1
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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-11618
HPSC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 04-2560004
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 720-3600
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK-PAR VALUE $.01 PER SHARE
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES _X_ NO ___
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 $25,701,269 at February 26, 1999, representing 3,091,882 shares.
The number of shares of common stock, par value $.01 per share, outstanding as
of February 26, 1999 was 4,185,529.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to
be held April 26, 1999 (the "1999 Proxy Statement") are incorporated by
reference into Part III of this annual report on Form 10-K.
The 1999 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 1998 Annual Report to Shareholders (the "1998
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 of 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, 1998, on a consolidated basis, approximately 92% of
the Company's portfolio was comprised of financing to licensed professionals,
including equipment financing and other non-equipment financing including
practice finance, leasehold improvements, office furniture, working capital and
supplies. Approximately 8% 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 generally
$250,000 or less, sometimes referred to as the "small-ticket" market. The
average size of the Company's financing transactions in 1998 was approximately
$31,000. 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 16 offices in 14 states and through
cooperative arrangements with equipment vendors.
At December 31, 1998, HPSC's gross outstanding owned and managed leases
and notes receivable to licensed professionals, excluding asset-based lending,
were approximately $387 million, consisting of approximately 15,000 active
contracts. HPSC's financing contract originations in 1998 were approximately
$159 million compared to approximately $129 million in 1997, an increase of 23%,
which compared to financing contract originations of approximately $87 million
in 1996.
ACFC, the Company's wholly-owned subsidiary, provides asset-based
financing, principally in the eastern United States, for 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 professional. ACFC's financing originations of new lines of
credit in 1998 were approximately $23 million compared to approximately $25
million in 1997, a decrease of 8%, which compared to financing contract
originations of approximately $18 million in 1996
The continuing increase in the Company's originations of financing
contracts and lines of credit helped contribute to a 37% increase in the
Company's net revenues for fiscal year 1998 as compared with fiscal year 1997,
and a 41% increase in the Company's net revenues for fiscal year 1997 compared
with fiscal year 1996. This percentage change in revenues is different 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, and 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 generally priced at over $250,000, which is
typically sold to hospitals and other institutional purchasers. Because of the
size of the purchase, long sales cycle, and number of financing alternatives
generally available to these types of customers, their choice among financing
alternatives tends to be based primarily on cost of financing. The second
market, in which the Company does compete, is the financing of lower-priced or
"small-ticket" equipment, where the price of the financed equipment is generally
$250,000 or less. Much of this equipment is sold to individual practitioners or
small group practices, including dentists, ophthalmologists, physicians,
chiropractors, veterinarians and other healthcare providers. The Company focuses
on the small-ticket market because it is able to respond in a prompt and
flexible manner to the needs of individual customers. Management believes that
purchasers in the small-ticket healthcare equipment market often seek the
value-added sales support and general ease of conducting business which the
Company offers.
The Company believes that healthcare providers are increasingly
choosing to purchase rather than lease equipment because of (i) the availability
of a tax deduction of up to $18,000 of the purchase price in the first year of
equipment use, (ii) changes in healthcare reimbursement methodologies that
reduce incentives to lease equipment for relatively short periods of time and
(iii) a reduced difference in financing costs between equipment purchases and
equipment leases, due to generally lower interest rates.
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 that
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 financed and may be secured by one or more personal guarantees or personal
assets. The average original size of a practice finance transaction was
approximately $124,000 in 1998, with a typical contract 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 the
acquisition of healthcare providers 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 noncancellable. The
contracts are full payout contracts and provide for scheduled payments
sufficient, in the aggregate, to cover the Company's borrowing costs and the
costs of the underlying financing, and to provide the Company with an
appropriate profit margin. The Company provides its leasing customers with an
option to purchase the equipment at the end of the lease for 10% of its original
cost. Historically, approximately 99% of lessees have exercised this option. The
length of the Company's lease agreements and finance agreements range from 12 to
84 months, with a weighted average original term of 55 months for the year ended
December 31, 1998.
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
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contract payments regardless of the performance of the equipment. Substantially
all of the Company's financing contracts provide for principal and interest
payments due monthly for the term of the contract. In the event of default by a
customer, the financing contract provides that the Company has the rights
afforded creditors under law, including the right to repossess the underlying
equipment and in the case of the legal proceeding arising from a default, to
recover damages and attorneys' fees. The Company's equipment financing contracts
generally provide for late fees and service charges to be applied on payments
which are overdue.
Although the customer has the full benefit of the equipment
manufacturers' warranties with respect to the equipment it finances, the Company
makes no warranties to its customers as to the equipment. In addition, the
financing contract obligates the customer to continue to make contract payments
regardless of any defects in the equipment. Under 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 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 600
practice finance loans aggregating approximately $66 million in financings. The
term of such loans generally range from 72 to 84 months. In 1998, practice
finance generated approximately 10% of HPSC's total 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, 1998, 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 generally 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, 1998 are
attributable to leases which will expire by the end of 2003. Realization of such
values depends on factors not within the Company's control, such as the
condition of the equipment, the cost of comparable new equipment and the
technological or economic obsolescence of equipment. Although the Company has
generally 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.
The United States Congress is considering changes to the
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Medicare program. The impact on the Company's business of any changes to the
Medicare program which may be adopted cannot be predicted.
Major changes have occurred in the United States healthcare delivery
system, including the formation of integrated patient care networks (often
involving joint ventures between hospitals and physician groups), as well as the
grouping of healthcare consumers into managed-care organizations sponsored by
insurance companies and other third parties. Moreover, state healthcare
initiatives have significantly affected the financing and structure of the
healthcare delivery system. These changes have not yet had a material effect on
the Company's business, but the effect of any changes on the Company's future
business cannot be predicted.
ASSET-BASED LENDING
ACFC makes asset-based loans of $5 million or less 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 rate. Finally, ACFC provides
term financing for equipment, which is secured by the machinery and equipment of
the borrower. Each of ACFC's officers has over ten years of experience providing
these types of financing on behalf of various finance companies.
The average ACFC loan is for a term of two to three years. No single
borrower accounts for more than 8.5% of ACFC's aggregate portfolio, and no more
than 10% 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.
