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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
24
25
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
25
26
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
- ----------------------------
* Management contracts or compensatory plans or arrangements required to be
filed as exhibits are identified by an asterisk.
26
27
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.
27
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, HPSC, Inc. has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
HPSC, Inc.
Dated: March 29, 2001 By: /s/ John W. Everets
---------------------------------------------
John W. Everets
Chairman, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of HPSC, Inc. and in
the capacities and on the dates indicated.
NAME TITLE DATED
By: /s/ John W. Everets Chairman, Chief Executive Officer and Director MARCH 29, 2001
---------------------------------- (Principal Executive Officer)
John W. Everets
By: /s/ Raymond R. Doherty President and Director MARCH 29, 2001
----------------------------------
Raymond R. Doherty
Senior Executive Vice President, Chief Financial
By: /s/ Rene Lefebvre Officer and Treasurer MARCH 29, 2001
---------------------------------- (Principal Financial Officer)
Rene Lefebvre
By: /s/ William S. Hoft Financial Reporting Manager MARCH 29, 2001
----------------------------------
William S. Hoft
By: /s/ Dollie A. Cole Director MARCH 29, 2001
----------------------------------
Dollie A. Cole
By: /s/ Thomas M. McDougal Director MARCH 29, 2001
----------------------------------
Thomas M. McDougal
By: /s/ Samuel P. Cooley Director MARCH 29, 2001
----------------------------------
Samuel P. Cooley
By: /s/ Joseph A. Biernat Director MARCH 29, 2001
----------------------------------
Joseph A. Biernat
By: /s/ J. Kermit Birchfield Director MARCH 29, 2001
----------------------------------
J. Kermit Birchfield
By: /s/ Lowell P. Weicker, Jr. Director MARCH 29, 2001
----------------------------------
Lowell P. Weicker, Jr.
By: /s/ Gunnar Overstrom Director MARCH 29, 2001
----------------------------------
Gunnar Overstrom
28
29
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
DECEMBER 31,
------------------------
2000 1999
--------- ---------
ASSETS
Cash and Cash Equivalents ................................................................ $ 1,713 $ 1,356
Restricted Cash- Servicing under securitization agreements ............................... 20,284 14,924
Restricted Cash- Prefunding .............................................................. 95,218 --
Investment in Leases and Notes:
Lease contracts and notes receivable due in installments .............................. 404,366 387,909
Notes receivable ...................................................................... 37,686 38,720
Retained interest in leases and notes sold ............................................ 11,280 17,869
Estimated residual value of equipment at end of lease term ............................ 22,121 18,988
Less: Unearned income ................................................................. (98,089) (94,228)
Less: Security deposits ............................................................... (5,893) (6,721)
Deferred origination costs ............................................................ 9,061 8,696
Less: Allowance for losses ............................................................ (14,170) (9,150)
--------- ---------
Net investment in leases and notes ............................................... 366,362 362,083
--------- ---------
Other assets ............................................................................. 10,376 7,384
--------- ---------
Total Assets ............................................................................. $ 493,953 $ 385,747
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving Credit Borrowings .............................................................. $ 49,000 $ 70,000
Senior Notes ............................................................................. 356,097 227,445
Less: Discount on Senior Notes ........................................................... (636) --
Subordinated Debt ........................................................................ 19,985 20,000
Accounts Payable and Accrued Liabilities ................................................. 16,522 15,852
Accrued Interest ......................................................................... 2,210 1,940
Deferred Income Taxes .................................................................... 9,985 10,192
--------- ---------
Total Liabilities ........................................................................ 453,163 345,429
--------- ---------
Commitments and Contingencies (Note E)
Stockholders' Equity:
Preferred stock, $1.00 par value; authorized, 5,000,000 shares; issued, none .......... -- --
Common stock, $.01 par value; 15,000,000 shares authorized; issued, 4,713,030 shares in
2000 and 4,699,530 shares in 1999 .................................................. 47 47
Additional paid-in capital ............................................................ 14,364 14,119
Retained earnings ..................................................................... 31,254 31,167
Less: Treasury stock, at cost; 546,477 shares in 2000 and 518,500 shares in 1999 ..... (3,830) (3,611)
Deferred compensation ........................................................... (635) (1,008)
Notes receivable from officers and employees .................................... (410) (396)
--------- ---------
Total Stockholders' Equity ............................................................... 40,790 40,318
--------- ---------
Total Liabilities and Stockholders' Equity ............................................... $ 493,953 $ 385,747
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
F-1
30
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and share amounts)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
Revenues:
Earned income on leases and notes ................... $ 49,462 $ 40,551 $ 33,258
Gain on sales of leases and notes ................... 12,078 4,916 4,906
Provision for losses ................................ (9,218) (4,489) (4,201)
----------- ----------- -----------
Net Revenues ................................... 52,322 40,978 33,963
----------- ----------- -----------
Operating and Other (Income) Expenses:
Selling, general and administrative ................. 19,781 17,715 14,897
Term securitization costs ........................... 7,106 -- --
Interest expense .................................... 26,222 18,903 15,587
Interest income ..................................... (1,018) (266) (40)
----------- ----------- -----------
Income before Income Taxes ............................. 231 4,626 3,519
Provision for Income Taxes ............................. 144 1,907 1,543
----------- ----------- -----------
Net Income ............................................. $ 87 $ 2,719 $ 1,976
=========== =========== ===========
Basic Net Income per Share ............................. $ 0.02 $ 0.72 $ 0.53
----------- ----------- -----------
Shares Used to Compute Basic Net Income per Share ...... 3,879,496 3,766,684 3,719,026
----------- ----------- -----------
Diluted Net Income per Share ........................... $ 0.02 $ 0.61 $ 0.47
----------- ----------- -----------
Shares Used to Compute Diluted Net Income per Share..... 4,292,650 4,436,476 4,194,556
----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
31
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands except share amounts)
COMMON STOCK
NOTES
RECEIVABLE
ADDITIONAL FROM
PAID-IN RETAINED TREASURY DEFERRED OFFICERS AND
SHARES AMOUNT CAPITAL EARNINGS STOCK COMPENSATION EMPLOYEES TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1998 .... 4,912,530 $ 49 $ 12,304 $ 26,472 $ (1,210) $ (2,286) $ (155) $ 35,174
Net Income .................... -- -- -- 1,976 -- -- -- 1,976
Restricted Stock Awards ....... -- -- 643 -- -- (643) -- --
Purchase of Treasury Stock .... -- -- -- -- (1,020) -- -- (1,020)
Restricted Stock Compensation.. -- -- -- -- -- 458 -- 458
ESOP Compensation ............. -- -- -- -- -- 105 -- 105
Notes Receivable from
Officers and Employees ..... -- -- -- -- -- -- (334) (334)
Cancellation of SESOP ......... (350,000) (4) (1,221) -- -- 1,225 -- --
Stock Bonus Awards ............ 6,000 -- 31 -- -- -- -- 31
Exercise of Stock Options ..... 200,000 2 613 -- -- -- -- 615
Tax Benefit related to
Exercise of Non-Qualified
Stock Options .............. -- -- 270 -- -- -- -- 270
Conversion of Restricted
Stock to Stock
Options .................... (150,000) (1) 1 -- -- -- -- --
Extension of Stock Options
Scheduled to
Expire ..................... -- -- 300 -- -- -- -- 300
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 .. 4,618,530 46 12,941 28,448 (2,230) (1,141) (489) 37,575
Net Income .................... -- -- -- 2,719 -- -- -- 2,719
Restricted Stock Awards ....... -- -- 637 -- -- (637) -- --
Restricted Stock Forfeitures .. (2,000) -- (18) -- -- 18 --
Purchase of Treasury Stock .... -- -- -- -- (1,381) -- -- (1,381)
F-3
32
Restricted Stock Compensation.. -- -- -- -- -- 647 -- 647
ESOP Compensation ............. -- -- -- -- -- 105 -- 105
Notes Receivable from
Officers and Employees ..... -- -- -- -- -- -- 93 93
Stock Bonus Awards ............ 6,000 -- 53 -- -- -- -- 53
Exercise of Stock Options ..... 77,000 1 299 -- -- -- -- 300
Tax Benefit related to
Exercise of Non-Qualified
Stock Options .............. -- -- 139 -- -- -- -- 139
Extension of Stock Options
Scheduled to Expire ........ -- -- 68 -- -- -- -- 68
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 .. 4,699,530 47 14,119 31,167 (3,611) (1,008) (396) 40,318
Net Income .................... -- -- -- 87 -- -- -- 87
Purchase of Treasury Stock .... -- -- -- -- (219) -- -- (219)
Restricted Stock Compensation.. -- -- -- -- -- 268 -- 268
ESOP Compensation ............. -- -- 157 -- -- 105 -- 262
Notes Receivable from
Officers and Employees ..... -- -- -- -- -- -- (14) (14)
Stock Bonus Awards ............ 7,000 -- 52 -- -- -- -- 52
Exercise of Stock Options ..... 6,500 -- 27 -- -- -- -- 27
Tax Benefit related to
Exercise of Non-Qualified
Stock Options .............. -- -- 9 -- -- -- -- 9
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 .. 4,713,030 $ 47 $ 14,364 $ 31,254 $ (3,830) $ (635) $ (410) $ 40,790
- ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
33
HPSC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income .......................................................................... $ 87 $ 2,719 $ 1,976
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization .................................................... 6,033 5,204 4,460
Increase (decrease) in deferred income taxes ..................................... (207) 1,096 1,543
Restricted stock, stock option, and stock bonus award compensation ............... 604 768 789
Gain on sale of lease contracts and notes receivable ............................. (12,078) (4,916) (4,906)
Term securitization transaction costs ............................................ 7,106 -- --
Provision for losses on lease contracts and notes receivable ..................... 9,218 4,489 4,201
Increase in accrued interest ..................................................... 270 655 156
Increase (decrease) in accounts payable and accrued liabilities .................. (1,060) 2,068 (972)
Increase (decrease) in accrued income taxes ...................................... (120) 314 18
Decrease in refundable income taxes .............................................. 260 514 1,996
(Increase) decrease in other assets .............................................. (2,038) (2,158) (615)
---------------------------------------
Cash provided by operating activities .................................................. 8,075 10,753 8,646
---------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of lease contracts and notes receivable due in installments ............. (251,206) (209,653) (162,587)
Portfolio receipts, net of amounts included in income ............................... 89,402 77,309 60,467
Proceeds from sales of lease contracts and notes receivable due in installments ..... 144,115 54,390 38,696
Net proceeds received from term securitization from reacquisition and resale of
lease contracts and notes receivable due in installments ......................... 9,804 -- --
Net (increase) decrease in notes receivable ......................................... 1,038 (2,857) (323)
Net increase (decrease) in security deposits ........................................ (828) (35) 955
Net increase (decrease) in other assets ............................................. 346 (819) (630)
Net (increase) decrease in loans to employees ....................................... (14) 93 (334)
---------------------------------------
Cash used in investing activities ...................................................... (7,343) (81,572) (63,756)
---------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes, term securitization, net of debt issue costs ...... 352,645 -- --
Repayments of term securitization notes upon sale of assets to ER 2000-1 LLC I ...... (35,535) -- --
Repayment of other senior debt ...................................................... (365,351) (75,147) (61,030)
Proceeds from issuance of other senior notes ........................................ 173,519 128,051 111,474
Costs incurred to break swap contracts hedging terminated borrowings in CP conduits.. (3,988) -- --
Net proceeds (repayments) from revolving notes payable to banks ..................... (21,000) 21,000 10,000
Purchase of treasury stock .......................................................... (219) (1,381) (1,020)
Increase in restricted cash ......................................................... (100,578) (5,336) (2,588)
Exercise of employee stock options .................................................. 27 300 615
Repayment of employee stock ownership plan promissory note .......................... 105 105 105
---------------------------------------
Cash provided by (used in) financing activities ........................................ (375) 67,592 57,556
---------------------------------------
Net increase (decrease) in cash and cash equivalents ................................... 357 (3,227) 2,446
Cash and cash equivalents at beginning of year ......................................... 1,356 4,583 2,137
---------------------------------------
Cash and cash equivalents at end of year ............................................... $ 1,713 $ 1,356 $ 4,583
---------------------------------------
Supplemental disclosures of cash flow information:
Interest paid ....................................................................... $ 25,371 $ 17,666 $ 14,775
Income taxes paid ................................................................... 228 150 52
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
34
HPSC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business-- HPSC, Inc. ("HPSC") and its consolidated subsidiaries (the "Company")
provide financing to licensed professionals, principally healthcare providers,
through leases and notes due in installments. The Company also provides
asset-based financing to small and medium-sized manufacturing and distribution
companies throughout the United States.
