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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 SEPTEMBER 30, 2000 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-11618
HPSC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2560004
(State or other jurisdiction of (IRS Employer 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 NOVEMBER 1, 2000, 4,176,553.
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HPSC, INC.
INDEX
PAGE
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PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999..................................................... 3
Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2000 and 1999.................................. 4
Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2000 and 1999......................................... 5
Notes to Condensed Consolidated Financial Statements...................... 6
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................. 9
PART II -- OTHER INFORMATION
Other Information......................................................... 12
Signatures................................................................ 12
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HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- ------------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS........................................... $ 433 $ 1,356
RESTRICTED CASH..................................................... 12,866 14,924
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments.......... 423,821 387,909
Notes receivable.................................................. 48,271 38,720
Retained interest in leases and notes sold........................ 25,977 17,869
Estimated residual value of equipment at end of lease term........ 21,540 18,988
Less unearned income.............................................. (104,139) (94,228)
Less allowance for losses......................................... (11,795) (9,150)
Less security deposits............................................ (6,185) (6,721)
Deferred origination costs........................................ 9,343 8,696
--------- ---------
Net investment in leases and notes.................................. 406,833 362,083
--------- ---------
OTHER ASSETS:
Other assets...................................................... 6,918 7,104
Refundable income taxes........................................... 260 260
--------- ---------
TOTAL ASSETS........................................................ $ 427,310 $ 385,727
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS......................................... $ 74,000 $ 70,000
SENIOR NOTES........................................................ 265,803 227,445
SENIOR SUBORDINATED NOTES........................................... 19,985 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES............................ 10,428 15,454
ACCRUED INTEREST.................................................... 2,132 1,940
INCOME TAXES:
Currently payable................................................. 443 398
Deferred.......................................................... 11,520 10,192
--------- ---------
TOTAL LIABILITIES................................................... 384,311 345,429
--------- ---------
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 4,713,030 shares in 2000 and 4,699,530
in 1999......................................................... 47 47
Additional paid-in capital....................................... 14,338 14,119
Retained earnings................................................ 33,514 31,167
Less: Treasury Stock (at cost) 536,477 shares in 2000 and 518,500 (3,768) (3,611)
in 1999...........................................................
Deferred compensation............................................. (691) (1,008)
Notes receivable from officers and employees...................... (441) (416)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.......................................... 42,999 40,298
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $ 427,310 $ 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 AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
REVENUES:
Earned income on leases and notes..................... $ 12,870 $ 10,304 $ 36,844 $ 29,317
Gain on sales of leases and notes..................... 2,149 1,573 5,770 3,625
Provision for losses.................................. (2,202) (1,147) (5,398) (2,930)
---------- ---------- ---------- ----------
Net revenues............................................ 12,817 10,730 37,216 30,012
---------- ---------- ---------- ----------
EXPENSES:
Selling, general and administrative................... 4,774 4,743 14,867 13,372
Interest expense...................................... 6,768 4,793 18,948 13,368
Interest income....................................... (179) (41) (581) (72)
---------- ---------- ---------- ----------
Net operating expenses.................................. 11,363 9,495 33,234 26,668
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 1,454 1,235 3,982 3,344
PROVISION FOR INCOME TAXES.............................. 594 505 1,635 1,372
---------- ---------- ---------- ----------
