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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 March 31, 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 Identification No.)
incorporation or organization)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (617) 720-3600
NONE
(Former name, former address, and former fiscal year if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date: COMMON STOCK, PAR VALUE $.01 PER
SHARE. SHARES OUTSTANDING AT APRIL 26, 2000, 4,184,630.
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HPSC, INC.
INDEX
PAGE
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PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of March 31, 2000 and December 31,
1999......................................................................... 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2000 and March 31, 1999...................................... 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2000 and March 31, 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.................................................................... 11
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HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
(unaudited)
ASSETS
CASH AND CASH EQUIVALENTS .......................................... $ 2,153 $ 1,356
RESTRICTED CASH .................................................... 16,112 14,924
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments ...... 401,045 387,909
Notes receivable .............................................. 39,709 38,720
Retained interest in leases and notes sold .................... 19,359 17,869
Estimated residual value of equipment at end of lease term .... 19,655 18,988
Less unearned income .......................................... (97,344) (94,228)
Less allowance for losses ..................................... (9,532) (9,150)
Less security deposits ........................................ (6,569) (6,721)
Deferred origination costs .................................... 8,898 8,696
--------- ---------
Net investment in leases and notes ................................. 375,221 362,083
--------- ---------
OTHER ASSETS:
Other assets .................................................. 7,193 7,104
Refundable income taxes ....................................... 260 260
--------- ---------
TOTAL ASSETS ....................................................... $ 400,939 $ 385,727
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS ........................................ $ 74,000 $ 70,000
SENIOR NOTES ....................................................... 242,613 227,445
SENIOR SUBORDINATED NOTES .......................................... 20,000 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ........................... 9,997 15,454
ACCRUED INTEREST ................................................... 2,217 1,940
INCOME TAXES:
Currently payable ............................................. 408 398
Deferred ...................................................... 10,585 10,192
--------- ---------
TOTAL LIABILITIES .................................................. 359,820 345,429
--------- ---------
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 4,704,030 shares in 2000 and
4,699,530 in 1999 ............................................. 47 47
Additional paid-in capital .................................... 14,191 14,119
Retained earnings ............................................. 31,860 31,167
Less: Treasury Stock (at cost) 526,300 shares in 2000 and
518,500 in 1999 .............................................. (3,681) (3,611)
Deferred compensation ......................................... (913) (1,008)
Notes receivable from officers and employees .................. (385) (416)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY ......................................... 41,119 40,298
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $ 400,939 $ 385,727
========= =========
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 THE THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(in thousands, except per share and share amounts)
(unaudited)
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2000 1999
--------- ---------
REVENUES:
Earned income on leases and notes ............. $ 11,492 $ 9,260
Gain on sales of leases and notes ............. 1,154 1,165
Provision for losses .......................... (1,357) (749)
----------- -----------
Net Revenues ...................................... 11,289 9,676
----------- -----------
EXPENSES:
Selling, general and administrative ........... 4,770 4,547
Interest expense .............................. 5,669 4,222
Interest income ............................... (330) (103)
----------- -----------
Net operating expenses ............................ 10,109 8,666
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INCOME BEFORE INCOME TAXES ........................ 1,180 1,010
----------- -----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current ................................... 98 72
Deferred .................................. 383 318
Additional paid-in capital from exercise of
non-qualified stock options .............. 6 26
----------- -----------
TOTAL INCOME TAXES ................................ 487 416
----------- -----------
NET INCOME ........................................ $ 693 $ 594
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BASIC NET INCOME PER SHARE ........................ $ 0.19 $ 0.16
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SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE .................................. 3,746,707 3,765,517
DILUTED NET INCOME PER SHARE ...................... $ 0.16 $ 0.14
=========== ===========
SHARES USED TO COMPUTE DILUTED NET
INCOME PER SHARE .................................. 4,319,621 4,340,447
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 THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(in thousands)
(unaudited)
MARCH 31, MARCH 31,
2000 1999
