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 31, 1995
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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 _____________________
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 of (IRS Employer 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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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 ______
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 1, 1995, 5,574,712.
1
HPSC, INC.
INDEX
PART 1 -- FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets as of March 31, 1995, and
December 31, 1994............................................... 3
Consolidated Statements of Income for each of the three
months ended March 31, 1995 and March 26, 1994.................. 4
Consolidated statements of Cash Flows for each of the three
months ended March 31, 1995 and March 26, 1994.................. 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
Exhibit Index................................................... 9
Signatures...................................................... 9
2
HPSC, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
ASSETS
March 31, December 31,
1995 1994
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CASH AND CASH EQUIVALENTS $ 658 $ 419
RESTRICTED CASH 7,413 7,936
INVESTMENT IN LEASES AND NOTES:
Lease contracts receivable and notes receivable due in installments 109,966 103,531
Estimated residual value of equipment at end of lease term 9,361 9,321
Less unearned income (18,436) (16,924)
Less allowance for losses (4,578) (4,595)
Less security deposits (2,824) (2,639)
Deferred origination costs 2,723 2,499
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Net investment in leases and notes 96,212 91,193
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OTHER ASSETS:
Deferred expense and other assets 2,518 2,154
Refundable income taxes 814 1,446
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TOTAL ASSETS $107,615 $103,148
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LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE TO BANKS 19,500 $ 16,500
NOTES PAYABLE - TREASURY STOCK PURCHASE 3,000 4,500
ACCOUNTS PAYABLE 2,071 2,450
ACCRUED INTEREST 469 293
INCOME TAXES:
Currently payable 56 20
Deferred 4,945 5,539
SENIOR NOTES 44,662 41,024
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TOTAL LIABILITIES $ 74,703 $ 70,326
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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 5,574,712 shares in 1995 and
5,574,395 shares in 1994 56 56
TREASURY STOCK (at cost) 1,225,182 shares (5,023) (5,023)
Additional paid-in capital 15,916 15,916
Retained earnings 24,688 24,601
Cumulative foreign currency translation adjustments (549) (552)
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35,088 34,998
Less deferred ESOP and SESOP compensation (2,176) (2,176)
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Total Stockholders' Equity 32,912 32,822
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $107,615 $103,148
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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 31, 1995 AND MARCH 26, 1994
(in thousands, except per share and share amounts)
(unaudited)
March 31, March 26,
1995 1994
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REVENUES:
Earned income on leases and notes $ 2,944 $ 3,605
Provision for losses (277) (156)
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Net revenues 2,667 3,449
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EXPENSES:
Selling, general and administrative 1,480 1,798
Interest, net 1,044 1,311
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Total expenses 2,524 3,109
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INCOME BEFORE INCOME TAXES 143 340
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PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current 650 695
Deferred (594) (562)
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TOTAL INCOME TAXES 56 133
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NET INCOME $ 87 $ 207
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NET INCOME PER SHARE $ .02 $ .04
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SHARES USED TO COMPUTE INCOME PER SHARE: 5,044,811 4,944,614
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 31, 1995 AND MARCH 26, 1994
(in thousands)
(unaudited)
March 31, March 26,
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 87 $ 207
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 125 123
Deferred income taxes (594) (562)
Provision for losses on lease contracts and notes
receivable 277 156
Increase (decrease) in accrued interest 176 (3,103)
(Decrease) in accounts payable (379) (24)
Increase in accrued income taxes 36 695
Decrease in refundable income taxes 632 1,184
(Increase) decrease in other Assets (209) 174
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Cash provided by (used in) operating activities 151 (1,150)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32) (89)
Lease contracts receivable and notes receivable (6,758) 9,692
Estimated residual value of equipment (40) 984
Unearned income 1,512 (3,161)
Security deposits 185 (122)
Deferred orgination costs (224) 192
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Cash (used in) provided by investing activities (5,357) 7,496
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Notes (5,862) (56,655)
Repayments of Subordinated Debt -- (20,000)
Repayment of notes payable to banks -- (1,391)
Repayment of notes payable treasury stock purchase (1,500) --
Proceeds from issuance of Senior Notes 9,500 70,000
Proceeds from revolving notes payable to banks 3,000 --
Decrease (increase) in restricted funds 523 (10,663)
Debt issuance costs (219) (864)
Other 3 (167)
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Cash provided by (used in) financing activities 5,445 (19,740)
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Net increase(decrease) in cash and cash equivalents 239 (13,394)
Cash and cash equivalents at beginning of period 419 (16,600)
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Cash and cash equivalents at end of period $ 658 $ 3,206
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Supplemental disclosures of cash flow information:
Interest paid $ 886 $ 4,133
Income taxes paid 71 --
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 1994
account balances have been reclassed to conform with 1995 presentation.
2. Interest expense is net of interest income of $95,000 and $71,000 for the
three months ended March 31, 1995, and March 26, 1994, respectively. Included
in interest expense is amortization of debt discount of -0- and $38,000 for
the three months ended March 31, 1995, and March 26, 1994.
3. For the three months ended March 31, 1995, and March 26, 1994, the
earnings per share computation assumed the exercise of stock options under
the modified treasury stock method.
