shall be determined by the Committee at the time the Option or
Restricted Stock Award is granted or made subject to the following restrictions.
Subject to Section 7(k)(i), if applicable, the purchase price per Share payable
upon the exercise of each Incentive Option granted hereunder shall not be less
than one hundred percent (100%) of the Market Price per Share on the day the
Incentive Option is granted. The purchase price per Share payable upon the
exercise of each Nonqualified Option granted hereunder shall be not less than
eighty-five percent (85%) of the Market Price per Share on the date of the
grant. Restricted Stock Awards may be issued in consideration of services to be
rendered, which shall be valued for such purposes by the Committee. No Share
shall be issued for less than its par value, if any, paid in cash, property or
services.
(b) NUMBER OF SHARES. Each grant or award form or agreement shall
specify the number of Shares to which it pertains.
(c) VESTING AND OTHER TERMS OF RESTRICTED STOCK AWARDS. All Shares
covered by a Restricted Stock Award will be issued promptly after the date of
grant of the award, subject to the following terms and conditions:
(i) VESTING. Such Shares shall remain unvested and subject to the
restrictions of this Section 7(c) until such time (if at all) as (I) one or both
of the following performance conditions (the "Performance Conditions") are met
within the period of five years beginning on the date of grant of the Restricted
Stock Award (the "Performance Period") and (II) the Service Requirement (as
defined below) (the "Service Requirement") is also met with respect to a
Participant.
The Partial Performance Condition is met when the closing price of a share
of the Common Stock as reported on the NASDAQ National Market System for a
consecutive ten-day period equals or exceeds 137.10% of the Market Price of a
share on the first day of the Performance Period. If the Partial Performance
Condition is met for a Restricted Stock Award, then fifty percent (50%) of the
Shares covered by the award shall vest in the Participant who holds the award,
and the restrictions of this Section 7(c) shall terminate with respect to such
vested Shares (but not with respect to the remaining unvested Shares), at such
time as the Participant meets the Service Requirement, subject to payment by the
Participant of any additional consideration required under the Restricted Stock
Award.
The Service Requirement is met if the Participant has provided continuous
Service from the date of grant of a Restricted Stock Award through the end of
the Performance Period; provided that (i) if a Participant's Service is
terminated by the Company without cause or by reason of death or Disability
during the Performance Period but after one or both of the Performance
Conditions are met, the Participant shall be deemed to have met the Service
Requirement as of such date of termination with respect to the Performance
Condition(s) which have been met (or deemed to have been met, as set forth in
(ii) below) as of such termination date and (ii) if a Participant's Service is
terminated by the Company without cause or by reason of death or Disability
prior to the date that both Performance Conditions are met, the Participant
shall be deemed to meet the Service Requirement until the first day of the fifth
month following
-4-
<PAGE> 9
such termination. The Committee's good faith determination of whether the
termination of a Participant's Service (other than a Director Participant's
Service) was without cause or for cause shall be binding for purposes of the
Plan.
The Full Performance Condition is met when the closing price of a share of
the Common Stock as reported on the NASDAQ National Market System for a
consecutive ten-day period equals or exceeds 174.20% of the Market Price of a
share on the first day of the Performance Period. If the Full Performance
Condition is met for a Restricted Stock Award, then the remaining fifty percent
(50%) or, if the Partial Performance Condition was not previously met, one
hundred percent (100%) of the Shares covered by the award shall vest in the
Participant who holds the award, and the restrictions of this Section 7(c) shall
terminate with respect to such vested Shares, at such time as the Participant
meets the Service Requirement, subject to payment by the Participant of any
additional consideration required under the Restricted Stock Award.
Notwithstanding any of the foregoing, if the Committee so provides at the
time of a Restricted Stock Award grant, if a Change in Control of the Company
occurs while any Shares covered by a Restricted Stock Award remain unvested
pursuant to the foregoing provisions of this Section 7(c), but before the date
of forfeiture pursuant to this Section 7(c) of such Shares, such unvested but
unforfeited Shares covered by the award shall thereupon vest in the Participant
and the restrictions of this Section 7(c) shall terminate, subject to payment by
the Participant of any additional consideration required (without regard to the
occurrence of a Change in Control) in the Restricted Stock Award. In the case of
Restricted Stock Awards that by their terms do not automatically vest upon a
Change in Control, the Committee is authorized, in its discretion, to provide
for the accelerated vesting of unvested, but unforfeited Shares upon a Change in
Control.
(ii) FORFEITURE OF UNVESTED SHARES. If the Performance Condition
applicable to Shares covered by a Restricted Stock Award to a Participant has
not been met by the end of the Performance Period or if any such Shares remain
unvested at a time when the Participant fails to meet the Service Requirement,
the Shares as to which the Performance Condition has not been met or the Shares
which remain unvested when the Participant fails to meet the Service Requirement
(as the case may be) shall thereupon be forfeited to the Company without any
further action by the Company or the Participant and for no consideration other
than the amount (if any) of cash or other property paid by the Participant for
such Shares. A Participant shall be deemed to fail to meet the Service
Requirement on the first day of the fifth month following termination of his or
her Service without cause or by reason of death or Disability and on the date of
termination of his or her Service for any other reason (including without
limitation, termination for cause and any voluntary termination by the
Participant).
(iii) ESCROW OF UNVESTED SHARES. While Shares covered by a
Restricted Stock Award remain unvested, they shall be held in escrow by the
Company in certificate or book-entry form and they may not be sold,
hypothecated, or otherwise disposed of by the Participant or anyone claiming
through him or her.