From its inception through December 31, 1998, ACFC has provided 57
lines of credit totaling approximately $70 million and currently has
approximately $30 million of loans outstanding to 30 borrowers. The annual
dollar volume of originations of new lines of credit by ACFC has grown from $5.0
million in 1994, to $12.1 million in 1995, $17.6 million in 1996, $24.8 million
in 1997 and $23.1 million in 1998.
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.
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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 customers' operations as it deems necessary during the term
of the loan. Loan officers are required to rate the risk of each loan made by
ACFC and to update the rating upon receipt of any financial statement from the
customer or when 90 days have elapsed since the date of the last rating. Loan
loss reserves are based on a percentage of loans originated and an evaluation of
the condition of the portfolio of loans outstanding. An account will be placed
in non-accrual status when management determines that a customer is unable to
service the debt and the collateral is deteriorating.
The Company considers its finance portfolio assets to consist of two
general categories based on such assets' relative risk.
The first category of assets consists of the Company's lease contracts
and notes receivable due in installments, which comprise approximately 87% of
the Company's net investment in leases and notes at December 31, 1998 (85% at
December 31, 1997). Substantially all of such contracts and notes are due from
licensed medical professionals who practice in individual or small group
practices. Such contracts and notes are at fixed interest rates and have terms
ranging from 12 to 84 months. The Company believes that leases and notes entered
into with medical professionals are generally "small-ticket," homogeneous
transactions with similar risk characteristics. Except for the amounts described
in the following paragraph related to asset-based lending, 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 13% of the Company's net investment in
leases and notes at December 31, 1998 (15% at December 31, 1997). These notes
receivable are primarily asset-based, revolving lines of credit to small and
medium size commercial and industrial companies, 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, 1998, the Company has had
charge-offs of commercial notes receivable of $75,000. The provision for losses
related to the commercial notes receivable was $147,000, $236,000 and $146,000
in 1998, 1997 and 1996, respectively. The amount of the allowance for losses
related to the commercial notes receivable was $592,000 and $520,000 at December
31, 1998 and 1997, 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, 1998, this
allowance for losses was 2.6% of the Company's net investment in leases and
notes (before allowance). There can be no assurance that this allowance will
prove to be adequate. Failure of the Company's customers to make scheduled
payments under their financing contracts could require the Company to (i) make
payments in connection with the recourse portion of its borrowing relating to
such contract, (ii) forfeit its residual interest in any underlying equipment
and (iii) forfeit cash collateral pledged as security for the Company's asset
securitizations. In addition, although net charge-offs on the financing
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, 1998, 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.
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The Company's receivables are subject to credit risk. To reduce this
risk, the Company has adopted stringent underwriting policies in approving
leases and notes that are closely monitored by management. Additionally, certain
of the Company's leases and notes receivable, which have been sold under certain
sales agreements, are subject to recourse and estimated losses are provided for
by the Company. Accounts are normally charged off when future payment is deemed
unlikely.
A summary of activity in the Company's allowance for losses for each of
the years in the three-year period ended December 31, 1998 is as follows:
(in thousands) 1998 1997 1996
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Beginning balance $(5,541) $(4,562) $(4,512)
Provision for losses (4,201) (2,194) (1,564)
Charge-offs 2,498 1,304 1,609
Recoveries (106) (89) (95)
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Balance, end of year $(7,350) $(5,541) $(4,562)
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The total contractual balances of delinquent lease contracts and notes
receivable due in installments, both owned by the Company and owned by others
and managed by the Company, over 90 days past due amounted to $9,967,000 at
December 31, 1998 compared to $6,806,000 at December 31, 1997. An account is
considered delinquent when not paid within thirty 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 $100 million (the
"Revolver"), (ii) securitized limited recourse revolving credit facilities with
wholly owned, special-purpose subsidiaries of the Company, HPSC Bravo Funding
Corp. ("Bravo") and HPSC Capital Funding, Inc. ("Capital"), currently in the
aggregate amount of $375 million, (iii) defined recourse fixed-term loans from
and sales of financing contracts to savings banks and other purchasers and (iv)
the Company's internally generated revenues. Management believes that the
Company's liquidity is adequate to meet current obligations and future projected
levels of financings and to carry on normal operations.
Information about the Revolver, the securitization transactions and
other funding sources referred to in the previous paragraph is incorporated by
reference from Note C and D of the "Notes to Consolidated Financial Statements"
at pages 11 through 13 of the 1998 Annual Report and "Management's Discussion
and Analysis of Financial Condition" at pages 11 through 17 of this Annual
Report on Form 10-K.
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
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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 believes that its system is among the most
advanced in the small-ticket equipment financing industry, giving the Company a
competitive advantage based on the speed of its contract processing, control
over credit risk and high level of service.
COMPETITION
Healthcare provider financing and asset-based lending are highly
competitive businesses. The Company competes for customers with a number of
national, regional and local finance companies, including those which, like the
Company, specialize in financing for healthcare providers. In addition, the
Company's competitors include those equipment manufacturers which finance the
sale or lease of their products themselves, conventional leasing companies and
other types of financial services companies such as commercial banks and savings
and loan associations. Although the Company believes that it currently has a
competitive advantage based on its customer-oriented financing and value-added
services, many of the Company's competitors and potential competitors possess
substantially greater financial, marketing and operational resources than the
Company. Moreover, the Company's future profitability will be directly related
to the Company's ability to obtain capital funding at favorable rates as
compared to the capital costs of its competitors. The Company's competitors and
potential competitors include many larger, more established companies that have
a lower cost of funds than the Company and access to capital markets and to
other funding sources which may be unavailable to the Company. The Company's
ability to compete effectively for profitable equipment financing business will
continue to depend upon its ability to procure funding on attractive terms, to
develop and maintain good relations with new and existing equipment suppliers,
and to attract additional customers.
Historically, the Company's equipment finance business has concentrated
on leasing small-ticket dental, medical and office equipment. 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, 1998, the Company had 99 full-time employees, 15 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
1998 under all operating leases was $628,000. 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, 1998.
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 1998 Annual Report.
The Company sold no equity securities during the period covered by this
annual report on Form 10-K other than sales registered under the Securities Act
of 1933, as amended.
Item 6. SELECTED FINANCIAL DATA
Selected financial data for each of the periods in the five year period
ended December 31, 1998 is incorporated by reference from page 25 of the 1998
Annual Report.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
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 $4,036,000 for ACFC)
for 1997. This increase of approximately 39.1% was due primarily to the increase
in the net investment in leases and notes from 1997 to 1998. The increase in net
investment in leases and notes resulted primarily 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 net gains on sales of
leases and notes increased to $4,906,000 in 1998 compared to $3,123,000 in 1997.
