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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For fiscal year ended DECEMBER 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE ACT
OF 1934
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
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK-PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES(X) NO( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K.
YES(X) NO( )
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $24,757,585 at February 28, 2000 representing 2,912,657 shares.
The number of shares of common stock, par value $.01 per share, outstanding as
of February 28, 2000 was 4,173,230.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held April 20, 2000 (the "2000 Proxy Statement") are incorporated by reference
into Part III of this annual report on Form 10-K.
The 2000 Proxy Statement, except for the parts therein which have been
specifically incorporated by reference, shall not be deemed "filed" as part of
this annual report on Form 10-K.
Portions of the Company's 1999 Annual Report to Shareholders (the "1999 Annual
Report") are incorporated by reference into Parts I and II of this annual report
on Form 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
HPSC, Inc. ("HPSC" or the "Company") is a specialty finance company engaged
primarily in financing licensed healthcare providers throughout the United
States. The largest part of the Company's revenues comes from its financing of
healthcare equipment and financing of the purchase of healthcare practices. The
Company has over 20 years experience as a provider of financing to healthcare
professionals in the United States. Through its subsidiary, American Commercial
Finance Corporation ("ACFC"), the Company also provides asset-based lending to
commercial and industrial businesses, principally in the eastern United States.
HPSC provides financing for equipment and other practice-related expenses to the
dental, ophthalmic, general medical, chiropractic and veterinary professions. At
December 31, 1999, on a consolidated basis, approximately 91% of the Company's
portfolio was comprised of financing to licensed professionals, including both
equipment financing and other non-equipment financing, such as practice finance,
leasehold improvements, office furniture, working capital and supplies.
Approximately 9% of the portfolio was asset-based lending to commercial and
industrial businesses. HPSC principally competes in the portion of the
healthcare finance market where the size of the transaction is $250,000 or less,
sometimes referred to as the "small-ticket" market. The average size of the
Company's financing transactions in 1999 was approximately $35,000. In
connection with its equipment financing, the Company enters into noncancellable
finance agreements and/or lease contracts, which provide for a full payout at a
fixed interest rate over a term of one to seven years. The Company markets its
financing services to healthcare providers in a number of ways, including direct
marketing through trade shows, conventions and advertising, through its sales
staff with 22 offices in 13 states and through cooperative arrangements with
equipment vendors.
At December 31, 1999, HPSC's gross outstanding owned and managed leases and
notes receivable to licensed professionals, excluding asset-based lending, were
approximately $524 million, consisting of approximately 17,000 active contracts.
HPSC's financing contract originations in 1999, excluding asset-based lending,
were approximately $208 million compared to approximately $159 million in 1998,
an increase of 31%, which compared to financing contract originations of
approximately $129 million in 1997.
ACFC, the Company's wholly-owned subsidiary, provides asset-based financing,
principally in the eastern United States, to commercial and industrial companies
which generally cannot readily obtain traditional bank financing. The ACFC loan
portfolio generally provides the Company with a greater spread over its
borrowing costs than the Company can achieve in its financing business to
licensed professionals. ACFC's originations of new lines of credit in 1999 were
approximately $18 million compared to approximately $23 million in 1998, a
decrease of 22%, which compared to line of credit originations of approximately
$25 million in 1997.
The continuing increase in the Company's originations of financing contracts and
lines of credit helped contribute to a 20% increase in the Company's net
revenues for fiscal year 1999 as compared with fiscal year 1998, and a 37%
increase in the Company's net revenues for fiscal year 1998 compared with fiscal
year 1997. This percentage change in revenues differs from the percentage change
in originations because revenues consist of earned income on leases and notes,
which is a function of the amount of net investment in leases and notes and the
level of interest rates. Earned income is recognized over the life of the
financing contract while originations are recognized at the time of inception.
BUSINESS STRATEGY
The Company's strategy is to expand its business and enhance its profitability
by (i) maintaining its share of the dental equipment market and increasing its
share of the other medical equipment financing markets; (ii) diversifying the
Company's revenue stream through its asset-based lending businesses; (iii)
emphasizing service to vendors and customers; (iv) increasing its direct sales
and other marketing efforts; (v) maintaining and increasing its access to
low-cost capital and managing interest rate risks; (vi) continuing to manage
effectively its credit risks; and (vii) capitalizing on information technology
to increase productivity and enable the Company to manage a higher volume of
financing transactions.
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INDUSTRY OVERVIEW
The equipment financing industry in the United States includes a wide variety of
sources for financing the purchase or lease of equipment, ranging from specialty
financing companies, which concentrate on a particular industry or financing
vehicle, to large banking institutions, which offer a full array of financial
services.
The medical equipment finance industry includes two distinct markets which are
generally differentiated based on equipment price and type of healthcare
provider. The first market, in which the Company currently does not compete, is
financing of equipment priced at over $250,000, which is typically sold to
hospitals and other institutional purchasers. Because of the size of the
purchase, long sales cycle, and number of financing alternatives available to
these types of customers, their choice among financing alternatives tends to be
based primarily on cost of financing. The second market, in which the Company
does compete, is the financing of lower-priced or "small-ticket" equipment,
where the price of the financed equipment is $250,000 or less. Much of this
equipment is sold to individual practitioners or small group practices,
including dentists, ophthalmologists, physicians, chiropractors, veterinarians
and other healthcare providers. The Company focuses on the small-ticket market
because it is able to respond in a prompt and flexible manner to the needs of
individual customers. Management believes that purchasers in the small-ticket
healthcare equipment market often seek the value-added sales support and ease of
conducting business that the Company offers.
The length of the Company's lease agreements and notes due in installments
ranges from 12 to 84 months, with a median term of 60 months and an average
initial term of 55 months.
Although the Company has focused its business in the past on equipment financing
to licensed professionals, it continues to expand into practice finance.
Practice finance is a specialized segment of the finance industry, in which the
Company's primary competitors are banks. Practice finance is a relatively new
business opportunity for financing companies such as HPSC which has developed as
the sale of healthcare professional practices has increased. HPSC may finance up
to 100% of the cost of the practice being purchased. A practice finance
transaction typically takes the form of a loan to a healthcare provider
purchasing a practice, which is secured by the assets of the practice being
purchased and may also be secured by one or more personal guarantees and
personal assets. The average original size of a practice finance transaction was
approximately $150,000 in 1999, with a typical repayment term of 72 to 84
months.
HEALTHCARE PROVIDER FINANCING
Terms and Conditions
The Company's business consists primarily of the origination of equipment
financing contracts pursuant to which the Company finances healthcare providers'
acquisition of various types of equipment as well as leasehold improvements,
working capital and supplies. The contracts are either finance agreements
(notes) or lease agreements, and are non-cancelable. The contracts are full
payout contracts and provide for scheduled payments sufficient, in the
aggregate, to cover the Company's costs, and to provide the Company with an
appropriate profit margin. The Company provides its leasing customers with an
option to purchase the equipment at the end of the lease for generally 10% of
its original cost. Historically, the vast majority of all lessees have exercised
this option. The length of the Company's lease agreements and finance agreements
range from 12 to 84 months, with a weighted average original term of 55 months
for the year ended December 31, 1999.
All of the Company's equipment financing contracts require the customer to: (i)
maintain, service and operate the equipment in accordance with the
manufacturer's and government-mandated procedures, and (ii) make all scheduled
contract payments regardless of the performance of the equipment. Substantially
all of the Company's financing contracts provide for principal and interest
payments due monthly for the term of the contract. In the event of default by a
customer, the financing contract provides that the Company has the rights
afforded creditors under law, including the right to repossess the underlying
equipment and in the case of the legal proceeding arising from a default, to
recover damages and attorneys' fees. The Company's equipment financing contracts
provide for late fees and service charges to be applied on payments which are
overdue.
Although the customer has the full benefit of the equipment manufacturers'
warranties with respect to the equipment it finances, the Company makes no
warranties to its customers as to the equipment. In addition, the financing
contract obligates the customer to continue to make contract payments regardless
of any defects in the equipment. Under a financing agreement (note), the
customer holds title to the equipment and the Company has a lien on the
equipment to secure the loan; under a lease, the Company
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retains title to the equipment. The Company has the right to assign any
financing contract without the consent of the customer.
Since 1994, the Company has originated a total of approximately 850 practice
finance loans aggregating approximately $100 million in financings. The terms of
such loans generally range from 72 to 84 months. In 1999, practice finance
generated approximately 17% of HPSC's total amount of originations. Management
believes that its practice finance business contributes to the diversification
of the Company's revenue sources and earns HPSC substantial goodwill among
healthcare providers. All practice finance inquiries received at the Company's
sales offices, or by its salespersons in the field, are referred to the Boston
office for processing.
The Company solicits business for its practice finance services primarily by
advertising in trade magazines, attending healthcare conventions, practice
brokers, and directly approaching potential purchasers of healthcare practices.
Over half of the healthcare practices financed by the Company to date have been
dental practices. The Company has also financed the purchase of practices by
chiropractors, ophthalmologists, general medical practitioners and
veterinarians.
Customers
The primary customers for the Company's financing contracts are healthcare
providers, including dentists, ophthalmologists, other physicians, chiropractors
and veterinarians. As of December 31, 1999, no single customer (or group of
affiliated customers) accounted for more than 1% of the Company's healthcare
finance portfolio. The Company's customers are located throughout the United
States, but primarily in heavily populated states such as California, Florida,
Texas, Illinois and New York.
Realization of Residual Values on Equipment Leases
Historically, the Company has realized over 99% of the residual value of
equipment covered by leases. The overall growth in the Company's equipment lease
portfolio in recent years has resulted in increases in the aggregate amount of
recorded residual values. Substantially all of the residual values on the
Company's balance sheet as of December 31, 1999 are attributable to leases which
will expire by the end of 2006. Realization of such residual values depends on
factors not entirely within the Company's control, such as the condition of the
equipment, the cost of comparable new equipment and the technological or
economic obsolescence of the equipment. Although the Company has received over
99% of recorded residual values for leases which expired during the last three
years, there can be no assurance that this realization rate will be maintained.
Government Regulation and Healthcare Trends
The majority of the Company's present customers are healthcare providers. The
healthcare industry is subject to substantial federal, state and local
regulation. In particular, the federal and state governments have enacted laws
and regulations designed to control healthcare costs, including mandated
reductions in fees for the use of certain medical equipment and the enactment of
fixed-price reimbursement systems, where the rates of payment to healthcare
providers for particular types of care are fixed in advance of actual treatment.
Major changes have occurred in the United States healthcare delivery system,
including the formation of integrated patient care networks (often involving
joint ventures between hospitals and physician groups), as well as the grouping
of healthcare consumers into managed-care organizations sponsored by insurance
companies and other third parties. Moreover, state healthcare initiatives have
significantly affected the financing and structure of the healthcare delivery
system. These changes have not yet had a material effect on the Company's
business, but the effect of any changes on the Company's future business cannot
be predicted.
ASSET-BASED LENDING
ACFC makes asset-based loans of generally $5 million or less to commercial and
industrial companies, primarily secured by accounts receivable, inventory and
equipment. ACFC typically makes accounts receivable loans to borrowers in a
variety of industries that cannot obtain traditional bank financing. ACFC takes
a security interest in all of the borrower's assets and monitors collection of
its receivable. Advances on a revolving loan generally do not exceed 80% of the
borrower's eligible accounts receivable. ACFC also makes revolving and "term
like" inventory loans not exceeding 50% of the value of the customer's active
inventory, valued at the lower of cost or market value. In addition, ACFC
provides term financing for equipment, which is secured by the machinery and
equipment of the borrower.
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The average ACFC loan is for a term of two to three years. No single borrower
accounts for more than 11% of ACFC's aggregate portfolio, and no more than 11%
of ACFC's portfolio is concentrated in any single industry.
ACFC's loans are "fully followed," which means that ACFC receives daily
settlement statements of its borrowers' accounts receivable. ACFC participates
in the collection of its borrowers' accounts receivable and requires that
payments be made directly to an ACFC lock-box account. Availability under lines
of credit is usually calculated daily. ACFC's credit committee, which includes
members of senior management of HPSC, must approve all ACFC loans in advance.
Each of ACFC's officers has over ten years of experience providing these types
of financing.
From its inception through December 31, 1999, ACFC has provided 66 lines of
credit totaling approximately $88 million and currently has approximately $32
million of loans outstanding to 40 borrowers. The annual dollar volume of
originations of new lines of credit by ACFC was $5.0 million in 1994, $12.1
million in 1995, $17.6 million in 1996, $24.8 million in 1997, $23.1 million in
1998 and $18.2 million in 1999.
CREDIT AND ADMINISTRATIVE PROCEDURES
The Company processes all credit applications, and monitors all existing
contracts at its corporate headquarters in Boston, Massachusetts (other than
ACFC applications and contracts, all of which are processed at ACFC's
headquarters in West Hartford, Connecticut). The Company's credit procedures
require the review, verification and approval of a potential customer's credit
file, accurate and complete documentation, delivery of the equipment and
verification of installation by the customer, and correct invoicing by the
vendor. The type and amount of information and time required for a credit
decision varies according to the nature, size and complexity of each
transaction. In smaller, less complicated transactions, a decision can often be
reached within one hour; more complicated transactions may require up to three
or four days. Once the equipment is shipped and installed, the vendor invoices
the Company. The Company verifies that the customer has received and accepted
the equipment and obtains the customer's authorization to pay the vendor.
Following this telephone verification, the file is forwarded to the accounting
department for audit, booking and funding and to commence automated billing and
transaction accounting procedures.
Timely and accurate vendor payments are essential to the Company's business. In
order to maintain its relationships with existing vendors and attract new
vendors, the Company generally makes payments to vendors for financing
transactions within one day of authorization to pay from the customer.
ACFC's underwriting procedures include an evaluation of the collectibility of
the borrower's receivables that are pledged to ACFC, including an evaluation of
the validity of such receivables and the creditworthiness of the payors of such
receivables. ACFC may also require its customers to pay for credit insurance
with respect to its loans. The Loan Administration Officer of ACFC is
responsible for maintaining lending standards and for monitoring loans and
underlying collateral. Before approving a loan, ACFC examines the prospective
customer's books and records and continues to make such examinations and to
monitor its customer's operations as it deems necessary during the term of the
loan. Loan officers are required to rate the risk of each loan made by ACFC and
to update the rating upon receipt of any financial statement from the customer
or when 90 days have elapsed since the date of the last rating.
The Company's finance portfolio consists of two general categories of assets:
The first category of assets consists of the Company's lease contracts and notes
receivable due in installments, which comprise approximately 89% of the
Company's net investment in leases and notes at December 31, 1999 (87% at
December 31, 1998). Substantially all of such contracts and notes are due from
licensed medical professionals who practice in individual or small group
practices. These contracts and notes are at fixed interest rates and have terms
ranging from 12 to 84 months. The Company believes that leases and notes entered
into with medical professionals are generally "small-ticket," homogeneous
transactions with similar risk characteristics. Except for the amounts described
in the following paragraph related to asset-based lending, substantially all of
the Company's historical provision for losses, charge-offs, recoveries and
allowance for losses have related to its lease contracts and notes due in
installments.
The second category of assets consists of the Company's notes receivable, which
comprise approximately 11% of the Company's net investment in leases and notes
at December 31, 1999 (13% at December 31, 1998). These notes receivable
primarily relate to commercial asset-based, revolving lines of credit to small
and medium sized manufacturers and distributors, at variable interest rates, and
typically have terms of two to three years. The Company began commercial lending
activities in mid-1994. Through December 31, 1999, the Company has had
charge-offs of commercial notes receivable of $113,000. The provision for losses
related to the commercial notes receivable were $113,000, $147,000 and $236,000
in 1999, 1998 and 1997, respectively. The
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amount of the allowance for losses related to the commercial notes receivable
was $686,000 and $592,000 at December 31, 1999 and 1998, respectively.
ALLOWANCE FOR LOSSES AND CHARGE-OFFS
The Company maintains an allowance for losses in connection with equipment
financing contracts and other loans held in the Company's portfolio at a level
which the Company deems sufficient to meet future estimated uncollectible
receivables, based on an analysis of delinquencies, problem accounts, overall
risks and probable losses associated with such contracts, and a review of the
Company's historical loss experience. At December 31, 1999, this allowance for
losses was 2.5% of the Company's net investment in leases and notes (before
allowance). There can be no assurance that this allowance will prove to be
adequate. Failure of the Company's customers to make scheduled payments under
their financing contracts could require the Company to (i) make payments in
connection with the recourse portion of its borrowing relating to such contract,
(ii) forfeit its residual interest in any underlying equipment or (iii) forfeit
cash collateral pledged as security for the Company's asset securitizations. In
addition, although net charge-offs on the financing portfolio of the Company
were less than 1% of the Company's average net investment in leases and notes
(before allowance) for the year ended December 31, 1999, any increase in such
losses or in the rate of payment defaults under the financing contracts
originated by the Company could adversely affect the Company's ability to obtain
additional funding, including its ability to complete additional asset
securitizations.
The Company's receivables are subject to credit risk. To manage this risk, the
Company has adopted underwriting policies that are closely monitored by
management. Additionally, certain of the Company's leases and notes receivable,
which have been sold under certain sales agreements, are subject to recourse and
estimated losses are provided for by the Company. Accounts are normally charged
off when future payments are deemed unlikely.
A summary of activity in the Company's allowance for losses for each of the
years in the three-year period ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $(7,350) $(5,541) $(4,562)
Provision for losses ..... (4,489) (4,201) (2,194)
Charge-offs .............. 2,853 2,498 1,304
Recoveries ............... (164) (106) (89)
------- ------- -------
Balance, end of year ..... $(9,150) $(7,350) $(5,541)
======= ======= =======
</TABLE>
The total contractual balances of delinquent lease contracts and notes
receivable due in installments, both owned by the Company and owned by others
and managed by the Company, over 90 days past due was $15,928,000 at December
31, 1999 compared to $9,967,000 at December 31, 1998. An account is considered
delinquent when not paid within 30 days of the billing due date.
FUNDING SOURCES
General
The Company's principal sources of funding for its financing transactions have
been: (i) a revolving loan agreement with BankBoston as managing agent providing
borrowing availability of up to $90 million (the "Revolver"), (ii) securitized
limited recourse revolving credit facilities with wholly-owned, special-purpose
subsidiaries of the Company, HPSC Bravo Funding Corp. ("Bravo") and HPSC Capital
Funding, Inc. ("Capital"), currently in the aggregate amount of $350 million,
(iii) defined recourse fixed-term loans and sales of financing contracts with
savings banks and other purchasers and (iv) the Company's internally generated
revenues. Management believes that the Company's liquidity is adequate to meet
current obligations and future projected levels of financings and to carry on
normal operations.
Information about the Revolver, the securitization facilities and other funding
sources referred to in the previous paragraph is incorporated by reference from
Notes C and D of the "Notes to Consolidated Financial Statements" at pages 11
through 13 and "Management's Discussion and Analysis of Financial Condition" at
pages 28 through 30 of the 1999 Annual Report.
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INFORMATION TECHNOLOGY
The Company has developed automated information systems and telecommunications
capabilities to support all areas within the organization. Systems support is
provided for accounting, taxes, credit, collections, operations, sales, sales
support and marketing. The Company has invested a significant amount of time and
capital in computer hardware and proprietary software. The Company's
computerized systems provide management with accurate and up-to-date customer
data which strengthens its internal controls and assists in forecasting.
The Company contracts with an outside consulting firm to provide information
technology services and has developed its own customized computer software. The
Company's Boston office is linked electronically with all of the Company's other
offices. Each salesperson's laptop computer may also be linked to the computer
systems in the Boston office, permitting a salesperson to respond to a
customer's financing request, or a vendor's informational request, almost
immediately. Management believes that its investment in technology has
positioned the Company to manage increased equipment financing volume.
The Company's centralized data processing system provides timely support for the
marketing and service efforts of its salespeople and for equipment manufacturers
and dealers. The system permits the Company to generate collection histories,
vendor analysis, customer reports and credit histories and other data useful in
servicing customers and equipment suppliers. The system is also used for
financial and tax reporting purposes, internal controls, personnel training and
management. The Company recently introduced an interactive web site offering its
customers real-time responses to credit inquiries, advanced functionality and
services, and industry specific informational content. The Company believes that
its systems give it a competitive advantage based on the speed of its contract
processing, control over credit risk and high level of service.
COMPETITION
Healthcare provider financing and asset-based lending are highly competitive
businesses. The Company competes for customers with a number of national,
regional and local finance companies, including those which, like the Company,
specialize in financing for healthcare providers. In addition, the Company's
competitors include those equipment manufacturers which finance the sale or
lease of their own products, conventional leasing companies and other types of
financial services companies such as commercial banks and savings and loan
associations. Although the Company believes that it currently has a competitive
advantage based on its customer-oriented financing and value-added services,
many of the Company's competitors and potential competitors possess
substantially greater financial, marketing and operational resources than the
Company. Moreover, the Company's future profitability will be directly related
to the Company's ability to obtain capital funding at favorable rates as
compared to the capital costs of its competitors. The Company's competitors and
potential competitors include many larger companies that have a lower cost of
funds than the Company and access to capital markets and to other funding
sources which may be unavailable to the Company. The Company's ability to
compete effectively for profitable equipment financing business will continue to
depend upon its ability to procure funding on attractive terms, to develop and
maintain good relations with new and existing equipment suppliers, and to
attract additional customers.
Historically, the Company's equipment finance business has concentrated on
leasing small-ticket dental, medical and office equipment. In the future, the
Company may finance more expensive equipment than it has in the past. As it does
so, the Company's competition can be expected to increase. In addition, the
Company may face greater competition with its expansion into the practice
finance and asset-based lending markets.
EMPLOYEES
At December 31, 1999, the Company had 117 full-time employees, 18 of whom work
for ACFC, and none of whom was represented by a labor union. Management believes
that the Company's employee relations are good.
Item 2. PROPERTIES
The Company leases approximately 13,887 square feet of office space at 60 State
Street, Boston, Massachusetts for approximately $34,000 per month. This lease
expires on June 30, 2004 with a five-year extension option. ACFC leases
approximately 4,101 square feet at 433 South Main Street, West Hartford,
Connecticut for approximately $6,047 per month. This lease expires on August 31,
2001 with a three-year extension option. The Company's total rent expense for
1999 under all operating leases was $748,000. The Company also rents space as
required for its sales locations on a shorter-term basis. The Company believes
that its facilities are adequate for its current operations and for the
foreseeable future.
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Item 3. LEGAL PROCEEDINGS
Although the Company is from time to time subject to actions or claims for
damages in the ordinary course of its business and engages in collection
proceedings with respect to delinquent accounts, the Company is aware of no such
actions, claims, or proceedings currently pending or threatened that are
expected to have a material adverse effect on the Company's business, operating
results or financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of HPSC is traded on the NASDAQ National Market System. The
high and low prices for the common stock as reported by NASDAQ for each quarter
in the last two fiscal years, as well as the approximate number of record
holders and information with respect to dividend restrictions, are incorporated
by reference from page 24 of the 1999 Annual Report.
The Company neither issued nor sold equity securities during the period covered
by this annual report on Form 10-K other than shares covered by employee and
director compensation plans.
Item 6. SELECTED FINANCIAL DATA
Selected financial data for each of the periods in the five year period ended
December 31, 1999 is incorporated by reference from page 25 of the 1999 Annual
Report.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is incorporated by reference from the
section captioned "Management's Discussion and Analysis of Financial Condition"
on pages 26 through 31 of the 1999 Annual Report.
Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Discussion regarding Quantitative and Qualitative Disclosures About Market Risk
is included in "Management's Discussion and Analysis of Financial Condition" at
pages 30 and 31 of the 1999 Annual Report.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Discussions containing such
forward-looking statements may be found in the material set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections of this Form 10-K, as well as within the
annual report generally. When used in this annual report, the words "believes,"
"anticipates," "expects," "plans," "intends," "estimates," "continue," "could,"
"may" or "will" (or the negative of such words) and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
a number of risks and uncertainties. Actual results in the future could differ
materially from those described in the forward-looking statements as a result of
the risk considerations set forth below under the heading "Certain
Considerations" and the matters set forth in this annual report generally. HPSC
cautions the reader, however, that such list of considerations may not be
exhaustive. HPSC undertakes no obligation to release publicly the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
CERTAIN CONSIDERATIONS
Dependence on Funding Sources; Restrictive Covenants. The Company's financing
activities are capital intensive. The Company's
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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 BankBoston, as Agent, for borrowing up to
$90 million (the "Revolver"), (ii) $350 million in limited recourse revolving
credit facilities with Bravo and Capital, (iii) fixed-rate, full recourse term
loans from several savings banks, (iv) specific recourse sales of financing
contracts to savings banks and other purchasers, (v) the issuance of
Subordinated Debt in 1997 and (vi) the Company's internally generated revenues.
The Company's Revolver provides availability through May 2000 at which time the
Company plans to renew the facility for another year. However, there can be no
assurance that it will be able to renew or extend the Revolver or to complete
additional asset securitizations or to obtain other additional financing when
needed and on acceptable terms. The Company would be adversely affected if it
were unable to continue to secure sufficient and timely funding on acceptable
terms. The agreement governing the Revolver (the "Revolver Agreement") contains
numerous financial and operating covenants. There can be no assurance that the
Company will be able to maintain compliance with these covenants, and failure to
meet such covenants would result in a default under the Revolver Agreement.