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(iv) STOCKHOLDER RIGHTS. Subject to the restrictions of this
Section 7(c), each Participant shall enjoy all the benefits of ownership with
respect to all Shares covered by a Restricted Stock Award (including the rights
to vote such Shares and to receive dividends thereon), regardless of whether
such Shares are vested or unvested; provided that all such rights shall
immediately cease with respect to any unvested Shares upon the forfeiture of
such Shares.
(v) OTHER TERMS. Each Restricted Stock Award shall be subject to
all other terms of the Plan (including without limitation the other terms of
this Section 7 and of Sections 9, 10 and 11) and of any form or agreement
embodying the award, except to the extent that such terms are inconsistent with
the express provisions of this Section 7(c).
(d) EXERCISE OF OPTIONS. Each Option (other than a Director Option) shall
be exercisable for the full amount or for any part thereof at such time or at
such intervals and in such installments as the Committee (or its delegate, if
applicable) may determine at the time it grants such Option; provided, however,
that no Option shall be exercisable with respect to any Shares later than ten
years after the date of the grant of such Option (or five years in the case of
Incentive Options to which Section 7(k)(ii) applies). Notwithstanding the
foregoing, if the Committee so provides at the time of an Option grant, an
outstanding Option shall become immediately exercisable for the full amount or
any part thereof upon the occurrence of a Change in Control of the Company. In
the case of Options that by their terms do not become immediately exercisable
upon a Change in Control, the Committee is authorized, in its discretion, to
provide for the accelerated vesting of such options upon a Change in Control.
An Option shall be exercisable only by delivery of a written notice to the
Company's Treasurer, or any other officer of the Company designated by the
Committee to accept such notices on its behalf, specifying the number of Shares
for which the Option is exercised and accompanied by either (i) payment or (ii)
if permitted by the Committee, irrevocable instructions to a broker to promptly
deliver to the Company full payment in accordance with Section 7(e)(ii) below of
the amount necessary to pay the aggregate exercise price. With respect to an
Incentive Option, the permission of the Committee referred to in clause (ii) of
the preceding sentence must be granted at the time the Incentive Option is
granted.
(e) PAYMENT. Payment shall be made in full (i) at the time the Option is
exercised, (ii) promptly after the Participant forwards the irrevocable
instructions referred to in Section 7(d)(ii) above to the appropriate broker, if
exercise of an Option is made pursuant to Section 7(d)(ii) above, or (iii) at
the time specified in the Restricted Stock Award if any payment is required
pursuant to the Award. Payment shall be made either (I) in cash, (II) by check,
(III) if permitted by the Committee (with respect to an Incentive Option, such
permission to have been granted at the time of the Incentive Option grant), by
delivery or deemed delivery and assignment to the Company of shares of Company
stock which (1) have a fair market value (as determined by the Committee) equal
to the exercise or purchase price and (2) except to the extent otherwise
permitted by the Committee in any instance, have been owned by the Participant
(or other person(s) exercising the Participant's rights under this Plan) for at
least six months prior to the date of delivery or deemed delivery of such
shares, (IV) by a combination of one or more of
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the foregoing methods. For purposes of this Section, a deemed delivery of shares
shall mean the offset by the Company of a number of shares subject to the Option
or Restricted Stock Award against an equal number of shares of the Company's
stock owned by the Participant. If shares of Company stock are to be used to pay
the exercise price of an Incentive Option, the Company prior to such payment
must be furnished with evidence satisfactory to it that the acquisition of such
shares and their transfer in payment of the exercise price satisfy the
requirements of Section 422 of the Code and other applicable laws.
Notwithstanding any other provision of this Plan, if an Option would have a
before-tax net value of at least $10,000 to the holder upon exercise, then the
holder of the Option shall be deemed to have exercised the Option in full (to
the extent not previously exercised) on the last day that such Option is
exercisable. Such deemed exercise shall be subject to payment in full of the
exercise price (and all applicable withholding taxes) by any of the methods
permitted pursuant to this Section 7(e) and Section 7(f), but subject to the
discretion of the Committee to require payment in cash if it determines that
payment by other methods is not in the best interests of the Company.
(f) WITHHOLDING TAXES; DELIVERY OF SHARES. The Company's obligation to
deliver Shares upon exercise of an Option or pursuant to a Restricted Stock
Award shall be subject to the Participant's satisfaction of all applicable
federal, state and local income and employment tax withholding obligations.
Without limiting the generality of the foregoing, the Company shall have the
right to deduct from payments of any kind otherwise due to the Participant any
federal, state or local taxes of any kind required by law to be withheld with
respect to any Shares issued upon exercise of Options or pursuant to Restricted
Stock Awards. Furthermore, to the extent possible, all federal, state and local
tax withholding required by law shall be satisfied by withholding of vested and
unrestricted Shares or by delivery to the Company of already owned unrestricted
Shares, having a value equal to the amount required to be withheld, as
determined by the Committee. To the extent satisfaction of all required tax
withholding is not possible in the manner specified in the preceding sentence
and to the extent that additional tax withholding is elected by the Participant,
payment of withholding taxes may be made by any of the methods permitted in
Section 7(e) for payment of the exercise or purchase price of an Option or
Restricted Stock Award, subject to the discretion of the Committee to require
payment in cash if it determines that payment by other methods is not in the
best interests of the Company.
