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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11618
HPSC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2560004
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 720-3600
NONE
(Former name, former address, and former fiscal year
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: COMMON STOCK, PAR VALUE $.01 PER
SHARE. SHARES OUTSTANDING AT November 3, 1998, 4,556,030.
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HPSC, INC.
INDEX
PAGE
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PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ........................................ 3
Condensed Consolidated Statements of Income for Each of the
Three and Nine Months Ended September 30, 1998 and
September 30, 1997 ........................................... 4
Condensed Consolidated Statements of Cash Flows for Each
of the Nine Months Ended September 30, 1998 and
September 30, 1997 ........................................... 5
Notes to Condensed Consolidated Financial Statements ........... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations ..................................... 8
PART II -- OTHER INFORMATION
Other Information............................................... 12
Signatures...................................................... 12
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<TABLE>
<CAPTION>
HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------- -----------
(UNAUDITED)
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ASSETS
CASH AND CASH EQUIVALENTS .................................................. $ 4,291 $ 2,137
RESTRICTED CASH ............................................................ 8,589 7,000
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments .............. 279,617 219,147
Notes receivable ...................................................... 33,470 33,245
Retained interest in leases and notes sold ............................ 13,720 11,895
Estimated residual value of equipment at end of lease term ............ 13,840 11,342
Less unearned income .................................................. (69,613) (53,868)
Less allowance for losses ............................................. (6,404) (5,541)
Less security deposits ................................................ (6,529) (5,801)
Deferred origination costs ............................................ 6,504 5,300
--------- ---------
Net investment in leases and notes ......................................... 264,605 215,719
--------- ---------
OTHER ASSETS:
Other assets .......................................................... 5,352 5,502
Refundable income taxes ............................................... 339 2,770
--------- ---------
TOTAL ASSETS ............................................................... $ 283,176 $ 233,128
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS ................................................ $ 34,000 $ 39,000
SENIOR NOTES ............................................................... 177,657 123,952
SENIOR SUBORDINATED NOTES .................................................. 20,000 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ................................... 5,436 6,254
ACCRUED INTEREST ........................................................... 536 1,129
INCOME TAXES:
Currently payable ..................................................... -- 66
Deferred .............................................................. 8,569 7,553
--------- ---------
TOTAL LIABILITIES .......................................................... 246,198 197,954
--------- ---------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 par value; authorized 5,000,000 shares;
issued - None ......................................................... -- --
COMMON STOCK, $.01 par value; 15,000,000 shares authorized; issued
and outstanding 4,556,030 shares in 1998 and 4,912,530 in 1997 ........ 46 49
Additional paid-in capital ............................................ 12,502 12,304
Retained earnings ..................................................... 27,880 26,472
Less: Treasury Stock (at cost) 328,900 shares in 1998 and 236,900
in 1997 .................................................................... (1,883) (1,210)
Deferred compensation ................................................. (1,267) (2,286)
Notes receivable from officers and employees .......................... (300) (155)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ................................................. 36,978 35,174
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................. $ 283,176 $ 233,128
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<TABLE>
<CAPTION>
HPSC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
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REVENUES:
Earned income on leases and notes.................. $ 8,890 $ 6,115 $ 24,417 $ 16,531
Gain on sales of leases and notes.................. 934 909 2,684 2,377
Provisions for losses.............................. (1,106) (531) (2,372) (1,271)
---------- ---------- ---------- ----------
Net Revenues............................................ 8,718 6,493 24,729 17,637
---------- ---------- ---------- ----------
EXPENSES:
Selling, general and administrative................ 3,881 3,193 11,082 8,437
Interest expense................................... 4,016 2,868 11,328 8,105
Interest income.................................... (128) (79) (196) (264)
----------- ----------- ----------- -----------
Net operating expenses.................................. 7,769 5,982 22,214 16,278
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 949 511 2,515 1,359
