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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended DECEMBER 31, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
Commission file number 0-11618
HPSC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2560004
(State or other jurisdiction of (IRS Employer Identification No.)
Incorporation or organization)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 720-3600
Securities registered pursuant to section 12(b) of the Act:
NONE
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK-PAR VALUE $.01 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (X) NO ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any other
amendment to this Form 10-K.
YES ( ) NO (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $17,075,448 at March 23, 2001 representing 2,626,992 shares.
The number of shares of common stock, par value $.01 per share, outstanding as
of March 23, 2001 was 4,167,053.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Stockholders to be
held May 15, 2001 (the "2001 Proxy Statement") are incorporated by reference
into Part III of this annual report on Form 10-K.
The 2001 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.
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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. A majority of the Company's revenues comes from its financing of
healthcare equipment and healthcare practice acquisitions. 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 to the dental, ophthalmic, general medical, chiropractic
and veterinary professions. At December 31, 2000, on a consolidated basis,
approximately 90% of the Company's net investment in leases and notes consisted
of financing contracts with licensed healthcare professionals. Approximately 10%
of the portfolio was asset-based lending to commercial and industrial
businesses. HPSC principally competes in the portion of the healthcare finance
market where the size of the transaction is $250,000 or less, sometimes referred
to as the "small-ticket" market. The average size of the Company's financing
transactions in 2000 was approximately $39,000. In connection with its equipment
financing, the Company enters into noncancellable finance agreements and/or
leases, which provide for a full payout at a fixed interest rate over a term of
one to seven years. The Company markets its financing services to healthcare
providers in a number of ways, including direct marketing through trade shows,
conventions and advertising, through its sales staff with 22 offices in 12
states and through cooperative arrangements with equipment vendors.
At December 31, 2000, HPSC's gross outstanding owned and managed financing
contracts with licensed professionals, excluding asset-based lending, were
approximately $658 million, consisting of approximately 20,000 active contracts.
HPSC's financing contract originations in 2000, excluding asset-based lending,
were approximately $242 million compared to approximately $208 million in 1999,
an increase of 16%, which compared to financing contract originations of
approximately $159 million in 1998.
ACFC, the Company's wholly-owned subsidiary, provides asset-based financing to
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 contracts with
licensed professionals. ACFC's originations of new lines of credit in 2000 were
approximately $7 million, compared to approximately $18 million in 1999 (a
decrease of 61%), and compared to approximately $23 million in 1998.
The continuing increase in the Company's originations of financing contracts
helped contribute to a 28% increase in the Company's net revenues for fiscal
year 2000 as compared with fiscal year 1999, and a 21% increase in the Company's
net revenues for fiscal year 1999 compared with fiscal year 1998. This
percentage change in revenues differs from the percentage change in originations
because revenues consist of earned income on leases and notes, which is a
function of time and of the amount of net investment in leases and notes and the
level of interest rates. Earned income is recognized over the life of the
financing contract while originations are measured 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.
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
technique, to large banking institutions, which offer a full array of financial
services.
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The medical equipment finance industry includes two distinct markets which are
generally differentiated based on equipment price and type of healthcare
provider. The first market, in which the Company currently does not compete, is
financing of equipment priced at over $250,000, which is typically sold to
hospitals and other institutional purchasers. Because of the size of the
purchase, long sales cycle, and number of financing alternatives available to
these types of customers, their choice among financing alternatives tends to be
based primarily on cost of financing. The second market, in which the Company
does compete, is the financing of lower-priced or "small-ticket" equipment,
where the price of the financed equipment is $250,000 or less. Much of this
equipment is sold to individual practitioners or small group practices,
including dentists, ophthalmologists, physicians, chiropractors, veterinarians
and other healthcare providers. The Company focuses on the small-ticket market
because it is able to respond in a prompt and flexible manner to the needs of
individual customers. Management believes that purchasers in the small-ticket
healthcare equipment market often seek the value-added sales support and ease of
conducting business that the Company offers.
The initial terms of the Company's leases and notes range from 12 to 84 months,
with a weighted average original term of 67 months at December 31, 2000.
Although the Company primarily focuses its business on equipment financing to
licensed professionals, it continues to expand its financing of healthcare
practice acquisitions. Practice finance is a specialized segment of the finance
industry, in which the Company's primary competitors are banks. Practice finance
is a relatively new business opportunity for financing companies such as HPSC
which has developed as the sale of healthcare professional practices has
increased. HPSC may finance up to 100% of the cost of the practice being
purchased.
HEALTHCARE PROVIDER FINANCING
Terms and Conditions
The Company's business consists primarily of the origination of equipment
financing contracts pursuant to which the Company finances healthcare providers'
acquisition of equipment as well as leasehold improvements, working capital and
supplies. The contracts are either finance agreements (notes) or leases, and are
non-cancelable. The contracts are full payout contracts and provide for
scheduled payments sufficient, in the aggregate, to cover the Company's costs,
and to provide the Company with an appropriate profit margin. The Company
provides lessees with an option to purchase the equipment at the end of the
lease, generally for 10% of its original cost. In the past, substantially all
lessees have exercised this option. The terms of the Company's leases and notes
range from 12 to 84 months, with a weighted average original term of 67 months
for the year ended December 31, 2000.
All of the Company's equipment financing contracts require the customer to: (i)
maintain, service and operate the equipment in accordance with the
manufacturer's and government-mandated procedures, and (ii) make all scheduled
contract payments regardless of the performance of the equipment. Substantially
all of the Company's financing contracts provide for principal and interest
payments due monthly for the term of the contract. In the event of default by a
customer, the financing contract provides that the Company has the rights
afforded creditors under law, including the right to repossess the underlying
equipment and in the case of the legal proceeding arising from a default, to
recover damages and attorneys' fees. The Company's equipment financing contracts
provide for late fees and service charges to be applied on payments which are
overdue.
Although the customer has the full benefit of the equipment manufacturers'
warranties with respect to the equipment it finances, the Company makes no
warranties to its customers regarding 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 970 practice
finance loans aggregating approximately $140 million in financings. The terms of
such loans generally range from 72 to 84 months. In 2000, practice finance
generated approximately 17% of HPSC's total healthcare 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.
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The Company solicits business for its practice finance services primarily by
advertising in trade magazines, attending healthcare conventions, working with
practice brokers, and directly approaching potential purchasers of healthcare
practices. More than half of the healthcare practices financed by the Company to
date have been dental practices. The Company has also financed the purchase of
professional practices of 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, 2000, 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
In the past, the Company has realized over 99% of the residual value of
equipment covered by leases that run full term. 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, 2000 are
attributable to leases which will expire by the end of 2007. Realization of such
residual 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 the equipment. Although the Company
has received over 99% of recorded residual values for leases which expired
during the last three years, there can be no assurance that this realization
rate will be maintained.
Government Regulation and Healthcare Trends
The majority of the Company's present customers are healthcare providers. The
healthcare industry is subject to substantial federal, state and local
regulation. In particular, the federal and state governments have enacted laws
and regulations designed to control healthcare costs, including mandated
reductions in fees for the use of certain medical equipment and the enactment of
fixed-price reimbursement systems, where the rates of payment to healthcare
providers for particular types of care are fixed in advance of actual treatment.
Major changes have occurred in the United States healthcare delivery system,
including the formation of integrated patient care networks (often involving
joint ventures between hospitals and physician groups), as well as the grouping
of healthcare consumers into managed-care organizations sponsored by insurance
companies and other third parties. Moreover, state healthcare initiatives have
significantly affected the financing and structure of the healthcare delivery
system. These changes have not had a material adverse 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, generally 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 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 inventory loans, generally not exceeding 50% of the
value of the customer's active inventory, valued at the lower of cost or market
value. In addition, ACFC provides term financing for equipment, which is secured
by the machinery and equipment of the borrower.
The average ACFC loan is for a term of two to three years. No single borrower
accounts for more than 10% 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.
Each of ACFC's officers has over ten years of experience providing this type of
financing.
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From its inception in 1994 through December 31, 2000, ACFC has provided 70 lines
of credit totaling approximately $95 million and currently has approximately $32
million of loans outstanding to 34 borrowers. The annual dollar volume of
originations of new lines of credit by ACFC were $23.1 million in 1998,
$18.2 million in 1999 and $7.3 million in 2000.
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 Company's
accounting department for audit, booking and funding and to commence automated
billing and transaction accounting procedures.
Timely and accurate vendor payments are essential to the Company's business. In
order to maintain its relationships with existing vendors and attract new
vendors, the Company generally makes payments to vendors for financing
transactions within one day of authorization to pay from the customer.
ACFC's underwriting procedures include an evaluation of the collectibility of
the borrower's receivables that are pledged to ACFC, including an evaluation of
the validity of such receivables and the creditworthiness of the payors of such
receivables. ACFC may also require its customers to pay for credit insurance
with respect to its loans. The Loan Administration Officer of ACFC is
responsible for maintaining lending standards and for monitoring loans and
underlying collateral. Before approving a loan, ACFC examines the prospective
customer's books and records and monitors its customer's operations as it deems
necessary during the term of the loan. Loan officers are required to rate the
risk of each loan made by ACFC and to update the rating upon receipt of any
financial statement from the customer or when 90 days have elapsed since the
date of the last rating.
The Company's finance portfolio consists of two general categories of assets:
The first category of assets consists of the Company's leases and notes
receivable due in installments, which comprise approximately 90% of the
Company's net investment in leases and notes at December 31, 2000 (89% at
December 31, 1999). Substantially all of such financing contracts are with
licensed medical professionals who practice in individual or small group
practices. These contracts and notes are at fixed interest rates and have terms
ranging from 12 to 84 months. The Company believes that financing contracts
entered into with medical professionals are generally "small-ticket,"
homogeneous transactions with similar risk characteristics.