NET INCOME.............................................. $ 860 $ 730 $ 2,347 $ 1,972
========== ========== ========== ==========
BASIC NET INCOME PER SHARE.............................. $ 0.22 $ 0.19 $ 0.61 $ 0.52
========== ========== ========== ==========
SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE........................................ 3,942,511 3,770,851 3,858,658 3,771,684
DILUTED NET INCOME PER SHARE............................ $ 0.20 $ 0.16 $ 0.54 $ 0.45
========== ========== ========== ==========
SHARES USED TO COMPUTE DILUTED
NET INCOME PER SHARE.................................... 4,283,896 4,493,815 4,331,300 4,426,176
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 THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................. $ 2,347 $ 1,972
Adjustments to reconcile net income to net cash provided
by (used in) Operating activities:
Depreciation and amortization.............................. 4,474 3,646
Increase in deferred income taxes.......................... 1,328 1,048
Restricted stock, stock option, and stock bonus award
compensation............................................... 490 611
Gain on sale of lease contracts and notes receivable....... (5,770) (3,625)
Provision for losses on lease contracts and notes
receivable............................................... 5,398 2,930
Increase (decrease) in accrued interest.................... 192 (512)
Increase in accounts payable and accrued liabilities....... 532 1,220
Increase (decrease) in accrued income taxes................ 45 (17)
Decrease in refundable income taxes........................ -- 357
(Increase) decrease in operating related other assets...... (101) 61
--------- ---------
Cash provided by operating activities........................... 8,935 7,691
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due
in Installments.......................................... (183,882) (146,291)
Portfolio receipts, net of amounts included in income...... 69,358 52,548
Proceeds from sales of lease contracts and notes receivable
due in Installments..................................... 74,145 37,606
Net increase in notes receivable........................... (9,530) (3,936)
Net increase (decrease) in security deposits............... (536) 36
Net (increase) decrease in investing related other assets.. 351 (654)
Net (increase) decrease in loans to employees.............. (25) 34
--------- ---------
Cash used in investing activities............................... (50,119) (60,657)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes.................................. (100,163) (56,091)
Proceeds from issuance of senior notes, net of debt
issue costs.............................................. 138,507 95,259
Net proceeds from revolving credit borrowings.............. 4,000 9,000
Purchase of treasury stock................................. (157) (1,130)
Increase (decrease) in restricted cash..................... (2,058) 3,906
Repayment of employee stock ownership plan promissory
note.................................................... 105 105
Exercise of employee stock options......................... 27 156
--------- ---------
Cash provided by financing activities........................... 40,261 51,205
--------- ---------
Net decrease in cash and cash equivalents....................... (923) (1,761)
Cash and cash equivalents at beginning of period................ 1,356 4,583
--------- ---------
Cash and cash equivalents at end of period...................... $ 433 $ 2,822
========= =========
Supplemental disclosures of cash flow information:
Interest paid.............................................. $ 18,139 $ 13,532
Income taxes paid.......................................... 239 148
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
amounts have been reclassified to conform with 2000 presentation. These
financial statements have been prepared in accordance with the instructions of
Form 10-Q pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures have been omitted
pursuant to such rules and regulations. As a result, these financial statements
should be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's latest annual report on Form 10-K.
2. The Company computes and presents its earnings per share data in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share". The Company's basic net income per share calculation is
based on the weighted average number of common shares outstanding, which does
not include unallocated shares under the Company's Employee Stock Ownership Plan
("ESOP"), unvested restricted shares issued under the Company's Incentive Stock
Plans, treasury stock, or any shares issuable upon the exercise of outstanding
stock options. Diluted net income per share includes the weighted average number
of stock options and contingently issuable restricted shares under the Company's
Incentive Stock Plans outstanding as calculated under the treasury stock method,
but not treasury stock or unallocated shares under the Company's ESOP.
3. On May 17, 2000, the Company's common stock began trading on the
American Stock Exchange ("AMEX"). The stock was previously traded on the NASDAQ
Market under the symbol HPSC. The Company is now traded on the AMEX under the
symbol HDR.
