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 June 25, 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
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 (IRS Employer
of Identification No.)
incorporation or
organization)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 720-3600
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470 ATLANTIC AVENUE, BOSTON, MASSACHUSETTS
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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
----- -----
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 6, 1994, 5,574,395.
THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON AUGUST 10, 1994 PURSUANT TO
A RULE 201 TEMPORARY HARDSHIP EXEMPTION.
1
HPSC, INC.
INDEX
PART I - FINANCIAL INFORMATION PAGE
----
Consolidated Balance Sheets as of June 25, 1994
and December 25, 1993............................ 3
Consolidated Statements of Income for each of the
three and six months ended June 25, 1994 and
June 26, 1993.................................... 4
Consolidated Statements of Cash Flows for
each of the six months ended June 25, 1994
and June 26, 1993................................ 5
Notes to Consolidated Financial Statements....... 6-7
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 8-9
PART II - OTHER INFORMATION
Signatures........................................ 10
Exhibit Index..................................... 11
2
HPSC, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
ASSETS
June 25, December 25,
1994 1993
------------ ------------
CASH AND CASH EQUIVALENTS $ 155 $ 16,600
RESTRICTED CASH 9,153 -----
INVESTMENT IN LEASES AND NOTES:
Lease contracts receivable and notes
receivable due in installments 110,750 126,369
Estimated residual value of equipment
at end of lease term 10,752 12,325
Less unearned income (17,511) (21,803)
Less allowance for losses (7,071) (6,897)
Less security deposits (2,711) (2,860)
Deferred origination costs 2,234 2,618
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Net investment in leases and notes 96,443 109,752
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OTHER ASSETS:
Deferred expense and other assets 2,022 1,812
Refundable income taxes 768 2,273
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TOTAL ASSETS $108,541 $ 130,437
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LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE TO BANKS $ 4,820 $ 7,130
ACCOUNTS PAYABLE 4,639 5.348
ACCRUED INTEREST 287 3,434
INCOME TAXES:
Currently payable 289 310
Deferred 5,597 6,632
SENIOR NOTES 54,988 50,000
SUBORDINATED DEBT (net of unamortized
discount of $38) ----- 19,962
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Total Liabilities 70,620 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 5,224,097 shares in
1994 and 4,923,571 in 1993 52 49
Additional paid-in capital 14,694 13,645
Retained earnings 24,497 24,151
Cumulative foreign currency
translation adjustments (371) (224)
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38,872 37,621
Less Loan Receivable from Employee
Stock Ownership Plan (951) -----
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Total stockholders' equity 37,921 37,621
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $108,541 $ 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 AND SIX MONTHS ENDED JUNE 25, 1994 AND JUNE 26, 1993
(in thousands, except per share and share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
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JUNE 25, JUNE 26, JUNE 25, JUNE 26,
1994 1993 1994 1993
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REVENUES:
Earned income on leases and notes $ 3,062 $ 4,876 $ 6,667 $ 9,646
Provision for losses (204) (1,028) (360) (2,066)
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Net revenues 2,858 3,848 6,307 7,580
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EXPENSES:
Selling, general and administrative 1,734 822 3,532 1,410
Interest, net 895 2,253 2,206 4,626
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Total expenses 2,629 3,075 5,738 6,036
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INCOME BEFORE INCOME TAXES 229 773 569 1,544
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PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current 560 536 1,258 1,228
Deferred (470) (229) (1,035) (620)
------------ ------------ ------------ ------------
TOTAL INCOME TAXES 90 307 223 608
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NET INCOME $ 139 $ 466 $ 346 $ 936
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NET INCOME PER SHARE $ .03 $ .09 $ .07 $ .19
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SHARES USED TO COMPUTE INCOME PER SHARE. 4,962,959 4,925,699 4,980,338 4,927,455
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
4
HPSC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR EACH OF THE SIX MONTHS ENDED JUNE 25, 1994 AND JUNE 26, 1993
(in thousands)
(unaudited)
June 25, June 26,
1994 1993
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 346 $ 936
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 222 539
Deferred income taxes (1,035) (620)
Provision for losses on lease contracts and notes