The second category of assets consists of the Company's commercial notes
receivable, which comprise approximately 10% of the Company's net investment in
leases and notes at December 31, 2000 (11% at December 31, 1999). These notes
receivable primarily relate to asset-based, revolving lines of credit to small
and medium sized manufacturers and distributors, at variable interest rates, and
typically have terms of two to three years. The Company began commercial lending
activities in mid-1994. Through December 31, 2000, the Company has had
cumulative charge-offs of commercial notes receivable of $513,000. The provision
for losses related to the commercial notes receivable were $690,000, $113,000
and $147,000 in 2000, 1999 and 1998, respectively. The amount of the allowance
for losses related to the commercial notes receivable was $976,000 and $686,000
at December 31, 2000 and 1999, respectively. The increase in both the provision
and the allowance in 2000 was principally due to a default in one loan that has
been partially written-off and the balance completely reserved.
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, general economic conditions and probable losses associated with such
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contracts, and a review of the Company's historical loss experience. At December
31, 2000, this allowance for losses was 3.7% 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 borrowings
relating to such contract, (ii) lose its residual interest in any underlying
equipment or (iii) forfeit cash collateral pledged as security for the Company's
asset securitizations. In addition, although net charge-offs on the financing
contract portfolio of the Company were less than 1% of the Company's average net
investment in leases and notes owned and managed (before allowance) for the year
ended December 31, 2000, any increase in such losses or in the rate of payment
defaults under the financing contracts originated by the Company could adversely
affect the Company's ability to obtain additional funding, including its ability
to complete additional asset securitizations.
The Company's receivables are subject to credit risk. To manage this risk, the
Company has adopted collection policies that are closely monitored by
management. Additionally, certain of the Company's leases and notes receivable,
which have been sold under certain sales agreements, are subject to recourse and
estimated losses are provided for by the Company. Accounts are normally charged
off when future payments are deemed unlikely.
A summary of activity in the Company's allowance for losses for each of the
years in the three-year period ended December 31, 2000 is as follows:
(in thousands) 2000 1999 1998
---- ---- ----
Balance, beginning of year........................................ $(9,150) $(7,350) $(5,541)
Provision for losses.............................................. (9,218) (4,489) (4,201)
Charge-offs....................................................... 4,287 2,853 2,498
Recoveries........................................................ (89) (164) (106)
-------- ------- -------
Balance, end of year.............................................. $(14,170) $(9,150) $(7,350)
======== ======= =======
The total contractual balances of delinquent lease contracts and notes
receivable due in installments, both owned by the Company and owned by others
and serviced by the Company, over 90 days delinquent was $23,759,000 at December
31, 2000 compared to $15,928,000 at December 31, 1999. An account is considered
delinquent when not paid within 30 days of the billing due date. The increase in
the provision and the allowance for losses were the result of continuing growth
in the portfolio, a specific provision relating to a vendor bankruptcy and the
Company's continuing evaluation of its portfolio.
FUNDING SOURCES
General
The Company's principal sources of funding for its financing transactions are:
(i) a revolving loan agreement with Fleet National Bank (formerly BankBoston) as
managing agent providing borrowing availability of up to $90 million (the
"Revolver"), (ii) securitized limited recourse revolving credit facilities with
wholly-owned, special-purpose subsidiaries of the Company, HPSC Bravo Funding
Corp. ("Bravo") and HPSC Capital Funding, Inc. ("Capital"), currently with
aggregate availability of $523 million, (iii) a term asset securitization
completed in December 2000 in the amount of $527 million (the "Equipment
Receivables 2000-1 term securitization") through two wholly-owned
special-purpose subsidiaries of the Company, HPSC Equipment Receivables 2000-1
LLC I ("ER 2000-1 LLC I") and HPSC Equipment Receivables 2000-1 LLC II ("ER
2000-1 LLC II"); (iv) defined recourse fixed-term loans and sales of financing
contracts with savings banks and other purchasers; and (v) the Company's
internally generated revenues. Management believes that the Company's liquidity
is adequate to meet current obligations and future projected levels of
financings and to carry on normal operations.
Information about the Revolver, the securitization facilities, the term asset
securitization, and other funding sources referred to in the previous paragraph
is located in Notes C and D of the "Notes to Consolidated Financial Statements"
at pages F-12 through F-16 and "Management's Discussion and Analysis of
Financial Condition" at pages 13 through 17 of the Annual Report on Form 10-K.
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INFORMATION TECHNOLOGY
The Company uses automated information systems and telecommunications
capabilities to support its business functions, including accounting, taxes,
credit, collections, operations, sales, sales support and marketing. The Company
has developed and owns proprietary software which support several of these
business functions. The Company's computerized systems provide management with
accurate and up-to-date customer data which strengthens its internal controls
and assists in forecasting. These systems are used to generate collection
histories, vendor analysis, customer reports and credit histories and other data
useful in servicing customers and equipment suppliers. They are also used to
provide financial and tax reporting, internal controls and personnel training
and management. The Company recently introduced an interactive web site offering
its customers advanced functionality and services, and industry specific
information. The Company believes that its computer systems give it a
competitive advantage by providing rapid contract processing and control over
credit risk. These systems permit the Company to offer a high level of customer
service.
The Company contracts with an outside consulting firm to provide information
technology services. 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 information request,
on a timely basis. Management believes that its investment in technology has
positioned the Company to manage increased equipment financing volume.
COMPETITION
Healthcare provider financing and asset-based lending are highly competitive
businesses. The Company competes for customers with a number of national,
regional and local finance companies, including those which, like the Company,
specialize in financing for healthcare providers. In addition, the Company's
competitors include those equipment manufacturers which finance the sale or
lease of their own products, other 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 excellent customer service, many of the Company's
competitors and potential competitors possess substantially greater financial,
marketing and operational resources than the Company. Moreover, the Company's
future profitability will be directly related to the Company's ability to obtain
capital funding at favorable rates as compared to the capital costs of its
competitors. The Company's competitors and potential competitors include many
larger companies that have a lower cost of funds than the Company and access to
capital markets and to other funding sources which may be unavailable to the
Company. The Company's ability to compete effectively for profitable equipment
financing business will continue to depend upon its ability to procure funding
on attractive terms, to develop and maintain good relations with new and
existing equipment suppliers, and to attract new customers.
The Company's equipment finance business has historically 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. If it does
so, the Company will be entering an even more competitive market. In addition,
the Company may face greater competition with its expansion into the practice
finance and asset-based lending markets.
EMPLOYEES
At December 31, 2000, the Company had 117 full-time employees, 14 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 13,800 square feet of office space at 60 State
Street, Boston, Massachusetts for approximately $36,000 per month. This lease
expires on June 30, 2004 with a five-year extension option. ACFC leases
approximately 5,900 square feet at 433 South Main Street, West Hartford,
Connecticut for approximately $10,000 per month. This lease expires on February
28, 2003 with a three-year extension option. The Company's total rent expense
for 2000 under all operating leases was $832,000. 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, including customer disputes over
products the Company has financed, 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. HPSC believes that it has adequately reserved for any
potential loss arising out of any litigation loss contingencies.
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, 2000.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On May 17, 2000, the Company's common stock began trading on the American Stock
Exchange (Symbol: "HDR"). Prior to that date, the Company's common stock was
traded on the NASDAQ Market (Symbol: "HPSC"). The table below sets forth the
representative high and low closing prices for shares of the common stock of the
Company in the over-the-counter market as reported by the American Stock
Exchange and the NASDAQ National Market System for the fiscal years 2000 and
1999:
2000 Fiscal Year High Low 1999 Fiscal Year High Low
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First Quarter.................... $ 10.00 $ 7.13 First Quarter ..................... $ 10.00 $ 8.13
Second Quarter................... 9.63 7.00 Second Quarter .................... 10.50 8.00
Third Quarter.................... 8.75 6.63 Third Quarter ..................... 13.00 9.38
Fourth Quarter................... 6.93 5.30 Fourth Quarter .................... 11.25 9.00
The foregoing quotations represent prices between dealers, and do not
include retail markups, markdowns, or commissions.
HOLDERS
Approximate Number of Record
Title of Class Holders (as of March 15, 2001)
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Common Stock, par value $.01 per share 93 (1)
(1) This number does not reflect beneficial ownership of shares held in
"nominee" or "street name."
DIVIDENDS
The Company has never paid any dividends and anticipates that, for the
foreseeable future, its earnings will be retained for use in its business.
The Company neither issued nor sold equity securities during the period covered
by this annual report on Form 10-K other than shares covered by employee and
director compensation plans.