Moreover, the Company's financing arrangements with Bravo and 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. In addition, the
Indenture, dated March 20, 1997, between the Company and State Street Bank and
Trust Company, as Trustee, relating to the Company's Subordinated Debt, contains
certain covenants that could restrict the Company's access to funding.
Securitization Recourse; Payment Restriction and Default Risk. As part of its
overall funding strategy, the Company utilizes asset securitization transactions
with wholly-owned, bankruptcy-remote subsidiaries to seek fixed rate,
matched-term financing. The Company transfers 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.
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 sold) 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
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 or (iii) forfeit
collateral pledged as security for the Company's limited recourse asset
securitizations. In addition, although the charge-offs on the portfolio of the
Company were less than 1% of the Company's average net investment in leases and
notes for 1999, any increase in such losses or in the rate of payment defaults
under the financing contracts originated by the Company could adversely affect
the Company's ability to obtain additional financing, including its ability to
complete additional asset securitizations and secured asset sales or loans.
There can be no assurance that the Company will be able to maintain or reduce
its current level of credit losses.
Competition. The Company operates in highly competitive markets. The Company
competes for customers with a number of national, regional and local finance
companies, including those which, like the Company, specialize in financing for
healthcare providers. In addition, the Company's competitors include those
equipment manufacturers which finance the sale or lease of their products
themselves, conventional leasing companies and other types of financial services
companies such as commercial banks and savings and loan associations. Many of
the Company's competitors and potential competitors possess substantially
greater financial, marketing and operational resources than the Company.
Moreover, the Company's future profitability will be directly related to its
ability to obtain capital funding at favorable funding rates as compared to the
capital costs of its competitors. The Company's competitors and potential
competitors include many larger, more established companies that have a lower
cost of funds than the Company and access to capital markets and to other
funding sources that may be unavailable to the Company. There can be no
assurance that the Company will be able to continue to compete successfully in
its targeted markets.
Equipment Market Risk. The demand for the Company's equipment financing services
depends upon various factors not within its control. These factors include
general economic conditions, including the effects of recession or inflation,
and fluctuations in supply and demand related to, among other things, (i)
technological advances in and economic obsolescence of the equipment and
10
<PAGE> 11
(ii) government regulation of equipment and payment for healthcare services.
Changes in the reimbursement policies of the Medicare and Medicaid programs and
other third-party payors, such as insurance companies, as well as changes in the
reimbursement policies of managed care organizations, such as health maintenance
organizations, may also affect demand for medical and dental equipment and,
accordingly, may have a material adverse effect on the Company's business,
operating results and financial condition.
Changes in Healthcare Payment Policies. The increasing cost of medical care has
brought about federal and state regulatory changes designed to limit
governmental reimbursement of certain healthcare providers. These changes
include the enactment of fixed-price reimbursement systems in which the rates of
payment to hospitals, outpatient clinics and private individual and group
practices for specific categories of care are determined in advance of
treatment. Rising healthcare costs may also cause non-governmental medical
insurers, such as Blue Cross and Blue Shield associations and the growing number
of self-insured employers, to revise their reimbursement systems and policies
governing the purchasing and leasing of medical and dental equipment.
Alternative healthcare delivery systems, such as health maintenance
organizations, preferred provider organizations and managed care programs, have
adopted similar cost containment measures. Other proposals to reform the United
States healthcare system are considered from time to time. These proposals could
lead to increased government involvement in healthcare and otherwise change the
operating environment for the Company's customers. Healthcare providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investment in medical and dental equipment. Future
changes in the healthcare industry, including governmental regulation thereof,
and the effect of such changes on the Company's business cannot be predicted.
Changes in payment or reimbursement programs could adversely affect the ability
of the Company's customers to satisfy their payment obligations to the Company
and, accordingly, may have a material adverse effect on the Company's business,
operating results and financial condition.
Interest Rate Risk. Except for approximately $32 million of the Company's
financing contracts, which are at variable interest rates with no scheduled
payments, the Company's financing contracts require the Company's customers to
make payments at fixed interest rates for specified terms. However,
approximately $70 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 at favorable rates and to generate higher-rate financing contracts is
limited by many factors, including competition, market and general economic
conditions and the Company's financial condition.
Residual Value Risk. At the inception of its equipment leasing transactions, the
Company estimates what it believes will be the fair market value of the financed
equipment at the end of the initial lease term and records that value (typically
10% of the initial purchase price) on its balance sheet. The Company's results
of operations depend, to some degree, upon its ability to realize these residual
values (as of December 31, 1999, the estimated residual value of equipment at
the end of the lease term was approximately $18 million, representing
approximately 5% of the Company's total assets). Realization of residual values
depends on many factors, several of which are not within the Company's control,
including, but not limited to, general market conditions at the time of the
lease expiration; any unusual wear and tear on the equipment; the cost of
comparable new equipment; the extent, if any, to which the equipment has become
technologically or economically obsolete during the contract term; and the
effects of any new government regulations. If, upon the expiration of a lease
contract, the Company sells or refinances the underlying equipment and the
amount realized is less than the original recorded residual value for such
equipment, a loss reflecting the difference will be recorded on the Company's
books. Failure to realize aggregate recorded residual values could thus have an
adverse effect on the Company's business, operating results and financial
condition.
Sales of Receivables. As part of the Company's portfolio management strategy and
as a source of funding of its operations, the Company has sold selected pools of
its lease contracts and notes receivable due in installments to a variety of
savings banks and as part of both the Bravo and Capital securitization
facilities. Each of these transactions is subject to certain covenants that
require the Company to (i) repurchase financing contracts from the bank and/or
make payments under certain circumstances, including the delinquency of the
underlying debtor, and (ii) service the underlying financing contracts. The
Company carries a reserve for each transaction in its allowance for losses and
recognizes a gain that is included for accounting purposes in net 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 consummated. Any default under
the Revolver may trigger a default under the savings bank agreements. The
Company may enter into additional asset sale agreements in the future in order
to manage its liquidity. The level of reserves established by the Company in
relation to these sales may not prove to be adequate.
11
<PAGE> 12
Failure of the Company to honor its repurchase and/or payment commitments under
these agreements is an event of default under the loan or asset sale agreements
and under the Revolver. There can be no assurance that the Company will be able
to continue to sell its lease contracts and notes receivable or that the sales
in the future will generate gain recognition that is comparable to that
recognized in the past.
Dependence on Sales Representatives. The Company is, and its growth and future
revenues are, dependent in a large part upon (i.) the ability of the Company's
sales representatives to establish new relationships, and maintain existing
relationships, with equipment vendors, distributors and manufacturers and with
healthcare providers and other customers and (ii.) the extent to which such
relationships lead equipment vendors, distributors and manufacturers to promote
the Company's financing services to potential purchasers of their equipment. As
of December 31, 1999, the Company had 23 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.
Dependence on Current Management. The operations and future success of the
Company are dependent upon the continued efforts of the Company's executive
officers, two of whom are also directors of the Company. The loss of the
services of any of these key executives could have a material adverse effect on
the Company's business, operating results and financial condition.
Fluctuations in Quarterly Operating Results. Historically, the Company has
generally experienced fluctuating quarterly revenues and earnings caused by
varying portfolio performance and operating and interest costs. Given the
possibility of such fluctuations, the Company believes that quarterly
comparisons of the results of its operations during any fiscal year are not
necessarily meaningful and that results for any one fiscal quarter should not be
relied upon as an indication of future performance.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item together with the Independent Auditors'
Report is incorporated by reference from pages 4 through 23 of the 1999 Annual
Report. (See also the "Financial Statement Schedule" filed under Item 14 of this
Form 10-K.)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
sections captioned "PROPOSAL ONE -- ELECTION OF DIRECTORS -- Nominees for Class
II Directors," " - Members of the Board of Directors Continuing in Office" and
"- Other Executive Officers" and "VOTING SECURITIES - Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2000 Proxy Statement filed on March 20,
2000.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
sections captioned "EXECUTIVE COMPENSATION - Summary Compensation Table,"
" - Stock Loan Program," " - Supplemental Executive Retirement Plan," " - Option
Grants in Last Fiscal Year," " - Aggregated Option Exercises and Year-End Option
Values," " - Employment Agreements, Termination of Employment and Change in
Control Arrangements" and " - Compensation of Directors" in the 2000 Proxy
Statement filed on March 20, 2000.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
section captioned "VOTING SECURITIES -- Share Ownership of Certain Beneficial
Owners and Management" in the 2000 Proxy Statement filed on March 20, 2000.
12
<PAGE> 13
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section captioned "VOTING SECURITIES - Certain Transactions" in the 2000 Proxy
Statement filed on March 20, 2000.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE NUMBER IN
(a) 1. FINANCIAL STATEMENTS 1999 ANNUAL REPORT
-------------------- ------------------
<S> <C>
Incorporated by reference from the Company's Annual Report to Stockholders for
the fiscal year ended December 31, 1999
Consolidated Balance Sheets at December 31, 1999 and December 31, 1998 4
Consolidated Statements of Operations for each of the three years in the period ended
December 31, 1999 5
Consolidated Statements of Changes in Stockholders' Equity for each of the three years in
the period ended December 31, 1999 6
Consolidated Statements of Cash Flows for each of the three years in the period ended
December 31, 1999 7
Independent Auditors' Report 23
</TABLE>
(a)2. FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules have been omitted because of the absence of
conditions under which they are required or because the required information is
given in the consolidated financial statements or notes thereto.
(a)3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS
NO. TITLE METHOD OF FILING
<S> <C> <C>
3.1 Restated Certificate of Incorporation of HPSC, Inc. Incorporated by reference to Exhibit 3.1 to HPSC's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1995.
3.2 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.2 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year
September 14, 1987 ended December 31, 1995.
3.3 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.3 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year
May 22, 1995 ended December 31, 1995.
3.4 Amended and Restated By-Laws Incorporated by reference to Exhibit 3.1 to HPSC's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
</TABLE>
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<PAGE> 14
<TABLE>
<S> <C> <C>
4.1 Amended and Restated Rights Agreement dated as of Incorporated by reference to Exhibit 4.1 to HPSC's
September 16, 1999 between the Company and The First Current Report on Form 8-K filed November 5, 1999.
National Bank of Boston, N.A.
10.1 Lease dated as of March 8, 1994 between the Trustees Incorporated by reference to Exhibit 10.1 to HPSC's
of 60 State Street Trust and HPSC, Inc., dated Annual Report on Form 10-K for the fiscal year
September 10, 1970 and relating to the principal ended December 31, 1994
executive offices of HPSC, Inc. at 60 State Street,
Boston, Massachusetts
10.2 Second Amendment, dated May 1998, to Lease dated as Filed herewith
of March 8, 1994 between the Trustees of 60 State
Street Trust and HPSC, Inc., dated September 10,
1970 and relating to the principal executive offices
of HPSC, Inc. at 60 State Street, Boston,
Massachusetts
*10.3 HPSC, Inc. Stock Option Plan, dated March 5, 1986 Incorporated by reference to Exhibit 10.6 to HPSC's
Annual Report on Form 10-K for the fiscal year
ended December 20, 1989
*10.4 Employment Agreement between the Company and John W. Filed herewith
Everets dated as of July 19, 1999
*10.5 Employment Agreement between the Company and Raymond Filed herewith
R. Doherty dated as of August 2, 1999
*10.6 Employment Agreement between HPSC, Inc. and Rene Incorporated by reference to Exhibit 10.2 to HPSC's
Lefebvre dated April 23, 1998 Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998
*10.7 HPSC, Inc. Employee Stock Ownership Plan Agreement Incorporated by reference to Exhibit 10.9 to HPSC's
dated December 22, 1993 between HPSC, Inc. and John Annual Report on Form 10-K for the fiscal year
W. Everets and Raymond R Doherty, as trustees ended December 25, 1993
*10.8 First Amendment effective January 1, 1993 to HPSC, Incorporated by reference to Exhibit 10.2 to HPSC's
Inc. Employee Stock Ownership Plan Quarterly Report on Form 10-K for the quarter ended
June 25, 1994
*10.9 Second Amendment effective January 1, 1994 to HPSC, Incorporated by reference to Exhibit 10.11 to HPSC's
Inc. Employee Stock Ownership Plan Annual Report on Form 10-K for the fiscal year
ended December 31, 1994
*10.10 Third Amendment effective January 1, 1993 to HPSC, Incorporated by reference to Exhibit 10.12 to HPSC's
Inc. Employee Stock Ownership Plan Annual Report on Form 10-K for the fiscal year
ended December 31, 1994
*10.11 HPSC, Inc. 1994 Stock Plan dated as of March 23, Incorporated by reference to Exhibit 10.4 to HPSC's
1994 and related forms of Nonqualified Option Grant Quarterly Report on Form 10-Q for the quarter
and Option Exercise Form ended June 25, 1994
*10.12 HPSC, Inc. Supplemental Executive Retirement Plan Incorporated by reference to Exhibit 10.12 to HPSC's
dated as of January 1, 1997 Annual Report on Form 10-K for the fiscal year
ended December 31, 1997
*10.13 First Amendment dated March 15, 1999 to HPSC, Inc. Incorporated by reference to Exhibit 10.12 to HPSC's
Supplemental Executive Retirement Plan dated as of Annual Report on Form 10-K for the fiscal year ended
December 31, 1998
</TABLE>
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<PAGE> 15
<TABLE>
<S> <C> <C>
*10.14 Second Amendment to HPSC, Inc. Supplemental Executive Incorporated by reference to Exhibit 10.3 to HPSC's
Retirement Plan Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999
*10.15 Third Amendment to HPSC, Inc. Supplemental Executive Filed herewith
Retirement Plan
*10.16 HPSC, Inc. 401(k) Plan dated February, 1993 between Incorporated by reference to Exhibit 10.15 to HPSC's
HPSC, Inc. and Metropolitan Life Insurance Company Annual Report on Form 10-K for the fiscal year ended
December 25, 1993
10.17 Third Amended and Credit Agreement dated as of Incorporated by reference to Exhibit 10.14 to HPSC's
March 16, 1998 among HPSC, Inc., BankBoston HPSC's Annual Report on Form 10-K for the fiscal
individually and as Agent and the Banks named therein year ended December 31, 1997
10.18 First Amendment dated June 29, 1998 to Third Amended Incorporated by reference to Exhibit 10.15 to HPSC's
and Restated Credit Agreement dated as of March 16, HPSC's Annual Report on Form 10-K for the fiscal
1998 among HPSC, Inc., BankBoston, individually and year ended December 31, 1998
as Agent and the Banks named therein
10.19 Second Amendment dated March 14, 1999 to Third Incorporated by reference to Exhibit 10.16 to HPSC's
Amended and Restated Credit Agreement dated as of HPSC's Annual Report on Form 10-K for the fiscal
March 16, 1998 among HPSC, Inc., Bank Boston, year ended December 31, 1998
individually and as Agent, and the banks named
therein
10.20 Third Amendment to Third Amended and Restated Credit Incorporated by reference to Exhibit 10.4 to HPSC's
Agreement by and among American Commercial Finance Quarterly Report on Form 10-Q for the quarter ended
Corporation, HPSC, Inc., BankBoston, N.A. individually June 30, 1999
and as Agent, and each of the lenders referred to
therein
10.21 Purchase and Contribution Agreement dated as of Incorporated by reference to Exhibit 10.31 to HPSC's
January 31, 1995 between HPSC, Inc. and HPSC Bravo Annual Report on Form 10-K for the fiscal year ended
Funding Corp. December 31, 1994
10.22 Amendment No. 4 dated June 29, 1998 to Purchase and Incorporated by reference to Exhibit 10.7 to HPSC,
Contribution Agreement, dated January 31, 1995 by and Inc.'s Quarterly Report on Form 10-Q for the quarter
among HPSC, Inc. and Bravo Funding Corp. ended June 30, 1998
10.23 Credit Agreement dated as of January 31, 1995 among Incorporated by reference to Exhibit 10.32 to HPSC's
HPSC Bravo Funding Corp., Triple-A One Funding Annual Report on Form 10-K for the fiscal year ended
Corporation, as lender, and CapMAC, as Administrative December 31, 1994
Agent and as Collateral Agent
10.24 Agreement to furnish copies of Omitted Exhibits to Incorporated by reference to Exhibit 10.33 to HPSC's
Certain Agreements with HPSC Bravo Funding Corp. Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
10.25 Amendment documents, effective November 5, 1996 to Incorporated by reference to Exhibit 10.26 to HPSC's
Credit Agreement dated as of January 31, 1995 among Registration Statement on Form S-1 filed January 30,
HPSC Bravo Funding Corp., Triple-A Funding 1997
Corporation, as Lender, and CapMAC, as Administrative
Agent and as Collateral Agent
10.26 Amendment No. 3 dated June 29, 1998 to Credit Incorporated by reference to Exhibit 10.6 to HPSC's
Agreement dated January 31, 1995 by and among HPSC Quarterly Report on Form 10-Q for the quarter ended
Bravo Funding Corp., Triple-A One Funding Corporation March 30, 1998
and CapMac, as Administrative Agent and Collateral
Agent
</TABLE>
15
<PAGE> 16
<TABLE>
<S> <C> <C>
10.27 Lease Receivables Purchase Agreement dated as of Incorporated by reference to Exhibit 10.1 to HPSC's
June 27, 1997 among HPSC Capital Funding, Inc., as Quarterly Report on Form 10-Q for the quarter ended
Seller, HPSC, Inc. as Service and Custodian, September 30, 1997
EagleFunding Capital Corporation as Purchaser and
BankBoston Securities, Inc. as Deal Agent
10.28 Appendix A to EagleFunding Purchase Agreement Incorporated by reference to Exhibit 10.2 to HPSC's
(Definitions List Attached) Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997
10.29 Purchase and Contribution Agreement dated as of June Incorporated by reference to Exhibit 10.3 to HPSC's
27, 1997 Between HPSC Capital Funding, Inc. as the Quarterly Report on Form 10-Q for the quarter ended
Buyer, and HPSC, Inc. as the Originator and the September 30, 1997
Servicer
10.30 Undertaking to Furnish Certain Copies of Omitted Incorporated by reference to Exhibit 10.4 to HPSC's
Exhibits to Exhibit 10.19 and 10.21 hereof Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.31 Amendment No. 2, dated April 30, 1998 to Lease Incorporated by reference to Exhibit 10.4 to HPSC's
Receivable Purchase Agreement dated June 27, 1997, Quarterly Report on Form 10-Q for the quarter ended
by and among HPSC Capital Funding, Inc. (Seller), June 30, 1998
EagleFunding CapitalCorporation (Purchaser), HPSC,
Inc. (Servicer and Custodian), and BankBoston
Securities, Inc. (Deal Agent)
10.32 Amendment No. 3, dated April 4, 1999 to Lease Filed herewith
Receivable Purchase Agreement dated June 27, 1997,
by and among HPSC Capital Funding, Inc. (Seller),
EagleFunding Capital Corporation (Purchaser), HPSC,
Inc. (Servicer and Custodian), and BankBoston
Securities, Inc. (Deal Agent)
10.33 Indenture dated as of March 20, 1997 between HPSC, Incorporated by reference to HPSC's Exhibit 10.28 to
Inc. and State Street Bank and Trust Company, as HPSC's Annual Report on Form 10K for the fiscal year
Trustee ended December 31, 1997
*10.34 Amended and Restated HPSC, Inc. 1995 Stock Incentive Incorporated by reference to Exhibit 10.27 to HPSC's
Plan Annual Report on Form 10-K for the fiscal year ended
December 31, 1995
*10.35 First Amendment to HPSC, Inc. Amended and Restated Incorporated by reference to Exhibit 10.2 to HPSC's
1995 Stock Incentive Plan Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999
*10.36 HPSC, Inc. Amended and Restated 1998 Stock Incentive Incorporated by reference to Exhibit 10.1 to HPSC's
Plan Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999
*10.37 Stock Option grant to Lowell P. Weicker Incorporated by reference to effective December 7,
1995 Exhibit 10.28 to HPSC's Annual Report on Form
10-K for the fiscal year ended December 31, 1995
*10.38 HPSC, Inc. 1998 Executive Bonus Plan Incorporated by reference to Exhibit 10.32 to HPSC's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1998
*10.39 HPSC, Inc. Outside Directors Stock Bonus Plan Incorporated by reference to Exhibit 10.1 to HPSC's
Quarterly Report on Form 10-Q for the quarter ended
</TABLE>
16
<PAGE> 17
<TABLE>
<S> <C> <C>
June 30, 1998
*10.40 Amended and Restated Stock Loan Program Incorporated by reference to Exhibit 10.26 to HPSC's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1997
13.1 1999 Annual Report to Stockholders Filed herewith
21.1 Subsidiaries of HPSC, Inc. Filed herewith
23.1 Consent of Deloitte & Touche LLP Filed herewith
27.1 HPSC, Inc. Financial Data Schedule Filed herewith
</TABLE>
- ----------
* Management contracts or compensatory plans or arrangements required to be
filed as exhibits are identified by an asterisk.
Copies of Exhibits may be obtained for a nominal charge by writing to:
INVESTOR RELATIONS
HPSC, INC.
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
(b) Reports on Form 8-K
Current report on Form 8-K filed November 5, 1999.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, HPSC, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HPSC, Inc.
Dated: March 29, 2000
By: /s/ John W. Everets
-----------------------
John W. Everets
Chairman, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of HPSC, Inc. and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATED
<S> <C> <C>
By: /s/ John W. Everets Chairman, Chief Executive Officer and Director March 29, 2000
--------------------------- (Principal Executive Officer)
John W. Everets
By: /s/ Raymond R. Doherty President and Director March 29, 2000
---------------------------
Raymond R. Doherty
By: /s/ Rene Lefebvre Senior Executive Vice President, Chief Financial
--------------------------- Officer and Treasurer March 29, 2000
Rene Lefebvre (Principal Financial Officer)
By: /s/ William S. Hoft Financial Reporting Manager March 29, 2000
---------------------------
William S. Hoft
By: /s/ Dollie A. Cole Director March 29, 2000
---------------------------
Dollie A. Cole
By: /s/ Thomas M. McDougal Director March 29, 2000
---------------------------
Thomas M. McDougal
By: /s/ Samuel P. Cooley Director March 29, 2000
---------------------------
Samuel P. Cooley
By: /s/ Joseph A. Biernat Director March 29, 2000
---------------------------
Joseph A. Biernat
By: /s/ J. Kermit Birchfield Director March 29, 2000
---------------------------
J. Kermit Birchfield
By: /s/ Lowell P. Weicker, Jr. Director March 29, 2000
---------------------------
Lowell P. Weicker, Jr.
</TABLE>
18
<PAGE> 1
Exhibit 10.2
SECOND AMENDMENT TO LEASE
-------------------------
This SECOND AMENDMENT TO LEASE ("SECOND AMENDMENT") is made as of May __,
1998 by and between the TRUSTEES OF 60 STATE STREET TRUST under Declaration of
Trust dated September 10, 1970, recorded with Suffolk Deeds, Book 8389, Page
286, as amended, with an address of c/o Hines, 60 State Street, Boston,
Massachusetts 02109 ("LANDLORD"), and HPSC, INC., having a mailing address of
60 State Street, Boston, Massachusetts 02109 ("TENANT").
REFERENCE is made to a certain lease dated as of March __, 1994, as amended
by First Amendment to Lease dated as of January __, 1996, between Landlord and
Tenant (the "LEASE") for approximately 11,210 square feet of space on the 35th
Floor of the building ("BUILDING") located at 60 State Street, Boston,
Massachusetts (the "PREMISES").
WHEREAS, Landlord and Tenant desire to make certain modifications to the
terms and conditions of the Lease including the addition of 2,592 square feet of
Rentable Floor Area on the 36th Floor ("ADDITIONAL SPACE"); and
WHEREAS, Tenant hereby certifies to Landlord, as a material part of the
consideration for Landlord entering into this Second Amendment and without which
Landlord would not enter into this Second Amendment, as follows:
(a) the Lease is a valid lease, is in full force and effect, has not been
modified, amended or supplemented, and represents the entire agreement
between the parties;
(b) all obligations and conditions under the Lease to be performed by
Landlord to the date of this Second Amendment have been satisfied;
(c) there exists no default or event of default, as those or similar terms
may be defined in the Lease ("DEFAULT"), on the part of Landlord of
any of the terms and conditions of the Lease, no event has occurred
which, with the passing of time or giving of notice or both, would
constitute a Default, and Tenant is not entitled to any "free rent",
other concession, rent offset, rent deduction, rent abatement or
defenses under the Lease;
(d) to the best of Tenant's knowledge, there is no apparent or likely
contamination of the Premises by Hazardous Materials, and Tenant has
not used, nor has Tenant disposed of, Hazardous Materials on or about
the Premises in violation of any so-called environmental laws. For
purposes hereof, the term Hazardous Materials shall mean all
chemicals, materials, substances and similar terms defined as or
included in the definitions of "hazardous substances", "hazardous
wastes", "hazardous materials" or "toxic substances" or words of
similar scope or meaning under any applicable local, state or federal
law, as same may be amended from time to time, or under regulations
pursuant thereto;
(e) no actions, voluntary or involuntary, are pending, threatened,
anticipated or contemplated against or by Tenant under the bankruptcy
laws of the United States or any state thereof, or, to the extent same
would impair Tenant's ability to perform its obligations under the
Lease, as modified by this Second Amendment, under any other laws; and
1
<PAGE> 2
(f) Tenant has not assigned, sublet, otherwise transferred or encumbered
its interest in the Premises or the Lease, and Tenant, and the parties
executing this Second Amendment on behalf of Tenant, respectively,
have the full right and authority to enter into this Second Amendment.
