<PAGE> 1
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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 JUNE 30, 2000 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
incorporation or organization) Identification No.)
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 AUGUST 7, 2000, 4,184,630.
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HPSC, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of June 30, 2000 and December 31,
1999 .......................................................................... 3
Condensed Consolidated Statements of Income for each of the Three and Six Months
Ended June 30, 2000 and June 30, 1999 ......................................... 4
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and June 30, 1999 ......................................... 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 .............................................................. 11
Signatures ..................................................................... 12
</TABLE>
2
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HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS ...................................................... $ 1,331 $ 1,356
RESTRICTED CASH ................................................................ 12,093 14,924
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments .................. 418,233 387,909
Notes receivable .......................................................... 41,317 38,720
Retained interest in leases and notes sold ................................ 21,874 17,869
Estimated residual value of equipment at end of lease term ................ 20,648 18,988
Less unearned income ...................................................... (102,383) (94,228)
Less allowance for losses ................................................. (10,533) (9,150)
Less security deposits .................................................... (6,373) (6,721)
Deferred origination costs ................................................ 9,334 8,696
--------- ---------
Net investment in leases and notes ............................................. 392,117 362,083
--------- ---------
OTHER ASSETS:
Other assets .............................................................. 6,368 7,104
Refundable income taxes ................................................... 260 260
--------- ---------
TOTAL ASSETS ................................................................... $ 412,169 $ 385,727
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS .................................................... $ 64,000 $ 70,000
SENIOR NOTES ................................................................... 263,094 227,445
SENIOR SUBORDINATED NOTES ...................................................... 19,985 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ....................................... 10,249 15,454
ACCRUED INTEREST ............................................................... 1,490 1,940
INCOME TAXES:
Currently payable ......................................................... 197 398
Deferred .................................................................. 11,036 10,192
--------- ---------
TOTAL LIABILITIES .............................................................. 370,051 345,429
--------- ---------
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 4,711,030 shares in 2000 and 4,699,530 in 1999 ............ 47 47
Additional paid-in capital ................................................ 14,289 14,119
Retained earnings ......................................................... 32,655 31,167
Less: Treasury Stock (at cost) 526,400 shares in 2000 and 518,500 in 1999.... (3,682) (3,611)
Deferred compensation ..................................................... (747) (1,008)
Notes receivable from officers and employees .............................. (444) (416)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ..................................................... 42,118 40,298
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................................... $ 412,169 $ 385,727
========= =========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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HPSC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Earned income on leases and notes .............. $ 12,356 $ 9,670 $ 23,976 $ 19,013
Gain on sales of leases and notes .............. 2,467 887 3,621 2,052
Provision for losses ........................... (1,839) (1,034) (3,196) (1,783)
----------- ----------- ----------- -----------
Net revenues ........................................ 12,984 9,523 24,401 19,282
----------- ----------- ----------- -----------
EXPENSES:
Selling, general and administrative ............ 5,323 4,010 10,093 8,558
Interest expense ............................... 6,511 4,425 12,180 8,646
Interest income ................................ (198) (11) (400) (31)
----------- ----------- ----------- -----------
Net operating expenses .............................. 11,636 8,424 21,873 17,173
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES .......................... 1,348 1,099 2,528 2,109
----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current ................................... 101 71 199 143
Deferred .................................. 452 317 835 635
Additional paid-in capital from exercise of
Non-qualified stock options ......... -- 63 6 89
----------- ----------- ----------- -----------
TOTAL INCOME TAXES .................................. 553 451 1,040 867
----------- ----------- ----------- -----------
NET INCOME .......................................... $ 795 $ 648 $ 1,488 $ 1,242
=========== =========== =========== ===========
BASIC NET INCOME PER SHARE .......................... $ 0.20 $ 0.17 $ 0.39 $ 0.33
=========== =========== =========== ===========
SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE .................................... 3,883,264 3,778,684 3,815,650 3,772,101
DILUTED NET INCOME PER SHARE ........................ $ 0.18 $ 0.15 $ 0.34 $ 0.29
=========== =========== =========== ===========
SHARES USED TO COMPUTE DILUTED
NET INCOME PER SHARE ................................ 4,354,441 4,351,666 4,341,871 4,349,361
