-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IYncSD74j2sfiG09Z/yf5/lT0OHuRz9EAc6kgTij6U4vHnvy5aliR6MgDTNQ3f+t 6Qf2jLJw0OS/CT4Dya//7w== 0000950135-98-003271.txt : 19980515 0000950135-98-003271.hdr.sgml : 19980515 ACCESSION NUMBER: 0000950135-98-003271 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HPSC INC CENTRAL INDEX KEY: 0000718909 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 042560004 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-11618 FILM NUMBER: 98619942 BUSINESS ADDRESS: STREET 1: 60 STATE ST CITY: BOSTON STATE: MA ZIP: 02109 BUSINESS PHONE: 6167203600 MAIL ADDRESS: STREET 1: 60 STATE ST CITY: BOSTON STATE: MA ZIP: 02109 10-Q 1 HPSC, INC. 1 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 March 31, 1998 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 of (IRS Employer Identification No.) 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 MAY 6, 1998, 4,912,530 2 HPSC, INC. INDEX
PAGE ---- PART 1 -- FINANCIAL INFORMATION Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31,1997............................................... 3 Condensed Consolidated Statements of Income for Each of the Three Months Ended March 31, 1998 and March 31, 1997........... 4 Condensed Consolidated Statements Of Cash Flows for Each of the Three Months Ended March 31, 1998 and March 31, 1997....... 5 Notes to Condensed Consolidated Financial Statements................ 6 Management's Discussion and Analysis of Financial Condition and Results of Operations............................ 7 PART II -- OTHER INFORMATION Signatures.......................................................... 13
3 HPSC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) (unaudited)
MARCH 31, DECEMBER 31, 1998 1997 --------- ----------- ASSETS ------ CASH AND CASH EQUIVALENTS $ 3,730 $ 2,137 RESTRICTED CASH 7,392 7,000 INVESTMENT IN LEASES AND NOTES: Lease contracts and notes receivable due in installments 236,464 219,147 Notes receivable 30,338 33,245 Retained interest in leases and notes sold 11,995 11,895 Estimated residual value of equipment at end of lease term 11,797 11,342 Less unearned income (58,373) (53,868) Less allowance for losses (5,617) (5,541) Less security deposits (5,985) (5,801) Deferred origination costs 5,645 5,300 --------- -------- Net investment in leases and notes 226,264 215,719 --------- -------- OTHER ASSETS: Other assets 5,567 5,502 Refundable income taxes 1,692 2,770 -------- -------- TOTAL ASSETS $244,645 $233,128 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ REVOLVING CREDIT BORROWINGS $ 41,000 $ 39,000 SENIOR NOTES 136,592 123,952 SENIOR SUBORDINATED NOTES 20,000 20,000 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 3,241 6,254 ACCRUED INTEREST 472 1,129 INCOME TAXES: Currently payable 31 66 Deferred 7,852 7,553 -------- -------- TOTAL LIABILITIES 209,188 197,954 --------- ------- 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 4,912,530 shares in 1998 and 1997 49 49 Additional paid-in capital 12,306 12,304 Retained earnings 26,882 26,472 Less: Treasury Stock (at cost) 274,400 shares in 1998 and 236,900 in 1997 (1,413) (1,210) Deferred compensation (2,236) (2,286) Notes receivable from officers and employees (131) (155) -------- -------- TOTAL STOCKHOLDERS' EQUITY 35,457 35,174 -------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $244,645 $233,128 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 3 4 HPSC, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997 (in thousands, except per share and share amounts) (unaudited)
THREE MONTHS ENDED ------------------------------ MARCH 31, MARCH 31, 1998 1997 ------------- ---------- REVENUES: Earned income on leases and notes $ 7,493 $ 5,015 Gain on sales of leases and notes 525 982 Provisions for losses (584) (437) ---------- ---------- Net Revenues 7,434 5,560 ---------- ---------- EXPENSES: Selling, general and administrative 3,315 2,807 Interest expense 3,412 2,437 Interest income (28) (92) ---------- ----------- Net operating expenses 6,699 5,152 ---------- ---------- INCOME BEFORE INCOME TAXES 735 408 ---------- ---------- PROVISION FOR INCOME TAXES: Federal, Foreign and State: Current 26 89 Deferred 299 108 ---------- ---------- TOTAL INCOME TAXES 325 197 ---------- ---------- NET INCOME $ 410 $ 211 ========== ========== BASIC NET INCOME PER SHARE $ 0.11 $ 0.06 ========== ========== SHARES USED TO COMPUTE BASIC INCOME PER SHARE 3,651,451 3,790,584 DILUTED NET INCOME PER SHARE $ 0.10 $ 0.05 ========== ========== SHARES USED TO COMPUTE DILUTED INCOME PER SHARE 4,098,166 4,379,012
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 4 5 HPSC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE THREE MONTHS ENDED MARCH 31, 1998 AND MARCH 31, 1997 (in thousands) (unaudited)