NOW, THEREFORE, in consideration of Tenant's certification set forth above,
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and for the mutual promises hereinafter set forth,
Landlord and Tenant agree to amend the Lease effective as of the date hereof as
follows:
1. Section 1.1 of the Lease shall be amended by adding the following at
the end thereof:
"With respect to the Additional Space (defined below) the following
shall apply:
TENANT'S ADDITIONAL
SPACE: Portion of the 36th Floor shown on
SECOND AMENDMENT EXHIBIT C attached
hereto.
RENTABLE FLOOR AREA
OF TENANT'S ADDITIONAL
SPACE: Approximately 2,592 rentable square
feet.
TENANT'S PROPORTIONATE
SHARE FOR ADDITIONAL SPACE: .31% (proportion of Rentable Floor
Area of the Additional Space to 100%
of the Rentable Floor Area of the
Building).
TERM FOR ADDITIONAL
SPACE: Co-terminus with the Term for the
original Premises which expires on
June 30, 2004.
ADDITIONAL SPACE
COMMENCEMENT DATE: July 1, 1998.
BASE RENT FOR
ADDITIONAL SPACE: From the Additional Space Commencement
Date through the expiration of the
Term: $45.00 per square foot; $116,640
per year; $9,720.00 per month.
PERMITTED USES
FOR ADDITIONAL SPACE: Office purposes and no other purpose.
ELECTRICITY CHARGE
FOR ADDITIONAL SPACE: $1.00 per square foot; $2,592.00 per
year; $216.00 per month.
2
<PAGE> 3
TAX EXPENSE BASE FOR
ADDITIONAL SPACE: Tenant's Proportionate Share of Tax
Expenses for the 1998 Tax Year (July
1, 1997-June 30, 1998).
OPERATING EXPENSE BASE
FOR ADDITIONAL SPACE: Tenant's Proportionate Share of
Operating Expenses for the 1997
Calendar Year (January 1, 1997-
December 31, 1997).
TENANT'S MOVING COSTS
FOR ADDITIONAL SPACE: None.
BROKERS FOR ADDITIONAL
SPACE: None.
PARKING SPACES: One (1) additional non-reserved
parking space in the Building Garage
at market rates for the Term of the
Lease through Parking Agreements with
Pilgrim Parking/State Street, Inc."
From and after the Additional Space Commencement Dale, all references
in the Lease to the Premises or to Tenant's Space shall be deemed to
be to the entire Premises and the entire Tenant's Space (consisting of
the original Premises [11,210 square feet] and the Additional Space
for a total of 14,210 square feet) except as otherwise set forth
herein and provided that the specific terms set forth in Section 1.1
of the Lease and in the above amendment to Section 1.1 shall apply
only to the applicable portion of the Premises."
2. The following paragraph shall be added as Section 3.1.1:
"3.1.1 DELIVERY AND CONDITION OF THE ADDITIONAL SPACE. Landlord
shall use reasonable efforts to deliver the Additional Space to
Tenant on the Additional Space Commencement Date as set forth
herein; provided, however, Landlord shall have no liability, nor
shall Tenant have the right to terminate this Second Amendment or
the Lease, as a result of Landlord's failure to timely deliver
the Additional Space. Tenant acknowledges that Tenant has
inspected (or had the opportunity to inspect) the Additional
Space, is satisfied with the condition thereof, and Tenant hereby
accepts the Additional Space in its "AS IS" condition and waives
any existing defect in the condition of the Additional Space
(latent or otherwise), Landlord shall have no obligation to
improve the Additional Space or the Premises other than to
re-carpet and re-paint the Additional Space in accordance with
Tenant's written request therefor. Tenant shall be entitled to a
tenant allowance of $10.00 per Rentable Square Foot of the
Additional Space to be used for any leasehold improvements to the
Additional Space, including carpeting and re-painting. Any costs
in excess of the foregoing allowance shall be at Tenant's sole
cost and expense."
The Lease is hereby ratified and confirmed and, as modified by this Second
Amendment, shall remain in full force and effect. All references appearing in
the Lease and in any related instruments shall be attended and read hereafter to
be references to the Lease as amended by this
3
<PAGE> 4
Second Amendment, All terms which are defined in the Lease shall have the same
meanings when used in this Second Amendment (unless a contrary intent is clearly
indicated from the context herein).
This Second Amendment shall have the effect of an agreement under seal and
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, executors, administrators, successors and assigns.
EXECUTED under seal as of the date first set forth above.
LANDLORD: TRUSTEES OF 60 STATE STREET TRUST
By: /s/ John A. Pirovano
---------------------------------------
John A. Pirovano, as Trustee of 60 State
Street Trust, for self and co-Trustees but
not individually
TENANT: HPSC, INC.
By: /s/ John W. Everets
---------------------------------------
its Chairman and CEO
hereunto duly authorized
4
<PAGE> 5
SECOND AMENDMENT EXHIBIT C
--------------------------
Plan of Tenant's Additional Space
---------------------------------
5
<PAGE> 6
CONSENT OF LENDERS
------------------
The undersigned hereby acknowledge notice of the Second Amendment to Lease
between the Trustees of 60 State Street Trust and HPSC, Inc, dated May __, 1998
and consent thereto.
CORNERSTONE PROPERTIES, INC.
By: /s/ Scott M. Dalrymple
---------------------------------
its Vice President
hereunto duly authorized
7
<PAGE> 7
CONSENT OF LENDERS
------------------
The undersigned hereby acknowledge notice of the Second Amendment to Lease
between the Trustees of 60 State Street Trust and HPSC, Inc. dated May __, 1998
and consent thereto.
TEACHERS INSURANCE ANNUITY
ASSOCIATION OF AMERICA
By: /s/ Joan Herman
---------------------------------
its
hereunto duly authorized
7
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between HPSC, Inc., a Delaware corporation (the
"Company"), and John W. Everets (the "Executive"), dated as of July 19, 1999.
W I T N E S S E T H
WHEREAS, the Executive has served as Chairman and Chief Executive Officer
of the Company since July 19, 1993, most recently pursuant to an employment
agreement dated July 19, 1996;
WHEREAS, the Company wishes to provide for the continued employment by the
Company of the Executive, and the Executive wishes to continue to serve the
Company, on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the
Executive shall be an employee of the Company, on the terms and conditions set
forth in this Agreement, for a period (the "Employment Period") commencing on
the date hereof (the "Effective Date") and ending on the third anniversary of
the Effective Date; provided, however, that, on the third anniversary of the
Effective Date and each subsequent anniversary thereof (each of such third and
subsequent anniversaries, an "Extension Date"), the Employment Period shall
automatically be extended for one additional year unless, at least six months
prior to the applicable Extension Date, the Company or the Executive shall have
given notice not to extend this Agreement. The Employment Period shall end upon
the termination of the Executive's employment hereunder, as of the Date of
Termination (as defined in Section 4(d)).
2. SCOPE OF EMPLOYMENT. (a) Position. During the Employment Period, the
Executive shall continue to serve as Chairman of the Board of the Directors and
Chief Executive Officer of the Company. The Executive shall adhere to policies
established by the Board of Directors of the Company (the "Board").
(b) DUTIES. During the Employment Period, and excluding any
periods of vacation and sick leave to which the Executive is entitled, the
Executive shall devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive under this Agreement,
use the Executive's reasonable best efforts to carry out such responsibilities
faithfully and efficiently. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic or charitable
boards or committees, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
<PAGE> 2
(c) LOCATION. The Company's headquarters shall be located in
Boston, Massachusetts, and the Executive shall be based and reside in the
general area of Boston, except for reasonable travel obligations.
3. COMPENSATION. The Executive's compensation during the Employment
Period shall be determined by the Board upon the recommendation of the committee
of the Board having responsibility for approving the compensation of senior
executives (the "Compensation Committee"), subject to Sections 3(a) through
3(d).
(a) BASE SALARY. During the Employment Period, commencing on the
Effective Date, the Executive shall receive an annual base salary ("Base
Salary") as determined by the Compensation Committee from time to time.
Commencing January 1, 2000, the Executive's Base Salary shall be at a rate of
not less than $345,000. The Base Salary shall be payable in accordance with the
Company's regular payroll practice for its senior executives, as in effect from
time to time.
(b) INCENTIVE PLAN. The Compensation Committee has developed an
incentive compensation plan ("Incentive Plan") for key management employees. The
Incentive Plan is designed to pay the Executive up to One Hundred Percent (100%)
of his annual base salary for achieving the results established by the
Compensation Committee. The Executive shall be eligible to receive awards under
the Incentive Plan, as determined annually by the Compensation Committee.
(c) OTHER INCENTIVE COMPENSATION. During the Employment Period,
the Executive shall be eligible for additional awards under the Company's
Amended and Restated 1998 Stock Incentive Plan, as it may be amended from time
to time, or under any subsequent similar plans, as determined by the
Compensation Committee.
(d) OTHER BENEFITS. During the Employment Period, (i) the
Executive shall participate in all applicable savings and retirement plans,
practices, policies and programs of the Company that are from time to time
applicable to senior executives of the Company including the Company's Employee
Stock Ownership Plan and Supplemental Executive Retirement Plan; (ii) the
Executive and/or the Executive's eligible dependents, as the case may be, shall
be eligible for participation in, and shall receive all benefits under, all
applicable welfare benefit plans, practices, policies and programs provided by
the Company, including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life insurance, group life insurance,
accidental death and travel accident insurance plans and programs on the same
basis and subject to the same terms, conditions, cost-sharing requirements and
the like as senior executives of the Company; and (iii) the Executive shall be
entitled to receive fringe benefits on a basis not less favorable than provided
to other senior executives of the Company. Specifically, the Executive shall be
entitled to four (4) weeks of vacation annually and an appropriate vehicle
provided by the Company.
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<PAGE> 3
4. TERMINATION OF EMPLOYMENT. This Employment Agreement may be
terminated as provided in Sections 4(a) through 4(d). Termination pursuant to
any of Sections 4(a) through 4(d) is subject to the provisions of Section 5.
(a) DEATH OR DISABILITY. The Executive's employment shall
terminate automatically upon the Executive's death. The Company shall be
entitled to terminate the Executive's employment because of the Executive's
Disability (as defined in the Company's long-term disability insurance
policies). A termination of the Executive's employment by the Company for
Disability shall be communicated to the Executive by written notice, and shall
be effective on the 30th day after receipt of such notice by the Executive (the
"Disability Effective Date"), unless the Executive returns to full-time
performance of the Executive's duties before the Disability Effective Date.
(b) TERMINATION BY THE COMPANY. (i) FOR CAUSE. The Company may
terminate the Executive's employment for Cause at any time during the Employment
Period as follows.
(A) "Cause" means the conviction of the Executive for the
commission of a crime involving moral turpitude, or willful gross
misconduct by the Executive in connection with his employment by the
Company that results in material and demonstrable financial harm to
the Company. No act or failure to act on the part of the Executive
shall be considered "willful" unless it is done, or omitted to be
done, by the Executive in bad faith or without reasonable belief
that the Executive's action or omission was in the best interests of
the Company. Any act or failure to act that is based upon authority
given pursuant to a resolution duly adopted by the Board, or the
advice of counsel for the Company, shall be conclusively presumed to
be done, or omitted to be done, by the Executive in good faith and
in the best interests of the Company. In the event of a dispute
concerning the application of this provision, no claim by the
Company that Cause exists shall be given effect unless the Company
establishes to the Board by clear and convincing evidence that Cause
exists.
(B) A termination of the Executive's employment for Cause
shall not be effective unless it is accomplished in accordance with
the following procedures. The Company shall give the Executive
written notice ("Notice of Termination for Cause") of its intention
to terminate the Executive's employment for Cause, setting forth in
reasonable detail the specific conduct of the Executive that it
considers to constitute Cause and the specific provisions of this
Agreement on which it relies, and stating the date, time and place
of the Special Board Meeting for Cause. The "Special Board Meeting
for Cause" means a meeting of the Board called and held specifically
and exclusively for the purpose of considering the Executive's
termination for Cause, that takes place not less than twenty nor
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<PAGE> 4
more than thirty business days after the Executive receives the
Notice of Termination for Cause. The Executive shall be given an
opportunity, together with counsel, to be heard at the Special Board
Meeting for Cause. The Executive's termination for Cause shall be
effective when and if a resolution is duly adopted at the Special
Board Meeting for Cause by the affirmative vote of three-quarters of
the entire membership of the Board stating that, in the good faith
opinion of the Board, the Executive is guilty of the conduct
described in the Notice of Termination for Cause and that such
conduct constitutes Cause under this Agreement.
(ii) Without Cause. The Company may terminate the Executive's
employment without cause at any time during the Employment Period.
(c) TERMINATION BY THE EXECUTIVE. (i) FOR GOOD REASON. The
Executive may terminate employment for Good Reason at any time during the
Employment Period as follows.
A. "Good Reason" means:
I. the assignment to the Executive of any duties or
responsibilities inconsistent in any respect with those customarily
associated with the position of Chairman of the Board and Chief
Executive Officer (including status, offices, titles and reporting
requirements) or any other action by the Company that results in a
diminution or other material adverse change in the Executive's
position, authority, duties or responsibilities, other than an
isolated, insubstantial and inadvertent action that is not taken in
bad faith and is remedied by the Company promptly after receipt of
notice thereof from the Executive;
II. any failure by the Company to comply with any
provision of Section 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure that is not taken in bad faith
and is remedied by the Company promptly after receipt of notice
thereof from the Executive;
III. any requirement by the Company that the Executive
be principally based at any office or location more than 25 miles
from the Company's current offices in Boston, Massachusetts; or
IV. any failure by the Company to comply with Section
11(c) of this Agreement;
(B) For purposes of this Section 4(c), any reasonable
determination of "Good Reason" made by the Executive shall be
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<PAGE> 5
conclusive. A termination of employment by the Executive for Good
Reason shall be effectuated by giving the Company written notice
("Notice of Termination for Good Reason") of the termination,
setting forth in reasonable detail the specific conduct of the
Company that constitutes Good Reason and the specific provision(s)
of this Agreement on which the Executive relies. A termination of
employment by the Executive for Good Reason shall be effective on
the fifth business day following the date when the Notice of
Termination for Good Reason is given, unless the notice sets forth a
later date (which date shall in no even be later than 30 days after
the notice is given).
(C) The failure to set forth any fact or circumstance in a
Notice of Termination for Good Reason shall not constitute a waiver
of the right to assert, and shall not preclude the Executive from
asserting, such fact or circumstance in an attempt to enforce any
right under or provision of this Agreement.
(ii) WITHOUT GOOD REASON. The Executive may terminate his
employment without Good Reason at any time during the Employment Period by
giving the Company written notice of the termination.
(d) DATE OF TERMINATION. The "Date of Termination" means the date
of the Executive's death, the Disability Effective Date, the date on which the
termination of the Executive's employment by the Company for Cause or without
Cause or by the Executive for Good Reason is effective, the date on which the
Executive gives the Company notice of a termination of his employment without
Good Reason, or the date of expiration of this Agreement, as the case may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) BY THE COMPANY
OTHER THAN FOR CAUSE; UPON NON-RENEWAL BY THE COMPANY OR THE EXECUTIVE; OR BY
THE EXECUTIVE FOR ANY REASON. Except as provided in Section 6 below, if, during
the Employment Period, the Company terminates the Executive's employment for any
reason, other than Cause or the Executive's death or Disability; the Company or
the Executive notifies the other pursuant to Section 1 of its or his intent not
to extend this Agreement; or the Executive terminates his employment for any
reason; the Company shall
(i) continue to pay the Executive his Base Salary for a
period of twelve months following the Date of Termination;
(ii) pay the Executive twelve monthly payments, each equal to
one-twelfth (1/12) of the maximum incentive compensation the Executive
could have earned during the twelve months following the Date of
Termination;
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<PAGE> 6
(iii) continue benefits to the Executive and/or the
Executive's family for a period of twelve months following the Date of
Termination at least equal to those which would have been provided in
accordance with the applicable health, medical, life, disability and other
welfare benefit plans, programs, and practices described in Section 3(d)
as if the Executive's employment had not been terminated; and
(iv) except in the case of termination by the Executive
without Good Reason, cause all of the Executive's outstanding equity
awards, to the extent then unvested or forfeitable, to immediately and
fully vest and, to the extent then not exercisable, to become immediately
and fully exercisable.
(b) DEATH OR DISABILITY. If the Executive's employment is
terminated by reason of the Executive's death or Disability during the
Employment Period, the Company shall
(i) continue to pay to the Executive or, in the case of the
Executive's death, to the Executive's designated beneficiaries (or,
if there is no such beneficiary, to the Executive's estate or legal
representative) the Executive's Base Salary for a period of six
months following the Date of Termination; and
(ii) continue benefits to the Executive and/or the
Executive's family for a period of six months following the Date of
Termination at least equal to those which would have been provided
in accordance with the applicable health, medical, life, disability
and other welfare benefit plans, programs, and practices described
in Section 3(d) as if the Executive's employment had not been
terminated.
(iii) cause all of the Executive's outstanding equity awards,
to the extent then unvested or forfeitable, to immediately and fully
vest and, to the extent then not exercisable, to become immediately
and fully exercisable.
(c) BY THE COMPANY FOR CAUSE. If the Executive's employment is
terminated by the Company for Cause, the Company's only obligation to the
Executive will be to pay any arrearages of salary or incentive compensation as
of the Date of Termination.
6. CHANGE OF CONTROL. Notwithstanding the provisions of Section 5 to
the contrary, in the event a Change in Control (as such term is defined in the
Company's 1998 Amended and Restated Stock Incentive Plan) occurs, the following
shall apply.
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<PAGE> 7
(a) If, during the three (3) year period following a Change in
Control, the Executive's employment is terminated by the Company for any reason
other than for Cause, if the Executive's employment is terminated by reason of
the Executive's death or Disability, or if the Executive terminates his
employment for Good Reason:
(i) The Company shall pay the Executive in a lump sum
payable within 30 days after the Date of Termination an amount equal
to the average of his total compensation from the Company which was
includable in the Executive's gross income for federal income tax
purposes (as reported on IRS Form W-2) for each of the preceding
five (5) calendar years ending before the date of the Change of
Control multiplied by 2.99; provided, however, that the Executive
may choose, in his discretion, to receive a lesser amount than he is
entitled to receive under this Section 6(a)(i) if after consultation
with the Compensation Committee he determines that it is in his best
interests to accept a lesser amount;
(ii) The Company shall cause all of the Executive's
outstanding equity awards, to the extent then unvested or
forfeitable, to immediately and fully vest and, to the extent then
not exercisable, to become immediately and fully exercisable; and
(iii) The Company shall continue benefits to the
Executive and/or the Executive's family for a period of twelve
months following the Date of Termination at least equal to those
which would have been provided in accordance with the applicable
health, medical, life, disability and other welfare benefit plans,
programs, and practices described in Section 3(d) as if the
Executive's employment had not been terminated.
(b) If, during the three (3) year period following a Change in
Control, the Executive terminates his employment for any reason other than for
Good Reason:
(i) the Company shall continue to pay the Executive
his Base Salary for the twelve (12) months following the Date of
Termination and the Company shall pay the Executive twelve monthly
payments, each equal to one-twelfth (1/12) of the maximum incentive
compensation the Executive could have earned during the twelve (12)
months following the Date of Termination; and
(ii) The Company shall continue benefits to the
Executive and/or the Executive's family for a period of twelve
months following the Date of Termination at least equal to those
which would have been provided in accordance with the applicable
health, medical, life, disability and other welfare benefit plans,
programs, and practices described in Section 3(d) as if the
Executive's employment had not been terminated.
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<PAGE> 8
(c) If, during the three (3) year period following a Change in
Control, the Executive is terminated by the Company for Cause, the Company's
only obligation to the Executive will be to pay any arrearages of salary or
incentive compensation as of the Date of Termination.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies for which the Executive may qualify (including, but not limited to,
the Employee Stock Ownership Plan and the Supplemental Executive Retirement
Plan), nor shall anything in this Agreement limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Vested benefits and other amounts
that the Executive is otherwise entitled to receive under any plan, policy,
practice or program of, or any contract of agreement with, the Company or any of
its affiliated companies on or after the Date of Termination shall be payable in
accordance with the terms of each such plan, policy, practice, program, contract
or agreement, as the case may be, except as explicitly modified by this
Agreement.
8. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in, and otherwise to perform its obligations under, this Agreement
shall not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action that the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced, regardless of whether the Executive obtains other employment.
9. CONFIDENTIAL INFORMATION; NON-COMPETITION. (a) The Executive shall
hold in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies and their respective businesses that the Executive
obtains during the Executive's employment by the Company or any of its
affiliated companies and that is not public knowledge (other than as a result of
the Executive's violation of this Section 9) ("Confidential Information"). The
Executive shall not communicate, divulge or disseminate Confidential Information
at any time during or after the Executive's employment with the Company, except
with the prior written consent of the Company or as otherwise required by law or
legal process.
(b) If the Executive has terminated his employment for any reason
other than Good Reason, the Executive agrees not to compete with the business of
the Company or be employed by a competitor of the Company while the Executive is
receiving termination payments under Section 5.
10. INDEMNIFICATION; ATTORNEYS' FEES. The Company shall pay or indemnify
the Executive to the full extent permitted by law and the by-laws of the
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<PAGE> 9
Company for all expenses, costs, liabilities and legal fees which the Executive
may incur in the discharge of his duties hereunder. The Company also agrees to
pay, as incurred, to the fullest extent permitted by law, or indemnify Executive
if such payment is not legally permitted, for all legal fees and expenses that
the Executive may in good faith incur as a result of any contest by the Company,
the Executive or others of the validity or enforceability of or liability under,
or otherwise involving, any provision of this Agreement, upon receipt of the
Executive's undertaking to repay any such amount advanced if the Company
prevails upon the final disposition of such action.
11. SUCCESSORS. (a) This Agreement is personal to the Executive and,
without the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, "the Company" shall mean
both the Company as defined above and any such successor that assumes and agrees
to perform this Agreement, by operation of law or otherwise.
12. MISCELLANEOUS. (a) This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Massachusetts,
without reference to its principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no force or
effect. This Agreement may not be amended or modified except by a written
agreement executed by the parties hereto or their respective successors and
legal representatives.
(b) All notices and other communications under this Agreement
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
John W. Everets
72 Chestnut Street
Boston, Massachusetts 02108
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<PAGE> 10
If to the Company:
HPSC, Inc.
60 State Street
Boston, Massachusetts 02109
or to such other address as either party furnishes to the other in writing in
accordance with this Section 12(b). Notices and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(e) The Executive's or the Company's failure to insist upon strict
compliance with any provisions of, or to assert any right under, this Agreement
(including, without limitation, the right of the Executive to terminate
employment for Good Reason pursuant to paragraph (c) of Section 4) shall not be
deemed to be a waiver of such provision or right or of any other provision of or
right under this Agreement.
(f) The Executive and the Company acknowledge that this Agreement
supersedes any other agreement between them concerning the subject matter
hereof.
(g) The rights and benefits of the Executive under this Agreement
may not be anticipated, assigned, alienated or subject to attachment,
garnishment, levy, execution or other legal or equitable process except as
required by law. Any attempt by the Executive to anticipate, alienate, assign,
sell, transfer, pledge, encumber or charge the same shall be void. Payments
hereunder shall not be considered assets of the Executive in the event of
insolvency or bankruptcy.
(h) This Agreement may be executed in several counterparts, each
of which shall be deemed an original, and said counterparts shall constitute but
one and the same instrument.
(i) The obligations of the Company and the Executive under
Sections 5, 6, 7, 8, 9, 10 and 11 shall survive the expiration or termination
for any reason of this Agreement.
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IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand
and, pursuant to the authorization of its Board, the Company has caused this
Agreement to be executed in its name on its behalf, all as of the day and year
first above written.
HPSC, INC.
By: /s/ J. Kermit Birchfield
---------------------------------------
J. Kermit Birchfield
Chairman of the Compensation Committee
of the Board of Directors
/s/ John W. Everets
-------------------------------
EXECUTIVE
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<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT by and between HPSC, Inc., a Delaware corporation (the
"Company"), and Raymond R. Doherty (the "Executive"), dated as of August 2,
1999.
W I T N E S S E T H
WHEREAS, the Executive has served as President and Chief Operating
Officer of the Company since August 2, 1993, most recently pursuant to an
employment agreement dated August 2, 1996;
WHEREAS, the Company wishes to provide for the continued employment by
the Company of the Executive, and the Executive wishes to continue to serve the
Company, on the terms and conditions set forth in this Agreement;
NOW, THEREFORE, it is hereby agreed as follows:
1. EMPLOYMENT PERIOD. The Company shall employ the Executive, and the
Executive shall be an employee of the Company, on the terms and conditions set
forth in this Agreement, for a period (the "Employment Period") commencing on
the date hereof (the "Effective Date") and ending on the third anniversary of
the Effective Date; provided, however, that, on the third anniversary of the
Effective Date and each subsequent anniversary thereof (each of such third and
subsequent anniversaries, an "Extension Date"), the Employment Period shall
automatically be extended for one additional year unless, at least six months
prior to the applicable Extension Date, the Company or the Executive shall have
given notice not to extend this Agreement. The Employment Period shall end upon
the termination of the Executive's employment hereunder, as of the Date of
Termination (as defined in Section 4(d)).