4. In March 2000, the HPSC Bravo Funding Corp. ("Bravo") revolving credit
facility (the "Bravo Facility") was amended to provide the Company with
available borrowings of up to $347,500,000 upon substantially the same terms and
conditions. In May 2000, this facility was increased to $397,500,000. Bravo had
a total of $263,779,000 outstanding under the loan and sale portions of the
Bravo Facility ($186,778,000 in loans and $77,001,000 in sales) at September 30,
2000. Bravo incurs interest at variable rates in the commercial paper market and
enters into interest rate swap agreements to assure fixed rate funding. In
connection with these borrowings and sales, Bravo had a total of 45 separate
interest rate swap contracts with Fleet National Bank (formerly BankBoston) with
a total notional value of $257,840,000 at September 30, 2000. These interest
rate swaps are matched swaps, and as such, are accounted for using settlement
accounting. Monthly cash settlements on the swap agreements are recognized in
income as they accrue. In the case where the notional value of the interest rate
swap agreements significantly exceeds the outstanding underlying debt, the
excess swap agreements would be marked-to-market through income until new
borrowings are incurred which would be subject to such swap agreements. All
interest rate swap agreements entered into by the Company are for other than
trading purposes.
5. In April 1999, the Company, along with its wholly-owned, special purpose
subsidiary, HPSC Capital Funding, Inc. ("Capital"), signed an amended Lease
Receivable Purchase Agreement with EagleFunding Capital Corporation ("Eagle").
Pursuant to the terms of this revolving credit facility (the "Capital
Facility"), Capital had a total of $125,000,000 outstanding in loans and sales
($61,938,000 in loans and $63,062,000 in sales) at September 30, 2000, and in
connection with these borrowings and sales, had 24 separate interest rate swap
agreements with Fleet National Bank with a total notional value of $121,999,000.
These interest rate swaps are matched swaps, and as such, are accounted for
using settlement accounting. Monthly cash settlements on the swap agreements are
recognized in income as they accrue. In the case where the notional value of the
interest rate swap agreements significantly exceeds the outstanding underlying
debt, the excess swap agreements would be marked-to-market through income until
new borrowings are incurred which would be subject to such swap agreements. All
interest rate swap agreements entered into by the Company are for other than
trading purposes.
6. On September 30, 2000, the Company had restricted cash of $8,664,000
under the Bravo Facility and $4,202,000 under the Capital Facility. All such
restricted cash is reserved for debt service.
7. In February 2000, the Company entered into an additional secured, fixed
rate, fixed term loan agreement with Springfield Institution for Savings. The
Company borrowed $9,324,000 under that agreement, subject to certain recourse
and performance covenants.
8. In May 2000, the Company executed a Fourth Amended and Restated Credit
Agreement with Fleet National Bank as Managing Agent (the "Revolving Loan
Agreement") providing availability to the Company of up to $90,000,000 through
May 2001 upon substantially the same terms and conditions.
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9. The Financial Accounting Standards Board ("FASB") issued SFAS No. 130,
"Reporting Comprehensive Income". This statement, adopted January 1, 1998,
established standards for reporting and presenting comprehensive income and its
components. Comprehensive income equals net income for the nine month periods
ended September 30, 2000 and September 30, 1999.
10. A summary of information about the Company's operations by segment for
the three and nine months ended September 30, 2000 and 1999 is as follows:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------- --------------------------------------
COMMERCIAL COMMERCIAL
LICENSED AND LICENSED AND
(IN THOUSANDS) PROFESSIONAL INDUSTRIAL PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL FINANCING FINANCING TOTAL
------------ ---------- ----- ------------ ---------- -----
2000
- ----
Earned income on leases and notes.............. $ 11,402 $ 1,468 $ 12,870 $ 32,863 $ 3,981 $ 36,844
Gain on sales of leases and notes.............. 2,149 -- 2,149 5,770 -- 5,770
Provision for losses........................... (2,122) (80) (2,202) (5,278) (120) (5,398)
Selling, general and administrative expenses... (4,246) (528) (4,774) (13,333) (1,534) (14,867)
-------- ------- -------- -------- ------- --------
Net profit contribution........................ 7,183 860 8,043 20,022 2,327 22,349
Total assets................................... 383,597 43,713 427,310
1999
- ----
Earned income on leases and notes.............. $ 9,106 $ 1,198 $ 10,304 $ 25,841 $ 3,476 $ 29,317