MARCH 31, MARCH 31, 1998 1997 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 410 $ 211 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 897 962 Deferred income taxes 299 108 Restricted stock compensation 50 50 Gain on sale of receivables (525) (982) Provision for losses on lease contracts and notes 584 437 receivable Increase (decrease) in accrued interest (657) 98 Decrease in accounts payable and accrued liabilities (1,565) (2,200) Increase (decrease) in accrued income taxes (35) 38 Decrease in refundable income taxes 1,078 500 (Increase) decrease in other assets (51) 123 --------- --------- Cash provided by (used in) operating activities 485 (655) --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Origination of lease contracts and notes receivable due in installments (35,260) (26,700) Portfolio receipts, net of amounts included in income 14,029 12,393 Proceeds from sales of lease contracts and notes receivable due in installments 4,566 8,573 Net (increase) decrease in notes receivable 2,853 (1,923) Net increase in security deposits 184 341 Net (increase) decrease in other assets (117) 130 Net (increase) decrease in loans to employees 24 (9) --------- --------- Cash (used in) investing activities (13,721) (7,195) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of senior notes (12,670) (9,631) Proceeds from issuance of senior notes, net of debt issue costs 25,310 12,059 Proceeds from issuance of senior subordinated notes, net of debt issuance costs --- 18,824 Net proceeds (repayments) of revolving credit 2,000 (14,508) borrowings Purchase of treasury stock (203) --- Increase (decrease) in restricted cash 392 1,218 --------- --------- Cash provided by financing activities 14,829 7,962 --------- --------- Net increase in cash and cash equivalents 1,593 112 Cash and cash equivalents at beginning of period 2,137 2,176 --------- --------- Cash and cash equivalents at end of period $ 3,730 $ 2,288 ========= ========= Supplemental disclosures of cash flow information: Interest paid $ 4,089 $ 2,118 Income taxes paid 17 68
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5 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 1997 account balances have been reclassified to conform with 1998 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. Statement of Financial Accounting Standards No. 128, "Earnings per Share", effective for the Company for the year ended December 31, 1997, provided new standards for computing and presenting earnings per share (EPS). 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, shares issued under the Restrictive Stock Plan, 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 issued common shares under the Restricted Stock Plan outstanding as calculated under the treasury stock method, but not unallocated shares under the Company's ESOP and SESOP. 3. In connection with the HPSC Bravo Funding Corp. ("Bravo") revolving credit facility, the Company had $50,996,000 of its Senior Notes subject to interest rate swap agreements. Under this facility, Bravo incurs interest at various rates in the commercial paper market and enters into interest rate swap agreements to assure fixed rate funding. At March 31, 1998, Bravo had sixteen separate swap contracts with BankBoston with a total notional value of $56,771,000. 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. 4. In March 1997, the Company completed the issuance of $20,000,000 of unsecured senior subordinated notes (the "Notes") due in 2007, which bear interest at a fixed rate of 11%. The Notes pay interest semi-annually on April 1 and October 1, with such payments beginning on October 1, 1997. The Notes are redeemable at the option of the Company, in whole or in part, other than through the operation of a sinking fund, after April 1, 2002 at established redemption prices, plus accrued but unpaid interest to the date of repurchase. Beginning July 1, 2002, the Company is required to redeem through sinking fund payments, on January 1, April 1, July 1, and October 1 of each year, a portion of the aggregate principal amount of the Notes at a redemption price equal to 100% of such principal amount redeemed plus accrued but unpaid interest to redemption date. 5. In June 1997, the Company entered into a three-year $100,000,000 Lease Receivable Purchase Agreement with EagleFunding Capital Corporation ("Eagle") under which the Company may transfer assets from time to time to HPSC Capital Funding, Inc. ("Capital"), a wholly-owned, bankruptcy remote, special purpose corporation. Capital may then pledge or sell assets to Eagle. Under this Agreement the Company had Senior Notes outstanding of $81,140,000 at March 31, 1998, and in connection with this facility had 9 separate interest rate swap agreements with BankBoston with a total notional value of $83,167,000. 6. On March 31, 1998, the Company had restricted cash of $4,909,000 under the Bravo facility and $2,483,000 under the Capital facility. All such restricted cash is reserved for debt service. 7. The Financial Accounting Standards Board ("FASB") has issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This statement, adopted January 1, 1998, establishes standards for reporting and presenting comprehensive income and its components. There was no difference between comprehensive income and net income as a result of the adoption of SFAS No. 130. 8. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," establishes standards for public enterprises in reporting information about its operating segments, products and services, geographic concentrations, and major customers. Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Post-Retirement Benefits" provides new standards for disclosures related to pension plans and other post retirement benefits. SFAS Nos. 131 and 132 will be effective for the Company for the year ending December 31, 1998. It is not expected that the adoption of these standards will have a material impact on the Company's consolidated operating results or financial condition. 