This increase was caused by improved margins associated with current year asset
sales activity. Earned income on leases and notes is a function of the amount of
net investment in leases and notes and the level of financing contract interest
rates. Earned income is recognized using the interest method over the life of
the net investment in leases and notes.
Interest expense net of interest income on cash balances for 1998 was
$15,126,000 (45.9% of earned income) compared to $11,019,000 (46.5% of earned
income) for 1997, an increase of 37.3%. The increase in net interest expense was
due primarily to a 33.1% increase in debt levels from 1997 to 1998, which
resulted primarily from increased borrowings to finance the Company's financing
contract originations. The decrease as a percentage of earned income was due to
lower interest rates on debt in 1998 as compared to 1997.
Net financing margin (earned income less net interest expense) for fiscal 1998
was $17,835,000 (54.1% of earned income) as compared to $12,672,000 (53.5% 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 fiscal 1998 was $4,201,000 (12.8% of earned income)
compared to $2,194,000 (9.3% of earned income) for 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 1998 were $15,021,000
(45.6% of earned income) as compared to $11,599,000 (49.0% 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 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 tax) in 1998 compared to $881,000 (44.0%) in 1997.
The Company's net income for fiscal 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 1997. The increase 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 $15,504,000 for the year ended December 31,
1998 compared to $10,607,000 for the comparable period in 1997, a 46% 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 $13,393,000 in 1998 compared to $10,270,000 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.
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12
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 completed
financing transactions with the Company.
FISCAL YEARS ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1996
Earned income from leases and notes for 1997 was $23,691,000 (including
$4,036,000 from ACFC) as compared to $17,515,000 (including $2,643,000 for ACFC)
for 1996. This increase of approximately 35.3% was due primarily to the increase
in the net investment in leases and notes from 1996 to 1997. The increase in net
investment in leases and notes resulted from an increase of approximately 45.7%
in the Company's financing contract originations for fiscal 1997 to
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) from approximately $105,000,000 (including approximately $18,000,000 in
ACFC line of credit originations, and excluding approximately $3,800,000 of
initial direct costs) for 1996. Gains on sales of leases and notes increased to
$3,123,000 in 1997 compared to $1,572,000 in 1996. This increase was caused by
higher levels of sales activity in 1997. Earned income on leases and notes is a
function of the amount of net investment in leases and notes and the level of
financing contract interest rates. Earned income is recognized using the
interest method over the life of the net investment in leases and notes.
Interest expense net of interest income on cash balances for 1997 was
$11,019,000 (46.5% of earned income) compared to $7,885,000 (45.0% of earned
income) for 1996, an increase in amount of 39.7%. The increase in net interest
expense was due primarily to a 56.7% increase in debt levels from 1996 to 1997,
which resulted primarily from increased borrowings to finance the company's
financing contract originations.
Net financing margin (earned income less net interest expense) for fiscal 1997
was $12,672,000 (53.5% of earned income) as compared to $9,630,000 (55.0% of
earned income) for 1996. The increase in amount was due to higher earnings on a
higher balance of earning assets.
The provision for losses for fiscal 1997 was $2,194,000 (9.3% of earned income)
compared to $1,564,000 (8.9% of earned income) for 1996. This increase in amount
resulted from higher levels of new financings in 1997 and the Company's
continuing evaluation of its allowance for losses. The allowance for losses at
December 31, 1997 was $5,541,000 (2.6% of net investment in leases and notes) as
compared to $4,562,000 (3.0% of net investment in leases and notes) at December
31, 1996. Net charge-offs were approximately $1,200,000 in 1997 compared to
$1,500,000 in 1996.
Selling, general and administrative expenses for fiscal 1997 were $11,599,000
(49.0% of earned income) as compared to $8,059,000 (46.0% of earned income) for
1996. This increase resulted from increased staffing and systems and support
costs required by higher volumes of financing activity in 1997 and to permit
anticipated near-term growth in financing activity.
The Company's income before income taxes for fiscal 1997 was $2,002,000 compared
to $1,579,000 for 1996. The provision for income taxes was $881,000 (44.0% of
income before tax) in 1997 compared to $704,000 (44.6%) in 1996.
The Company's net income for fiscal 1997 was $1,121,000 or $0.30 per basic share
and $0.26 per diluted share, compared to $875,000 or $0.23 per basic share and
$0.20 per diluted share for 1996. The increase in 1997 over 1996 was due to
higher earned income from leases and notes and gains on sales, offset by
increases in the provision for losses, higher selling, general and
administrative expenses, and higher average debt levels in 1997.
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 $10,607,000 for the year ended December 31, 1997 compared
to $7,943,000 for the comparable period in 1996, a 34% increase. The increase
was due to an increase in earned income on leases and notes to $19,712,000 in
1998 compared to $14,899,000 in 1997, higher gain on sales of leases and notes
of $3,123,000 in 1997 from $1,572,000 in 1996, offset by an increase in the
provision for losses in 1998 to $1,958,000 from $1,381,000 in the prior year, as
well as an increase in selling, general and administrative expenses to
$10,270,000 in 1997 compared to $7,147,000 in 1996.
Net profit contribution (income before interest and taxes) from the commercial
and industrial financing segment was $2,414,000 for the year ended December 31,
1997 compared to $1,521,000 for the comparable period in 1996, a 59% increase.
The increase was due to an increase in earned interest and fee income on notes
to $3,979,000 in 1997 compared to $2,616,000 in 1996, offset by an increase in
the provision for losses in 1997 to $236,000 from $183,000 in the prior year, as
well as an increase in selling, general and administrative expenses to
$1,329,000 in 1997 compared to $912,000 in 1996.
At December 31, 1997, the Company had approximately $59,000,000 of customer
applications which had been approved but had not yet resulted in a completed
transaction, compared to approximately $47,500,000 of such customer applications
at December 31, 1996. Not all approved applications will result in completed
financing transactions with the Company.