2. SCOPE OF EMPLOYMENT. (a) Position. During the Employment Period,
the Executive shall continue to serve as President and Chief Operating Officer
of the Company, reporting to the Chairman and Chief Executive Officer. The
Executive shall adhere to policies established by the Board of Directors of the
Company (the "Board").
(b) DUTIES. During the Employment Period, and excluding any
periods of vacation and sick leave to which the Executive is entitled, the
Executive shall devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent necessary to
discharge the responsibilities assigned to the Executive under this Agreement,
use the Executive's reasonable best efforts to carry out such responsibilities
faithfully and efficiently. It shall not be considered a violation of the
foregoing for the Executive to serve on corporate, industry, civic or charitable
boards or committees, so long as such activities do not significantly interfere
with the performance of the Executive's responsibilities as an employee of the
Company in accordance with this Agreement.
<PAGE> 2
(c) LOCATION. The Company's headquarters shall be located in
Boston, Massachusetts, and the Executive shall be based and reside in the
general area of Boston, except for reasonable travel obligations.
3. COMPENSATION. The Executive's compensation during the Employment
Period shall be determined by the Board upon the recommendation of the committee
of the Board having responsibility for approving the compensation of senior
executives (the "Compensation Committee"), subject to Sections 3(a) through
3(d).
(a) BASE SALARY. During the Employment Period, commencing on
the Effective Date, the Executive shall receive an annual base salary ("Base
Salary") as determined by the Compensation Committee from time to time.
Commencing January 1, 2000, the Executive's Base Salary shall be at a rate of
not less than $240,000. The Base Salary shall be payable in accordance with the
Company's regular payroll practice for its senior executives, as in effect from
time to time.
(b) INCENTIVE PLAN. The Compensation Committee has developed an
incentive compensation plan ("Incentive Plan") for key management employees. The
Incentive Plan is designed to pay the Executive up to One Hundred Percent (100%)
of his annual base salary for achieving the results established by the
Compensation Committee. The Executive shall be eligible to receive awards under
the Incentive Plan, as determined annually by the Compensation Committee.
(c) OTHER INCENTIVE COMPENSATION. During the Employment Period,
the Executive shall be eligible for additional awards under the Company's
Amended and Restated 1998 Stock Incentive Plan, as it may be amended from time
to time, or under any subsequent similar plans, as determined by the
Compensation Committee.
(d) OTHER BENEFITS. During the Employment Period, (i) the
Executive shall participate in all applicable savings and retirement plans,
practices, policies and programs of the Company that are from time to time
applicable to senior executives of the Company including the Company's Employee
Stock Ownership Plan and Supplemental Executive Retirement Plan; (ii) the
Executive and/or the Executive's eligible dependents, as the case may be, shall
be eligible for participation in, and shall receive all benefits under, all
applicable welfare benefit plans, practices, policies and programs provided by
the Company, including, without limitation, medical, prescription, dental,
disability, salary continuance, employee life insurance, group life insurance,
accidental death and travel accident insurance plans and programs on the same
basis and subject to the same terms, conditions, cost-sharing requirements and
the like as senior executives of the Company; and (iii) the Executive shall be
entitled to receive fringe benefits on a basis not less favorable than provided
to other senior executives of the Company. Specifically, the Executive shall be
entitled to four (4) weeks of vacation annually and an appropriate vehicle
provided by the Company.
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<PAGE> 3
4. TERMINATION OF EMPLOYMENT. This Employment Agreement may be
terminated as provided in Sections 4(a) through 4(d). Termination pursuant to
any of Sections 4(a) through 4(d) is subject to the provisions of Section 5.
(a) DEATH OR DISABILITY. The Executive's employment shall
terminate automatically upon the Executive's death. The Company shall be
entitled to terminate the Executive's employment because of the Executive's
Disability (as defined in the Company's long-term disability insurance
policies). A termination of the Executive's employment by the Company for
Disability shall be communicated to the Executive by written notice, and shall
be effective on the 30th day after receipt of such notice by the Executive (the
"Disability Effective Date"), unless the Executive returns to full-time
performance of the Executive's duties before the Disability Effective Date.
(b) TERMINATION BY THE COMPANY. (i) FOR CAUSE. The Company may
terminate the Executive's employment for Cause at any time during the Employment
Period as follows.
(A) "Cause" means the conviction of the Executive for
the commission of a crime involving moral turpitude, or willful
gross misconduct by the Executive in connection with his
employment by the Company that results in material and
demonstrable financial harm to the Company. No act or failure to
act on the part of the Executive shall be considered "willful"
unless it is done, or omitted to be done, by the Executive in bad
faith or without reasonable belief that the Executive's action or
omission was in the best interests of the Company. Any act or
failure to act that is based upon authority given pursuant to a
resolution duly adopted by the Board, or the advice of counsel for
the Company, shall be conclusively presumed to be done, or omitted
to be done, by the Executive in good faith and in the best
interests of the Company. In the event of a dispute concerning the
application of this provision, no claim by the Company that Cause
exists shall be given effect unless the Company establishes to the
Board by clear and convincing evidence that Cause exists.
(B) A termination of the Executive's employment for
Cause shall not be effective unless it is accomplished in
accordance with the following procedures. The Company shall give
the Executive written notice ("Notice of Termination for Cause")
of its intention to terminate the Executive's employment for
Cause, setting forth in reasonable detail the specific conduct of
the Executive that it considers to constitute Cause and the
specific provisions of this Agreement on which it relies, and
stating the date, time and place of the Special Board Meeting for
Cause. The "Special Board Meeting for Cause" means a meeting of
the Board called and held specifically and exclusively for the
purpose of considering the
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<PAGE> 4
Executive's termination for Cause, that takes place not less than
twenty nor more than thirty business days after the Executive
receives the Notice of Termination for Cause. The Executive shall
be given an opportunity, together with counsel, to be heard at the
Special Board Meeting for Cause. The Executive's termination for
Cause shall be effective when and if a resolution is duly adopted
at the Special Board Meeting for Cause by the affirmative vote of
three-quarters of the entire membership of the Board stating that,
in the good faith opinion of the Board, the Executive is guilty of
the conduct described in the Notice of Termination for Cause and
that such conduct constitutes Cause under this Agreement.
(ii) Without Cause. The Company may terminate the
Executive's employment without cause at any time during the Employment
Period.
(c) TERMINATION BY THE EXECUTIVE. (i) FOR GOOD REASON. The
Executive may terminate employment for Good Reason at any time during the
Employment Period as follows.
A. "Good Reason" means:
I. the assignment to the Executive of any duties
or responsibilities inconsistent in any respect with those
customarily associated with the position of President and Chief
Operating Officer (including status, offices, titles and reporting
requirements) or any other action by the Company that results in a
diminution or other material adverse change in the Executive's
position, authority, duties or responsibilities, other than an
isolated, insubstantial and inadvertent action that is not taken
in bad faith and is remedied by the Company promptly after receipt
of notice thereof from the Executive;
II. any failure by the Company to comply with any
provision of Section 3 of this Agreement, other than an isolated,
insubstantial and inadvertent failure that is not taken in bad
faith and is remedied by the Company promptly after receipt of
notice thereof from the Executive;
III. any requirement by the Company that the
Executive be principally based at any office or location more than
25 miles from the Company's current offices in Boston,
Massachusetts; or
IV. any failure by the Company to comply with
Section 11(c) of this Agreement;
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<PAGE> 5
(B) For purposes of this Section 4(c), any reasonable
determination of "Good Reason" made by the Executive shall be
conclusive. A termination of employment by the Executive for Good
Reason shall be effectuated by giving the Company written notice
("Notice of Termination for Good Reason") of the termination,
setting forth in reasonable detail the specific conduct of the
Company that constitutes Good Reason and the specific provision(s)
of this Agreement on which the Executive relies. A termination of
employment by the Executive for Good Reason shall be effective on
the fifth business day following the date when the Notice of
Termination for Good Reason is given, unless the notice sets forth
a later date (which date shall in no even be later than 30 days
after the notice is given).
(C) The failure to set forth any fact or circumstance in
a Notice of Termination for Good Reason shall not constitute a
waiver of the right to assert, and shall not preclude the
Executive from asserting, such fact or circumstance in an attempt
to enforce any right under or provision of this Agreement.
(ii) WITHOUT GOOD REASON. The Executive may terminate his
employment without Good Reason at any time during the Employment Period
by giving the Company written notice of the termination.
(d) DATE OF TERMINATION. The "Date of Termination" means the
date of the Executive's death, the Disability Effective Date, the date on which
the termination of the Executive's employment by the Company for Cause or
without Cause or by the Executive for Good Reason is effective, the date on
which the Executive gives the Company notice of a termination of his employment
without Good Reason, or the date of expiration of this Agreement, as the case
may be.
5. OBLIGATIONS OF THE COMPANY UPON TERMINATION. (a) BY THE COMPANY
OTHER THAN FOR CAUSE; UPON NON-RENEWAL BY THE COMPANY OR THE EXECUTIVE. Except
as provided in Section 6 below, if, during the Employment Period, the Company
terminates the Executive's employment for any reason, other than Cause or the
Executive's death or Disability; the Company or the Executive notifies the other
pursuant to Section 1 of its or his intent not to extend this Agreement; the
Company shall
(i) continue to pay the Executive his Base Salary for a
period of twelve months following the Date of Termination;
(ii) pay the Executive twelve monthly payments, each
equal to one-twelfth (1/12) of the maximum incentive compensation the
Executive could have earned during the twelve months following the Date
of Termination;
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<PAGE> 6
(iii) continue benefits to the Executive and/or the
Executive's family for a period of twelve months following the Date of
Termination at least equal to those which would have been provided in
accordance with the applicable health, medical, life, disability and
other welfare benefit plans, programs, and practices described in Section
3(d) as if the Executive's employment had not been terminated; and
(iv) cause all of the Executive's outstanding equity
awards, to the extent then unvested or forfeitable, to immediately and
fully vest and, to the extent then not exercisable, to become immediately
and fully exercisable.
(b) DEATH OR DISABILITY. If the Executive's employment is
terminated by reason of the Executive's death or Disability during the
Employment Period, the Company shall
(i) continue to pay to the Executive or, in the case of
the Executive's death, to the Executive's designated beneficiaries
(or, if there is no such beneficiary, to the Executive's estate or
legal representative) the Executive's Base Salary for a period of
six months following the Date of Termination; and
(ii) continue benefits to the Executive and/or the
Executive's family for a period of six months following the Date
of Termination at least equal to those which would have been
provided in accordance with the applicable health, medical, life,
disability and other welfare benefit plans, programs, and
practices described in Section 3(d) as if the Executive's
employment had not been terminated.
(iii) cause all of the Executive's outstanding equity
awards, to the extent then unvested or forfeitable, to immediately
and fully vest and, to the extent then not exercisable, to become
immediately and fully exercisable.
(c) BY THE COMPANY FOR CAUSE; BY THE EXECUTIVE FOR ANY REASON.
If the Executive's employment is terminated by the Company for Cause, or by the
Executive for any reason the Company's only obligation to the Executive will be
to pay any arrearages of salary or incentive compensation as of the Date of
Termination.
6. CHANGE OF CONTROL. Notwithstanding the provisions of Section 5 to
the contrary, in the event a Change in Control (as such term is defined in the
Company's 1998 Amended and Restated Stock Incentive Plan) occurs, the following
shall apply.
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<PAGE> 7
(a) If, during the three (3) year period following a Change in
Control, the Executive's employment is terminated by the Company for any reason
other than for Cause, if the Executive's employment is terminated by reason of
the Executive's death or Disability, or if the Executive terminates his
employment for Good Reason:
(i) The Company shall pay the Executive in a lump sum
payable within 30 days after the Date of Termination an amount equal to
the average of his total compensation from the Company which was
includable in the Executive's gross income for federal income tax
purposes (as reported on IRS Form W-2) for each of the preceding five (5)
calendar years ending before the date of the Change of Control multiplied
by 2.99; provided, however, that the Executive may choose, in his
discretion, to receive a lesser amount than he is entitled to receive
under this Section 6(a)(i) if after consultation with the Compensation
Committee he determines that it is in his best interests to accept a
lesser amount;
(ii) The Company shall cause all of the Executive's
outstanding equity awards, to the extent then unvested or forfeitable, to
immediately and fully vest and, to the extent then not exercisable, to
become immediately and fully exercisable; and
(iii) The Company shall continue benefits to the Executive
and/or the Executive's family for a period of twelve months following the
Date of Termination at least equal to those which would have been
provided in accordance with the applicable health, medical, life,
disability and other welfare benefit plans, programs, and practices
described in Section 3(d) as if the Executive's employment had not been
terminated.
(b) If, during the three (3) year period following a Change in
Control, the Executive terminates his employment for any reason other than for
Good Reason:
(i) the Company shall continue to pay the Executive his
Base Salary for the twelve (12) months following the Date of Termination
and the Company shall pay the Executive twelve monthly payments, each
equal to one-twelfth (1/12) of the maximum incentive compensation the
Executive could have earned during the twelve (12) months following the
Date of Termination; and
(ii) The Company shall continue benefits to the Executive
and/or the Executive's family for a period of twelve months following the
Date of Termination at least equal to those which would have been
provided in accordance with the applicable health, medical, life,
disability and other welfare benefit plans, programs, and practices
described in Section 3(d) as if the Executive's employment had not been
terminated.
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<PAGE> 8
(c) If, during the three (3) year period following a Change in
Control, the Executive is terminated by the Company for Cause, the Company's
only obligation to the Executive will be to pay any arrearages of salary or
incentive compensation as of the Date of Termination.
7. NON-EXCLUSIVITY OF RIGHTS. Nothing in this Agreement shall prevent
or limit the Executive's continuing or future participation in any plan,
program, policy or practice provided by the Company or any of its affiliated
companies for which the Executive may qualify (including, but not limited to,
the Employee Stock Ownership Plan and the Supplemental Executive Retirement
Plan), nor shall anything in this Agreement limit or otherwise affect such
rights as the Executive may have under any contract or agreement with the
Company or any of its affiliated companies. Vested benefits and other amounts
that the Executive is otherwise entitled to receive under any plan, policy,
practice or program of, or any contract of agreement with, the Company or any of
its affiliated companies on or after the Date of Termination shall be payable in
accordance with the terms of each such plan, policy, practice, program, contract
or agreement, as the case may be, except as explicitly modified by this
Agreement.
8. FULL SETTLEMENT. The Company's obligation to make the payments
provided for in, and otherwise to perform its obligations under, this Agreement
shall not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action that the Company may have against the Executive or
others. In no event shall the Executive be obligated to seek other employment or
take any other action by way of mitigation of the amounts payable to the
Executive under any of the provisions of this Agreement and such amounts shall
not be reduced, regardless of whether the Executive obtains other employment.
9. CONFIDENTIAL INFORMATION; NON-COMPETITION. (a) The Executive shall
hold in a fiduciary capacity for the benefit of the Company all secret or
confidential information, knowledge or data relating to the Company or any of
its affiliated companies and their respective businesses that the Executive
obtains during the Executive's employment by the Company or any of its
affiliated companies and that is not public knowledge (other than as a result of
the Executive's violation of this Section 9) ("Confidential Information"). The
Executive shall not communicate, divulge or disseminate Confidential Information
at any time during or after the Executive's employment with the Company, except
with the prior written consent of the Company or as otherwise required by law or
legal process.
(b) If the Executive has terminated his employment for any
reason other than Good Reason, the Executive agrees not to compete with the
business of the Company or be employed by a competitor of the Company while the
Executive is receiving termination payments under Section 5.
10. INDEMNIFICATION; ATTORNEYS' FEES. The Company shall pay or
indemnify the Executive to the full extent permitted by law and the by-laws of
the
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<PAGE> 9
Company for all expenses, costs, liabilities and legal fees which the Executive
may incur in the discharge of his duties hereunder. The Company also agrees to
pay, as incurred, to the fullest extent permitted by law, or indemnify Executive
if such payment is not legally permitted, for all legal fees and expenses that
the Executive may in good faith incur as a result of any contest by the Company,
the Executive or others of the validity or enforceability of or liability under,
or otherwise involving, any provision of this Agreement, upon receipt of the
Executive's undertaking to repay any such amount advanced if the Company
prevails upon the final disposition of such action.
11. SUCCESSORS. (a) This Agreement is personal to the Executive and,
without the prior written consent of the Company, shall not be assignable by the
Executive otherwise than by will or the laws of descent and distribution. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
legal representatives.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, "the Company" shall mean
both the Company as defined above and any such successor that assumes and agrees
to perform this Agreement, by operation of law or otherwise.
12. MISCELLANEOUS. (a) This Agreement shall be governed by, and
construed in accordance with, the laws of the Commonwealth of Massachusetts,
without reference to its principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no force or
effect. This Agreement may not be amended or modified except by a written
agreement executed by the parties hereto or their respective successors and
legal representatives.
(b) All notices and other communications under this Agreement
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Executive:
Raymond R. Doherty
242 Cross Street
Belmont, Massachusetts 02178
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<PAGE> 10
If to the Company:
HPSC, Inc.
60 State Street
Boston, Massachusetts 02109
or to such other address as either party furnishes to the other in writing in
accordance with this Section 12(b). Notices and communications shall be
effective when actually received by the addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement. If any provision of this Agreement shall be held invalid or
unenforceable in part, the remaining portion of such provision, together with
all other provisions of this Agreement, shall remain valid and enforceable and
continue in full force and effect to the fullest extent consistent with law.
(d) Notwithstanding any other provision of this Agreement, the
Company may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
laws or regulations.
(e) The Executive's or the Company's failure to insist upon
strict compliance with any provisions of, or to assert any right under, this
Agreement (including, without limitation, the right of the Executive to
terminate employment for Good Reason pursuant to paragraph (c) of Section 4)
shall not be deemed to be a waiver of such provision or right or of any other
provision of or right under this Agreement.
(f) The Executive and the Company acknowledge that this
Agreement supersedes any other agreement between them concerning the subject
matter hereof.
(g) The rights and benefits of the Executive under this
Agreement may not be anticipated, assigned, alienated or subject to attachment,
garnishment, levy, execution or other legal or equitable process except as
required by law. Any attempt by the Executive to anticipate, alienate, assign,
sell, transfer, pledge, encumber or charge the same shall be void. Payments
hereunder shall not be considered assets of the Executive in the event of
insolvency or bankruptcy.
(h) This Agreement may be executed in several counterparts,
each of which shall be deemed an original, and said counterparts shall
constitute but one and the same instrument.
(i) The obligations of the Company and the Executive under
Sections 5, 6, 7, 8, 9, 10 and 11 shall survive the expiration or termination
for any reason of this Agreement.
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<PAGE> 11
IN WITNESS WHEREOF, the Executive has hereunto set the Executive's
hand and, pursuant to the authorization of its Board, the Company has caused
this Agreement to be executed in its name on its behalf, all as of the day and
year first above written.
HPSC, INC.
By: /s/ John W. Everets
--------------------------------------
John W. Everets
Chairman of the Board and Chief
Executive Officer
/s/ Raymond R. Doherty
--------------------------------------
EXECUTIVE
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<PAGE> 1
EXHIBIT 10.15
HPSC, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
THIRD AMENDMENT
---------------
WHEREAS, HPSC, Inc. (the "Company") maintains the HPSC, Inc. Supplemental
Executive Retirement Plan (the "Plan") for the benefit of certain eligible
executive employees;
WHEREAS, the Company desires to amend the Plan to change the definition
of Compensation; NOW, THEREFORE, the Plan is amended effective January 1, 2000,
as follows:
1. Section 2.11 is deleted and replaced with the following:
2.11 COMPENSATION. The total salary plus bonuses and similar
types of remuneration earned by a Participant for personal
services rendered to an Employing Company for any Plan Year,
regardless of when such remuneration is actually paid (or would be
paid if not deferred pursuant to any deferred compensation plan).
Compensation shall include (a) amounts deferred under any deferred
compensation plan and (b) amounts contributed from the
Participant's remuneration under any plan maintained by an
Employing Company pursuant to Code Sections 125, 132, 401(k), or
any other Code provision which provides tax benefits to an
employee on account of a voluntary reduction in compensation. The
base salary component of a Participant's Compensation during his
or her final calendar year of Service shall be deemed to equal the
Participant's annual base salary at the time of his or her
Separation from Service. Compensation shall not include (x)
employer contributions to any employee benefit plan (including
without limitation this Plan) and all benefits provided under any
such plan and (y) the value of or any income from any types of
equity-based compensation programs (including without limitation
stock options, stock appreciation rights and restricted stock).
2. The first paragraph of Section 2.31 is deleted and replaced with the
following:
2.31 TARGET RETIREMENT BENEFIT. The Actuarial Equivalent of a
retirement benefit payable on a Participant's Normal Retirement
Date and continuing for the Participant's life in an amount equal
to [((a) minus (b)) times (c)] minus (d). For purposes of the
preceding sentence (a) equals the percentage of the Participant's
Average Final Compensation shown for the Participant on Schedule
2.31, as amended from time to time, (b) equals fifty percent of
the Participant's Primary Insurance Amount ("PIA") as determined
in accordance with the following paragraph, (c) equals a fraction
not greater than 1.0, the numerator of which
<PAGE> 2
equals the Participant's total Years of Benefit Service as of the
date of determination and the denominator equals fifteen (15) and
(d) equals his or her Other Retirement Benefits.
3. New Schedule 2.31, as follows, is hereby added to the Plan immediately
following the signature page:
'' SCHEDULE 2.31 TO THE
HPSC, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
(Designation of Target Retirement Benefit percentages for Participants
EFFECTIVE AS OF JANUARY 1, 2000)
Participant Target Retirement Benefit Percentage of
Average Final Compensation
John W. Everets 55%
Raymond Doherty 50%
Rene Lefebvre 50%
IN WITNESS WHEREOF the Company has caused this amendment to be executed
by its duly authorized officer this 28 day of March, 2000.
HPSC, INC.
By: /s/ John W. Everets
----------------------------------
Chairman and CEO
----------------------------------
Title
<PAGE> 1
EXHIBIT 10.32
AMENDMENT NO. 3
to
LEASE RECEIVABLES PURCHASE AGREEMENT
Dated as of June 27, 1997
THIS AMENDMENT NO. 3 ("AMENDMENT") dated as of April 4, 1999, is
entered into among HPSC CAPITAL FUNDING, INC., a Delaware corporation
("FUNDING"), as Seller (the "SELLER"), EAGLEFUNDING CAPITAL CORPORATION, a
Delaware corporation ("EAGLEFUNDING"), as Purchaser (the "PURCHASER"), HPSC,
INC., a Delaware corporation ("HPSC"), as Servicer (the "SERVICER") and as
Custodian (the "CUSTODIAN"), and BANCBOSTON ROBERTSON STEPHENS INC., a
Massachusetts corporation ("BRS"), as Deal Agent (the "DEAL AGENT"). Capitalized
terms used herein without definition shall have the meanings ascribed thereto in
the "Receivables Purchase Agreement" referred to below.
PRELIMINARY STATEMENTS. Each of the Seller, the Servicer, the
Custodian, the Purchaser and the Deal Agent are parties to that certain Lease
Receivables Purchase Agreement dated as of June 27, 1997, as amended pursuant to
Amendment No. 1 dated as of January 30, 1998, and Amendment No. 2 dated as of
April 30, 1998 (the "Receivables Purchase Agreement").
The Seller, the Servicer and the Custodian have agreed with the Deal
Agent and the Purchaser to make an amendment to the Receivables Purchase
Agreement. Each of the parties hereto has consented to the proposed amendment,
as hereinafter set forth.
SECTION 1. AMENDMENT TO THE RECEIVABLES PURCHASE AGREEMENT. The
Receivables Purchase Agreement is, effective as of the date first written above
and subject to the satisfaction of the conditions precedent set forth in Section
2 hereof, hereby amended to delete the reference to "$150,000,000" in the
definition of the term "Purchase Limit" set forth in Appendix A of the
Receivables Purchase Agreement, and to replace the same with a reference to
"$125,000,000".
SECTION 2. CONDITIONS PRECEDENT. This amendment shall become effective
as of April 4,1999 upon receipt by the DealAgent or its counsel of (i)
counterpart signature pages of this Amendment, executed by each of the parties
hereto, (ii) counterpart signature pages of Amendment No. 2 to the Liquidity
Agrement, dated as of April 30, 1999, executed by each of the parties thereto.
SECTION 3. COVENANTS, REPRESENTATIONS AND WARRANTIES OF THE SELLER
AND THE SERVICER.
(a) Upon the effectiveness of this Amendment, each of the Seller, the
Servicer and the Custodian hereby (i) reaffirms all covenants, representations
and warranties made by it in the Receivables Purchase Agreement to the extent
the same are not amended hereby, (ii) agrees that all such covenants,
representations and warranties shall be deemed
<PAGE> 2
to have been re-made as of the effective date of this Amendment, and (iii)
represents and warrants that no Event of Termination, Unmatured Event of
Termination, Wind-Down Event, Unmatured Wind-Down Event, Servicing Termination
Event or event which with the giving of notice or the passage of time or both
would constitute a Servicing Termination Event, is in effect or is continuing.
(b) Each of the Seller, the Servicer and the Custodian hereby
represents and warrants that this Amendment constitutes its legal, valid and
binding obligation, enforceable against such Person in accordance with its
terms.
SECTION 4. REFERENCE TO AND EFFECT ON THE FACILITY DOCUMENTS.