6 7 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 March 31, 1998 was $7,493,000 (including approximately $1,257,000 from the Company's commercial lending subsidiary American Commercial Finance Corporation ("ACFC")) as compared to $5,015,000 (including approximately $860,000 from ACFC) for the three months ended March 31, 1997. The increase of 49% was due principally to increases in net investment in leases and notes in 1998 as compared to 1997. The increases in net investment resulted in part from a higher level of originations in the first quarter of 1998 of $39,000,000 compared to $27,000,000 for the same period of 1997. Gains on sales of leases and notes were $525,000 in the three months ended March 31, 1998 compared to $982,000 for the comparable 1997 quarter. The decrease was primarily caused by a lower level of asset sale activity in the current period. Interest expense (net of interest income) for the first quarter of 1998 was $3,384,000 (45% of earned income) compared to $2,345,000 (47% of earned income) in the comparable 1997 period, an increase of 44%. The increase in net interest expense was due primarily to an increase in debt levels of 58% from March 31, 1997 to March 31 1998. 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 first quarter of 1998 was $4,109,000 (55% of earned income) as compared to $2,670,000 (53% of earned income) for the first quarter of 1997. The increase in amount was due to higher earnings on a higher balance of earning assets. The provision for losses for the first quarter of 1998 was $584,000 (8% of earned income) compared to $437,000 (9% of earned income) in the comparable quarter of 1997. The increase is primarily due to increases in new financing activity in the current period. The allowance for losses at March 31, 1998 was $5,617,000 (2.5% of net investment) compared to $4,047,000 (2.6% of net investment) at March 31, 1997. The increase was due to a larger portfolio. Net charge offs for the three months ended March 31, 1998 were $459,000 compared to $250,000 for the same period ended March 31, 1997. Selling, general and administrative expenses for the three months ended March 31, 1998 were $3,315,000 (44% of earned income) compared to $2,807,000 (56% of earned income) in the comparable 1997 period. The change was caused by an acceleration in the first quarter of 1997 of the recognition of unamortized deferred costs associated with the termination of HPSC Funding Corp I and, in 1998, increased staffing and support costs required by higher levels of owned and managed assets, offset by a higher level of earned income. The Company's income before income taxes for the quarter ended March 31, 1998 was $735,000 compared to $408,000 in the corresponding 1997 period. The provision for income taxes was $325,000 (44% of income before income taxes) for the three months ended March 31, 1998, compared to $197,000 (48% of income before income taxes) in the first quarter of 1997. The 1998 provision was affected by approximately $50,000 in expenses ($70,000 in 1997) related to the continuing wind-down of the Company's Canadian operation which are not deductible in computing the income tax provision. The Company's net income for the three months ended March 31, 1998 was $410,000 ($.10 per diluted share) compared to $211,000 ($.05 per diluted share) for the three months ended March 31, 1997. Basic net income per share was $.11 per share for the quarter ended March 31, 1998 and $.06 per share for the comparable period ended March 31, 1997. The increase resulted from higher earned income on leases and notes, offset by higher operating and interest costs and a higher provision for losses. 7 8 LIQUIDITY AND CAPITAL RESOURCES At March 31, 1998, the Company had $11,122,000 in cash, cash equivalents and restricted cash as compared to $9,137,000 at December 31, 1997. As described in Note 6 to the Company's condensed consolidated financial statements included in this report on Form 10-Q, $7,392,000 was restricted pursuant to financing agreements as of March 31, 1998, compared to $7,000,000 at December 31, 1997. Cash provided by operating activities was $485,000 for the three months ended March 31, 1998 compared to cash used in operating activities of $655,000 for the three months ended March 31, 1997. The significant components of cash provided by operating activities for the three months ended March 31, 1998, as compared to the same period in 1997, were the decrease in accounts payable and accrued liabilities of $1,565,000 as compared to $2,200,000 for the same period of 1997, a decrease in refundable income taxes of $1,078,000 as compared to $500,000 from the prior period, offset by a decrease in accrued income taxes. Cash used in investing activities was $13,721,000 for the three months ended March 31, 1998 compared to $7,195,000 for the three months ended March 31, 1997. The significant components of cash used in investing activities for the first three months of 1998 compared to the same period in 1997 were an increase in originations of lease contracts and notes receivable to $35,260,000 from $26,700,000 along with a decrease in proceeds from sales of lease contracts and notes receivable to $4,566,000 in the 1998 period from $8,573,000 in the 1997 period, offset by an increase in portfolio receipts to $14,029,000 from $12,393,000 and a decrease in notes receivable of $2,853,000 for the quarter ended March 31, 1998 as compared to an increase of $1,923,000 in the comparable period ended March 31, 1997. Cash provided by financing activities for the three months ended March 31, 1998 was $14,829,000 compared to $7,962,000 for the three months ended March 31, 1997. The significant components of cash provided by financing activities for the first three months of 1998 as compared to 1997 were an increase in proceeds from issuance of senior notes, net of debt issue costs, to $25,310,000 from $12,059,000, an increase in proceeds from revolving credit borrowings of $2,000,000 as compared to repayments of $14,508,000 in the prior period, offset by higher repayments of senior notes of $12,670,000 for the three months ended March 31, 1998 as compared to $9,631,000 for the three months ended March 31, 1997 as well as a lower level of senior subordinated note borrowings in 1998. On December 27, 1993, the Company raised $70,000,000 through an asset securitization transaction in which its wholly-owned subsidiary, HPSC Funding Corp I ("Funding I"), issued senior secured notes (the "Funding I Notes") at a rate of 5.01%. The Funding I Notes are secured by a portion of the Company's portfolio which it sold in part and contributed in part to Funding I. Proceeds of this financing were used to retire $50,000,000 of 10.125% senior notes due December 28, 1993, and $20,000,000 of 10% subordinated notes due January 15, 1994. Under the terms of the Funding I securitization, when the principal balance of the Funding I Notes equals the balance of the restricted cash in the facility, the Funding I Notes are paid off from the restricted cash and Funding I terminates. This occurred during the second quarter of 1997, prior to the scheduled termination of Funding I. Due to this early termination, the Company incurred a $175,000 non-cash, non-operating charge against earnings in the first quarter of 1997 representing the partial early recognition of certain unamortized deferred transaction origination costs. The Company's Second Amended and Restated Revolving Credit Agreement with BankBoston as Agent Bank, dated December 12, 1996 ("the Revolver Agreement") increased the Company's availability under the Revolver Agreement to $95,000,000. On December 10, 1997, this agreement was extended on the same terms and conditions providing availability to $60,000,000. The Third Amended and Restated Revolving Credit Agreement was signed March 16, 1998 providing the Company with availability up to $100,000,000 through March 31, 1999. Under the Revolver Agreement, the Company may borrow at variable rates of prime and at LIBOR plus 1.35% to 1.50%, dependent on certain performance covenants. At March 31, 1998, the Company had $41,000,000 outstanding under this facility and $59,000,000 available for borrowing, subject to borrowing base limitations. The Revolver Agreement currently is not hedged and is, therefore, exposed to upward movements in interest rates. As of January 31, 1995, the Company, along with its wholly-owned, special-purpose subsidiary HPSC Bravo Corp ("Bravo"), established a $50,000,000 revolving credit facility structured and guaranteed by Capital Markets Assurance Corporation ("CapMAC", subsequently acquired by MBIA in February, 1998). Under the terms of the facility, Bravo, to 8 9 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 meeting certain covenants. The required monthly payments of principal and interest to purchasers of the commercial paper are guaranteed by CapMAC pursuant to the terms of the agreement. In November 1996, the Bravo facility was increased to $100,000,000 and amended to allow up to $30,000,000 of such facility to be used for sale accounting treatment. The Company had $26,942,000 outstanding at March 31, 1998 from sales of receivables under this portion of the Bravo facility. The Company had $50,996,000 of indebtedness outstanding under the Bravo loan facility at March 31, 1998, and in connection with this facility, had 16 separate interest rate swap agreements with BankBoston with a total notional value of $56,771,000. In April, 1995, the Company entered into a fixed rate, fixed term loan agreement with Springfield Institution for Savings ("SIS") under which the Company borrowed approximately $3,500,000 at 9.5% subject to certain recourse and performance covenants. In July 1997, the Company entered into another fixed rate, fixed term loan agreement with SIS under which the Company borrowed an additional $3,984,000 at 8% subject to the same conditions as the first loan. The Company had $4,456,000 outstanding under these agreements at March 31, 1998. 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 amounts outstanding under the Revolver Agreement. In September 1997, the Company, along with its wholly-owned, special purpose subsidiary, HPSC Capital Funding, Inc. ("Capital"), established a $100,000,000 Lease Receivable Purchase Agreement with EagleFunding Capital Corporation ("Eagle"). Under the terms of the facility, Capital, to which the Company may sell certain of its portfolio assets from time to time, pledges or sells its interests in these assets to Eagle, a commercial paper conduit entity. Capital may borrow at variable rates in the commercial paper market and may enter into interest rate swap agreements to assure fixed rate funding. Monthly settlements of the borrowing base and any applicable principal and interest payments are made from collections of Capital's portfolio. The Company is the servicer of the Capital portfolio subject to certain covenants. The Company had $8,716,000 outstanding at March 31, 1998 from sales of receivables under the Capital facility. The