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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HPSC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income .......................................................... $ 1,488 $ 1,242
Adjustments to reconcile net income to net cash provided by (used in)
Operating activities:
Depreciation and amortization ....................................... 2,892 2,342
Increase in deferred income taxes ................................... 844 635
Restricted stock and option compensation ............................ 364 232
Gain on sale of lease contracts and notes receivable ................ (3,621) (2,052)
Provision for losses on lease contracts and notes receivable ........ 3,196 1,783
Decrease in accrued interest ........................................ (450) (73)
Increase (decrease) in accounts payable and accrued liabilities ..... 442 (426)
Decrease in accrued income taxes .................................... (201) (44)
Decrease in refundable income taxes ................................. -- 31
(Increase) decrease in other assets ................................. 496 (135)
--------- ---------
Cash provided by operating activities .................................... 5,450 3,535
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due in
Installments ..................................................... (126,086) (91,465)
Portfolio receipts, net of amounts included in income ............... 48,539 36,159
Proceeds from sales of lease contracts and notes receivable due in
Installments ..................................................... 47,692 18,891
Net (increase) decrease in notes receivable ......................... (2,581) 2,020
Net increase (decrease) in security deposits ........................ (348) 123
Net (increase) decrease in other assets ............................. 480 (298)
Net (increase) decrease in loans to employees ....................... (28) 37
--------- ---------
Cash used in investing activities ........................................ (32,332) (34,533)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes ........................................... (66,383) (36,300)
Proceeds from issuance of senior notes, net of debt issue costs ..... 102,017 72,217
Net repayments of revolving credit borrowings ....................... (6,000) (8,000)
Purchase of treasury stock .......................................... (71) (857)
Increase (decrease) in restricted cash .............................. (2,831) 3,537
Repayment of employee stock ownership plan promissory note .......... 105 105
Exercise of employee stock options .................................. 20 153
--------- ---------
Cash provided by financing activities .................................... 26,857 30,855
--------- ---------
Net decrease in cash and cash equivalents ................................ (25) (143)
Cash and cash equivalents at beginning of period ......................... 1,356 4,583
--------- ---------
Cash and cash equivalents at end of period ............................... $ 1,331 $ 4,440
========= =========
Supplemental disclosures of cash flow information:
Interest paid ....................................................... $ 12,249 $ 7,328
Income taxes paid ................................................... 338 119
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
5
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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 1999
account balances have been reclassified to conform with 2000 presentation. These
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. The Company computes and presents its earnings per share data in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". The Company's basic net income per share calculation is
based on the weighted average number of common shares outstanding, which does
not include unallocated shares under the Company's Employee Stock Ownership Plan
("ESOP"), unvested 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 treasury stock or unallocated shares under the Company's ESOP.
3. On May 17, 2000, the Company's common stock began trading on the
American Stock Exchange ("AMEX"). The stock was previously traded on the NASDAQ
Market under the symbol HPSC. The Company is now traded on the AMEX under the
symbol HDR.
4. In March 2000, the HPSC Bravo Funding Corp. ("Bravo") revolving credit
facility (the "Bravo Facility") was amended to provide the Company with
available borrowings of up to $347,500,000 upon substantially the same terms and
conditions. In May 2000, this facility was increased to $397,500,000. Bravo had
a total of $250,466,000 outstanding under the loan and sale portions of the
Bravo Facility ($174,692,000 in loans and $75,774,000 in sales) at June 30,
2000. Bravo incurs interest at variable rates in the commercial paper market and
enters into interest rate swap agreements to assure fixed rate funding. In
connection with these borrowings and sales, Bravo had a total of 43 separate
interest rate swap contracts with Fleet National Bank (formerly BankBoston) with
a total notional value of $245,064,000 at June 30, 2000. 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 April 1999, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), signed an amended Lease
Receivable Purchase Agreement with EagleFunding Capital Corporation ("Eagle").
Pursuant to the terms of this revolving credit facility (the "Capital
Facility"), Capital had a total of $118,890,000 outstanding in loans and sales
($70,403,000 in loans and $48,487,000 in sales) at June 30, 2000, and in
connection with these borrowings and sales, had 22 separate interest rate swap
agreements with Fleet National Bank with a total notional value of $112,799,000.
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.
6. On June 30, 2000, the Company had restricted cash of $7,309,000 under
the Bravo Facility and $4,784,000 under the Capital Facility. All such
restricted cash is reserved for debt service.
7. In February 2000, the Company entered into an additional secured, fixed
rate, fixed term loan agreement with Springfield Institution for Savings. The
Company borrowed $9,324,000 under that agreement, subject to certain recourse
and performance covenants.