The Company finances dental, ophthalmic, chiropractic, veterinary and other
medical equipment utilized in the healthcare professions. The Company does not
carry any inventory. The Company acquires the financed equipment from vendors at
their customary selling price to other customers. All leases are classified as
direct financing leases. The Company also finances the acquisition of healthcare
practices by healthcare professionals and provides financing for leasehold
improvements, office furniture and equipment, and certain other costs involved
in opening or maintaining a healthcare provider's office.
Through its wholly-owned subsidiary, American Commercial Finance Corporation
("ACFC"), the Company also provides asset-based financing to manufacturing and
distribution companies with borrowing requirements of generally less than
$5,000,000.
Consolidation-- The accompanying consolidated financial statements include HPSC,
Inc. and the following wholly-owned subsidiaries: ACFC, an asset-based lender
engaged primarily in providing accounts receivable and inventory financing at
variable rates, HPSC Bravo Funding Corp. ("Bravo"), HPSC Capital Funding Inc.
("Capital"), HPSC Equipment Receivables 2000-1 LLC I, and HPSC Equipment
Receivables 2000-1 LLC II, all special-purpose corporations formed in connection
with securitization facilities. All inter-company transactions have been
eliminated in consolidation.
Use of Estimates-- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenues and expenses during the
reporting period. A significant area requiring the use of management estimates
is the allowance for losses on leases and notes receivable. Actual results could
differ from those estimates.
Revenue Recognition-- The Company finances equipment only after a customer's
credit has been approved and a lease or financing agreement for the transaction
has been executed. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses. When a
transaction is initially activated, the Company records the minimum payments and
the estimated residual value, if any, associated with the transaction. An amount
equal to the sum of the payments due plus the residual value less the cost of
the transaction is recorded as unearned income. The unearned income is
recognized as revenue over the life of the transaction using the interest
method. Recognition of revenue on these assets is suspended when a transaction
enters the legal collection phase. Also included in earned income are fee income
from various service charges on portfolio accounts, gains and losses on residual
transactions, and miscellaneous income items, net of initial direct cost
amortization.
Sales of Leases and Notes Receivable_ The Company sells a portion of its leases
and notes receivable in its securitization facilities and to various banks.
Gains on sales of leases and notes are recognized at the time of the sale. The
gain is computed as the excess of the present value of the anticipated future
cash flows plus retained interest, net of initial direct costs and expenses,
over the Company's current carrying value of the assets sold. The Company
typically retains the servicing of financing contracts sold. Servicing fees on
sold assets specified in the securitization and bank agreements, which the
Company believe approximate its servicing costs, are deferred and recognized as
revenue in proportion to the estimated periodic servicing costs.
Deferred Origination Costs-- The Company capitalizes initial direct costs that
relate to the origination of leases and notes receivable in accordance with SFAS
No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases". These initial direct
costs comprise certain specific activities related to processing requests for
financing, such as the costs to underwrite the transaction, to prepare and
execute the documentation, filing fees, and commission payments. Deferred
origination costs are amortized on the interest method over the life of the
receivable as an adjustment of yield.
F-6
35
Allowance for Losses-- The Company records an allowance for losses in its
portfolio. The extent of the allowance is based on an evaluation of its
portfolio quality, delinquency trends, general economic conditions, historical
loss experiences on its owned and serviced portfolio, as well as a specific
analysis of potential loss accounts. An account is specifically reserved for or
written off when deemed uncollectible.
The Company occasionally repossesses equipment from lessees or borrowers who
have defaulted on their obligations to the Company. There was no such equipment
held for resale at December 31, 2000 or 1999.
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan- Income Recognition and
Disclosure." These standards apply to the Company's practice acquisition and
asset-based loans, but not its leases. The standards require that a loan be
classified and accounted for as an impaired loan when it is probable that the
Company will be unable to collect all principal and interest due on the loan in
accordance with the loan's original contract terms.
Impaired practice acquisition and asset-based loans are valued based on the
present value of expected future cash flows, using the interest rate in effect
at the time the loan was placed on nonaccrual status. A loan's observable market
value or collateral value may be used as an alternative valuation technique.
Impairment exists when the recorded investment in a loan exceeds the value of
the loan measured using the above mentioned valuation techniques. Such
impairment is recognized as a valuation reserve, which is included as a part of
the Company's allowance for losses.
Accounting for Stock-Based Compensation-- The Company accounts for stock-based
compensation in accordance with Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." The Company applies the
intrinsic value method under APB No. 25 to measure compensation expense related
to grants of stock options, and has disclosed the pro forma information required
by SFAS No. 123, "Accounting for Stock-Based Compensation".
Income Taxes-- The Company accounts for income taxes in accordance with SFAS No.
109 "Accounting for Income Taxes". Current tax liabilities or assets are
recognized, through charges or credits to the current tax provision, for the
estimated taxes payable or refundable for the current year. Net deferred tax
liabilities or assets are recognized, through charges or credits to the deferred
tax provision, for the estimated future tax effects, based on enacted tax rates,
attributable to temporary differences. Deferred tax liabilities are recognized
for temporary differences that will result in amounts taxable in the future, and
deferred tax assets are recognized for temporary differences and tax benefit
carryforwards that will result in amounts deductible or creditable in the
future. The effect of enacted changes in tax law, including changes in tax
rates, on these deferred tax assets and liabilities is recognized in income in
the period that includes the enactment date. A deferred tax valuation reserve is
established if it is more likely than not that all or a portion of the Company's
deferred tax assets will not be realized. Changes in the deferred tax valuation
reserve are recognized through charges or credits to the deferred tax provision.
Cash and Cash Equivalents-- The Company considers all highly liquid investments
with a maturity of three months or less when acquired to be cash equivalents.
Restricted Cash-- As part of its servicing obligation under its securitization
and bank agreements (Notes C and D), the Company collects certain cash receipts
on financing contracts pledged or sold. These collections are segregated in
separate accounts for the benefit of the entity to which the related lease
contracts and notes receivable were pledged or sold and are remitted to such
entities on a monthly basis.
The Company also holds restricted cash received in connection with the term
securitization entered into in December 2000 (Notes C and D) that provided for
prefunding for the purchase of future financing agreements that will be pledged
or sold by the Company into the securitization facility.
Interest Rate Swap Contracts-- Pursuant to the terms of its securitization
agreements (Notes C and D), the Company is required to enter into interest rate
swap contracts. These interest rate swaps are matched swaps and, as such, are
accounted for using settlement accounting. In the case where the notional value
of the interest rate swap contracts significantly exceeds the outstanding
underlying debt, the excess swap contracts would be marked-to-market. All
interest rate swap contracts entered into by the Company are for other than
trading purposes. The Company has established a control environment which
includes policies and procedures for risk management and the approval, reporting
and monitoring of derivative financial instrument activities.
F-7
36
Property and Equipment-- Office furniture, equipment and capital leases are
recorded at cost and depreciated using the straight-line method over a period of
three to five years. Leasehold improvements are amortized over the shorter of
the life of the lease or the asset. Upon retirement or other disposition, the
cost and related accumulated depreciation of the assets are removed from the
accounts and the resulting gain or loss is reflected in income. Net property,
plant and equipment is included in other assets and was not material at December
31, 2000 or 1999.
Deferred Compensation-- Deferred compensation includes notes receivable from the
Company's Employee Stock Ownership Plan ("ESOP") and deferred compensation
related to restricted stock awards, as follows:
(in thousands) 2000 1999 1998
---- ---- ----
ESOP .................. $ 316 $ 421 $ 526
Restricted stock....... 319 587 615
------ ------ ------
Total .............. $ 635 $1,008 $1,141
====== ====== ======
Comprehensive Income-- Comprehensive income equaled net income for the years
ended December 31, 2000, 1999 and 1998.