(g) TRANSFERABILITY. No Option or Restricted Stock Award shall be
transferable by the Participant otherwise than by will or the laws of descent or
distribution, and each Option shall be exercisable during the Participant's
lifetime only by the Participant. Notwithstanding the foregoing, the Board or
the Committee, as the case may be, may grant Nonqualified Options and Restricted
Stock Awards under this Plan that are transferable (subject to any terms and
conditions imposed by the Committee) by the Participant, either directly or in
trust, to one or more members of the Participant's family or to a trust, a
family partnership or other entity for the exclusive benefit of one or more
members of the Participant's family. Following any transfer permitted pursuant
to this paragraph, of which the Participant has notified the Committee in
writing, such Option or Restricted Stock Award may be exercised or shall be
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<PAGE> 12
held by the transferee(s), subject to all terms and conditions of the Option or
the Restricted Stock Award, as the case may be. For these purposes, the members
of the Participant's family are only the Participant's: (i) spouse and the
lineal descendants of such spouse; (ii) lineal descendants and the spouses of
such lineal descendants; (iii) lineal ancestors and the spouses of such lineal
ancestors; and (iv) siblings and the spouses and the children of such siblings.
(h) TERMINATION OF RESTRICTED STOCK AWARDS AND OPTIONS. Each Restricted
Stock Award shall be subject to the termination and forfeiture provisions of
Section 7(c) above. Except to the extent the Committee provides specifically in
a grant form or Option agreement for a lesser period (or a greater period, in
the case of Nonqualified Options only), each Option (other than a Director
Option) shall terminate and may no longer be exercised if the Participant ceases
for any reason to render continuous Service, in accordance with the following
provisions:
(i) if the Participant ceases to render Service for any reason
other than death, Disability or termination for cause, the Participant may,
at any time within a period of three months after the date of such
cessation of Service, exercise the Option to the extent that the Option was
exercisable on the date of such cessation;
(ii) if the Participant ceases to render Service because of
termination for cause, the Option shall terminate immediately and may no
longer be exercised on and after the date of such termination for cause;
(iii) if the Participant ceases to render Service because of
Disability, the Participant may, at any time within a period of six months
after the date of such cessation of Service, exercise the Option to the
extent that the Option was exercisable on the date of such cessation; and
(iv) if the Participant ceases to render Service because of death,
the Option, to the extent that the Participant was entitled to exercise it
on the date of death, may be exercised within a period of six months after
the Participant's death by the person or persons to whom the Participant's
rights under the Option pass by will or by the laws of descent or
distribution;
provided, however, that no Option may be exercised to any extent by anyone after
the date of its expiration; and provided, further, that Options may be exercised
at any time only as to Shares which at such time are available for acquisition
pursuant to the terms of the applicable grant form or agreement.
(i) RIGHTS AS STOCKHOLDER. A Participant shall have no rights as a
stockholder with respect to any Shares covered by an Option until the date of
issuance of a stock certificate in the Participant's name for such Shares. A
Participant shall have such rights as a stockholder with respect to any Shares
covered by a Restricted Stock Award as are provided in Section 7(c) above.
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(j) FORFEITURE. Any Options, any Shares acquired upon exercise of an Option
and any gain realized upon exercise of any Options (other than, in each case, a
Director Option) may in the discretion of the Committee be subject to forfeiture
to the Company if and to the extent and at the repurchase price, if any,
specifically set forth in the applicable Option grant form or agreement.
Certificates representing Shares subject to such repurchase or forfeiture may be
subject to such escrow and stock legending provisions as may be set forth in the
Option grant form or agreement pursuant to which the Shares were acquired. Any
Shares issued pursuant to a Restricted Stock Award shall be subject to such
forfeiture to the Company and to such escrow provisions as are specified in
Section 7(c) above and may be subject to such additional repurchase and
forfeiture rights and escrow and stock legending provisions as the Committee (in
its discretion) may set forth in any form or agreement embodying the award.
(k) 10% STOCKHOLDER. If any Participant to whom an Incentive Option is
granted pursuant to the provisions of the Plan is on the date of grant the owner
of stock (as determined under Section 424(d) of the Code) possessing more than
ten percent (10%) of the total combined voting power or value of all classes of
stock of the Company, its parent, if any, or Subsidiaries, then the following
special provisions shall be applicable:
(i) The exercise price per Share subject to such Option shall not
be less than one hundred and ten percent (110%) of the Market Price of each
Share on the date of grant; and
(ii) The Option shall not have a term in excess of five years from
the date of grant.
(l) CONFIDENTIALITY AGREEMENTS. Each Participant shall execute, prior to or
contemporaneously with the grant of any Option or Restricted Stock Award
hereunder, the Company's then standard form of agreement, if any, relating to
nondisclosure of confidential information, assignment of inventions and related
matters.
(m) AGGREGATE LIMITATION. The maximum number of Shares with respect to
which any Options and Restricted Stock Awards may be granted under the Plan to
any individual during each successive twelve-month period commencing on the
Effective Date of the Plan shall not exceed 200,000 shares.
(n) RIGHT TO TERMINATE. Nothing contained in the Plan or in any Option or
Restricted Stock Award granted hereunder shall restrict the right of any member
of the Company Group to terminate the employment of any Participant or other
Service by the Participant at any time and for any reason, with or without
notice. Nothing contained in the Plan or in any Option granted hereunder shall
give any Non-Employee Director the right to continue in Service as a director.
