1
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, 2001 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 $.01 PER
SHARE SHARES OUTSTANDING AT MAY 3, 2001, 4,167,053.
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HPSC, INC.
TABLE OF CONTENTS
PAGE
PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31,
2000............................................................................ 3
Condensed Consolidated Statements of Income for the Three Months
Ended March 31, 2001 and 2000.................................................. 4
Condensed Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2001 and 2000................................................... 5
Notes to Condensed Consolidated Financial Statements............................ 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 10
PART II -- OTHER INFORMATION
Other Information............................................................... 14
Signatures...................................................................... 14
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HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2001 2000
--------------- ---------------
ASSETS
CASH AND CASH EQUIVALENTS..............................................$ 4,761 $ 1,713
RESTRICTED CASH- SERVICING UNDER SECURITIZATION AGREEMENTS............. 24,640 20,284
RESTRICTED CASH- PREFUNDING............................................ 3,844 95,218
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments.......... 423,814 404,366
Notes receivable.................................................. 36,225 37,686
Retained interest in leases and notes sold........................ 15,123 13,690
Estimated residual value of equipment at end of lease term........ 22,547 22,121
Deferred origination costs........................................ 9,556 9,061
Less: Unearned income.................................................. (103,877) (98,089)
Security deposits................................................. (5,773) (5,893)
Allowance for losses.............................................. (14,077) (14,170)
--------------- ----------------
Net investment in leases and notes..................................... 383,538 368,772
-------------- ---------------
OTHER ASSETS........................................................... 10,235 10,376
-------------- ---------------
TOTAL ASSETS...........................................................$ 427,018 $ 496,363
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS............................................$ 35,000 $ 49,000
SENIOR NOTES........................................................... 300,829 356,097
Less DISCOUNT ON SENIOR NOTES.......................................... (1,785) (636)
SENIOR SUBORDINATED NOTES.............................................. 19,985 19,985
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES............................... 18,862 18,932
ACCRUED INTEREST....................................................... 2,054 2,210
INTEREST RATE SWAP CONTRACTS........................................... 5,469 --
DEFERRED INCOME TAXES.................................................. 8,313 9,985
-------------- ---------------
TOTAL LIABILITIES...................................................... 388,727 455,573
-------------- ---------------
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 par value; authorized 5,000,000
shares; issued - None............................................. -- --
COMMON STOCK, $.01 par value; 15,000,000 shares
authorized; issued and outstanding 4,713,530 shares in
2001 and 4,713,030 in 2000........................................ 47 47
Additional paid-in capital........................................ 14,391 14,364
Retained earnings................................................. 32,097 31,254
Less: Accumulated other comprehensive loss, net of tax................. (3,321) --
Treasury Stock (at cost) 546,477 shares in 2001 and 2000.......... (3,830) (3,830)
Deferred compensation............................................. (578) (635)
Notes receivable from officers and employees...................... (515) (410)
--------------- ----------------
TOTAL STOCKHOLDERS' EQUITY............................................. 38,291 40,790
-------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................$ 427,018 $ 496,363
============== ===============
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, 2001 AND 2000
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
---------------------------------------------
MARCH 31, MARCH 31,
2001 2000
----------------- ----------------
REVENUES:
Earned income on leases and notes....... $ 12,031 $ 11,620
Gain on sales of leases and notes....... 2,644 1,154
Provision for losses.................... (1,507) (1,357)
----------------- -----------------
Net Revenues................................ 13,168 11,417
----------------- ----------------
EXPENSES:
Selling, general and administrative..... 5,186 4,770
Interest expense........................ 7,797 5,669
Interest income......................... (1,242) (202)
----------------- -----------------
Net operating expenses...................... 11,741 10,237
---------------- ----------------
INCOME BEFORE INCOME TAXES.................. 1,427 1,180
---------------- ----------------
PROVISION FOR INCOME TAXES.................. 584 487
NET INCOME.................................. $ 843 $ 693
================ ================
BASIC NET INCOME PER SHARE.................. $ 0.21 $ 0.19
================ ================
SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE............................ 3,947,977 3,746,707
DILUTED NET INCOME PER SHARE................ $ 0.20 $ 0.16