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13
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing activities require substantial amounts
of capital, and its ability to originate new financing transactions is dependent
on the availability of cash and credit. The Company currently has access to
credit under the Revolver, its securitization transactions with Bravo and
Capital, and loans secured by financing contracts. The Company obtains cash from
sales of its financing contracts under its securitization facilities and from
lease and note payments received. Substantially all of the assets of HPSC and
ACFC and the stock of ACFC have been pledged to HPSC's lenders as security under
HPSC's various short- and long-term credit arrangements. Borrowings under the
securitizations are secured by financing contracts, including the amounts
receivable thereunder and the assets securing the financing contracts. The
securitizations are limited recourse obligations of the Company, structured so
that the cash flow from the securitized financing contracts services the debt.
In these limited recourse transactions, the Company retains some risk of loss
because it shares in any losses incurred and it may forfeit the residual
interest, if any, that it has in the securitized financing contracts should a
default occur. The Company's borrowings under the Revolver (as defined below)
are full recourse obligations of HPSC. The Company's borrowings under the
Revolver are used to provide asset based lending within 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, 1998, the Company had $14,171,000 in cash, cash equivalents and
restricted cash as compared to $9,137,000 at the end of 1997. As described in
Note C to the Company's Consolidated Financial Statements, $9,588,000 of such
cash was restricted pursuant to financing agreements as of December 31, 1998,
compared to $7,000,000 at December 31, 1997.
Cash provided by operating activities was $8,811,000 for the year ended December
31, 1998 compared to $5,278,000 in 1997 and $6,680,000 in 1996. The significant
components of cash provided by operating activities in 1998 as compared to 1997
were an increase in net income in 1998 to $1,976,000 from $1,121,000 in 1997, an
increase in the gain on sales of leases and notes to $4,906,000 in 1998 from
$3,123,000 in 1997, which resulted from improved margins associated with current
year asset sales activity, and a decrease in refundable income taxes of
$1,996,000 in 1998 compared to an increase of $1,567,000 in 1997, offset by a
decrease in accounts payable and accrued liabilities of $920,000 in 1998
compared to an increase of $346,000 for the same period in 1997.
Cash used in investing activities was $68,909,000 for the year ended December
31, 1998 compared to $69,298,000 in 1997 and $34,406,000 in 1996. The primary
component of cash used in investing activity for 1998 as compared to 1997 was an
increase in originations of lease contracts and notes receivable to $166,672,000
in 1998 from $135,625,000 in 1997. This use of cash was offset by an increase in
portfolio receipts of $59,365,000 in 1998 from $48,889,000 in 1997, an increase
in notes receivable of $289,000 in 1998 as compared to $16,729,000 in 1997, and
an increase in proceeds from sales of lease contracts and notes receivable to
$38,696,000 in 1998 from $33,039,000 in 1997.
Cash provided by financing activities was $62,544,000 for the year ended
December 31, 1998 compared to $63,981,000 in 1997 and $29,041,000 in 1996. The
significant components of cash provided by financing activities in 1998 as
compared to 1997 were an increase in the net proceeds from senior notes in 1998
to $111,474,000 from $100,087,000 in 1997, net proceeds from revolving notes
payable of $10,000,000 in 1998 compared to net repayments of $1,000,000 in 1997,
and an increase in restricted cash of $2,588,000 in the current year compared to
$231,000 in 1997, offset by repayments of senior notes of $61,030,000 in 1998
compared to $53,125,000 in 1997 as well as no senior subordinated note
borrowings in 1998.
On December 27, 1993, the Company raised $70,000,000 through an asset
securitization transaction in which its wholly-owned subsidiary, Funding I,
issued senior secured notes (the "Funding I Notes") at a rate of 5.01%. The
Funding I Notes were secured by a portion of the Company's portfolio which it
sold in part and contributed in part to Funding I. Proceeds of this financing
were used to retire $50,000,000 of 10.125% senior notes due December 28, 1993,
and $20,000,000 of 10% subordinated notes due January 15, 1994. Under the terms
of the Funding I Notes, when the principal balance equals the balance of the
restricted cash in the facility, the Funding I Notes are paid off from the
restricted cash and Funding I terminates. This occurred in June of 1997. Due to
this early termination, the Company incurred a $175,000 non-cash, non-operating
charge against earnings in both the first and second quarters of 1997
representing the partial early recognition of certain unamortized deferred
transaction origination costs.
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14
In December 1996, the Company executed a Second Amended and Restated Revolving
Loan Agreement with BankBoston as Managing Agent (the "Revolving Loan Agreement"
or "Revolver"), providing availability up to $95,000,000. In December 1997, this
agreement was extended on the same terms and conditions until March 1998,
providing availability of $60,000,000. In March 1998, the Company executed a
Third Amended and Restated Revolving Loan Agreement with BankBoston as Managing
Agent, providing availability up to $100,000,000 through March 16, 1999. In
March 1999, this agreement was extended under the same terms and conditions
through May 14, 1999, providing availability up to $86,000,000. It is
anticipated the Company will execute a Fourth Amended and Restated Revolving
Loan Agreement in May 1999 which will provide the Company availability up to
$100,000,000 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, 1998, the Company had $49,000,000
outstanding under this facility and $51,000,000 available for borrowing, subject
to borrowing base limitations. The Revolver is not currently hedged and is,
therefore, exposed to upward movements in interest rates.
As of January 31, 1995, the Company, along with its wholly-owned,
special-purpose subsidiary Bravo Funding Corp. ("Bravo"), established a
$50,000,000 revolving credit facility (the "Bravo Facility") structured and
guaranteed by Capital Markets Assurance Corporation ("CapMAC", subsequently
acquired by MBIA in February 1998). Under the terms of the facility, Bravo, to
which the Company has sold and may continue to sell or contribute certain of its
portfolio assets, pledges its interests in these assets to a commercial paper
conduit entity. Bravo incurs interest at variable rates in the commercial paper
market and enters into interest rate swap agreements to assure fixed rate
funding. Monthly settlements of principal and interest payments are made from
the collection of payments on Bravo's portfolio. HPSC may make additional sales
to Bravo subject to certain covenants regarding Bravo's portfolio performance
and borrowing base calculations. The Company is the servicer of the Bravo
portfolio, subject to meeting certain covenants. The required monthly payments
of principal and interest to purchasers of the commercial paper are guaranteed
by MBIA pursuant to the terms of the Bravo Facility. In November, 1996, the
Bravo Facility was increased to $100,000,000 and amended to provide that up to
$30,000,000 of the Bravo Facility may be used as sales of receivables from Bravo
for accounting purposes. In June 1998, the Bravo Facility was further amended by
increasing availability to $225,000,000 with $67,500,000 available to be used
for sale accounting treatment. The Company had $61,506,000 outstanding under the
loan portion of the Bravo Facility at December 31, 1998, and in connection with
these borrowings, had 19 separate interest rate swap agreements with BankBoston
with a total notional value of $57,120,000. The Company had $44,549,000
outstanding from sales of receivables under the sale portion of the Bravo
Facility and in connection with this portion of the facility, had 9 separate
interest rate swap agreements with BankBoston with a total notional value of
$45,860,000 at December 31, 1998.
