ITEM 1. BUSINESS
GENERAL
Seagate Technology, Inc. (herein "Seagate Technology", "Seagate" or the "Company") designs, manufactures and markets a broad line of rigid magnetic disc drives for use in computer systems ranging from notebook computers and desktop personal computers to workstations and supercomputers as well as in multimedia applications such as digital video and video-on-demand. The Company's products include approximately 100 rigid disc drive models with form factors from 2.5 to 5.25 inches and capacities from 170 megabytes to 9 gigabytes. The Company sells its products to original equipment manufacturers ("OEMs") for inclusion in their computer systems or subsystems, and to distributors, resellers and dealers. The Company has pursued a strategy of vertical integration and accordingly designs and manufactures rigid disc drive components including recording heads, discs, substrates, motors and custom integrated circuits. It also assembles certain of the key subassemblies for use in its products including printed circuit board and head stack assemblies. The Company's products are currently manufactured primarily in the Far East with limited production in the United States.
In addition to pursuing its core rigid disc drive business, the Company is broadening its business strategy as a data technology company to more fully address the markets for storage, retrieval and management of data. In this regard, the Company has implemented a strategy to establish itself as a leading supplier of selected magnetic recording components, including thin-film heads, to other manufacturers. In line with this strategy the Company, in December 1994, acquired Applied Magnetics Corporation's tape head subsidiary, a manufacturer of magnetic recording tape heads for digital data storage. The Company has also invested in, and continues to investigate opportunities to invest in software activities (see Software Expansion, below). Finally, the Company's broadened strategy may include expanding its traditional rigid disc drive business to include other forms of data storage and retrieval, such as flash memory, where the Company has made a significant investment in SunDisk Corporation ("SunDisk"), a flash memory company. The Company anticipates that this broadened strategy may include additional acquisitions of, investments in and strategic alliances regarding complementary businesses, products and technologies. Neither the components business, the software business nor the investment in SunDisk was material to the Company's results of operations for fiscal 1995.
SOFTWARE EXPANSION
The Company is seeking to leverage its name recognition, existing presence in international markets, distribution channels and OEM relationships by offering software products directed towards the client/server environment.
The Company anticipates that users of computer systems will increasingly rely upon client/server network computing environments and believes that as this reliance increases, users will demand software that more efficiently and securely manages and provides access to data across computer networked environments. As such, the Company is broadening its core competencies to include software products to meet these requirements.
In May 1994 Seagate acquired Crystal Computer Services, Inc., a Vancouver, Canada based developer and marketer of data access and reporting software for the Windows platform. These products are sold as Crystal Reports, Crystal Reports Pro and Crystal Reports Server.
In July 1994 the Company established an equity position in Dragon Systems, Inc., a Massachusetts based developer of advanced speech recognition technology and products for PC/workstation platforms. The Dragon family of products consists of dictation command and control programs, and developer's tools, including Dragon Dictate, Dragon Talk->To, and Dragon VoiceTools.
In August 1994 the Company acquired Palindrome Corporation, an Illinois based developer and marketer of storage management software for Novell NetWare based networks and enterprise LANs. Palindrome provides data protection and management software including disaster recovery planning, backup archiving, migration, hierarchical storage management (HSM), library and robotics control, and centralized management.
In February 1995 Seagate acquired Network Computing, Inc., a California based developer and marketer of solutions for proactively managing NetWare file servers, workstations and SNMP devices. Its LANAlert product provides for automated monitoring and alerting of file servers and workstations.
In March 1995 the Company acquired NetLabs Inc., a California based developer and marketer of network management software solutions for UNIX-based networks. NetLabs markets an integrated suite of application software products that enable users to automate and simplify the monitoring of network status and performance, detect problems, issue alerts and initiate corrective action, track inventory, and manage changes in network operation.
In May 1995 the Company acquired Frye Computer Systems Inc., a Massachusetts based developer and marketer of network management software solutions for PC LANs. Fryes line of products, THE FRYE UTILITIES FOR NETWORKS, includes an integrated set of product modules providing solutions for complicated network management problems.
In June 1995 the Company acquired Creative Interaction Technologies, Inc. (CIT), a North Carolina based network management software company. CIT makes AshWin, a batch scheduler for heterogeneous client/server computing.
Seagate intends to continue its expansion into software and other complementary businesses and is actively pursuing discussions with companies that fit with its strategy. Key to the Company's software expansion success is acquiring companies that possess technology, development personnel and management providing long-term growth potential. However, implementation of this broadened strategy entails risks of entering markets in which the Company may have limited or no experience. In addition, such broadened strategy could result in the diversion of management's attention from the core rigid disc drive business which could adversely impact the core business. The broadened strategy has entailed and may continue to entail acquisitions of, or investments in, businesses, products and technologies. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations and products of the acquired businesses and the potential loss of key employees or customers of the acquired businesses.
RIGID DISC DRIVE TECHNOLOGY
Magnetic disc drives are used in computer systems to record, store and retrieve digital information. Most computer applications require access to a greater volume of data than can economically be stored in the random access memory of the computer's central processing unit (commonly known as "semiconductor" memory). This information can be stored on a variety of storage devices, including rigid disc drives, flexible disc drives, magnetic tape drives, optical disc drives and semiconductor memory. Rigid disc drives provide access to large volumes of information faster than optical disc drives, flexible disc drives or magnetic tape drives and at substantially lower cost than high-speed semiconductor memory.
Although products vary, all rigid disc drives incorporate the same basic technology. Inside a sealed housing, one or more rigid discs are attached to a spindle assembly that rotates the discs at a high constant speed around a hub. The discs, or media, are the components on which data is stored and from which it is retrieved. Each disc typically consists of a substrate of finely machined aluminum or glass with a magnetic layer of a "thin-film" metallic material.
Read/write heads, mounted on an arm assembly similar in concept to that of a record player, fly extremely close to each disc surface, and record data on and retrieve it from concentric tracks in the magnetic layers of the rotating discs.
Areal density is a measure of storage capacity per square inch on the recording surface of a disc. It represents the number of bits of information on a linear inch of the recording track (called bits per inch or bpi) multiplied by the number of recording tracks on a radial inch of the disc. With the proliferation of multimedia applications, the demand for increased areal densities has and continues to increase at an accelerating rate since sound and moving pictures require many times the storage capacity of simple text. The Company is aggressively pursuing a range of technologies to increase areal densities across the entire range of its products including the use of advanced signal processing techniques such as PRML (Partial Response Maximum Likelihood) read/write channels, advanced servo systems, higher precision mechanics and a more advanced head technology. Today, all Seagate drives use inductive thin-film heads, which are based on semiconductor processing technology. However, to attain greater areal densities, the Company currently has under development magneto-resistive ("MR") thin-film heads to be incorporated into its recently announced 8 GB Barracuda drive, the ST18771, as well as into future products. MR heads have discrete read and write structures which take advantage of special magnetic properties in certain metals to achieve significantly higher storage capacities. There can be no assurance that the Company's development efforts will be successful. See "Product Development."
Upon instructions from the drive's electronic circuitry, a head positioning mechanism (an "actuator") guides the heads to the selected track of a disc where the data will be recorded or retrieved. The disc drive communicates with the host computer through an internal controller. Disc drive manufacturers may use one or more of several industry standard interfaces, such as IPI (Intelligent Peripheral Interface), SCSI (Small Computer System Interface), ATA (AT Attachment), PCMCIA (Personal Computer Memory Card International Association) or proprietary interfaces, such as EISA (Extended Industry Standard Architecture).
Rigid disc drive performance is commonly measured by four key characteristics: average seek time (commonly expressed in milliseconds), which is the time needed to position the heads over a selected track on the disc surface; internal data transfer rate (commonly expressed in Megabits per second), which is the rate at which data is transferred to and from the disc; storage capacity (commonly expressed in Megabytes), which is the amount of data that can be stored on the disc; and spindle rotational speed (commonly expressed in revolutions per minute), which has an effect on average latency or access to data.
MARKET OVERVIEW
Rigid disc drives are used in a broad range of computer systems as well as multimedia applications such as digital video and video-on-demand. The Company defines the major computer system markets to include mobile computers, personal computers, mid-range systems and high-end applications. Users of computer systems are increasingly demanding additional data storage capacity with higher performance in order to (i) use more sophisticated applications software, including database management, CAD/CAM/CAE, desktop publishing and enhanced graphics applications, and (ii) operate in multi-user, multitasking and multimedia environments.
PERSONAL AND MOBILE COMPUTERS
Desktop and portable personal computers are used in a number of environments, ranging from homes to businesses and multi-user networks. Software applications are primarily word processing, spreadsheet, desktop publishing, database management, multimedia and other related applications. The Company believes the minimum storage requirements in the past year for entry-level personal computers were generally 270 megabytes ("MB") to 540 MB of formatted capacity with average seek times of 15 milliseconds ("msec") or less. As the personal computer market has matured, users of
personal computers have become increasingly price sensitive. The Company's objective for the desktop and portable personal computer market is to design drives for high-volume, low-cost manufacture.
Smaller footprint microcomputers, such as portable, laptop, notebook and sub-notebook computers require rigid disc drives in form factors of 2.5 inches or less that emphasize durability and low power consumption in addition to capacity and other performance characteristics found in their desktop functional equivalents. Personal digital assistants, hand-held and pen-based computers may use 1.8 or 2.5 inch hard disc drives or flash memory in the form of a PCMCIA card for additional memory. These applications also emphasize low power consumption as well as very high degrees of durability.