================ ================
SHARES USED TO COMPUTE DILUTED NET
INCOME PER SHARE............................ 4,178,319 4,319,621
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 THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
MARCH 31, MARCH 31,
2001 2000
--------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................................. $ 843 $ 693
Adjustments to reconcile net income to net cash provided by
Operating activities:
Depreciation and amortization.............................................. 1,626 1,417
Increase (decrease) in deferred income taxes............................... 476 393
Interest rate swap breakage cost........................................... 280 --
Restricted stock and option compensation................................... 112 95
Gain on sales of lease contracts and notes receivable...................... (2,644) (1,154)
Provision for losses on lease contracts and notes receivable............... 1,507 1,357
Increase (decrease) in accrued interest.................................... (156) 277
Decrease in accounts payable and accrued liabilities....................... (471) (203)
Increase in accrued income taxes........................................... 116 10
Increase in other assets................................................... (337) (46)
------------- ---------------
Cash provided by operating activities........................................... 1,352 2,839
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due in
Installments............................................................ (66,015) (61,375)
Portfolio receipts, net of amounts included in income...................... 23,198 20,582
Proceeds from sales of lease contracts and notes receivable due in
Installments............................................................ 26,976 21,544
Net (increase) decrease in notes receivable................................ 1,461 (975)
Net decrease in security deposits.......................................... (120) (152)
Net decrease in other assets............................................... 371 374
Net (increase) decrease in loans to employees.............................. (105) 31
------------- --------------
Cash used in investing activities............................................... (14,234) (19,971)
------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of term securitization notes.................................... (40,215) ---
Repayment of other senior notes............................................ (21,114) (24,932)
Proceeds from issuance of term securitization notes, net of debt issue
costs................................................................... 4,519 ---
Proceeds from issuance of other senior notes, net of debt issue costs...... --- 40,099
Net proceeds (repayments) of revolving credit borrowings................... (14,000) 4,000
Swap breakage costs........................................................ (280) ---
Purchase of treasury stock................................................. --- (70)
(Increase) decrease in restricted cash..................................... 87,018 (1,188)
Exercise of employee stock options......................................... 2 20
------------ --------------
Cash provided by financing activities........................................... 15,930 17,929
------------ --------------
Net increase in cash and cash equivalents....................................... 3,048 797
Cash and cash equivalents at beginning of period................................ 1,713 1,356
------------ --------------
Cash and cash equivalents at end of period...................................... $ 4,761 $ 2,153
============ ==============
Supplemental disclosures of cash flow
information:
Interest paid................................................................ $ 6,753 $ 5,257
Income taxes paid............................................................. 23 77
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 2000
amounts have been reclassified to conform with 2001 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 common shares subject to stock options and contingently issuable restricted
shares under the Company's Stock Incentive Plans outstanding as calculated under
the treasury stock method, but not treasury stock or unallocated shares under
the Company's ESOP.
3. During the quarter ended March 31, 2001, the Company utilized
approximately $91,374,000 of the prefunding restricted cash originally provided
to the Company in December 2000 pursuant to the Equipment Receivables 2000-1
term securitization ("ER 2000-1"). The remaining unused portion of approximately
$3,844,000 was used to prepay principal on the ER 2000-1 notes in April 2001. In
addition, of the original $1,049,000 of proceeds set aside to service the
interest requirements on the prefunding debt, $768,000 was unused during the
quarter ended March 31, 2001 and was subsequently released from restrictions to
the Company in April 2001. At March 31, 2001, the Company had a total of
$187,613,000 outstanding relating to contracts sold to Equipment Receivables
2000-1 LLC I ("ER 2000-1 LLC I") and $286,315,000 of indebtedness outstanding
relating to contracts pledged to Equipment Receivables 2000-1 LLC II ("ER 2000-1
LLC II"). In connection with these sales and loans, the Company had two separate
interest rate swap agreements outstanding as a hedge against exposures to
variable rates applicable to the Class A and Class B-1 notes.
4. In March 2001, the Company received proceeds of $4,909,000, plus
accrued but unpaid interest thereon, upon the sale of the ER 2000-1 Class F
notes. At the time of the sale, the notes had a remaining face value of
approximately $6,060,000.