Recently Issued Accounting Pronouncements-- In June 1998, SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. This
Statement, which will be effective for the Company on January 1, 2001,
establishes new accounting guidance and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and to measure those instruments at fair value. Changes in the fair
value of derivative instruments designated as a hedge which perfectly offset
corresponding changes in the fair value of forecasted hedged cash flows will be
recorded as a separate component of stockholders' equity in accumulated other
comprehensive income. To the extent changes in the fair value of the derivative
do not perfectly offset corresponding changes in the fair value of forecasted
hedged cash flows, a gain or loss will generally be recorded to the Statement of
Operations in the current period. The Company currently utilizes interest rate
swap contracts as hedges against changes in interest rates on its debt
obligations incurred through its securitization activities (Notes C and D). The
Company has also reviewed all other contracts and does not currently believe
that any contracts are derivatives under the definition provided by SFAS No. 133
nor that they contain any embedded derivative instruments. The Company does not
anticipate a material impact to its consolidated financial statements as a
result of the implementation of this accounting standard. As of January 1, 2001,
the fair value of interest rate swap contracts held by the Company hedging cash
flows of pledged financing contracts represented a liability of $1,749,000 (Note
K).
In September 2000, SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a replacement of FASB
Statement No. 125" was issued. This Statement modifies certain standards for the
accounting of transfers of financial assets and also requires entities to
provide expanded financial statement disclosures related to securitization
activities. The new disclosure requirements, which became effective for the
Company on December 15, 2000, are provided in Note D of these footnotes to
financial statements. The adoption of the new accounting requirements of SFAS
No. 140, which will become effective for new asset sales executed by the Company
for periods after March 31, 2001, is not expected to have a material effect on
the Company's consolidated financial position or results of operations.
In July 2000, the Emerging Issues Task Force ("EITF") released Issue No. 99-20
"Recognition of Interest Income and Impairment on Certain Investments". This
Issue provides guidance to transferors of financial assets as to appropriate
accounting treatment for interest income and impairment in retained beneficial
interests in securitized assets. The guidelines provided by this Issue will be
effective for the second quarter of the Company's fiscal year ending December
31, 2001. The Company is evaluating the impact that this guidance may have on
its consolidated financial results.
Reclassifications-- Certain amounts in the 1999 and 1998 consolidated financial
statements have been reclassified to conform to the current year presentation.
NOTE B. LEASES AND NOTES RECEIVABLE
The Company's finance portfolio consists of two general categories of assets.
The first category of assets consists of 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). The
majority of these leases and
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37
notes are due from licensed medical professionals, principally dentists, who
practice in individual or small group practices. These leases and notes are at
fixed interest rates and have terms ranging from 12 to 84 months. The Company
believes that its leases and notes entered into with medical professionals are
generally "small-ticket," homogenous transactions with similar risk
characteristics.
The second category of assets consists of 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 primarily relate to
commercial, asset-based, revolving lines of credit to small and medium sized
manufacturers and distributors, at variable interest rates, and typically have
terms of two to three years.
The Company provides for an allowance of losses on its lease and note portfolio.
The extent of the allowance is based on an evaluation of its portfolio quality,
delinquency trends, historical loss experiences on its owned and serviced
portfolio, as well as a specific analysis of potential loss accounts.
A summary of activity in the Company's total consolidated 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)
======== ======== ========
For the years ended December 31, 2000, 1999, and 1998, the provision for losses
related to the Company's commercial lending subsidiary, ACFC, were $690,000,
$113,000, and $147,000, respectively. Net charge-offs of commercial notes
receivable were $400,000, $19,000, and $75,000 in 2000, 1999, and 1998,
respectively. The amount of the allowance for losses related to the commercial
notes receivable were $976,000 $686,000, and $592,000 at December 31, 2000, 1999
and 1998, respectively. All such amounts are included in the above table.
The Company's receivables are subject to credit risk. To reduce this risk, the
Company has adopted underwriting policies in approving leases and notes that are
closely monitored by management. Additionally, some of the Company's leases and
notes receivable, which have been sold under certain sales agreements (Note D),
are subject to recourse and estimated losses and therefore a provision is made
by the Company.
The total contractual balances of delinquent leases and notes receivable due in
installments, both owned by the Company and owned by others and serviced by the
Company, which were over 90 days past due amounted to $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 Company's agreements with its customers, except for notes receivable of
approximately $37,686,000 in 2000 and $38,720,000 in 1999, are non-cancelable
and provide for a full payout at a fixed financing rate with a fixed payment
schedule over a term of one to seven years. Scheduled future receipts on leases
and notes receivable due in installments, plus retained interest on leases and
notes sold, were as follows at December 31, 2000. These amounts include the
interest component on the payments, but exclude the residual value of the
equipment as well as ACFC receivables:
(in thousands)
2001..................................................................................... $117,334
2002..................................................................................... 93,492
2003..................................................................................... 76,069
2004..................................................................................... 58,823
2005..................................................................................... 39,056
2006 and thereafter...................................................................... 30,872
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38
NOTE C. REVOLVING CREDIT BORROWINGS AND OTHER DEBT
Debt of the Company as of December 31, 2000 and 1999 is summarized below.
(in thousands) 2000 1999
---- ----
Revolving credit arrangement, due May 2001 .......................... $ 49,000 $ 70,000
--------- ---------
Senior Notes:
ER LLC II, due December 2008 .................................. 320,469 --
Less: Original Issue Discount on Senior Notes- ER LLC II...... (636)
--------- ---------
Net Senior Notes- ER LLC II ............................ 319,833 --
Bravo, due June 2003 .......................................... 19,955 132,475
Capital, due April 2001 ....................................... -- 84,587
Various banks, due June 2004 through January 2007 ............. 15,673 10,383
--------- ---------
Total Senior Notes .................................................. 355,461 227,445
--------- ---------
Unsecured Senior Subordinated Notes, due March 2007 ................. 19,985 20,000
--------- ---------
Total ............................................................... $ 424,446 $ 317,445
========= =========
Revolving Credit Arrangement-- 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"), under substantially the same
terms and conditions, through May 2001. Under the Revolving Loan Agreement, the
Company may borrow at variable interest rates of prime and at LIBOR plus 1.35%
to 1.50%, depending upon certain performance covenants. The weighted average
interest rates on the outstanding borrowings were 8.6% and 7.8% at December 31,
2000 and 1999, respectively. All HPSC and ACFC assets, including ACFC stock, but
excluding assets collateralizing the senior notes, have been pledged as
collateral security for the Revolver. The Revolver has not been hedged and was
not hedged at December 31, 2000 and is therefore exposed to upward movements in
interest rates. At December 31, 2000, the Company had $49,000,000 outstanding
under the Revolver compared to $70,000,000 at December 31, 1999.
Senior Notes- Bravo-- In June 1998, the Company, along with its wholly-owned,
special-purpose subsidiary, HPSC Bravo Funding Corporation ("Bravo") signed an
amended revolving credit facility (the "Bravo Facility") structured and
guaranteed by MBIA, Inc. The Bravo Facility 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 sells and may continue to sell or contribute certain of its
portfolio assets, subject to certain covenants regarding Bravo's portfolio
performance and borrowing base calculations, pledges or sells its interest in
these assets to a commercial-paper conduit entity. Bravo incurs interest at
variable rates based on prevailing rates in the commercial paper markets and
enters into interest rate swap contracts to assure fixed rate funding.
Monthly settlements of principal and interest payments are made from collections
on portfolio assets held by Bravo. The terms of the Bravo Facility restrict the
use of certain collected cash. This restricted cash amounted to approximately
$5,738,000 and $7,448,000 at December 31, 2000 and 1999, respectively. The
required monthly payments of principal and interest to purchasers of commercial
paper issued pursuant to the Bravo Facility are guaranteed by MBIA.
Bravo enters into interest rate swap contracts to hedge its interest rate risk
related to its' variable rate obligations to the commercial paper conduit. Under
such interest rate swap contracts, Bravo pays a fixed rate of interest and
receives a variable rate from the counterparty. Bravo may assign its' rights,
title, and interest in such contracts for the benefit of the purchasers of
commercial paper issued pursuant to the Bravo Facility. Credit risk exists to
the extent a loss may occur if a counterparty to a contract fails to perform
according to the terms of the contract. The notional amount of the interest rate
swap contracts is the amount upon which interest and other payments under the
contracts are based.
Senior Notes- Capital-- In April 1998, the Company, along with its wholly-owned,
special purpose subsidiary, HPSC Capital
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39
Funding, Inc. ("Capital") signed an amended Lease Receivable Purchase Agreement
with EagleFunding Capital Corporation ("Eagle"). This facility (the "Capital
Facility") provided the Company with availability up to $150,000,000. In April
1999, the Capital Facility was renewed on substantially the same terms and
conditions, providing available borrowings up to $125,000,000. Under the terms
of the Capital Facility, Capital, to which the Company may sell or contribute
certain of its portfolio assets from time to time, subject to certain covenants
regarding Capital's portfolio performance and borrowing base calculations,
pledges or sells its interests in these assets to a commercial paper conduit
entity. Capital incurs interest at variable rates based on prevailing rates in
the commercial paper markets 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 terms of
the Capital Facility restrict the use of certain collected cash. At December 31,
2000, Capital had no restricted cash but had approximately $7,476,000 at
December 31, 1999. The required monthly payments of principal and interest to
the purchasers of the commercial paper are guaranteed by Fleet National Bank
pursuant to the terms of the Capital Facility.
Capital enters into interest rate swap contracts to hedge its interest rate risk
related to its' variable rate obligations to the commercial paper conduit. Under
such interest rate swap contracts, Capital pays a fixed rate of interest and
receives a variable rate from the counterparty. Capital may assign its' rights,
title, and interest in such contracts for the benefit of the purchasers of
commercial paper issued pursuant to the Capital Facility. Credit risk exists to
the extent a loss may occur if a counterparty to a contract fails to perform
according to the terms of the contract. The notional amount of the interest rate
swap contracts is the amount upon which interest and other payments under the
contracts are based.
Summary of Senior Notes outstanding in the Bravo and Capital Facilities_ In
December 2000, the Company repaid substantial portions of outstanding borrowings
in the Bravo Facility as well as all outstanding borrowings in the Capital
Facility with proceeds received from a new senior note issuance (see section
entitled Senior Notes- Equipment Receivables 2000-1). The lines of credit
provided under both the Bravo and Capital Facilities are currently still
available to the Company. At December 31, 2000, the Company had approximately
$19,955,000 of indebtedness outstanding under the Bravo Facility, and in
connection with these borrowings, had an interest rate swap contract with Fleet
National Bank with a total notional value of $11,328,000 at an effective
interest rate of 6.52%. At December 31, 1999, the Company had approximately
$217,062,000 of indebtedness outstanding under both the Bravo and Capital
Facilities, and in connection with these borrowings, had interest rate swap
contracts with Fleet National Bank with a total notional value of $215,565,000
at an effective interest rate of 5.90%.