MID-RANGE SYSTEMS
Mid-range systems include high performance microcomputers, technical workstations, servers and departmental minicomputers. Applications are characterized by compute- and data-intensive solutions, such as CAD/CAM/CAE, network management, larger database management systems, scientific applications and small to medium-sized business applications such as materials requirement planning, payroll, general ledger systems and related management reports. Mid-range systems typically require rigid disc drive storage capacities from 1 gigabyte ("GB") to 4 GB per drive and average seek times of less than 12 msec. Mid-range systems typically use 3.5 and 5.25 inch disc drives. Due to the leading edge characteristics required by end-users of mid-range systems, manufacturers of such systems emphasize performance as well as price as the key selling points.
HIGH-END APPLICATIONS
Large systems include mainframes and supercomputers. Typical applications are medium and large business management systems, transaction processing, parallel processing applications and other applications requiring intensive data manipulation. Also inclusive in high-end applications are systems designed for video-on-demand and near-line storage.
Users of these systems generally require capacities of 1 GB to 9 GB per drive with average seek times of less than 12 msec. End-users of large systems are less concerned than users of smaller systems with the size, weight, power consumption and absolute cost of the drive. As with mid-range systems, disc drive products are typically designed into these systems by the OEM with emphasis on performance, reliability and capacity. In this arena, data storage subsystems are used containing large numbers of spindles. Data integrity is paramount, so high device reliability and maintainability are key features. Mainframe, supercomputer and digital video systems also benefit from very high device data rates (up to ten times that in small computer systems).
PRODUCTS
The Company's products include approximately 100 rigid disc drive models with form factors from 2.5 to 5.25 inches and capacities from 170 megabytes to 9 gigabytes. The Company provides more than one product at some capacity points and differentiates products on a price/performance and form factor basis. The Company believes that its broad range of rigid disc drives is particularly appealing to customers, such as large OEMs, which require a wide variety of drive capacities, performance levels and interfaces. Producing for several market segments also broadens the Company's customer base and reduces the Company's reliance on any one segment of the computer market. The Company continues to devote its resources to developing products with industry leading performance characteristics and to being among the first to introduce such products to market. The Company continuously seeks to enhance its market presence in emerging segments of the rigid disc drive market by drawing on its established capabilities in high-volume, low-cost production. The Company believes it offers the broadest range of disc storage products available.
MOBILE COMPUTING
Announcement of the Company's first 2.5 inch family of drives was made in November 1990 with the ST9096 family. The Company has continued to expand its 2.5 inch family with two different form
factors, the 19mm high form factor which is designed to address the highest capacity segment of the mobile computing market, and the 12.5mm high form factor which is designed to address the sub-notebook market. In November 1992 the Company introduced a patented shock sensing technology called SafeRite-TM-. SafeRite technology allows for a much higher specification of operating shock and helps to prevent the drive from writing data "off track". This technology is available in all of the Company's 2.5 inch drives.
In October 1993 the Company announced its ST9550 family, later renaming it the "Marathon" family. This 19mm height family was introduced in 455 MB and 341 MB versions. Recent additions to this family include the ST9655, the ST9420, and the ST9816, with formatted capacities of 520 MB, 420 MB and 816 MB respectively. The ST9655 and the ST9420 went into volume production during the first and fourth quarters of fiscal 1995, respectively. The ST9816 is expected to begin volume production in the first quarter of fiscal 1996. In January 1994 the 12.5mm high ST9300 family (Marathon "SL") was announced with 262, 210 and 131 MB versions. Volume production of the Marathon SL products began in the fourth quarter of fiscal 1994. Future plans for the 2.5 inch family of drives include continued higher capacities and lower cost designs.
DESKTOP COMPUTING
In January 1995 the Company began volume shipments of the newest Medalist xe product, the Medalist 545xe (ST3660). This 545 MB drive ended the fiscal year as one of the Company's highest unit volume products. The Medalist xe family of 3.5 inch low-profile cost-effective disc drives features capacity points ranging from 214 MB to 545 MB of formatted capacity. The design was leveraged from the earlier ST3290 and ST3144 products that had been shipping in volume in 1993. The Medalist xe family, formerly the ST3491 family, began volume shipments in the third quarter of fiscal 1994.
Also in January 1995 the Company announced two new additions to the Decathlon family: the ST5850 and the ST51080. These drives have 850 MB and 1.08 GB of formatted capacity, respectively. Volume production of the ST5850 began in the third quarter of fiscal 1995. The ST51080 is expected to begin volume production in the first quarter of fiscal 1996. The Decathlon family of disc drives was first introduced in October 1993. The Decathlon family features a 3.5 inch, 19mm high profile which targets the emerging ultra-low profile PCs. This family also enables a mini-array package whereby up to six drives can be mounted in the space of one 5.25 inch full height drive. In addition to its unique form factor, the Company believes the Decathlon family offers the most energy efficient design in its class, providing advanced power savings for "Green PCs" and Energy Star systems. Volume production of the first product in this family, the ST5660 with 545 MB of formatted capacity, commenced in the first quarter of fiscal 1995.
In May 1995 the Company announced another expansion of the Medalist family to include a higher performance series of products with 1.6 GB and 2 GB formatted capacities. As of June 1995, the Medalist 2140 (2 GB) is the highest capacity ATA disc drive announced in the industry. These new products are directed to the growing capacity and cost-effective requirements of the PC market. They are scheduled for volume production in the second quarter of fiscal 1996. The Medalist family now features drives with capacity points ranging from 700 MB to 2 GB.
MID-RANGE SYSTEMS
In October 1992 the Company expanded its low-profile 3.5 inch mid-range product line with the ST31200, a high performance drive with 1 GB of formatted capacity that began production during the first quarter of fiscal 1994. In October 1993 the Company expanded that product family to a 2 GB formatted capacity platform with the family name of Hawk. The Hawk 2 went into production the fourth quarter of fiscal 1994. In January 1994 the Hawk 4, 3.5 inch half-height 4 GB formatted capacity drive, was announced. Volume production began in the first quarter of fiscal 1995. In February 1995 the Company announced the Hawk 2XL in 1 GB and 2 GB versions. The Hawk 2XL features PRML read channels and embedded servos and is designed to provide a balance of price and
performance. Volume production of the Hawk 2XL is scheduled to begin in the first quarter of fiscal 1996. The Company plans to continue designing and manufacturing for the higher capacity, high performance and cost sensitive requirements of this market.
HIGH-END COMPUTING
High-end applications range from digital video, video-on-demand, high-end file servers, mainframes and minicomputers to supercomputers. Two new product families have been introduced by the Company to address this wide range of applications. The Barracuda family of 3.5 inch drives, first introduced in October 1992, had the highest rotational speed of any drives produced at that time. Since then three additional products have been added to the family. The Barracuda 4 and Barracuda 2-2HP were introduced in October 1993. The Barracuda 4 is a 4 GB formatted capacity, 7200 RPM drive in the half-height form factor. Volume production commenced in the first quarter of fiscal 1995. The Barracuda 2-2HP is a 2 GB formatted capacity high-performance drive in the half-height form factor featuring the 2 head parallel design which doubles the data transfer rate. Volume production of this product began in the first quarter of fiscal 1995. In January 1994 the Company announced the Barracuda 2, a 3.5 inch low-profile, one-inch high, 2 GB formatted capacity disc drive. Volume production of this product also began in the fourth quarter of fiscal 1994.
In May 1995 the Company announced the Barracuda 4 LP, a 4 GB formatted capacity, high-performance drive in the low-profile form factor. The Barracuda 4 LP is scheduled for volume production in the second quarter of fiscal 1996. Also announced in May 1995 was the Barracuda 8. This 8.7 GB drive is the third generation of ultrahigh performance disc drives in the 7200 RPM, 3.5 inch Barracuda family. The Barracuda 4 LP and the Barracuda 8 incorporate three new technologies into the Barracuda family. The new technologies are MR heads, a PRML data channel and a high-performance embedded servo. These technologies allow for greater areal densities and result in increased capacity per disc. The Barracuda 8 is scheduled for volume production in the second quarter of fiscal 1996.
Addressing the high-end 5.25 inch market the Company has continued to leverage its Elite product line. The Elite 3, with 2.9 GB of formatted capacity began volume shipments in August 1992. To address the emerging digital video and near-line storage applications the Company introduced the Elite 9 in October 1993. The Elite 9 leverages the established design of the Elite family to an expanded 9 GB of formatted capacity. Volume production began in the fourth quarter of fiscal 1994.
OTHER PRODUCTS
In January 1993 the Company established an equity position in SunDisk, a California-based designer, marketer and manufacturer of solid-state flash memory devices. These devices are designed for both integrated (embedded) applications and removable applications. The flash devices range from 1.8 MB to 175 MB and are best suited for highly rugged, power-sensitive environments.
The Company offers warranty and out-of-warranty repair service to users of its disc drives. The Company also designs and manufactures disc drive components, primarily thin-film heads, principally for use in its own products but also for sale to other disc drive manufacturers.
MARKETING AND CUSTOMERS
The Company sells its products to OEMs and distributors. OEM customers incorporate Seagate disc drives into computer systems for resale. OEMs either manufacture and assemble computer system components into computer systems; purchase components to build their systems; or purchase complete computer systems and integrate the hard disc drives and other hardware and software. Distributors typically resell Seagate disc drives to small OEMs, dealers and other resellers. Certain resellers to which the Company directly sells its products also resell Seagate drives as part of enhanced packages (e.g., an add-on kit for a computer or as part of their own computers). Shipments to OEMs were 72%, 68% and 70% of net sales in fiscal 1995, 1994 and 1993, respectively. No customer accounted
for 10% or more of consolidated net sales in 1995 and 1994. During fiscal 1993 sales to Sun Microsystems, Inc. accounted for approximately 11% of the Company's consolidated net sales. No other customer accounted for 10% or more of consolidated net sales in 1993.