receivable 360 2,066
(Decrease) in accrued interest (3,147) (54)
(Decrease) in accounts payable (709) (2,357)
(Decrease) in accrued income taxes (21) (749)
Decrease in refundable income taxes 1,505 2
Decrease in other assets 799 306
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Cash (used in) provided by operating activities (1,680) 69
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (320) (74)
Lease contracts receivable and notes receivable 15,481 19,545
Estimated residual value of equipment 1,573 336
Unearned income (4,292) (5,678)
Security deposits (149) (244)
Deferred origination costs 384 263
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Cash provided by investing activities 12,677 14,148
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Notes (65,012) -----
Repayment of Subordinated Debt (20,000) -----
Repayment of notes payable to banks (2,310) (9,444)
Proceeds from issuance of Senior Notes 70,000 -----
Debt issuance costs (918) -----
Increase in restricted cash (9,153) -----
Proceeds from issuance of common stock ----- 1
Contribution to Employee Stock Ownership Plan 99 -----
Other (148) (30)
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Cash (used in) financing activities (27,442) (9,473)
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Net (decrease) increase in cash and cash equivalents (16,445) 4,744
Cash and cash equivalents at beginning of period 16,600 625
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Cash and cash equivalents at end of period $ 155 $ 5,369
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Supplemental disclosures of cash flow information:
Interest Paid $ 5,031 $4,212
Income taxes paid 1,031 3,081
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS
5
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 $83,000 and $65,000 for the
three months ended and $154,000 and $134,000 for the six months ended June 25,
1994 and June 26, 1993, respectively. Included in interest expense is
amortization of debt discount of $38,000 and $218,000 for the three months ended
and $38,000 and $436,000 for the six months ended June 25, 1994 and June 26,
1993, respectively.
3. For the three and six months ended June 25, 1994 and June 26, 1993, the
earnings per share computation assumes the conversion of stock options under the
modified treasury stock method and includes only those shares allocated to
participant accounts in the Company's Employee Stock Ownership Plan discussed in
Note 6.
4. Effective January 1, 1993, the Company adopted Statement of 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 effect of this change in accounting for income
taxes had no impact on the financial results of the Company.
The Items which comprise a significant portion of deferred tax liabilities
as of June 25, 1994 are as follows:
Operating method $8,620,000
State income tax accrual $1,590,000
Alternative minimum tax credit $(2,710,000)
Other $(1,903,000)
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Deferred income taxes $5,597,000
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5. On June 25, 1994, the Company had $9,153,000 in restricted cash of which
$3,287,000 was reserved for debt service and $5,866,000 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. In June, 1994, the Board of Directors authorized and the Company made a
contribution of $99,000 to the Employee Stock Ownership Plan (ESOP) for 1993.
This contribution had the effect of allocating 28,280 shares of common stock of
the Company to qualified participant accounts at the end of 1993 in a ratio
representing approximately 8.6% of qualified 1993 wages as defined in the
appropriate regulations. The ESOP holds 271,720 shares that have not yet been
funded or allocated to specific participant accounts. These unallocated shares
have not been included in earnings per share calculations.
6
HPSC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONT'D)
On July 28, 1994, the Company adopted a supplemental Employee Stock
Ownership Plan (Supplemental ESOP) that is expected to be primarily invested in
Common Stock of the Company. The Company has issued 350,000 shares of Common
Stock to the Supplemental ESOP which will be allocated first to the accounts of
certain highly compensated employees to make up for certain limitations on
Company contributions under the ESOP required by the 1993 Tax Act and next to
all eligible employees of the Company on a non-discriminatory basis. The
Company has not yet made contributions to the Supplemental ESOP. Shares
allocated to participant accounts in the Supplemental ESOP fully vest over five
years of service from plan adoption at 20% per year of service. At retirement or
other qualifying termination of a participant, the vested portion of the common
stock may be distributed or converted to cash.
7. On June 23, 1994 the Company executed a $20,000,000 revolving credit
agreement with the First National Bank of Boston and Continental Bank, N.A.. The
agreement is secured primarily by the customer receivables of the Company,
expires on December 31, 1995 and contains certain financial and other
restrictive covenants.