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current....................................... 34 97 90 268
Deferred...................................... 380 120 1,017 327
---------- ---------- ---------- ----------
TOTAL INCOME TAXES...................................... 414 217 1,107 595
---------- ---------- ---------- ----------
NET INCOME.............................................. $ 535 $ 294 $ 1,408 $ 764
========== ========== ========== ==========
BASIC NET INCOME PER SHARE.............................. $ 0.14 $ 0.08 $ 0.38 $ 0.20
========== ========== ========== ==========
SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE........................................ 3,769,284 3,699,117 3,713,173 3,749,339
DILUTED NET INCOME PER SHARE............................ $ 0.12 $ 0.07 $ 0.34 $ 0.19
========== ========== ========== ==========
SHARES USED TO COMPUTE DILUTED
NET INCOME PER SHARE.................................... 4,407,825 4,047,637 4,163,257 4,097,860
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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<TABLE>
<CAPTION>
HPSC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................ $ 1,408 $ 764
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization .................................... 3,082 2,847
Deferred income taxes ............................................ 1,017 328
Restricted stock compensation .................................... 762 149
Gain on sale of receivables ...................................... (2,684) (2,377)
Provision for losses on lease contracts and notes receivable ..... 2,372 1,271
Increase (decrease) in accrued interest .......................... (593) 1,243
Decrease in accounts payable and accrued liabilities ............. (1,669) (3,430)
Increase (decrease) in accrued income taxes ...................... (66) 120
Decrease in refundable income taxes .............................. 2,431 500
Decrease in other assets ......................................... 209 228
--------- --------
Cash provided by (used in) operating activities ....................... 6,269 1,643
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due in
installments .................................................... (119,294) (94,965)
Portfolio receipts, net of amounts included in income ............ 44,032 42,594
Proceeds from sales of lease contracts and notes receivable due in
installments .................................................... 21,377 20,616
Net increase in notes receivable ................................. (284) (5,883)
Net increase in security deposits ................................ 728 979
Net increase in other assets ..................................... (425) (38)
Net (increase) decrease in loans to employees .................... (145) 26
--------- --------
Cash used in investing activities ..................................... (54,011) (36,671)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes ........................................ (36,488) (29,837)
Proceeds from issuance of senior notes, net of debt issue costs .. 90,048 58,550
Proceeds from issuance of senior subordinated notes, net of debt
issuance costs .................................................. -- 18,306
Net repayments of revolving credit borrowings .................... (5,000) (5,008)
Purchase of treasury stock ....................................... (673) (623)
Increase (decrease) in restricted cash ........................... 1,589 (1,996)
Repayment of employee stock ownership plan promissory note ....... 105 105
Exercise of employee stock options ............................... 315 --
--------- --------
Cash provided by financing activities ................................. 49,896 39,497
--------- --------
Net increase (decrease) in cash and cash equivalents .................. 2,154 4,469
Cash and cash equivalents at beginning of period ...................... 2,137 2,176
--------- --------
Cash and cash equivalents at end of period ............................ $ 4,291 $ 6,645
========= ========
Supplemental disclosures of cash flow information:
Interest paid..................................................... $ 11,544 $ 6,218
Income taxes paid ................................................ 45 111
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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HPSC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The information presented for the interim periods is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of HPSC, Inc. (the "Company"), are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The results for interim periods are not necessarily
indicative of results to be expected for the full fiscal year. Certain 1997
account balances have been reclassified to conform with 1998 presentation. Such
financial statements have been prepared in accordance with the instructions of
Form 10-Q pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations. As a result, these financial statements
should be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's latest annual report on Form 10-K.
2. Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share", effective for the Company for the year ended December 31,
1997, provided new standards for computing and presenting earnings per share
(EPS). The Company's basic net income per share calculation is based on the
weighted average number of common shares outstanding, which does not include
unallocated shares under the Company's Employee Stock Ownership Plan,
Supplemental Employee Stock Ownership Plan (for 1997 only-see Note 3),
restricted shares issued under the Company's Incentive Stock Plans, treasury
stock, or any shares issuable upon the exercise of outstanding stock options.