In April 1995, the Company entered into a fixed rate, fixed term loan agreement
with Springfield Institution for Savings ("SIS") under which the Company
borrowed $3,500,000 at 9.5% subject to certain recourse and performance
covenants. In July 1997, the Company entered into another fixed rate, fixed term
loan agreement with SIS under which the Company borrowed an additional
$3,984,000 at 8% subject to the same conditions as the first loan. The Company
had approximately $2,781,000 outstanding under these agreements at December 31,
1998.
In March 1997, the Company issued $20,000,000 of unsecured senior subordinated
notes due 2007 ("Senior Subordinated Note") bearing interest at a fixed rate of
11% (the "Note Offering"). The Company received approximately $18,300,000 in net
proceeds from the Note Offering and used such proceeds to repay amounts
outstanding under the Revolver Agreement.
In June 1997, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), established a $100,000,000
Lease Receivable Purchase Agreement with EagleFunding Capital Corporation
("Eagle"). Under the terms of the facility (the "Capital Facility"), Capital, to
which the Company may sell certain of its portfolio assets from time to time,
pledges or sells its interests in these assets to Eagle, a commercial paper
conduit entity. Capital may borrow at variable rates in the commercial paper
market and may enter into interest rate swap agreements to assure fixed rate
funding. Monthly settlements of the borrowing base and any applicable principal
and interest payments will be made from collections of Capital's portfolio. The
Company is the servicer of the Capital portfolio subject to certain covenants.
The required monthly payments
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15
of principal and interest to purchasers of the commercial paper are guaranteed
by BankBoston pursuant to the terms of the facility. In April 1998, the Capital
Facility was amended to increase availability to $150,000,000 under the same
terms and conditions through April 2001. The Company had $110,254,000 of
indebtedness outstanding under the loan portion of the Capital Facility at
December 31, 1998, and in connection with these borrowings had 14 separate
interest rate swap agreements with BankBoston with a total notional value of
$105,241,000. The Company had $16,073,000 outstanding from sales of receivables
under the sale portion of the Capital Facility and in connection with this
portion of the facility, had 3 separate interest rate swap agreements with
BankBoston with a total notional value of $14,657,000 at December 31, 1998.
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. Based on year end market
prices, the shares subject to repurchase represent approximately 3.7% of the
outstanding common stock. No minimum number or value of shares to be repurchased
has been fixed, nor has a time limit 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 1998, the
Company repurchased an aggregate of 131,100 shares of its common stock for
approximately $1,020,000.
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 savings banks, along with cash obtained from the
sales of its financing contracts and from internally generated revenues is
adequate to meet current obligations and future projected levels of financings
and to carry on normal operations. In order to finance adequately its
anticipated growth, the Company will continue to seek to raise additional
capital from bank and non-bank sources, make selective use of asset sale
transactions in 1999 and use its current credit facilities. The Company expects
that it will be able to obtain additional capital at competitive rates, but
there can be no assurance it will be able to do so.
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's exposure to
interest rate risk relates to changes in interest rates between the time a new
financing contract is approved and the time the permanent, fixed-rate financing
is completed. 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 swap agreements were to be terminated,
the cost to the Company would have been approximately $2,958,000 at December 31,
1998. Assuming a hypothetical 10% change in interest rates from current weighted
average swap rates, the cost to the Company for terminating such swap agreements
would have been approximately $4,895,000 at December 31, 1998.
The carrying value of the Company's fixed rate debt at December 31, 1998 was
$194,541,000. The estimated fair value of this debt was $197,082,000, which was
determined by applying the fixed rate that the Company received on its
securitization transaction in December 1998 against the entire outstanding fixed
rate debt balance at December 31, 1998. The Company's variable rate debt at
December 31, 1998 was $49,000,000, which approximated fair value. Assuming a
hypothetical 10% change in interest rates from current weighted average debt
rates, market risk for the fixed rate debt is estimated as the potential change
in the fair value of the debt, which would have approximated $3,373,000 at
December 31, 1998. The effect of a 10% hypothetical change in interest rates on
the Company's variable rate debt would have changed the Company's consolidated
interest expense by $348,000 for the year ended December 31, 1998.
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16
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, 1998, the
carrying value of these assets, including the retained interest of sold assets,
was approximately $246,984,000, which approximated fair value. Assuming implicit
rates changed by a hypothetical 10% from current weighted average implicit
rates, the effect on the fair value of the Company's fixed rate financing
contracts would have approximated $2,725,000 at December 31, 1998.
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, 1998, the carrying value of these assets was
approximately $30,991,000 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 $412,000 for the year ended December 31, 1998.
For additional information about the Company's financial instruments, see Note K
in Notes to Consolidated Financial Statements.
YEAR 2000 ISSUES
The year 2000 issue relates to the inability of computer applications to
distinguish between years with the same last two digits in different centuries
such as 1900 and 2000. In 1996, the Company, along with its subsidiary, ACFC,
began a review to assess the year 2000 readiness of all of its information
technology ("IT") systems. In 1998, the Company expanded this review to include
non-IT systems, including embedded software such as the Company's telephone
system, as well as the systems of third parties who are important business
partners with the Company.
The Company is heavily reliant on integrated IT systems for providing much of
its day-to-day operations, including application processing, underwriting,
billing and collections, as well as much of the financial and operational
reporting to management. The Company has performed a complete review of all
relevant computer systems. Based on its internal review, the Company believes
that substantially all of its internal IT systems are year 2000 compliant. The
Company has also obtained written assurances from all providers of its IT
software and systems as to the year 2000 compliance of each of these systems.
The Company believes that the loss of any ancillary systems as to which the
Company is not currently assured of year 2000 compliance would not cause major
business disruption.