5. In February 2001, the Company repaid all amounts remaining outstanding
under the loan portion of the HPSC Bravo Funding Corp. ("Bravo") revolving
credit facility (the "Bravo Facility") with proceeds received from the
prefunding arrangement provided through the ER 2000-1 term securitization. On
March 31, 2001, Bravo had a total of $34,273,000 outstanding under the sale
portion of the Bravo Facility. 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 sales, Bravo had two separate
interest rate swap contracts with Fleet National Bank with a total notional
value of $32,019,000 at March 31, 2001. At the time of entering into each sale,
Bravo assigns its rights, title and interest in each interest rate swap contract
to the purchasers of commercial paper. 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. A summary of information about the Company's operations by segment for
the three months ended March 31, 2001 and 2000 are as follows:
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COMMERCIAL
LICENSED AND
(in thousands) PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL
------------ ----------- ---------
FOR THE THREE MONTHS ENDED MARCH 31, 2001
Earned income on leases and notes.................... $10,892 $ 1,139 $ 12,031
Gain on sales of leases and notes.................... 2,644 -- 2,644
Provision for losses................................. (1,397) (110) (1,507)
Selling, general and administrative expenses......... (4,794) (392) (5,186)
------- ------- -------
Net profit contribution.............................. 7,345 637 7,982
Total assets......................................... 393,490 33,528 427,018
FOR THE THREE MONTHS ENDED MARCH 31, 2000
Earned income on leases and notes.................... 10,400 1,220 11,620
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.............................. 5,927 720 6,647
Total assets......................................... 367,085 36,840 403,925
The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
---- ----
(in thousands)
Net segment profit contribution.......... $ 7,982 $ 6,647
Interest expense......................... (7,797) (5,669)
Interest income on cash balances......... 1,242 202
------- --------
Income before income taxes............... $ 1,427 $ 1,180
Other Segment Information - The Company derives substantially all of its
revenues from domestic customers. As of March 31, 2001, 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
10% 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, 2001, no one vendor accounted for greater than 7%
of the Company's licensed professional financing originations.
7. On January 1, 2001 the Company adopted the new accounting provisions of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as
amended by SFAS No. 137 and SFAS No.138. This Statement establishes new
accounting and reporting standards for derivative instruments and for hedging
activities. It requires an entity to recognize derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value, with an offset generally recorded to Accumulated Other
Comprehensive Income. If changes in the fair value of a derivative instrument
designated as a hedge are not perfectly offset against corresponding changes in
the fair value or forecasted cash flows of the hedged item, the difference will
generally require an entity to recognize a gain or loss in the Statement of
Operations. The Company manages its exposure to interest rate risks by entering
into interest rate swap contracts as a hedge against the variable interest rate
exposures on portions of its outstanding loan and sale obligations in its ER
2000-1 term securitization facility (Note 3) as well as its Bravo Facility (Note
5). These interest rate swap contracts, which qualify and are designated as cash
flow hedges, have the effect of converting the Company's interest payments on
these debt obligations from a variable rate to a fixed rate. The Company
measures effectiveness of its hedging activities on an ongoing basis in
accordance with its documented risk management policies.
The Company had two separate interest rate swap contracts outstanding,
the fair value of which is recorded as a liability on the Company's balance
sheet at March 31, 2001.
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At March 31, 2001, comprehensive income consisted of unrealized gains and
losses resulting from changes in the fair market value of cash flow hedges
during the quarter and from the adoption of SFAS No. 133 on January 1, 2001.
Details of the Company's comprehensive income for the three months ended March
31, 2001 and 2000 are as follows:
FOR THE THREE MONTHS ENDED MARCH 31, 2001 2000
---- ----
(in thousands)
Net income..................................................................... $ 843 $ 693
Unrealized losses on interest rate swap contracts, net of taxes................ (2,391) ---
Less: Reclassification adjustment for losses included in net income,
net of taxes............................................................. 132 ---
-------- ------
Other comprehensive income before cumulative effect adjustment................. (1,415) 693
-------- ------
Cumulative effect adjustment upon the adoption of SFAS No. 133,
net of taxes............................................................. (1,062) ---
-------- ------
Comprehensive income (loss).................................................... $(2,478) $ 693
======== ======
During the first quarter ended March 31, 2001, the Company's interest rate
swaps were effective in offsetting changes in cash flows on the Company's debt
instruments. The reclassification adjustment from Other Comprehensive Income
pertains to swap breakage costs on a terminated interest rate swap contract.
The total cost to terminate the swap was $280,000 and is reflected as a
component of selling, general and administrative expenses for the three months
ended March 31, 2001.
8. 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 new transfers and servicing of financial assets occurring after
March 31, 2001. The Company does not anticipate a material impact on its
consolidated results of operations as a result of the implementation of the new
accounting standards.