(a) Upon the effectiveness of this Amendment, (i) each reference in the
Receivables Purchase Agreement to "this EagleFunding Purchase Agreement", "this
Agreement", "hereunder", "hereof", "herein" or words of like import shall mean
and be a reference to the Receivables Purchase Agreement, as amended hereby, and
(ii) each reference to the Receivables Purchase Agreement in any other Facility
Document, or any other document, instrument or agreement executed and/or
delivered in connection therewith, shall mean and be a reference to the
Receivables Purchase Agreement as amended hereby.
(b) Except as specifically amended above, the terms and conditions of
the Receivables Purchase Agreement, of all other Facility Documents and any
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not operate as a waiver of any right, power or remedy of the Deal Agent or the
Purchaser under the Receivables Purchase Agreement or any other Facility
Document or any other document, instrument or agreement executed in connection
therewith, nor constitute a waiver of any provision contained therein, in each
case except as specifically set forth herein.
SECTION 5. EXECUTION OF COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall be deemed to be
an original and all of which taken together shall constitute but one and the
same instrument.
SECTION 6. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 7. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of
this Amendment for any other purpose.
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
HPSC CAPITAL FUNDING, INC.
By: /s/ John W. Everets
--------------------------------
Title: President
Sixty State Street
35th Floor
Boston, MA 02109-1803
Attn: President
Telecopy: (617) 720-7299
HPSC, INC., as Servicer and as Custodian
By: /s/ John W. Everets
--------------------------------
Title: Chairman
By: /s/ Rene Lefebvre
--------------------------------
Title: Chief Financial Officer
Sixty State Street
35th Floor
Boston, MA 02109-1803
Attn: Vice President, Finance
Telecopy: (617) 720-7272
<PAGE> 4
EAGLEFUNDING CAPITAL CORPORATION
By: BancBoston Robertson Stephens Inc.,
its attorney-in-fact
By: /s/ John T. Hackett III
------------------------------
Title: Director
100 Federal Street
Boston, MA 02110
Telecopy: (617) 434-1533
BANCBOSTON ROBERTSON STEPHENS
INC., as Deal Agent
By: /s/ John T. Hackett III
---------------------------------
Title: Director
100 Federal Street
Boston, MA 02110
Telecopy: (617) 434-1533
<PAGE> 1
EXHIBIT 13.1
TO OUR STOCKHOLDERS
1999 was a year in which HPSC enjoyed continued growth. At year end, gross
owned and serviced receivables exceeded one-half billion dollars while our net
income increased by 38% and our originations increased to $227,000,000 from
$182,000,000. We continue to achieve and in many areas exceed the goals
established by our strategic planning process.
For the future we will remain focused while continuing our commitment to
excellent service. We will aggressively pursue the goals outlined in our
Strategic Plan and make every effort to maintain credit quality and to invest in
technology, including a highly visible internet presence.
We are gratified by the strong support of our stockholders, lenders and the
ongoing professionalism of our employee shareholders. Future growth and
profitability remain our goals.
/s/ John W. Everets
- --------------------------
JOHN W. EVERETS
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
<PAGE> 2
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents ............................................ $ 1,356 $ 4,583
Restricted Cash ...................................................... 14,924 9,588
Investment in Leases and Notes:
Lease contracts and notes receivable due in installments .......... 387,909 293,211
Notes receivable .................................................. 38,720 35,863
Retained interest in leases and notes sold ........................ 17,869 14,500
Estimated residual value of equipment at end of lease term ........ 18,988 14,830
Less unearned income .............................................. (94,228) (73,019)
Less allowance for losses ......................................... (9,150) (7,350)
Less security deposits ............................................ (6,721) (6,756)
Deferred origination costs ........................................ 8,696 6,696
-------- --------
Net investment in leases and notes ........................... 362,083 277,975
-------- --------
Other Assets:
Other assets ...................................................... 7,104 5,682
Refundable income taxes ........................................... 260 774
-------- --------
Total Assets ......................................................... $385,727 $298,602
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving Credit Borrowings .......................................... $ 70,000 $ 49,000
Senior Notes ......................................................... 227,445 174,541
Subordinated Debt .................................................... 20,000 20,000
Accounts Payable and Accrued Liabilities ............................. 15,454 7,030
Accrued Interest ..................................................... 1,940 1,285
Income Taxes:
Currently payable ................................................. 398 84
Deferred .......................................................... 10,192 9,096
-------- --------
Total Liabilities .................................................... 345,429 261,036
-------- --------
Stockholders' Equity:
Preferred stock, $1.00 par value;
authorized, 5,000,000 shares; issued, none ................... -- --
Common stock, $.01 par value; 15,000,000 shares
authorized; issued, 4,699,530 shares in
1999 and 4,618,530 shares in 1998 ............................ 47 46
Additional paid-in capital ........................................ 14,119 12,941
Retained earnings ................................................. 31,167 28,448
Less: Treasury stock, at cost (518,500 shares
in 1999 and 368,000 shares in 1998) ............................. (3,611) (2,230)
Deferred compensation ....................................... (1,008) (1,141)
Notes receivable from officers and employees ................ (416) (498)
-------- --------
Total Stockholders' Equity ........................................... 40,298 37,566
-------- --------
Total Liabilities and Stockholders' Equity ........................... $385,727 $298,602
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE> 3
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Earned income on leases and notes ................... $ 40,052 $ 32,961 $ 23,691
Gain on sales of leases and notes ................... 4,916 4,906 3,123
Provision for losses ................................ (4,489) (4,201) (2,194)
---------- ---------- ----------
Net Revenues ................................... 40,479 33,666 24,620
---------- ---------- ----------
Operating and Other (Income) Expenses:
Selling, general and administrative ................. 17,715 14,897 11,449
Interest expense .................................... 18,903 15,587 11,530
Interest income ..................................... (765) (337) (361)
---------- ---------- ----------
Income before Income Taxes ............................. 4,626 3,519 2,002
Provision for Income Taxes ............................. 1,907 1,543 881
---------- ---------- ----------
Net Income ............................................. $ 2,719 $ 1,976 $ 1,121
========== ========== ==========
Basic Net Income per Share ............................. $ 0.72 $ 0.53 $ 0.30
---------- ---------- ----------
Shares Used to Compute Basic Net Income per Share ...... 3,766,684 3,719,026 3,732,576
---------- ---------- ----------
Diluted Net Income per Share ........................... $ 0.61 $ 0.47 $ 0.26
---------- ---------- ----------
Shares Used to Compute Diluted Net Income per Share .... 4,436,476 4,194,556 4,315,370
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK
-------------- NOTES
RECEIVABLE
ADDITIONAL FROM
PAID-IN RETAINED TREASURY DEFERRED OFFICERS AND
SHARES AMOUNT CAPITAL EARNINGS STOCK COMPENSATION EMPLOYEES TOTAL
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 ........... 4,786,530 $ 48 $12,305 $25,351 $ (587) $(2,590) $(195) $34,332
Net Income ........................... -- -- -- 1,121 -- -- -- 1,121
Restricted Stock Awards .............. 126,000 1 (1) -- -- -- -- --
Purchase of Treasury Stock . ......... -- -- -- -- (623) -- -- (623)
Restricted Stock Compensation ........ -- -- -- -- -- 199 -- 199
ESOP Compensation .................... -- -- -- -- -- 105 -- 105
Notes Receivable from
Officers and Employees ............ -- -- -- -- -- -- 40 40
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 ......... 4,912,530 49 12,304 26,472 (1,210) (2,286) (155) 35,174
Net Income ........................... -- -- -- 1,976 -- -- -- 1,976
Restricted Stock Awards .............. -- -- 643 -- -- (643) -- --
Purchase of Treasury Stock ........... -- -- -- -- (1,020) -- -- (1,020)
Restricted Stock Compensation ........ -- -- -- -- -- 458 -- 458
ESOP Compensation .................... -- -- -- -- -- 105 -- 105
Notes Receivable from
Officers and Employees ............ -- -- -- -- -- -- (343) (343)
Cancellation of SESOP ................ (350,000) (4) (1,221) -- -- 1,225 -- --
Stock Bonus Awards ................... 6,000 -- 31 -- -- -- -- 31
Exercise of Stock Options ............ 200,000 2 613 -- -- -- -- 615
Tax Benefit related to
Exercise of Non-Qualified
Stock Options ..................... -- -- 270 -- -- -- -- 270
Conversion of Restricted
Stock to Stock Options ............ (150,000) (1) 1 -- -- -- -- --
Extension of Stock Options
Scheduled to Expire ............... -- -- 300 -- -- -- -- 300
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 ......... 4,618,530 46 12,941 28,448 (2,230) (1,141) (498) 37,566
Net Income .......................... -- -- -- 2,719 -- -- -- 2,719
Restricted Stock Awards .............. -- -- 637 -- -- (637) -- --
Restricted Stock Forfeitures ......... (2,000) -- (18) -- -- 18 -- --
Purchase of Treasury Stock ........... -- -- -- -- (1,381) -- -- (1,381)
Restricted Stock Compensation ........ -- -- -- -- -- 647 -- 647
ESOP Compensation .................... -- -- -- -- -- 105 -- 105
Notes Receivable from
Officers and Employees ............ -- -- -- -- -- -- 82 82
Stock Bonus Awards ................... 6,000 -- 53 -- -- -- -- 53
Exercise of Stock Options ............ 77,000 1 299 -- -- -- -- 300
Tax Benefit related to
Exercise of Non-Qualified
Stock Options ..................... -- -- 139 -- -- -- -- 139
Extension of Stock Options
Scheduled to Expire .............. -- -- 68 -- -- -- -- 68
- -------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 ......... 4,699,530 $ 47 $14,119 $31,167 $(3,611) $(1,008) $(416) $40,298
===============================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................................................ $ 2,719 $ 1,976 $ 1,121
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization .................................................. 5,204 4,460 3,708
Increase in deferred income taxes .............................................. 1,096 1,543 2,551
Restricted stock, stock option, and stock bonus award compensation ............. 768 789 199
Gain on sale of lease contracts and notes receivable ........................... (4,916) (4,906) (3,123)
Provision for losses on lease contracts and notes receivable ................... 4,489 4,201 2,194
Increase in accrued interest ................................................... 655 156 679
Increase (decrease) in accounts payable and accrued liabilities ................ 1,614 (920) 346
Increase (decrease) in accrued income taxes .................................... 314 18 (234)
(Increase) decrease in refundable income taxes ................................. 514 1,996 (1,567)
(Increase) decrease in other assets ............................................ (1,052) 14 (446)
--------------------------------------
Cash provided by operating activities ................................................ 11,405 9,327 5,428
--------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of lease contracts and notes receivable due in installments ........... (213,819) (166,672) (135,625)
Portfolio receipts, net of amounts included in income ............................. 70,245 58,661 48,739
Proceeds from sales of lease contracts and notes receivable due in installments ... 54,390 38,696 33,039
Net increase in notes receivable .................................................. (2,951) (289) (16,729)
Net increase (decrease) in security deposits ...................................... (35) 955 1,279
Net increase in other assets ...................................................... (808) (621) (191)
Net (increase) decrease in loans to employees ..................................... 82 (343) 40
--------------------------------------
Cash used in investing activities .................................................... (92,896) (69,613) (69,448)
--------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of senior subordinated notes, net of debt issue costs ...... -- -- 18,306
Repayment of senior notes ......................................................... (75,147) (61,030) (53,125)
Proceeds from issuance of senior notes, net of debt issue costs ................... 128,051 111,474 100,087
Net proceeds (repayments) from demand and revolving notes payable to banks ........ 21,000 10,000 (1,000)
Purchase of treasury stock ........................................................ (1,381) (1,020) (623)
Increase in restricted cash ....................................................... 5,336 2,588 231
Exercise of employee stock options ................................................ 300 615 --
Repayment of employee stock ownership plan promissory note ........................ 105 105 105
--------------------------------------
Cash provided by financing activities ................................................ 78,264 62,732 63,981
--------------------------------------
Net increase (decrease) in cash and cash equivalents ................................. (3,227) 2,446 (39)
Cash and cash equivalents at beginning of year ....................................... 4,583 2,137 2,176
--------------------------------------
Cash and cash equivalents at end of year ............................................. $ 1,356 $ 4,583 $ 2,137
--------------------------------------
Supplemental disclosures of cash flow information:
Interest paid ..................................................................... $ 17,666 $ 14,775 $ 9,835
Income taxes paid ................................................................. 150 52 616
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business_ HPSC, Inc. ("HPSC") and its consolidated subsidiaries (the
"Company") provide financing to licensed professionals, principally healthcare
providers, through leases and notes due in installments. The Company also
provides asset-based financing to small and medium-sized manufacturing and
distribution companies throughout the United States.
The Company finances dental, ophthalmic, chiropractic, veterinary and
other medical equipment utilized in the healthcare professions. The Company does
not carry any inventory. The Company acquires the financed equipment from
vendors at their customary selling price to other customers. All leases are
classified as direct financing leases. The Company also finances the acquisition
of healthcare practices by healthcare professionals and provides financing on
leasehold improvements, office furniture and equipment, and certain other costs
involved in opening or maintaining a healthcare provider's office.
Through its wholly-owned subsidiary, American Commercial Finance
Corporation ("ACFC"), the Company also provides asset-based financing to
manufacturing and distribution companies whose borrowing requirements are
generally less than $5,000,000.
Consolidation_ The accompanying consolidated financial statements
include HPSC, Inc. and the following wholly-owned subsidiaries: ACFC, an
asset-based lender focused primarily on providing accounts receivable and
inventory financing at variable rates; HPSC Funding Corp. I ("Funding I"), HPSC
Bravo Funding Corp. ("Bravo") and HPSC Capital Funding Inc. ("Capital"),
special-purpose corporations formed in connection with securitizations; and
Credident, Inc. ("Credident") the Company's inactive Canadian subsidiary. All
intercompany transactions have been eliminated in consolidation.
Use of Estimates_ The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. A significant area requiring the use of management
estimates is the allowance for losses on leases and notes receivable. Actual
results could differ from those estimates.
Revenue Recognition_ The Company finances equipment only after a
customer's credit has been approved and a lease or financing agreement for the
transaction has been executed. The Company performs ongoing credit evaluations
of its customers and maintains allowances for potential credit losses. When a
transaction is initially activated, the Company records the minimum payments and
the estimated residual value, if any, associated with the transaction. An amount
equal to the sum of the payments due plus residual value less the cost of the
transaction is recorded as unearned income. The unearned income is recognized as
revenue over the life of the transaction using the interest method. Recognition
of revenue on these assets is suspended when a transaction enters the legal
collection phase. Also included in earned income are fee income from service
charges on portfolio accounts, gains and losses on residual transactions, and
miscellaneous income items, net of initial direct cost amortization.
Sales of Leases and Notes Receivable_ The Company sells a portion of
its leases and notes receivable to third parties. Gains on sales of leases and
notes are recognized at the time of the sale. The gain is computed as the excess
of the present value of the anticipated future cash flows plus retained
interest, net of initial direct costs and expenses, over the Company's current
carrying value of the assets sold. Generally, the Company retains the servicing
of financing contracts sold. Servicing fees specified in the sale agreements,
which the Company believes approximate its servicing costs, are deferred and
recognized as revenue in proportion to the estimated periodic servicing costs.
Effective January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" for recording
the net gains and retained interests from such sales. The adoption of SFAS
6
<PAGE> 7
No. 125, which superseded SFAS No. 77, "Reporting by Transferors for Transfers
of Financial Assets and Extinguishments of Liabilities," did not have a material
effect on the Company's consolidated financial position or results of
operations.
Deferred Origination Costs_ The Company capitalizes initial direct
costs that relate to the origination of leases and notes receivable in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases". These initial direct costs comprise certain specific activities related
to processing requests for financing. Deferred origination costs are amortized
on the interest method over the life of the receivable as an adjustment of
yield.
Allowance for Losses_ The Company records an allowance for losses in
its portfolio. The extent of the allowance is based on historical loss
experiences, delinquencies, and a specific analysis of potential loss accounts.
An account is specifically reserved for or written off when deemed
uncollectible.
The Company occasionally repossesses equipment from lessees who have
defaulted on their obligations to the Company. There was no such equipment held
for resale at December 31, 1999 or 1998.
The Company accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosure." These standards, which do not apply to the Company's lease
contracts, apply to the Company's practice acquisition and asset-based loans,
the Company's two major risk classifications used to aggregate loans for
purposes of SFAS No. 114. The standards require that a loan be classified and
accounted for as an impaired loan when it is probable that the Company will be
unable to collect all principal and interest due on the loan in accordance with
the loan's original contractual terms.
Impaired practice acquisition and asset-based loans are valued based on
the present value of expected future cash flows, using the interest rate in
effect at the time the loan was placed on nonaccrual status. A loan's observable
market value or collateral value may be used as an alternative valuation
technique. Impairment exists when the recorded investment in a loan exceeds the
value of the loan measured using the above mentioned valuation techniques. Such
impairment is recognized as a valuation reserve, which is included as a part of
the Company's allowance for losses. The Company had no impaired loans at
December 31, 1999 or 1998.
Accounting for Stock-Based Compensation_ The Company accounts for
stock-based compensation in accordance with Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company applies
the intrinsic value method under APB No. 25 to measure compensation expense
related to grants of stock options, and has disclosed the pro forma information
required by SFAS No. 123, "Accounting for Stock-Based Compensation".
Income Taxes_ The Company accounts for income taxes in accordance with
SFAS No. 109 "Accounting for Income Taxes". Current tax liabilities or assets
are recognized, through charges or credits to the current tax provision, for the
estimated taxes payable or refundable for the current year. Net deferred tax
liabilities or assets are recognized, through charges or credits to the deferred
tax provision, for the estimated future tax effects, based on enacted tax rates,
attributable to temporary differences. Deferred tax liabilities are recognized
for temporary differences that will result in amounts taxable in the future, and
deferred tax assets are recognized for temporary differences and tax benefit
carryforwards that will result in amounts deductible or creditable in the
future. The effect of enacted changes in tax law, including changes in tax
rates, on these deferred tax assets and liabilities is recognized in income in
the period that includes the enactment date. A deferred tax valuation reserve is
established if it is more likely than not that all or a portion of the Company's
deferred tax assets will not be realized. Changes in the deferred tax valuation
reserve are recognized through charges or credits to the deferred tax provision.
Cash and Cash Equivalents_ The Company considers all highly liquid
investments with a maturity of three months or less when acquired to be cash
equivalents.
Restricted Cash_ As part of its servicing obligation under its
securitization and sales agreements (Notes C and D), the Company collects
certain cash receipts on financing contracts pledged or sold. These collections
are segregated in separate accounts for the benefit of the third parties to whom
the related lease contracts and notes receivable were pledged or sold and are
remitted to the third parties on a monthly basis.
7
<PAGE> 8
Interest Rate Swap Contracts_ Pursuant to the terms of its
securitization agreements (Notes C and D), the Company is required to enter into
interest rate swap contracts. These interest rate swaps are matched swaps and,
as such, are accounted for using settlement accounting. In the case where the
notional value of the interest rate swap agreements significantly exceeds the
outstanding underlying debt, the excess swap agreements would be
marked-to-market. All interest rate swap agreements entered into by the Company
are for other than trading purposes. The Company has established a control
environment which includes policies and procedures for risk assessment and the
approval, reporting and monitoring of derivative financial instrument
activities.
Property and Equipment_ Office furniture, equipment and capital leases
are recorded at cost and depreciated using the straight-line method over a
period of three to five years. Leasehold improvements are amortized over the
shorter of the life of the lease or the asset. Upon retirement or other
disposition, the cost and related accumulated depreciation of the assets are
removed from the accounts and the resulting gain or loss is reflected in income.
Net property, plant and equipment is included in other assets and was not
material at December 31, 1999 or 1998.
Deferred Compensation_ Deferred compensation includes notes receivable
from the Company's Employee Stock Ownership Plan ("ESOP") and Supplemental
Employee Stock Ownership Plan ("SESOP"), and deferred compensation related to
restricted stock awards. In April 1998, the Company canceled its SESOP. The
Company had originally issued 350,000 shares of common stock to this plan in
July 1994 in consideration of a promissory note. The shares issued to the SESOP
were retired and the promissory note in the principal amount of $1,225,000 was
canceled. Deferred compensation consists of the following:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
ESOP ......................................... $ 421 $ 526 $ 631
SESOP ........................................ -- -- 1,225
Restricted stock ............................. 587 615 430
------ ------ ------
Total ..................................... $1,008 $1,141 $2,286
====== ====== ======
</TABLE>
Recently Issued Accounting Pronouncements_ Effective January 1, 1998,
the Company adopted SFAS No. 130, "Reporting Comprehensive Income". This
statement established standards for reporting and presenting comprehensive
income and its components. Comprehensive income equals net income for the years
ended December 31, 1999, 1998 and 1997.
Effective January 1, 1998, the Company adopted the provisions of SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
and SFAS No. 132, "Employers' Disclosure about Pensions and Other Post
Retirement Benefits". The Company has provided the required disclosures of these
pronouncements in Notes L and I, respectively.
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This statement establishes new accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
This statement will be effective for the first quarter of the Company's year
ended December 31, 2001. The Company is evaluating the impact of the adoption of
this statement on its consolidated financial statements.
Reclassifications_ Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform to the current year
presentation.
NOTE B. LEASES AND NOTES RECEIVABLE
The Company's finance portfolio consists of two general categories of
assets.
The first category of assets consists of the Company's lease contracts
and notes receivable due in installments, which comprise approximately 89% of
the Company's net investment in leases and notes at December 31, 1999 (87% at
December 31, 1998). The majority of such contracts and notes are due from
licensed medical professionals, principally dentists, who practice in individual
or small group practices. Such contracts and notes are at fixed interest rates
and have terms ranging from 12 to 84 months. The Company believes that leases
and notes entered into with medical professionals are generally "small-ticket,"
homogenous transactions with similar risk characteristics. Except for the
amounts described in the following paragraph related to
8
<PAGE> 9
asset-based lending, the majority of the Company's historical provision for
losses, charge-offs, recoveries and allowance for losses have related to its
lease contracts and notes receivable due in installments.
The second category of assets consists of the Company's notes
receivable, which comprise approximately 11% of the Company's net investment in
leases and notes at December 31, 1999 (13% at December 31, 1998). These notes
primarily relate to commercial, asset-based, revolving lines of credit to small
and medium sized manufacturers and distributors, at variable interest rates, and
typically have terms of two years. The provision for losses related to the
commercial notes receivable were $113,000, $147,000, and $236,000 in 1999, 1998,
and 1997, respectively. Net charge-offs of commercial notes receivable were
$19,000, $75,000, and $0 in 1999, 1998, and 1997, respectively. The amount of
the allowance for losses related to the commercial notes receivable were
$686,000 and $592,000 at December 31, 1999 and 1998, respectively.
A summary of activity in the Company's allowance for losses for each of
the years in the three-year period ended December 31, 1999 is as follows:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $(7,350) $(5,541) $(4,562)
Provision for losses (4,489) (4,201) (2,194)
Charge-offs 2,853 2,498 1,304
Recoveries (164) (106) (89)
------- ------- -------
Balance, end of year $(9,150) $(7,350) $(5,541)
======= ======= =======
</TABLE>
The Company's receivables are subject to credit risk. To reduce this
risk, the Company has adopted underwriting policies in approving leases and
notes that are closely monitored by management. Additionally, certain of the
Company's leases and notes receivable, which have been sold under certain sales
agreements (Note D), are subject to recourse and estimated losses are provided
for by the Company.
The total contractual balances of delinquent lease contracts and notes
receivable due in installments, both owned by the Company and owned by others
and managed by the Company, which were over 90 days past due amounted to
$15,928,000 at December 31, 1999 compared to $9,967,000 at December 31, 1998. An
account is considered delinquent when not paid within 30 days of the billing due
date.
The Company's agreements with its customers, except for commercial
notes receivable of approximately $38,720,000 in 1999 and $35,863,000 in 1998,
are non-cancelable and provide for a full payout at a fixed financing rate with
a fixed payment schedule over a term of one to seven years. Scheduled future
receipts on lease contracts and notes receivable due in installments, plus
retained interest on leases and notes sold, including interest and excluding the
residual value of the equipment and ACFC receivables, at December 31, 1999 were
as follows:
<TABLE>
(in thousands)
<S> <C>
2000....................................................... $112,274
2001....................................................... 97,109
2002....................................................... 80,040
2003....................................................... 58,032
2004....................................................... 35,365
2005 and thereafter........................................ 22,958
</TABLE>
NOTE C. REVOLVING CREDIT BORROWINGS AND OTHER DEBT
Debt of the Company as of December 31, 1999 and 1998 is summarized
below.
<TABLE>
<CAPTION>
(in thousands) 1999 1998
-------- --------
<S> <C> <C>
Revolving credit arrangement, due May 2000 ............... $ 70,000 $ 49,000
-------- --------
</TABLE>
9
<PAGE> 10
<TABLE>
<S> <C> <C>
Senior Notes:
Senior Notes- Bravo, due June 2003 ................. 132,475 61,506
Senior Notes- Capital, due April 2001 .............. 84,587 110,254
Senior Notes- Various banks, due June 2000
through April 2006 .............................. 10,383 2,781
-------- --------
Total Senior Notes ....................................... 227,445 174,541
-------- --------
Unsecured Senior Subordinated Notes, due March 2007 ...... 20,000 20,000
-------- --------
Total .................................................... $317,445 $243,541
======== ========
</TABLE>
Revolving Credit Arrangement_ In March 1998, the Company executed a
Third Amended and Restated Revolving Loan Agreement with BankBoston as Managing
Agent (the "Revolving Loan Agreement" or "Revolver"), providing availability up
to $100,000,000 through March 1999. In March 1999, this agreement was extended
on the same terms and conditions through May 1999, providing availability up to
$86,000,000. In May 1999, the Company executed the Third Amendment to the Third
Amended and Restated Revolving Loan Agreement. The Third Amendment to the
Revolver provides availability up to $90,000,000 under substantially the same
terms and conditions, through May 2000. Under the Revolving Loan Agreement, the
Company may borrow at variable interest rates of prime and at LIBOR plus 1.35%
to 1.50%, depending upon certain performance covenants. The weighted average
interest rates on the outstanding borrowings were 7.8% and 7.1% at December 31,
1999 and 1998, respectively. In connection with the arrangement, all HPSC and
ACFC assets, including ACFC stock, but excluding assets collateralizing the
senior notes, have been pledged as collateral. The Revolver has not been hedged
and was not hedged at December 31, 1999 and is therefore exposed to upward
movements in interest rates.