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(o) DEFERRAL
(i) Notwithstanding anything herein to the contrary, a
Participant, may elect, at the discretion of, and in accordance with rules
(consistent with the terms of this Plan) which may be established by, the
Committee, to defer delivery of the Shares otherwise receivable upon exercise of
a Nonqualified Option using any of the payment methods permitted by Section 7(e)
(I) or (II) of this Plan (provided that any such election must apply to all
Shares otherwise receivable upon such exercise of the Option) or Section
7(e)(III) of this Plan, provided such election is irrevocable and is made at
least (i) six months prior to the date that such Option otherwise would expire
and (ii) two months prior to the exercise of such Option. Phantom shares of
Common Stock (the "Phantom Shares") equal in number to the Shares so deferred
shall be credited to an account in the name of the Participant on the books and
records of the Company (a "Deferred Compensation Account") at the date of
exercise. A separate Deferred Compensation Account shall be maintained with
respect to each Option subject to an effective deferral election.
(ii) The Phantom Shares shall be entitled to dividends when, as
and if paid generally with respect to shares of Common Stock. At its election,
the Company may (i) pay such dividends to the Participant in cash when such
dividends are paid to the holders of Common Stock or (ii) credit the Deferred
Compensation Account with additional Phantom Shares equal to the aggregate
pre-tax amount of the dividends otherwise payable upon the number of Phantom
Shares then held in the Deferred Compensation Account, based on the Market Value
of the Common Stock on the date of payment of such dividends with any resulting
fractional Phantom Shares rounded up to the next whole Phantom Share.
(iii) The value of a Participant's Deferred Compensation Account
shall be payable in shares of Common Stock in one single payment or in annual
installments over a period not to exceed 10 years or as otherwise determined by
the Committee. At the time Participant makes such deferral election, the
Participant shall elect the form of payment and date for lump sum payment or
commencement of annual payments of the Deferred Compensation Account, with such
date at least one year subsequent to the date of exercise of the Option, but not
later than the date of the Participant's termination of Service. Notwithstanding
any election by an optionee, in the event of Disability or death of the
optionee, the Participant's Deferred Compensation Account shall be paid within
90 days in the form of shares of Common Stock in a single lump sum.
(iv) Notwithstanding the deferred payment date elected by the
Participant, the Committee may, in its discretion, allow for early payment of a
Participant's Deferred Compensation Account in the event of an "unforeseeable
emergency." For this purpose, an unforeseeable emergency shall be defined as an
unanticipated emergency that is caused by an event beyond the control of the
Participant and that would result in severe financial hardship to the
Participant if early withdrawal were not permitted. Any withdrawal on account of
an unforeseeable emergency must be limited to the amount necessary to meet the
emergency. The above provisions regarding a withdrawal upon an unforeseeable
emergency shall be interpreted in accordance with published revenue procedures,
regulations, releases or interpretations. In addition, solely for the
convenience or other benefit of the Company, Deferred
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<PAGE> 15
Compensation Accounts may be distributed on an accelerated basis in the
discretion of the Committee.
(v) Participants have the status of general unsecured creditors of
the Company with respect to their Deferred Compensation Accounts, and such
accounts constitute a mere promise by the Company to make payments with respect
thereto.
(vi) A Participant's right to benefit payments under this Plan
with respect to the Deferred Compensation Accounts may not be anticipated,
alienated, sold, transferred, assigned, pledged, encumbered by the Participant
on the Participant's beneficiary, or attached or garnished by creditors of the
Participant or the Participant's beneficiary and any attempt to do so shall be
void.
8. RESTRICTIONS ON INCENTIVE OPTIONS. Incentive Options granted under this
Plan shall be specifically designated as such and shall be subject to the
additional restriction that the aggregate Market Price, determined as of the
date the Incentive Option is granted, of the Shares with respect to which
Incentive Options are exercisable for the first time by a Participant during any
calendar year shall not exceed $100,000. If an Incentive Option which exceeds
the $100,000 limitation of this Section 8 is granted, the portion of such Option
which is exercisable for Shares in excess of the $100,000 limitation shall be
treated as a Nonqualified Option pursuant to Section 422(d) of the Code. In the
event that such Participant is eligible to participate in any other stock
incentive plans of the Company, its parent, if any, or a Subsidiary which are
also intended to comply with the provisions of Section 422 of the Code, such
annual limitation shall apply to the aggregate number of shares for which
options may be granted under all such plans.
9. SUSPENSION OF RIGHTS PRIOR TO A DISSOLUTION, REORGANIZATION, ETC. Prior
to any dissolution, liquidation, merger, consolidation or reorganization of the
Company as to which the Company will not be the surviving corporation, or the
sale or exchange of substantially all of the Common Stock or the sale of
substantially all of the assets of the Company (the "Event"), unless such Event
would constitute a Change in Control of the Company, the Board or the Committee
may decide to terminate each outstanding Option and Restricted Stock Award. If
the Board or the Committee so decides, each Option (including Director Options)
and Restricted Stock Award shall terminate as of the effective date of the
Event, but the Board or the Committee shall suspend the exercise of all
outstanding Options a reasonable time prior to the Event, giving each person
affected thereby not less than fourteen days written notice of the date of
suspension, prior to which date such person may purchase in whole or in part the
Shares otherwise available to him or her as of the date of purchase. If the
Event is not consummated, the suspension shall be removed and all Options and
Restricted Stock Awards shall continue in full force and effect, subject to
their terms.
10. ADJUSTMENT IN SHARES. Appropriate adjustment shall be made by the
Committee in the maximum number of Shares subject to the Plan and in the number,
kind, and exercise or purchase price of Shares covered by outstanding Options
and Restricted Stock Awards granted hereunder and in the number and kind of
Shares in each Director Option subsequently granted pursuant to Section 5(b) to
give effect to any stock dividends, stock splits, stock combinations,
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recapitalizations and other similar changes in the capital structure of the
Company after the Effective Date of the Plan. In the event of a change of the
Common Stock resulting from a merger or similar reorganization as to which the
Company is the surviving corporation, the number and kind of Shares which
thereafter may be purchased pursuant to an Option or issued pursuant to a
Restricted Stock Award under the Plan and the number and kind of Shares then
subject to Options or Restricted Stock Awards granted hereunder and the price
per Share thereof shall be appropriately adjusted in such manner as the
Committee may deem equitable to prevent dilution or enlargement of the rights
available or granted hereunder.