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Item 6. SELECTED FINANCIAL DATA
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Year Ended
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(in thousands, except Dec. 31, Dec. 31, Dec.31, Dec. 31, Dec. 31,
share and per share data) 2000(4) 1999 1998 1997 1996
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STATEMENT OF OPERATIONS DATA
Revenues:
Earned income on leases and notes $ 49,462 $ 40,551 $ 33,258 $ 23,691 $ 17,515
Gain on sales of leases and notes 12,078 4,916 4,906 3,123 1,572
Provision for losses (9,218) (4,489) (4,201) (2,194) (1,564)
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Net Revenues $ 52,322 $ 40,978 $ 33,963 $ 24,620 $ 17,523
=========================================================================================================================
Net Income $ 87 $ 2,719 $ 1,976 $ 1,121 $ 875
=========================================================================================================================
Net Income per Share -- Basic(1) $ 0.02 $ 0.72 $ 0.53 $ 0.30 $ 0.23
-- Diluted(1) $ 0.02 $ 0.61 $ 0.47 $ 0.26 $ 0.20
=========================================================================================================================
Shares Used to Compute -- Basic(1) 3,879,496 3,766,684 3,719,026 3,732,576 3,786,799
Net Income per Share -- Diluted(1) 4,292,650 4,436,476 4,194,556 4,315,370 4,326,604
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Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31,
(in thousands) 2000 1999 1998 1997 1996
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BALANCE SHEET DATA
Cash and Cash Equivalents $ 1,713 $ 1,356 $ 4,583 $ 2,137 $ 2,176
Restricted Cash(2) 115,502 14,924 9,588 7,000 6,769
Lease Contracts Receivable
and Notes Receivable(3) 453,332 444,498 343,574 263,582 178,383
Unearned Income 98,089 94,228 73,019 53,868 34,482
Total Assets 493,953 385,747 298,611 232,626 162,383
Revolving Credit Borrowings 49,000 70,000 49,000 39,000 40,000
Senior Notes 355,461 227,445 174,541 123,952 76,737
Subordinated Debt 19,985 20,000 20,000 20,000 --
Stockholders' Equity 40,790 40,318 37,575 35,174 34,332
- ----------------------------
(1) Net income per share for all periods presented conform to the provisions of
Statement of Financial Accounting Standards No. 128, "Earnings per Share".
(2) Restricted cash at December 31, 2000 includes $20,284,000 for
securitization servicing arrangements and $95,218,000 in prefunding
provided to the Company pursuant to the ER 2000-1 term securitization.
(3) Lease contracts and notes receivable include the Company's retained
interest in leases and notes receivable sold under sales and securitization
agreements.
(4) Results for the year ended December 31, 2000 include one-time charges of
$7,106,000 associated with closing on the ER 2000-1 term securitization.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FISCAL YEARS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
Earned income from leases and notes for 2000 was $49,462,000 (including
$5,349,000 from ACFC) as compared to $40,551,000 (including $4,752,000 from
ACFC) for 1999. This increase of approximately 22% was primarily due to an
increase in net investment in leases and notes from 1999 to 2000. The increase
in net investment in leases and notes resulted from an increase in the Company's
financing contract originations, net of increased asset sales activity.
Financing contract originations for fiscal 2000 increased approximately 10% to
$248,874,000 (including approximately $7,300,000 in ACFC line of credit
originations) from approximately $226,534,000 (including approximately
$18,167,000 in ACFC line of credit originations) for 1999. Earned income on
leases and notes is primarily a function of the interest on the Company's net
investment in leases and notes which it owns. Earned income, which is net of
amortization of initial direct costs, is recognized using the interest method
over the life of the underlying leases and notes. Pre-tax gains from sales of
leases and notes increased to $12,078,000 in 2000 compared to $4,916,000 in
1999. This increase was due to higher levels of sales activity in 2000 as
compared to 1999. For the twelve months ended December 31, 2000, the Company
sold a portion of its beneficial interest in leases and notes totaling
$143,690,000 compared to $54,930,000 for the same period in 1999.
Interest expense, net of interest income on cash balances, was $25,204,000
(51.0% of earned income) in 2000, compared to $18,637,000 (46.0% of earned
income) for 1999, an increase of 35%. The increase in net interest expense was
primarily due to a 34% increase in debt levels from 1999 to 2000, which resulted
from increased borrowings to finance the Company's increased financing contract
originations as well as higher debt levels in 2000 associated with the
prefunding arrangement provided through the term securitization which the
Company entered into in December 2000. The increase in percentage of earned
income was due to higher average borrowing costs in 2000 as compared to 1999.
Net financing margin (earned income less net interest expense) for fiscal year
2000 was $24,258,000 (49.0% of earned income) as compared to $21,914,000 (54.0%
of earned income) for 1999. The increase in amount was generally due to higher
earnings on a higher balance of earning assets. The decrease in percentage of
earned income was due to higher interest rate debt during 2000 as compared to
1999.
The provision for losses for the year ended December 31, 2000 was $9,218,000
(18.6% of earned income) compared to $4,489,000 (11.1% of earned income) for the
same period in 1999. The increase in amount resulted in part from higher levels
of new financings in 2000. In addition, the Company has experienced higher
delinquencies and charge-offs in its owned and serviced portfolio of financing
contracts. In reviewing these facts as well as the potential impact of general
economic conditions, the Company has increased its allowance for loss levels
accordingly. A primary cause for the increase in delinquencies, the provision
for losses, and the allowance for losses was the bankruptcy of an equipment
vendor and resulting customer disputes over the products which the Company had
financed, and not any identifiable weakness in the Company's underwriting or
collections standards. If delinquencies related to this vendor situation were
excluded, the Company's financing contract delinquencies at December 31, 2000
would have been comparable, on a percentage basis, to the delinquencies at the
end of the prior year. During 2000, the Company's commercial lending subsidiary
also experienced a loss on a loan as a result of an obligor bankruptcy. The
account had an original carrying value of approximately $900,000, of which
$400,000 has been charged-off and the balance reserved. At December 31, 2000,
the Company's allowance for losses was $14,170,000 (3.9% of net investment in
leases and notes) as compared to $9,150,000 (2.5% of net investment in leases
and notes) at December 31, 1999. Total consolidated net charge-offs were
$4,198,000 in 2000 compared to $2,689,000 in 1999.
Selling, general and administrative expenses for fiscal year 2000 were
$19,781,000 (40.0% of earned income) as compared to $17,715,000 (43.7% of earned
income) for 1999. The increase in amount resulted in part from higher legal and
collection agency related expenses arising out of higher delinquency levels,
higher liquidity and bank charges associated with the Company's commercial paper
securitization facilities, as well as increased systems and administrative costs
required to support higher levels of owned and serviced assets. The decrease as
a percentage of earned income was the result of increased productivity and the
Company's continuing efforts to monitor and control operating expense growth
rates.
In December 2000, the Company incurred one-time charges of $7,106,000 associated
with the closing of a $527,000,000 term securitization transaction (Notes C and
D). These charges primarily fell into two categories. The first, which totaled
approximately $3,118,000, was non-cash charges associated with structural and
rate differences upon the transfer of previously
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sold leases and notes from the Company's Bravo and Capital commercial paper
conduit facilities into the term securitization facility as well as differences
between the carrying value and the fair value of the Company's retained interest
on previously sold leases and notes under the commercial paper conduit
facilities. The second category of expense, which totaled approximately
$3,988,000, was costs incurred to break existing interest rate swap contracts
associated with the terminated borrowings from the Bravo and Capital facilities.
The Company's income before income taxes for fiscal year 2000 was $231,000
compared to $4,626,000 for 1999. The provision for income taxes was $144,000
(62.3% of income before income taxes) in 2000 compared to $1,907,000 (41.2% of
income before income taxes) in 1999.
The Company's net income for the year ended December 31, 2000 was $87,000, or
$0.02 per basic share and $0.02 per diluted share, compared to $2,719,000, or
$0.72 per basic share and $0.61 per diluted share for the comparable 1999
period. The decrease in net income in 2000 compared to 1999 was due
substantially to the one-time charges incurred in connection with the Company's
term securitization transaction in December 2000.
Although the one-time charges incurred in December 2000 resulted in lower
earnings for the year, the term securitization facility has provided the Company
with increased liquidity at reduced rates, which should allow the Company to
continue its planned growth. In addition, the Company has effectively match
funded significant portions of its total portfolio at favorable rates.
As discussed in Note L of the Notes to Consolidated Financial Statements, net
profit contribution, representing income before interest and taxes, from the
licensed professional financing segment was $22,644,000 for the year ended
December 31, 2000 compared to $20,289,000 for the comparable period in 1999, a
12% increase. The increase was due to an increase in earned income on leases and
notes to $44,113,000 in 2000 compared to $35,799,000 in 1999 and higher gain on
sales of leases and notes of $12,078,000 in 2000 from $4,916,000 in 1999, offset
by one time charges associated with the term securitization in December 2000 of
$7,106,000, an increase in the provision for losses in 2000 to $8,528,000 from
$4,376,000 in the prior year, and an increase in selling, general and
administrative expenses to $17,913,000 in 2000 compared to $16,050,000 in 1999.
Net profit contribution (income before interest and taxes) from the commercial
and industrial financing segment was $2,791,000 for the year ended December 31,
2000 compared to $2,974,000 for the comparable period in 1999, a 6% decrease.
The decrease was due to an increase in selling, general and administrative
expenses to $1,868,000 in 2000 compared to $1,665,000 in 1999 and an increase in
the provision for losses in 2000 to $690,000 from $113,000 in 1999, offset by an
increase in earned interest and fee income on notes to $5,349,000 in 2000
compared to $4,752,000 in 1999.
At December 31, 2000, the Company had approximately $119,000,000 of customer
applications which had been approved but which had not yet resulted in a
completed transaction, compared to approximately $104,000,000 of customer
applications at December 31, 1999. Not all approved applications will result in
a completed financing transaction with the Company.