Diluted net income per share includes the weighted average number of stock
options and contingently issuable restricted shares under the Company's
Incentive Stock Plans outstanding as calculated under the treasury stock method,
but not unallocated shares under the Company's ESOP and SESOP.
3. In April 1998, the Company canceled its Supplemental Employee Stock
Ownership Plan ("SESOP"). The Company had originally issued 350,000 shares of
common stock to this plan in July 1994 in consideration of a promissory note in
the principal amount of $1,225,000. No contributions or allocations had been
made to any participant accounts. The shares issued to the SESOP were retired
and the promissory note canceled. In addition, 550,000 shares of the Company's
common stock were reserved for issuance pursuant to the Company's 1998 Stock
Incentive Plan, as approved by the stockholders. The Board of Directors also
approved the 1998 Outside Directors Stock Bonus Plan, pursuant to which 25,000
shares of the Company's common stock were reserved for issuance. During the
quarter ended June 30, 1998, the Company also extended certain 5-year options
which were scheduled to expire and certain of such options were exercised.
Additionally, as a result of increases in the Company's stock price in May and
June 1998, vesting events occurred with respect to restricted shares issued
under the 1995 Incentive Stock Plan. As a result of this activity, the Company
recognized additional compensation expense of $660,000 in the quarter ended June
30, 1998. Furthermore, certain restricted shares issued under the 1995 Incentive
Stock Plan were converted to stock options under such plan.
4. The terms of the HPSC Bravo Funding Corp. ("Bravo") revolving credit
facility were amended in June 1998 to increase available borrowings to
$225,000,000 and to allow up to $67,500,000 of the facility to be used to
finance sales of financing contracts. Under this facility, Bravo had Senior
Notes of $68,878,000 outstanding at September 30, 1998. Bravo incurs interest at
various rates in the commercial paper market and enters into interest rate swap
agreements to assure fixed rate funding. At September 30, 1998, Bravo had
nineteen separate swap contracts with BankBoston with a total notional value of
$60,560,000. These interest rate swaps are matched swaps, and as such, are
accounted for using settlement accounting. Monthly cash settlements on the swap
agreements are recognized in income as they accrue. In the case where the
notional value of the interest rate swap agreements significantly exceeds the
outstanding underlying debt, the excess swap agreements would be
marked-to-market through income until new borrowings are incurred which would be
subject to such swap agreements. All interest rate swap agreements entered into
by the Company are for other than trading purposes.
5. In March 1997, the Company completed the issuance of $20,000,000 of
unsecured senior subordinated notes (the "Notes") due in 2007, which bear
interest at a fixed rate of 11%. The Notes pay interest semi-annually on April 1
and October 1, with such payments beginning on October 1, 1997. The Notes are
redeemable at the option of the Company, in whole or in part, other than through
the operation of a sinking fund, after April 1, 2002 at established redemption
prices, plus accrued but unpaid interest to the date of repurchase. Beginning
July 1, 2002, the Company is required to redeem through sinking fund payments,
on January 1, April 1, July 1, and October 1 of each year, a portion of the
aggregate principal amount of the Notes at a redemption price equal to 100% of
such principal amount redeemed plus accrued but unpaid interest to the
redemption date.
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6. In April 1998, the HPSC Capital Funding Inc. ("Capital") Lease
Receivable Purchase Agreement was amended to increase availability to
$150,000,000. All other terms of the Agreement remain substantially the same.