At June 25, 1994, the Company was in compliance with the covenants of the
agreement and had not yet drawn any funds under the agreement.
8. The Company entered into an agreement to transfer substantially all the
finance assets of Credident, Inc., its wholly-owned Canadian subsidiary,
effective June 30, 1994, to Newcourt Credit Group, Inc. (Newcourt), for
approximately $7 million (U.S.) in cash. The Company also entered into a
service agreement whereby Newcourt will manage certain accounts over the next
two years for a fee related to collections. The final accounting for assets
sold and those to be serviced by Newcourt has not yet been completed and the
effect of these transactions is not currently expected to have a material effect
on the Company's results of operations. Subsequent to the transfers, all of
Credident, Inc.'s Canadian bank debt was retired. As discussed in its annual
Form 10-K for fiscal 1993, HPSC ceased to book any more business in Canada
effective July, 1993. This transfer of substantially all of Credident's finance
assets is consistent with the Company's strategic plan to focus on its business
in the United States
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended June 25, 1994 Compared to Quarter Ended June 26, 1993.
The Company's net income for the second quarter of 1994 was $139,000, or
$.03 per share, compared to $466,000, or $.09 per share for the second quarter
of 1993. For the six months ended June 25, 1994, net income was $346,000 or
$.07 per share compared to $936,000 or $.19 per share in 1993. These decreases
were due principally to a decrease in earned income on leases and notes as well
as a continuing increase in selling, general administrative costs as part of the
Company's implementation of its long term strategic plan, partially offset by a
reduced provision for losses and a reduction in interest expense discussed
below.
Earned income on leases and notes for the second quarter of 1994 was
$3,062,000 compared to $4,876,000 for the second quarter of 1993. For the six
months ended June 25, 1994, earned income was $6,667,000 compared to $9,646,000
in 1993. This decline is partially due to a declining portfolio resulting from
reduced bookings over the last several quarters of 1993 and to reduced finance
rates charged to the Company's customers. The reduced bookings were due to the
fact that Healthco International, Inc. (Healthco), which had previously referred
to the Company substantially all of the Company's business, 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 as a result of a
securitization transaction described herein in the first quarter of 1994 which
allowed it to lower the rates which it charges to its customers, while helping
to maintain its target margins on financings. Although the Company's management
anticipates increases 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 consistently exceeds portfolio runoff. The
Company's U.S. bookings for the second quarter of 1994 were $6,296,000 compared
to $4,027,000 for the comparable period in 1993. The Company also had
$1,096,000 of Canadian bookings in the second quarter of 1993 but stopped
booking business in Canada in July, 1993.
The provision for losses was $204,000 in the second quarter of 1994
compared to $1,028,000 for the comparable period in 1993. For the six months
ended June 25, 1994, the provision for losses was $360,000 compared to
$2,066,000 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
portfolio size.
Selling general and administrative expenses for the second quarter of 1994
were $1,734,000 compared to $822,000 in the second quarter of 1993. For the six
months ended June 25, 1994 it was $3,532,000 compared to $1,410,000 in 1993.
The increase was due in part on the Company's need to replace services which
were formerly provided by Healthco under intercompany agreements between the two
companies. The Company continues to hire additional sales and support personnel
to assist in its transition to a diversified financial services organization no
longer affiliated with a single vendor. The Company opened an asset based
lending subsidiary with an office in Connecticut and a Midwest Division near St.
Louis, supported by a sales office in Oregon, during the second quarter.
Net interest expense for the second quarter of 1994 decreased to $895,000
from $2,253,000 for the same period in 1993. For the six months ended June 25,
1994, interest expense was $2,206,000 compared to $4,626,000 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 second quarter of 1994 was
$229,000 compared to $773,000 for the second quarter of 1993. For the six
months ended June 25, 1994, income before income taxes was $569,000 compared to
$1,544,000 in 1993.