The following is a summary of certain cash flow activity received from and
paid to securitization facilities for the three months ended March 31, 2001:
(in thousands)
Cash proceeds from new securitizations................................. $26,976
Cash collections from obligors, remitted to securitization facilities.. (16,455)
Servicing fees received................................................ 260
Other cash flows retained by servicer.................................. 1,183
Servicing advances..................................................... (1,332)
Reimbursed servicing advances.......................................... ---
The following is a summary of the performance of financing contracts owned
by the Company as well as owned by others and managed by the Company:
NET INVESTMENT
OUTSTANDING FOR
NET INVESTMENT ACCOUNTS OVER 90
(in thousands) OUTSTANDING DAYS PAST DUE NET CREDIT LOSSES
----------- ------------- -----------------
FOR THREE MONTHS ENDING
AT MARCH 31, 2001 MARCH 31, 2001
--------------
-------------------------------------------
Licensed professional financing segment........... $548,612 $ 20,792 $ 1,067
Commercial and industrial financing segment....... 28,692 --- 533
--------- -------- -------
Total owned and managed...................... 577,304 $ 20,792 $ 1,600
Less:
Securitized licensed professional financing assets 193,766
Total owned $383,538
========
9. In July 2000, the Emerging Issues Task Force ("EITF") released Issue
No. 99-20 "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets". This Issue
provides guidance to transferors of financial assets as to appropriate
accounting treatment for interest income and impairment in retained beneficial
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interests in securitized assets. The guidelines provided by this Issue will be
effective for the second quarter of the Company's fiscal year ending December
31, 2001. The Company does not believe this guidance will have a material effect
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 March 31,
2001 was $12,031,000 (including approximately $1,139,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $11,620,000 (including approximately $1,220,000 from ACFC) for
the three months ended March 31, 2000. The increase was due principally to
increases in net investment in leases and notes in 2001 over 2000 resulting in
part from a higher level of originations of $59,490,000 for the three months
ended March 31, 2001 compared to $57,253,000 for the same period in 2000. Gains
on sales of leases and notes were $2,644,000 for the three months ended March
31, 2001 compared to $1,154,000 for the three months ended March 31, 2000. The
increase was due to higher levels of sales activity and improved margins
associated with current year asset sales as compared to 2000. For the quarter
ended March 31, 2001 the Company sold a portion of the beneficial interests in
assets totaling $24,472,000 compared to $22,649,000 for the same period in 2000.
Interest expense (net of interest income) for the first quarter of 2001
was $6,555,000 (54% of earned income) compared to $5,467,000 (47% of earned
income) in the comparable 2000 period. The increase in net interest expense was
partially due to a 21% increase in average debt levels from March 31, 2000 to
March 31, 2001. These higher average debt levels resulted primarily from
increased borrowings to finance higher levels of contract originations in 2001
as well as from the prefunding arrangement provided to the Company through the
ER 2000-1 term securitization transaction. The increase in percentage of earned
income was due to higher average interest rates in the Revolver in the current
year as compared to the prior fiscal year, increased amortization of deferred
debt origination costs in 2001 compared to 2000, as well as higher interest
costs resulting from the prefunded debt provided to the Company through the term
securitization.
Net financing margin (earned income less net interest expense) for the
quarter ended March 31, 2001 was $5,476,000 (46% of earned income) compared to
$6,153,000 (53% of earned income) for the first quarter of 2000. The decrease in
amount was due to higher Revolver interest rates in the current year as compared
to borrowing costs in the prior year, increased amortization of deferred debt
origination costs in 2001 compared to 2000, as well as higher interest costs
resulting from the prefunded debt provided to the Company through the term
securitization.
The provision for losses for the first quarter of 2001 was $1,507,000 (13%
of earned income) compared to $1,357,000 (12% of earned income) in the first
quarter of 2000. The increase 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 March 31, 2001 was $14,077,000 (3.7% of net
investment in leases and notes) compared to $14,170,000 (3.9% of net investment
in leases and notes) at December 31, 2000. Net charge-offs for the three months
ended March 31, 2001 were $1,600,000 compared to $975,000 for the same period in
2000. The increase was primarily due to the write-off of the remaining balance
of an account within the Company's commercial lending subsidiary. This obligors'
account had been fully reserved in prior periods.
Selling, general and administrative expenses for the three months ended
March 31, 2001 were $5,186,000 (43% of earned income) compared to $4,770,000
(41% of earned income) in the comparable 2000 period. The increase was primarily
caused by increased interest rate swap breakage costs in the current year as
well as higher legal and collection related expenses arising out of higher
delinquency levels.