FISCAL YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
Earned income from leases and notes for 1999 was $40,551,000 (including
$4,752,000 from ACFC) as compared to $33,258,000 (including $4,916,000 from
ACFC) for 1998. This increase of approximately 22% was primarily due to an
increase in net investment in leases and notes from 1998 to 1999. The increase
in net investment in leases and notes resulted from an increase of approximately
24% in the Company's financing contract originations for fiscal 1999 to
approximately $226,500,000 (including approximately $18,000,000 in ACFC line of
credit originations, and excluding approximately $8,000,000 of initial direct
costs) from approximately $182,000,000 (including approximately $23,000,000 in
ACFC line of credit originations, and excluding approximately $6,000,000 of
initial direct costs) for 1998. Pre-tax gains from sales of leases and notes
increased to $4,916,000 in 1999 compared to $4,906,000 in 1998. This increase
was caused by higher levels of sales activity in 1999, partially offset by lower
margins associated with the current year asset sales. Earned income on leases
and notes is primarily a function of interest on the Company's net investment in
leases and notes which it owns. Earned income, which is net of amortization of
initial direct costs, is recognized using the interest method over the life of
the underlying lease and note contracts.
Interest expense, net of interest income on cash balances, was $18,637,000
(46.0% of earned income) in 1999, compared to $15,547,000 (46.7% of earned
income) for 1998, an increase of 20%. The increase in net interest expense was
primarily due to a 30% increase in debt levels from 1998 to 1999, which resulted
from increased borrowings to finance the Company's increased financing contract
originations.
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13
Net financing margin (earned income less net interest expense) for fiscal year
1999 was $21,914,000 (54.0% of earned income) as compared to $17,711,000 (53.3%
of earned income) for 1998. The increase in amount was due to higher earnings on
a higher balance of earning assets. The increase in percentage of earned income
was due to a higher percentage of the portfolio being matched to lower interest
rate debt during 1999 as compared to 1998.
The provision for losses for the year ended December 31, 1999 was $4,489,000
(11.1% of earned income) compared to $4,201,000 (12.6% of earned income) for the
same period in 1998. The increase in amount resulted from higher levels of new
financings in 1999 and the Company's continuing evaluation of its portfolio
quality, loss history and allowance for losses. The allowance for losses at
December 31, 1999 was $9,150,000 (2.5% of net investment in leases and notes) as
compared to $7,350,000 (2.6% of net investment in leases and notes) at December
31, 1998. Net charge-offs were $2,689,000 in 1999 compared to $2,392,000 in
1998.
Selling, general and administrative expenses for fiscal year 1999 were
$17,715,000 (43.7% of earned income) as compared to $14,897,000 (44.8% of earned
income) for 1998. The increase in amount resulted from higher advertising and
marketing related costs, an increase in consulting and professional fees
associated with the design and implementation of a new interactive web site, as
well as increased systems and administrative costs required to support higher
levels of owned and serviced assets. The decrease as a percentage of earned
income was the result of improved per unit costs on higher levels of
originations and higher levels of owned portfolio assets.
The Company's income before income taxes for fiscal year 1999 was $4,626,000
compared to $3,519,000 for 1998. The provision for income taxes was $1,907,000
(41.2% of income before income taxes) in 1999 compared to $1,543,000 (43.9%) in
1998.
The Company's net income for the year ended December 31, 1999 was $2,719,000, or
$0.72 per basic share and $0.61 per diluted share, compared to $1,976,000, or
$0.53 per basic share and $0.47 per diluted share for the comparable 1998
period. The 38% increase in net income in 1999 over 1998 was due to higher
earned income from leases and notes, higher gains on sales of assets, offset by
increases in the provision for losses, higher selling, general and
administrative expenses, and higher interest costs.
Net profit contribution, representing income before interest and taxes (see Note
L to Notes to Consolidated Financial Statements) from the licensed professional
financing segment was $20,289,000 for the year ended December 31, 1999 compared
to $15,925,000 for the comparable period in 1998, a 27% increase. The increase
was due to an increase in earned income on leases and notes to $35,799,000 in
1999 compared to $28,342,000 in 1998, higher gain on sales of leases and notes
of $4,916,000 in 1999 from $4,906,000 in 1998, offset by an increase in the
provision for losses in 1999 to $4,376,000 from $4,054,000 in the prior year, as
well as an increase in selling, general and administrative expenses to
$16,050,000 in 1999 compared to $13,269,000 in 1998.
Net profit contribution (income before interest and taxes) from the commercial
and industrial financing segment was $2,974,000 for the year ended December 31,
1999 compared to $3,141,000 for the comparable period in 1998, a 5% decrease.
The decrease was due to a decrease in earned interest and fee income on notes to
$4,752,000 in 1999 compared to $4,916,000 in 1998, an increase in selling,
general and administrative expenses to $1,665,000 in 1999 compared to $1,628,000
in 1998, offset by a decrease in the provision for losses in 1999 to $113,000
from $147,000 in 1998.
At December 31, 1999, the Company had approximately $104,000,000 of customer
applications which had been approved but had not yet resulted in a completed
transaction, compared to approximately $81,000,000 of such customer applications
at December 31, 1998. Not all approved applications will result in a completed
financing transaction with the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financing activities require substantial amounts of capital, and
its ability to originate new financing contracts depends on the availability of
cash and credit. The Company currently has access to credit under its Revolving
Loan Agreement, the Equipment Receivables 2000-1 term securitization, its Bravo
and Capital revolving securitization facilities, as well as bank loans secured
by financing contracts. The Company also 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 its various
credit arrangements. Borrowings under the securitizations are secured by
financing contracts, including the amounts receivable thereunder and the
collateral securing the financing contracts.
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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
defaults occur. The Company's borrowings under the Revolving Loan Agreement are
full recourse obligations of the Company. Borrowings under the Revolving Loan
Agreement are used to fund certain ACFC asset based lines of credit as well as
to temporarily warehouse new financing contracts entered into by the Company.
The warehouse borrowings are repaid with the proceeds obtained from other full
or limited recourse permanent financings and from cash flows generated from the
Company's financing transactions. Borrowings under the Equipment Receivables
2000-1 term securitization are used to finance certain ACFC asset based lines of
credit as well as a portion of the leases and notes originated by the Company.
At December 31, 2000, the Company had $117,215,000 in cash, cash equivalents and
restricted cash as compared to $16,280,000 at the end of 1999. As described in
Note C to the Company's Consolidated Financial Statements, a significant portion
of this cash was restricted pursuant to various financing agreements. Components
of restricted cash at December 31, 2000 and 1999 were as follows:
DECEMBER 31, DECEMBER 31,
2000 1999
-------- -------
(IN THOUSANDS)
Cash collections- Bravo............................................. $ 5,738 $ 7,448
Cash collections- Capital........................................... --- 7,476
Cash collections- ER 2000-1 LLC I................................... --- ---
Cash collections- ER 2000-1 LLC II.................................. 4,675 ---
Prefunding arrangements- ER 2000-1.................................. 95,218 ---
Capitalized interest- ER 2000-1..................................... 1,049 ---
Amounts required for initial interest payment- ER 2000-1............ 2,735 ---
Cash escrow- ER 2000-1 swap agreement............................... 1,002 ---
Cash reserves- ER 2000-1............................................ 5,085 ---
-------- -------
Total............................................................ $115,502 $14,924
-------- -------
The Equipment Receivables 2000-1 term securitization agreement provided for a
portion of the initial proceeds from the issuance of the notes to be prefunded
to the Equipment Receivables 2000-1 term securitization special purpose
subsidiaries, ER 2000-1 LLC I and ER 2000-1 LLC II. This prefunding, in the
amount of $95,218,000, is to be used in subsequent periods to acquire additional
financing contracts from the Company, at which time the restrictions on the cash
will be removed. The prefunding period expired on March 19, 2001, at which time
approximately $3,800,000 remained unused for the purpose of acquiring contracts
from the Company and was used to prepay principal on the notes issued by ER
2000-1 LLC I and ER 2000-1 LLC II. Capitalized interest, in the amount of
$1,049,000, represents a portion of the proceeds from the initial issuance of
the notes reserved to service the interest requirements to the noteholders on
prefunding debt outstanding during the prefunding period. The Company also had
$2,735,000 in cash restricted for the purpose of servicing the interest on the
notes for the initial interest accrual period which ended January 22, 2001. At
the time of entering into the interest rate swap contracts, the Company
deposited $1,000,000 into an interest bearing cash escrow account at Fleet
National Bank as collateral on the swap contracts. The provisions of the
Equipment Receivables 2000-1 term securitization further require that certain
cash reserves be maintained to fund, to the extent necessary, any deficiencies
in the monthly amounts to be paid with respect to the notes. At December 31,
2000, these cash reserves totaled $5,085,000.
Cash provided by operating activities was $8,075,000 for the year ended December
31, 2000 compared to $10,753,000 in 1999 and $8,646,000 in 1998. The significant
components of cash provided by operating activities in 2000 as compared to 1999
were net income of $87,000 in 2000 compared to $2,719,000 in 1999, adjusted for
a decrease in accounts payable and accrued liabilities of $1,060,000 in 2000
compared to an increase of $2,068,000 in 1999, an increase in the provision for
losses to $9,218,000 in 2000 compared to $4,489,000 in 1999, increased gains on
sales of leases in 2000 of $12,078,000 compared to $4,916,000 in 1999, and a
decrease in deferred income taxes of $207,000 compared to an increase of
$1,096,000 in 1999. The Company's net income for 2000 also includes the effects
of one-time charges of $7,106,000 associated with the closing of the term asset
securitization transaction.