Gain on sales of leases and notes.............. 1,573 -- 1,573 3,625 -- 3,625
Provision for losses........................... (1,106) (41) (1,147) (2,847) (83) (2,930)
Selling, general and administrative expenses... (4,350) (393) (4,743) (12,158) (1,214) (13,372)
-------- ------- -------- -------- ------- --------
Net profit contribution........................ 5,223 764 5,987 14,461 2,179 16,640
Total assets................................... 313,272 36,601 349,873
The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
(IN THOUSANDS) 2000 1999 2000 1999
---- ---- ---- ----
Net segment profit contribution............. $ 8,043 $ 5,987 $ 22,349 $ 16,640
Interest expense............................ (6,768) (4,793) (18,948) (13,368)
Interest income............................. 179 41 581 72
------- ------- -------- --------
Income before income taxes.................. $ 1,454 $ 1,235 $ 3,982 $ 3,344
OTHER SEGMENT INFORMATION - The Company derives substantially all of its
revenues from domestic customers. As of September 30, 2000, no single customer
within the licensed professional financing segment accounted for greater than 1%
of the total owned and serviced portfolio of that segment. Within the commercial
and industrial financing segment, no single customer accounted for greater than
17% of the total portfolio of that segment. The licensed professional financing
segment relies on certain vendors to provide referrals to the Company. For the
nine months ended September 30, 2000, no one vendor accounted for greater than
6% of the Company's licensed professional financing originations.
11. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This Statement, which will be effective on
January 1, 2001 for the Company, 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 and
also provides new guidance for hedge accounting. If a derivative instrument is
designated as a hedge, to the extent changes in the fair value of the derivative
are not perfectly offset against corresponding changes in the fair value or
forecasted cash flows of the hedged item, the difference will generally require
a gain or loss be recorded to the Statement of Operations in the current period.
The Company currently utilizes interest rate swap contracts as hedges against
changes in interest rates on its commercial paper debt obligations incurred
through its securitization activities (see Notes 4 and 5). This commercial paper
is issued on a fixed rate basis with relatively short contractual maturities
(generally 30 day intervals) at which time the debt rolls-over at a new fixed
rate based on prevailing market conditions. This current strategy will be
accounted for under the cash flow hedge accounting guidance of SFAS No. 133
which will require the changes in the fair value of the derivatives be recorded
as a separate component of stockholders' equity in accumulated other
comprehensive income. The Derivatives
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Implementation Group has recently provided certain guidance that addresses a
similar hedge accounting strategy as the Company's. The Company has also
reviewed all other contracts and currently does not believe that any contracts
are derivatives under the definition provided by SFAS No. 133 nor do they
contain any embedded derivatives. Although a final definitive response has yet
to be provided from the Financial Accounting Standard Board on cash flow hedges
of commercial paper, the Company does not currently anticipate a material impact
to its consolidated financial statements as a result of the implementation of
this accounting standard.
12. In September 2000, SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125" was issued. This Statement modifies certain standards
for the accounting of transfers of financial assets and also requires entities
to provide expanded financial statement disclosures related to securitization
activities. The accounting changes associated with this Statement will be
effective for transfers and servicing of financial assets occurring after March
31, 2001. The new disclosure requirements will be effective for the Company's
fiscal year ended December 31, 2000. The Company is evaluating the impact of the
new accounting standard on its consolidated results of operations as a result of
any transfers of financial assets which may occur subsequent to its effective
date.
13. In July 2000, the Emerging Issues Task Force ("EITF") released Issue
No. 99-20 "Recognition of Interest Income and Impairment on Certain
Investments". This Issue provides guidance to transferors of financial assets
as to appropriate accounting treatment for interest income and impairment in
retained beneficial interests in securitized assets. The guidelines provided by
this Issue will be effective for the first quarter of the Company's fiscal year
ending December 31, 2001. The Company is evaluating the impact this guidance
may have on its consolidated financial results.