The total amount of loans outstanding under the Bravo Facility, the notional
amount of interest rate swaps outstanding related to such loans, and the
effective interest rate under the swaps, assuming payments are made as
scheduled, will be as follows:
(in thousands except for %) BORROWINGS SWAPS RATE
- --------------------------- ---------- ----- ----
December 31, 2001................ $14,383 $9,066 6.52%
December 31, 2002................ 10,968 6,917 6.52%
December 31, 2003................ 7,627 4,814 6.52%
December 31, 2004................ 4,659 2,946 6.52%
December 31, 2005................ 2,031 1,291 6.52%
During the first quarter of 2001, all remaining outstanding borrowings in the
Bravo Facility were repaid with proceeds received from the prefunding
arrangement provided through the Equipment Receivables 2000-1 term
securitization. Accordingly, the swap contract listed above was terminated.
Senior Notes- Equipment Receivables 2000-1-- In December 2000, the Company
completed a $527,106,000 private placement equipment receivables term
securitization (referred to herein as Equipment Receivables 2000-1). Pursuant to
the terms of the securitization, the Company formed two wholly-owned special
purpose limited liability companies, Equipment Receivables 2000-1 LLC I and
Equipment Receivables 2000-1 LLC II ("ER 2000-1 LLC I" and "ER 2000-1 LLC II",
and collectively "ER 2000-1"). ER 2000-1 LLC I was formed to meet the criteria
of a qualifying unconsolidated special purpose entity within the meaning of SFAS
Nos. 125 and 140 (Note D), while ER 2000-1 LLC II was formed to be a
consolidated special purpose entity. The Company, along with subsidiaries ACFC,
Bravo, and Capital, transferred certain leases and loan contracts to the newly
formed special purpose companies. The securitized assets consist of leases and
notes of licensed medical and other professionals originated by HPSC, as well as
commercial asset based revolving loans originated by ACFC.
F-11
40
ER 2000-1 LLC I and ER 2000-1 LLC II issued seven classes of equipment contract
backed notes and one class of equipment contract backed variable funding notes
("VFN"). The original notes, which are ranked in payment priority in
alphabetical order, are as follows:
($ in thousands)
Principal Balance Coupon Rate, per INTEREST ACCRUAL
CLASS ----------------- annum METHOD RATING
----- ---------------- ---------------- ------
1 Month USD
Class A $414,466 LIBOR +0.30% Actual/360 Aaa/AAA
1 Month USD
Class B-1 29,959 LIBOR + 0.50% Actual/360 Aa3/AA
Class B-2 13,267 7.23% 30/360 Aa3/AA
Class C 19,070 7.70% 30/360 A3/A
Class D 5,085 8.11% 30/360 Baa3/BBB
Class E 8,899 10.00% 30/360 Ba2/BB
Class F 6,360 12.91% 30/360 B1
1 Month USD
Class VFN 30,000 LIBOR + 1.00% Actual/360 --
--------
Total $527,106
========
The notes were underwritten by Credit Suisse First Boston Corporation. As of
December 31, 2000, the Class F notes and the VFN notes had not yet been sold. In
March 2001, the Class F notes were sold. The VFN notes may be issued in the
future as required.
Proceeds from the issuance of the notes were used to retire senior notes
outstanding in both the Bravo and Capital facilities as well as to repay in part
amounts outstanding under the Revolving Loan Agreement. The securitization also
provided for a portion of the initial proceeds to be prefunded into a restricted
cash account, to be utilized by ER 2000-1 LLC I and ER 2000-1 LLC II for a
limited period for the sole purpose of acquiring additional financing contracts
from the Company. As of December 31, 2000, the 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 ER
2000-1 notes. The ER 2000-1 securitization agreements also provided for
$1,049,000 of the initial proceeds to be placed in a restricted cash account to
service the interest requirements to the noteholders on prefunded debt
outstanding during the prefunding period. In addition, initial proceeds of
$2,735,000 were deposited in the restricted cash collection account for the
purpose of servicing the interest on the ER 2000-1 notes for the initial
interest accrual period ending January 22, 2001.
The Company is the servicer of the ER 2000-1 portfolio, subject to its
continuing to meet 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 loan portfolio. Under certain circumstances, the
Company, as servicer, 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. The ER 2000-1
securitization agreements restrict the use of certain cash collections on the
portfolio. Restricted cash collections amounted to approximately $4,675,000 as
of December 31, 2000.
The Company has provided additional credit enhancement to the ER 2000-1
noteholders through the creation of a cash reserve account and a residual
payment account. Initial proceeds of $5,085,000 were placed in the cash reserve
account on the date of the closing. Pursuant to the terms of the ER 2000-1
securitization agreements, certain excess cash collections generated by the
portfolio are to be deposited to the cash reserve account as well as to the
residual payment account, up to agreed upon limits. These interest bearing
restricted cash accounts are available to fund, to the extent necessary, any
deficiencies in the monthly amounts to be paid with respect to the ER 2000-1
notes. As of December 31, 2000, the balance in the restricted cash reserve
account was $5,085,000 and the balance in the restricted cash residual payment
account was $0. Under specific circumstances, the Company may also substitute
new leases and notes for leases and notes previously contributed to the
securitization, up to certain defined limits.
As a hedge against interest rate risk related to its variable rate obligations
on the notes, ER 2000-1 entered into interest
F-12
41
rate swap contracts with Fleet National Bank as 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 borrowing costs on the Company's financing
portfolio. Credit risk exists to the extent a loss may occur if a counterparty
to a swap contract fails to perform according to the terms of the contract. At
the time of entering into the interest rate contracts, the Company deposited
$1,000,000 into an interest bearing cash escrow account at Fleet National Bank
as collateral on the swap agreements. The weighted average interest rate paid on
all classes of ER 2000-1 notes is 6.67%.
Approximately 5% of the original collateral contributed to ER 2000-1 comprised
revolving lines of credit originated by ACFC. Under the terms of the ER 2000-1
securitization agreements, when an ACFC obligor requests future advances, such
advances will be made by ACFC and the resulting receivable may be purchased from
ACFC by ER 2000-1 LLC II using funds then on deposit in the collection account,
provided that after such purchase, funds on deposit in the collection account
will be sufficient to make required distributions on the ER 2000-1 notes on the
next payment date. If funds on deposit in the collection account are
insufficient to make such deposit, holders of the VFN notes will have the option
to fund the remaining amount necessary to fund such purchase. As of December 31,
2000, the total outstanding amount of ACFC revolving lines of credit in ER
2000-1 LLC II was $18,368,000. The VFN notes may be issued as required in the
future and therefore no associated debt was outstanding at December 31, 2000.
Under the terms of the ER 2000-1 securitization agreements, ER 2000-1 LLC II may
optionally redeem principal amounts outstanding on the notes when the
outstanding remaining principal balance of the notes is less than 10% of the
original note principal balance.
The total amount of outstanding indebtedness issued by ER 2000-1 LLC II, by
class of notes, assuming payments are made as scheduled, the portfolio prepays
at a rate approximating 5%, and the remaining notes are redeemed when 10% of the
original principal balance of the notes remains outstanding, will be as follows:
(in thousands) CLASS A CLASS B-1 CLASS B-2 CLASS C CLASS D CLASS E
------- --------- --------- ------- ------- -------
December 31, 2001...... $189,460 $ 13,695 $ 6,065 $ 8,717 $ 2,324 $ 4,068
December 31, 2002...... 121,796 8,804 3,899 5,604 1,494 2,615
December 31, 2003...... 70,371 5,087 2,253 3,238 863 1,511
December 31, 2004...... 32,479 2,348 1,040 1,494 398 697
December 31, 2005...... 0 0 0 0 0 0
Senior Notes- Various Banks-- The Company periodically enters into secured,
fixed term loan agreements with various banks for purposes of financing its
operations. The loans are generally subject to certain recourse and performance
covenants. At December 31, 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%
Senior Subordinated Notes-- The Company's unsecured senior subordinated notes
(the "Notes") bear interest at a fixed rate of 11%, payable semi-annually on
April 1 and October 1 of each year. The Notes are redeemable at the option of
the Company, in whole or in part, other than through the operation of a sinking
fund, after April 1, 2002 at established redemption prices, plus accrued but
unpaid interest to the date of repurchase. Beginning July 1, 2002, the Company
is required to redeem through sinking fund payments, on January 1, April 1, July
1, and October 1 of each year, a portion of the aggregate principal amount of
the Notes at a redemption price equal to $1,000,000 plus accrued but unpaid
interest to the redemption date. At December 31, 2000 and 1999, the Company had
outstanding senior subordinated notes of $19,985,000 and $20,000,000,
respectively.
Certain debt and securitization agreements contain restrictive covenants which,
among other things, include minimum net worth, interest coverage ratios, capital
expenditures, and portfolio performance guidelines. At December 31, 2000, the
Company was not in compliance with its tangible net worth, interest coverage,
and leverage requirements primarily as a result of costs related to the ER
2000-1 asset securitization transaction. In March 2001, the Company obtained
amendments with respect to its Revolver and Capital Facility and waivers with
respect to the Bravo Facility for compliance requirements with respect to these
covenants for its fiscal year 2000. The Company intends to work with its lenders
to obtain amendments to these covenants in 2001.
The scheduled maturities of the Company's revolving credit borrowings as well as
all other debt obligations, at face value, as of December 31, 2000 are as
follows:
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42
(in thousands)
2001........................................................................................... $ 153,649
2002........................................................................................... 88,823
2003........................................................................................... 71,559
2004........................................................................................... 54,649
2005........................................................................................... 47,304
Thereafter..................................................................................... 9,098
Management believes that the Company's liquidity is adequate to meet current
obligations and future projected levels of financings, and to carry on normal
operations. The Company will continue to seek to raise additional capital from
bank and non-bank sources, and from selective use of asset sale transactions in
the future. The Company expects that it will be able to obtain additional
capital at competitive rates, but there can be no assurance that it will be able
to do so.
NOTE D. SALES OF LEASES AND NOTES RECEIVABLE
The Company sells lease contracts and notes receivable due in installments under
certain sales and securitization agreements.
Asset Sales- Bravo and Capital Facilities-- Under the Company's Bravo and
Capital commercial paper securitization facilities, the Company may sell certain
of its financing assets to one of its two wholly-owned, special purpose,
bankruptcy-remote subsidiaries, Bravo and Capital (Note C). Under the terms of
the agreements for these facilities, the special purpose entities in turn sell
the assets to a conduit entity which issues commercial paper to pay for the
financing contracts. Sales by the Company to either of its subsidiaries are
subject to certain performance and borrowing base calculations. Proceeds from
sales consist of cash, representing a portion of the net present value of the
future scheduled payments for the financing contracts sold, and a
non-certificated, undivided interest in the financing contracts sold. In
recording the net gain on the sale of the financing contracts and the fair value
of the retained interest, the Company assumes a loss rate on its retained
interest of approximately 0.50% per year, based on historical loss rates, and
present values its retained interest at implicit rates ranging from 12% to 14%.