Cash used in investing activities was $7,343,000 for the year ended December 31,
2000 compared to $81,572,000 in 1999 and $63,756,000 in 1998. The primary
components of cash used in investing activities for 2000 as compared to 1999
were an increase in originations of lease contracts and notes receivable to
$251,206,000 in 2000 from $209,653,000 in 1999, offset by an increase in
portfolio receipts of $89,402,000 in 2000 from $77,309,000 in 1999, an increase
in proceeds from sales of lease contracts and
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notes receivable of $144,115,000 in 2000 from $54,390,000 in 1999, and a
decrease in notes receivable of $1,038,000 in 2000 compared with an increase of
$2,857,000 in 1999. The Company also received net proceeds in 2000 of $9,804,000
from the ER 2000-1 term securitization upon the negotiated reacquisition and
resale of certain lease contracts and notes receivable due in installments.
Cash provided by (used in) financing activities was ($375,000) for the year
ended December 31, 2000 compared to $67,592,000 in 1999 and $57,556,000 in 1998.
The significant components of cash provided by (used in) financing activities in
2000 as compared to 1999 were an increase in proceeds from the issuance of
senior notes pursuant to the ER 2000-1 term securitization in 2000, net of debt
issuance costs, of $352,645,000, and an increase in proceeds from issuance of
other senior notes, net of debt issuance costs, in 2000 of $173,519,000 from
$128,051,000 in 1999. These are offset by repayments of senior notes pursuant to
the ER 2000-1 term securitization in 2000 of $35,535,000, repayment of other
senior notes of $365,351,000 in 2000 compared to $75,147,000 in 1999, net
repayments from revolving notes payable of $21,000,000 in 2000 compared to net
proceeds of $21,000,000 in 1999, an increase in restricted cash of $100,578,000
in 2000 compared to $5,336,000 in 1999, and from swap breakage costs of
$3,988,000 in 2000 associated with terminated borrowings in the Bravo and
Capital Facilities.
In December 2000, the Company completed a $527,106,000 private placement term
securitization. The securitization, referred to as the Equipment Receivables
2000-1, was underwritten by Credit Suisse First Boston Corporation. The Company,
along with subsidiaries ACFC, Bravo, and Capital, transferred certain leases and
notes to the newly formed special purpose entities, ER 2000-1 LLC I and ER
2000-1 LLC II. HPSC, Bravo, Capital and ACFC sold their leases and notes to ER
2000-1 LLC I and pledged their leases and notes to ER 2000-1 LLC II as
collateral for a loan. ER 2000-1 LLC I and ER 2000-1 LLC II issued notes to
finance the purchase of, and loan against the collateral consisting of leases
and notes transferred from HPSC, ACFC, Bravo and Capital. The proceeds of the
purchase and loan were used to retire senior notes and other obligations
outstanding in both the Bravo and Capital Facilities as well as to pay down
amounts outstanding under the Revolving Loan Agreement. The securitization
further provided for a portion of the initial proceeds from the issuance of the
notes to be prefunded to ER 2000-1 LLC I and ER 2000-1 LLC II. The cash, which
was placed in a restricted cash account, can be utilized in subsequent periods
for the sole purpose of acquiring additional financing contracts from the
Company. Upon subsequent purchase or loan against the collateral consisting of
the leases and notes, the restrictions on the cash will be removed and will be
available for use by the Company. As of December 31, 2000, such prefunded
restricted cash totaled approximately $95,218,000. The prefunding period expired
March 19, 2001, at which time approximately $3,800,000 remained unused for the
purpose of acquiring subsequent contracts and was treated as a prepayment of
principal on the notes. The Company is the servicer of the portfolio, subject to
its meeting certain covenants. Monthly payments of principal and interest on the
ER 2000-1 Notes are made from regularly scheduled collections generated from the
underlying lease and note portfolio. Under certain circumstances, the Company
may be obligated to advance its own funds for amounts due on the notes in the
event an obligor fails to remit a payment when due. Such advances are reimbursed
to the servicer, plus accrued interest thereon, from available funds upon
subsequent collection from the obligor. Within certain defined limitations, the
Company may also substitute contracts contributed to the securitization. The
priority of payment of the notes is in alphabetical order, i.e., Class A, Class
B-1, etc. As a hedge against interest rate risk related to its variable rate
obligations on the notes, ER 2000-1 entered into interest rate swap contracts
with Fleet National Bank as the swap counterparty. The interest rate swap
contracts have the effect of converting the Company's interest payments on the
Class A and Class B-1 notes from a variable rate of interest to a fixed rate,
thereby locking in spreads on the Company's financing portfolio. Approximately
5% of the original collateral contributed to ER 2000-1 comprised revolving lines
of credit originated by ACFC. It is currently the intention of the Company to
finance the renewals on these ACFC lines of credit through the Revolver.
In May 1999, the Company executed the Third Amendment to the Third Amended and
Restated Revolving Loan Agreement with Fleet National Bank (formerly BankBoston)
as Managing Agent, providing the Company with availability up to $90,000,000,
through May 2000. In May 2000, the Company signed a Fourth Amended and Restated
Credit Agreement with Fleet National Bank (the "Revolving Loan Agreement" or
"Revolver"), upon substantially the same terms and conditions, through May 2001.
Under the Revolver, the Company may borrow at variable rates of prime and at
LIBOR plus 1.35% to 1.50%, depending on compliance with certain performance
covenants. At December 31, 2000, the Company had $49,000,000 outstanding under
the Revolver and $41,000,000 available for borrowing, subject to borrowing base
limitations. The Revolver is not currently hedged and, therefore, is exposed to
upward movements in interest rates. In March 2001, the Revolver was amended,
effective December 31, 2000, to modify the Company's tangible net worth,
interest coverage, and leverage ratio covenant requirements, primarily to permit
the costs incurred by the Company in connection with its ER 2000-1 term
securitization in December 2000. The Company is currently in discussion with
Fleet National Bank regarding extension of the Revolver beyond May 2001.
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In June 1998, the Company, along with its wholly-owned, special-purpose
subsidiary Bravo Funding Corp. ("Bravo"), signed an amended revolving credit
facility (the "Bravo Facility") structured and guaranteed by MBIA, Inc. The
Bravo Facility provided the Company with available borrowings up to
$225,000,000. In March 2000, the Bravo Facility was amended to provide the
Company with availability up to $347,500,000 upon substantially the same terms
and conditions. This facility was subsequently increased to $397,500,000 in May
2000. Under the terms of the Bravo Facility, Bravo, to which the Company
contributes certain of its portfolio assets, pledges or sells its interests in
these assets to a commercial paper conduit entity. Bravo incurs interest at
variable rates in the commercial paper market and enters into interest rate swap
contracts to assure fixed rate funding. Monthly settlements of principal and
interest payments are made from the collection of payments on Bravo's portfolio.
The Company is the servicer of the Bravo portfolio, subject to its 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 December 2000, the Company repaid a substantial
portion of outstanding borrowings in the Bravo Facility with the proceeds
received from the issuance of the Equipment Receivables 2000-1 term
securitization notes. At December 31, 2000, the Company had a total of
$56,971,000 outstanding under the loan and sale portions of the Bravo Facility
($19,955,000 in loans and $37,016,000 in sales), and in connection with these
borrowings and sales, had three separate interest rate swap contracts with Fleet
National Bank with a total notional value of $44,230,000. The Company
anticipates that it will continue to use the Bravo Facility to meet a portion of
its financing requirements. At December 31, 2000, the Company was not in
compliance with its tangible net worth, interest coverage, and leverage ratio
covenant requirements as a result of costs incurred related to the ER 2000-1
asset securitization transaction. The Company has obtained a waiver of these
requirements and intends to work with its lenders to obtain an amendment to
these covenants in 2001.
The Company periodically enters into secured, fixed rate, fixed term loan
agreements with various banks for purposes of financing portions of its
operations. The loans are generally subject to certain recourse and performance
covenants. At December 31, 2000 and 1999, the Company had outstanding borrowings
under such loan agreements of approximately $15,673,000 and $10,383,000,
respectively. At December 31, 2000, annual interest rates on outstanding
borrowings ranged from 6.5% to 8.0%.
In March 1997, the Company issued $20,000,000 of unsecured senior subordinated
notes due in 2007 ("Senior Subordinated Notes") bearing interest at a fixed rate
of 11% (the "Note Offering"). The Company received approximately $18,300,000 in
net proceeds from the Note Offering and used such proceeds to repay amounts
outstanding under the Revolver. The Senior Subordinated Notes are redeemable at
the option of the Company, in whole or in part, other than through the operation
of a sinking fund, after April 1, 2002 at established redemption prices, plus
accrued but unpaid interest to the date of repurchase. Beginning July 1, 2002,
the Company is required to redeem through sinking fund payments, on January 1,
April 1, July 1, and October 1 of each year, a portion of the aggregate
principal amount of the Senior Subordinated Notes at a redemption price equal to
$1,000,000 plus accrued but unpaid interest to the redemption date.
In April 1998, the Company, along with its wholly-owned, special-purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), signed an Amended Lease
Receivable Purchase Agreement with EagleFunding Capital Corporation ("Eagle").
The revolving credit facility (the "Capital Facility") provided the Company with
available borrowings up to $150,000,000. In April 1999, the Capital Facility was
renewed under substantially the same terms and conditions, providing the Company
availability up to $125,000,000. Under the terms of the Capital Facility,
Capital, to which the Company contributes certain of its portfolio assets,
pledges or sells its interests in these assets to Eagle, a commercial paper
conduit entity. Capital borrows at variable rates in the commercial paper market
and enters into interest rate swap contracts to assure fixed rate funding.