11. INVESTMENT REPRESENTATIONS; TRANSFER RESTRICTIONS. The Company may
require Participants, as a condition of purchasing Shares pursuant to the
exercise of an Option or of receiving Shares pursuant to a Restricted Stock
Award, to give written assurances in substance and form satisfactory to the
Company to the effect that such person is acquiring the Shares for the
Participant's own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate (including without limitation
confirmation that the Participant is aware of any applicable restrictions on
transfer of the Shares, as specified in the by-laws of the Company or otherwise)
in order to comply with federal and applicable state securities laws.
12. DEFINITIONS.
(a) "BOARD" means the Board of Directors of the Company.
(b) "CHANGE IN CONTROL" has the meaning defined in Section 14 below.
(c) "CODE" means the Internal Revenue Code of 1986, as heretofore and
hereafter amended, and the regulations promulgated thereunder.
(d) "COMMITTEE" has the meaning defined in Section 4 above.
(e) "COMMON STOCK" has the meaning defined in Section 3 above.
(f) "COMPANY" AND "COMPANY GROUP" have the meanings defined in Section
1 above.
(g) "DEFERRED COMPENSATION ACCOUNT" has the meaning defined in Section
7(o) above.
(h) "DIRECTOR OPTION" has the meaning defined in Section 5(b) above.
(i) "DISABILITY" has the meaning defined in Section 22(e)(3) of the
Code.
(j) "EFFECTIVE DATE" has the meaning defined in Section 2 above.
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(k) "EMPLOYEE" means any individual (including an officer of the
Company) who is a common law employee of any member of the Company Group. Any
individual who was an Employee at the start of a leave of absence shall continue
to be an Employee for purposes of this Plan to the extent provided in
regulations under applicable provisions of the Code or to the extent required by
the Uniformed Services Employment and Reemployment Rights Act or other
applicable law.
(l) "EVENT" has the meaning defined in Section 9 above.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
heretofore and hereafter amended.
(n) "INCENTIVE OPTION" has the meaning defined in Section 1 above.
(o) "MARKET PRICE" means the average of the closing prices of the
Common Stock as published in the Wall Street Journal for all days on which
trades of the Common Stock occurred within the thirty calendar-day period ending
on the day before the relevant date, provided that if the closing price of the
Common Stock is no longer reported in the Wall Street Journal or if no trading
occurs during such thirty-day period, then the Market Price as of the relevant
date shall be as determined by the Board.
(p) "1995 PLAN" means the HPSC, Inc. 1995 Stock Incentive Plan, as
adopted March 8, 1995, and amended and restated March 14, 1996.
(q) "NON-EMPLOYEE DIRECTOR" has the meaning defined in Section 5(b)
above.
(r) "NONQUALIFIED OPTION" has the meaning defined in Section 1 above.
(s) "OPTION" has the meaning defined in Section 1 above.
(t) "PARTICIPANT" has the meaning defined in Section 5 above.
(u) "PERFORMANCE CONDITIONS" "PARTIAL PERFORMANCE CONDITION" AND "FULL
PERFORMANCE CONDITION" have the meanings defined in Section 7(c) above.
(v) "PERFORMANCE PERIOD" has the meaning defined in Section 7(c) above.
(w) "PHANTOM STOCK" has the meaning defined in Section 7(o) above.
(x) "PLAN" has the meaning defined in Section 1 above.
(y) "RESTRICTED STOCK AWARD" has the meaning defined in Section 1
above.
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(z) "SERVICE" means the performance of work for one or more members of
the Company Group as an Employee, consultant or other individual contributor, or
service as a Non-Employee Director of the Company.
(aa) "SERVICE REQUIREMENT" has the meaning defined in Section 7(c)
above.
(bb) "SHARES" has the meaning defined in Section 3 above.
(cc) "SUBSIDIARY" has the meaning defined in Section 424(f) of the
Code.
13. TERMINATION OR AMENDMENT OF PLAN. The Board may by written action at
any time terminate the Plan or make such changes in or additions or deletions to
the Plan as it deems advisable without further action on the part of the
stockholders of the Company, provided:
(a) that no such termination or amendment shall adversely affect or
impair any then outstanding Option or Restricted Stock Award or related
agreement without the consent of the Participant holding such Option or
Restricted Stock Award or related agreement; and
(b) that no such amendment which (i) increases the maximum number of
Shares subject to this Plan (except to the extent provided in Sections 9 and
10), (ii) materially modifies the requirements as to eligibility for
participation in the Plan, or (iii) makes any other change which, pursuant to
the Code or regulations thereunder or Section 16(b) of the Exchange Act and the
rules and regulations thereunder, requires action by the stockholders may be
made without obtaining, or being conditioned upon, stockholder approval.
With the consent of the Participant affected, the Committee may amend
outstanding Options or Restricted Stock Awards or related agreements in a manner
not inconsistent with the Plan. The Committee shall have the right to amend or
modify the terms and provisions of the Plan and of any outstanding Incentive
Options granted under the Plan to the extent necessary to qualify any or all
such Options for such favorable federal income tax treatment (including deferral
of taxation upon exercise) as may be afforded incentive stock options under
Section 422 of the Code.