Company had $81,140,000 of indebtedness outstanding under the loan facility at March 31, 1998, and in connection with this facility had 9 separate interest rate swap agreements with BankBoston with a total notional value of $83,167,000. Management believes that the Company's liquidity, resulting from the availability of credit under the Revolver, the Bravo facility, the Capital facility and the loans from SIS, along with cash obtained from the sales of its financing contracts and from internally generated revenues is adequate to meet current obligations and future projected levels of financings and to carry on normal operations. In order to finance adequately its anticipated growth, the Company will continue to seek to raise additional capital from bank and non-bank sources, make selective use of asset sale transactions and use its current credit facilities. The Company expects that it will be able to obtain additional capital at competitive rates, but there can be no assurance it will be able to do so. Inflation in the form of rising interest rates could have an adverse impact on the interest rate margins of the Company and its ability to maintain adequate earning spreads on its portfolio assets. The Company has reviewed all significant areas within its operations, including the application, underwriting and accounting management systems, for date sensitive issues after December 31, 1999 ("Year 2000 Issues"). The Company is also monitoring the progress of its major service providers. Based on this review, the Company does not anticipate any material adverse impact from Year 2000 Issues. 9 10 FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. If 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: a) Dependence on Funding Sources; Restrictive Covenants. The Company's financing activities are capital intensive. The Company's revenues and profitability are related directly to the volume of financing contracts it originates. To generate new financing contracts, the Company requires access to substantial short- and long-term credit. To date, the Company's principal sources of funding for its financing transactions have been (i) a revolving credit facility with The First National Bank of Boston (now BankBoston), as Agent, for borrowing up to $100 million (the "Revolver"), (ii) a $100 million limited recourse revolving credit facility with Capital, (iii) a $100 million limited recourse revolving credit facility with Bravo, (iv) a fixed-rate, full recourse term loan from a savings bank, (v) specific recourse sales of financing contracts to savings banks and other purchasers, (vi) $20 million in unsecured senior subordinated notes due in 2007, and (vii) the Company's internally generated revenues. There can be no assurance that the Company will be able to complete additional asset securitizations or obtain other additional financing, when needed and on acceptable terms. The Company would be adversely affected if it were unable to continue to secure sufficient and timely funding on acceptable terms. The agreement governing the Revolver (the "Revolver Agreement") contains numerous financial and operating covenants. There can be no assurance that the Company will be able to maintain compliance with these covenants, and failure to meet such covenants would result in a default under the Revolver Agreement. Moreover, the Company's financing arrangements with Bravo, Capital and the savings banks described above incorporate the covenants and default provisions of the Revolver Agreement. Thus, any default under the Revolver Agreement will also trigger defaults under these other financing arrangements. b) Securitization Recourse; Payment Restriction and Default Risk. As part of its overall funding strategy, the Company utilizes asset securitization transactions with wholly-owned, bankruptcy-remote subsidiaries to see fixed rate, matched-term financing. The Company sells financing contracts to these subsidiaries which, in turn, either pledge or sell the contracts to third parties. The third parties' recourse with regard to the pledge or sale is limited to the contracts sold to the subsidiary. If the contract portfolio of these subsidiaries does not perform within certain guidelines, the subsidiaries must retain or "trap" any monthly cash distribution to which the Company might otherwise be entitled. This restriction on cash distributions could continue until the portfolio performance returns to acceptable levels (as defined in the relevant agreements), which restriction could have a negative impact on the cash flow available to the Company. There can be no assurance that the portfolio performance would return to acceptable levels or that the payment restrictions would be removed. c) Customer Credit Risks. The Company maintains an allowance for doubtful accounts in connection with payments due under financing contracts originated by the Company (whether or not such contracts have been securitized, held as collateral for loans to the Company or, when sold, a separate recourse reserve is maintained) at a level which the Company deems sufficient to meet future estimated uncollectible receivables, based on an analysis of the delinquencies, problem accounts, and overall risks and probable losses associated with such contracts, together with a review of the Company's historical credit loss experience. There can be no assurance that this allowance or recourse reserve will prove to be