SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 March 26, 1994
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-11618
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HPSC, INC
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2560004
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
470 ATLANTIC AVENUE, BOSTON, MASSACHUSETTS 02210
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 574-4240
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NONE
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(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
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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 MAY 6, 1994, 5,224,097.
HPSC, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets as of March 26, 1994
and December 25, 1993 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for each of the three
months ended March 26, 1994 and March 27, 1993. . . . . . . . . 4
Consolidated Statements of Cash Flows for each of the three
months ended March 26, 1994 and March 27, 1993. . . . . . . . . 5
Notes to Consolidated Financial Statements. . . . . . . . . . . 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 7-8
PART II - OTHER INFORMATION
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2
HPSC, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
ASSETS
March 26, December 25,
1994 1993
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CASH AND CASH EQUIVALENTS $ 3,206 $ 16,600
RESTRICTED CASH 10,663 --
INVESTMENT IN LEASES AND NOTES:
Lease contracts receivable and notes
receivable due in installments 116,685 126,369
Estimated residual value of equipment
at end of lease term 11,341 12,325
Less unearned income (18,642) (21,803)
Less allowance for losses (7,007) (6,897)
Less security deposits (2,738) (2,860)
Deferred origination costs 2,426 2,618
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Net investment in leases and notes 102,065 109,752
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OTHER ASSETS:
Deferred expense and other assets 2,452 1,812
Refundable income taxes 1,089 2,273
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TOTAL ASSETS $119,475 $130,437
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LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE TO BANKS $ 5,739 $ 7,130
ACCOUNTS PAYABLE 5,324 5.348
ACCRUED INTEREST 331 3,434
INCOME TAXES:
Currently payable 1,005 310
Deferred 6,070 6,632
SENIOR NOTES 63,345 50,000
SUBORDINATED DEBT (net of unamortized
discount of $38) -- 19,962
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Total Liabilities 81,814 92,816
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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 4,924,097 shares in
1994 and 4,923,571 in 1993 49 49
Additional paid-in capital 13,645 13,645
Retained earnings 24,358 24,151
Cumulative foreign currency
translation adjustments (391) (224)
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Total stockholders' equity 37,661 37,621
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $119,475 $130,437
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
3
HPSC, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE MONTHS ENDED MARCH 26, 1994 AND MARCH 27, 1993
(in thousands, except per share and share amounts)
(unaudited)
March 26, March 27,
1994 1993
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REVENUES:
Earned income on leases and notes $ 3,605 $ 4,770
Provision for losses (156) (1,038)
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Net revenues 3,449 3,732
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EXPENSES:
Selling, general and administrative 1,798 588
Interest, net 1,311 2,373
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Total expenses 3,109 2,961
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INCOME BEFORE INCOME TAXES 340 771
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PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current 695 692
Deferred (562) (391)
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TOTAL INCOME TAXES 133 301
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NET INCOME $ 207 $ 470
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NET INCOME PER SHARE $ .04 $ .10
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SHARES USED TO COMPUTE INCOME PER SHARE. 4,944,614 4,929,459
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
4
HPSC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR EACH OF THE THREE MONTHS ENDED MARCH 26, 1994 AND MARCH 27, 1993
(in thousands)
(unaudited)
March 26, March 27,
1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 207 $ 470
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 123 270
Deferred income taxes (562) (391)
Provision for losses on lease contracts and notes
receivable 156 1,038
(Decrease) in accrued interest (3,103) (1,761)
(Decrease) in accounts payable (24) (876)
Increase (decrease) in accrued income taxes 695 (164)
(Increase) decrease in refundable income taxes 1,184 (3)
Decrease in other assets 174 314
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Cash used in operating activities (1,150) (1,103)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (89) (60)
Lease contracts receivable and notes receivable 9,692 8,764
Estimated residual value of equipment 984 (181)
Unearned income (3,161) (2,414)
Security deposits (122) (113)
Deferred origination costs 192 46
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Cash provided by investing activities 7,496 6,042
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Notes (56,655) --
Repayment of Subordinated Debt (20,000) --
Repayment of notes payable to banks (1,391) (5,000)
Proceeds from issuance of Senior Notes 70,000 --
Debt issuance costs (864) --
Net increase in demand notes payable to banks -- 144
(Increase) in restricted funds (10,663) --
Proceeds from issuance of common stock -- 1
Other (167) 40
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Cash used in financing activities (19,740) (4,815)
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Net (decrease) increase in cash and cash equivalents (13,394) 124
Cash and cash equivalents at beginning of period 16,600 625
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Cash and cash equivalents at end of period $ 3,206 $ 749
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Supplemental disclosures of cash flow information:
Interest Paid $ 4,133 $ 3,962
Income taxes paid -- 919
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
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HPSC, INC.
NOTES TO 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 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 1993 account balances have been
reclassed to conform with 1994 presentation.
2. Interest expense is net of interest income of $71,000 and $69,000 for the
three months ended March 26, 1994 and March 27, 1993, respectively. Included in
interest expense is amortization of debt discount of $38,000 and $218,000 for
the three months ended March 26, 1994 and March 27, 1993.
3. For the three months ended March 26, 1994 and March 27, 1993, the earnings
per share computation assumed the conversion of stock options under the modified
treasury stock method.