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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 September
30, 2000 was $12,870,000 (including approximately $1,468,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $10,304,000 (including approximately $1,198,000 from ACFC) for
the three months ended September 30, 1999. Earned income for the nine months
ended September 30, 2000 was $36,844,000 (including approximately $3,981,000
from ACFC) compared to $29,317,000 (including approximately $3,476,000 from
ACFC) for the comparable period in 1999. The increase of 25% for the three month
period and 26% for the nine month period was due principally to increases in net
investment in leases and notes in 2000 over 1999. The increase in net investment
in both periods resulted in part from a higher level of originations of
$180,142,000 for the nine months ended September 30, 2000 compared to
$151,100,000 for the same period in 1999. Gains on sales of leases and notes
were $2,149,000 for the three months ended September 30, 2000 compared to
$1,573,000 for the three months ended September 30, 1999. For the nine months
ended September 30, 2000, gains on sales of leases and notes were $5,770,000
compared to $3,625,000 for the comparable 1999 period. The increase for the
three and nine month periods was due to a higher level of asset sales activity.
For the nine months ended September 30, 2000, the Company sold a portion of the
beneficial interests in assets totaling $76,280,000 compared to $37,760,000 for
the same period in 1999.
Interest expense (net of interest income) for the third quarter of 2000 was
$6,589,000 (51% of earned income) compared to $4,752,000 (46% of earned income)
in the comparable 1999 period. For the first nine months ended September 30,
2000, net interest expense was $18,367,000 (50% of earned income) compared to
$13,296,000 (45% of earned income). The increase in net interest expense was
primarily due to a 23% increase in average debt levels from September 30, 1999
to September 30, 2000. These higher average debt levels resulted primarily from
borrowings to finance a higher level of contract originations, offset by
increased portfolio assets sales in 2000 compared to 1999. The increase in
percentage in both the three month and the nine month periods was due to higher
interest rate borrowing costs in the current year as compared to the Company's
borrowing costs in the prior fiscal year.
Net financing margin (earned income less net interest expense) for the
third quarter of 2000 was $6,281,000 (49% of earned income) compared to
$5,552,000 (54% of earned income) for the third quarter of 1999. For the nine
month period ended September 30, 2000, net financing margin increased to
$18,477,000 (50% of earned income) from $16,021,000 (55% of earned income) in
1999. The increase in amounts in both the three month and the nine month periods
was due to higher earnings on a higher balance of earning assets. The decrease
in percentage in both the three month and the nine month periods was due to
higher interest rate borrowing costs in the current year as compared to
borrowing costs in the prior year.
The provision for losses for the third quarter of 2000 was $2,202,000 (17%
of earned income) compared to $1,147,000 (11% of earned income) in the third
quarter of 1999. The provision for losses for the nine months ended September
30, 2000 was $5,398,000 (15% of earned income) compared to $2,930,000 (10% of
earned income) for the nine months ended September 30, 1999. The increases in
amount and percentage were due to growth in the portfolio, along with the
Company's evaluation of its allowance for losses, portfolio quality, delinquency
trends, and loss history across its entire owned and serviced portfolio.
The allowance for losses at September 30, 2000 was $11,795,000 (2.9% 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 nine months
ended September 30, 2000 were $2,754,000 compared to $1,572,000 for the same
period in 1999.
Selling, general and administrative expenses for the three months ended
September 30, 2000 were $4,774,000 (37% of earned income) compared to $4,743,000
(46% of earned income) in the comparable 1999 period. For the nine months ended
September 30, 2000, selling, general and administrative expenses were
$14,867,000 (40% of earned income) compared to $13,372,000 (46% of earned
income) for the same period in 1999. The increase in amount for the nine month
periods was primarily caused by increased bank liquidity fees as well as
increased payroll and administrative costs incurred to support higher levels of
owned and serviced assets. The decrease in percentage of earned income for the
three and nine month periods resulted 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 September
30, 2000 was $1,454,000 compared to $1,235,000 in the same period in 1999. For
the nine months ended September 30, 2000, income before income taxes was
$3,982,000 compared to $3,344,000 in the comparable 1999 period. The provision
for income taxes was $594,000 (41% of income before income taxes) for the three
months ended September 30, 2000 compared to $505,000 (41% of income before
income taxes) for the same period in 1999. For the nine months ended September
30, 2000, the provision for income taxes was $1,635,000 (41% of income before
income taxes) compared to $1,372,000 (41% of income before income taxes) for the
nine months ended September 30, 1999.