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8. In May 2000, the Company executed a Fourth Amended and Restated Credit
Agreement with Fleet National Bank as Managing Agent (the "Revolving Loan
Agreement") providing availability to the Company of up to $90,000,000 through
May 2001 upon substantially the same terms and conditions.
9. The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income". This statement, adopted January 1, 1998,
established standards for reporting and presenting comprehensive income and its
components. Comprehensive income equals net income for each of the six month
periods ended June 30, 2000 and June 30, 1999.
10. A summary of information about the Company's operations by segment for
each of the three and six months ended June 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
COMMERCIAL COMMERCIAL
LICENSED AND LICENSED AND
(in thousands) PROFESSIONAL INDUSTRIAL PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL FINANCING FINANCING TOTAL
------------ ---------- ----- ------------ ---------- -----
<S> <C> <C> <C> <C> <C> <C>
2000
Earned income on leases and notes .............. $ 11,061 $ 1,295 $ 12,356 $ 21,464 $ 2,512 $ 23,976
Gain on sales of leases and notes .............. 2,467 -- 2,467 3,621 -- 3,621
Provision for losses ........................... (1,799) (40) (1,839) (3,156) (40) (3,196)
Selling, general and administrative expenses.... (4,816) (507) (5,323) (9,086) (1,007) (10,093)
--------- --------- --------- --------- --------- ---------
Net profit contribution ........................ 6,913 748 7,661 12,843 1,465 14,308
Total assets ................................... 373,913 38,256 412,169
1999
Earned income on leases and notes .............. 8,565 1,105 9,670 16,735 2,278 19,013
Gain on sales of leases and notes .............. 887 -- 887 2,052 -- 2,052
Provision for losses ........................... (1,021) (13) (1,034) (1,741) (42) (1,783)
Selling, general and administrative expenses.... (3,585) (425) (4,010) (7,737) (821) (8,558)
--------- --------- --------- --------- --------- ---------
Net profit contribution ........................ 4,846 667 5,513 9,309 1,415 10,724
Total assets ................................... 295,942 33,401 329,343
</TABLE>
The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(in thousands) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net segment profit contribution ..... $ 7,661 $ 5,513 $ 14,308 $ 10,724
Interest expense .................... (6,511) (4,425) (12,180) (8,646)
Interest income on cash balances..... 198 11 400 31
-------- -------- -------- --------
Income before income taxes .......... $ 1,348 $ 1,099 $ 2,528 $ 2,109
</TABLE>
Other Segment Information - The Company derives substantially all of its
revenues from domestic customers. As of June 30, 2000, no single customer within
the licensed professional financing segment accounted for greater than 1% of the
total owned and serviced portfolio of that segment. Within the commercial and
industrial financing segment, no single customer accounted for greater than 14%
of the total portfolio of that segment. The licensed professional financing
segment relies on certain vendors to provide referrals to the Company. For the
six months ended June 30, 2000, no one vendor accounted for greater than 8% of
the Company's licensed professional financing originations.
11. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This Statement establishes new 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 the first quarter of the
Company's year ended December 31, 2001. The Company is evaluating the impact of
this statement 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 June 30,
2000 was $12,356,000 (including approximately $1,295,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $9,670,000 (including approximately $1,105,000 from ACFC) for the
three months ended June 30, 1999. Earned income for the six months ended June
30, 2000 was $23,976,000 (including approximately $2,512,000 from ACFC) compared
to $19,013,000 (including approximately $2,278,000 from ACFC) for the comparable
period in 1999. The increase of 28% for the three month period and 26% for the
six month period was due principally to increases in net investment in leases
and notes in 2000 over 1999. The increase in net investment in both periods
resulted in part from a higher level of originations of $63,466,000 for the
second quarter of 2000 compared to $49,810,000 for the same period in 1999 and
$120,719,000 for the six months ended June 30, 2000 compared to $90,087,000 for
the same period in 1999. Gains on sales of leases and notes were $2,467,000 in
the three months ended June 30, 2000 compared to $887,000 for the three months
ended June 30, 1999. For the six months ended June 30, 2000, gains on sales of
leases and notes were $3,621,000 compared to $2,052,000 for the comparable 1999
period. The increase for the three and six month periods were due to a higher
level of asset sales activity in 2000 compared to 1999, offset by lower margins
generated by the current year asset sales.