OEMS -- OEM customers typically enter into purchase agreements with the Company. These agreements provide for pricing, volume discounts, order lead times, product support obligations and other terms and conditions, usually for periods of 12 to 24 months, although product support obligations generally extend substantially beyond this period. These master agreements typically do not commit the customer to buy any minimum quantity of products. Deliveries are scheduled only after receipt of purchase orders. In addition, with limited lead time, customers may cancel or defer most purchase orders without significant penalty. Anticipated orders from many of Seagate's customers have in the past failed to materialize or OEM delivery schedules have been deferred as a result of changes in their business needs. Such order fluctuations and deferrals have had a material adverse effect on the Company's operations in the past, and there can be no assurance that the Company will not experience such effects in the future.
DISTRIBUTORS -- The Company's distributors, located throughout the world, generally enter into non-exclusive agreements for the redistribution of the Company's products. Distributors typically furnish the Company with a non-binding indication of their near-term requirements. Product deliveries are generally scheduled based on a weekly confirmation by the distributor of its requirements for that week. The agreements typically provide the distributors with price protection with respect to their inventory of Seagate drives at the time of a reduction by Seagate in its selling price for the drives, and also provide limited rights to return the product.
SERVICE AND WARRANTY -- Seagate warrants its products against defects in design, materials and workmanship by the Company generally for three to five years depending upon the capacity category of the disc drive, with the higher capacity products being warranted for the longer periods. Warranty periods for disc drives have been increasing and may continue to increase. The Company's products are refurbished or repaired at facilities located in the United States, Singapore and Thailand.
SALES OFFICES -- The Company maintains sales offices throughout the United States and in Australia, England, France, Hong Kong, Ireland, Italy, Japan, Singapore, South Korea, Taiwan, Thailand, Germany and Sweden. Foreign sales are subject to certain controls and restrictions, including, in the case of certain countries, approval by the office of Export Administration of the United States Department of Commerce.
BACKLOG
In view of customers' rights to cancel or defer orders with little or no penalty, the Company believes backlog in the disc drive industry can be misleading.
The Company's backlog includes only those orders for which a delivery schedule has been specified by the customer. Substantially all orders shown as backlog at June 30, 1995 were scheduled for delivery within six months. Because many customers place large orders for delivery throughout the year, and because of the possibility of customer cancellation of orders or changes in delivery schedules, the Company's backlog as of any particular date is not indicative of the Company's potential sales for any succeeding fiscal period. The Company's order backlog at June 30, 1995 was approximately $1,103,000,000 compared with approximately $739,000,000 at July 1, 1994.
MANUFACTURING
The Company's business objectives require it to establish manufacturing capacity in anticipation of market demand. The key elements of the Company's manufacturing strategy are: high-volume, low-cost assembly and test; vertical integration of selected components; and key vendor relationships. The highly competitive disc drive industry requires that the Company manufacture significant volumes of high-quality drives at low unit cost. To do this, the Company must achieve high manufacturing yields and obtain uninterrupted access to high-quality components in required volumes at competitive prices.
The Company is currently in the early stages of automating certain of its manufacturing processes. In the coming year it expects several such processes to become substantially automated. The Company believes its competitors' level of automation is significantly greater than its own.
Manufacturing of the Company's rigid disc drives is a complex process, requiring a "clean room" environment, the assembly of precision components within narrow tolerances and extensive testing to ensure reliability. The first step in the manufacturing of a rigid disc drive is the assembly of the actuator mechanism, heads, discs, and spindle motor in a housing to form the head-disc assembly (the "HDA"). The assembly of the HDA involves a combination of manual and semiautomated processes. After the HDA is assembled and servo writing has been completed, automated testing equipment subjects the HDA to several tests aimed at ensuring that it meets all of the Company's specifications for quality and performance. Upon completion of assembly and testing, circuit boards are added to the HDA and the completed unit is again tested prior to packaging and shipment. The Company uses statistical process control in an effort to continually improve its manufacturing processes. Final assembly and test operations of the Company's disc drives take place primarily at facilities located in Singapore, Thailand, Minnesota and Oklahoma. The Company has also announced plans to establish a disc drive manufacturing operation in the Republic of Ireland that will begin production in mid-October, 1995. Subassembly and component operations are performed at the Company's facilities in Singapore, Thailand, Minnesota, California, Malaysia, Scotland, Northern Ireland and Indonesia. In addition, independent entities manufacture or assemble components for the Company in the United States, Europe and various Far East countries including Hong Kong, Japan, Korea, China, the Philippines, Singapore, Taiwan and Thailand.
The cost, quality and availability of certain components including head, media, spindle motors, actuator motors, printed circuit boards and custom semiconductors are critical to the successful production of disc drives. The Company's design and vertical integration have allowed it to internally manufacture substantial percentages of its critical components. The Company's objectives of vertical integration are to maintain control over component technology, quality and availability, and to reduce costs. The Company believes that its strategy of vertical integration gives it an advantage over other disc drive manufacturers. However, this strategy entails a high level of fixed costs and requires a high volume of production to be successful. During periods of decreased production, these high fixed costs in the past have had and in the future could have a material adverse effect on the Company's results of operations.
Thin-film sliders are fabricated and assembled into head gimbal assemblies at the Company's facilities. Spindle motors are sourced principally from outside vendors in the Far East, although the Company is increasing its internal motor manufacturing capabilities. Actuator motors are sourced both from outside vendors and internally. The vast majority of the high-volume surface-mount printed circuit assemblies are assembled internally. The Company evaluates the need for second sources on a case-by-case basis and, where it is deemed desirable and feasible to do so, secures multiple sources for components. The Company has experienced production delays when unable to obtain sufficient quantities of certain components or assembly capacity. The Company maintains component inventory levels adequate for its short-term needs. However, an inability to obtain essential components, if prolonged, would adversely affect the Company's business.
Because of the significant fixed costs associated with the production of its products and components and the industry's history of declining prices, the Company must continue to produce and sell its disc drives in significant volume, continue to lower manufacturing costs and carefully monitor inventory levels. Toward these ends, the Company continually evaluates its components and manufacturing processes as well as the desirability of transferring volume production of disc drives and related components between facilities, including transfer overseas to countries where labor costs and other manufacturing costs are significantly lower than in the U.S., principally Singapore, Thailand, Malaysia and China. In addition, the Company is considering expanding its manufacturing operations into other third world countries. Frequently, transfer of production of a product to a different facility requires qualification of such new facility by certain of the Company's OEM customers. There can be
no certainty that such changes and transfers will be implemented on a cost-effective basis without delays or disruption in the Company's production and without adversely affecting the Company's results of operations.
Although offshore operations are subject to certain inherent risks, including delays in transportation, changes in governmental policies, tariffs, import/export regulations, and fluctuations in currency exchange rates in addition to geographic limitations on management controls and reporting, the Company has not had any significant adverse experience in this regard and has significant experience in the offshore production of its products. Certain of the Far East countries in which the Company operates have experienced political unrest and the Company's operations have been adversely affected for short periods of time.
PRODUCT DEVELOPMENT
The Company's strategy for new products emphasizes developing and introducing on a timely basis products that offer functionality and performance equal to or better than competitive product offerings. The rigid disc drive industry is characterized by ongoing, rapid technological change, relatively short product life cycles and rapidly changing user needs. The Company believes that its future success will depend upon its ability to develop, manufacture and market products which meet changing user needs, and which successfully anticipate or respond to changes in technology and standards on a cost-effective and timely basis. Accordingly, the Company is committed to the development of new component technologies, new products, and the continuing evaluation of alternative technologies. The Company is presently concentrating its product development efforts on new disc drives and improved disc drive components as described below.
The Company develops new disc drive products and the processes to produce them at four locations: Scotts Valley and Simi Valley, California; Oklahoma City, Oklahoma; and Bloomington, Minnesota. Generally speaking, Scotts Valley and Simi Valley are responsible for development of 3.5 inch, 2.5 inch and smaller form factor drives intended for desktop, laptop, notebook and sub-notebook personal computer systems; Oklahoma City is responsible for development of 3.5 inch disc drives with capacities and interfaces intended for use in minicomputers, supermicrocomputers, workstations and file servers; and Bloomington is responsible for 3.5 inch and 5.25 inch products principally intended for use in systems ranging from workstations and superminicomputers to mainframe and supercomputers as well as new markets such as digital video and video-on-demand.
The Company has focused its components research and development efforts in four main areas: motors, heads, media and ASICs (application specific integrated circuits). The major emphasis of this R&D is reduced size and power consumption, improved performance and reliability, and reduced cost. Disc drive customers require new products to have greater reliability with ever decreasing defective parts per million ("DPPMs") and ever increasing mean time between failures ("MTBFs").
The principal areas of research and development relating to motors are improved bearings, smaller form factors, lower power requirements, quieter operation, higher reliability, improved magnets and lower cost.
The Company's head research and development efforts are focused on increasing recording densities, reducing the size and mass of the slider, developing suspensions and assembly technology for reduced head size, reducing the cost and increasing the reliability. This research and development includes substantial effort to develop and manufacture magneto-resistive ("MR") heads and advanced air bearing sliders for high areal density and small form factor products. There can be no assurance that the Company's MR head development effort will be successful and a failure of the Company to successfully manufacture and market products incorporating MR head technology in a timely manner could have a material adverse effect on the Company's business and results of operations.