Monthly settlements of the borrowing base and any applicable principal and
interest payments are made from collections of Capital's portfolio. The Company
is the servicer of the Capital portfolio, subject to its meeting certain
covenants regarding Capital's portfolio performance and borrowing base
calculations. The required monthly payments of principal and interest to
purchasers of the commercial paper are guaranteed by Fleet National Bank
pursuant to the terms of the Capital Facility. In December 2000, the Company
repaid all outstanding borrowings in the Capital Facility with the proceeds
received from the issuance of the Equipment Receivables 2000-1 term
securitization notes. The Capital Facility and its associated line of credit are
currently still available to the Company.
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 December 1999, the
Company's Board of Directors approved an increase in this program to include an
additional 250,000 shares of the Company's common stock or up to the maximum
dollar limitations as set forth under the Company's Revolving Loan Agreement and
Senior Subordinated Notes. On December 14, 2000, the Company's Board of
Directors again approved an increase in this program to include an additional
250,000 shares of the Company's common stock subject to the same dollar
limitations. Based on such limitations and market values at December 31, 2000,
the Company may repurchase up to an additional 250,000 shares of its common
stock. No time limit has been established for the duration of the repurchase
program. The Company expects to use the
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repurchased stock to meet current and future requirements of its employee stock
plans. In 2000, the Company repurchased an aggregate of 27,977 shares of its
common stock for approximately $218,000.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo and Capital
Facilities, the proceeds received from the Equipment Receivables 2000-1 term
securitization, and loans from various savings banks, along with cash obtained
from the sales of its financing contracts and from internally generated revenues
is adequate to meet current obligations and future projected levels of
financings and to carry on normal operations. In order to adequately finance its
anticipated growth, the Company will continue to seek to raise additional
capital from bank and non-bank sources, make selective use of asset sale
transactions in 2001 and utilize its current credit facilities. The Company
expects that it will be able to obtain additional capital at competitive rates,
but there can be no assurance it will be able to do so.
Item 7a. 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 obtained through its securitization facilities. The Company is exposed to
interest rate changes between the time a new financing contract is approved and
the time the permanent, fixed-rate financing is completed, thereby locking in
financing spreads. The Company 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 contracts as a hedge against variable interest rates incurred through
its commercial paper securitization facilities as well as on its Class A and
Class B-1 notes in its term securitization transaction. 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. At December 31, 2000, the mark-to-market value of
all interest rate swap contracts outstanding was approximately $2,985,000
against the Company. Assuming a hypothetical 10% reduction in interest rates
from current weighted average swap rates, the mark-to-market value of the swap
agreements against the Company would have changed by approximately $5,724,000 at
December 31, 2000.
The carrying value of the Company's fixed rate debt at December 31, 2000 was
$375,446,000. Assuming this debt was to be discounted using the fixed rate
received by the Company on its most recent securitization transaction in
December 2000, the estimated fair value of this debt would have been
approximately $375,513,000. The Company's variable rate debt at December 31,
2000 was $49,000,000, which approximated fair value. Sensitivity analysis is
utilized to determine the impacts that market risk exposures may have on fair
values of the Company's debt instruments. Assuming a hypothetical 10% change in
interest rates from current weighted average debt rates, the fair value of the
Company's fixed rate debt would have changed by approximately $4,776,000 at
December 31, 2000. The effect of a hypothetical 10% change in interest rates on
the Company's variable rate debt would have changed the Company's consolidated
interest expense by approximately $377,000 for the year ended December 31, 2000.
The Company's portfolio of financing contracts originated in its licensed
professional financing segment are fixed rate, non-cancelable, full payout
leases and notes receivable due in installments. At December 31, 2000, the
carrying value of these assets, including the retained interest of sold assets,
was approximately $329,809,000. Assuming the anticipated future cash flows
associated with these assets were discounted at current rates applied to similar
contracts, the estimated fair value of these assets would have approximated
$322,585,000 at December 31, 2000. Assuming implicit rates changed by a
hypothetical 10% from current weighted average implicit rates, the fair value of
the Company's fixed rate financing contracts would have changed by approximately
$4,227,000 at December 31, 2000.
The Company's variable rate assets generally comprise 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
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December 31, 2000, the carrying value of these assets was approximately
$36,553,000, 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 approximately
$548,000 for the year ended December 31, 2000.
For additional information about the Company's financial instruments, see Note K
in Notes to Consolidated Financial Statements.
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act. Discussions containing such
forward-looking statements may be found in the material set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" sections of this Form 10-K, as well as within the
annual report generally. When used in this annual report, the words "believes,"
"anticipates," "expects," "plans," "intends," "estimates," "continue," "could,"
"may" or "will" (or the negative of such words) and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
a number of risks and uncertainties. Actual results in the future could differ
materially from those described in the forward-looking statements as a result of
the risk considerations set forth below under the heading "Certain
Considerations" and the matters set forth in this annual report generally. HPSC
cautions the reader, however, that such list of considerations may not be
exhaustive. HPSC undertakes no obligation to release publicly the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
CERTAIN CONSIDERATIONS
Dependence on Funding Sources; Restrictive Covenants. The Company's financing
activities are capital intensive. The Company's 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 Fleet
Bank, as Agent, for borrowing up to $90 million (the "Revolver"), (ii) $523
million in limited recourse revolving credit facilities with Bravo and Capital,
(iii) a term asset securitization of $527 million completed in December 2000;
(iv) fixed-rate, full recourse term loans from several savings banks, (v)
specific recourse sales of financing contracts to savings banks and other
purchasers, (vi) the issuance of Subordinated Debt in 1997 and (vii) the
Company's internally generated revenues. The Company's Revolver provides
availability through May 2001 at which time the Company plans to renew the
facility for another year. However, there can be no assurance that it will be
able to renew or extend the Revolver or to complete additional asset
securitizations or to obtain other additional financing when needed and on
acceptable terms. The Company would be adversely affected if it were unable to
continue to secure sufficient and timely funding on acceptable terms. The
agreement governing the Revolver (the "Revolver Agreement") contains numerous
financial and operating covenants. There can be no assurance that the Company
will be able to comply with these covenants, and failure to meet such covenants
or a failure to amend or waive compliance 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. The term asset securitization
facility also contains covenants and default provisions as does the Indenture
governing the Company's Senior Subordinated Notes issued in 1997. Thus, any
material default that is not amended or waived under any of these agreements
will likely result in a default under most or all of the Company's financing
arrangements. In addition, the Senior Subordinated Note Indenture contains
certain limits on the Company's ability to incur senior debt.
Securitization Recourse; Payment Restriction and Default Risk. As part of its
overall funding strategy, the Company utilizes asset securitization transactions
with wholly-owned, bankruptcy-remote subsidiaries to seek fixed rate,
matched-term financing. The Company transfers financing contracts to these
subsidiaries which, in turn, either pledge or sell the contracts to third
parties. The third parties' recourse with regard to the pledge or sale is
limited to the contracts sold to the subsidiary. If the contract portfolio of
these subsidiaries does not perform within certain guidelines, the subsidiaries
must retain or "trap" any monthly cash distribution to which the Company might
otherwise be entitled. This restriction on cash distributions could continue
until the portfolio performance returns to acceptable levels (as defined in the
relevant agreements), which restriction could have a negative impact on the cash
flow available to the Company. In the event of a "payment trap", 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
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an analysis of the delinquencies, problem accounts, and overall risks and
probable losses associated with such contracts, together with a review of the
Company's historical credit loss experience. There can be no assurance that this
allowance will prove to be adequate. Failure of the Company's customers to make
scheduled payments under their financing contracts could require the Company to
(i) make payments in connection with its recourse loan and asset sale
transactions, (ii) lose its residual interest in any underlying equipment or
(iii) lose 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 owned and managed for 2000, any increase in such losses or in the rate
of payment defaults under the financing contracts originated by the Company
could adversely affect the Company's ability to obtain additional financing,
including its ability to complete additional asset securitizations and secured
asset sales or loans. There can be no assurance that the Company will be able to
maintain or reduce its current level of credit losses.
Competition. The Company operates in highly competitive markets. The Company
competes for customers with a number of national, regional and local finance
companies, including those which, like the Company, specialize in financing for
healthcare providers. In addition, the Company's competitors include those
equipment manufacturers which finance the sale or lease of their products
themselves, other 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 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 equipment and (ii)
government regulation of equipment and payment for healthcare services. Changes
in the reimbursement policies of the Medicare and Medicaid programs and other
third-party payors, such as insurance companies, as well as changes in the
reimbursement policies of managed care organizations, such as health maintenance
organizations, may also affect demand for medical and dental equipment and,
accordingly, may have a material adverse effect on the Company's business,
operating results and financial condition.
Changes in Healthcare Payment Policies. The increasing cost of medical care has
brought about federal and state regulatory changes designed to limit
governmental reimbursement of certain healthcare providers. These changes
include the enactment of fixed-price reimbursement systems in which the rates of
payment to hospitals, outpatient clinics and private individual and group
practices for specific categories of care are determined in advance of
treatment. Rising healthcare costs may also cause non-governmental medical
insurers, such as Blue Cross and Blue Shield associations and the growing number
of self-insured employers, to revise their reimbursement systems and policies
governing the purchasing and leasing of medical and dental equipment.
Alternative healthcare delivery systems, such as health maintenance
organizations, preferred provider organizations and managed care programs, have
adopted similar cost containment measures. Other proposals to reform the United
States healthcare system are considered from time to time. These proposals could
lead to increased government involvement in healthcare and otherwise change the
operating environment for the Company's customers. Healthcare providers may
react to these proposals and the uncertainty surrounding such proposals by
curtailing or deferring investment in medical and dental equipment. Future
changes in the healthcare industry, including governmental regulation thereof,
and the effect of such changes on the Company's business cannot be predicted.