The Company's income before income taxes for the quarter ended March 31,
2001 was $1,427,000 compared to $1,180,000 in the same period in 2000. The
provision for income taxes was $584,000 (41% of income before income taxes) for
the three months ended March 31, 2001 compared to $487,000 (41% of income before
income taxes) for the same period in 2000.
The Company's net income for the three months ended March 31, 2001 was
$843,000 ($0.20 diluted net income per share) compared to $693,000 ($0.16
diluted net income per share) for the three months ended March 31, 2000. The
increase resulted from
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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 March 31, 2001, the Company had $33,245,000 in cash, cash equivalents
and restricted cash as compared to $117,215,000 at December 31, 2000. A
significant portion of this cash was restricted pursuant to financing
agreements. Components of restricted cash at March 31, 2001 and at December 31,
2000 were as follows:
MARCH 31, DECEMBER 31,
(in thousands) 2001 2000
Cash collections- Bravo.................................................... $ 817 $ 5,738
Cash collections- ER 2000-1 LLC I.......................................... 9,011 ---
Cash collections- ER 2000-1 LLC II......................................... 5,804 4,675
Prefunding arrangements- ER 2000-1......................................... 3,844 95,218
Capitalized interest- ER 2000-1............................................ 768 1,049
Amounts required for initial interest payment- ER 2000-1................... --- 2,735
Cash escrow- ER 2000-1 swap agreement...................................... 1,012 1,002
Cash reserves- ER 2000-1................................................... 7,072 5,085
Cash residual payment reserves- ER 2000-1.................................. 156 ---
------- --------
Total..................................................................$28,484 $115,502
------- --------
As discussed in Note 3, the Company utilized approximately $91,374,000 of
the prefunding restricted cash originally provided to the Company in December
2000 pursuant to the ER 2000-1 securitization. The remaining unused portion of
$3,844,000 was used to prepay principal on the ER 2000-1 notes in April 2001. In
addition, of the original $1,049,000 of proceeds set aside to service the
interest requirements on the prefunding debt, $768,000 was unused during the
quarter ended March 31, 2001 and was subsequently released to the Company in
April 2001.
Cash provided by operating activities was $1,352,000 for the three months
ended March 31, 2001 compared to $2,839,000 for the three months ended March 31,
2000. The significant components of cash provided by operating activities for
the three months ended March 31, 2001 as compared to the same period in 2000
were an increase in net income of $843,000 in 2001 from $693,000 in 2000,
adjusted for increased gains on sales of lease contracts and notes receivable of
$2,644,000 in 2001 compared to $1,154,000 in 2000, and swap breakage costs of
$280,000 in 2001 compared to none in the prior year.
Cash used in investing activities was $14,234,000 for the three months
ended March 31, 2001 compared to $19,971,000 for the three months ended March
31, 2000. The significant components of cash used in investing activities for
the first three months of 2001 compared to the same period in 2000 were an
increase in originations of lease contracts and notes receivable due in
installments to $66,015,000 from $61,375,000, offset by an increase in portfolio
receipts of $23,198,000 from $20,582,000, an increase in proceeds from sales of
lease contracts and notes receivable of $26,976,000 in 2001 compared to
$21,544,000 in 2000, as well as a net decrease in notes receivable of $1,461,000
for the quarter ended March 31, 2001 compared to a net increase of $975,000 for
the first quarter of 2000.
Cash provided by financing activities for the three months ended March 31,
2001 was $15,930,000 compared to $17,929,000 for the three months ended March
31, 2000. The significant components of cash provided by financing activities
for the first three months of 2001 as compared to the equivalent period in 2000
included proceeds from the issuance of senior notes pursuant to the ER 2000-1
term securitization, net of debt issuance costs, of $4,519,000 in 2001, proceeds
from the issuance of other senior notes of $40,099,000 in 2000, along with a
decrease in restricted cash of $87,018,000 in 2001 compared to an increase of
$1,188,000 in 2000. These were offset by repayments on term securitization notes
of $40,215,000 in 2001, repayments of other senior notes of $21,114,000 in 2001
compared to $24,932,000 in 2000, and net repayments of revolving credit
borrowings of $14,000,000 in 2001 compared to net proceeds of $4,000,000 for the
same period in 2000.