As a hedge against fluctuations in interest rates associated with commercial
paper markets, both Bravo and Capital enter into interest rate swap contracts.
Subject to its compliance with certain covenants, the Company continues to act
as the servicer of both the Bravo and Capital portfolios, and receives servicing
fees equal to 1.00% of the monthly billing amounts. The Company's retained
interest in the financing contracts is subordinate to the interests of its
credit providers. The value of the retained interest is subject to credit risk
in the transferred financing contracts.
In December 2000, a substantial portion of the outstanding amounts in the Bravo
Facility and all remaining amounts outstanding under the Capital Facility were
repaid from proceeds received from the ER 2000-1 term securitization
transaction. In March 2001 all outstanding amounts under the Bravo transaction
were repaid.
For the years ended December 31, 2000, 1999, and 1998, the Company received cash
proceeds of $108,475,000, $54,390,000 and $38,696,000, respectively, from the
sale of financing contracts to the Bravo and Capital Facilities, and in
conjunction with these sales, recognized pre-tax gains of $8,796,000,
$4,916,000, and $4,906,000.
At December 31, 2000, the Bravo Facility had approximately $37,016,000
outstanding, and in connection therewith, had interest rate swap contracts with
a total notional value of approximately $32,902,000. At December 31, 1999, Bravo
and Capital had approximately $93,044,000 outstanding, and in connection
therewith, had interest rate swap contracts with a total notional value of
approximately $82,328,000.
Asset Sales- Equipment Receivables 2000-1-- In December 2000, Equipment
Receivables 2000-1 LLC I was formed as a wholly owned special purpose limited
liability corporation (Note C). ER 2000-1 LLC I was formed to meet the criteria
of a qualified special purpose entity within the meaning of SFAS Nos. 125 and
140. Under the terms of the ER 2000-1 LLC securitization agreements, the Company
and its subsidiaries transferred certain financing contracts to ER 2000-1 LLC I,
which in turn, sold an undivided interest in the financing contracts in the term
securitization transaction. Proceeds from sales consist of cash, representing a
portion of the net present value of the future scheduled payments for the
financing contracts sold, and a non-certificated, undivided interest in the
remaining value of the financing contracts which were sold. In recording the net
gain on the sale of the assets and the fair value of the retained receivables,
the Company assumes a loss rate on its retained interest of approximately 0.50%
per year, based on historical loss rates, and present values its remaining
retained receivable stream at implicit rates ranging from 12% to 14%. As a hedge
against fluctuations in LIBOR rates associated with outstanding borrowings of
the Class A and Class B-1 notes, ER 2000-1 LLC I entered into interest rate swap
contracts. Subject to complying with certain covenants, the Company continues to
act as the servicer of the financing contracts, and receives servicing fees of
.70% of the outstanding amounts. Under certain circumstances, the Company may be
obligated to advance its own funds for amounts due in the event an obligor under
a financing contract fails to remit a payment when due. Such advances are
reimbursed to the servicer, plus accrued interest thereon, from available funds
upon subsequent
F-14
43
collection from the obligor. The Company's retained interest is subordinate to
the interests of its credit providers. The value of the retained interest is
subject to credit risk in the transferred financing contracts.
For the year ended December 31, 2000, the Company received cash proceeds of
$35,640,000 from the sale of contracts through ER 2000-1, and in connection with
these sales, recognized pre-tax gains of $3,282,000.
At December 31, 2000, ER 2000-1 LLC I had $170,276,000 outstanding. In
connection with the amounts financed through the issuance of the Class A and
Class B-1 variable rate notes, the Company had interest rate swap contracts
outstanding with a notional value of $152,231,000.
Asset Sales- Various Banks-- Certain sales agreements from 1996 and 1995 are
subject to covenants that, among other matters, may require the Company to
repurchase the financing contracts sold and/or make payments under certain
circumstances, primarily upon the failure of the underlying debtors under the
financing contracts to make payments when due. The total outstanding balance of
such financing contracts subject to repurchase obligations by the Company were
approximately $1,719,000 at December 31, 2000 and $4,081,000 at December 31,
1999.
Under all of the securitization agreements, the Company may continue to service
the financing contracts sold, subject to complying with certain covenants. The
Company believes that its servicing fee approximates its estimated servicing
costs, but has limited market basis to assess the fair value of its servicing
asset. Accordingly, the Company has valued its servicing asset and liability at
zero. The Company will recognize servicing fee revenue as earned over the
servicing period. The Company recognized approximately $405,000, $285,000, and
$208,000 of such revenue in 2000, 1999 and 1998, respectively.
The following is a summary of certain cash flow activity received from and paid
to securitization facilities for the year ended December 31, 2000:
(in thousands)
Cash proceeds from new securitizations .................................. $ 144,115
Cash proceeds from term securitization for negotiated purchase of amounts
outstanding under Bravo and Capital Facilities ....................... 134,741
Payment for negotiated purchase of contracts previously sold to Bravo and
Capital............................................................... (124,937)
Cash collections from obligors, remitted to transferees ................. (49,820)
Servicing fees received ................................................. 913
Other cash flows retained by servicer ................................... 3,542
Servicing advances ...................................................... --
Reimbursed servicing advances ........................................... --
In connection with the proceeds received from the term securitization
transaction, the Company negotiated to repurchase certain lease contracts and
notes receivable which were previously sold. The negotiated transaction was
accepted by the Company's lenders and completed in December 2000.
The following is a summary of performance of financing contracts owned by the
Company as well as owned by others and managed by the Company:
(in thousands) NET INVESTMENT
--------------
OUTSTANDING FOR
---------------
NET INVESTMENT ACCOUNTS OVER 90
-------------- ----------------
OUTSTANDING DAYS PAST DUE NET CREDIT LOSSES
-------------- ----------------- -----------------
FOR YEAR ENDING
---------------
AT DECEMBER 31, 2000 DECEMBER 31, 2000
--------------------------------- -----------------
Licensed professional financing ........ $525,488 $ 18,979 $ 3,798
Commercial and industrial financing..... 31,310 -- 400
-------- -------- --------
Total owned and managed ........... 556,798 $ 18,979 $ 4,198
Less:
Securitized licensed professional
financing assets .................... 190,436
--------
Total owned ......................... $366,362
========
F-15
44
The primary exposure in determining the fair value of the Company's retained
interest in securitized financing contracts is from credit risk associated with
the lessees and borrowers under these contracts. In determining the original
fair value of its retained interest at December 31, 2000, the Company assumed a
loss rate of approximately 0.50% per annum on a static pool basis, then
discounted the resulting retained cash flows at discount rates ranging from 12%
to 14%. Assuming a hypothetical 10% adverse change in actual loss rates from
assumed loss rates, the fair value of the Company's retained interest in
securitized financing contracts would change by approximately $7,000. Assuming a
hypothetical 20% adverse change in actual loss rates from assumed loss rates,
the fair value of the Company's retained interest in securitized financing
contracts would change by approximately $14,000. Assuming a hypothetical 10%
adverse change in discount rates, the fair value of the Company's retained
interest in securitized financing contracts would change by approximately
$214,000. Assuming a hypothetical 20% adverse change in discount rates, the fair
value of the Company's retained interest in securitized financing contracts
would change by approximately $421,000. These sensitivities are presented here
as hypothetical assumptions and may not be indicative of actual results or
events.
NOTE E. COMMITMENTS AND CONTINGENCIES
The Company leases various office locations under noncancelable lease
arrangements that have initial terms of from three to six years and may provide
renewal options from one to five years. Rent expense under all operating leases
was $832,000, $748,000, and $628,000 for 2000, 1999, and 1998, respectively.
Future minimum lease payments under non-cancelable operating leases as of
December 31, 2000 are as follows:
(in thousands)
2001............................................................................................... $814
2002............................................................................................... 672
2003............................................................................................... 540
2004............................................................................................... 263
2005 and thereafter................................................................................ --
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.
NOTE F. INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between the
amount of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.
Income taxes consist of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------
(in thousands) 2000 1999 1998
- -------------- ---- ---- ----
Federal:
Current .................................................................. $ 7 $ 111 $ (296)
Deferred ................................................................. 108 1,408 1,525
State:
Current .................................................................. 827 700 295
Deferred ................................................................. (798) (312) 19
-------------------------------------------
Provision for income taxes .................................................. $ 144 $ 1,907 $ 1,543
======= ======= =======
F-16
45
A reconciliation of the statutory federal income tax rate and the effective tax
rate as a percentage of pre-tax income for each year is as follows:
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
---- ---- ----
Statutory rate ......................................................... 34.0% 34.0% 34.0%
State taxes net of U.S. federal income tax benefit ..................... 8.3 5.5 5.9
Foreign loss not benefited ............................................. -- -- 2.1
Non-deductible write-off of foreign currency translation adjustment..... -- -- 0.2
Non-deductible expenses................................................. 20.0 1.7 1.6
----------------------------------
62.3% 41.2% 43.8%
==== ==== ====
The Company's effective tax rate for 2000 increased primarily due to the effect
of comparing an equivalent level of permanent non-deductible expenses as a
percentage of lower pre-tax income for the year.
The items which comprise a significant portion of the net deferred tax
liabilities are as follows at December 31:
(in thousands) 2000 1999
- -------------- ---- ----
Net operating loss carryforwards and tax
credit carry forwards....................... $(10,674) $ (2,991)
Accrued expenses and other................... (1,556) (1,491)
Miscellaneous................................ (152) (120)
Accounting for lease contracts and notes..... $ 22,367 $ 14,794
---------------------------
Net deferred income tax liability............ $ 9,985 $ 10,192
======== ========
The accounting for the deferred tax liability for leases and notes represents
the tax effect of temporary differences relating to the book and tax treatment
of direct financing leases and notes receivable and related securitization
transactions.
At December 31, 2000, the Company had federal and state net operating loss
carryforwards of approximately $26,500,000 and $43,800,000, respectively. The
federal net operating loss carryforwards expire in the years 2018 through 2020,
while the state net operating loss carryforwards expire in the years 2001
through 2020.