Media research and development efforts are focused on higher performance materials for increased areal density and better substrate and surface topographies for lower flying height applications, improved head/disc separation margin and increased reliability.
ASIC development has been and will continue to be focused on optimizing the architecture for system performance, cost and reliability. In addition, the focus has been and will continue to be on reducing the number of parts, the amount of power consumption, and the size, and increasing areal densities by use of advanced signal processing techniques such as PRML (Partial Response Maximum Likelihood) read/write channels. The Company designs nearly all of its ASICs for motor and actuator control and manufactures some of these circuits. It designs many of the other ASICs in the drive such as interface and read/write, and procures these from third parties.
In addition to developing new products and components, the Company devotes significant resources to product engineering aimed at improving manufacturing processes, lowering manufacturing costs and increasing volume production of new and existing products. Process engineering groups are located with the disc drive development groups and the reliability engineering groups in locations listed above; however, most of the Company's volume production is done in locations remote from these groups and the development of the volume processes are completed at the volume manufacturing sites.
No assurance can be given that the Company will be able to successfully complete the design or introduction of new products in a timely manner, that the Company will be able to manufacture new products in volume with acceptable manufacturing yields, or successfully market these products, or that these products will perform to specifications on a long-term basis.
During the fiscal years ended June 30, 1995, July 1, 1994 and July 2, 1993 the Company's product development expenses were $220,024,000, $171,907,000 and $154,005,000 respectively.
PATENTS AND LICENSES
The Company has been issued over 460 U.S. patents and approximately 370 foreign patents relating to certain of its disc drive components and manufacturing processes. The Company also has approximately 254 U.S. and 250 foreign patent applications pending. Due to the rapid technological change that characterizes the rigid disc drive industry, the Company believes that the improvement of existing products, reliance upon trade secrets and unpatented proprietary know-how and development of new products are generally more important than patent protection in establishing and maintaining a competitive advantage. Nevertheless, the Company believes that patents are of value to its business and intends to continue its efforts to obtain patents, when available, in connection with its research and development program. There can be no assurance that any patents obtained will provide substantial protection or be of commercial benefit to the Company, or that their validity will not be challenged.
Because of rapid technological development in the disc drive industry, it is possible that certain of the Company's products could involve infringement of existing patents. The rigid disc drive industry has been characterized by significant litigation relating to patent and other intellectual property rights. From time to time, the Company receives claims that certain of its products infringe patents of third parties. Although the Company has been able to resolve some such claims or potential claims by obtaining licenses or rights under the patents in question without a material adverse affect on the Company, other such claims are pending which if resolved unfavorably to the Company could have a material adverse effect on the Company's business. For a description of current disputes see the "Litigation" note to the Company's consolidated financial statements. In addition, the costs of engaging in intellectual property litigation may be substantial regardless of outcome. The Company has patent cross licenses with Areal Technology, Hewlett-Packard Company, NEC Corporation, Toshiba Corporation, Hitachi, Ltd., Quantum Corporation, Western Digital Corporation, Ceridian Corporation (formerly Control Data Corporation), IBM, Maxtor Corporation, Read-Rite Corporation, Applied Magnetics Corporation and Headway Technologies, Inc., and is licensed under certain Unysis, Bull and Bull SA disc drive and controller patents by virtue of such companies' former ownership of Magnetic Peripherals Inc., now merged into the Company. Additionally, the Company has agreements in principle with other major disc drive companies.
COMPETITION
The rigid disc drive industry is intensely competitive, with manufacturers competing for a limited number of major customers. The principal competitive factors in the rigid disc drive market include product quality and reliability, form factor, storage capacity, price per unit, price per megabyte, product performance, production volume capability and responsiveness to customers. The relative importance of these factors varies with different customers and for different products. The Company believes that it is generally competitive as to these factors.
The Company has experienced and expects to continue to experience intense competition from a number of domestic and foreign companies, some of which have far greater resources than the Company. In addition to independent rigid disc drive manufacturers, the Company also faces competition from present and potential customers, including IBM, Hewlett-Packard, Toshiba, NEC and Fujitsu Limited who continually evaluate whether to manufacture their own drives or purchase them from outside sources. These manufacturers also sell drives to third parties which results in direct competition with the Company.
Product life cycles are relatively short in the disc drive industry. The Company expects its competitors to offer new and existing products at prices necessary to gain or retain market share and customers. To remain competitive, the Company believes it will be necessary to continue to reduce its prices and aggressively enhance its product offerings. In addition to the foregoing, the ability of the Company to compete successfully will also depend on its ability to provide timely product introductions and to continue to reduce production costs. The Company's establishment and ongoing expansion of production facilities in Singapore, Thailand, Malaysia and China are directed toward such cost reductions. The Company's four development centers and market-focused design strategies are structured for time-to-market product introductions.
The introduction of products using alternative technologies could be a significant source of competition. For example, optical recording and high-speed semiconductor memory could compete with the Company's products in the future. Although optical disc technologies are attractive for certain archival and imaging applications, they have lower performance and are more costly than magnetic disc drives and the Company does not believe that they will be competitive with magnetic disc drives in the near future in markets requiring on-line, random access, non-volatile mass storage. Semiconductor memory (SRAM and DRAM) is much faster than magnetic disc drives, but currently is volatile (i.e., subject to loss of data in the event of power failure) and much more costly. Flash EE prom, a nonvolatile semiconductor memory, is currently much more costly and, while it has higher read performance than disc drives, it has lower write performance. Flash EE prom could become competitive in the near future for applications requiring less storage capacity (i.e., less than 40 MB) than is required in the Company's more traditional computer related market place.
ENVIRONMENTAL MATTERS
The United States Environmental Protection Agency (EPA) and/or similar state agencies have identified the Company as a potentially responsible party with respect to environmental conditions at several different sites to which hazardous wastes had been shipped or from which they were released. These sites were acquired by the Company from Ceridian Corporation ("Ceridian") (formerly Control Data Corporation) in fiscal 1990. Other parties have also been identified at certain of these sites as potentially responsible parties. Many of these parties either have shared or likely will share in the costs associated with the sites. Investigative and/or remedial activities are ongoing at such sites.
The Company's portion of the estimated cost of investigation and remediation of known contamination at the sites to be incurred after June 30, 1995 was approximately $14,900,000. Through June 30, 1995 the Company had recovered approximately $2,500,000 from Ceridian through its indemnification and cost sharing agreements with Ceridian and, in addition, expects to recover approximately $9,800,000 from Ceridian over the next 30 years. After deducting the expected recoveries from Ceridian, the expected aggregate undiscounted liability was approximately $5,100,000 at
June 30, 1995 with payments expected to begin in 1999. The total liability for all sites recorded by the Company after considering the estimated effects of inflation, reimbursements by Ceridian and discounting was approximately $3,000,000 at June 30, 1995.
The Company believes that the indemnification and cost-sharing agreements entered into with Ceridian and the reserves that the Company has established with respect to its future environmental costs are such that, based on present information available to it, future environmental costs related to currently known contamination will not have a material adverse effect on its financial condition or results of operations.
EMPLOYEES
From July 1, 1994 to June 30, 1995, the number of persons employed worldwide by the Company increased from approximately 53,000 to approximately 65,000. Approximately 55,000 of the Company's employees were located in the Company's Far East operations as of June 30, 1995. In addition, the Company makes use of supplemental employees, principally in manufacturing, who are hired on an as-needed basis. Management believes that the future success of the Company will depend in part on its ability to attract and retain qualified employees at all levels, of which there can be no assurance. The Company believes that its employee relations are good.
ITEM 2.

ITEM 2. PROPERTIES
Seagate's executive offices are located in Scotts Valley, California. Principal manufacturing facilities are located in Singapore, Thailand, Minnesota, Oklahoma, California, Malaysia, Scotland and Northern Ireland. A major portion of the Company's facilities are occupied under leases which expire at various times through 2005. The following is a summary of square footage owned or leased by the Company:
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The information required by this item is incorporated by reference to pages 30-31 and 33-36 of the Annual Report to Shareholders, filed as Exhibit 13.1 hereto.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The information required by this Item is incorporated by reference to pages 1-2 of the Annual Report to Shareholders, filed as Exhibit 13.1 hereto.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to pages 1-2 of the Annual Report to Shareholders, filed as Exhibit 13.1 hereto.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to pages 3-11 of the Annual Report to Shareholders, filed as Exhibit 13.1 hereto.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to pages 1-2 and 12-39 of the Annual Report to Shareholders, filed as Exhibit 13.1 hereto.
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The present directors and executive officers of the Company are as follows:
All directors hold office until the annual meeting of shareholders of the Company following their election, or until their successors are duly elected and qualified. Officers are elected annually by the Board of Directors and serve at the discretion of the Board.
Mr. Shugart was Chairman of the Board and Chief Executive Officer of the Company from its inception in 1979 until 1991. From 1979 until 1983 he also served as the Company's President. He now serves as Chairman of the Board, President and Chief Executive Officer. He was re-appointed Chairman of the Board in October 1992. Mr. Shugart is also currently a Director of Valence Technology, Inc.
Mr. Carballo was General Manager, Product Line Management for the Company's Oklahoma City operations at the time of the Company's acquisition of Imprimis in 1989. In 1990 he was promoted to Vice President, Product Line Management, Oklahoma City operations, in September 1991 he was promoted to Senior Vice President, Sales, Marketing and Product Line Management and in March 1995 he was promoted to Executive Vice President Worldwide Sales, Marketing, Product Line Management and Customer Service. Prior to joining the Company, Mr. Carballo had seventeen years with Control Data/Imprimis.