adequate. Failure of the Company's customers to make scheduled payments under their financing contracts could require the Company to (i) make payments in connection with its recourse loan and asset sale transactions, (ii) lose its residual interest in any underlying equipment and (iii) forfeit collateral pledged as security for the Company's limited recourse asset securitizations. d) Competition. The Company's financing activities are highly competitive. The Company competes for customers with a number of national, regional and local finance companies, including those which, like the Company, specialize in financing for healthcare providers. In addition, the Company's competitors include those equipment manufacturers which finance the sale of lease of their products themselves, conventional leasing companies and other types of financial services companies such as commercial banks and savings and loan associations. Many of the Company's competitors and potential competitors possess substantially greater financial, marketing and operational resources than 10 11 the Company. Moreover, the Company's future profitability will be directly related to its ability to obtain capital funding at favorable funding rates as compared to the capital costs of its competitors. The Company's competitors and potential competitors include many larger, more established companies that have a lower cost of funds than the Company and access to capital markets and to their funding sources that may be unavailable to the Company. There can be no assurance that the Company will be able to continue to compete successfully in its targeted markets. e) Equipment Market Risk. The demand for the Company's equipment financing services depends upon various factors not within its control. These factors include general economic conditions, including the effects of recession or inflation, and fluctuations in supply and demand related to, among other things, (i) technological advances in and economic obsolescence of the equipment and (ii) government regulation of equipment and payment for healthcare services. The acquisition, use, maintenance and ownership of most types of medical and dental equipment, including the types of equipment financed by the Company, are affected by rapid technological changes in the healthcare field and evolving federal, state and local regulation of healthcare equipment, including regulation of the ownership and resale of such equipment. Changes in the reimbursement policies of the Medicare and Medicaid programs and other third-party payers, such as insurance companies, as well as changes in the reimbursement policies of managed care organizations, such as health maintenance organizations, may also affect demand for medical and dental equipment and, accordingly, may have a material adverse effect on the Company's business, operating results and financial condition. f) Changes in Healthcare Payment Policies. The increasing cost of medical care has brought about federal and state regulatory changes designed to limit governmental reimbursement of certain healthcare providers. These changes include the enactment of fixed-price reimbursement systems in which the rates of payment to hospitals, outpatient clinics and private individual and group practices for specific categories of care are determined in advance of treatment. Rising healthcare costs may also cause non-governmental medical insurers, such as Blue Cross and Blue Shield associations and the growing number of self-insured employers, to revise their reimbursement systems and policies governing the purchasing and leasing of medical and dental equipment. Alternative healthcare delivery systems, such as health maintenance organizations, preferred provider organizations and managed care programs, have adopted similar cost containment measures. Other proposals to reform the United States healthcare system are considered from time to time. These proposals could lead to increased government involvement in healthcare and otherwise change the operating environment for the Company's customers. Healthcare providers may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investment in medical and dental equipment. Future changes in the healthcare industry, including governmental regulation thereof, and the effect of such changes on the Company's business cannot be predicted. Changes in payment or reimbursement programs could adversely affect the ability of the Company's customers to satisfy their payment obligations to the Company and, accordingly, may have a material adverse effect on the Company's business, operating results and financial condition. g) Interest Rate Risk. Except for approximately $30 million of the Company's notes receivable contracts at March 31, 1998, which are at variable interest rates with no scheduled payments, the Company's financing contracts require the Company's customers to make payments at fixed interest rates for specified terms. However, approximately $41 million of the Company's borrowings currently are subject to a variable interest rate. Consequently, an increase in interest rates, before the Company is able to secure fixed-rate, long-term financing for such contracts or to generate higher-rate financing contracts to compensate for the increased borrowing cost, could adversely affect the Company's business, operating results and financial condition. The Company's ability to secure additional long-term financing and to