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ....................................................... $ 693 $ 594
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................... 1,417 1,142
Increase in deferred income taxes ................................ 393 318
Restricted stock and option compensation ......................... 95 150
Gain on sale of lease contracts and notes receivable ............. (1,154) (1,165)
Provision for losses on lease contracts and notes receivable ..... 1,357 749
Increase in accrued interest ..................................... 277 371
Increase (decrease) in accounts payable and accrued liabilities .. (172) 74
Increase in accrued income taxes ................................. 10 16
Decrease in refundable income taxes .............................. -- 33
Increase in other assets ......................................... (46) (154)
-------- --------
Cash provided by operating activities ................................. 2,870 2,128
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due in
installments ................................................... (66,651) (39,813)
Portfolio receipts, net of amounts included in income ............ 23,451 20,006
Proceeds from sales of lease contracts and notes receivable due in
installments ................................................... 21,544 9,829
Net (increase) decrease in notes receivable ...................... (975) 3,114
Net increase (decrease) in security deposits ..................... (152) 79
Net (increase) decrease in other assets .......................... 374 (142)
Net decrease in loans to employees ............................... 31 36
-------- --------
Cash used in investing activities ..................................... (22,378) (6,891)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes ........................................ (24,932) (18,337)
Proceeds from issuance of senior notes, net of debt issue costs .. 40,099 33,069
Net proceeds (repayments) of revolving credit borrowings ......... 4,000 (8,000)
Purchase of treasury stock ....................................... (70) (683)
Increase in restricted cash ...................................... 1,188 1,256
Exercise of employee stock options ............................... 20 53
-------- --------
Cash provided by financing activities ................................. 20,305 7,358
-------- --------
Net increase in cash and cash equivalents ............................. 797 2,595
Cash and cash equivalents at beginning of period ...................... 1,356 4,583
-------- --------
Cash and cash equivalents at end of period ............................ $ 2,153 $ 7,178
======== ========
Supplemental disclosures of cash flow information:
Interest paid .................................................... $ 5,257 $ 3,696
Income taxes paid ................................................ 77 43
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
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HPSC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The information presented for the interim periods is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of HPSC, Inc. (the "Company"), are necessary for a fair
presentation of the financial position, results of operations and cash flows for
the periods presented. The results for interim periods are not necessarily
indicative of results to be expected for the full fiscal year. Certain 1999
account balances have been reclassified to conform with 2000 presentation. Such
financial statements have been prepared in accordance with the instructions of
Form 10-Q pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations. As a result, these financial statements
should be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's latest annual report on Form 10-K.
2. 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"), 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. In March 2000, the HPSC Bravo Funding Corp. ("Bravo") revolving credit
facility (the "Bravo Facility") was amended under substantially the same terms
and conditions, providing the Company with available borrowings of up to
$347,500,000. As of March 31, 2000, Bravo had a total of $207,611,000
outstanding under the loan and sale portions of the Bravo Facility ($145,871,000
in loans and $61,740,000 in sales). Bravo incurs interest at various rates in
the commercial paper market and enters into interest rate swap agreements to
assure fixed rate funding. In connection with these borrowing and sales, Bravo
had a total of 41 separate interest rate swap contracts with BankBoston with a
total notional value of $207,000,000 at March 31, 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.
4. 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 the revolving credit facility (the "Capital
Facility"), Capital had a total of $122,068,000 outstanding in loans and sales
($77,956,000 in loans and $44,112,000 in sales) at March 31, 2000, and in
connection with these borrowings and sales, had 22 separate interest rate swap
agreements with BankBoston with a total notional value of $118,887,000. These
interest rate swaps are matched swaps, and as such, are accounted for using
settlement accounting. Monthly cash settlements on the swap agreements are
recognized in income as they accrue. In the case where the notional value of the
interest rate swap agreements significantly exceeds the outstanding underlying
debt, the excess swap agreements would be marked-to-market through income until
new borrowings are incurred which would be subject to such swap agreements. All
interest rate swap agreements entered into by the Company are for other than
trading purposes.
5. On March 31, 2000, the Company had restricted cash of $10,476,000
under the Bravo Facility and $5,636,000 under the Capital Facility. All such
restricted cash is reserved for debt service.
6. 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.
7. 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 three month
periods ended March 31, 2000 and March 31, 1999.