14. CHANGE IN CONTROL. A change in control of the Company (a "Change in
Control") will occur upon:
(a) The acquisition by any individual, entity or group (within the
meaning of Sections 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20 percent or more of either (i) the then outstanding shares of
the Common Stock or (ii) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the election of
the directors (the "Outstanding Company Voting Securities"); provided, however,
that the following acquisitions shall not constitute a Change in Control: (A)
any acquisition directly from the Company (excluding an acquisition by virtue of
the exercise of a conversion privilege); (B) any
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<PAGE> 19
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 Section 14 are satisfied.
Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any Person (the "Subject Person") acquired beneficial
ownership of more than the permitted percentage of the then Outstanding Company
Voting Securities as a result of the acquisition of Voting Securities by the
Company which by reducing the number of Voting Securities then outstanding,
increases the percentage of shares beneficially owned by the Subject Person,
provided that if a Change in Control would occur (but for the operation of this
sentence) as a result of the acquisition of Voting Securities by the Company
and, after such share acquisition by the Company, the Subject Person becomes the
beneficial owner of any additional Voting Securities which increases the
percentage of the then Outstanding Company Voting Securities beneficially owned
by the Subject Person, then a Change in Control shall occur;
(b) Individuals who, as of the date of this Agreement, constitute the
Board (the "Incumbent Board") ceasing for any reason to constitute at least
two-thirds of the Board over any period of 24 consecutive months or less;
provided, however, that any individual becoming a director subsequent to the
date of this Agreement whose election, or nomination for election by the
Corporation's shareholders, was approved by a vote or resolution of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
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
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Securities, as the case may be, (ii) no Person (excluding the Company, any
employee benefit plan (or related trust) of the Company or such corporation or
other business entity resulting from such consolidation or merger and any Person
beneficially owning, immediately prior to such consolidation or merger, directly
or indirectly, 35 percent or more of the Common Stock and/or Outstanding Company
Voting Securities, as the case may be) beneficially owns, directly or
indirectly, 35 percent or more of, respectively, the then outstanding shares of
common stock of the corporation resulting from such consolidation or merger or
the combined voting power of the then outstanding voting securities of such
corporation or business entity entitled to vote generally in the election of its
directors (or other persons having the general power to direct the affairs of
such entity) and (iii) at least two-thirds of the members of the board of
directors (or other group of persons having the general power to direct the
affairs of the corporation or other business entity) resulting from such
consolidation or merger were members of the Incumbent Board at the time of the
execution of the initial agreement providing for such consolidation or merger;
provided that any right which shall vest by reason of the action of the Board
pursuant to this paragraph (c) shall be divested, with respect to any such right
not already exercised, upon (A) the rejection of such agreement of consolidation
or merger by the stockholders of the Company or (B) its abandonment by either
party thereto in accordance with its terms; or
(d) Adoption by the requisite majority of the whole Board, or by the
holders of such majority of stock of the Company as is required by law or by the
Certificate of Incorporation or By-Laws of the Company as then in effect, of a
resolution or consent authorizing (i) the dissolution of the Company or (ii) the
sale or other disposition of all or substantially all of the assets of the
Company, other than to a corporation or other business entity with respect to
which, following such sale or other disposition, (A) more than 60 percent of,
respectively, the then outstanding shares of common stock of such corporation
and/or the combined voting power of the outstanding voting securities of such
corporation or other business entity entitled to vote generally in the election
of directors (or other persons having the general power to direct the affairs of
such entity) is then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Common Stock and Outstanding Company Voting
Securities immediately prior to such sale or other disposition in substantially
the same proportions as their ownership, immediately prior to such sale or other
disposition, of the Common Stock and/or Outstanding Company Voting securities,
as the case may be, (B) no Person (excluding the Company and any employee
benefit plan (or related trust) of the Company or such corporation or other
business entity and any Person beneficially owning, immediately prior to such
sale or other disposition, directly or indirectly, 35 percent or more of the
Common Stock and/or Outstanding Company Voting Securities, as the case may be)
beneficially owns, directly or indirectly, 35 percent or more of, respectively,
the then outstanding shares of common stock of such corporation and/or the
combined voting power of the then outstanding voting securities of such
corporation or other business entity entitled to vote generally in the election
of directors (or other persons having the general power to direct the affairs of
such entity) and (C) at least two-thirds of the members of the board of
directors (or other group of persons having the general power to direct the
affairs of such corporation or other entity) were members of the Incumbent Board
at the time of the execution of the initial agreement or action of the Board
providing for such sale or other disposition of assets of the Company; provided
that any right which shall vest by reason of the action of the Board or the
stockholders pursuant to this paragraph (d) shall be divested, with respect to
any such right not already exercised, upon the abandonment by the Company of
such dissolution, or such sale or other disposition of assets, as the case may
be.
-16-
<PAGE> 21
A Change in Control shall not occur upon the mere reincorporation of the
Company in another state.
-17-
<PAGE> 1
Exhibit 10.2
5/25/99
HPSC, INC.
AMENDED AND RESTATED 1995 STOCK INCENTIVE PLAN
FIRST AMENDMENT
WHEREAS, HPSC, Inc. (the "Company") maintains the HPSC, Inc. Amended and
Restated 1995 Stock Incentive Plan (the "Plan") for the benefit of certain
eligible employees and directors;
WHEREAS, the Company desires to amend the Plan to change the definition of
Change in Control.