Dr. Hegarty joined Control Data/Imprimis in 1988 as Vice President, Thin-Film Heads. In October 1989 he was named Seagate's Vice President of Component Operations in Bloomington, Minnesota, and in August 1990 was promoted to Senior Vice President and Chief Technical Officer. In March 1995 he was promoted to Executive Vice President, Chief Operating Officer, Components Group. From October 1990 to October 1993 Dr. Hegarty was also a Director of the Company. Prior to joining Control Data/Imprimis, Dr. Hegarty had twenty-one years with IBM in the U.K., Netherlands and the U.S.
Mr. Luczo joined the Company in October 1993 as Senior Vice President, Corporate Development. In March 1995 he was promoted to Executive Vice President, Corporate Development and Chief Operating Officer of the Software Group. Prior to joining the Company he was Senior Managing Director of the Global Technology Group of Bear, Stearns & Co. Inc., an investment banking firm, from September 1993 to October 1993. He served as Co-Head of the Global Technology Group of Bear, Stearns & Co. Inc. from February 1992 to October 1993. Prior to joining Bear, Stearns & Co. Inc., Mr. Luczo was with Salomon Brothers Inc., an investment banking firm, from 1984 to February 1992, most recently as Vice President and Head of West Coast Technology.
Mr. Verdoorn joined the Company in 1983. From 1987 to 1991 he was Vice President, Far East Manufacturing and in November 1991 he was promoted to Senior Vice President, Manufacturing Operations. In March 1995 he was promoted to Executive Vice President, Chief Operating Officer of the Storage Products Group.
Mr. Waite joined the Company in 1983 as Vice President of Finance and Chief Financial Officer, and was promoted to Senior Vice President, Finance in 1984. In March 1995 he was promoted to Executive Vice President, Chief Administrative Officer and Chief Financial Officer.
Mr. Greenspan joined the Company in September 1987 as Vice President, Process Development. In 1991 he was made Vice President, Manufacturing Operations for Singapore and California operations. He was promoted to Senior Vice President, Quality and Customer Service in November 1991. Prior to joining the Company, Mr. Greenspan had over twenty years experience in computer-related industries, including nineteen years with IBM.
Dr. Moghadam was Vice President, Engineering of Control Data/Imprimis from December 1986 until October 1989 when he became Vice President, Engineering at Seagate concurrent with the Company's acquisition of Imprimis Technology. Dr. Moghadam was promoted to Senior Vice President and Chief Technical Officer, Data Storage Products in August 1993.
Mr. Sandie joined the Company in 1983 as Vice President, Materials. He was promoted to Senior Vice President, Corporate Materials in November 1991.
Mr. Filler was appointed Senior Vice President and Chief Financial Officer of Diamond Multimedia Systems, Inc. in January 1995. Diamond Multimedia Systems, Inc. designs, manufacturers and markets high-performance multimedia solutions. From February 1994 until June 1994 he served as Executive Vice President and Chief Financial Officer at ASK Group, Inc. From December 1989 to May 1993 he served as Chairman of the Board of Directors and Chief Executive Officer of Burke Industries, a manufacturer of rubber products for military and industrial usage. Mr. Filler was Chairman of the Board of Seagate from September 1991 until October 1992. From October 1990 until September 1991 Mr. Filler served as Vice Chairman of the Board of Directors of the Company.
Dr. Haughton is an engineering consultant. He was a Vice President of Engineering at DaVinci Graphics, a plotter manufacturer, from May 1990 until August 1991. Prior to that he was a consultant from May 1989 to May 1990. From August 1988 to May 1989 Dr. Haughton was Professor of Mechanical Engineering at Santa Clara University. Dr. Haughton is also a Director of Solectron Corporation.
Mr. Kleist has been President, Chief Executive Officer and a Director of Printronix, Inc., a manufacturer of computer printers, since 1974.
Mr. Perlman presently holds the position of Chairman of the Board of Directors and Chief Executive Officer of Ceridian Corporation (formerly Control Data Corporation), an information services and defense electronics company. He previously held several executive positions at Control Data Corporation including President and CEO of Imprimis. Prior to Control Data Corporation, he was in the private practice of law and at Medtronic, where he served as Executive Vice President for U.S. Pacemaker Operations. He also serves on a number of other corporate boards including Inter-Regional Financial Group, Inc., Computer Network Technology Corporation , Valspar Corporation, Bio-Vascular, Inc. and Kmart Corporation.
General Stafford, a former astronaut, has been Vice Chairman of Stafford, Burke and Hecker, Inc., a consulting firm based in Alexandria, Virginia since 1982. He also serves as a Director for the following companies: Allied-Signal Corporation, Pacific Scientific, Inc., Tremont, Inc., CMI, Inc., Fisher Scientific International, Inc., Wackenhut, Inc. and Wheelabrator Technologies, Inc.
Dr. Wilkening has served as Chancellor of the University of California, Irvine since July 1, 1993. From September 1988 to June 30, 1993 she was Provost and Vice President of Academic Affairs at the University of Washington. From 1991 to 1993 Dr. Wilkening also served as Chairwoman of the Space Policy Advisory Board of the National Space Council.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission within 120 days of the end of the Registrant's fiscal year pursuant to General Instruction G(3) to Form 10-K.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission within 120 days of the end of the Registrant's fiscal year pursuant to General Instruction G(3) to Form 10-K.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the Company's Proxy Statement to be filed with the Commission within 120 days of the end of the Registrant's fiscal year pursuant to General Instruction G(3) to Form 10-K.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
1. FINANCIAL STATEMENTS. The following Consolidated Financial Statements of Seagate Technology, Inc. and subsidiaries and Report of Independent Auditors are incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets -- June 30, 1995 and July 1, 1994.
Consolidated Statements of Income -- Years Ended June 30, 1995, July 1, 1994 and July 2, 1993.
Consolidated Statements of Shareholders' Equity -- Years Ended June 30, 1995, July 1, 1994 and July 2, 1993.
Consolidated Statements of Cash Flows -- Years Ended June 30, 1995, July 1, 1994 and July 2, 1993.
Notes to Consolidated Financial Statements.
Separate financial statements of Seagate Technology, Inc. have not been presented because it is primarily an operating company and its subsidiaries included in the Consolidated Financial Statements are wholly-owned.
2. FINANCIAL STATEMENT SCHEDULE. The following consolidated financial statement schedule of Seagate Technology, Inc. and subsidiaries is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Seagate Technology, Inc. and subsidiaries:
Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or notes thereto.
3. EXHIBITS: NOTES:
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SEAGATE TECHNOLOGY, INC.
By: /s/ ALAN F. SHUGART
----------------------------------- (ALAN F. SHUGART, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER)
Dated: August 4, 1995
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature appears below constitutes and appoints Alan F. Shugart and Donald L. Waite, jointly and severally, his or her attorney-in-fact, each with the power of substitution, for him or her in any and all capacities, to sign any amendments to this Report on Form 10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SEAGATE TECHNOLOGY, INC. SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SEAGATE TECHNOLOGY, INC. INDEX TO EXHIBITS


Item 1. BUSINESS
GENERAL
HPSC, Inc. (the "Company" or "HPSC") is a financial services company dedicated to providing financing for healthcare professionals. HPSC formerly provided financing exclusively to the dental profession, but in mid-1993 it began to expand into other healthcare markets and through its wholly-owned subsidiary, American Commercial Finance Corporation ("AACFC"), into asset based lending which focuses primarily on accounts receivable and inventory financing.
The Company's new business volume in 1995 increased substantially compared to 1994 - $68,554,000 versus $32,609,000. In 1993, Healthco International, Inc. (Healthco), the dental equipment supplier which previously supplied the Company with substantially all of its business, filed for bankruptcy. The bankruptcy of Healthco initially posed several significant challenges to the Company. Management has worked to replace its lost business while at the same time pursuing its plan to diversify into other markets. Within the dental industry the Company continues its efforts to expand its business by capitalizing on its reputation for providing a high level of customer service and innovative and competitive financing programs. Today the Company provides financing for over 500 different dental distributors and healthcare providers. While certain of these vendors provide a substantial amount of business for the Company, the Company is no longer dependent on any single source for its business. The Company is now also providing financing to the ophthalmic, podiatry, veterinary and chiropractic professions.
The Company finances dental, medical and other healthcare equipment as well as leasehold improvements, office furniture, supplies and certain other costs involved in opening, maintaining or acquiring a healthcare facility or practice. The Company finances transactions only after a customer's credit has been approved and a financing agreement has been executed.
The Company does not maintain any inventory. Typically, the manufacturer or distributor delivers the equipment directly to the customer, and the Company purchases the equipment from the supplier, at its customary selling price to the customer, upon installation and customer acceptance.
Substantially all of the Company's agreements with its customers are non-cancelable and provide for a full payout at a fixed financing rate with a fixed payment schedule. The majority of the agreements have a term of between three and seven years. All leases are classified as direct financing leases.
The Company's principal sources of funding include fixed rate borrowings of varying maturities and a revolving line of credit at variable rates (see Note B of Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition Liquidity and Capital Resources" in the 1995 Annual Report). The Company's income depends, to a significant extent, upon its ability to maintain a satisfactory spread between its cost of borrowings and the rates that it charges its customers. In a rising interest rate environment, the Company's use of variable rate financing could adversely affect its ability to maintain these margins. Competitive pressures and other market conditions could hinder the Company's ability to raise the rates charged to its customers as quickly as its variable rate financing costs rise.