generate higher-rate financing contracts is limited by many factors, including competition, market and general economic conditions and the Company's financial conditions. h) Residual Value Risk. At the inception of its equipment leasing transactions, the Company estimates what it believes will be the fair market value of the financed equipment at the end of the initial lease term and records that value (typically 10% of the initial purchase price) on its balance sheet. The Company's results of operations depend, to some degree, upon its ability to realize these residual values (as of March 31, 1998, the estimated residual value of equipment at the end of the lease term was approximately $11.8 million, representing approximately 4.8% of the Company's total assets). Realization of residual values depends on many factors, several of which are not within the Company's control, including, but not limited to, general market conditions at the time of the lease expiration; any unusual wear and tear on the equipment; the cost of comparable new equipment; the extent, if any, to which the equipment has become technologically or economically obsolete during the contract term; and the effects of any new government regulations. 11 12 If, upon the expiration of a lease contract, the Company sells or refinances the underlying equipment and the amount realize is less than the original recorded residual value for such equipment, a loss reflecting the difference will be recorded on the Company's books. Failure to realize aggregate recorded residual values could thus have an adverse effect on the Company's business, operating results and financial condition. i) Sales of Receivables. As part of the Company's portfolio management strategy and as a source of funding of its operations, the Company has sold selected pools of its lease contracts and notes receivable due in installments to a variety of savings banks, as well as the Bravo and Capital facilities. These transactions are subject to certain covenants that require the Company to (i) in the savings bank sales, repurchase financing contracts from the bank and/or make payments under certain circumstances, including the delinquency of the underlying debtor, (ii) under the Bravo and Capital facilities, a limited recourse reserve is established and (iii) service the underlying financing contracts. The Company carries a recourse reserve for each transaction and recognizes a gain that is included for accounting purposes in revenues for the year in which the transaction is completed. Each of these transactions incorporates the covenants under the Revolver as such covenants were in effect at the time the asset sale or loan agreement was entered into. Any default under the Revolver may trigger a default under the loan or asset sale agreements. The Company may enter into additional asset sale agreements in the future in order to manage its liquidity. The level of recourse reserves established by the Company in relation to these sales may not prove to be adequate. Failure of the Company to honor its repurchase and/or payment commitments under these agreements could create an event of default under the loan or asset sale agreements and under the Revolver. There can be no assurance that a continuing market can be found to sell these types of assets or that the purchase prices in the future would generate comparable gain recognition. j) Dependence on Sales Representatives. The Company is, and its growth and future revenues are, dependent in large part upon (i) the ability of the Company's sales representatives to establish new relationships, and maintain existing relationships, with equipment vendors, distributors and manufacturers and with healthcare providers and other customers and (ii) the extent to which such relationships lead equipment vendors, distributors and manufacturers to promote the Company's financing services to potential purchasers of their equipment. As of March 31, 1998, the Company had 18 field sales representatives and 12 in-house sales personnel. Although the Company is not materially dependent upon any one sales representative, the loss of a group of sales representatives could, until appropriate replacements were obtained, have a material adverse effect on the Company's business, operating results and financial condition. k) Dependence on Current Management. The operations and future success of the Company are dependent upon the continued efforts of the Company's executive officers, two of whom are also directors of the Company. The loss of the services of any of these key executives could have a material adverse effect on the Company's business, operating results and financial condition. l) Fluctuations in Quarterly Operating Results. Historically, the Company has generally experienced fluctuation in quarterly revenues and earnings caused by varying portfolio performance and operating and interest costs. Given the possibility of such fluctuations, the Company believes that quarterly comparisons of the results of its operations during any fiscal year are not necessarily meaningful and that results for any one fiscal quarter should not be relied upon as an indication of future performance. HPSC cautions the reader that the above list of risk factors may not be exhaustive. HPSC undertakes no obligation to release publicly any revisions to these forward-looking statements to reflect any future events or circumstances. 