NOTE G. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
Common Stock - The Company has 15,000,000 shares authorized and 4,713,030 shares
outstanding at December 31, 2000. Of the outstanding shares, 300,000 shares have
been issued to the Company's ESOP (Note I), 124,000 shares have been issued to
certain employees under the 1995 Stock Incentive Plan (Note H), and 546,477
shares are held in treasury.
Preferred Stock - The Company has 5,000,000 shares of $1.00 par value preferred
stock authorized with no shares outstanding at December 31, 2000. (Note J,
Preferred Stock Purchase Rights Plan.)
Treasury Stock - In September 1998, the Company initiated a stock repurchase
program pursuant to which up to 175,000 shares of the Company's common stock
were to be repurchased for an aggregate purchase price 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 Note
financing. In December 2000, the Company's Board of Directors approved an
additional 250,000 shares subject to the same dollar limitations. Based on such
limitations and current market values as of 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 repurchased stock to meet the current and future requirements
of its employee stock plans.
Earnings per Share - The Company calculates and reports earnings per share in
accordance with SFAS No. 128, "Earnings per Share". The Company's basic net
income per share calculation is based on the weighted average number of common
shares outstanding, which does not include unallocated shares under the
Company's ESOP (Note I), restricted shares issued under the
F-17
46
Stock Plans (Note H), treasury stock, or any shares issuable upon the exercise
of outstanding stock options. Diluted net income per share includes the weighted
average number of common shares subject to stock options and contingently
issuable restricted stock, as calculated under the treasury stock method, but
not treasury stock or unallocated shares under the Company's ESOP.
The following is a reconciliation of the numerators and denominators of the
basic and diluted net income per share:
(in thousands, except per share and share YEAR ENDED DECEMBER 31,
amounts) --------------------------------------------
2000 1999 1998
---- ---- ----
Basic Net Income per Share:
Net income .................................... $ 87 $ 2,719 $ 1,976
Weighted average common shares outstanding..... 3,879,496 3,766,684 3,719,026
---------- ---------- ----------
Basic net income per share .................... $ 0.02 $ 0.72 $ 0.53
========== ========== ==========
Diluted Net Income per Share:
Net income .................................... $ 87 $ 2,719 $ 1,976
Weighted average common shares outstanding..... 3,879,496 3,766,684 3,719,026
Stock options and restricted shares ........... 413,154 669,792 475,530
---------- ---------- ----------
Total diluted shares .......................... 4,292,650 4,436,476 4,194,556
---------- ---------- ----------
Diluted net income per share .................. $ 0.02 $ 0.61 $ 0.47
========== ========== ==========
NOTE H. STOCK OPTION AND STOCK INCENTIVE PLANS
Stock Option Plans-- The following is a historical summary of the Company's
various stock option plans:
PLAN INCEPTION
--------------
STOCK OPTION PLAN NAME DATE PLAN TERMINATION DATE (IF APPLICABLE)
---------------------- ---- -------------------------------------
Employee Stock Option Plan (the "1983 Plan") March 1983 May 1995 (upon approval of the 1995 Plan)
Stock Option Plan (the "1986 Plan") March 1986 May 1995 (upon approval of the 1995 Plan)
1994 Stock Plan (the "1994 Plan") March 1994 May 1995 (upon approval of the 1995 Plan)
1995 Stock Incentive Plan (the "1995 Plan") May 1995 February 1998 (upon approval of the 1998 Plan)
1998 Stock Incentive Plan (the "1998 Plan") February 1998 April 2000 (upon approval of the 2000 Plan)
2000 Stock Incentive Plan (the "2000 Plan") April 2000
Options granted under the 1983 Plan are non-qualified options granted at an
exercise price of not less than 85% of the fair market value of the common stock
on the date of grant. Options granted under the 1986 Plan are non-qualified
stock options granted at an exercise price equal to the market price of the
common stock on the date of grant. Options granted under the 1994 Plan are
non-qualified options granted at an exercise price equal to the fair market
value of the common stock on the date of grant.
In April 1998, 120,000 five year options issued under the 1986 Plan, which were
scheduled to expire in 1998, were extended for an additional 5 years. Upon the
extension of the options, the Company recorded compensation expense of $300,000.
In February 1999, 15,000 options issued under the 1994 Plan, which were
scheduled to expire in 1999, were extended for an additional 5 years. Upon the
extension of the options, the Company recorded compensation expense of $68,000.
Compensation expense represents the difference between the original option
exercise price on the date of grant and the market price of the Company's stock
(the intrinsic value) on the date the extensions were granted.
F-18
47
1995 Plan - Upon approval of the 1995 Plan in May 1995, 550,000 shares were
initially reserved for the issuance of stock options or awards of restricted
stock. The Company has outstanding stock options and awards of restricted stock
under its 1995 Plan. The options are incentive stock options and non-qualified
stock options and were granted at an exercise price equal to the market price of
the Company's common stock on the date of the grant. Restricted shares of common
stock awarded under the 1995 Plan will remain unvested until certain performance
and service conditions are both met.
The performance condition for restricted stock issued under the 1995 Plan is met
with respect to 50% of the restricted shares if and when during the five-year
period after the date of grant (the "Performance Period") the closing price of
the Company's common stock, as reported for a consecutive 10 day period on the
stock exchange for which the Company's stock is customarily traded, equals at
least 134.175% of the closing price on the grant date (the "Partial Performance
Condition"). The performance condition is met with respect to the remaining 50%
of the restricted shares if and when during the Performance Period the closing
price of the Company's common stock, as reported for a consecutive 10 day period
on the stock exchange for which the Company's stock is customarily traded,
equals at least 168.35% of the closing price on the grant date (the "Full
Performance Condition").
The service condition for restricted stock issued under the 1995 Plan is met
with respect to all restricted shares (provided that the applicable performance
condition has also been met) by the holder's continuous service to the Company
throughout the Performance Period, provided that such holder shall also have
completed five (5) years of continued service with the Company from the date of
grant. Upon a change of control of the Company (as defined in the 1995 Plan),
all restricted stock awards granted prior to such change of control become fully
vested.
Upon the termination of a holder's employment by the Company without cause or by
reason of death or disability during the Performance Period, any restricted
stock awards for which the applicable performance condition is satisfied no
later than four months after the date of such termination of employment shall
become fully vested.
Awards of 337,000 restricted shares of the Company's common stock were made in
May 1995. The Partial Performance Condition of these shares was $5.90 per share
with respect to 332,000 shares and $6.04 with respect to 5,000 shares, and the
Full Performance Condition was $7.37 per share with respect to 332,000 shares
and $7.58 with respect to 5,000 shares. Additional paid in capital and deferred
compensation of $994,000 was recorded when the partial performance condition was
achieved with respect to 50% of the restricted shares in June 1996. In April
1998, 150,000 of the outstanding restricted shares were forfeited in exchange
for stock options granted pursuant to the 1995 Plan. Additional paid in capital
and deferred compensation of $136,345 was recorded when the Full Performance
Condition was met with respect to the remaining restricted shares outstanding.
In May 2000, the service condition was met with respect to the remaining
outstanding restricted shares, at which time the shares of common stock were
issued to the holders without restriction.
In May 1997, 126,000 additional restricted shares were awarded under the 1995
Plan. The Partial Performance Condition of these shares was $8.05 per share and
the Full Performance Condition was $10.10 per share. Additional paid in capital
and deferred compensation of $507,150 was recorded in May 1998 when the Partial
Performance Condition was met with respect to 50% of the restricted shares. In
August 1999, the Full Performance Condition was met with respect to the
remaining restricted shares outstanding, whereupon additional paid in capital
and deferred compensation of $637,000 was recorded. These shares remain subject
to the service condition.
In 2000, 1999, and 1998, the Company recognized approximately $268,000,
$647,000, and $458,000, respectively, in compensation expense related to
restricted stock awards under its 1995 Plan. The compensation expense is
recognized by the Company on a straight line basis over the 5 year service
period which begins on the date of grant. A cumulative adjustment was recorded
by the Company on the date the performance conditions were met to recognize
retroactively compensation expense from the date of grant to the date the
performance condition was met.
1998 Plan-- Upon the approval of the 1998 Plan in February 1998, 550,000 shares
of common stock were initially reserved for the issuance of stock options and/or
awards of restricted stock. In addition, shares subject to options or stock
awards under the 1995 Plan that expired or were terminated unexercised were made
available for issuance as stock options or restricted stock awards under the
1998 Plan. The Company has outstanding stock options under its 1998 Plan. The
options are either incentive stock options or non-qualified stock options. In
the case of incentive stock options, the exercise price is the average of the
closing prices of the common stock on each of the days on which the stock was
traded during the 30 calendar day period ending on the day before the date of
the option grant (the "Market Price"). The exercise price for non-qualified
options is also the Market Price on the date of the grant. No restricted shares
were awarded under the 1998 Plan.
F-19
48
2000 Plan-- In April 2000, the 2000 Plan was approved, at which time 450,000
shares of the Company's common stock were reserved for issuance as stock options
or restricted stock awards. In addition, shares subject to options or stock
awards under the 1998 Plan that expire or are terminated unexercised will be
available for issuance as stock options or restricted stock awards under the
2000 Plan.
The 2000 Plan provides that with respect to options granted to key employees
(except non-employee directors), the option term and the terms and conditions
upon which the options may be exercised will be determined by the Compensation
Committee of the Company's Board of Directors for each such option at the time
it is granted. Options granted to key employees of the Company are either
incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code of 1986 and subject to the restrictions of that section on certain
terms of such options) or non-qualified options, as designated by the
Compensation Committee. The exercise price for stock options may not be less
than the closing price of the Company's common stock as reported in the Wall
Street Journal on the date of the option grant (the "2000 Plan Market Price").
Each non-employee director who was such at the conclusion of any regular annual
meeting of the Company's stockholders while the 2000 Plan is in effect and who
continues to serve on the Board of Directors is granted automatic options to
purchase 1,000 shares of the Company's common stock at an exercise price not
less than the 2000 Plan Market Price on the date of the option grant. Each
automatic option is exercisable immediately in full or for any portion thereof
and remains exercisable for 10 years after the date of grant, unless terminated
earlier (as provided in the 2000 Plan) upon or following termination of the
holder's service as a director.
As of December 31, 2000, the Company had granted 325,500 stock options and no
restricted stock awards pursuant to the 2000 Plan.