In July 1995 the Company completed payment for 1,225,182 shares of its Common Stock that it repurchased from certain secured creditors of Healthco ("Secured Creditors") pursuant to a Purchase and Sale Agreement among the Company and the Secured Creditors dated as of November 1, 1994. Healthco had pledged the shares of the Company's Common Stock to secure its obligations to the Secured Creditors. Upon final payment by the Company, the shares were released from the pledge and the Secured Creditors also released the Company from any claims that may arise out of the bankruptcy of Healthco. The Company has retired 1,125,182 of these shares and holds 100,000 of these shares in its treasury.
Item 1. BUSINESS (continued)
SEGMENT
The Company is principally engaged in providing financing to healthcare professionals.
MARKETING AND SOURCES OF SUPPLY
The Company obtains its customers principally from equipment vendor referral programs and from advertising and direct mail brochures targeted to dentists and other professionals who use equipment in their practices. The vendor referral programs permit the Company to utilize vendors' sales personnel operating from retail distribution centers throughout the United States to generate business for the Company. The Company also sends representatives to major trade conventions.
The Company advertises its services through industry publications, its own marketing brochures which it distributes and also through direct mail advertising. Existing customers and referrals from existing customers of the Company are also important sources of business.
LEASES AND NOTES RECEIVABLE
At December 31, 1995 the Company's lease, note receivable and asset based lending portfolio of $140,652,000 consisted of approximately 8,300 accounts and 6,300 customers with a weighted average remaining term of approximately 36 months. Lease and note terms ranged from 12-72 months, with the majority having a 36- or 60-month term. No single customer accounted for more than 1.0% of the Company's total receivables at December 31, 1995.
FINANCING TERMS AND CONDITIONS
The Company generally finances equipment to customers through standard non-cancelable full payout leases or conditional sales agreements or notes. Following execution of an agreement, the equipment is delivered from either a distributor or a manufacturer directly to the customer. Following installation and customer acceptance of the equipment, the Company purchases the equipment from the supplier. The Company is the owner of the leased equipment and holds a security interest in equipment financed with conditional sales agreements or notes.
The Company makes no warranties to customers as to any matter, including the condition, performance or suitability of the equipment. In substantially all cases, customers are obligated to remit to the Company all amounts due regardless of the performance of the equipment, to maintain and service the equipment and to insure the equipment against casualty loss.
The Company establishes residual values when the equipment is purchased and leased. Substantially all the Company's direct financing leases include a lease purchase option. Historically, because substantially all lessees have exercised this option at the recorded value, the Company generally does not incur gains/losses from the sale or releasing of equipment.
Item 1. BUSINESS (continued)
CREDIT REVIEW AND LOSS EXPERIENCE
The Company conducts a credit review of each prospective customer, using both commercial credit bureaus and its own internal credit procedures. The Company's collection department is responsible for monitoring slow paying accounts and collection activities when the Company determines such action to be appropriate. Slow paying accounts are subject to service charges.
For discussion of the provision for losses and allowance for losses, see "Management's Discussion and Analysis of Financial Condition - Results of Operations, Fiscal 1995 Compared to 1994 and Fiscal 1994 Compared to 1993" in the 1995 Annual Report.
FUNDING
At December 31, 1995 the Company had financing from fixed rate securitizations, variable rate revolving lines of credit, and fixed rate bank loans and asset sales. See Note B of the "Notes to Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition - Liquidity and Capital Resources" in the 1995 Annual Report.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS
The Company does not have any material patents, trademarks, licenses, franchises or concessions.
SEASONALITY
The Company's business is not seasonal; however, healthcare professionals generally tend to purchase more equipment in the fourth quarter, which may result in a higher volume of equipment purchases to be financed by the Company in that quarter.
WORKING CAPITAL
The Company does not carry inventory or provide rights of return to its customers. Its working capital requirements relate directly to its volume of financing transactions (see "Business - Credit Review and Loss Expedrience" and "Management's Discussion and Analysis of Financial Condition - Liquidity and Capital Resources" in the 1995 Annual Report).
Item 1. BUSINESS (continued)
MATERIAL CUSTOMERS
No customer or group of related customers accounted for 1.0% or more of fiscal 1995 revenues. No individual supplier of leased equipment accounted for more than 8% of the current year's originations.
RAW MATERIALS
The Company's business does not depend on raw materials.
BACKLOG
At December 31, 1995, the Company had a backlog of approximately $35,000,000, consisting of customer applications which have been approved but have not yet resulted in a completed transaction, compared to $25,000,000 at the end of 1994. Not all approved applications will result in financing transactions for the Company.
GOVERNMENT CONTRACTS OR SUB-CONTRACTS
The Company does not have a material amount of government contracts or subcontracts.
COMPETITION
The equipment financing business is highly competitive. Participants in the industry compete through vendor/customer service, product innovation, and price. Pricing is affected by each participant's ability to control origination and funding costs, portfolio risk management and operating overhead costs. The Company's ability to compete effectively in this market depends upon: (i) its ability to procure financing on attractive terms; (ii) its knowledge of and experience in its markets; (iii) its flexibility and adaptability in dealing with the special needs of its clients; (iv) its relationships with equipment vendors; (v) its ability to continue to expand its business into areas other than the dental profession and (vi) its ability to manage its portfolio effectively.
The Company competes with finance divisions, affiliates and subsidiaries of equipment manufacturers, other leasing and finance companies, certain banks engaged in leasing and lease brokers. Many of these organizations are much larger than the Company, have greater financial or other resources than the Company and have access to funds at more favorable rates and terms than those available to the Company.
RESEARCH AND DEVELOPMENT
The Company does not have research and development activities.
ENVIRONMENTAL PROTECTION
The Company's compliance with laws and regulations relating to the protection of the environment will not have a material effect on its capital expenditures, earnings or competitive position.
EMPLOYEES
At December 31, 1995, the Company and its subsidiaries had 44 full-time employees, including 23 in general and administration and 21 in sales and marketing.
Item 1. BUSINESS (continued)
FOREIGN OPERATIONS
The Company, through its Canadian subsidiary, Credident, Inc., engaged in the financing of dental equipment in Canada. In 1994 the Company sold substantially all of Credident's assets to Newcourt Credit Group, Inc. Credident, Inc. was in substantially the same business as the Company, (see Note A of Notes to Consolidated Financial Statements). The Company has ceased to underwrite any new business in Canada. See "Management's Discussion and Analysis of Financial Condition" in the 1995 Annual Report.
EXPORT SALES
The Company does not have any export sales.
Item 2.

Item 2. PROPERTIES
The Company leases approximately 8,320 square feet of office space at 60 State Street, Boston, Massachusetts from the Trustees of 60 State Street Trust. Approximately 2,431 square feet at 433 South Main Street, West Hartford, Connecticut are leased by its wholly-owned subsidiary, American Commercial Finance Corporation. The Company also rents space as required for its sales locations on a short-term basis. (See Note C of the "Notes to Consolidated Financial Statements" in the 1995 Annual Report.) In March 1996, the Company executed an agreement to lease an additional 3,000 square feet adjacent to the current space at 60 State Street.
Item 3.

Item 3. LEGAL PROCEEDINGS
The Company was not subject to any material legal proceedings at December 31, 1995.
Item 4.

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, 1995.
PART II
Item 5.

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The common stock of HPSC is traded on the NASDAQ National Market System. The high and low sales prices for the common stock as reported by NASDAQ for each quarter in the last two fiscal years, as well as the approximate number of record holders and information with respect to dividend restrictions, are incorporated by reference from page 17 of the 1995 Annual Report.
Item 6.

Item 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended December 31, 1995 is incorporated by reference from page 16 of the 1995 Annual Report.
Item 7.

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition of the Company is incorporated by reference from pages 17 through 19 of the 1995 Annual Report.
Item 8.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item together with the Report of Independent Accountants is incorporated by reference from pages 4 through 14 and page 16 of the 1995 Annual Report. (See also the "Financial Statement Schedule" filed under Item 14 of this Form 10-K.)
Item 9.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10.

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the directors, nominees for director and executive officers of the Company:
NOMINEES FOR CLASS I DIRECTOR
Lowell P. Weicker, Jr., age 64, was elected a director in December 1995. Mr. Weicker began his political career in 1962, when he was elected as a member of Connecticut's House of Representatives for Town of Greenwich. He served three terms. Mr. Weicker served concurrently as First Selectman of Greenwich from 1964 to 1968. He was elected to the U.S. Congress from Connecticut's 4th District in 1968. He was subsequently elected to the United States Senate in 1970, 1976 and 1982. Mr. Weicker served in the U. S. Senate until January 1989. In January 1991, Mr. Weicker was elected Governor of Connecticut, a position which he held until January 1995. Mr. Weicker has been associated with the firm of Dresing, Lierman, Weicker since 1995. Dresing, Lierman, Weicker provides a variety of health care related services.
Thomas M. McDougal, D.D.S., age 56, was elected a director of HPSC in 1991. He has been a practicing dentist for approximately 30 years. He is active in national, state and local dental organizations and has lectured extensively throughout the United States. He is a past President of the Dallas County Dental Society and is past Chairman of its Continuing Education Committee and its Banking, Nominating and Patient Relations Committee.
MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE
CLASS II DIRECTORS (TERM EXPIRES AT THE 1997 ANNUAL MEETING)
Joseph A. Biernat, age 68, became a director of HPSC in December 1993. Since his retirement in 1987, Mr. Biernat has served as a consultant for several investment management firms. From 1965 until 1987, he was employed with United Technologies Corporation, most recently as Senior Vice President -- Treasurer, and prior thereto as President, Treasurer and Chief Financial Officer of Philco-Ford Finance Corporation. He is also a director of The Hartford Insurance Company Mutual Funds and previously has been a director of several financial and civic organizations.
Raymond R. Doherty, age 50, has been President of HPSC since December 1989 and Chief Operating Officer of HPSC since August 1993. He was Treasurer of HPSC from December 1988 until May 1994. He was elected a director of HPSC in June 1991. Mr. Doherty previously served as Chairman and Chief Executive Officer of HPSC from October 1992 until July 1993, Chief Operating Officer of HPSC from December 1989 to October 1992, and Chief Financial Officer of HPSC from December 1988 to October 1992. He was Assistant Treasurer of HPSC from June 1986 to December 1988. He was Vice President and Chief Operating Officer of Healthco International, Inc., a company engaged in sales of dental equipment and formerly affiliated with the Company, from October 1992 until August 1993. He was the Senior Vice President of Finance and Operational Controls of Healthco International, Inc. from January 1986 to October 1992.
Samuel P. Cooley, age 64, became a director of HPSC in December 1993. From 1955 until his retirement at the end of 1993, Mr. Cooley was employed with Shawmut Bank Connecticut, N.A., and its predecessors and affiliates, including Hartford National Bank and Connecticut National Bank. His most recent position was Executive Vice President and Senior Credit Approval Officer. Mr. Cooley is also a director of Lydall, Inc. and the Connecticut Health and Education Facilities Authority and serves as a director or trustee of numerous nonprofit organizations in Connecticut.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (cont'd)
CLASS III DIRECTORS (TERM EXPIRES AT THE 1998 ANNUAL MEETING)
John W. Everets, age 49, has been Chairman of the Board and Chief Executive Officer of HPSC since July 1993 and has been a director of HPSC since 1983. He was Chairman of the Board and Chief Executive Officer of T.O. Richardson Co., Inc., a financial services company, from January 1990 until July 1993. Previously he was Executive Vice President of Advest, Inc., an investment banking firm, from 1977 to January 1990. Mr. Everets also served as Chairman of the Board of Billings and Co., Inc., a real estate investment banking firm, and Chairman of Advest Credit Corp., both subsidiaries of Advest Group, Inc. Mr. Everets formerly was Vice Chairman of the Connecticut Development Authority and Chairman of the Loan Committee of the Connecticut Development Authority. Mr. Everets is also a director of Dairy Mart Convenience Stores, Inc., Crown/Northcorp, and the Eastern Company.
Dollie A. Cole, age 65, a director of HPSC since 1991, has been involved for many years in the leadership of several business, charitable and civic organizations. She serves as Chairman of the Dollie Cole Corporation, a venture capital and industrial consulting firm. For seven years Ms. Cole was an owner and board member of Checker Motors and Checker Taxi until selling her interest in 1988. Ms. Cole was also Senior Editor of Curtis Publishing until 1977, and was director of Public Relations for Magnetic Video and Twentieth Century Fox Video until 1985. She serves as a consultant to the Solar and Electric 500 Company based in Phoenix, Arizona, and to Separation Dynamics, an international company involved in the energy and manufacturing industries. In addition to these business activities, Ms. Cole serves on the boards of Project Hope -- the World Health Organization, the National Captioning Institute for the Hearing Impaired, the Smithsonian Institution and on the National Academy of Science -- President's Circle Board.
J. Kermit Birchfield, age 56, became a director of HPSC in December 1993. He currently serves as a consultant for various businesses. From 1990 until 1994, Mr. Birchfield served as Senior Vice President, Secretary, and General Counsel with M/A-COM, Inc., a publicly-held manufacturer of semiconductors and communications equipment based in Wakefield, Massachusetts. Before joining M/A-COM, he was Senior Vice President for Legal and Governmental Affairs and General Counsel for the Georgia Pacific Corporation. Mr. Birchfield is also a Managing Director of Century Partners, Incorporated, a privately-held investment and operating company, of Darien, Connecticut. He is also a director of Intermountain Industries Inc. and its wholly-owned subsidiary, Intermountain Gas Company, a public utility and Dairy Mart Convenience Stores, Inc.
OTHER EXECUTIVE OFFICERS
Rene Lefebvre, age 49, has been Chief Financial Officer, Vice President of Finance and Treasurer of HPSC since May 1994. From June 1993 until May 1994, he was Chief Financial Officer of NETTS, Inc., a vocational training institution. He was an independent financial services consultant from February 1992 through May 1993. He served as interim Chief Financial Officer of the Business Funding Group from June through November of 1991. From September 1982 until March 1991, Mr. Lefebvre was Chief Financial Officer of Eaton Financial Corporation, a subsidiary of AT&T Capital Corporation.
Item 11.

Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
Item 11. EXECUTIVE COMPENSATION (cont'd)
(2) The amounts reported in this column represent the market price of the stock awarded under the Amended 1995 Stock Plan on the grant date without diminution in value attributable to the restrictions on such stock. The aggregate non-vested restricted stock holdings at the end of fiscal 1995 were as follows: for Mr. Everets - 185,000 shares (the value of these shares at fiscal year end equaled $878,750, which is 108.6% of the value at the grant date); for Mr. Doherty - 90,000 shares (the value at fiscal year end for these shares equaled $427,500, which is 108.6% of the value at the grant date); and for Mr. Lefebvre, 25,000 shares (the value at year end equaled $118,750, which is 108.6% of the value at the grant date). Dividends on stock awards will be paid at the same rate as dividends, if any, are paid to all shareholders.
(3) Includes term life insurance premiums paid by the Company and Company contributions to the individual's 401(k) retirement plan account, respectively, in the following amounts for the fiscal year ended December 31, 1995: Mr. Everets, $3,240 and $4,049; Mr. Doherty, $3,240 and $3,696; and Mr. Lefebvre, $810 and $2,500. Also includes the value of shares of Common Stock in the Company's ESOP allocated to participants in the fiscal year ended December 31, 1995 (for services rendered during the previous fiscal year) in the following amounts: Mr. Everets, $11,670; Mr. Doherty, $11,670; and Mr. Lefebvre, $7,595. The value of the allocated ESOP shares was calculated by using the year-end closing price of $4.75 per share for fiscal 1995. The Company has not allocated shares of Common Stock to participants in its ESOP for services rendered during the fiscal year ended December 31, 1995 as of the date of this Proxy Statement.
(4) Mr. Everets' employment with the Company commenced in July 1993. His compensation is governed by an employment agreement dated July 19, 1993. See "Employment Agreements" below.
(5) Includes relocation and temporary living expenses of $81,806 paid in fiscal 1994 in connection with Mr. Everets' relocation to the Boston area.
(6) Includes relocation and temporary living expenses of $9,794 paid in fiscal 1993 in connection with Mr. Everets' relocation to the Boston area.
(7) Mr. Doherty's compensation is governed by an employment agreement dated August 2, 1993. See "Employment Agreements" below.
(8) Includes $3,835 paid by the Company for an automobile for Mr. Doherty.
(9) Mr. Lefebvre's employment with the Company commenced in May 1994. His compensation is governed by an employment agreement dated April 6, 1994. See "Employment Agreements" below.
OPTION GRANTS IN LAST FISCAL YEAR
The Company made no option or SAR grants to its executive officers in its last fiscal year.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table provides information regarding the exercise of stock options by the Company's executive officers during fiscal 1995 and the value of unexercised "in-the-money" options at year-end. The columns showing the number of options exercised during fiscal 1995 and the value realized thereby have been omitted because none of the executive officers exercised any options during fiscal 1995.
Item 11. EXECUTIVE COMPENSATION (cont'd)
EMPLOYMENT AGREEMENTS
John W. Everets and Raymond R. Doherty
On July 19, 1993, the Company entered into an employment agreement with each of John W. Everets and Raymond R. Doherty. The Company agreed to pay a base annual salary of $210,000 to Mr. Everets and $190,000 to Mr. Doherty as well as a bonus of up to 100% of base salary to each individual under an incentive plan developed by the Compensation Committee of the Board in consultation with management and approved by the full Board of Directors. The Company also granted options for 150,000 shares of Common Stock to Mr. Everets and 90,000 shares of Common Stock to Mr. Doherty, each at a price of $2.625 per share, which was the fair market value of a share of Common Stock on the date of grant. The Company also agreed to pay Mr. Everets' reasonable expenses incurred in his relocation to Boston, up to $50,000 on an after-tax basis.
Each employment agreement has a three-year term and thereafter will automatically renew from year to year unless either party to such agreement gives notice of intention to terminate the agreement six months in advance of any anniversary. Either party to each employment agreement may terminate it at any time for any reason. In the event of decision not to renew by either party or a termination by the Company which is not "for cause" with respect to either Mr. Everets or Mr. Doherty (or, in the case of Mr. Everets, in the event of termination by Mr. Everets), the Company will pay the employee his base monthly pay plus his maximum monthly bonus for the next 12 months. Upon a termination by the Company which is not "for cause," all of Mr. Everets' stock options will fully vest. Each employee agrees not to compete with the business of the Company while receiving termination payments and to maintain in confidence all of the Company's confidential information.