The Company is currently monitoring the year 2000 progress of its major service
providers of non-IT systems, including embedded systems and software, as well as
of its third party business partners such as banking institutions and customers.
The Company has recently begun a review of the systems of major customers of its
subsidiary, ACFC. The Company continues to work to obtain written assurances
from all such identified third parties. In situations where any of these third
parties are not yet compliant, the Company will closely monitor such party's
plans to implement the changes necessary to become compliant.
The Company's target is to complete its year 2000 compliance review by the
second quarter of 1999. Expenses incurred to date associated with implementing
the year 2000 review process have not been material. The Company does not
separately track the internal costs associated with the year 2000 project. All
such costs, which primarily consist of payroll and IT related consulting costs,
have been expensed as incurred. The Company does not anticipate that any
remaining costs will have a material impact on the future financial position or
results of operations of the Company.
The estimates and conclusions stated above contain forward-looking statements
and are based on management's best estimates of future events. These statements
should be read in conjunction with the Company's disclosures under the heading
"Forward-Looking Statements".
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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 and Results of Operations at pages 15 and 16 of this annual report on
Form 10-K.
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,"
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18
"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 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 $100 million (the "Revolver"), (ii)
$375 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 extended its revolving credit
facility on March 14, 1999 to May 14, 1999 and plans to renew the facility until
May 2000 at that time, but there can be no assurance that it will be able to
renew or extend this agreement at its expiration or complete additional asset
securitizations or obtain other additional financing when needed and on
acceptable terms. The Company would be adversely affected if it were unable to
continue to secure sufficient and timely funding on acceptable terms. The
agreement governing the Revolver (the "Revolver Agreement") contains numerous
financial and operating covenants. There can be no assurance that the Company
will be able to maintain compliance with these covenants, and failure to meet
such covenants would result in a default under the Revolver Agreement. Moreover,
the Company's financing arrangements with Bravo and 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 contains certain covenants that could restrict the
Company's access to funding.
Securitization Recourse; Payment Restriction and Default Risk. As part of its
overall funding strategy, the Company utilizes asset securitization transactions
with wholly-owned, bankruptcy-remote subsidiaries to seek fixed rate,
matched-term financing. The Company sells financing contracts to these
subsidiaries which, in turn, either pledge or sell the contracts to third
parties. The third parties' recourse with regard to the pledge or sale is
limited to the contracts sold to the subsidiary. If the contract portfolio of
these subsidiaries does not perform within certain guidelines, the subsidiaries
must retain or "trap" any monthly cash distribution to which the Company might
otherwise be entitled. This restriction on cash distributions could continue
until the portfolio performance returns to acceptable levels (as defined in the
relevant agreements), which restriction could have a negative impact on the cash
flow available to the Company. There can be no assurance that 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 and (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 1998, 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
- 18 -
19
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's financing activities are highly competitive. The
Company competes for customers with a number of national, regional and local
finance companies, including those which, like the Company, specialize in
financing for healthcare providers. In addition, the Company's competitors
include those equipment manufacturers which finance the sale or lease of their
products themselves, conventional leasing companies and other types of financial
services companies such as commercial banks and savings and loan associations.
Many of the Company's competitors and potential competitors possess
substantially greater financial, marketing and operational resources than the
Company. Moreover, the Company's future profitability will be directly related
to its ability to obtain capital funding at favorable funding rates as compared
to the capital costs of its competitors. The Company's competitors and potential
competitors include many larger, more established companies that have a lower
cost of funds than the Company and access to capital markets and to other
funding sources that may be unavailable to the Company. There can be no
assurance that the Company will be able to continue to compete successfully in
its targeted markets.
Equipment Market Risk. The demand for the Company's equipment financing services
depends upon various factors not within its control. These factors include
general economic conditions, including the effects of recession or inflation,
and fluctuations in supply and demand related to, among other things, (i)
technological advances in and economic obsolescence of the equipment and (ii)
government regulation of equipment and payment for healthcare services. The
acquisition, use, maintenance and ownership of most types of medical and dental
equipment, including the types of equipment financed by the Company, are
affected by rapid technological changes in the healthcare field and evolving
federal, state and local regulation of healthcare equipment, including
regulation of the ownership and resale of such equipment. Changes in the
reimbursement policies of the Medicare and Medicaid programs and other
third-party payors, such as insurance companies, as well as changes in the
reimbursement policies of managed care organizations, such as health maintenance
organizations, may also affect demand for medical and dental equipment and,
accordingly, may have a material adverse effect on the Company's business,
operating results and financial condition.
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 $30 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 $49 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.
- 19 -
20
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, 1998, the estimated residual value of equipment at
the end of the lease term was approximately $15 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 entered into. Any default under
the Revolver may trigger a default under the loan or asset sale agreements. The
Company may enter into additional asset sale agreements in the future in order
to manage its liquidity. The level of reserves established by the Company in
relation to these sales may not prove to be adequate. Failure of the Company to
honor its repurchase and/or payment commitments under these agreements could
create an event of default under the loan or asset sale agreements and under the
Revolver. There can be no assurance that a continuing market can be found to
sell these types of assets or that the purchase prices in the future would
generate comparable gain recognition.
Dependence on Sales Representatives. The Company is, and its growth and future
revenues are, dependent in 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, 1998, the Company had 21 field sales representatives and 15
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.
- 20 -
21
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 1998 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
I 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 1999 Proxy Statement to be filed not
later than 120 days after the end of the fiscal year covered by this annual
report on Form 10-K.
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
Values," - Employment Agreements, Termination of Employment and Change of
Control Arrangements" and " - Compensation of Directors" in the 1999 Proxy
Statement to be filed not later than 120 days after the end of the fiscal year
covered by this annual report on Form 10-K.
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 1999 Proxy Statement to be filed not later than
120 days after the end of the fiscal year covered by this annual report on Form
10-K.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable
- 21 -
22
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE NUMBER IN
(a) 1. FINANCIAL STATEMENTS 1998 ANNUAL REPORT
-------------------- ------------------
Incorporated by reference from the Company's
Annual Report to Stockholders for the fiscal
year ended December 31, 1998
Consolidated Balance Sheets at December 31,
1998 and December 31, 1997 4
Consolidated Statements of Operations for each
of the three years in the period ended
December 31, 1998 5
Consolidated Statements of Changes in Stock-
holders' Equity for each of the three years in
the period ended December 31, 1998 6
Consolidated Statements of Cash Flows for
each of the three years in the period ended
December 31, 1998 7
Independent Auditors' Report 23
(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
Exhibits
- --------
Management contracts or compensatory plans or arrangements required to be filed
as exhibits are identified by an asterisk.