Under this Agreement, Capital had Senior Notes outstanding of $105,754,000 at
September 30, 1998, and in connection with this facility had twelve separate
interest rate swap agreements with BankBoston with a total notional value of
$95,300,000. These interest rate swaps are matched swaps, and as such, are
accounted for using settlement accounting. Monthly cash settlements on the swap
agreements are recognized in income as they accrue. In the case where the
notional value of the interest rate swap agreements significantly exceeds the
outstanding underlying debt, the excess swap agreements would be
marked-to-market through income until new borrowings are incurred which would be
subject to such swap agreements. All interest rate swap agreements entered into
by the Company are for other than trading purposes.
7. In September 1998, the Company initiated a stock repurchase program
where up to 175,000 shares of the Company's common stock may be repurchased,
subject to market conditions, in open market or negotiated transactions on the
Nasdaq National Market. Based on current market prices, the shares subject to
repurchase represent approximately 4% of the presently outstanding common stock.
No minimum number or value of shares to be repurchased has been fixed, nor has a
time limit been established for the duration of the repurchase program. The
Company expects to use the repurchased stock to meet the current and future
requirements of its employee stock plans.
8. On September 30, 1998, the Company had restricted cash of $4,654,000
under the Bravo facility and $3,935,000 under the Capital facility. All such
restricted cash is reserved for debt service.
9. The Financial Accounting Standards Board ("FASB") has issued SFAS
No. 130, "Reporting Comprehensive Income". This statement, adopted January 1,
1998, establishes standards for reporting and presenting comprehensive income
and its components. There was no difference between comprehensive income and net
income as a result of the adoption of SFAS No. 130.
10. SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for public enterprises in reporting
information about its operating segments, products and services, geographic
concentrations, and major customers. SFAS No. 132, "Employer's Disclosures about
Pensions and Other Post-Retirement Benefits" provides new standards for
disclosures related to pension plans and other post retirement benefits. SFAS
Nos. 131 and 132 will be effective for the Company for the year ending December
31, 1998. It is not expected that the adoption of these standards will have a
material impact on the Company's consolidated operating results or financial
condition.
11. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement will be effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. The Company is still evaluating
whether this Statement will have an impact on its consolidated results of
operations.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Earned income from leases and notes for the three months ended September
30, 1998 was $8,890,000 (including approximately $1,244,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $6,115,000 (including approximately $1,007,000 from ACFC) for the
three months ended September 30, 1997. Earned income for the nine months ended
September 30, 1998 was $24,417,000 (including approximately $3,735,000 from
ACFC) compared to $16,531,000 (including approximately $2,842,000 from ACFC) for
the comparable period of 1997. The increases of 45% for the three months and 48%
for the nine months were due principally to increases in net investment in
leases and notes for both periods in 1998 over 1997. The increases in net
investment for both periods resulted in part from a higher level of originations
in the 1998 third quarter of $48,367,300 compared to $38,297,000 for the third
quarter of 1997 and $129,370,100 for the nine months ended September 30, 1998
compared to $104,968,000 in the comparable 1997 period. Gains on sales of leases
and notes were $934,000 in the three months ended September 30, 1998 compared to
$909,000 for the 1997 quarter. Gains on sales of leases and notes for the nine
months ended September 30, 1998 were $2,684,000 compared to $2,377,000 in the
comparable 1997 period. The increase for the nine month period was caused by
improved margins associated with current year asset sales offset by a lower
level of asset sales activity.
Interest expense (net of interest income) for the third quarter of 1998 was
$3,888,000 (44% of earned income) compared to $2,789,000 (46% of earned income)
in the comparable 1997 period. For the nine months ended September 30, 1998, net
interest expense was $11,132,000 (46% of earned income) compared to $7,841,000
(47% of earned income) in the nine months ended September 30, 1997. The increase
in net interest expense was primarily due to a 44% increase in debt levels from
September 30, 1997 to September 30, 1998. These higher debt levels resulted
primarily from borrowings to finance a higher level of contract originations.