Changes in payment or reimbursement programs could adversely affect the ability
of the Company's customers to satisfy their payment obligations to the Company
and, accordingly, may have a material adverse effect on the Company's business,
operating results and financial condition.
Interest Rate Risk. Except for approximately $32 million of the Company's
financing contracts, which are at variable interest rates with no scheduled
payments, the Company's financing contracts require the Company's customers to
make payments at fixed interest rates for specified terms. However,
approximately $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.
Residual Value Risk. At the inception of its equipment leasing transactions, the
Company estimates what it believes will be the fair
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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, 2000, the estimated
residual value of equipment at the end of the lease term was approximately $22
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
have an adverse effect on the Company's business, operating results and
financial condition.
Sales of Receivables. As part of the Company's portfolio management strategy and
as a source of funding of its operations, the Company has sold selected pools of
its lease contracts and notes receivable due in installments to a number of
savings banks and as part of the Bravo, Capital and term asset securitization
facilities. Each of these sale transactions is subject to certain covenants that
may require the Company to (i) repurchase financing contracts 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 sale transaction is completed. Each of these
securitization transactions has financial and operating covenants which are the
same as or similar to those contained in the Revolver Agreement. Thus, a
material default under any agreement is likely to be a default under most or all
of the Company's other financing agreements. The Company may enter into
additional agreements for the sale of its financing contracts in the future in
order to manage its liquidity. The level of reserves established by the Company
in relation to its sold financing contracts may prove to be inadequate. There
can be no assurance that the Company will be able to continue to sell its leases
and notes or that the sales in the future will generate gain recognition that is
comparable to that recognized in the past.
Dependence on Sales Representatives. The Company is, and its growth and future
revenues are, dependent in a large part upon (i) the ability of the Company's
sales representatives to establish new relationships, and maintain existing
relationships, with equipment vendors, distributors and manufacturers and with
healthcare providers and other customers and (ii) the extent to which such
relationships lead equipment vendors, distributors and manufacturers to promote
the Company's financing services to potential purchasers of their equipment. As
of December 31, 2000, 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. The Company has historically
experienced fluctuating quarterly revenues and earnings due to varying portfolio
performance and operating and interest costs. Given the possibility of such
fluctuations, the Company believes that quarterly comparisons of the results of
its operations during any fiscal year are not necessarily meaningful and that
results for any one fiscal quarter should not be relied upon as an indication of
future performance.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item together with the Independent Auditors'
Report are included on pages F-1 through F-28 of this Annual Report on Form
10-K.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
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PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
sections captioned "PROPOSAL ONE -- ELECTION OF DIRECTORS -- Nominees for Class
II Directors," " - Members of the Board of Directors Continuing in Office" and "
- - Other Executive Officers" and "VOTING SECURITIES - Section 16(a) Beneficial
Ownership Reporting Compliance" in the 2001 Proxy Statement to be filed before
April 30, 2001.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
sections captioned "EXECUTIVE COMPENSATION - Summary Compensation Table," " -
Stock Loan Program," " - Supplemental Executive Retirement Plan," " - Option
Grants in Last Fiscal Year," " - Aggregated Option Exercises and Year-End Option
Values," " - Employment Agreements, Termination of Employment and Change in
Control Arrangements" and " - Compensation of Directors" in the 2001 Proxy
Statement to be filed before April 30, 2001.
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 2001 Proxy Statement to be filed before April 30,
2001.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
section captioned "VOTING SECURITIES - Certain Transactions" in the 2001 Proxy
Statement to be filed prior to April 30, 2001.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(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
EXHIBIT
NO. TITLE METHOD OF FILING
3.1 Restated Certificate of Incorporation of HPSC, Inc Incorporated by reference to Exhibit 3.1 to HPSC's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995
3.2 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.2 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year ended
September 14, 1987 December 31, 1995
3.3 Certificate of Amendment to Restated Certificate of Incorporated by reference to Exhibit 3.3 to HPSC's
Incorporation of HPSC, Inc. filed in Delaware on Annual Report on Form 10-K for the fiscal year ended
May 22, 1995 December 31, 1995.
3.4 Amended and Restated By-Laws Incorporated by reference to Exhibit 3.1 to HPSC's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.
4.1 Amended and Restated Rights Agreement dated as of September Incorporated by reference to Exhibit 4.1 to HPSC's
16, 1999 between the Company and The First National Bank of Current Report on Form 8-K filed November 5, 1999.
Boston, N.A.
*10.1 HPSC, Inc. Stock Option Plan, dated March 5, 1986 Incorporated by reference to Exhibit 10.6 to HPSC's
Annual Report on Form 10-K for the fiscal year ended
December 30, 1989
*10.2 HPSC, Inc. Employee Stock Ownership Plan Agreement dated Incorporated by reference to Exhibit 10.9 to HPSC's
December 22, 1993 between HPSC, Inc. and John W. Everets Annual Report on Form 10-K for the fiscal year ended
and Raymond R Doherty, as trustees December 25, 1993
*10.3 First Amendment effective January 1, 1993 to HPSC, Inc. Incorporated by reference to Exhibit 10.2 to HPSC's
Employee Stock Ownership Plan Quarterly Report on Form 10-Q for the quarter ended
June 25, 1994
*10.4 Second Amendment effective January 1, 1994 to HPSC, Inc. Incorporated by reference to Exhibit 10.11 to HPSC's
Employee Stock Ownership Plan Annual Report on Form 10-K for the fiscal year
ended December 31, 1994
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*10.5 Third Amendment effective January 1, 1993 to HPSC, Inc. Incorporated by reference to Exhibit 10.12 to HPSC's
Employee Stock Ownership Plan Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
*10.6 HPSC, Inc. 1994 Stock Plan dated as of March 23, 1994 and Incorporated by reference to Exhibit 10.4 to HPSC's
related forms of Nonqualified Option Grant and Option Quarterly Report on Form 10-Q for the quarter ended
Exercise Form June 25, 1994
*10.7 Amended and Restated HPSC, Inc. 1995 Stock Incentive Plan Incorporated by reference to Exhibit 10.27 to HPSC's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1995
*10.8 First Amendment to HPSC, Inc. Amended and Restated 1995 Incorporated by reference to Exhibit 10.2 to HPSC's
Stock Incentive Plan Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999
*10.9 HPSC, Inc. Amended and Restated 1998 Stock Incentive Plan Incorporated by reference to Exhibit 10.1 to HPSC's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999
*10.10 HPSC, Inc. 2000 Stock Incentive Plan Incorporated by reference to Exhibit 10. to HPSC's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000
*10.11 HPSC, Inc. Amended Outside Directors Stock Bonus Plan Filed herewith
*10.12 Amended and Restated Stock Loan Program Filed herewith
*10.13 Stock Option grant to Lowell P. Weicker Incorporated by reference to effective December 7,
1995 Exhibit 10.28 to HPSC's Annual Report on Form
10-K for the fiscal year ended December 31, 1995
*10.14 HPSC, Inc. Supplemental Executive Retirement Plan dated as Incorporated by reference to Exhibit 10.12 to HPSC's
of January 1, 1997 Annual Report on Form 10-K for the fiscal year-ended
December 31, 1997
*10.15 First Amendment dated March 15, 1999 to HPSC, Inc. Incorporated by reference to Exhibit 10.12 to HPSC's
Supplemental Executive Retirement Plan dated as of January Annual Report on Form 10-K for the fiscal year-ended
1, 1997 December 31, 1998
*10.16 Second Amendment to HPSC, Inc. Supplemental Executive Incorporated by reference to Exhibit 10.3 to HPSC's
Retirement Plan Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999
*10.17 Third Amendment to HPSC, Inc. Supplemental Executive Incorporated by reference to Exhibit 10.15 HPSC's
Retirement Plan Annual Report on Form 10-K for the fiscal year ended
December 31, 1999
*10.18 Fourth Amendment to the HPSC, Inc. Supplemental Executive Incorporated by reference to Exhibit 10.6 to HPSC's
Retirement Plan, dated August 10, 2000 Quarterly Report Form 10-Q for the quarter ended
June 30, 2000
*10.19 HPSC, Inc. 1998 Executive Bonus Plan Incorporated by reference to Exhibit 10.32 to HPSC's
Annual Report on Form 10-K for the fiscal
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year ended December 31, 1998
*10.20 HPSC, Inc. 401(k) Plan dated February, 1993 between HPSC, Incorporated by reference to Exhibit 10.15 to HPSC's
Inc. and Metropolitan Life Insurance Company Annual Report on Form 10-K for the fiscal year ended
December 25, 1993
*10.21 Amended and Restated Employment Agreement between HPSC, Incorporated by reference to Exhibit 10.7 to HPSC's
Inc. and John W. Everets dated August 4, 2000 Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000
*10.22 Amended and Restated Employment Agreement between HPSC, Incorporated by reference to Exhibit 10.8 to HPSC's
Inc. and Raymond R. Doherty dated August 4, 2000 Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000
*10.23 Amended and Restated Employment Agreement between HPSC, Incorporated by reference to Exhibit 10.9 to HPSC's
Inc. and Rene Lefebvre dated August 4, 2000 Quarterly Report on Form 10-Q for the quarter ended
June 30, 2000
10.24 Lease dated as of March 8, 1994 between the Trustees of 60 Incorporated by reference to Exhibit 10.1 to HPSC's
State Street Trust and HPSC, Inc., dated September 10, 1970 Annual Report on Form 10-K for the fiscal year ended
and relating to the principal executive offices of HPSC, December 31, 1994
Inc. at 60 State Street, Boston, Massachusetts
10.25 Second Amendment, dated May 1998, to Lease dated as of Incorporated by reference to Exhibit 10.2 to HPSC's
March 8, 1994 between the Trustees of 60 State Street Trust Annual Report on Form 10-K for the fiscal year ended
and HPSC, Inc., dated September 10, 1970 and relating to December 31, 1999
the principal executive offices of HPSC, Inc. at 60 State
Street, Boston, Massachusetts
10.26 Fourth Amended and Restated Credit Agreement dated May 12, Incorporated by reference to Exhibit 10.14 to
2000 among HPSC, Inc. and Fleet National Bank individually HPSC's Quarterly Report on Form 10-Q for the
and as Agent, and the Banks named therein quarter ended June 30, 2000
10.27 First Amendment dated as of November 1, 2000 to Fourth Filed herewith.
Amended and Restated Credit Agreement dated May 12, 2000
among HPSC, Inc., American Commercial Finance Corporation
and Fleet National Bank individually and as Agent, and the
Banks named therein.