Interest expense (net of interest income) for the second quarter of 2000
was $6,313,000 (51% of earned income) compared to $4,414,000 (46% of earned
income) in the comparable 1999 period. For the first six months ended June 30,
2000, net interest expense was $11,780,000 (49% of earned income) compared to
$8,615,000 (45% of earned income). The increase in net interest expense was
primarily due to a 28% increase in average debt levels from June 30, 1999 to
June 30, 2000. These higher average debt levels resulted primarily from
borrowings to finance a higher level of contract originations. The increase in
percentage in both the three month and the six month periods was due to higher
interest rate borrowing costs in the current year as compared to the Company's
borrowing costs in the prior fiscal year.
Net financing margin (earned income less net interest expense) for the
second quarter of 2000 was $6,043,000 (49% of earned income) compared to
$5,256,000 (54% of earned income) for the second quarter of 1999. For the six
month period ended June 30, 2000, net financing margin increased to $12,196,000
(51% of earned income) from $10,398,000 (55% of earned income) in 1999. The
increase in amounts in both the three month and the six month periods was due to
higher earnings on a higher balance of earning assets. The decrease in
percentage in both the three month and the six month periods was due to higher
interest rate borrowing costs in the current year as compared to borrowing costs
in the prior year.
The provision for losses for the second quarter of 2000 was $1,839,000 (15%
of earned income) compared to $1,034,000 (11% of earned income) in the second
quarter of 1999. The provision for losses for the six months ended June 30, 2000
was $3,196,000 (13% of earned income) compared to $1,783,000 (9% of earned
income) for the six months ended June 30, 1999. The increases in amount and
percentage were due to growth in the portfolio, along with the Company's
continuing evaluation of its portfolio quality, delinquencies, loss history and
allowance for losses.
The allowance for losses at June 30, 2000 was $10,533,000 (2.7% of net
investment in leases and notes) compared to $9,150,000 (2.5% of net investment
in leases and notes) at December 31, 1999. Net charge offs for the six months
ended June 30, 2000 were $1,813,000 compared to $1,019,000 for the same period
in 1999.
Selling, general and administrative expenses for the three months ended
June 30, 2000 were $5,323,000 (43% of earned income) compared to $4,010,000 (41%
of earned income) in the comparable 1999 period. For the six months ended June
30, 2000, selling, general and administrative expenses were $10,093,000 (42% of
earned income) compared to $8,558,000 (45% of earned income) for the same period
in 1999. The increase in amount for both the three month and the six month
periods was caused by increased administrative costs required to support higher
levels of owned and serviced assets. The increase in percentage of earned income
for the three month period was primarily due to increased bank liquidity fees
and a lower capitalization of initial direct costs in 2000 as compared to 1999.
The decrease in percentage of earned income for the six month period resulted
primarily from increased productivity and the Company's continuing efforts to
control its operating expense growth rate.
The Company's income before income taxes for the quarter ended June 30,
2000 was $1,348,000 compared to $1,099,000 in the same period in 1999. For the
six months ended June 30, 2000, income before income taxes was $2,528,000
compared to $2,109,000 in the comparable 1999 period. The provision for income
taxes was $553,000 (41% of income before income taxes) for the three months
ended June 30, 2000 compared to $451,000 (41% of income before income taxes) for
the same period in 1999. For the six
8
<PAGE> 9
months ended June 30, 2000, the provision for income taxes was $1,040,000 (41%
of income before income taxes) compared to $867,000 (41% of income before income
taxes) for the six months ended June 30, 1999.
The Company's net income for the three months ended June 30, 2000 was
$795,000 ($0.18 diluted net income per share) compared to $648,000 ($0.15
diluted net income per share) for the three months ended June 30, 1999. For the
six months ended June 30, 2000, the Company's net income was $1,488,000 ($0.34
diluted net income per share) compared to $1,242,000 ($0.29 diluted net income
per share). The increase for the three and six month periods resulted from
higher earned income on leases and notes and higher gains on sales of leases and
notes, offset by higher selling, general and administrative costs, higher net
interest costs, and a higher provision for losses.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had $13,424,000 in cash, cash equivalents and
restricted cash as compared to $16,280,000 at December 31, 1999. As described in
Note 6 to the Company's condensed consolidated financial statements included in
this report on Form 10-Q, $12,093,000 was restricted pursuant to financing
agreements as of June 30, 2000, compared to $14,924,000 at December 31, 1999.
Cash provided by operating activities was $5,450,000 for the six months
ended June 30, 2000 compared to $3,535,000 for the six months ended June 30,
1999. The significant components of cash provided by operating activities for
the six months ended June 30, 2000 as compared to the same period in 1999 were
an increase in net income of $1,488,000 in 2000 from $1,242,000 in 1999, an
increase in accounts payable and accrued liabilities of $442,000 in 2000
compared to a decrease of $426,000 in 1999, as well as a decrease in other
assets of $496,000 in 2000 compared to an increase of $135,000 for the same
period in 1999.