Net financing margin (earned income less net interest expense) for the
third quarter of 1998 was $5,002,000 (56% of earned income) compared to
$3,326,000 (54% of earned income) for the third quarter of 1997. For the nine
months, net financing margin in 1998 was $13,285,000 (54% of earned income)
compared to $8,690,000 (53% of earned income). The increases in amounts in the
three and nine month periods were due to higher earnings on higher balances of
earning assets.
The provision for losses for the third quarter of 1998 was $1,106,000 (12%
of earned income) compared to $531,000 (9% of earned income) in the third
quarter of 1997. For the nine months ended September 30, 1998, the provision for
losses was $2,372,000 (10% of earned income) compared to $1,271,000 (8% of
earned income) for the comparable 1997 period. The increases in the three and
nine month periods were due to growth in the portfolio along with the Company's
continuing evaluation of its portfolio quality, loss history and allowance for
losses.
The allowance for losses at September 30, 1998 was $6,404,000 (2.4% of net
investment) compared to $4,174,000 (2.2% of net investment) at September 30,
1997. Net charge offs for the nine months ended September 30, 1998 were
$1,501,000 compared to $767,000 in 1997.
Selling, general and administrative expenses for the three months ended
September 30, 1998 were $3,881,000 (44% of earned income) compared to $3,193,000
(52% of earned income) in the comparable 1997 period. For the nine months ended
September 30, 1998, selling, general and administrative expenses were
$11,082,000 (45% of earned income) compared to $8,437,000 (51% of earned income)
in the same 1997 period. The increases in both periods were caused by increased
staffing and sales and marketing related costs required to support higher levels
of owned and managed assets. The increase for the nine month period in 1998 was
further caused by increased compensation and related costs associated with the
Company's 1995 Stock Incentive Plan as higher HPSC stock prices caused certain
performance benchmarks in such plans to be met and certain five-year options
scheduled to expire were extended.
The Company's income before income taxes for the quarter ended September
30, 1998 was $949,000 compared to $511,000 in the 1997 period. For the nine
months ended September 30, 1998, income before income taxes was $2,515,000
compared to $1,359,000 in the 1997 period. For the quarter ended September 30,
1998 the provision for income taxes was $414,000 (44% of income before income
taxes) compared to $217,000 (42% of income before income taxes) in the third
quarter of 1997. For the nine months ended
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September 30, 1998, the provision for income taxes was $1,107,000 (44% of income
before income taxes) compared to $595,000 (44% of income before income taxes) in
the 1997 period.
The Company's net income for the three months ended September 30, 1998 was
$535,000 ($.14 basic net income per share) compared to $294,000 ($.08 basic net
income per share) for the three months ended September 30, 1997. For the nine
months ended September 30, 1998, the Company's net income was $1,408,000 ($.38
basic net income per share) compared to $764,000 ($.20 basic net income per
share) for the nine months ended September 30, 1997. The increases in both
periods in 1998 as compared to 1997 were due to higher earned income on leases
and notes and higher gains on asset sales offset by higher selling, general and
administrative costs and higher net interest costs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had $12,880,000 in cash, cash
equivalents and restricted cash as compared to $9,137,000 at December 31, 1997.
As described in Note 8 to the Company's condensed consolidated financial
statements included in this report on Form 10-Q, $8,589,000 was restricted
pursuant to financing agreements as of September 30, 1998, compared to
$7,000,000 at December 31, 1997.
Cash provided by operating activities was $6,269,000 for the nine months
ended September 30, 1998 compared to $1,643,000 for the nine months ended
September 30, 1997. The significant components of cash provided by operating
activities for the nine months ended September 30, 1998, as compared to the same
period in 1997, were a decrease in accounts payable and accrued liabilities of
$1,669,000 as compared to $3,430,000 for the same period in 1997, a decrease in
refundable income taxes of $2,431,000 as compared to $500,000 from the prior
period, offset by a decrease in accrued interest of $593,000 in 1998 compared to
an increase of $1,243,000 for the same period in 1997.