12 13 HPSC, INC. PART II. OTHER INFORMATION ITEMS 1 THROUGH 5 ARE OMITTED BECAUSE THEY ARE INAPPLICABLE. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits 10.1 1998 Stock Incentive Plan 27 Financial Data Schedule b) Reports on Form 8-K: There were no reports on Form 8-K filed during the three months ended March 31, 1998. 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. Dated: May 13, 1998 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 13 EX-10.1 2 1998 STOCK INCENTIVE PLAN 1 Appendix A HPSC, INC. 1998 STOCK INCENTIVE PLAN AS ADOPTED FEBRUARY 23, 1998 2 TABLE OF CONTENTS 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.................................................3 (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..................................................................4 (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) NON-TRANSFERABILITY....................................................7 (h) TERMINATION OF RESTRICTED STOCK AWARDS AND OPTIONS.....................8 (i) RIGHTS AS STOCKHOLDER..................................................8 (j) FORFEITURE.............................................................8 3 (k) 10% STOCKHOLDER........................................................9 (l) CONFIDENTIALITY AGREEMENTS.............................................9 (m) AGGREGATE LIMITATION...................................................9 (n) RIGHT TO TERMINATE.....................................................9 (o) DEFERRAL...............................................................9 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"............................................................12 (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 (t) "PARTICIPANT".........................................................13 -ii- 4 (u) "PERFORMANCE CONDITIONS"..............................................13 (v) "PERFORMANCE PERIOD"..................................................13 (w) "PHANTOM STOCK".......................................................13 (x) "PLAN"................................................................13 (y) "PURCHASE AUTHORIZATION"..............................................13 (z) "SERVICE".............................................................13 (aa) "SERVICE REQUIREMENT"................................................13 (bb) "SHARES".............................................................14 (cc) "SUBSIDIARY".........................................................14 13. TERMINATION OR AMENDMENT OF PLAN..........................................14 14. CHANGE IN CONTROL.........................................................14 -iii- 5 As adopted 2/23/98 HPSC, INC. 1998 STOCK INCENTIVE PLAN 1. PURPOSE; RESTRICTIONS. The purpose of this 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. 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 - ------------------- (1) Capitalized terms not otherwise defined herein are defined in Section 12 below. 6 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 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. -2- 7 (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"). 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 -3- 8 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 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 -4- 9 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 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 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, all 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. (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. -5- 10 (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) and provided, further, that each 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. 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 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 -6- 11 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 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 -7- 12 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 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. (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 -8- 13 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. (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 -9- 14 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 Compensation Accounts may be distributed on an accelerated basis in the discretion of the Committee. -10- 15 (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, 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 -11- 16 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. (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 -12- 17 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. (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. -13- 18 (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 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; -14- 19 (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 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 -15- 20 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. A Change in Control shall not occur upon the mere reincorporation of the Company in another state. -16- EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS MAR-31-1998 JAN-01-1998 MAR-31-1998 11,122 0 278,797 5,617 0 237,386 2,725 1,271 244,645 44,241 156,592 0 0 49 35,408 244,645 0 8,018 0 3,315 0 584 3,412 735 325 410 0 0 0 410 .11 .10
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