4. Effective January 1, 1993, the Company adopted Statement Accounting Standards
No. 109, "Accounting for Income Taxes," which requires recognition of deferred
tax liabilities and assets for the expected future tax consequences of events
that have been included in the financial statements or tax returns. Prior to
1993, the Company used the asset and liability method prescribed by Statement of
Financial Accounting Standards No. 96, under which deferred tax assets and
liabilities were recognized for all events that had been recognized in the
financial statements. The Company has determined the effect of this change in
accounting for income taxes had no impact on the financial results of the
Company.
5. On March 26, 1994 the Company had $10,663,000 in restricted cash of which
$4,243,000 was reserved for debt service and $6,420,000 was reserved for credit
enhancement pursuant to the terms of agreements entered into by the Company on
December 27, 1993 with respect to a $70,000,000 securitization transaction.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended March 26, 1994 Compared to Quarter Ended March 27, 1993
The Company's net income for the first quarter of 1994 was $207,000, or
$.04 per share, compared to $470,000, or $.10 per share, for the first quarter
of 1993. This decrease was due principally to a decrease in earned income on
leases and notes as well as a substantial increase in selling, general and
administrative costs, partially offset by a reduced provision for losses and a
reduction in interest expense discussed below.
Earned income on leases and notes for the first quarter of 1994 was
$3,605,000 compared to $4,770,000 for the first quarter of 1993. This decline is
partially due to a declining portfolio resulting from reduced bookings over the
last several quarters and to reduced finance rates charged to the Company's
customers. Healthco International, Inc. ("Healthco") had previously referred to
the Company substantially all of the Company's business. Healthco filed for
bankruptcy on June 9, 1993 and subsequently began liquidation under Chapter 7 of
the U.S. Bankruptcy Code. The Company has reduced its cost of capital
significantly as a result of the recent Securitization transaction which allowed
it to lower the rates which it charges to its customers while maintaining its
target margins on its financings. Although the Company's management anticipates
an increase in its 1994 bookings from 1993 levels, it expects earned income on
leases and notes to continue to decrease from comparable 1993 levels
until its volume of new business exceeds portfolio runoff. The Company's U.S.
bookings for the first quarter of 1994 were $4,647,800 compared to $4,441,100
for the comparable period in 1993. The Company also had $1,447,500 of Canadian
bookings in the first quarter of 1993 but decided to stop booking business in
Canada in July, 1993.
The provision for losses was $156,000 in the first quarter of 1994 compared
to $1,038,000 for the comparable period in 1993. This decrease is due in part
to an increase in loan loss reserves for the year ended December 25, 1993 and in
part to a decrease in business.
Selling, general and administrative expenses for the quarter were
$1,798,000 compared to $558,000 in the first quarter of 1993, based in large
part on the Company's need to replace services which were formerly provided by
Healthco under intercompany agreements between the two companies. After the
Healthco bankruptcy the Company hired additional senior
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management and sales and support personnel to assist the Company in its
transition to a financial services organization no longer affiliated with a
single vendor.
Net interest expense for the first quarter of 1994 decreased to $1,311,000
from $2,373,000 for the same period in 1993. This decrease resulted from a
reduced level of borrowings as well as reduced interest rates on outstanding
debt.
The Company's income before income taxes for the first quarter of 1994 was
$340,000 compared to $771,000 for the first quarter of 1993.
Despite the adverse developments arising out of the Healthco bankruptcy,
the Company has begun to replace the business previously supplied by Healthco
with referrals from other equipment vendors. The Company has established
relationships with several dental, healthcare and other equipment distributors
representing diversified sources of new business. At quarter end, the Company
had customer inquiries with respect to possible new business of $30,000,000,
compared to $20,000,000 of customer inquiries at December 25, 1993.
Additionally, consistent with its strategic plan, the Company opened a new sales
office in southern California in May 1994.
LIQUIDITY AND CAPITAL RESOURCES
At March 26, 1994 the Company had $13,869,000 in cash and cash equivalents
compared with $16,600,000 at the end of 1993. As described in footnote 5 to the
Company's consolidated financial statements included in this report on Form
10-Q, $10,663,000 of such cash was restricted pursuant to the Securitization
agreements as of March 26, 1994. Cash used in operating activities was
$1,150,000 for the three months ended March 26, 1994, compared to $1,103,000 for
the same period in 1993. Cash provided by investing activities was $7,496,000
for the three months ended March 26, 1994 compared to $6,042,000 for the first
quarter of 1993.
On December 27, 1993, the Company raised $70,000,000 through an asset
securitization transaction (the "Securitization") in which a wholly owned
subsidiary, HPSC Funding Corp. I ("HPSCF"), issued senior secured notes at a
rate of 5.01%. The notes were secured by a portion of the Company's portfolio
which it sold in part and contributed in part to HPSCF. Proceeds of this
financing were used to retire $50,000,000, 10.125% senior notes due
December 28, 1993, and $20,000,000, 10% subordinated debentures due
January 15, 1994.
The Company has continued discussions with the First National Bank of
Boston as agent bank for a new $20,000,000 revolving credit agreement. The
Company anticipates that it may seek to raise additional capital in 1994 to
finance its activities. The Company expects that it will be able to obtain the
line of credit and additional capital, but there can be no assurance it will be
able to do so.
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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
None
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months ended
March 26, 1994.
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.
Dated: May 10, 1994 HPSC, INC.
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(Registrant)
By: /s/ John Everets, Jr.
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John Everets, Jr.
Chief Executive Officer
Chairman of the Board
By: /s/ Dennis J. McMahon
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Dennis J. McMahon
Vice President--Administration
Controller
(Principal Accounting Officer)
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