NO. TITLE METHOD OF FILING
3.1 Restated Certificate of Incorporated by reference to
Incorporation of HPSC, Inc. 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 Incorporated by reference to
Restated Certificate of Exhibit 3.2 to HPSC's Annual
Incorporation of HPSC, Inc. filed Report on Form 10-K for the fiscal
in Delaware on September 14, 1987 year ended December 31, 1995.
3.3 Certificate of Amendment to Incorporated by reference to
Restated Certificate of Exhibit 3.3 to HPSC's Annual
Incorporation of HPSC, Inc. filed Report on Form 10-K for the fiscal
in Delaware on May 22, 1995 year ended December 31, 1995.
- 22 -
23
3.4 Amended and Restated By-Laws Incorporated by reference to
Exhibit 3.4 to HPSC's Amendment
No. 1 to Registration Statement
on Form S-1 filed March 10, 1997
4.1 Rights Agreement dated as of Incorporated by reference to
August 3, 1993 between the Exhibit 4 to HPSC's Amendment
Company and The First National No. 1 to its Current Report on
Bank of Boston, N.A., including Form 8-K filed August 11, 1993.
as Exhibit B thereto the form of
Rights Certificate
10.1 Lease dated as of March 8, Incorporated by reference to
1994 between the Trustees of Exhibit 10.1 to HPSC's Annual
60 State Street Trust and Report on Form 10-K for the
HPSC, Inc., dated September fiscal year ended December 31,
10, 1970 and relating to the 1994
principal executive offices of
HPSC, Inc. at 60 State Street,
Boston, Massachusetts
*10.2 HPSC, Inc. Stock Option Plan, Incorporated by reference to
dated March 5, 1986 Exhibit 10.6 to HPSC's Annual
Report on Form 10-K for the
fiscal year ended December 30,
1989
*10.3 Employment Agreement Incorporated by reference to
between the Company and Exhibit 10.3 to HPSC's Amendment No. 1
John W. Everets, dated as of to Registration Statement on Form S-1
July 19, 1996 filed March 10, 1997
*10.4 Employment Agreement Incorporated by reference to
between the Company and Exhibit 10.4 to HPSC's Amendment No. 1
Raymond R. Doherty dated to Registration Statement on Form S-1
as of August 2, 1996 filed March 10, 1997
*10.5 Employment Agreement between HPSC, Incorporated by reference to
Inc. and Rene Lefebvre dated April Exhibit 10.2 to HPSC's Quarterly
23, 1998 Report on Form 10-Q for the
quarter ended June 30, 1998
*10.6 HPSC, Inc. Employee Stock Incorporated by reference to
Ownership Plan Agreement dated Exhibit 10.9 to HPSC's Annual
December 22, 1993 between HPSC, Report on Form 10-K for the
Inc. and John W. Everets and fiscal year ended December 25,
Raymond R Doherty, as trustees 1993
*10.7 First Amendment effective Incorporated by reference to
January 1, 1993 to HPSC, Inc. Exhibit 10.2 to HPSC's Quarterly
Employee Stock Ownership Plan Report on Form 10-Q for the
quarter ended June 25, 1994
*10.8 Second Amendment effective Incorporated by reference to
January 1, 1994 to HPSC, Inc. Exhibit 10.11 to HPSC's Annual
Employee Stock Ownership Plan Report on Form 10-K for the
fiscal
year ended December 31, 1994
*10.9 Third Amendment effective January Incorporated by reference to
1, 1993 to HPSC, Inc. Employee Exhibit 10.12 to HPSC's Annual
Stock Ownership Plan Report on Form 10-K for the
fiscal year ended December 31,
1994
*10.10 HPSC, Inc. 1994 Stock Plan Incorporated by reference to
dated as of March 23, 1994 and Exhibit 10.4 to HPSC's Quarterly
related forms of Nonqualified Report on Form 10-Q for the
Option Grant and Option quarter ended June 25, 1994
Exercise Form
- 23 -
24
*10.11 HPSC, Inc. Supplemental Executive Incorporated by reference to
Retirement Plan dated as of Exhibit 10.12 to HPSC's Annual
January 1, 1997 Report on Form 10-K for the
fiscal year-ended December 31,
1997
*10.12 First Amendment dated March 15, Filed herewith
1999 to HPSC, Inc. Supplemental
Executive Retirement Plan dated as
of January 1, 1997
*10.13 HPSC, Inc. 401(k) Plan dated Incorporated by reference to
February, 1993 between HPSC, Exhibit 10.15 to HPSC's Annual
Inc. and Metropolitan Life Report on Form 10-K for the
Insurance Company fiscal year ended December 25, 1993
10.14 Third Amended and Credit Agreement Incorporated by reference to
dated as of March 16, 1998 among Exhibit 10.14 to HPSC's Annual
HPSC, Inc., BankBoston Report on Form 10-K for the
individually and as Agent and the fiscal year ended December 31,
Banks named therein 1997
10.15 First Amendment dated June 29, Filed herewith
1998 to Third Amended and Restated
Credit Agreement dated as of March
16, 1998 among HPSC, Inc.,
BankBoston, individually and as
Agent and the Banks named therein.
10.16 Second Amendment dated March 14, Filed herewith
1999 to Third Amended and Restated
Credit Agreement dated as of
March 16, 1998 among HPSC, Inc.,
Bank Boston, individually and as
Agent, and the banks named therein
10.17 Purchase and Contribution Incorporated by reference to
Agreement dated as of Exhibit 10.31 to HPSC's Annual
January 31, 1995 between Report on Form 10-K for the fiscal
HPSC, Inc. and HPSC Bravo year ended December 31, 1994
Funding Corp.
10.18 Amendment No. 4 dated June 29, Incorporated by reference to
1998 to Purchase and Contribution Exhibit 10.7 to HPSC, Inc.'s
Agreement, dated January 31, 1995 Quarterly Report on Form 10-Q for
by and among HPSC, Inc. and Bravo the quarter ended June 30, 1998
Funding Corp.