Senior Notes- Bravo_ In June 1998, the Company, along with its
wholly-owned, special-purpose subsidiary, HPSC Bravo Funding Corporation
("Bravo") signed an amended revolving credit facility (the "Bravo Facility")
structured and guaranteed by MBIA, Inc. The Bravo Facility provides the Company
with available borrowings up to $225,000,000 with $67,500,000 of the Bravo
Facility available to be used for sales of financing contracts. Under the terms
of the Bravo Facility, Bravo, to which the Company sells and may continue to
sell or contribute certain of its portfolio assets, subject to certain covenants
regarding Bravo's portfolio performance and borrowing base calculations, pledges
or sells its interest in these assets to a commercial-paper conduit entity.
Bravo incurs interest at variable rates based on rates in the commercial paper
market and enters into interest rate swap agreements to assure fixed rate
funding.
Monthly settlements of principal and interest payments are made from
collections on portfolio assets held by Bravo. The terms of the Bravo Facility
restrict the use of certain collected cash. This restricted cash amounted to
approximately $7,448,000 and $5,114,000 at December 31, 1999 and 1998,
respectively. The required monthly payments of principal and interest to
purchasers of commercial paper issued pursuant to the Bravo Facility are
guaranteed by MBIA.
Bravo enters into interest rate swap contracts to hedge its interest
rate risk related to its variable rate obligation to the commercial paper
conduit. Under such interest rate swap contracts, Bravo pays a fixed rate of
interest and receives a variable rate from the counterparty. At the time of
entering into the interest rate swap contract, Bravo may assign its right,
title, and interest in such contracts to the assignee or purchaser of the
assets. Credit risk exists to the extent that a loss may occur if a counterparty
to a transaction fails to perform according to the terms of the contract. The
notional amount of interest rate swap contracts is the amount upon which
interest and other payments under the contract are based.
Senior Notes- Capital_ In April 1998, the Company, along with its
wholly-owned, special purpose subsidiary, HPSC Capital Funding, Inc. ("Capital")
signed an amended Lease Receivable Purchase Agreement with EagleFunding Capital
Corporation ("Eagle"). This facility (the "Capital Facility") provided the
Company with availability up to $150,000,000. In April 1999, the Capital
Facility was renewed on substantially the same terms and conditions, providing
available borrowings up to $125,000,000. Under the terms of the Capital
Facility, Capital, to which the Company may sell or contribute certain of its
portfolio assets from time to time, subject to certain covenants regarding
Capital's portfolio performance and borrowing base calculations, pledges or
sells its interests in these assets to a commercial paper conduit entity.
Capital incurs interest at variable rates based on rates in the commercial paper
market and enters into interest rate swap agreements to assure fixed rate
funding.
10
<PAGE> 11
Monthly settlements of the borrowing base and any applicable principal
and interest payments are made from collections of Capital's portfolio. The
terms of the Capital Facility restrict the use of certain collected cash. This
restricted cash equaled approximately $7,476,000 and $4,474,000 at December 31,
1999 and 1998, respectively. The required monthly payments of principal and
interest to the purchasers of the commercial paper are guaranteed by BankBoston
pursuant to the terms of the Capital Facility.
In the normal course of securitization transactions, Capital enters
into interest rate swap contracts to hedge its interest rate risk related to its
variable rate obligation to the commercial paper conduit. Under such interest
rate swap contracts, Capital pays a fixed rate of interest and receives a
variable rate from the counterparty. At the time of entering into the interest
rate swap contract, Capital may assign its right, title, and interest in such
contracts to the assignee or purchaser of the assets. Credit risk exists to the
extent a loss may occur if a counterparty to a transaction fails to perform
according to the terms of the contract. The notional amount of interest rate
contracts is the amount upon which interest and other payments under the
contract are based.
At December 31, 1999, the Company had approximately $217,062,000 of
indebtedness outstanding under both the Bravo and Capital Facilities, and in
connection with these borrowings, had interest rate swap contracts with
BankBoston with a total notional value of $215,565,000 at an effective interest
rate of 5.90%. At December 31, 1998, the Company had approximately $171,760,000
of indebtedness outstanding under both the Bravo and Capital Facilities, and in
connection with these borrowings, had interest rate swap contracts with
BankBoston with a total notional value of $162,361,000 at an effective interest
rate of 5.88%.
The total amount of loans outstanding under both the Bravo and Capital
Facilities, the notional amount of interest rate swaps outstanding related to
such loans, and the effective interest rate under the swaps, assuming payments
are made as scheduled, will be as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT FOR %) BORROWINGS SWAPS RATE
- --------------------------- ---------- ----- ----
<S> <C> <C> <C>
December 31, 2000............................... $ 154,104 $151,336 5.88%
December 31, 2001............................... 101,046 98,408 5.88%
December 31, 2002............................... 56,524 54,835 5.90%
December 31, 2003............................... 25,255 24,415 5.99%
December 31, 2004............................... 8,190 7,946 6.08%
</TABLE>
Senior Notes- Various Banks_ The Company periodically enters into
secured, fixed term loan agreements with various banks for purposes of financing
its operations. The loans are generally subject to certain recourse and
performance covenants. At December 31, 1999 and 1998, the Company had
outstanding borrowings under such loan agreements of approximately $10,383,000
and $2,781,000, respectively, with annual interest rates ranging from 6.5% to
9.5%.
Senior Subordinated Notes_ The Company's unsecured senior subordinated
notes (the "Notes") bear interest at a fixed rate of 11%, payable semi-annually
on April 1 and October 1 of each year. The Notes are redeemable at the option of
the Company, in whole or in part, other than through the operation of a sinking
fund, after April 1, 2002 at established redemption prices, plus accrued but
unpaid interest to the date of repurchase. Beginning July 1, 2002, the Company
is required to redeem through sinking fund payments, on January 1, April 1, July
1, and October 1 of each year, a portion of the aggregate principal amount of
the Notes at a redemption price equal to $1,000,000 plus accrued but unpaid
interest to the redemption date. At December 31, 1999 and 1998, the Company had
$20,000,000 of senior subordinated notes outstanding.
Certain debt and securitization agreements contain restrictive
covenants which, among other things, include minimum net worth, interest
coverage ratios, capital expenditures, and portfolio performance guidelines. At
December 31, 1999, the Company was in compliance with the provisions of its debt
covenants.
The scheduled maturities of the Company's revolving credit borrowings
and all other debt obligations at December 31, 1999 are as follows:
<TABLE>
(in thousands)
<S> <C>
2000.................................................................. $ 132,492
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C>
2001.................................................................. 55,081
2002.................................................................. 48,550
2003.................................................................. 37,213
2004.................................................................. 22,482
Thereafter............................................................ 21,627
</TABLE>
Management believes that the Company's liquidity is adequate to meet current
obligations and future projected levels of financings, and to carry on normal
operations. The Company will continue to seek to raise additional capital from
bank and non-bank sources, and from selective use of asset-sale transactions in
the future. The Company expects that it will be able to obtain additional
capital at competitive rates, but there can be no assurance that it will be able
to do so.
NOTE D. SALES OF LEASES AND NOTES RECEIVABLE
The Company sells lease contracts and notes receivable due in
installments under certain sales and securitization agreements. In 1999, 1998
and 1997, the Company received cash proceeds of approximately $54,390,000,
$38,696,000, and $33,039,000, respectively, and recognized pre-tax gains of
approximately $4,916,000, $4,906,000, and $3,123,000, respectively, in
connection with these sales.
In conjunction with the Company's two securitization facilities, the
Company may sell certain of its portfolio assets to one of its two wholly-owned,
special purpose, bankruptcy-remote subsidiaries, Bravo and Capital (Note C).
Under the terms of the agreements for these facilities, the special purpose
entities in turn sell the assets to a commercial paper conduit. Sales by the
Company to either of its subsidiaries are subject to certain asset performance
and asset base calculations. Proceeds from sales consist of cash, representing a
portion of the net present value of the future scheduled payments for the assets
sold, and a non-certificated, undivided interest in the assets sold. In
recording the net gain on the sale of the assets and the fair value of the net
receivables due, the Company assumes a loss rate on its retained interest
approximating its historical loss rates, and present values its receivable
stream at the implicit rate of the underlying sold assets. At December 31, 1999
and 1998, the Company had approximately $93,044,000 and $60,623,000 outstanding,
respectively, under the Bravo and Capital agreements. As a hedge against
fluctuations in interest rates associated with commercial paper markets, both
Bravo and Capital enter into interest rate swap agreements. At December 31, 1999
and 1998, interest rate swap agreements, with a total notional value of
approximately $82,328,000 and $60,517,000, respectively, were in place in
connection with such sales.
Certain sales agreements from 1996 and 1995 are subject to covenants
that, among other matters, may require the Company to repurchase the assets sold
and/or make payments under certain circumstances, primarily on the failure of
the underlying debtors to make payments when due. The total outstanding balances
subject to repurchase obligations by the Company were approximately $4,081,000
at December 31, 1999 and $8,093,000 at December 31, 1998.
Under the sales and securitization agreements, the Company may continue
to service the assets sold, subject to the maintenance of certain covenants. The
Company believes that its servicing fee approximates its estimated servicing
costs, but does not have a market to assess the fair value of its servicing
asset. Accordingly, the Company has valued its servicing asset and liability at
zero. The Company will recognize servicing fee revenue as earned over the
servicing period. The Company recognized approximately $285,000, $208,000, and
$171,000 of such revenue in 1999, 1998 and 1997, respectively.
NOTE E. LEASE COMMITMENTS
The Company leases various office locations under noncancelable lease
arrangements that have initial terms of from three to six years and that
generally provide renewal options from one to five years. Rent expense under all
operating leases was $748,000, $628,000, and $448,000 for 1999, 1998, and 1997,
respectively.
Future minimum lease payments for commitments under non-cancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
(in thousands)
<S> <C>
2000.................................................................... $752
2001.................................................................... 611
2002.................................................................... 542
</TABLE>
12
<PAGE> 13
<TABLE>
<S> <C>
2003.................................................................... 423
2004 and thereafter..................................................... 201
</TABLE>
NOTE F. INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences"
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations.
The components of income (loss) before income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
(IN THOUSANDS) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Domestic................................................... $4,626 $3,729 $2,072
Foreign.................................................... -- (210) (70)
------ ------ ------
Income before income taxes................................. $4,626 $3,519 $2,002
====== ====== ======
Income taxes consist of the following:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
(IN THOUSANDS) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Federal:
Current................................................. $ -- $ (511) $(1,347)
Deferred................................................ 1,408 1,525 2,050
Additional paid in capital from exercise of
non-qualified stock options.......................... 111 215 --
State:
Current................................................. 672 240 (346)
Deferred................................................ (312) 19 524
Additional paid in capital from exercise of
non-qualified stock options.......................... 28 55 --
------ ------ ------
Provision for income taxes................................. $1,907 $1,543 $ 881
====== ====== ======
Deferred income taxes arise from the following:
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
(IN THOUSANDS) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Accounting for lease contracts and notes................... $ 388 $ 3,509 $2,785
Alternative minimum tax credit............................. 1,425 (1,425) --
Other...................................................... (717) (540) (211)
------ ------- ------
$1,096 $ 1,544 $2,574
====== ======= ======
</TABLE>
A reconciliation of the statutory federal income tax rate and the
effective tax rate as a percentage of pre-tax income for each year is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory rate............................................... 34.0% 34.0% 34.0%
</TABLE>
13
<PAGE> 14
<TABLE>
<S> <C> <C> <C>
State taxes net of U.S. federal income tax benefit........... 5.5 5.9 5.9
Foreign loss not benefited................................... -- 2.1 1.2
Non-deductible write-off of foreign currency
translation adjustment.................................... -- 0.2 --
Other........................................................ 1.7 1.6 2.9
---- ---- ----
41.2% 43.8% 44.0%
==== ==== ====
</TABLE>
The items which comprise a significant portion of deferred tax
liabilities are as follows at December 31:
<TABLE>
<CAPTION>
(IN THOUSANDS) 1999 1998
------- -------
<S> <C> <C>
Accounting for lease contracts and notes......................... $10,379 $11,416
Alternative minimum tax credit................................... 1,425 (1,425)
Other............................................................ (1,612) (895)
------- -------
Deferred income taxes............................................ $10,192 $ 9,096
======= =======
</TABLE>
The Accounting for lease contracts and notes deferred tax liability
represents the tax effect of temporary differences relating to the book and tax
treatment of direct financing leases and notes receivable and related
securitization transactions.
At December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $7,300,000 and $25,500,000, respectively.
The federal net operating loss carryforwards expire in the years 2018 through
2019, while the state net operating loss carryforwards expire in the years 2000
through 2019.
NOTE G. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Common Stock - The Company has 15,000,000 shares authorized and
4,699,530 shares outstanding at December 31, 1999. Of the outstanding shares,
300,000 shares have been issued to the Company's ESOP (Note I), 311,000 shares
have been issued to certain employees under the 1995 Stock Incentive Plan (Note
H), and 518,500 shares are held in treasury.
Preferred Stock - The Company has 5,000,000 shares of $1.00 par value
preferred stock authorized with no shares outstanding at December 31, 1999.
(Note J, Preferred Stock Purchase Rights Plan.)
Treasury Stock - In September 1998, the Company initiated a stock
repurchase program pursuant to which up to 175,000 shares of the Company's
common stock may be repurchased for an aggregate purchase price of up to
$1,700,000, subject to market conditions, in open market or negotiated
transactions on the NASDAQ National Market. In December 1999, the Company's
Board of Directors approved an increase in this program to include an additional
250,000 shares of the Company's common stock or up to the maximum dollar
limitations as set forth under the Company's Revolving Loan Agreement and Senior
Subordinated Note. Based on such limits, the Company may currently repurchase up
to an additional $1,000,000 in common stock. No time limit has been established
for the duration of the repurchase program. The Company expects to use the
repurchased stock to meet the current and future requirements of its employee
stock plans.
Earnings per Share - SFAS No. 128, "Earnings per Share" became
effective for the Company for the year ended December 31, 1997. SFAS No. 128
superseded APB Opinion No. 15, "Earnings per Share," by establishing new
requirements for calculating and reporting earnings per share. The Company's
basic net income per share calculation is based on the weighted average number
of common shares outstanding, which does not include unallocated shares under
the Company's ESOP and SESOP (Note I), restricted shares issued under the Stock
Plans (Note H), treasury stock, or any shares issuable upon the exercise of
outstanding stock options. Diluted net income per share includes the weighted
average number of common shares related to stock options and contingently
issuable common shares under the Restricted Stock Plan outstanding, as
calculated under the treasury stock method, but not treasury stock or
unallocated shares under the Company's ESOP and SESOP.
The following is a reconciliation of the numerators and denominators of
the basic and diluted net income per share:
14
<PAGE> 15
<TABLE>
<CAPTION>
(in thousands, except per share and share amounts) YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Basic Net Income per Share:
Net income ......................................... $ 2,719 $ 1,976 $ 1,121
Weighted average common shares outstanding ......... 3,766,684 3,719,026 3,732,576
---------- ---------- ----------
Basic net income per share ......................... $ 0.72 $ 0.53 $ 0.30
========== ========== ==========
Diluted Net Income per Share:
Net income ......................................... $ 2,719 $ 1,976 $ 1,121
Denominator:
Weighted average common shares outstanding ......... 3,766,684 3,719,026 3,732,576
Stock options and restricted shares ................ 669,792 475,530 582,794
---------- ---------- ----------
Total diluted shares ............................... 4,436,476 4,194,556 4,315,370
---------- ---------- ----------
Diluted net income per share ....................... $ 0.61 $ 0.47 $ 0.26
========== ========== ==========
</TABLE>
NOTE H. STOCK OPTION AND STOCK INCENTIVE PLANS
Stock Option Plans_ The Company had three initial stock option plans
which provided for the granting of options to purchase up to 355,375 shares of
common stock of the Company: the Employee Stock Option Plan dated March 23,
1983, as amended (the "1983 Plan"), the Stock Option Plan dated March 5, 1986
(the "1986 Plan") and the 1994 Stock Plan dated March 23, 1994 (the "1994
Plan"). These three plans were terminated in May 1995 upon the approval of the
1995 Stock Incentive Plan (the "1995 Plan"). The 1995 Plan was subsequently
terminated in February 1998 upon the approval of the 1998 Stock Incentive Plan
(the "1998 Plan"). In December 1999, the Company adopted the 2000 Stock
Incentive Plan (the "2000 Plan"). Subject to stockholder approval of the 2000
Plan in April 2000, the 1998 Plan will be terminated.
Options granted under the 1983 Plan are non-qualified options granted
at an exercise price not less than 85% of the fair market value of the common
stock on the date of grant. Options granted under the 1986 Plan are
non-qualified stock options granted at an exercise price equal to the market
price on the date of grant. Options granted under the 1994 Plan are
non-qualified options granted at an exercise price equal to the fair market
value of the common stock on the date of grant.
In April 1998, 120,000 five year options issued under the 1986 Plan,
which were scheduled to expire in 1998, were extended for an additional 5 years.
Upon the extension of the options, the Company recorded compensation expense of
$300,000. In February 1999, 15,000 options issued under the 1994 Plan, which
were scheduled to expire in 1999, were extended for an additional 5 years. Upon
the extension of the options, the Company recorded compensation expense of
$68,000. Compensation expense represents the difference between the original
option exercise price on the date of grant and the market price of the Company's
stock (the intrinsic value) on the date the extensions were granted.
1995 Plan_ The Company has outstanding stock options and awards of
restricted stock under its 1995 Plan. The options are incentive stock options
and non-qualified stock options and were granted at an exercise price equal to
the market price on the date of the grant. Restricted shares of common stock
awarded under the 1995 Plan will remain unvested until certain performance and
service conditions are both met.
The performance condition is met with respect to 50% of the restricted
shares if and when during the five-year period after the date of grant (the
"Performance Period") the closing price of the Company's common stock, as
reported on the NASDAQ National Market System for a consecutive 10 day period,
equals at least 134.175% of the closing price on the grant date (the "Partial
Performance Condition"). The performance condition is met with respect to the
remaining 50% of the restricted shares if and when during the Performance Period
the closing price of the Company's common stock, as reported on the NASDAQ
National Market System for a consecutive 10 day period, equals at least 168.35%
of the closing price on the grant date (the "Full Performance Condition").
15
<PAGE> 16
The service condition is met with respect to all restricted shares
(provided that the applicable performance condition has also been met) by the
holder's continuous service to the Company throughout the Performance Period
provided that such holder shall also have completed five (5) years of continued
service with the Company from the date of grant. Upon a change of control of the
Company (as defined in the 1995 Plan), all restricted stock awards granted prior
to such change of control become fully vested.
Upon the termination of a holder's employment by the Company without
cause or by reason of death or disability during the Performance Period, any
restricted stock awards for which the applicable performance condition is
satisfied no later than four months after the date of such termination of
employment shall become fully vested.
Awards of 337,000 restricted shares of the Company's common stock were
made in May 1995. The Partial Performance Condition of these shares is $5.90 per
share with respect to 332,000 shares and $6.04 with respect to 5,000 shares, and
the Full Performance Condition is $7.37 per share with respect to 332,000 shares
and $7.58 with respect to 5,000 shares. Additional paid in capital and deferred
compensation of $994,000 was recorded when the partial performance criteria was
achieved with respect to 50% of the restricted shares in June 1996. In April
1998, 150,000 of the outstanding restricted shares were forfeited in exchange
for stock options granted pursuant to the 1995 Plan. Additional paid in capital
and deferred compensation of $136,345 was recorded when the Full Performance
Condition was met with respect to the remaining restricted shares outstanding.
In May 1997, an additional 126,000 restricted shares were awarded under
the 1995 Plan. The Partial Performance Condition of these shares is $8.05 per
share and the Full Performance Condition is $10.10 per share. Additional paid in
capital and deferred compensation of $507,150 was recorded in May 1998 when the
Partial Performance Condition was met with respect to 50% of the restricted
shares. In August 1999, the Full Performance Condition was met with respect to
the remaining restricted shares outstanding, whereupon additional paid in
capital and deferred compensation of $637,000 was recorded.
In 1999, 1998, and 1997, the Company recognized approximately $647,000,
$458,000, and $199,000, respectively, in compensation expense related to
restricted stock awards under its 1995 Plan. The compensation expense is
recognized by the Company on a straight line basis over the 5 year service
period which begins on the date of grant. A cumulative adjustment is recorded by
the Company on the date the performance conditions are met to retroactively
recognize compensation expense from the date of grant to the date the
performance condition was met.
1998 Plan_ In February 1998, the Company's Board of Directors approved
the 1998 Plan pursuant to which 550,000 shares of common stock were reserved. In
addition, shares subject to options or stock awards under the 1995 Plan that
expire or are terminated unexercised were made available for issuance pursuant
to stock options or restricted stock awards under the 1998 Plan.
1998 Plan-Stock Options_ The 1998 Plan provided that with respect to
options granted to key employees (except non-employee directors), the option
term and the terms and conditions upon which the options may be exercised shall
be determined by the Compensation Committee of the Company's Board of Directors
for each such option at the time it is granted. Options granted to key employees
of the Company are either incentive stock options (within the meaning of Section
422 of the Internal Revenue Code of 1986 and subject to the restrictions of that
section on certain terms of such options) or non-qualified options, as
designated by the Compensation Committee. In the case of incentive stock
options, the exercise price may not be less than the average of the closing
prices of the common stock on each of the days on which the stock was traded
during the 30 calendar day period ending on the day before the date of the
option grant (the "Market Price"). The exercise price for non-qualified options
may not be less than 85% of the Market Price on the date of the grant.
With respect to automatic options to non-employee directors of the
Company (which must be non-qualified options), the 1998 Plan specifies the
option term and the terms and conditions upon which the options may be
exercised. Each non-employee director who was such at the conclusion of any
regular annual meeting of the Company's stockholders while the 1998 Plan is in
effect and who continues to serve on the Board of Directors is granted such
automatic options to purchase 1,000 shares of the Company's common stock at an
exercise price not less than the Market Price on the date of the option grant.
Each automatic option is exercisable immediately in full or for any portion
thereof and remains exercisable for 10 years after the date of grant, unless
terminated earlier (as provided in the 1998 Plan) upon or following termination
of the holder's service as a director.
16
<PAGE> 17
1998 Plan-Restricted Stock_ The 1998 Plan provides that restricted
shares of common stock awarded under the 1998 Plan will remain unvested until
certain performance and service conditions are both met.
The performance condition is met with respect to 50% of the restricted
shares if and when during the five-year period after the date of grant (the
"Performance Period") the closing price of the Company's common stock, as
reported on the NASDAQ National Market System for a consecutive 10 day period,
equals at least 137.1% of the Market Price on the grant date (the "Partial
Performance Condition"). The performance condition is met with respect to the
remaining 50% of the restricted shares if and when during the Performance Period
the closing price of the Company's common stock, as reported on the NASDAQ
National Market System for a consecutive 10 day period, equals at least 174.2%
of the Market Price on the grant date (the "Full Performance Condition").
The service condition is met with respect to all restricted shares
(provided that the applicable performance condition has also been met) by the
holder's continuous service to the Company throughout the Performance Period
provided that such holder shall also have completed five (5) years of continued
service with the Company from the date of grant. Upon a change of control of the
Company (as defined in the 1998 Plan), all restricted stock awards granted prior
to such change of control become fully vested.
Upon the termination of a holder's employment by the Company without
cause or by reason of death or disability during the Performance Period, any
restricted stock awards for which the applicable performance condition is
satisfied no later than four months after the date of such termination of
employment shall become fully vested. As of December 31, 1999, no restricted
shares had been awarded under the 1998 Plan.
2000 Plan_ In December 1999, the Company's Board of Directors approved
the 2000 Plan. Subject to stockholder approval of the 2000 Plan at the April
2000 Annual Stockholder Meeting, the 1998 Plan will be terminated. Under the
terms of the 2000 Plan, 450,000 shares of the Company's common stock will be
reserved for issuance as stock options or restricted stock awards. In addition,
shares subject to options or stock awards under the 1998 Plan that expire or are
terminated unexercised will be available for issuance pursuant to non-qualified
stock options or restricted stock awards under the 2000 Plan.
The terms of the 2000 Plan are substantially similar to the terms of
the 1998 Plan described above with the following exceptions: (1) The definition
of "market price" for the purpose of determining the exercise price for stock
options and performance conditions for restricted stock awards under the 2000
Plan will be the closing price of the Company's common stock for the relevant
date, as reported in the Wall Street Journal; and (2) the "Partial Performance
Condition" for restricted stock awards under the 2000 Plan will be 144.605% of
the market price on the grant date. The "Full Performance Condition" will be
189.210% of the market price on the grant date.