The following table summarizes stock option and restricted stock activity:
OPTIONS
--------------------------
NUMBER OF WEIGHTED RESTRICTED
OPTIONS AVERAGE STOCK
--------- EXERCISE ----------
PRICE
--------
Outstanding at January 1, 1998 .................... 652,875 $3.43 463,000
Granted ........................................ 419,000 5.37 --
Exercised ...................................... (200,000) 3.08 --
Forfeited ...................................... (28,000) 5.51 --
Restricted stock converted to stock options..... 150,000 5.13 (150,000)
---------- ----- ---------
Outstanding at December 31, 1998 .................. 993,875 4.52 313,000
Granted ........................................ 141,000 8.90 --
Exercised ...................................... (77,000) 3.87 --
Forfeited ...................................... (4,000) 5.13 (2,000)
---------- ----- ---------
Outstanding at December 31, 1999 .................. 1,053,875 5.15 311,000
Granted ........................................ 330,500 7.49 --
Exercised ...................................... (6,500) 4.14
Release of restriction on restricted stock ..... -- -- (187,000)
Forfeited ...................................... (10,000) 9.08 --
---------- ----- ---------
Outstanding at December 31, 2000 .................. 1,367,875 $5.69 124,000
========== ===== =========
F-20
49
The following table sets forth information regarding options outstanding at
December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------------------- ------------------------------------
RANGE OF WEIGHTED AVERAGE
EXERCISE NUMBER OF REMAINING CONTRACTUAL WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
-------- --------- --------------------- ----------------- --------- ----------------
$2.63 - 3.25 268,875 2.0 $2.97 268,875 $2.97
$3.56 - 3.63 15,000 3.2 3.56 15,000 3.56
$4.36 - 4.88 42,000 4.9 4.70 40,000 4.70
$5.12 - 6.63 595,500 7.3 5.34 417,800 5.31
$7.50 - 8.00 325,500 9.3 7.50 66,500 7.51
$8.83 - 9.54 121,000 8.6 9.18 38,500 9.27
$2.63 - 9.54 1,367,875 6.7 $5.69 846,675 $4.86
============ ========= === ===== ======= =====
The weighted average grant date fair values of options granted for the years
ended December 31, 2000, 1999, and 1998 were $5.84, $5.23, and $3.50,
respectively.
1998 Outside Directors Stock Bonus Plan-- The Company's Board of Directors
approved the 1998 Outside Directors Stock Bonus Plan in April 1998, pursuant to
which 25,000 shares of the Company's common stock were reserved for issuance.
Under the terms of the agreement, 1,000 bonus shares of common stock will be
awarded to each non-employee director who is such at the beginning of any
regular annual meeting of the Company's stockholders while the 1998 Outside
Directors Stock Bonus Plan is in effect and who will continue to serve on the
Board of Directors. Bonus shares are issued in consideration of services
previously rendered to the Company. The 1998 Outside Directors Stock Bonus Plan
will terminate 5 years from the effective date, unless terminated earlier (as
provided in the plan). In 1998, 1999, and 2000, the Company issued 6,000, 6,000
and 7,000 shares of common stock, respectively, pursuant to the 1998 Outside
Directors Stock Bonus Plan. The Company amended the 1998 Outside Directors Stock
Bonus Plan on March 8, 2001 to increase the number of shares reserved under the
Plan from 25,000 to 50,000.
Notes Receivable from Officers and Employees ("Stock Loan Program")--The Company
maintains a Stock Loan Program (as most recently amended on March 14, 2000)
whereby executive officers and other senior personnel of the Company may borrow
from the Company for the purpose of acquiring common stock of the Company, to
pay the exercise price of options and to pay any taxes including alternative
minimum taxes, payable upon the exercise of options or the vesting of restricted
stock. Such borrowings may not exceed $400,000 in any fiscal quarter or $800,000
in the aggregate at any time during the term of the Stock Loan Program for all
employees. The loans are recourse, bear interest at a variable rate which is
one-half of one percent above the Company's cost of funds, are payable as to
interest annually in arrears, and are payable as to principal no later than five
years after the date of the loan. Periodic principal repayments are required in
an amount equal to 20% of the participant's after-tax bonus. All shares
purchased with such loans are pledged to the Company as collateral for repayment
of the loans.
Pro Forma Disclosure-- As described in Note A, the Company uses the intrinsic
value method to measure compensation expense associated with the grants of stock
options or awards to employees. Had the Company used the fair value method to
measure compensation, reported net income (loss) and basic and diluted net
income (loss) per share would have been as follows:
(in thousands, except per share amounts) 2000 1999 1998
---- ---- ----
Net income (loss) ............................ $ (690) $2,346 $1,721
====== ====== ======
Basic net income (loss) per share ............ $(0.18) $ 0.62 $ 0.46
====== ====== ======
Diluted net income (loss) per share........... $(0.18) $ 0.53 $ 0.41
====== ====== ======
For purposes of determining the above disclosure required by SFAS No. 123, the
fair value of options on their grant date was measured using the Black-Scholes
option pricing model. Key assumptions used to apply this pricing model were as
follows:
2000 1999 1998
---- ---- ----
Weighted average risk-free interest rate........................................ 6.0% 6.1% 6.0%
F-21
50
Expected life of option grants.................................................. 5-10 years 5-10 years 5-10 years
Expected volatility of underlying stock......................................... 65.3% 32.4% 45.9%
The pro forma presentation only includes the effects of grants made subsequent
to January 1, 1995. The pro forma amounts may not be indicative of the future
benefit, if any, to be received by the option holder.
NOTE I. EMPLOYEE BENEFIT PLANS
Employee Stock Ownership Plan-- In 1993, the Company established a stock bonus
type of Employee Stock Ownership Plan ("ESOP") for the benefit of all eligible
employees. The ESOP is expected to be primarily invested in common stock of the
Company on behalf of the employees. ESOP contributions are at the discretion of
the Company's Board of Directors and are determined annually. However, it is the
Company's present intention to make contributions sufficient to repay the ESOP's
promissory note on a level funding basis over a 10-year period. The Company
measures the expense related to such contributions based on the average annual
fair value of the stock contributed. The difference between the average fair
value of the stock contribution and the original cost of the stock when issued
to the ESOP is recorded as Additional Paid in Capital for the year in which the
contribution relates. Shares of stock issued to the ESOP are allocated to the
participants based on a calculation of the ratio of the annual contribution
amount to the original principal of the promissory note. Principal repayments on
the promissory note were $105,000, in 2000, 1999, and 1998.
Employees with five or more years of service with the Company from and after
December 1993 at the time of termination of employment will be fully vested in
their benefits under the ESOP. For a participant with fewer than five years of
service from December 1993 through his or her termination date, his or her
account balance will vest at the rate of 20% for each year of employment. Upon
the retirement or other termination of an ESOP participant, the shares of common
stock in which he or she is vested, at the option of the participant, may be
converted to cash or may be distributed. The unvested shares are allocated to
the remaining participants. The Company has issued 300,000 shares of common
stock to this plan in consideration of a promissory note in the original
principal amount of $1,050,000. As of December 31, 2000, 196,281 shares of
common stock have been allocated to participant accounts under the ESOP and
103,719 shares remain unallocated. The market value of unallocated shares at
December 31, 2000 was approximately $622,000.
Savings Plan-- The Company has established a Savings Plan covering substantially
all full-time employees, which allows participants to make contributions by
salary deductions pursuant to Section 401(k) of the Internal Revenue Code. The
Company matches employee contributions up to a maximum of 2% of the employee's
salary. Both employee and employer contributions are vested immediately. The
Company's contributions to the Savings Plan were $128,000 in 2000, $111,000 in
1999, and $90,000 in 1998.
Supplemental Executive Retirement Plan-- In 1997, the Company adopted an
unfunded Supplemental Executive Retirement Plan effective January 1, 1997 (the
"SERP"). The SERP was most recently amended January 2000. The SERP provides
certain executives retirement income benefits which supplement other retirement
benefits available to the executives. Benefits under the plan, based on an
actuarial equivalent of a life annuity, are based on age, length of service and
average earnings and vest over 15 years, assuming five years of service.
Benefits are payable upon separation of service.
Details of the SERP for the years ended December 31, 2000 and 1999 are as
follows:
(in thousands) DECEMBER 31, DECEMBER 31,
------------- ------------
2000 1999
---- ----
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year ............ $ 927 $ 729
Service cost .................................. 254 146
Interest cost ................................. 175 51
Amendments .................................... 1,088 --
Actuarial loss ................................ 237 1
------- -------
Benefit obligation, end of year .................. 2,681 927
------- -------
FUNDED STATUS AND STATEMENT OF FINANCIAL POSITION:
Fair value of assets, end of year ............. -- --
Benefit obligation, end of year ............... 2,681 927
------- -------
Funded status .................................... (2,681) (927)
F-22
51
Unrecognized actuarial loss ..................................... 253 18
Unrecognized prior service cost ................................. 1,280 317
------- -------
Net accrued benefit cost ........................................... (1,148) (592)
------- -------
Amount recognized in the statement of financial position consist of:
Accrued benefit liability included in accrued liabilities ....... (1,614) (618)
Intangible assets included in other assets ...................... 466 26
------- -------
Net accrued benefit cost ........................................... (1,148) (592)
------- -------
COMPONENTS OF NET PERIODIC BENEFIT COSTS:
Service cost .................................................... 254 146
Interest cost ................................................... 175 51
Amortization of prior service cost .............................. 124 28
Recognized actuarial loss ....................................... 3 2
------- -------
Net periodic benefit cost .......................................... $ 556 $ 227
------- -------
DECEMBER 31, DECEMBER 31,
------------ ------------
2000 1999
---- ----
WEIGHTED AVERAGE ASSUMPTIONS
For pension cost and year end benefit obligation
Discount rate ............................... 7.00% 7.00%
Compensation increase ....................... 4.00% 4.00%
Assumed retirement age ...................... 65 years 65 years
NOTE J. PREFERRED STOCK PURCHASE RIGHTS PLAN
Pursuant to a rights agreement between the Company and Fleet National Bank, as
rights agent, dated August 3, 1993 and amended and restated on September 16,
1999, the Board of Directors declared a dividend on August 3, 1993 of one
preferred stock purchase right ("Right") for each share of the Company's common
stock (the "Shares") outstanding on or after August 13, 1993. The Right entitles
the holder to purchase one one-hundredth of a share of Series A preferred stock,
which fractional share is substantially equivalent to one share of common stock,
at an exercise price of $20. The Rights will not be exercisable or transferable
apart from the common stock until the earlier to occur of 10 days following a
public announcement that a person or affiliated group has acquired 15 percent or
more of the outstanding common stock (such person or group, an "Acquiring
Person"), or 10 business days after an announcement or commencement of a tender
offer which would result in a person or group's becoming an Acquiring Person,
subject to certain exceptions. The Rights beneficially owned by the Acquiring
Person and its affiliates become null and void upon the Rights becoming
exercisable.