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In December 2000, the Company completed a $527,106,000 private placement
term securitization. The securitization, referred to as the Equipment
Receivables 2000-1, was underwritten by Credit Suisse First Boston Corporation.
The Company, along with subsidiaries ACFC, Bravo, and Capital, transferred
certain leases and notes to the newly formed special purpose entities, ER 2000-1
LLC I and ER 2000-1 LLC II. HPSC, Bravo, Capital and ACFC sold their leases and
notes to ER 2000-1 LLC I and pledged their leases and notes to ER 2000-1 LLC II
as collateral for a loan. ER 2000-1 LLC I and ER 2000-1 LLC II issued notes to
finance the purchase of, and loan against the collateral consisting of leases
and notes transferred from HPSC, ACFC, Bravo and Capital. The proceeds of the
purchase and loan were used to retire senior notes and other obligations
outstanding in both the Bravo and Capital Facilities as well as to pay down
amounts outstanding under the Revolving Loan Agreement. The securitization
further provided for $95,218,000 of the initial proceeds from the issuance of
the notes to be prefunded to ER 2000-1 LLC I and ER 2000-1 LLC II for the sole
purpose of acquiring additional financing contracts from the Company. Upon the
expiration of the prefunding period in March 2001, approximately $3,800,000 of
the original prefunding remained unused for the purpose of acquiring contracts
and was subsequently used to prepay principal on the notes in April 2001. The
Company is the servicer of the portfolio, subject to its meeting certain
covenants. Monthly payments of principal and interest on the ER 2000-1 Notes are
made from regularly scheduled collections generated from the underlying lease
and note portfolio. As a hedge against interest rate risk related to its
variable rate obligations on the notes, ER 2000-1 entered into interest rate
swap contracts with Fleet National Bank. The interest rate swap contracts have
the effect of converting the Company's interest payments on the Class A and
Class B-1 notes from a variable rate of interest to a fixed rate. At March 31,
2001, ER 2000-1 LLC I had $187,613,000 of notes outstanding and ER 2000-1 LLC II
had $286,315,000 of notes outstanding. Approximately 6% of the contract
obligations securing ER 2000-1 LLC II notes comprise revolving lines of credit
originated by ACFC.
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 1.50% to 1.75%,
depending upon certain performance covenants. At March 31, 2001, the Company had
$35,000,000 outstanding under this facility and $55,000,000 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 2001, the Revolver was amended,
effective December 31, 2000, to modify the Company's tangible net worth,
interest coverage, and leverage ratio covenant requirements, primarily to permit
the costs incurred by the Company in connection with its ER 2000-1 term
securitization in December 2000. In May 2001, the Company executed a Third
Amendment to the Fourth Amended and Restated Credit Agreement, providing
availability of $83,500,000 through May 2002 at variable rates of prime plus
.75% to 1.25% and at LIBOR plus 2.25% to 2.75%, depending upon certain
performance covenants.
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
Fleet Bank pursuant to the terms of the facility. In December 2000, the Company
repaid all outstanding borrowings in the Capital Facility with the proceeds
received from the issuance of the Equipment Receivables 2000-1 term
securitization notes. In April 2001, the Capital Facility was renewed under
substantially the same terms and conditions, providing the Company with
availability up to $75,000,000. No borrowings were outstanding in Capital as of
March 31, 2001.
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
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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. In December 2000 and in February 2001, the Company repaid
substantial portions of outstanding borrowings in the Bravo Facility with the
proceeds received from the issuance of the ER 2000-1 term securitization notes.
At March 31, 2001, the Company did not have any outstanding borrowings under the
loan portion of the Bravo Facility and had $34,273,000 outstanding under the
sale portion of the Bravo Facility. In connection with these sales, Bravo had
two separate interest rate swap contracts with Fleet National Bank with a total
notional value of $32,019,000. The Company anticipates that it will continue to
use the Bravo Facility to meet a portion of its financing requirements. As of
March 31, 2001, the Company has obtained a waiver from its lenders for
non-compliance with its tangible net worth, interest coverage, and leverage
ratio covenant requirements as a result of costs incurred related to the ER
2000-1 asset securitization transaction in December 2000.
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 March 31, 2001, the outstanding balance of the Senior
Subordinated Notes was $19,985,000.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo and Capital
Facilities, the Equipment Receivables 2000-1 term securitization, 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 its
anticipated portfolio growth, the Company will continue to seek to 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, 2000,
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 6 are omitted because they are inapplicable.
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 14, 2001
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