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The Company's net income for the three months ended September 30, 2000 was
$860,000 ($0.20 diluted net income per share) compared to $730,000 ($0.16
diluted net income per share) for the three months ended September 30, 1999. For
the nine months ended September 30, 2000, the Company's net income was
$2,347,000 ($0.54 diluted net income per share) compared to $1,972,000 ($0.45
diluted net income per share). The increase for the three and nine month periods
resulted from higher earned income on leases and notes and higher gains on sales
of leases and notes, offset by higher selling, general and administrative costs,
higher net interest costs, and a higher provision for losses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, the Company had $13,299,000 in cash, cash
equivalents and restricted cash as compared to $16,280,000 at December 31, 1999.
As described in Note 6 to the Company's condensed consolidated financial
statements included in this report on Form 10-Q, $12,866,000 was restricted
pursuant to financing agreements as of September 30, 2000, compared to
$14,924,000 at December 31, 1999.
Cash provided by operating activities was $8,935,000 for the nine months
ended September 30, 2000 compared to $7,691,000 for the nine months ended
September 30, 1999. The significant components of cash provided by operating
activities for the nine months ended September 30, 2000 as compared to the same
period in 1999 were an increase in net income of $2,347,000 in 2000 from
$1,972,000 in 1999, an increase in the provision for losses of $5,398,000 in
2000 compared to $2,930,000 in 1999, as well as increased gains on sales of
lease contracts and notes receivable of $5,770,000 in 2000 compared to
$3,625,000 in the first nine months of the prior year.
Cash used in investing activities was $50,119,000 for the nine months ended
September 30, 2000 compared to $60,657,000 for the nine months ended September
30, 1999. The significant components of cash used in investing activities for
the first nine 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 $183,882,000 from $146,291,000 and a net increase in notes
receivable of $9,530,000 compared to $3,936,000 in the prior year, offset by an
increase in portfolio receipts to $69,358,000 from $52,548,000, along with an
increase in proceeds from sales of lease contracts and notes receivable of
$74,145,000 in 2000 compared to $37,606,000 in the comparable period ended
September 30, 1999.
Cash provided by financing activities for the nine months ended September
30, 2000 was $40,261,000 compared to $51,205,000 for the nine months ended
September 30, 1999. The significant components of cash provided by financing
activities for the first nine 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 $138,507,000 from $95,259,000. This is offset by
lower net proceeds from revolving credit borrowings of $4,000,000 in 2000
compared to $9,000,000 for the same period in 1999, higher repayments of senior
notes of $100,163,000 for the nine months ended September 30, 2000 compared to
$56,091,000 for the nine months ended September 30, 1999, as well as a decrease
in restricted cash of $2,058,000 in 2000 compared to an increase of $3,906,000
for the same period in 1999.
In May 1999, the Company executed the Third Amendment to the Third Amended
and Restated Revolving Credit Agreement with Fleet National Bank (formerly
BankBoston) as the Agent Bank. The Third Amendment to the Revolver Agreement
provided availability to the Company of $90,000,000 through May 2000. In May
2000, a Fourth Amended and Restated Credit Agreement was executed with Fleet
National Bank as Managing Agent (the "Revolver Agreement") providing
availability to the Company of up to $90,000,000 through May 2001 upon
substantially the same terms and conditions. Under the Revolver Agreement, the
Company may borrow at variable rates of prime and at LIBOR plus 1.35% to 1.50%,
depending upon certain performance covenants. At September 30, 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 March 1997, the Company issued $20,000,000 of unsecured senior
subordinated notes due in 2007 ("Senior Subordinated Notes") bearing interest at
a fixed rate of 11% (the "Note Offering"). The Company received approximately
$18,300,000 in net proceeds from the Note Offering and used such proceeds to
repay amounts outstanding under the Revolver Agreement. The Senior Subordinated
Notes are redeemable at the option of the Company, in whole or in part, other
than through the operation of a sinking fund, after April 1, 2002 at established
redemption prices, plus accrued but unpaid interest to the date of repurchase.