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 March 31, 1995, are as follows:
Operating method $ 6,217,000
State income tax accrual $ 1,134,000
Alternative minimum tax credit $ (612,000)
Other $(1,794,000)
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Deferred income taxes $ 4,945,000
5. On March 31, 1995, the Company had $7,413,000 in restricted cash of which
$4,065,000 was reserved for debt service and $3,348,000 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 31, 1995 Compared to Quarter Ended March 26, 1994
The Company's net income in the first quarter of 1995 was $87,000 or $.02 per
share compared to $207,000 or $.04 per share in the first quarter of 1994.
This decrease was principally due to a decrease in earned income on leases
and notes and an increase in the provision for losses partially offset by
lower selling, general and administrative expenses and reduced interest costs.
Earned income on leases and notes for the first quarter of 1995 was
$2,944,000 compared to $3,605,000 for the first quarter of 1994. This
decline was primarily due to a declining portfolio resulting from a run-off
of portfolio assets exceeding the new financings for most of 1994 and the
sale of the Canadian portfolio during 1994. The Company's volume of new
financing for the first quarter of 1995 was approximately $14,600,000
compared to $4,648,000 in the comparable period in 1994.
The provision for losses in the first quarter of 1995 was $277,000 compared
to $156,000 in 1994. This increase was due to the higher volume of new
financings added.
Selling, general and administrative expenses for the quarter were $1,480,000
compared to $1,798,000 in 1994. This decrease was due primarily to a
significant decrease in Canadian subsidiary operating costs.
Net interest expense for the first quarter of 1995 decreased to $1,044,000
from $1,311,000 for the same period in 1994. This decrease was caused by the
elimination of Canadian interest costs in 1995 compared to 1994, and higher
debt levels in 1995 at lower interest rates.
The Company's income before income taxes in the first quarter of 1995 was
$143,000 compared to $340,000 in 1994, and its effective tax rate remained
constant.
The Company continues to increase the amount of new financing assets added to
the portfolio for the fifth consecutive quarter. The quarter ended March 31,
1995 was the first quarter in the last five years in which that the net
investment in leases and notes increased from the previous quarter end.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(cont'd)
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company has $8,071,000 in cash and cash equivalents as
compared to $8,355,000 at the end of 1994. As described in Note 6 to the
Company's consolidated financial statements included in this report on Form
10-Q, $7,413,000 of such cash was restricted pursuant to financing agreements
as of March 31, 1995. Cash provided by operating activities was $151,000 for
the three months ended March 31, 1995 compared to cash used in operating
activities of $1,150,000 in the same period of 1994. Cash used in investing
activities was $5,357,000 for the three months ended March 31, 1995 compared
to cash provided by investing activities of $7,496,000 for the first quarter
of 1994.
As of January 31, 1995, the Company, along with its newly-formed,
wholly-owned, special-purpose subsidiary, HPSC Bravo Funding Corp.
("Bravo") completed a $50,000,000 revolving credit facility structured and
guaranteed by Capital Markets Assurance Corporation ("CapMAC"). Under the
terms of the facility, Bravo, to which the Company has sold and may continue
to sell or contribute certain of its portfolio assets, pledges its interest
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 transactions. Additional sales to Bravo
from HPSC may be made subject to certain covenants regarding Bravo's
portfolio performance and borrowing base calculations.
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 Cap MAC pursuant to the
terms of the agreement. Amounts outstanding under this agreement were
$9,500,000 at March 31, 1995.
In February 1995, the Company's Revolving Loan Agreement was amended to
increase availability to $25 Million. The Company currently has received
commitments to increase the availability under an amended and restated
agreement to $50 Million subject to finalizing negotiations and
documentation. This new agreement would expire at December 31, 1995. In
order to finance adequately its anticipated growth, the Company will continue
to seek to raise additional capital from bank and non-bank sources in 1995.
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.
8
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
10.1 Loan Agreement between Springfield Institution for
Savings and HPSC, Inc. dated April 13, 1995.
10.2 Eighth Amendment dated as of April 12, 1995 to
Revolving Credit Agreement dated as of June 23,
1994, among HPSC, Inc., The First National Bank of Boston,
individually and as agent, and Bank of America Illinois,
individually and as co-agent.
10.3 Ninth Amendment dated as of April 28, 1995, to
Revolving Credit Agreement dated as of June 23, 1994,
among HPSC, Inc., The First National Bank of Boston,
individually and as agent, and Bank of America Illinois,
individually and as co-agent.
10.4 Tenth Amendment dated as of May 11, 1995 to
Revolving Credit Agreement dated as of June 23, 1994,
among HPSC, Inc., The First National Bank of Boston,
individually and as agent, and Bank of America Illinois,
individually and as co-agent.
27. Financial Data Schedule.
b) Reports on Form 8-K
During the quarter for which this report is filed, the Company filed
with the Commission the following report on Form 8-K.
The Registrant determined on March 29, 1995 to change its fiscal year
from a 52/53 week year (the "Old Fiscal Year") to a calendar year (the
"New Fiscal Year"). Since the quarter ending dates for the Old Fiscal
Year and the New Fiscal Year coincided for the quarter ended December 31,
1994, there is no stub period and accordingly no report covering the
transition period needs to be filed.
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 12, 1995 HPSC, INC.
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(Registrant)
By: /s/ John W. Everets
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John W. Everets
Chief Executive Officer
Chairman of the Board
By: /s/ Rene Lefebvre
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Rene Lefebvre
Vice President
Chief Financial Officer
9