If a person becomes an Acquiring Person or certain other events occur, each
Right entitles the holder, other than the Acquiring Person, to purchase common
stock (or one one-hundredth of a share of preferred stock, at the discretion of
the Board of Directors) having a market value of two times the exercise price of
the Right. If the Company is acquired in a merger or other business combination,
each exercisable Right entitles the holder, other than the Acquiring Person, to
purchase common stock of the acquiring company having a market value of two
times the exercise price of the Right.
At any time after a person becomes an Acquiring Person and prior to the
acquisition by such person of 50% or more of the outstanding common stock, the
Board of Directors may direct the Company to exchange the Rights held by any
person other than an Acquiring Person at an exchange ratio of one share of
common stock per Right. The Rights may be redeemed by the Company, subject to
approval of the Board of Directors, for one cent per Right in accordance with
the provisions of the Rights Plan. The Rights have no voting or dividend
privileges.
NOTE K. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
the Company to disclose the estimated fair values for its financial instruments.
Financial instruments include items such as loans, interest rate swap contracts,
notes payable, and other items as defined in SFAS No. 107.
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52
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
Quoted market prices are used when available; otherwise, management estimates
fair value based on prices of financial instruments with similar characteristics
or using valuation techniques such as discounted cash flow models. Valuation
techniques involve uncertainties and require assumptions and judgments regarding
prepayments, credit risk and discount rates. Changes in these assumptions will
result in different valuation estimates. The fair values presented would not
necessarily be realized in an immediate sale, nor are there plans to settle
liabilities prior to contractual maturity. Additionally, SFAS No. 107 allows
companies to use a wide range of valuation techniques; therefore, it may be
difficult to compare the Company's fair value information to other companies'
fair value information.
The following table presents a comparison of the carrying value and estimated
fair value of the Company's financial instruments at December 31, 2000:
CARRYING ESTIMATED
(in thousands) VALUE FAIR VALUE
-------- ----------
Financial assets:
Cash and cash equivalents ................................................ $ 1,713 $ 1,713
Restricted cash .......................................................... 115,502 115,502
Net investment in leases and notes ....................................... 366,362 359,138
Financial liabilities:
Notes payable and subordinated debt, net of original issue discount....... 424,446 424,513
Interest rate swap contracts ............................................. -- 2,985
The estimated fair value of interest rate swap contracts at December 31, 2000
includes $1,236,000 related to interest rate swap contracts that have been
assigned to third parties in connection with sales of leases and notes
receivable (see Note D).
The following table presents a comparison of the carrying value and estimated
fair value of the Company's financial instruments at December 31, 1999:
CARRYING ESTIMATED
(in thousands) VALUE FAIR VALUE
-------- ----------
Financial assets:
Cash and cash equivalents ................................................ $ 1,356 $ 1,356
Restricted cash .......................................................... 14,924 14,924
Net investment in leases and notes ....................................... 362,083 366,454
Interest rate swap contracts ............................................. -- 4,386
Financial liabilities:
Notes payable and subordinated debt....................................... 317,445 313,806
The estimated fair value of interest rate swap contracts at December 31, 1999
includes $1,182,000 related to interest rate swap contracts that have been
assigned to third parties in connection with sales of leases and notes
receivable (see Note D).
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash, cash equivalents and restricted cash: For these short-term
instruments, the carrying amount is a reasonable estimate of fair value.
Net investment in leases and notes: The fair value was estimated by
discounting the anticipated future cash flows using current rates applied
to similar contracts. The fair value of impaired loans is estimated by
discounting management's estimate of future cash flows with a discount rate
commensurate with the risk associated with such assets.
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53
Notes payable and subordinated debt: The fair market value of the Company's
senior and subordinated notes is estimated based on the quoted market
prices for similar issues or on the current rates offered to the Company
for debt of similar maturities.
Interest rate swap contracts: The fair value of interest rate swap
contracts is estimated based on the estimated amount necessary to terminate
the agreements.
NOTE L. OPERATING SEGMENTS
General - The Company has two reportable segments: (i) financing to licensed
professionals, and (ii) asset-based financing to commercial and industrial
companies. The Company's financing agreements with licensed professionals are
structured as non-cancelable, full-payout leases or notes receivable due in
installments. Asset-based financing includes revolving lines of credit to
commercial and industrial companies in the form of notes receivable
collateralized by accounts receivable, inventory and/or fixed assets. These two
segments employ separate sales forces and market their products to different
types of customers. The licensed professional financing segment derives its
revenues primarily from earnings generated by the fixed-rate leases and loan
contracts, whereas revenues from the commercial and industrial financing segment
are derived predominantly from the variable interest rates on the usage of the
lines of credit plus miscellaneous commitment and performance-based fees.
Financial Statement Information - In the monthly internal management reports,
the Company allocates resources and assesses performance of the operating
segments by monitoring the profit contribution of each segment before interest
expense, interest income on cash balances, and income tax provision. The Company
does not allocate corporate overhead to its asset-based financing segment since
the majority of all such overhead is related to the licensed professional
financing segment.
A summary of information about the Company's operations by segment for the years
ended December 31, 2000, 1999, and 1998 are as follows:
COMMERCIAL
LICENSED AND
(in thousands) PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL
------------ ---------- -----
2000
----
Earned income on leases and notes ............... $ 44,113 $ 5,349 $ 49,462
Gain on sales of leases and notes ............... 12,078 -- 12,078
Provision for losses ............................ (8,528) (690) (9,218)
Term securitization costs ....................... (7,106) -- (7,106)
Selling, general and administrative expenses..... (17,913) (1,868) (19,781)
--------- --------- ---------
Net profit contribution ......................... 22,644 2,791 25,435
Total assets .................................... 459,244 34,709 493,953
1999
----
Earned income on leases and notes ............... 35,799 4,752 40,551
Gain on sales of leases and notes ............... 4,916 -- 4,916
Provision for losses ............................ (4,376) (113) (4,489)
Selling, general and administrative expenses..... (16,050) (1,665) (17,715)
--------- --------- ---------
Net profit contribution ......................... 20,289 2,974 23,263
Total assets .................................... 351,170 34,577 385,747
1998
----
Earned income on leases and notes ............... 28,342 4,916 33,258
Gain on sales of leases and notes ............... 4,906 -- 4,906
Provision for losses ............................ (4,054) (147) (4,201)
Selling, general and administrative expenses..... (13,269) (1,628) (14,897)
--------- --------- ---------
Net profit contribution ......................... 15,925 3,141 19,066
Total assets .................................... 264,428 34,183 298,611
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The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
(in thousands) 2000 1999 1998
---- ---- ----
Net segment profit contribution............ $ 25,435 $ 23,263 $ 19,066
Interest expense .......................... (26,222) (18,903) (15,587)
Interest income ........................... 1,018 266 40
-------- -------- --------
Income before income taxes ................ $ 231 $ 4,626 $ 3,519
Other Segment Information - The Company derives substantially all of its
revenues from domestic customers. As of December 31, 2000, no single customer
within the licensed professional financing segment accounted for greater than 1%
of the total owned and serviced portfolio of financing contracts in that
segment. Within the commercial and industrial financing segment, no single
customer accounted for greater than 10% of the total portfolio in that segment.
The licensed professional financing segment does rely on certain vendors to
provide referrals to the Company, but for the year ended December 31, 2000, no
one vendor accounted for greater than 7% of the Company's lease and loan
originations.
NOTE M. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly consolidated financial data (unaudited) for the years ended
December 31, 2000 and 1999 are as follows:
(in thousands, except per share amounts) THREE MONTHS ENDED
YEAR 2000 March 31 June 30 September 30 December 31
- ---------
Revenues:
Earned income on leases and notes ...... $ 11,620 $ 12,356 $ 12,870 $ 12,616
Gain on sales of leases and notes ...... 1,154 2,467 2,149 6,308
Provision for losses ................... (1,357) (1,839) (2,202) (3,820)
-------- -------- -------- --------
Net Revenues ........................... 11,417 12,984 12,817 15,104
-------- -------- -------- --------
Operating and Other Expenses
Selling, general and administrative..... 4,770 5,323 4,774 4,914
Term securitization costs .............. -- -- -- 7,106
Interest expense (net) ................. 5,467 6,313 6,589 6,835
-------- -------- -------- --------
Income (Loss) before Income Taxes ......... 1,180 1,348 1,454 (3,751)
Provision for Income Taxes ................ 487 553 594 (1,490)
-------- -------- -------- --------
Net Income (Loss) ......................... $ 693 $ 795 $ 860 $ (2,261)
======== ======== ======== ========
Basic Net Income (Loss) per Share ......... $ 0.19 $ 0.20 $ 0.22 $ (0.57)
-------- -------- -------- --------
Diluted Net Income (Loss) per Share ....... $ 0.16 $ 0.18 $ 0.20 $ (0.57)
-------- -------- -------- --------
YEAR 1999
- ---------
Revenues:
Earned income on leases and notes ...... $ 9,343 $ 9,670 $ 10,304 $ 11,234
Gain on sales of leases and notes ...... 1,165 887 1,573 1,291
Provision for losses ................... (749) (1,034) (1,147) (1,559)
-------- -------- -------- --------
Net Revenues ........................... 9,759 9,523 10,730 10,966
-------- -------- -------- --------
Operating and Other Expenses
Selling, general and administrative..... 4,547 4,010 4,743 4,415
Interest expense (net) ................. 4,202 4,414 4,752 5,269
-------- -------- -------- --------
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Income before Income Taxes ...... 1,010 1,099 1,235 1,282
Provision for Income Taxes ...... 416 451 505 535
------ ------ ------ ------
Net Income ...................... $ 594 $ 648 $ 730 $ 747
====== ====== ====== ======
Basic Net Income per Share ...... $ 0.16 $ 0.17 $ 0.19 $ 0.20
------ ------ ------ ------
Diluted Net Income per Share..... $ 0.14 $ 0.15 $ 0.16 $ 0.17
------ ------ ------ ------
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of HPSC, Inc.:
We have audited the accompanying consolidated balance sheets of HPSC, Inc. and
subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of HPSC, Inc. and subsidiaries as of
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
- ------------------------------
Boston, Massachusetts
March 27, 2001
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