Beginning July 1, 2002, the Company is required to redeem through sinking fund
payments, on January 1, April 1, July 1, and October 1 of each year, a portion
of the aggregate principal amount of the Senior Subordinated Notes at a
redemption price equal to $1,000,000 plus accrued but unpaid interest to the
redemption date. As of September 30, 2000, the outstanding balance of the Senior
Subordinated Notes was $19,985,000.
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
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facility (the "Capital Facility") provides the Company with available borrowings
up to $125,000,000. Under the terms of the Capital Facility, Capital, to which
the Company may sell or contribute certain of its portfolio assets from time to
time, pledges or sells its interests in these assets to Eagle, a commercial
paper conduit entity. Capital may borrow at variable rates in the commercial
paper market and may enter into interest rate swap agreements to assure fixed
rate funding. Monthly settlements of the borrowing base and any applicable
principal and interest payments are made from collections of Capital's
portfolio. The Company is the servicer of the Capital portfolio subject to
certain covenants. The required monthly payments of principal and interest to
purchasers of the commercial paper are guaranteed by Fleet National Bank
pursuant to the terms of the facility. At September 30, 2000, the Company had
$63,062,000 outstanding from sales of receivables under the sale accounting
portion of the Capital Facility and $61,938,000 of borrowings outstanding under
the loan portion of the Capital Facility. In connection with this facility, the
Company had 24 separate interest rate swap agreements with Fleet National Bank
with a total notional value of $121,999,000.
In June 1998, the Company, along with its wholly-owned, special-purpose
subsidiary HPSC Bravo Funding Corp. ("Bravo"), signed an amended revolving
credit facility (the "Bravo Facility") structured and guaranteed by MBIA, Inc.,
providing the Company with available borrowings up to $225,000,000. In March
2000, the Bravo Facility was amended to provide the Company with available
borrowings up to $347,500,000 upon substantially the same terms and conditions.
This facility was subsequently increased to $397,500,000 in May 2000. Under the
terms of the Bravo Facility, Bravo, to which the Company sells and may continue
to sell or contribute certain of its portfolio assets, subject to certain
covenants regarding Bravo's portfolio performance and borrowing base
calculations, pledges or sells its interests in these assets to a commercial
paper conduit entity. Bravo incurs interest at variable rates in the commercial
paper market and enters into interest rate swap agreements to assure fixed rate
funding. Monthly settlements of principal and interest payments are made from
the collection of payments on Bravo's portfolio. The Company is the servicer of
the Bravo portfolio, subject to meeting certain covenants. Pursuant to the terms
of the facility, the required monthly payments of principal and interest to
purchasers of the commercial paper are guaranteed by MBIA, Inc. At September 30,
2000, Bravo had $77,001,000 outstanding from sales of receivables under the sale
accounting portion of the Bravo Facility and $186,778,000 of indebtedness
outstanding under the loan portion of the Bravo Facility. In connection with
this facility, the Company had 45 separate interest rate swap agreements with
Fleet National Bank with a total notional value of $257,840,000.
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 $12,836,000 outstanding under all loan agreements
with SIS at September 30, 2000.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo Facility, the
Capital Facility, the Senior Subordinated Notes, and loans from various savings
banks, along with cash obtained from the sales of its financing contracts and
from internally generated revenues, is adequate to meet current obligations and
to carry on current operations. In order to finance portfolio growth, the
Company must raise additional capital from bank and non-bank sources. 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 maintaining and increasing 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
27 Financial Data Schedule
b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended
September 30, 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.
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(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: November 14, 2000
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