If, within three years after a "change of control" of the Company (as defined in each agreement), either the Company terminates Mr. Everets or Mr. Doherty other than "for cause" or the employee terminates his employment due to a "change in employment" (as defined in each agreement), the Company will pay the employee his base monthly pay plus the maximum monthly bonus for 24 months; the non-compete provisions will no longer apply; the employee's stock options will fully vest; and normal employee benefits will continue for 12 months. If, within three years after a "change of control", the employee terminates his employment for any reason other than a "change in employment," the Company will pay the employee his base monthly pay plus the maximum monthly bonus and normal employee benefits for 12 months.
Item 11. EXECUTIVE COMPENSATION (cont'd)
EMPLOYMENT AGREEMENTS (CONT'D)
Rene Lefebvre
During April 1994, the Company entered into an employment agreement with Rene Lefebvre for employment commencing in May 1994. The Company agreed to pay Mr. Lefebvre a base annual salary of $125,000 as well as a bonus of up to 50% of base salary at the discretion of the Chief Executive Officer and subject to approval of the Compensation Committee of the Board. The Company also granted to Mr. Lefebvre options for 30,000 shares of Common Stock at a price of $3.5625 per share, which was the fair market value of a share of Common Stock on the date of grant.
The employment agreement has a three-year term and thereafter will automatically renew from year to year unless either party to such agreement gives notice of intention to terminate the agreement 60 days in advance of any anniversary. Either party to Mr. Lefebvre's employment agreement may terminate it at any time for any reason. The Company is obligated to pay Mr. Lefebvre's salary for three months after termination, if it does not renew the agreement, and for six months after termination, if it otherwise terminates his employment without cause. Mr. Lefebvre has agreed not to compete with the business of the Company while receiving severance payments and to maintain in confidence all of the Company's confidential information.
In the event of a "change of control" of the Company (as defined in his agreement), Mr. Lefebvre's stock options will fully vest.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director a fee of $5,000 per annum plus $2,500 per annum for each committee of the Board on which he or she serves and $500 for each meeting attended. In addition, the Company reimburses directors for their travel expenses incurred in attending meetings of the Board or its committees. Pursuant to the 1995 Stock Plan, each non-employee continuing director is granted 1,000 non-qualified stock options on the day of each Annual Meeting of Stockholders during the term of such Plan.
Mr. Weicker received a non-qualified option grant exercisable for 4,000 shares of Common Stock at $4.75 per share, the fair market value of Common Stock on the date of grant, at the time that he joined the Board of Directors.
Item 12.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (cont'd)
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D)
(2) Includes allocated shares under the HPSC, Inc. Employee Stock Ownership Plan (the "ESOP") of 4,714 for Mr. Everets, 6,711 for Mr. Doherty, 1,599 for Mr. Lefebvre and 13,024 for all executive officers and directors as a group.
(3) Dimensional Fund Advisors, Inc. ("Dimensional") has filed an Amendment No. 5 to Schedule 13G with the SEC reporting that it is a registered investment adviser and is deemed to have beneficial ownership of 354,400 shares of Common Stock of the Company as of December 31, 1995, all of which shares are held in portfolios of DFA Investment Dimensions Group Inc., a registered open-end investment company, or in series of the DFA Investment Trust Company, a Delaware business trust, or the DFA Group Trust and DFA Participation Group Trust, investment vehicles for qualified employee benefit plans, all of which Dimensional serves as investment manager. Dimensional disclaims beneficial ownership of all such shares.
(4) Fidelity Management and Research Corporation ("FMRC") filed a Form 13G with the SEC for the year ended December 31, 1995 reporting that it has investment discretion with respect to 352,500 shares of Common Stock of the Company. FMRC reports that it has no voting authority with respect to such shares.
(5) Tweedy, Browne Company L.P. ("TBC"), TBK Partners, L.P. ("TBK") and Vanderbilt Partners, L.P. ("Vanderbilt") filed an Amendment No. 4 to their Form 13Ds on October 28, 1995 with the Securities and Exchange Commission. TBC is the beneficial owner of 408,285 shares of the Company's Common Stock. TBK owns directly 15,000 shares. Vanderbilt owns directly 10,000 shares. The aggregate number of shares of the Company's Common Stock of which TBC, TBK and Vanderbilt could be deemed to be beneficial owners is 433,285. TBC has investment discretion with respect to 408,285 shares and sole power to dispose or direct the disposition of all of such shares. TBC has shared power to vote or direct the vote of 350,285 shares. TBK has the sole power to vote or direct the voting of and to dispose or direct the disposition of the TBK shares. Vanderbilt has the sole power to vote or direct the voting of and dispose or direct the disposition of the Vanderbilt shares. The general partners of TBC and Vanderbilt are Christopher H. Browne, William H. Browne and John D. Spears. The general partners of TBK are Christopher H. Browne, William H. Browne, Thomas P. Knapp and John D. Spears. The general partners of TBC, by reason of their positions as such, may be deemed to have shared power to dispose of or to direct the disposition of 408,285 shares and shared power to vote or to direct the vote of 350,285 shares. Each of the general partners of TBK and Vanderbilt, by reason of his position as such, may be deemed to have shared power to vote or direct the vote of and to dispose or direct the disposition of the 15,000 shares held by TBK and the 10,000 shares held by Vanderbilt, respectively.
(6) 59,652 of these shares have been allocated to the accounts of ESOP participants and 240,348 shares are unallocated. Messrs. Doherty and Everets disclaim beneficial ownership of all such shares, other than the shares allocated to their respective ESOP accounts listed in Note (2) above.
(7) None of the 350,000 shares have been allocated to the accounts of participants in the HPSC, Inc. Supplemental Employee Stock Ownership Plan and Trust (the "SESOP"). Messrs. Doherty and Everets disclaim beneficial ownership of all such shares.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (cont'd)
SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT (CONT'D)
(8) Excludes the 300,000 shares held in the ESOP for the benefit of the employee participants (other than the shares allocated to the respective ESOP accounts of Messrs. Doherty and Everets listed in Note (2) above) and the 350,000 shares held in the SESOP for the benefit of the employee participants. Although Messrs. Doherty and Everets are the trustees of both the ESOP and SESOP and accordingly share voting power with respect to all unallocated shares and share dispositive power with respect to all shares in the ESOP and the SESOP, they disclaim beneficial ownership of all such shares, other than the shares allocated to their respective ESOP accounts listed in Note (2) above.
(9) Includes 26,133 shares, 10,000 shares and 10,000 shares, respectively, for Messrs. Everets, Doherty and Lefebvre, purchased under the Stock Loan Program described in "EXECUTIVE COMPENSATION -- Stock Loan Program." All such shares are pledged to the Company pursuant to such Program.
(10) Includes 100 shares held by Mr. Everets' son, A. Hale W. Everets. Mr. Everets disclaims beneficial ownership of such shares.
(11) Includes 185,000, 90,000 and 25,000 restricted shares granted to Messrs. Everets, Doherty and Lefebvre on May 12, 1995, as described under the Summary Compensation Table.
(12) Includes 3,000 shares held by Mr. Birchfield's spouse. Mr. Birchfield disclaims beneficial ownership of such shares.
Item 13.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK LOAN PROGRAM
On January 5, 1995 the Compensation Committee approved a Stock Loan Program whereby executive officers and other senior personnel of the Company earning more than $80,000 per year may borrow from the Company an amount equal to the cost of purchasing two shares of Common Stock, solely for the purpose of acquiring such stock, for each share of Common Stock purchased by the employee from sources other than Company funds. Such borrowings may not exceed $200,000 in any fiscal quarter of the Company, $200,000 per employee or $400,000 during the term of the loan program for all employees. All shares purchased with such loans are pledged to the Company as collateral for repayment of the loans. The loans are recourse, bear interest at a variable rate which is one-half of one percent above the Company's cost of funds, payable monthly in arrears, and are payable as to principal no later than five (5) years after the date of the loan. As of the date of this proxy statement, the Company has loans outstanding to executive officers in the following amounts secured by the number of shares listed: Mr. Everets, $98,000, secured by 26,133 shares; Mr. Doherty, $37,500, secured by 10,000 shares; and Mr. Lefebvre, $37,500, secured by 10,000 shares.
REPURCHASE OF SHARES FORMERLY HELD BY HEALTHCO INTERNATIONAL, INC.
In July 1995 the Company completed payment for 1,225,182 shares of the Company's Common Stock which it repurchased from certain secured creditors of Healthco International, Inc. ("Healthco"), which was formerly the largest shareholder of the Company and which declared bankruptcy in June 1993, pursuant to a Purchase and Sale Agreement between the Company and the Healthco secured creditors, dated as of November 1, 1994. Healthco had pledged the shares of the Company's Common Stock to secure its obligations to the secured creditors. The shares were released from the pledge agreement upon the Company's completion of the payment. The secured creditors also released the Company from any claims that may arise out of the bankruptcy of Healthco, effective upon payment by the Company for the shares. The Company has retired 1,125,182 of these shares and holds 100,000 of these shares in its treasury.
PART IV
Item 14.

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
Copies of Exhibits may be obtained for a nominal charge by writing to:
INVESTOR RELATIONS HPSC, INC. 60 STATE STREET BOSTON, MASSACHUSETTS 02019
(b) Reports on Form 8-K
None
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.
By: /s/ John W. Everets ---------------------------- Dated: March 29, 1996 John W. Everets Chairman, Chief Executive Officer and Director
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of HPSC, Inc.:
Our report on the consolidated financial statements of HPSC, Inc. has been incorporated by reference in this Form 10-K from the 1995 Annual Report to Stockholders of HPSC, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in item 14(a)2 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND, L.L.P.
Boston, Massachusetts March 25,1996 SCHEDULE VIII