Cash used in investing activities was $54,011,000 for the nine months ended
September 30, 1998 compared to $36,671,000 for the nine months ended September
30, 1997. The significant components of cash used in investing activities for
the first nine months of 1998 compared to the same period in 1997 were an
increase in originations of lease contracts and notes receivable to $119,294,000
from $94,965,000, offset by an increase in portfolio receipts to $44,032,000
from $42,594,000, along with an increase in notes receivable of $284,000 in 1998
compared to $5,883,000 in the comparable period ended September 30, 1997.
Cash provided by financing activities for the nine months ended September
30, 1998 was $49,896,000 compared to $39,497,000 for the nine months ended
September 30, 1997. The significant components of cash provided by financing
activities for the first nine months of 1998 as compared to 1997 were an
increase in proceeds from issuance of senior notes, net of debt issuance costs,
to $90,048,000 from $58,550,000, and an increase in restricted cash balances of
$1,589,000 compared to a decrease of $1,996,000, offset by higher repayments of
Senior Notes of $36,488,000 for the nine months ended September 30, 1998
compared to $29,837,000 for the nine months ended September 30, 1997 as well as
no Senior Subordinated Note borrowings in 1998.
On December 27, 1993, the Company raised $70,000,000 through an asset
securitization transaction in which its wholly-owned subsidiary, HPSC Funding
Corp I ("Funding I"), issued senior secured notes (the "Funding I Notes") at a
rate of 5.01%. The Funding I Notes are secured by a portion of the Company's
portfolio which it sold in part and contributed in part to Funding I. Proceeds
of this financing were used to retire $50,000,000 of 10.125% senior notes due
December 28, 1993, and $20,000,000 of 10% subordinated notes due January 15,
1994. Under the terms of the Funding I securitization, when the principal
balance of the Funding I Notes equals the balance of the restricted cash in the
facility, the Funding I Notes are paid off from the restricted cash and Funding
I terminates. This occurred during the second quarter of 1997, prior to the
scheduled termination of Funding I. Due to this early termination, the Company
incurred a $175,000 non-cash, non-operating charge against earnings in both the
first and second quarters of 1997 representing the partial early recognition of
certain unamortized deferred transaction origination costs.
The Company's Second Amended and Restated Revolving Credit Agreement with
BankBoston as Agent Bank, dated December 12, 1996 ("the Revolver Agreement")
increased the Company's availability under the Revolver Agreement to
$95,000,000. On December 10, 1997, the Revolver Agreement was extended on the
same terms and conditions providing availability to $60,000,000. The Company
signed a Third Amended and Restated Revolving Credit Agreement with BankBoston
as Agent on March 16, 1998 providing the Company with availability up to
$100,000,000 through March 31, 1999. Under the Third Amended and Restated
Revolving Credit Agreement, the Company may borrow at variable rates of prime
and at LIBOR plus 1.35% to 1.50%, dependent on certain performance covenants. At
September 30, 1998, the Company had $34,000,000 outstanding under this facility
and
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$66,000,000 available for borrowing, subject to borrowing base limitations. The
Third Amended and Restated Revolving Credit Agreement currently is not hedged
and is, therefore, exposed to upward movements in interest rates.