Cash used in investing activities was $32,332,000 for the six months ended
June 30, 2000 compared to $34,533,000 for the six months ended June 30, 1999.
The significant components of cash used in investing activities for the first
six months of 2000 compared to the same period in 1999 were an increase in
originations of lease contracts and notes receivable due in installments to
$126,086,000 from $91,465,000 and a net increase in notes receivable of
$2,581,000 compared to a decrease of $2,020,000 in the prior year, offset by an
increase in portfolio receipts to $48,539,000 from $36,159,000, along with an
increase in proceeds from sales of lease contracts and notes receivable of
$47,692,000 in 2000 compared to $18,891,000 in the comparable period ended June
30, 1999.
Cash provided by financing activities for the six months ended June 30,
2000 was $26,857,000 compared to $30,855,000 for the six months ended June 30,
1999. The significant components of cash provided by financing activities for
the first six months of 2000 as compared to the equivalent period in 1999 were
an increase in proceeds from issuance of senior notes, net of debt issuance
costs, to $102,017,000 from $72,217,000, as well as lower levels of repayments
of revolving credit borrowings of $6,000,000 in the first six months of 2000
compared to $8,000,000 in the same period in 1999. This is offset by higher
repayments of senior notes of $66,383,000 for the six months ended June 30, 2000
compared to $36,300,000 for the six months ended June 30, 1999, as well as a
decrease in restricted cash of $2,831,000 in 2000 compared to an increase of
$3,537,000 for the same period in 1999.
In May 1999, the Company executed the Third Amendment to the Third Amended
and Restated Revolving Credit Agreement with Fleet National Bank (formerly
BankBoston) as the Agent Bank. The Third Amendment to the Revolver Agreement
provided availability to the Company of $90,000,000 through May 2000. In May
2000, a Fourth Amended and Restated Credit Agreement was executed with Fleet
National Bank as Managing Agent (the "Revolver Agreement") providing
availability to the Company of up to $90,000,000 through May 2001 upon
substantially the same terms and conditions. Under the Revolver Agreement, the
Company may borrow at variable rates of prime and at LIBOR plus 1.35% to 1.50%,
depending upon certain performance covenants. At June 30, 2000, the Company had
$64,000,000 outstanding under this facility and $26,000,000 available for
borrowing, subject to borrowing base limitations. The outstanding borrowings
under the Revolver Agreement are not hedged and, therefore, are exposed to
upward movements in interest rates.
In March 1997, the Company issued $20,000,000 of unsecured senior
subordinated notes due in 2007 ("Senior Subordinated Notes") bearing interest at
a fixed rate of 11% (the "Note Offering"). The Company received approximately
$18,300,000 in net proceeds from the Note Offering and used such proceeds to
repay amounts outstanding under the Revolver Agreement. The Senior Subordinated
Notes are redeemable at the option of the Company, in whole or in part, other
than through the operation of a sinking fund, after April 1, 2002 at established
redemption prices, plus accrued but unpaid interest to the date of repurchase.
Beginning July 1, 2002, the Company is required to redeem through sinking fund
payments, on January 1, April 1, July 1, and October 1 of each year, a portion
of the aggregate principal amount of the Senior Subordinated Notes at a
redemption price equal to $1,000,000 plus accrued but unpaid interest to the
redemption date. As of June 30, 2000, the outstanding balance of the Senior
Subordinated Notes was $19,985,000.
9
<PAGE> 10
In April 1999, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), signed an amended Lease
Receivable Purchase Agreement with EagleFunding Capital Corporation ("Eagle").
This revolving credit facility (the "Capital Facility") provides the Company
with available borrowings up to $125,000,000. Under the terms of the Capital
Facility, Capital, to which the Company may sell or contribute certain of its
portfolio assets from time to time, 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. The required monthly payments of
principal and interest to purchasers of the commercial paper are guaranteed by
Fleet National Bank pursuant to the terms of the facility. At June 30, 2000, the
Company had $48,487,000 outstanding from sales of receivables under the sale
accounting portion of the Capital Facility and $70,403,000 of borrowings
outstanding under the loan portion of the Capital Facility. In connection with
this facility, the Company had 22 separate interest rate swap agreements with
Fleet National Bank with a total notional value of $112,799,000.