10.28 Purchase and Contribution Agreement dated as of January 31, Incorporated by reference to Exhibit 10.31 to HPSC's
1995 between HPSC, Inc. and HPSC Bravo Funding Corp. Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
10.29 Amended and Restated Purchase and Contribution Agreement, Incorporated by reference to Exhibit 10.1 to HPSC's
dated March 31, 2000, between HPSC, Inc. and HPSC Bravo Quarterly Report on Form 10-Q for the quarter ended
Funding Inc. March 31, 2000
10.30 Amendment No. 1 to Amended and Restated Purchase and Incorporated by reference to Exhibit 10.5 to HPSC's
Contribution Agreement dated as of June 16, 2000, between Quarterly Report on Form 10-Q for the quarter ended
HPSC, Inc. and HPSC Bravo Funding Corp. June 30, 2000
10.31 Credit Agreement dated as of January 31, 1995 among HPSC
Incorporated by reference to Exhibit 10.32 to HPSC's Bravo
Funding Corp., Triple-A One Funding Corporation, as Annual
Report on Form 10-K for the fiscal year ended lender, and
CapMAC, as Administrative Agent and as December 31, 1994
Collateral Agent
10.32 Amended and Restated Lease Receivable Purchase Agreement, Incorporated by reference to Exhibit 10.2 to HPSC's
dated March 31, 2000 by and among HPSC Bravo Funding Inc., Quarterly Report on Form 10-Q for the quarter ended
HPSC, Inc., Triple-A One Funding Corporation and Capital March 31, 2000
Markets Assurance Corporation
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10.33 Agreement to furnish copies of Omitted Exhibits to Certain Incorporated by reference to Exhibit 10.33 to HPSC's
Agreements with HPSC Bravo Funding Corp. Annual Report on Form 10-K for the fiscal year ended
December 31, 1994
10.34 Amendment No. 1 to Amended and Restated Lease Receivables Incorporated by reference to Exhibit 10.4 to HPSC's
Purchase Agreement dated as of May 26, 2000, among HPSC Quarterly Report on Form 10-Q for the quarter ended
Bravo Funding Corp., HPSC, Inc., Triple-A One Funding Corp. June 30, 2000
and Capital Markets Assurance Corp.
10.35 Consent dated December 20, 2000 to Amended and Restated Filed herewith.
Lease Receivables Purchase Agreement dated as of May 26,
2000, among HPSC Bravo Funding Corp., HPSC Inc., Triple-A
One Funding Corp. and Capital Markets Assurance Corp.
10.36 Amendment documents, effective November 5, 1996 to Credit Incorporated by reference to Exhibit 10.26 to HPSC's
Agreement dated as of January 31, 1995 among HPSC Bravo Registration Statement on Form S-1 filed
Funding Corp., Triple-A Funding Corporation, as Lender,
and CapMAC, as Administrative Agent and as Collateral Agent January 30, 1997
10.37 Amendment No. 3 dated June 29, 1998 to Credit Agreement Incorporated by reference to Exhibit 10.6 to HPSC's
dated January 31, 1995 by and among HPSC Bravo Funding Quarterly Report on Form 10-Q for the quarter ended
Corp., Triple-A One Funding Corporation and CapMac, as March 30, 1998
Administrative Agent and Collateral Agent
10.38 Lease Receivables Purchase Agreement dated as of June 27, Incorporated by reference to Exhibit 10.1 to HPSC's
1997 among HPSC Capital Funding, Inc., as Seller, HPSC, Quarterly Report on Form 10-Q for the quarter ended
Inc. as Service and Custodian, EagleFunding Capital September 30, 1997.
Corporation as Purchaser and BankBoston Securities, Inc. as
Deal Agent
10.39 Appendix A to EagleFunding Purchase Agreement (Definitions Incorporated by reference to Exhibit 10.2 to HPSC's
List Attached). Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997
10.40 Purchase and Contribution Agreement dated as of June 27, Incorporated by reference to Exhibit 10.3 to HPSC's
1997 Between HPSC Capital Funding, Inc. as the Buyer, and Quarterly Report on Form 10-Q for the quarter ended
HPSC, Inc. as the Originator and the Servicer. September 30, 1997
10.41 Undertaking to Furnish Certain Copies of Omitted Exhibits Incorporated by reference to Exhibit 10.4 to HPSC's
to Exhibit 10.27 hereof. Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
10.42 Amendment No. 2, dated April 30, 1998 to Lease Receivable Incorporated by reference to Exhibit 10.4 to HPSC's
Purchase Agreement dated June 27, 1997, by and among HPSC Quarterly Report on Form 10-Q for the quarter ended
Capital Funding, Inc. (Seller), EagleFunding Capital June 30, 1998
Corporation (Purchaser), HPSC, Inc. (Servicer and
Custodian), and BankBoston Securities, Inc. (Deal Agent)
10.43 Amendment No. 3, dated April 4, 1999 to Lease Receivable Incorporated by reference to Exhibit 10.32 to HPSC's
Purchase Agreement dated June 27, 1997, by and among HPSC Annual Report on Form 10-K for the fiscal year ended
Capital Funding, Inc. (Seller), EagleFunding Capital December 31, 1999.
Corporation (Purchaser), HPSC, Inc. (Servicer and
Custodian), and BankBoston Securities, Inc. (Deal Agent)
10.44 Amendement No. 3 and Consent dated December 1, 2000 to Filed herewith.
Lease Receivables Purchase Agreement dated June 27, 1997
by and among HPSC Capital Funding Inc. (Seller), Eagle
Funding Capital Corporation (Purchaser), HPSC, Inc.
(Servicer and Custodian), Robertson Stephens Inc. (formerly
known as BancBoston Securities Inc.) (Old Deal Agent) and
Fleet Securities Inc. (New Deal Agent).
10.45 Indenture dated as of March 20, 1997 between HPSC, Inc. and Incorporated by reference to HPSC's Exhibit 10.28
State Street Bank and Trust Company, as Trustee to HPSC's Annual Report on Form 10K for the fiscal
year ended December 31, 1997
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10.46 Limited Liability Company Agreement of HPSC Equipment Filed herewith
Receivables 2000-1 LLC I
10.47 Limited Liability Company Agreement of HPSC Equipment Filed herewith
Receivables 2000-1 LLC II
10.48 Custody Agreement among HPSC Equipment Receivables 2000-1 Filed herewith
LLC I, HPSC Equipment Receivables 2000-1 LLC II, BNY
Midwest Trust Company, Iron Mountain Records Management,
Inc., and HPSC, Inc. dated as of December 1, 2000
10.49 Servicing Agreement by and among HPSC Equipment Receivables Filed herewith
2000-1 LLC I, HPSC Equipment Receivables 2000-1 LLC II,
HPSC, Inc., American Commercial Finance Corporation, BNY
Midwest Trust Company and BNY Asset Solutions, LLC dated as
of December 1, 2000
10.50 Purchase Agreement for Equipment Contract-Backed Notes, Filed herewith
Series 2000-1 of Class A-F between HPSC Equipment
Receivables 2000-1 LLC I, HPSC Equipment Receivables
2000-1 LLC II and Credit Suisse First Boston Corporation
dated December 14, 2000
10.51 Purchase Agreement for Floating Rate Equipment Filed herewith
Contract-Backed Variable Funding Notes, Series 2000-1
between HPSC Equipment Receivables 2000-1 LLC I, HPSC
Equipment Receivables 2000-1 LLC II and Credit Suisse First
Boston Corporation dated December 14, 2000
10.52 Receivable Transfer Agreement by and among HPSC Equipment Filed herewith
Receivables 2000-1 LLC I, HPSC Equipment Receivables 2000-1
LLC II, HPSC, Inc., American Commercial Finance
Corporation, HPSC Bravo Funding Corp. and HPSC Capital
Funding, Inc. dated as of December 1, 2000
10.53 Indenture Agreement by and among HPSC Equipment Receivables Filed herewith
2000-1 LLC I, HPSC Equipment Receivables 2000-1 LLC II,
HPSC, Inc., American Commercial Finance Corporation, and
BNY Midwest Trust Company dated as of December 1, 2000
21.1 Subsidiaries of HPSC, Inc. Filed herewith
23.1 Consent of Deloitte & Touche LLP Filed herewith
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* Management contracts or compensatory plans or arrangements required to be
filed as exhibits are identified by an asterisk.
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Copies of Exhibits may be obtained for a nominal charge by writing to:
INVESTOR RELATIONS
HPSC, INC.
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
(b) Reports on Form 8-K
HPSC filed a Form 8-K on December 22, 2000 to announce that on December 21,
2000, the Company completed a $527 million equipment receivable backed
securitization.
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SIGNATURES
Purs