NOW THEREFORE, the Plan is amended effective April 26, 1999, as follows:
Section 14 is amended by adding the following paragraph at the end of
subparagraph (a):
Notwithstanding the foregoing, a Change in Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired
beneficial ownership of more than the permitted percentage of the then
Outstanding Company Voting Securities as a result of the acquisition
of Voting Securities by the Company which by reducing the number of
Voting Securities then outstanding, increases the percentage of shares
beneficially owned by the Subject Person, provided that if a Change in
Control would occur (but for the operation of this sentence) as a
result of the acquisition of Voting Securities by the Company and,
after such share acquisition by the Company, the Subject Person
becomes the beneficial owner of any additional Voting Securities which
increases the percentage of the then Outstanding Company Voting
Securities beneficially owned by the Subject Person, then a Change in
Control shall occur.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by its
duly authorized officer this day of , 1999.
-------------- --------------
HPSC, INC.
By:
-------------------------------
Title: -------------------------------
<PAGE> 1
Exhibit 10.3
5/25/99
HPSC, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
SECOND AMENDMENT
WHEREAS, HPSC, Inc. (the "Company") maintains the HPSC, Inc. Supplemental
Executive Retirement Plan (the "Plan") for the benefit of certain eligible
executive employees;
WHEREAS, the Company desires to amend the Plan to change the definition of
Change in Control.
NOW THEREFORE, the Plan is amended effective April 26, 1999, as follows:
Section 2.8 is amended by adding the following paragraph at the end of
subparagraph (a):
Notwithstanding the foregoing, a Change in Control shall not be
deemed to occur solely because any Person (the "Subject Person")
acquired beneficial ownership of more than the permitted
percentage of the then Outstanding Company Voting Securities as a
result of the acquisition of Voting Securities by the Company
which by reducing the number of Voting Securities then
outstanding, increases the percentage of shares beneficially
owned by the Subject Person, provided that if a Change in Control
would occur (but for the operation of this sentence) as a result
of the acquisition of Voting Securities by the Company and, after
such share acquisition by the Company, the Subject Person becomes
the beneficial owner of any additional Voting Securities which
increases the percentage of the then Outstanding Company Voting
Securities beneficially owned by the Subject Person, then a
Change in Control shall occur.
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by its
duly authorized officer this day of , 1999.
------------ ---------------
HPSC, INC.
By:
-------------------------------
Title: -------------------------------
<PAGE> 1
EXHIBIT 10.4
THIRD AMENDMENT
TO
THIRD AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT
Third Amendment dated as of May 14, 1999 to the Third Amended and Restated
Revolving Credit Agreement (the "Third Amendment"), by and among HPSC, INC., a
Delaware corporation (the "Borrower"), AMERICAN COMMERCIAL FINANCE COMPANY, a
Delaware corporation (the "Guarantor" or "ACFC"), BANKBOSTON, N.A. and the other
lending institutions listed on SCHEDULE 1 to the Credit Agreement (as
hereinafter defined) (the "Banks"), and BankBoston, N.A. as agent for the Banks
(in such capacity, the "Agent"), amending certain provisions of the Third
Amended and Restated Revolving Credit Agreement dated as of March 16, 1998 (as
amended and in effect from time to time, the "Credit Agreement") by and among
the Borrower, the Guarantor, the Banks and the Agent. Terms not otherwise
defined herein which are defined in the Credit Agreement shall have the same
respective meanings herein as therein.
WHEREAS, the Borrower and the Banks have agreed to modify certain terms and
conditions of the Credit Agreement as specifically set forth in this Third
Amendment;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
contained herein and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
SS.1. Amendment to Section 1 of the Credit Agreement.
(a) Section 1.1 of the Credit Agreement is hereby amended by deleting the
following definitions in their entirety and restating such definitions as
follows:
Revolving Credit Loan Maturity Date. May 12, 2000.
Term Loan Maturity Date. May 11, 2001.
(b) Section 1.1 of the Credit Agreement is hereby amended by deleting
clause (y) of the proviso to the definition of "Borrowing Base" and replacing it
with the following new clause (y): "(y) (A) the aggregate amount of pre-approved
specific use personally guaranteed line of credit receivables included as
Eligible Accounts Receivable shall not exceed $20,000,000 and (B) the aggregate
amount of Practice Receivables included as Eligible Accounts Receivable shall
not exceed $30,000,000."
(c) Section 1.1 of the Credit Agreement is hereby amended by deleting
clause (ii) of the last sentence of the definition of "Eligible Accounts
Receivable" and replacing it with the following new clause (ii): "(ii) (A) the
maximum aggregate amount of pre-approved specific use personally guaranteed
lines of credit receivables which may be
<PAGE> 2
treated as Eligible Accounts Receivable is $20,000,000 and (B) the maximum
aggregate amount of Practice Receivables which may be treated as Eligible
Accounts Receivable is $30,000,000."
SS.2. Amendment to Section 4.3 of the Credit Agreement. Section 4.3 of the
Credit Agreement is hereby amended by changing the date "June 30, 1999" to "June
30, 2000".
SS.3. Amendment to Section 10 of the Credit Agreement. Section 10 of the
Credit Agreement is hereby amended as follows in the sub-sections indicated:
(a) Section 10.3(e) is hereby amended by changing the words "the Closing
Date" in the fifth line thereof to "May 14, 1999".
(b) Section 10.4 is hereby amended by changing the figure "$3,000,000" in
the fifth line thereof to "$4,000,000".
SS.4. Amendment to Section 11 of the Credit Agreement. Section 11 of the
Credit Agreement is hereby amended as follows in the sub-sections indicated:
(a) Section 11.1 is hereby amended by changing the ratio in the last line
thereof from "6.00:1.00" to "7.00:1.00".