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8. A summary of information about the Company's operations by segment for
each of the three months ended March 31, 2000 and 1999 is as follows:
COMMERCIAL
LICENSED AND
(in thousands) PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL
------------ ---------- -----
FOR THE THREE MONTHS ENDED MARCH 31, 2000
- -----------------------------------------
Earned income on leases and notes ............... $ 10,272 $ 1,220 $ 11,492
Gain on sales of leases and notes ............... 1,154 -- 1,154
Provision for losses ............................ (1,357) -- (1,357)
Selling, general and administrative expenses..... (4,270) (500) (4,770)
--------- --------- ---------
Net profit contribution ......................... 5,799 720 6,519
Total assets .................................... 364,099 36,840 400,939
FOR THE THREE MONTHS ENDED MARCH 31, 1999
- -----------------------------------------
Earned income on leases and notes ............... 8,087 1,173 9,260
Gain on sales of leases and notes ............... 1,165 -- 1,165
Provision for losses ............................ (720) (29) (749)
Selling, general and administrative expenses..... (4,151) (396) (4,547)
--------- --------- ---------
Net profit contribution ......................... 4,381 748 5,129
Total assets .................................... 270,122 35,677 305,799
The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
FOR THE THREE MONTHS ENDED MARCH 31, 2000 1999
---- ----
(in thousands)
Net segment profit contribution....... $ 6,519 $ 5,129
Interest expense ..................... (5,669) (4,222)
Interest income on cash balances...... 330 103
------- -------
Income before income taxes ........... $ 1,180 $ 1,010
Other Segment Information - The Company derives substantially all of its
revenues from domestic customers. As of March 31, 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
11% of the total portfolio of that segment. The licensed professional financing
segment relies on certain vendors to provide referrals to the Company. For the
three months ended March 31, 2000, no one vendor accounted for greater than 8%
of the Company's licensed professional financing originations.
9. 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 March 31,
2000 was $11,492,000 (including approximately $1,220,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $9,260,000 (including approximately $1,173,000 from ACFC) for the
three months ended March 31, 1999. The increase of 24% was due primarily to an
increase in the net investment in leases and notes in 2000 over 1999, resulting
in part from a higher level of originations in the first quarter of 2000 of
$57,253,000 compared to $40,277,000 for the same period in 1999. Gains on sales
of leases and notes were $1,154,000 in the three months ended March 31, 2000
compared to $1,165,000 for the quarter ended March 31, 1999. The decrease was
due to higher levels of asset sales activity in 2000 of $24,166,000 compared to
$10,921,000 in 1999, offset by lower margins generated by the current year asset
sales.
Interest expense (net of interest income) for the first quarter of 2000 was
$5,339,000 (46% of earned income) compared to $4,119,000 (44% of earned income)
in the comparable 1999 period. The increase in net interest expense was
primarily due to a 35% increase in average debt levels from March 31, 1999 to
March 31, 2000. These higher average debt levels resulted primarily from
borrowings to finance a higher level of contract originations. The increase in
percentage was due to higher interest rate borrowing costs during the most
recent three month period as compared to borrowing costs during the first three
months of the Company's prior fiscal year.
Net financing margin (earned income less net interest expense) for the
first quarter of 2000 was $6,153,000 (54% of earned income) compared to
$5,141,000 (56% of earned income) for the first quarter of 1999. The increase in
amount was due to higher earnings on a higher balance of earning assets. The
decrease in percentage was due to higher interest rate borrowing costs during
the most recent three month period as compared to borrowing costs during the
first three months of the Company's prior fiscal year.
The provision for losses for the first quarter of 2000 was $1,357,000 (12%
of earned income) compared to $749,000 (8% of earned income) in the first
quarter of 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 March 31, 2000 was $9,532,000 (2.5% 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 three months
ended March 31, 2000 were $975,000 compared to $534,000 for the same period in
1999.
Selling, general and administrative expenses for the three months ended
March 31, 2000 were $4,770,000 (42% of earned income) compared to $4,547,000
(49% of earned income) in the comparable 1999 period. The increase in amount was
caused by increased administrative costs required to support higher levels of
owned and serviced assets. The decrease in percentage of earned income 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 March 31,
2000 was $1,180,000 compared to $1,010,000 in the same period in 1999. The
provision for income taxes was $487,000 (41% of income before income taxes) for
the three months ended March 31, 2000 compared to $416,000 (41% of income before
income taxes) for the same period in 1999.
The Company's net income for the three months ended March 31, 2000 was
$693,000 ($0.16 diluted net income per share) compared to $594,000 ($0.14
diluted net income per share) for the three months ended March 31, 1999. The
increase resulted from higher earned income on 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 March 31, 2000, the Company had $18,265,000 in cash, cash equivalents
and restricted cash as compared to $16,280,000 at December 31, 1999. As
described in Note 5 to the Company's condensed consolidated financial statements
included in this report on Form 10-Q, $16,112,000 was restricted pursuant to
financing agreements as of March 31, 2000, compared to $14,924,000 at December
31, 1999.