As of December 31, 1999, the Company had not granted any options or restricted
stock awards or allocated or reserved any shares of common stock to the 2000
Plan.
The following table summarizes stock option and restricted stock
activity:
<TABLE>
<CAPTION>
OPTIONS
---------------------
WEIGHTED
AVERAGE
NUMBER OF EXERCISE RESTRICTED
OPTIONS PRICE STOCK
--------- -------- ----------
<S> <C> <C> <C>
Outstanding at January 1, 1997 .......................... 641,875 $3.36 337,000
Granted .............................................. 16,000 6.08 126,000
Forfeited ............................................ (5,000) 4.75 --
--------- ----- -------
Outstanding at December 31, 1997 ........................ 652,875 3.43 463,000
Granted .............................................. 419,000 5.37 --
Exercised ............................................ (200,000) 3.08 --
Forfeited ............................................ (28,000) 5.51 --
Restricted stock converted to stock options .......... 150,000 5.13 (150,000)
--------- ----- -------
Outstanding at December 31, 1998 ........................ 993,875 4.52 313,000
</TABLE>
17
<PAGE> 18
<TABLE>
<S> <C> <C> <C>
Granted .............................................. 131,000 8.88 --
Exercised ............................................ (77,000) 3.85 --
Forfeited ............................................ (4,000) 5.13 (2,000)
--------- ----- -------
Outstanding at December 31, 1999 ........................ 1,043,875 $5.11 311,000
========= ===== =======
</TABLE>
The following table sets forth information regarding options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED WEIGHTED
RANGE OF NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
EXERCISE PRICES OF OPTIONS LIFE (YEARS) EXERCISE PRICE OF OPTIONS EXERCISE PRICE
- --------------- ---------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
$2.63 - 3.25 268,875 3.0 $2.97 268,875 $2.97
$3.56 - 3.63 17,000 4.3 3.57 17,000 3.57
$4.50 - 4.88 46,500 5.8 4.73 36,000 4.72
$5.12 - 6.63 590,500 8.3 5.33 308,198 5.31
$8.83 - 9.54 121,000 9.6 9.18 20,000 9.26
$2.63 - 9.54 1,043,875 6.9 $5.11 650,073 $4.38
============ ========= === ===== ======= =====
</TABLE>
The weighted average grant date fair values of options granted for the
years ended December 31, 1999, 1998, and 1997 were $5.23, $3.50, and $3.29,
respectively.
1998 Outside Directors Stock Bonus Plan_ The Company's Board of
Directors approved the 1998 Outside Directors Stock Bonus Plan in April 1998,
pursuant to which 25,000 shares of the Company's common stock were reserved for
issuance. Under the terms of the agreement, 1,000 bonus shares of common stock
will be awarded to each non-employee director who is such at the beginning of
any regular annual meeting of the Company's stockholders while the 1998 Outside
Directors Stock Bonus Plan is in effect and who will continue to serve on the
Board of Directors. Bonus shares are issued in consideration of services
previously rendered to the Company. The Outside Directors Stock Bonus Plan will
terminate 5 years from the effective date, unless terminated earlier (as
provided in the plan). In both 1999 and 1998, the Company issued 6,000 shares of
common stock pursuant to the 1998 Outside Directors Stock Bonus Plan.
Notes Receivable from Officers and Employees ("Stock Loan Program")_The
Company maintains a Stock Loan Program (as most recently amended on July 28,
1997) whereby executive officers and other senior personnel of the Company may
borrow from the Company for the purpose of acquiring common stock of the
Company. Such borrowings may not exceed $200,000 in any fiscal quarter or
$500,000 in the aggregate at any time during the term of the Stock Loan Program
for all employees. The loans are recourse, bear interest at a variable rate
which is one-half of one percent above the Company's cost of funds, are payable
monthly in arrears, and are payable as to principal no later than five years
after the date of the loan. All shares purchased with such loans are pledged to
the Company as collateral for repayment of the loans, with periodic principal
repayments equal to between 20% and 30% of the participant's after-tax bonus.
Pro Forma Disclosure_ As described in Note A, the Company uses the
intrinsic value method to measure compensation expense associated with the
grants of stock options or awards to employees. Had the Company used the fair
value method to measure compensation, reported net income and basic and diluted
earnings per share would have been as follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income before income taxes ......................... $4,339 $3,315 $1,985
Provision for income taxes ......................... 1,993 1,594 898
------ ------ ------
Net income ......................................... $2,346 $1,721 $1,087
====== ====== ======
Basic net income per share ......................... $ 0.62 $ 0.46 $ 0.29
====== ====== ======
</TABLE>
18
<PAGE> 19
<TABLE>
<S> <C> <C> <C>
Diluted net income per share ....................... $ 0.53 $ 0.41 $ 0.25
====== ====== ======
</TABLE>
For purposes of determining the above disclosure required by SFAS No.
123, the fair value of options on their grant date was measured using the
Black-Scholes option pricing model. Key assumptions used to apply this pricing
model were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average risk-free interest rate...................... 6.1% 6.0% 5.7%
Expected life of option grants................................ 5-10 years 5-10 years 5-10 years
Expected volatility of underlying stock....................... 32.4% 45.9% 29.7%
</TABLE>
The pro forma presentation only includes the effects of grants made
subsequent to January 1, 1995. The pro forma amounts may not be indicative of
the future benefit, if any, to be received by the option holder.
NOTE I. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan_ In 1993, the Company established a stock
bonus type of Employee Stock Ownership Plan ("ESOP") for the benefit of all
eligible employees. The ESOP is expected to be primarily invested in common
stock of the Company on behalf of the employees. ESOP contributions are at the
discretion of the Company's Board of Directors and are determined annually.
However, it is the Company's present intention to make contributions sufficient
to repay the ESOP's promissory note on a level funding basis over a 10-year
period. The Company measures the expense related to such contributions based on
the original cost of the stock which was originally issued to the ESOP. Shares
of stock which were issued to the ESOP are allocated to the participants based
on a calculation of the ratio of the annual contribution amount to the original
principal of the promissory note. The Company made contributions of $105,000 in
1999, 1998, and 1997.
Employees with five or more years of service with the Company from and
after December 1993 at the time of termination of employment will be fully
vested in their benefits under the ESOP. For a participant with fewer than five
years of service from December 1993 through his or her termination date, his or
her account balance will vest at the rate of 20% for each year of employment.
Upon the retirement or other termination of an ESOP participant, the shares of
common stock in which he or she is vested, at the option of the participant, may
be converted to cash or may be distributed. The unvested shares are allocated to
the remaining participants. The Company has issued 300,000 shares of common
stock to this plan in consideration of a promissory note in the original
principal amount of $1,050,000. As of December 31, 1999, 179,654 shares of
common stock have been allocated to participant accounts under the ESOP and
120,346 shares remain unallocated. The market value of unallocated shares at
December 31, 1999 was $1,113,200.
Supplemental Employee Stock Ownership Plan_ In April 1998, the Company
canceled its Supplemental Employee Stock Ownership Plan ("SESOP"). The Company
had originally issued 350,000 shares of common stock to this plan in July 1994
in consideration of a promissory note in the principal amount of $1,225,000. No
contributions or allocations had been made to any participant accounts. The
shares issued to the SESOP were retired and the promissory note was canceled.
Savings Plan_ The Company has established a Savings Plan covering
substantially all full-time employees, which allows participants to make
contributions by salary deductions pursuant to Section 401(k) of the Internal
Revenue Code. The Company matches employee contributions up to a maximum of 2%
of the employee's salary. Both employee and employer contributions are vested
immediately. The Company's contributions to the Savings Plan were $111,000 in
1999, $90,000 in 1998, and $72,000 in 1997.
Supplemental Employee Retirement Plan_ In 1997, the Company adopted an
unfunded Supplemental Executive Retirement Plan ("SERP", as amended) effective
January 1, 1997. The SERP provides certain executives retirement income benefits
in addition to certain other retirement programs received by the executives.
Benefits under the plan, based on an actuarial equivalent of a life annuity, are
based on age, length of service and average earnings and vest over 15 years,
assuming five years of service. Benefits are payable upon separation of service.
19
<PAGE> 20
Details of the SERP for the years ended December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
(in thousands) DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year .................................. $ 729 $ 630
Service cost ........................................................ 146 137
Interest cost ....................................................... 51 44
Actuarial loss (gain) ............................................... 1 (82)
----- -----
Benefit obligation, end of year ........................................ 927 729
----- -----
FUNDED STATUS AND STATEMENT OF FINANCIAL POSITION:
Fair value of assets, end of year ................................... -- --
Benefit obligation, end of year ..................................... 927 729
----- -----
Funded status .......................................................... (927) (729)
Unrecognized actuarial loss ......................................... 18 20
Unrecognized prior service cost ..................................... 317 345
----- -----
Net accrued benefit cost ............................................... (592) (364)
----- -----
Amount recognized in the statement of financial position consist of:
Accrued benefit liability included in accrued liabilities ........... (618) (453)
Intangible assets included in other assets .......................... 26 89
----- -----
Net accrued benefit cost ............................................... (592) (364)
----- -----
COMPONENTS OF NET PERIODIC BENEFIT COSTS:
Service cost ........................................................ 146 137
Interest cost ....................................................... 51 44
Amortization of prior service cost .................................. 28 28
Recognized actuarial loss (gain) .................................... 2 8
----- -----
Net periodic benefit cost .............................................. $ 227 $ 217
----- -----
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
WEIGHTED AVERAGE ASSUMPTIONS
For pension cost and year end benefit obligation
Discount rate....................................................... 7.00% 7.00%
Compensation increase............................................... 4.00% 4.00%
Assumed retirement age.............................................. 65 years 65 years
</TABLE>
NOTE J. PREFERRED STOCK PURCHASE RIGHTS PLAN
Pursuant to a rights agreement between the Company and BankBoston, as
rights agent, dated August 3, 1993 and amended and restated on September 16,
1999, the Board of Directors declared a dividend on August 3, 1993 of one
preferred stock purchase right ("Right") for each share of the Company's common
stock (the "Shares") outstanding on or after August 13, 1993. The Right entitles
the holder to purchase one one-hundredth of a share of Series A preferred stock,
which fractional share is substantially equivalent to one share of common stock,
at an exercise price of $20. The Rights will not be exercisable or transferable
apart from the common stock until the earlier to occur of 10 days following a
public announcement that a person or affiliated group has acquired 15 percent or
more of the outstanding common stock (such person or group, an "Acquiring
Person"), or 10 business days after an announcement or commencement of a tender
offer which would result in a person or group's becoming an Acquiring Person,
subject to certain exceptions. The Rights beneficially owned by the Acquiring
Person and its affiliates become null and void upon the Rights becoming
exercisable.
If a person becomes an Acquiring Person or certain other events occur,
each Right entitles the holder, other than the Acquiring Person, to purchase
common stock (or one one-hundredth of a share of preferred stock, at the
discretion of the Board
20
<PAGE> 21
of Directors) having a market value of two times the exercise price of the
Right. If the Company is acquired in a merger or other business combination,
each exercisable Right entitles the holder, other than the Acquiring Person, to
purchase common stock of the acquiring company having a market value of two
times the exercise price of the Right.
At any time after a person becomes an Acquiring Person and prior to the
acquisition by such person of 50% or more of the outstanding common stock, the
Board of Directors may direct the Company to exchange the Rights held by any
person other than an Acquiring Person at an exchange ratio of one share of
common stock per Right. The Rights may be redeemed by the Company, subject to
approval of the Board of Directors, for one cent per Right in accordance with
the provisions of the Rights Plan. The Rights have no voting or dividend
privileges.
NOTE K. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires the Company to disclose the estimated fair values for certain of its
financial instruments. Financial instruments include items such as loans,
interest rate swap contracts, notes payable, and other items as defined in SFAS
No. 107.
The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale.
Quoted market prices are used when available; otherwise, management
estimates fair value based on prices of financial instruments with similar
characteristics or using valuation techniques such as discounted cash flow
models. Valuation techniques involve uncertainties and require assumptions and
judgments regarding prepayments, credit risk and discount rates. Changes in
these assumptions will result in different valuation estimates. The fair values
presented would not necessarily be realized in an immediate sale, nor are there
plans to settle liabilities prior to contractual maturity. Additionally, SFAS
No. 107 allows companies to use a wide range of valuation techniques; therefore,
it may be difficult to compare the Company's fair value information to other
companies' fair value information.
The following table presents a comparison of the carrying value and
estimated fair value of the Company's financial instruments at December 31,
1999:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
(IN THOUSANDS) VALUE FAIR VALUE
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ....................... $ 1,356 $ 1,356
Restricted cash ................................. 14,924 14,924
Net investment in leases and notes .............. 362,083 366,454
Interest rate swap contracts .................... -- 4,386
Financial liabilities:
Notes payable and subordinated debt ............. 317,445 313,806
</TABLE>
The estimated fair value of interest rate swap contracts at December
31, 1999 includes $1,182,000 related to interest rate swap contracts that have
been assigned to third parties in connection with sales and notes receivable
(see Note D).
The following table presents a comparison of the carrying value and
estimated fair value of the Company's financial instruments at December 31,
1998:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
(IN THOUSANDS) VALUE FAIR VALUE
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ....................... $ 4,583 $ 4,583
Restricted cash ................................. 9,588 9,588
Net investment in leases and notes .............. 277,975 277,975
Interest rate swap contracts .................... -- 2,958
</TABLE>
21
<PAGE> 22
<TABLE>
<S> <C> <C>
Financial liabilities:
Notes payable and subordinated debt ............. 243,541 246,082
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
Cash, cash equivalents and restricted cash: For these
short-term instruments, the carrying amount is a reasonable estimate of
fair value.
Net investment in leases and notes: The fair value of net
investment in leases and notes was estimated by discounting the
anticipated future cash flows using current rates applied to similar
contracts. For December 31, 1998, the estimated fair value of the net
investment in leases and notes approximated carrying value. If the
Company had nonaccrual practice acquisition loans, or impaired asset
based loans, the fair value would be estimated by discounting
management's estimate of future cash flows with a discount rate
commensurate with the risk associated with such assets.
Notes payable and subordinated debt: The fair market value of
the Company's senior and subordinated notes is estimated based on the
quoted market prices for similar issues or on the current rates offered
to the Company for debt of the same maturity.
Interest rate swap contracts: The fair value of interest rate
swap contracts is estimated based on the estimated amount necessary to
terminate the agreements.
NOTE L. OPERATING SEGMENTS
General - The Company has two reportable segments: (i) financing to
licensed professionals, and (ii) asset-based financing to commercial and
industrial companies. The Company's financing agreements with licensed
professionals are structured as non-cancelable, full-payout lease contracts or
notes receivable due in installments. Asset-based financing includes revolving
lines of credit to commercial and industrial companies in the form of notes
receivable collateralized by accounts receivable, inventory and/or fixed assets.
These two segments employ separate sales forces and market their products to
different types of customers. The licensed professional financing segment
derives its revenues primarily from earnings generated by the fixed-rate lease
and loan contracts, whereas revenues from the commercial and industrial
financing segment are derived predominantly from the variable interest rates on
the usage of the lines of credit plus miscellaneous commitment and
performance-based fees.
Financial Statement Information - In the monthly internal management
reports, the Company allocates resources and assesses performance of the
operating segments by monitoring the profit contribution of each segment before
interest expense, interest income on cash balances, and income tax provision.
The Company does not allocate corporate overhead to its asset-based financing
segment since the majority of all such overhead is related to the licensed
professional financing segment.
A summary of information about the Company's operations by segment for
the years ended December 31, 1999, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
LICENSED COMMERCIAL AND
PROFESSIONAL INDUSTRIAL
(in thousands) FINANCING FINANCING TOTAL
------------ -------------- --------
<S> <C> <C> <C>
1999
- ----
Earned income on leases and notes $ 35,284 $ 4,768 $ 40,052
Gain on sales of leases and notes 4,916 -- 4,916
Provision for losses (4,376) (113) (4,489)
Selling, general and administrative expenses (16,050) (1,665) (17,715)
-------- ------- --------
Net profit contribution 19,774 2,990 22,764
Total assets 351,150 34,577 385,727
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C> <C>
1998
- ----
Earned income on leases and notes 28,045 4,916 32,961
Gain on sales of leases and notes 4,906 -- 4,906
Provision for losses (4,054) (147) (4,201)
Selling, general and administrative expenses (13,269) (1,628) (14,897)
-------- ------- --------
Net profit contribution 15,628 3,141 18,769
Total assets 264,419 34,183 298,602
1997
- ----
Earned income on leases and notes 19,712 3,979 23,691
Gain on sales of leases and notes 3,123 -- 3,123
Provision for losses (1,958) (236) (2,194)
Selling, general and administrative expenses (10,120) (1,329) (11,449)
-------- ------- --------
Net profit contribution 10,757 2,414 13,171
Total assets 198,200 34,426 232,626
</TABLE>
The following reconciles net segment profit contribution as reported
above to total consolidated income before income taxes:
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
-------- ------- --------
<S> <C> <C> <C>
Net segment profit contribution $ 22,764 $ 18,769 $ 13,171
Interest expense (18,903) (15,587) (11,530)
Interest income on cash balances 765 337 361
-------- ------- --------
Income before income taxes $ 4,626 $ 3,519 $ 2,002
</TABLE>
Other Segment Information - The Company derives substantially all of
its revenues from domestic customers. As of December 31, 1999, no single
customer within the licensed professional financing segment accounted for
greater than 1% of the total owned and serviced portfolio of that segment.
Within the commercial and industrial financing segment, no single customer
accounted for greater than 10.8% of the total portfolio of that segment. The
licensed professional financing segment does rely on certain vendors to provide
referrals to the Company, but for the year ended December 31, 1999, no one
vendor accounted for greater than 9.3% of the Company's lease originations.
23
<PAGE> 24
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of HPSC, Inc.:
We have audited the accompanying consolidated balance sheets of HPSC, Inc. and
subsidiaries (the "Company") as of December 31, 1999 and 1998, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of HPSC, Inc. and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche, LLP
- -----------------------------
Boston, Massachusetts
February 28, 2000
24
<PAGE> 25
MARKET INFORMATION
The table below sets forth the representative high and low closing
prices for shares of the common stock of the Company in the over-the-counter
market as reported by the NASDAQ National Market System (Symbol: "HPSC") for the
fiscal years 1999 and 1998:
`
<TABLE>
<CAPTION>
1999 Fiscal Year High Low 1998 Fiscal Year High Low
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Quarter............ $10 $8 1/8 First Quarter ............. $ 5 5/8 $5
Second Quarter........... 10 1/2 8 Second Quarter ............ 8 3/4 5 1/8
Third Quarter............ 13 9 3/8 Third Quarter ............. 12 7 5/8
Fourth Quarter........... 11 1/4 9 Fourth Quarter ............ 9 15/16 7 7/8
</TABLE>
The foregoing quotations represent prices between dealers, and do not
include retail markups, markdowns, or commissions.
HOLDERS
Approximate Number of Record
Title of Class Holders (as of February 25, 2000)
- -------------------------------------------------------------------------------
Common Stock, par value $.01 per share 98 (1)
DIVIDENDS
The Company has never paid any dividends and anticipates that, for the
foreseeable future, its earnings will be retained for use in its business.
(1) This number does not reflect beneficial ownership of shares held in
"nominee" or "street name."
25
<PAGE> 26
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Year Ended
-------------------------------------------------------------
(in thousands, except Dec. 31, Dec. 31, Dec.31, Dec. 31, Dec. 31,
share and per share data) 1999 1998 1997 1996 19951
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues:
Earned income on leases and notes $ 40,052 $ 32,961 $ 23,691 $ 17,515 $ 12,871
Gain on sales of leases and notes 4,916 4,906 3,123 1,572 53
Provision for losses (4,489) (4,201) (2,194) (1,564) ( 1,296)
- ---------------------------------------------------------------------------------------------------------------
Net Revenues $ 40,479 $ 33,666 $ 24,620 $ 17,523 $ 11,628
===============================================================================================================
Net Income (Loss) $ 2,719 $ 1,976 $ 1,121 $ 875 $ (125)
===============================================================================================================
Net Income (Loss) per Share -- Basic2 $ 0.72 $ 0.53 $ 0.30 $ 0.23 $ (0.03)
-- Diluted2 $ 0.61 $ 0.47 $ 0.26 $ 0.20 $ (0.03)
===============================================================================================================
Shares Used to Compute -- Basic2 3,766,684 3,719,026 3,732,576 3,786,799 4,575,970
Net Income (Loss) per Share -- Diluted2 4,436,476 4,194,556 4,315,370 4,326,604 4,575,970
===============================================================================================================
<CAPTION>
Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands) 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and Cash Equivalents $ 1,356 $ 4,583 $ 2,137 $ 2,176 $ 861
Restricted Cash 14,924 9,588 7,000 6,769 5,610
Lease Contracts Receivable
and Notes Receivable3 444,498 343,574 263,582 178,383 140,689
Unearned Income 94,228 73,019 53,868 34,482 25,875
Total Assets 385,727 298,602 232,626 162,383 130,571
Revolving Credit Borrowings 70,000 49,000 39,000 40,000 39,000
Senior Notes 227,445 174,541 123,952 76,737 46,523
Subordinated Debt 20,000 20,000 20,000 -- --
Stockholders' Equity 40,298 37,566 35,174 34,332 33,161
</TABLE>
- ----------
1 Net loss reflects a one-time, non-cash loss on write-off of cumulative
foreign currency translation adjustment of $601,000 related to the
Company's discontinued Canadian operations.
2 Net income (loss) per share for all periods presented conform to the
provisions of Statement of Financial Accounting Standards No. 128,
"Earnings per Share".
3 Lease contracts and notes receivable include the Company's retained
interest in leases and notes receivable sold under certain sales and
securitization agreements.
26
<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
RESULTS OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Earned income from leases and notes for 1999 was $40,052,000 (including
$4,768,000 from ACFC) as compared to $32,961,000 (including $4,916,000 from
ACFC) for 1998. This increase of approximately 22% was primarily due to an
increase in net investment in leases and notes from 1998 to 1999. The increase
in net investment in leases and notes resulted from an increase of approximately
24% in the Company's financing contract originations for fiscal 1999 to
approximately $226,500,000 (including approximately $18,000,000 in ACFC line of
credit originations, and excluding approximately $8,000,000 of initial direct
costs) from approximately $182,000,000 (including approximately $23,000,000 in
ACFC line of credit originations, and excluding approximately $6,000,000 of
initial direct costs) for 1998. Pre-tax gains from sales of leases and notes
increased to $4,916,000 in 1999 compared to $4,906,000 in 1998. This increase
was caused by higher levels of sales activity in 1999, partially offset by lower
margins associated with the current year asset sales. Earned income on leases
and notes is primarily a function of the amount of net investment in leases and
notes and the level of financing contract interest rates. Earned income, which
is net of amortization of initial direct costs, is recognized using the interest
method over the life of the net investment in leases and notes.
Interest expense, net of interest income on cash balances, was
$18,138,000 (45.3% of earned income) in 1999, compared to $15,250,000 (46.3% of
earned income) for 1998, an increase of 19%. The increase in net interest
expense was primarily due to a 30% increase in debt levels from 1998 to 1999,
which resulted from increased borrowings to finance the Company's increased
financing contract originations.
Net financing margin (earned income less net interest expense) for
fiscal year 1999 was $21,914,000 (54.7% of earned income) as compared to
$17,711,000 (53.7% of earned income) for 1998. The increase in amount was due to
higher earnings on a higher balance of earning assets. The increase in
percentage of earned income was due to a higher percentage of the portfolio
being matched to lower interest rate debt during 1999 as compared to 1998.
The provision for losses for the year ended December 31, 1999 was
$4,489,000 (11.2% of earned income) compared to $4,201,000 (12.8% of earned
income) for the same period in 1998. The increase in amount resulted from higher
levels of new financings in 1999 and the Company's continuing evaluation of its
portfolio quality, loss history and allowance for losses. The allowance for
losses at December 31, 1999 was $9,150,000 (2.5% of net investment in leases and
notes) as compared to $7,350,000 (2.6% of net investment in leases and notes) at
December 31, 1998. Net charge-offs were approximately $2,700,000 in 1999
compared to $2,400,000 in 1998.
Selling, general and administrative expenses for fiscal year 1999 were
$17,715,000 (44.2% of earned income) as compared to $14,897,000 (45.2% of earned
income) for 1998. The increase in amount resulted from higher advertising and
marketing related costs, an increase in consulting and professional fees
associated with the design and implementation of a new interactive web site, as
well as increased systems and administrative costs required to support higher
levels of owned and serviced assets. The decrease as a percentage of earned
income was the result of improved per unit costs on higher levels of
originations and higher levels of owned portfolio assets.
The Company's income before income taxes for fiscal year 1999 was
$4,626,000 compared to $3,519,000 for 1998. The provision for income taxes was
$1,907,000 (41.2% of income before income taxes) in 1999 compared to $1,543,000
(43.9%) in 1998.
The Company's net income for the year ended December 31, 1999 was
$2,719,000, or $0.72 per basic share and $0.61 per diluted share, compared to
$1,976,000, or $0.53 per basic share and $0.47 per diluted share for the
comparable 1998 period. The 38% increase in net income in 1999 over 1998 was due
to higher earned income from leases and notes, higher gains on sales of assets,
offset by increases in the provision for losses, higher selling, general and
administrative expenses, and higher interest costs.