Despite the adverse developments arising out of the Healthco bankruptcy,
the Company is replacing the business previously supplied by Healthco with
referrals from the Company's customers and an expanding list of vendors
representing diversified sources of new business. At quarter end, the Company
had customer inquiries with respect to possible new business of $36,000,000,
compared to $20,000,000 of customer inquiries at December 25, 1993. The volume
of U.S. bookings in the first six months of 1994 was $10,843,000 compared to
$8,468,000 in 1993.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES
At June 25, 1994 the Company had $155,000 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, $9,153,000 of cash was restricted pursuant to the Securitization agreements
as of June 25, 1994. Cash used for operating activities was $1,680,000 for the
six months ended June 25, 1994, compared to $69,000 of cash provided by
operating activities for the same period in 1993. Cash provided by investing
activities was $12,677,000 for the six months ended June 25, 1994 compared to
$14,148,000 for the same period in 1993.
On December 27, 1993, the Company raised $70,000,000 through an asset
securitization transaction in which a wholly owned subsidiary, HPSC Funding
Corp. I 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 HPSC Funding. 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. As of June 25, 1994, the HPSC
Funding portfolio is performing according to expectations. On June 23, 1994,
the Company entered into a $20,000,000 revolving credit agreement with The First
National Bank of Boston as Agent Bank and Continental Bank, N.A. as described in
Note 7 of the Financial Statements.
The Company anticipates that it may seek to raise additional capital in
1994 to finance its activities and expects that it will be able to obtain
additional capital on competitive terms, but there can be no assurance it will
be able to do so.
9
HPSC, INC.
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 3 AND 5 ARE OMITTED BECAUSE THEY ARE INAPPLICABLE
Item 4. Submission of matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on May 25, 1994, at
which its stockholders voted to elect each of the nominees for director of the
Company and to ratify the appointment of Coopers & Lybrand as independent
accountants for the fiscal year ending December 31, 1994. Total voters cast for
and withheld from each director are as follows:
Total Vote for Total Vote Withheld
Each Director from each Director
------------- ------------------
Joseph A. Biernat 2,859,382 2,024,904
J. Kermit Birchfield 2,859,482 2,024,804
Louis J.P. Calisti 2,858,382 2,025,904
Dollie A. Cole 2,859,482 2,024,804
Samuel P. Cooley 2,859,382 2,024,904
Raymond R. Doherty 2,857,682 2,026,604
John Everets, Jr. 2,856,782 2,027,504
Thomas M. McDougal 2,859,382 2,024,904
Stockholders holding 2,915,654 shares voted in favor of ratification of the
appointment of Coopers & Lybrand, stockholders holding 3,300 shares voted
against and stockholders holding 1,965,332 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
See the Exhibit Index on Page 11.
b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three months
ended June 25, 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: August 9, 1994 HPSC, INC.
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(Registrant)
By: /s/ John Everets, Jr.
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John Everets, Jr.
Chairman & Chief Executive Officer
By: /s/ Rene Lefebvre
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Rene Lefebvre
Chief Financial Officer
By: /s/ Dennis J. McMahon
----------------------------------------
Dennis J. McMahon
Vice President--Administration
Controller
(Principal Accounting Officer)
10
HPSC, INC.
EXHIBIT INDEX
EXHIBIT
NO. TITLE PAGE
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3.1 Amended and Restated By-Laws
10.1 Revolving Credit Agreement dated as of
June 23, 1994 among HPSC, Inc., The First
National Bank of Boston, individually and
as agent, and Continental Bank, N.A.,
individually and as co-agent
10.2 First Amendment effective January 1, 1993
to HPSC, Inc. Employee Stock Ownership
Plan
10.3 HPSC, Inc. Supplemental Employee Stock
Ownership Plan and Trust dated July 25, 1994
10.4 HPSC, Inc. 1994 Stock Plan dated as
of March 23, 1994 and related forms of
Non-qualified Option Grant and Option
Exercise Form
10.5 Employment Agreement between HPSC, Inc.
and Rene Lefebvre dated April 6, 1994
10.6 Amendment dated as of May 25, 1994 to
Employment Agreement between HPSC, Inc.
and John Everets, Jr.
10.7 Amendment dated as of May 25, 1994 to
Employment Agreement between HPSC, Inc.
and Raymond R. Doherty.
11