As of January 31, 1995, the Company, along with its wholly-owned,
special-purpose subsidiary HPSC Bravo Funding Corp ("Bravo"), established a
$50,000,000 revolving credit facility structured and guaranteed by Capital
Markets Assurance Corporation ("CapMAC", subsequently acquired by MBIA in
February, 1998). Under the terms of the facility, Bravo, to which the Company
sells and may continue to sell or contribute certain of its portfolio assets
subject to certain covenants regarding Bravo's portfolio performance and
borrowing base calculations, pledges its interests in these assets to a
commercial paper conduit entity. Bravo incurs interest at variable rates in the
commercial paper market and enters into interest rate swap agreements to assure
fixed rate funding. Monthly settlements of principal and interest payments are
made from the collection of payments on Bravo's portfolio. The Company is the
servicer of the Bravo portfolio, subject to the Company meeting certain
covenants. The required monthly payments of principal and interest to purchasers
of the commercial paper are guaranteed by CapMAC pursuant to the terms of the
facility. In November 1996, the Bravo facility was increased to $100,000,000 and
amended to allow up to $30,000,000 of the facility to be used for sale
accounting treatment. In June 1998, the Bravo facility was further amended by
increasing the availability of the facility to $225,000,000 with $67,500,000 of
the facility available to be used for sale accounting treatment. Bravo had
$29,598,000 outstanding at September 30, 1998 from sales of receivables under
the sale accounting portion of the Bravo facility. Bravo had $68,878,000 of
indebtedness outstanding under the loan portion of the facility at September 30,
1998. In connection with this facility, the Company had 26 separate interest
rate swap agreements with BankBoston with a total notional value of $94,155,000.
In April, 1995, the Company entered into a fixed rate, fixed term loan
agreement with Springfield Institution for Savings ("SIS") under which the
Company borrowed approximately $3,500,000 at 9.5% subject to certain recourse
and performance covenants. In July 1997, the Company entered into another fixed
rate, fixed term loan agreement with SIS under which the Company borrowed an
additional $3,984,000 at 8% subject to the same conditions as the first loan.
The Company had $3,025,000 outstanding under these agreements at September 30,
1998.
In March 1997, the Company completed a $20,000,000 offering of unsecured
senior subordinated notes due 2007 bearing interest at a fixed rate of 11% (the
"Note Offering"). The Note Offering was completed on the terms and conditions
described in Amendment No. 2 to the Company's Registration Statement No.
333-20733 on Form S-1. The Company received approximately $18,300,000 in net
proceeds from the Note Offering and used such proceeds to repay in part amounts
outstanding under the Revolver Agreement.
In September 1997, the Company, along with its wholly-owned, special
purpose subsidiary, HPSC Capital Funding, Inc. ("Capital"), established a
$100,000,000 Lease Receivable Purchase Agreement with EagleFunding Capital
Corporation ("Eagle"). Under the terms of the facility, Capital, to which the
Company may sell certain of its portfolio assets from time to time, pledges or
sells its interests in these assets to Eagle, a commercial paper conduit entity.
Capital may borrow at variable rates in the commercial paper market and may
enter into interest rate swap agreements to assure fixed rate funding. Monthly
settlements of the borrowing base and any applicable principal and interest
payments are made from collections of Capital's portfolio. The Company is the
servicer of the Capital portfolio subject to certain covenants. In April 1998,
the facility was amended to increase availability under the facility to
$150,000,000. The Company had $17,361,000 outstanding at September 30, 1998 from
sales of receivables under the Capital facility. The Company had $105,754,000 of
indebtedness outstanding under the loan portion of the facility at September 30,
1998. In connection with this facility, the Company had 15 separate interest
rate swap agreements with BankBoston with a total notional value of
$116,921,000.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Third Amended and Restated Revolving Credit
Agreement, the Bravo facility, the Capital facility, the Note Offering, and the
loans from SIS, along with cash obtained from the sales of its financing
contracts and from internally generated revenues, is adequate to meet current
obligations and future projected levels of financings and to carry on normal
operations. In order to finance adequately its anticipated growth, the Company
will continue to seek to raise additional capital from bank and non-bank
sources, make selective use of asset sale transactions and use its current
credit facilities. The Company expects that it will be able to obtain additional
capital at competitive rates, but there can be no assurance it will be able to
do so.