Net profit contribution, representing income before interest and taxes
(see Note L to Notes to Consolidated Financial Statements) from the licensed
professional financing segment was $19,774,000 for the year ended December 31,
1999 compared to $15,628,000 for the comparable period in 1998, a 27% increase.
The increase was due to an increase in earned income on leases and notes to
$35,284,000 in 1999 compared to $28,045,000 in 1998, higher gain on sales of
leases and notes of $4,916,000 in 1999 from $4,906,000 in 1998, offset by an
increase in the provision for losses in 1999 to $4,376,000 from $4,054,000 in
the prior year, as well as an increase in selling, general and administrative
expenses to $16,050,000 in 1999 compared to $13,269,000 in 1998.
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Net profit contribution (income before interest and taxes) from the
commercial and industrial financing segment was $2,990,000 for the year ended
December 31, 1999 compared to $3,141,000 for the comparable period in 1998, a 5%
decrease. The decrease was due to a decrease in earned interest and fee income
on notes to $4,768,000 in 1999 compared to $4,916,000 in 1998; an increase in
selling, general and administrative expenses to $1,665,000 in 1999 compared to
$1,628,000 in 1998, offset by a decrease in the provision for losses in 1999 to
$113,000 from $147,000 in 1998.
At December 31, 1999, the Company had approximately $104,000,000 of
customer applications which had been approved but had not yet resulted in a
completed transaction, compared to approximately $81,000,000 of such customer
applications at December 31, 1998. Not all approved applications will result in
a completed financing transaction with the Company.
FISCAL YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
Earned income from leases and notes for 1998 was $32,961,000 (including
$4,916,000 from ACFC) as compared to $23,691,000 (including $3,979,000 from
ACFC) for 1997. This increase of approximately 39% was primarily due to an
increase in net investment in leases and notes from 1997 to 1998. The increase
in net investment in leases and notes resulted from an increase of approximately
19.0% in the Company's financing contract originations for fiscal 1998 to
approximately $182,000,000 (including approximately $23,000,000 in ACFC line of
credit originations, and excluding approximately $6,000,000 of initial direct
costs) from approximately $153,000,000 (including approximately $24,000,000 in
ACFC line of credit originations, and excluding approximately $4,500,000 of
initial direct costs) for 1997. Pre-tax gains from sales of leases and notes
increased to $4,906,000 in 1998 compared to $3,123,000 in 1997. This increase
was caused by higher levels of asset sales activity in 1998 as well as improved
margins associated with the current year asset sales. Earned income on leases
and notes is primarily a function of the amount of net investment in leases and
notes and the level of financing contract interest rates. Earned income, which
is net of amortization of initial direct costs, is recognized using the interest
method over the life of the net investment in leases and notes.
Interest expense, net of interest income on cash balances, was
$15,250,000 (46.3% of earned income) in 1998, compared to $11,169,000 (47.1% of
earned income) for 1997, an increase of 37%. The increase in net interest
expense was due primarily to a 33% increase in debt levels from 1997 to 1998,
which resulted primarily from increased borrowings to finance the Company's
increased financing contract originations.
Net financing margin (earned income less net interest expense) for
fiscal 1998 was $17,711,000 (53.7% of earned income) as compared to $12,522,000
(52.9% of earned income) for 1997. The increase in amount was due to higher
earnings on a higher balance of earning assets. The increase in percentage of
earned income was due to a higher percentage of the portfolio being matched to
lower interest rate debt during 1998 as compared to 1997.
The provision for losses for the year ended December 31, 1998 was
$4,201,000 (12.8% of earned income) compared to $2,194,000 (9.3% of earned
income) for the same period in 1997. The increase in amount resulted from higher
levels of new financings in 1998 and the Company's continuing evaluation of its
portfolio quality, loss history and allowance for losses. The allowance for
losses at December 31, 1998 was $7,350,000 (2.6% of net investment in leases and
notes) as compared to $5,541,000 (2.6% of net investment in leases and notes) at
December 31, 1997. Net charge-offs were approximately $2,400,000 in 1998
compared to $1,200,000 in 1997.
Selling, general and administrative expenses for fiscal year 1998 were
$14,897,000 (45.2% of earned income) as compared to $11,449,000 (48.3% of earned
income) for 1997. The increase in amount resulted from increased staffing and
systems and support costs required by higher volumes of financing activity in
1998 and costs incurred to permit anticipated near-term growth in financing
activity. The increase in amount was also caused by increased compensation and
related costs associated with the Company's 1995 Stock Incentive Plan as certain
performance benchmarks in such plans related to the price of HPSC common stock
were met and by the extension of certain five-year options which were scheduled
to expire. The decrease as a percentage of earned income was the result of
improved per unit costs on higher levels of originations and higher levels of
owned portfolio assets.
The Company's income before income taxes for fiscal year 1998 was
$3,519,000 compared to $2,002,000 for 1997. The provision for income taxes was
$1,543,000 (43.9% of income before income taxes) in 1998 compared to $881,000
(44.0%) in 1997.
The Company's net income for the year ended December 31, 1998 was
$1,976,000, or $0.53 per basic share and $0.47 per diluted share, compared to
$1,121,000, or $0.30 per basic share and $0.26 per diluted share for the
comparable 1997 period. The 76% increase in net income in 1998 over 1997 was due
to higher earned income from leases and notes, higher gains on sales of assets,
and lower cost of funds, offset by increases in the provision for losses, higher
selling, general and administrative expenses, and higher average debt levels.
Net profit contribution, representing income before interest and taxes
(see Note L to Notes to Consolidated Financial Statements) from the licensed
professional financing segment was $15,628,000 for the year ended December 31,
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<PAGE> 29
1998 compared to $10,757,000 for the comparable period in 1997, a 45% increase.
The increase was due to an increase in earned income on leases and notes to
$28,045,000 in 1998 compared to $19,712,000 in 1997, higher gain on sales of
leases and notes of $4,906,000 in 1998 from $3,123,000 in 1997, offset by an
increase in the provision for losses in 1998 to $4,054,000 from $1,958,000 in
the prior year, as well as an increase in selling, general and administrative
expenses to $13,269,000 in 1998 compared to $10,120,000 in 1997.
Net profit contribution (income before interest and taxes) from the
commercial and industrial financing segment was $3,141,000 for the year ended
December 31, 1998 compared to $2,414,000 for the comparable period in 1997, a
30% increase. The increase was due to an increase in earned interest and fee
income on notes to $4,916,000 in 1998 compared to $3,979,000 in 1997, as well as
a decrease in the provision for losses in 1998 to $147,000 from $236,000 in the
prior year, offset by an increase in selling, general and administrative
expenses to $1,628,000 in 1998 compared to $1,329,000 in 1997.
At December 31, 1998, the Company had approximately $81,000,000 of
customer applications which had been approved but had not yet resulted in a
completed transaction, compared to approximately $59,000,000 of such customer
applications at December 31, 1997. Not all approved applications will result in
a completed financing transaction with the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing activities require substantial amounts of
capital, and its ability to originate new financing transactions is dependent on
the availability of cash and credit. The Company currently has access to credit
under its Revolving Loan Agreement (as defined below), its securitization
transactions with Bravo and Capital, and loans secured by financing contracts.
The Company obtains cash from sales of its financing contracts under its
securitization facilities and from lease and note payments received.
Substantially all of the assets of HPSC and ACFC and the stock of ACFC have been
pledged to HPSC's lenders as security under HPSC's various short- and long-term
credit arrangements. Borrowings under the securitizations are secured by
financing contracts, including the amounts receivable thereunder and the assets
securing the financing contracts. The securitizations are limited recourse
obligations of the Company, structured so that the cash flow from the
securitized financing contracts services the debt. In these limited recourse
transactions, the Company retains some risk of loss because it shares in any
losses incurred and it may forfeit the residual interest, if any, that it has in
the securitized financing contracts should a default occur. The Company's
borrowings under the Revolving Loan Agreement are full recourse obligations of
HPSC. The Company's borrowings under the Revolving Loan Agreement are used to
fund asset based lending by ACFC as well as to temporarily fund new financing
contracts entered into by the Company. These borrowings are repaid with the
proceeds obtained from other full or limited recourse financings and cash flow
from the Company's financing transactions.
At December 31, 1999, the Company had $16,280,000 in cash, cash
equivalents and restricted cash as compared to $14,171,000 at the end of 1998.
As described in Note C to the Company's Consolidated Financial Statements,
$14,924,000 of such cash was restricted pursuant to financing agreements as of
December 31, 1999, compared to $9,588,000 at December 31, 1998.
Cash provided by operating activities was $11,405,000 for the year
ended December 31, 1999 compared to $9,327,000 in 1998 and $5,428,000 in 1997.
The significant components of cash provided by operating activities in 1999 as
compared to 1998 were an increase in net income to $2,719,000 in 1999 from
$1,976,000 in 1998, an increase in accounts payable and accrued liabilities of
$1,614,000 in 1999 compared to a decrease of $920,000 in 1998, offset by a
decrease in refundable income taxes of $514,000 in 1999 compared to a decrease
of $1,996,000 in 1998, and an increase in other assets of $1,052,000 during 1999
compared to a decrease of $14,000 for the same period in 1998.
Cash used in investing activities was $92,896,000 for the year ended
December 31, 1999 compared to $69,613,000 in 1998 and $69,448,000 in 1997. The
primary components of cash used in investing activities for 1999 as compared to
1998 was an increase in originations of lease contracts and notes receivable to
$213,819,000 in 1999 from $166,672,000 in 1998, and an increase in notes
receivable of $2,951,000 compared to $289,000 in the same period in 1998. This
use of cash was offset by an increase in portfolio receipts of $70,245,000 in
1999 from $58,661,000 in 1998, and an increase in proceeds from sales of lease
contracts and notes receivable to $54,390,000 in 1999 from $38,696,000 in 1998.
Cash provided by financing activities was $78,264,000 for the year
ended December 31, 1999 compared to $62,732,000 in 1998 and $63,981,000 in 1997.
The significant components of cash provided by financing activities in 1999 as
compared to 1998 were an increase in net proceeds from senior notes in 1999 to
$128,051,000 from $111,474,000 in 1998, net proceeds from revolving notes
payable of $21,000,000 in 1999 compared to $10,000,000 in 1998, and an increase
in restricted cash of $5,336,000 in the current year compared to $2,588,000 in
1998, offset by repayments of senior notes of $75,147,000 in 1999 compared to
$61,030,000 in 1998.
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In 1993, the Company raised $70,000,000 through an asset securitization
transaction in which its wholly-owned special-purpose subsidiary, Funding I,
issued senior secured notes (the "Funding I Notes") at a rate of 5.01%. The
Funding I Notes were secured by a portion of the Company's portfolio which it
sold in part and contributed in part to Funding I. Proceeds of this financing
were used to retire $50,000,000 of 10.125% senior notes due December 1993, and
$20,000,000 of 10% subordinated notes due January 1994. Under the terms of the
Funding I Notes, when the principal balance equaled the balance of the
restricted cash in the facility, the Funding I Notes were paid off from the
restricted cash and Funding I terminated, which occurred in June 1997. Due to
the early termination, the Company incurred a $175,000 non-cash, non-operating
charge against earnings in both the first and second quarters in 1997
representing the partial early recognition of certain unamortized deferred
transaction origination costs.
In March 1998, the Company executed a Third Amended and Restated
Revolving Loan Agreement with BankBoston as Managing Agent (the "Revolving Loan
Agreement" or "Revolver"), providing availability up to $100,000,000 through
March 1999. The agreement was extended through May 1999 under the same terms and
conditions, providing availability up to $86,000,000. In May 1999, the Company
executed the Third Amendment to the Third Amended and Restated Revolving Loan
Agreement. The Third Amendment to the Revolving Loan Agreement provides
availability to the Company up to $90,000,000 under substantially the same terms
and conditions, through May 2000. Under the Revolver, the Company may borrow at
variable rates of prime and at LIBOR plus 1.35% to 1.50%, depending on certain
performance covenants. At December 31, 1999, the Company had $70,000,000
outstanding under the Revolver and $20,000,000 available for borrowing, subject
to borrowing base limitations. The Revolver is not currently hedged and,
therefore, is exposed to upward movements in interest rates. The Company is
currently in discussion with BankBoston regarding extension of the Revolver
beyond May 2000 and anticipates renewal of the agreement under substantially the
same terms and conditions.
In June 1998, the Company, along with its wholly-owned, special-purpose
subsidiary Bravo Funding Corp. ("Bravo"), signed an amended revolving credit
facility (the "Bravo Facility") structured and guaranteed by MBIA, Inc. The
Bravo Facility provides the Company with available borrowings up to
$225,000,000, of which $67,500,000 may be used for sales of financing contracts.
Under the terms of the Bravo Facility, Bravo, to which the Company contributes
certain of its portfolio assets, pledges or sells 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 MBIA pursuant to the terms of the
Bravo Facility. The Company had a total of $187,500,000 outstanding under the
loan and sale portions of the Bravo Facility at December 31, 1999 ($132,475,000
in loans and $55,025,000 in sales), and in connection with these borrowings and
sales, had 39 separate interest rate swap agreements with BankBoston with a
total notional value of $182,611,000. The Company may continue to contribute
certain portfolio assets to Bravo, subject to certain covenants regarding
Bravo's portfolio performance and borrowing base calculations.
The Company periodically enters into secured, fixed rate, fixed term
loan agreements with various banks for purposes of financing portions of its
operations. The loans are generally subject to certain recourse and performance
covenants. At December 31, 1999 and 1998, the Company had outstanding borrowings
under such loan agreements of approximately $10,383,000 and $2,781,000,
respectively, with annual interest rates ranging from 6.5% to 9.5%.
In March 1997, the Company issued $20,000,000 of unsecured senior
subordinated notes due in 2007 ("Senior Subordinated Notes") bearing interest at
a fixed rate of 11% (the "Note Offering"). The Company received approximately
$18,300,000 in net proceeds from the Note Offering and used such proceeds to
repay amounts outstanding under the Revolver. The Senior Subordinated 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 Senior Subordinated Notes at a redemption
price equal to $1,000,000 plus accrued but unpaid interest to the redemption
date
In April 1998, the Company, along with its wholly-owned,
special-purpose subsidiary, HPSC Capital Funding, Inc. ("Capital"), signed an
Amended Lease Receivable Purchase Agreement with EagleFunding Capital
Corporation ("Eagle"). The revolving credit facility (the "Capital Facility")
provided the Company with available borrowings up to $150,000,000. In April
1999, the Capital Facility was renewed under substantially the same terms and
conditions, providing the Company availability up to $125,000,000. Under the
terms of the Capital Facility, Capital, to which the Company contributes certain
of its portfolio assets, pledges or sells its interests in these assets to
Eagle, a commercial paper conduit entity. Capital borrows at variable rates in
the commercial paper market and enters into interest rate swap agreements to
assure fixed rate funding. Monthly settlements of the borrowing base and any
applicable principal and interest payments are made from collections of
Capital's portfolio. The Company is the servicer of the Capital portfolio,
subject to meeting certain covenants. The required monthly payments of principal
and interest to purchasers of the commercial paper are guaranteed by
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BankBoston pursuant to the terms of the Capital Facility. The Company had a
total of $122,606,000 outstanding under the loan and sale portions of the
Capital Facility at December 31, 1999 ($84,587,000 in loans and $38,019,000 in
sales), and in connection with these borrowings and sales, had 20 separate
interest rate swap agreements with BankBoston with a total notional value of
$115,282,000.
In September 1998, the Company initiated a stock repurchase program
under which up to 175,000 shares of the Company's common stock may be
repurchased from a pool of up to $1,700,000, subject to market conditions, in
open market or negotiated transactions on the NASDAQ National Market. In
December 1999, the Company's Board of Directors approved an increase in this
program to include an additional 250,000 shares of the Company's common stock or
up to the maximum dollar limitations as set forth under the Company's Revolving
Loan Agreement and Senior Subordinated Notes. Based on such limits, the Company
may currently repurchase up to an additional $1,000,000 in common stock. No time
limit has been established for the duration of the repurchase program. The
Company expects to use the repurchased stock to meet the current and future
requirements of its employee stock plans. In 1999, the Company repurchased an
aggregate of 150,500 shares of its common stock for approximately $1,381,000.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo Facility, the
Capital Facility and loans from various savings banks, along with cash obtained
from the sales of its financing contracts and from internally generated revenues
is adequate to meet current obligations and future projected levels of
financings and to carry on normal operations. In order to adequately finance its
anticipated growth, the Company will continue to seek to raise additional
capital from bank and non-bank sources, make selective use of asset sale
transactions in 2000 and utilize 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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of its business, the Company is subject to a
variety of risks, including market risk associated with interest rate movements.
The Company is exposed to such interest rate risk from the time elapsed between
the approval of a transaction with a customer and when permanent fixed rate
financing is secured. The Company does not hold or issue financial instruments
for trading purposes.
The Company temporarily funds its new fixed rate financing contracts
through variable rate revolving credit borrowings until permanent fixed rate
financing is secured through its securitization facilities. The Company is
exposed to interest rate changes between the time a new financing contract is
approved and the time the permanent, fixed-rate financing is completed, thereby
locking in financing spreads. The Company believes that it mitigates this
exposure by obtaining such permanent financing generally within 60 days of the
activation date of the new financing contract and believes it will be able to
continue this operating strategy.
The Company manages its exposure to interest rate risk by entering into
interest rate swap agreements under its securitization transactions. These swap
agreements have the effect of converting the Company's debt from securitizations
from a variable rate to a fixed rate. Changes in interest rates would result in
unrealized gains or losses in the market value of the fixed rate debt to the
extent of differences between current market rates and the actual stated rates
for these debt instruments. Assuming all interest rate swap agreements were to
be terminated, the value to the Company would have been approximately $4,386,000
at December 31, 1999. Assuming a hypothetical 10% change in interest rates from
current weighted average swap rates, the value of the swap agreements to the
Company would have changed by approximately $3,516,000 at December 31, 1999.
The carrying value of the Company's fixed rate debt at December 31,
1999 was $247,445,000. Assuming this debt was to be discounted using the fixed
rate received by the Company on its most recent securitization transaction in
December 1999, the estimated fair value of this debt would have been
approximately $243,806,000. The Company's variable rate debt at December 31,
1999 was $70,000,000, which approximated fair value. Sensitivity analysis is
utilized to determine the impacts that market risk exposures may have on fair
values of the Company's debt instruments. Assuming a hypothetical 10% change in
interest rates from current weighted average debt rates, the fair value of the
Company's fixed rate debt would have changed by approximately $3,854,000 at
December 31, 1999. The effect of a hypothetical 10% change in interest rates on
the Company's variable rate debt would have changed the Company's consolidated
interest expense by $546,000 for the year ended December 31, 1999.
The Company's portfolio of financing contracts originated in its
licensed professional financing segment are fixed rate, non-cancelable, full
payout lease contracts and notes receivable due in installments. At December 31,
1999, the carrying value of these assets, including the retained interest of
sold assets, was approximately $329,723,000. Assuming the anticipated future
cash flows associated with these assets were discounted at current rates applied
to similar contracts, the estimated fair value of these assets would have
approximated $334,094,000 at December 31, 1999. Assuming implicit rates
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changed by a hypothetical 10% from current weighted average implicit rates, the
fair value of the Company's fixed rate financing contracts would have changed by
approximately $3,396,000 at December 31, 1999.
The Company's variable rate assets are generally comprised of financing
contracts originated by its commercial asset-based lending subsidiary, ACFC.
These financing agreements are structured as variable rate lines of credit
extended to various commercial and industrial entities, collateralized by
accounts receivable, inventory, or fixed assets, generally for periods of two to
three years. At December 31, 1999, the carrying value of these assets was
approximately $32,360,000, which approximated fair value. The effect of a
hypothetical 10% change in interest rates on the Company's variable rate
financing contracts would have changed the Company's consolidated interest
income by $485,000 for the year ended December 31, 1999.
For additional information about the Company's financial instruments,
see Note K in Notes to Consolidated Financial Statements.
YEAR 2000
As of the date of this report, the Company had not experienced any
significant adverse year 2000 issues or disruptions with its internal
information technology systems. The Company has not encountered any material
increases in customer payment delinquencies related to the year 2000 issue, nor
is the Company aware of any year 2000 issues of its major service providers or
third party business partners. Expenses incurred in 1999 with respect to year
2000 compliance were not material. No additional expenses are anticipated to be
incurred in connection with year 2000 issues.
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FORWARD-LOOKING STATEMENTS
This Annual Report contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Discussions containing such
forward-looking statements may be found in the material set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as within the Annual Report generally. When used in this
Annual Report, the words "believes," "anticipates," "expects," "plans,"
"intends," "estimates," "continue," "may," or "will" (or the negative of such
words) and similar expressions are intended to identify forward-looking
statements. Such statements are subject to a number of risks and uncertainties,
including but not limited to the following: the Company's dependence on funding
sources; restrictive covenants in funding documents; payment restrictions and
default risks in asset securitization transactions to which the Company is a
party; customer credit risks; competition for customers and for capital funding
at favorable rates relative to the capital costs of the Company's competitors;
changes in healthcare payment policies; interest rate risk; the risk that the
Company may not be able to realize the residual value on financed equipment at
the end of its lease term; risks associated with the sale of certain receivable
pools by the Company; dependence on sales representatives and the current
management team; and fluctuations in quarterly operating results. The Company's
filings with the Securities and Exchange Commission, including its Annual Report
on Form 10-K for the year ended December 31, 1999, to be filed on or before
March 31, 2000, contain additional information concerning such risk factors.
Actual results in the future could differ materially from those described in the
forward-looking statements as a result of the risk factors set forth above, the
risk factors described in the Annual Report on Form 10-K for the year ended
December 31, 1999, and the matters set forth in this Annual Report generally.
HPSC cautions the reader, however, that such list of risk factors may not be
exhaustive. HPSC undertakes no obligation to release publicly the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
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OFFICERS
JOHN W. EVERETS
Chairman
Chief Executive Officer
RAYMOND R. DOHERTY
President
Chief Operating Officer
RENE LEFEBVRE
Senior Executive Vice President
Treasurer
Chief Financial Officer
DIRECTORS
JOHN W. EVERETS (3)
Chairman
Chief Executive Officer
RAYMOND R. DOHERTY (3)
President
Chief Operating Officer
JOSEPH A. BIERNAT (2)
Retired
Former Senior Vice President,
United Technologies Corp.
J. KERMIT BIRCHFIELD, JR. (1)(3)
Chairman
Displaytech, Inc.
DOLLIE COLE (1)(2)
Chairperson
Dollie Cole Corporation
SAMUEL P. COOLEY (1)(2)(3)
Retired
Former Executive Vice President,
Shawmut National Corp.
THOMAS M. MCDOUGAL, DDS (2)
Practicing Dentist
LOWELL P. WEICKER, JR. (2)
Former Governor and
and U.S. Senator of Connecticut
LOUIS J.P. CALISTI, DDS, MPH
Director Emeritus
AUDITORS
Deloitte & Touche LLP
200 Berkeley Street
Boston, Massachusetts 02116
COUNSEL
Hill & Barlow
One International Place
Boston, Massachusetts 02110
TRANSFER AGENT
BankBoston, N.A.
c/o EquiServe Limited Partnership
150 Royall Street
Canton, Massachusetts 02021
Tel: 800-736-3001
10-K
HPSC's Annual Report on Form 10-K is available to stockholders without charge by
writing to:
Investor Relations Department HPSC, Inc.
60 State Street, Suite 3520
Boston, Massachusetts 02109
E-mail address:
[email protected]
Internet web site:
http://www.hpsc.com
HPSC's Annual Report on Form 10-K is also available from the Securities and
Exchange Commission (the "SEC") via the internet. The SEC maintains a web site
which contains reports, proxy and information statements, and other information
regarding registrants which file electronically with the SEC. The address of the
SEC is: http://www.sec.gov
(1) Member, Compensation Committee
(2) Member, Audit Committee
(3) Member, Executive Committee
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF HPSC, INC.
<TABLE>
<CAPTION>
Name of Subsidiary Jurisdiction of Incorporation
------------------ -----------------------------
<S> <C>
Credident, Inc. Canada
American Commercial Finance Corporation Delaware
HPSC Funding Corp. I Delaware
HPSC Bravo Funding Corp. Delaware
HPSC Capital Funding, Inc. Delaware
</TABLE>
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-56927, 333-28983, 33-60077, 33-10796 and 33-6075 of HPSC, Inc. and
subsidiaries on Form S-8 of our report dated February 28, 2000, incorporated by
reference in this Annual Report on Form 10-K of HPSC, Inc. and subsidiaries for
the year ended December 31, 1999.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 29, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 16,280
<SECURITIES> 0
<RECEIVABLES> 444,498
<ALLOWANCES> 9,150
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,948
<DEPRECIATION> 2,096
<TOTAL-ASSETS> 385,727
<CURRENT-LIABILITIES> 0
<BONDS> 317,445
0
0
<COMMON> 47
<OTHER-SE> 40,251
<TOTAL-LIABILITY-AND-EQUITY> 385,727
<SALES> 0
<TOTAL-REVENUES> 44,968
<CGS> 0
<TOTAL-COSTS> 17,715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,489
<INTEREST-EXPENSE> 18,903
<INCOME-PRETAX> 4,626
<INCOME-TAX> 1,907
<INCOME-CONTINUING> 2,719
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,719
<EPS-BASIC> .72
<EPS-DILUTED> .61
</TABLE>