In June 1998, the Company, along with its wholly-owned, special-purpose
subsidiary HPSC Bravo Funding Corp. ("Bravo"), signed an amended revolving
credit facility (the "Bravo Facility") structured and guaranteed by MBIA, Inc.,
providing the Company with available borrowings up to $225,000,000. In March
2000, the Bravo Facility was amended to provide the Company with available
borrowings up to $347,500,000 upon substantially the same terms and conditions.
This facility was subsequently increased to $397,500,000 in May 2000. Under the
terms of the Bravo Facility, Bravo, to which the Company sells and may continue
to sell or contribute certain of its portfolio assets, subject to certain
covenants regarding Bravo's portfolio performance and borrowing base
calculations, pledges or sells its 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 meeting certain covenants. The required monthly
payments of principal and interest to purchasers of the commercial paper are
guaranteed by MBIA, Inc pursuant to the terms of the facility. At June 30, 2000,
Bravo had $75,774,000 outstanding from sales of receivables under the sale
accounting portion of the Bravo Facility and $174,692,000 of indebtedness
outstanding under the loan portion of the Bravo Facility. In connection with
this facility, the Company had 43 separate interest rate swap agreements with
Fleet National Bank with a total notional value of $245,064,000.
In February 2000, the Company entered into an additional fixed rate, fixed
term loan agreement with Springfield Institution for Savings ("SIS"). The
Company borrowed $9,324,000, subject to certain recourse and performance
covenants. The Company had $13,534,000 outstanding under all loan agreements
with SIS at June 30, 2000.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo Facility, the
Capital Facility, the Senior Subordinated Notes, and loans from various savings
banks, along with cash obtained from the sales of its financing contracts and
from internally generated revenues, is adequate to meet current obligations and
projected levels of financings and to carry on current operations. In order to
finance its current 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.
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, 1999, 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.
10
<PAGE> 11
HPSC, INC.
PART II. OTHER INFORMATION
ITEMS 1, 2, 3, AND 5 ARE OMITTED BECAUSE THEY ARE INAPPLICABLE.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS:
a) The Annual Meeting of Stockholders was held on April 20, 2000
b) Not applicable
c) The stockholders elected the following three persons to serve as Class
II Directors:
<TABLE>
<CAPTION>
FOR WITHHELD
--- --------
<S> <C> <C>
Joseph A. Biernat ................... 3,403,650 509,000
Raymond R. Doherty .................. 3,403,650 509,000
Samuel P. Cooley .................... 3,402,650 510,000
</TABLE>
The stockholders approved the Company's 2000 Stock Incentive Plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C>
2,523,343 509,184 24,750 855,373
</TABLE>
The stockholders ratified the appointment of Deloitte & Touche LLP as
the independent auditors of the Company for the fiscal year ending
December 31, 2000:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
3,887,127 9,250 16,273
</TABLE>
d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 HPSC, Inc. 2000 Stock Incentive Plan dated as of December 13, 1999.
10.2 HPSC, Inc. Audit Committee Charter adopted April 20, 2000.
10.3 Fourth Amended and Restated Credit Agreement dated as of May 12, 2000
among HPSC, Inc. and Fleet National Bank, individually and as Agent,
and the Banks named herein with FleetBoston Robertson Stephens Inc. as
Arranger.
10.4 Amendment No. 1 to Amended and Restated Lease Receivables Purchase
Agreement dated as of May 26, 2000, among HPSC Bravo Funding Corp.,
HPSC, Inc., Triple-A One Funding Corporation and Capital Markets
Assurance Corporation.
10.5 Amendment No. 1 to Amended and Restated Purchase and Contribution
Agreement dated as of June 16, 2000, between HPSC, Inc. and HPSC Bravo
Funding Corp.
10.6 Fourth Amendment to the HPSC, Inc. Supplemental Executive Retirement
Plan, dated August 10, 2000.
10.7 Amended and Restated Employment Agreement by and between HPSC, Inc.
and John W. Everets, dated August 4, 2000.
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<PAGE> 12
10.8 Amended and Restated Employment Agreement by and between HPSC, Inc.
and Raymond R. Doherty, dated August 4, 2000.
10.9 Amended and Restated Employment Agreement by and between HPSC, Inc.
and Rene Lefebvre, dated August 4, 2000.
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 May 24, 2000 the filing of an application to list
on the American Stock Exchange as described in the Form 8-K.
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
By: /s/ William S. Hoft
---------------------------------
WILLIAM S. HOFT
FINANCIAL REPORTING MANAGER
Dated: August 14, 2000
12