10.19 Credit Agreement dated as of Incorporated by reference to
January 31, 1995 among Exhibit 10.32 to HPSC's Annual
HPSC Bravo Funding Corp., Report on Form 10-K for the fiscal
Triple-A One Funding year ended December 31, 1994
Corporation, as lender, and
CapMAC, as Administrative
Agent and as Collateral Agent
10.20 Agreement to furnish copies of Incorporated by reference to
Omitted Exhibits to Certain Exhibit 10.33 to HPSC's Annual
Agreements with HPSC Bravo Report on Form 10-K for the
Funding Corp. fiscal year ended December 31, 1994
10.21 Amendment documents, effective Incorporated by reference to
November 5, 1996 to Credit Exhibit 10.26 to HPSC's
Agreement dated as of January 31, Registration Statement on Form S-1
1995 among HPSC Bravo Funding filed January 30, 1997
Corp., Triple-A Funding
Corporation, as Lender, and
CapMAC, as Administrative Agent
and as Collateral Agent
- 24 -
25
10.22 Amendment No. 3 dated June 29, Incorporated by reference to
1998 to Credit Agreement dated Exhibit 10.6 to HPSC's Quarterly
January 31, 1995 by and among Report on Form 10-Q for the
HPSC Bravo Funding Corp., quarter ended March 30, 1998
Triple-A One Funding Corporation
and CapMac, as Administrative
Agent and Collateral Agent
10.23 Lease Receivables Purchase Incorporated by reference to
Agreement dated as of June 27, Exhibit 10.1 to HPSC's Quarterly
1997 among HPSC Capital Funding, Report on Form 10-Q for the
Inc., as Seller, HPSC, Inc. as quarter ended September 30, 1997.
Service and Custodian,
EagleFunding Capital Corporation
as Purchaser and BankBoston
Securities, Inc. as Deal Agent
10.24 Appendix A to EagleFunding Incorporated by reference to
Purchase Agreement (Definitions Exhibit 10.2 to HPSC's Quarterly
List Attached). Report on Form 10-Q for the
quarter ended September 30, 1997
10.25 Purchase and Contribution Incorporated by reference to
Agreement dated as of June 27, Exhibit 10.3 to HPSC's Quarterly
1997 Between HPSC Capital Report on Form 10-Q for the
Funding, Inc. as the Buyer, and quarter ended September 30, 1997
HPSC, Inc. as the Originator and
the Servicer.
10.26 Undertaking to Furnish Certain Incorporated by reference to
Copies of Omitted Exhibits to Exhibit 10.4 to HPSC's Quarterly
Exhibit 10.19 and 10.21 hereof. Report on Form 10-Q for the
quarter ended September 30, 1997.
10.27 Amendment No. 2, dated April 30, Incorporated by reference to
1998 to Lease Receivable Purchase Exhibit 10.4 to HPSC's Quarterly
Agreement dated June 27, 1997, by Report on Form 10-Q for the
and among HPSC Capital Funding, quarter ended June 30, 1998
Inc. (Seller), EagleFunding
Capital Corporation (Purchaser),
HPSC, Inc. (Servicer and
Custodian), and BankBoston
Securities, Inc. (Deal Agent)
10.28 Indenture dated as of March 20, Incorporated by reference to
1997 between HPSC, Inc. and State HPSC's Exhibit 10.28 to HPSC's
Street Bank and Trust Company, Annual Report on Form 10K for the
as Trustee fiscal year ended December 31, 1997
*10.29 Amended and Restated HPSC, Inc. Incorporated by reference to
1995 Stock Incentive Plan Exhibit 10.27 to HPSC's Annual
Report on Form 10-K for the fiscal
year ended December 31, 1995
*10.30 Stock Option grant to Lowell P. Incorporated by reference to
Weicker effective December 7,
1995 Exhibit 10.28 to
HPSC's Annual Report on
Form 10-K for the fiscal
year ended December 31,
1995
*10.31 HPSC 1998 Stock Incentive Plan Incorporated by reference to
Exhibit 10.1 to HPSC's Quarterly
Report on Form 10-Q for the
quarter ended March 30, 1998
*10.32 HPSC, Inc. 1998 Executive Bonus Filed herewith
Plan
*10.33 HPSC, Inc. Outside Directors Incorporated by reference to
Stock Bonus Plan Exhibit 10.1 to HPSC's Quarterly
Report on Form 10-Q for the
quarter ended June 30, 1998
- 25 -
26
*10.34 Amended and Restated Stock Loan Incorporated by reference to
Program Exhibit 10.26 to HPSC's Annual
Report on Form 10-K for the fiscal
year ended December 31, 1997
13.1 1998 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 Filed herewith
Schedule
Copies of Exhibits may be obtained for a nominal charge by writing to:
INVESTOR RELATIONS
HPSC, INC.
60 STATE STREET
BOSTON, MASSACHUSETTS 02019
(b) Reports on Form 8-K
None
- 26 -
27
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, 1999 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.
NAME TITLE DATED
By: /s/ John W. Everets Chairman, Chief Executive March 29, 1999
---------------------------- Officer and Director (Principal
John W. Everets Executive Officer)
By: /s/ Rene Lefebvre Vice President, March 29, 1999
---------------------------- Chief Financial Officer and
Rene Lefebvre Treasurer (Principal Financial
Officer)
By: /s/ Dennis J. McMahon Vice President, Administration March 29, 1999
----------------------------
Dennis J. McMahon (Principal Accounting Officer)
By: /s/ Raymond R. Doherty President and Director March 29, 1999
----------------------------
Raymond R. Doherty
By: /s/ Dollie A. Cole Director March 29, 1999
----------------------------
Dollie A. Cole
By: /s/ Thomas M. McDougal Director March 29, 1999
----------------------------
Thomas M. McDougal
- 27 -
28
By: /s/ Samuel P. Cooley Director March 29, 1999
----------------------------
Samuel P. Cooley
By: /s/ Joseph A. Biernat Director March 29, 1999
----------------------------
Joseph A. Biernat
By: /s/ J. Kermit Birchfield Director March 29, 1999
----------------------------
J. Kermit Birchfield
By: /s/ Lowell P. Weicker, Jr. Director March 29, 1999
----------------------------
Lowell P. Weicker, Jr.
- 28 -