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Cash provided by operating activities was $2,870,000 for the three months
ended March 31, 2000 compared to $2,128,000 for the three months ended March 31,
1999. The significant components of cash provided by operating activities for
the three months ended March 31, 2000 as compared to the same period in 1999
were an increase in the provision for losses of $1,357,000 compared to $749,000
for the same period in 1999, offset by gains on sales of lease contracts and
notes receivable of $1,154,000 in 2000 compared to $1,165,000 for the same
period in 1999.
Cash used in investing activities was $22,378,000 for the three months
ended March 31, 2000 compared to $6,891,000 for the three months ended March 31,
1999. The significant components of cash used in investing activities for the
first three 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
$66,651,000 from $39,813,000 and an increase in notes receivable of $975,000
compared to a decrease of $3,114,000 in the prior year, offset by an increase in
portfolio receipts to $23,451,000 from $20,006,000, along with an increase in
proceeds from sales of lease contracts and notes receivable of $21,544,000 in
2000 compared to $9,829,000 in the comparable period ended March 31, 1999.
Cash provided by financing activities for the three months ended March 31,
2000 was $20,305,000 compared to $7,358,000 for the three months ended March 31,
1999. The significant components of cash provided by financing activities for
the first three 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 $40,099,000 from $33,069,000, and net proceeds from revolving credit
borrowings of $4,000,000 in the first three months of 2000 compared to net
repayments of revolving credit borrowings of $8,000,000 in the same period in
1999, offset by higher repayments of senior notes of $24,932,000 for the three
months ended March 31, 2000 compared to $18,337,000 for the three months ended
March 31, 1999.
In May 1999, the Company executed the Third Amendment to the Third Amended
and Restated Revolving Credit Agreement with BankBoston as the Agent Bank (the
"Revolver Agreement"). The Third Amendment to the Revolver Agreement provides
availability to the Company of $90,000,000 through May 2000. Under the Revolver
Agreement, the Company may borrow at variable rates of prime and at LIBOR plus
1.35% to 1.50% respectively, depending upon certain performance covenants. At
March 31, 2000, the Company had $74,000,000 outstanding under this facility and
$16,000,000 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 May 2000, the
Company executed the Fourth Amended and Restated Revolving Credit Agreement,
providing the Company with available borrowings up to $90,000,000 under
substantially the same terms and conditions.
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.
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
BankBoston pursuant to the terms of the facility. At March 31, 2000, the Company
had $44,112,000 outstanding from sales of receivables and $77,956,000 of
borrowings outstanding from loans under the Capital Facility. In connection with
this facility, the Company had 22 separate interest rate swap agreements with
BankBoston with a total notional value of $118,887,000.
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 on substantially the same terms and
conditions, providing the Company with available borrowings up to $347,500,000.
Under the terms of the Bravo Facility, Bravo, to
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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 pursuant to the terms of the
facility. At March 31, 2000, Bravo had $61,740,000 outstanding from sales of
receivables under the sale accounting portion of the Bravo Facility and
$145,871,000 of indebtedness outstanding under the loan portion of the Bravo
Facility. In connection with this facility, the Company had 41 separate interest
rate swap agreements with BankBoston with a total notional value of
$207,000,000.
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 $14,112,000 outstanding under all loan agreements
with SIS at March 31, 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
future projected levels of financings and to carry on normal operations. In
order to finance adequately its anticipated growth, the Company will continue to
seek to raise additional capital from bank and non-bank sources, make selective
use of asset sale transactions and use its current credit facilities. The
Company expects that it will be able to obtain additional capital at competitive
rates, but there can be no assurance it will be able to do so.
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.
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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
10.1 Amended and Restated Purchase and Contribution Agreement, dated
March 31, 2000, between HPSC, Inc. and HPSC Bravo Funding Inc.
10.2 Amended and Restated Lease Receivable Purchase Agreement, dated
March 31, 2000, by and among HPSC Bravo Funding, Inc., HPSC,
Inc., Triple-A One Funding Corporation, and Capital Markets
Assurance Corporation.
27 Financial Data Schedule
b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended March
31, 2000.
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: May 15, 2000
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