SS.5. Amendment to Schedule to Credit Agreement. Schedule 1 to the Credit
Agreement is hereby amended by replacing the existing Schedule 1 with the new
Schedule 1 attached hereto.
SS.6. Amendment to Certain Exhibits to Credit Agreement. Exhibit B-1 to the
Credit Agreement is hereby amended by replacing the date "March 15, 1999" on the
first line thereof with the date "May 14, 1999". EXHIBIT B-2 to the Credit
Agreement is hereby amended by replacing the date "May 14, 1999" on the first
line thereof with the date "May 12, 2000".
SS.7. Conditions to Effectiveness. This Third Amendment shall not become
effective until the Agent receives (a) a counterpart of this Third Amendment,
executed by the Borrower, the Guarantor and each of the Banks, (b) revolving
credit notes of the Borrower dated as of May 14, 1999 and otherwise in
substantially the form of exhibit B-1 to the Credit Agreement and completed with
appropriate insertions (the "Revolving Credit Notes"), (c) certificates executed
by the respective secretaries of the Borrower and the Guarantor (i) confirming
that the charter and by-laws of each of the Borrower and the Guarantor have not
been amended since the Closing Date, (ii) as to evidence that all necessary
corporate action for the valid execution and delivery of this Third Amendment
shall have been duly and effectively taken by the Borrower and the Guarantor,
(iii) as to the incumbency and signature of the officers signing this Third
Amendment on behalf of the Borrower and the Guarantor and (iv) certifying as to
the continuing accuracy of the
<PAGE> 3
Perfection Certificates, (d) a favorable legal opinion, dated as of the date
hereof, in form and substance satisfactory to the Agent from Hill & Barlow,
counsel to the Borrower and the Guarantor, (e) such UCC-3 continuation
statements and UCC-1 financing statements as the Agent shall request, and (f)
for the account of each Bank, an amendment fee equal to .05% of such Bank's
Commitment.
SS.8. Representations and Warranties. The Borrower hereby repeats, on and
as of the date hereof, each of the representations and warranties made by it in
ss.8 of the Credit Agreement, and such representations and warranties remain
true as of the date hereof (except to the extent of changes resulting from
transactions contemplated or permitted by the Credit Agreement and the other
Loan Documents, and to the extent that such representations and warranties
relate expressly to an earlier date), provided, that all references therein to
the Credit Agreement shall refer to such Credit Agreement as amended hereby. In
addition, the Borrower hereby represents and warrants that the execution and
delivery by the Borrower of this Third Amendment and the performance by the
Borrower of all of its agreements and obligations under the Credit Agreement as
amended hereby are within the corporate authority of the Borrower and has been
duly authorized by all necessary corporate action on the part of the Borrower.
SS.9. RATIFICATION, Etc. Except as expressly amended hereby, the Credit
Agreement, the Security Documents and all documents, instruments and agreements
related thereto are hereby ratified and confirmed in all respects and shall
continue in full force and effect. The Credit Agreement and this Third Amendment
shall be read and construed as a single agreement. All references in the Credit
Agreement or any related agreement or instrument (a) to the Credit Agreement
shall hereafter refer to the Credit Agreement as amended hereby and (b) to
Revolving Credit Notes shall hereafter refer to the Revolving Credit Notes
issued pursuant to ss.7 of this Third Amendment.
SS.10. No Waiver. Nothing contained herein shall constitute a waiver of,
impair or otherwise affect any Obligations, any other obligation of the Borrower
or any rights of the Agent or the Banks.
SS.11. Counterparts. This Third Amendment may be executed in one or more
counterparts, each of which shall be deemed an original but which together shall
constitute one and the same instrument.
SS.12. Governing Law. THIS THIRD AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
(WITHOUT REFERENCE TO CONFLICT OF LAWS).
<PAGE> 4
IN WITNESS WHEREOF, the undersigned have duly executed this Third Amendment
as a sealed instrument as of the date first set forth above.
HPSC, INC.
By: /s/ Rene Lefebvre
---------------------------------------
Name: Rene Lefebvre
Title: Vice President,
Chief Financial Officer
BANKBOSTON, N.A., individually and as Agent
By: /s/ Harvey H. Thayer, Jr.
---------------------------------------
Name: Harvey H. Thayer, Jr.
Title: Managing Director
<PAGE> 5
MELLON BANK, N.A.
By: /s/ David B. Wirl
----------------------------------------
Name: David B. Wirl
Title: Assistant Vice President
NATIONAL BANK OF CANADA
By: /s/ A. Keith Broyles
----------------------------------------
Name: A. Keith Broyles
Title: Vice President and Manager
By: /s/ Leonard J. Pellecchia
----------------------------------------
Name: Leonard J. Pellecchia
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Allison A. Mason
----------------------------------------
Name: Allison A. Mason
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Norm B. Gratson
----------------------------------------
Name: Norm B. Gratson
Title: Vice President
<PAGE> 6
Ratification by Guarantor
The undersigned Guarantor hereby acknowledges and consents to the foregoing
Third Amendment as of May 14, 1999 and agrees that the Guaranty dated as of June
23, 1994 from the undersigned in favor of the Agent and each of the Banks, as
amended by Omnibus Amendment No. 3 to Security Documents, dated March 16, 1998,
and each of the other Security Documents to which it is a party remain in full
force and effect, and the Guarantor confirms and ratifies all of its obligations
thereunder.
AMERICAN COMMERCIAL
FINANCE CORPORATION
By: /s/ John W. Everets
--------------------------------------
Name: John W. Everets
Title: Chairman
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