10
<PAGE> 11
YEAR 2000 ISSUES
The Year 2000 issue relates to the inability of computer applications to
distinguish between years with the same last two digits in different centuries
such as 1900 and 2000. In 1996, the Company, along with its subsidiary, ACFC,
began a review to assess the Year 2000 readiness of all of its information
technology (IT) systems. In 1998, the Company expanded this review to include
non-IT systems, including embedded software such as the Company's telephone
system, as well as the systems of third parties who are important business
partners with the Company.
The Company is heavily reliant on integrated IT systems for providing much
of its day-to-day operations, including application processing, underwriting,
billing and collections, as well as much of the financial and operational
reporting to management. The Company has performed a complete review of all
relevant computer systems. Based on its internal review, the Company believes
that substantially all of its internal IT systems are Year 2000 compliant. The
Company has also obtained written assurances from all providers of its IT
software and systems as to the Year 2000 compliance of each of these systems.
The Company believes that the loss of any ancillary systems as to which the
Company is not currently assured of Year 2000 compliance would not cause major
business disruption.
The Company is currently monitoring the Year 2000 progress of its major
service providers of non-IT systems, including embedded systems and software, as
well as of its third party business partners such as banking institutions and
customers. The Company has recently begun a review of the systems of major
customers of its subsidiary, ACFC. The Company continues to work to obtain
written assurances from all such identified third parties. In situations where
any of these third parties is not yet compliant, the Company will closely
monitor such partys' plans to implement the changes necessary to become
compliant.
The Company's target is to complete its Year 2000 compliance review by the
second quarter 1999. Expenses incurred to date associated with implementing the
Year 2000 review process have not been material. The Company does not separately
track the internal costs associated with the Year 2000 project. All such costs,
which primarily consist of payroll and IT related consulting costs, have been
expensed as incurred. The Company does not anticipate that any remaining costs
will have a material impact on the future financial position or results of
operations of the Company.
The estimates and conclusions stated above contain forward-looking
statements and are based on management's best estimates of future events. These
statements should be read in conjunction with the Company's disclosures under
the heading "Forward-Looking Statements" below.
FORWARD-LOOKING STATEMENTS
This Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act. When used in this Form 10-Q, the words
"believes," "anticipates," "expects," "plans," "intends," "estimates,"
"continue," "may," or "will" (or the negative of such words) and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to a number of risks and uncertainties, including but not limited to
the following: the Company's dependence on funding sources; restrictive
covenants in funding documents; payment restrictions and default risks in asset
securitization transactions to which the Company, or its subsidiaries, are a
party; customer credit risks; competition for customers and for capital funding
at favorable rates relative to the capital costs of the Company's competitors;
changes in healthcare payment policies; interest rate risk; the risk that the
Company may not be able to realize the residual value on financed equipment at
the end of its lease term; risks associated with the sale of certain receivable
pools by the Company; dependence on sales representatives and the current
management team; and fluctuations in quarterly operating results. The Company's
filings with the Securities and Exchange Commission, including its Annual Report
on Form 10-K for the year ended December 31, 1997 contain additional information
concerning such risk factors. Actual results in the future could differ
materially from those described in any forward-looking statements as a result of
the risk factors set forth above, and the risk factors described in the Annual
Report. HPSC cautions the reader, however, that such list of risk factors may
not be exhaustive. HPSC undertakes no obligation to release publicly the result
of any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
11
<PAGE> 12
HPSC, INC.
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 5 ARE OMITTED BECAUSE THEY ARE INAPPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K:
During the period for which this report is filed, the Company filed with
the Commission the following report on Form 8-K:
The Company reported on September 23, 1998 the adoption of a stock
repurchase program as described in the press release attached thereto.
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.
------------------------------------
(REGISTRANT)
By: /s/ John W. Everets
--------------------------------
JOHN W. EVERETS
CHIEF EXECUTIVE OFFICER
CHAIRMAN OF THE BOARD
By: /s/ Rene Lefebvre
--------------------------------
RENE LEFEBVRE
VICE PRESIDENT
CHIEF FINANCIAL OFFICER
Dated: November 11, 1998
12
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