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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, 1995
__________________________________
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, 1995, 4,449,530.
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HPSC, INC.
INDEX
PART 1 -- FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets as of September 30, 1995, and
December 31, 1994........................................ 3
Consolidated Statements of Income for each of the three
and nine months ended September 30, 1995 and September 24,
1994..................................................... 4
Consolidated statements of Cash Flows for each of the
three and nine months ended September 30, 1995 and
September 24, 1994 ...................................... 5
Notes to Consolidated Financial Statements............... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 7-8
PART II -- OTHER INFORMATION
Signatures............................................... 9
Exhibits................................................. 10
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HPSC, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
(unaudited)
ASSETS
Sept. 30, December 31,
1995 1994
------------ ------------
CASH AND CASH EQUIVALENTS $ 1,109 $ 419
RESTRICTED CASH 5,590 7,936
INVESTMENT IN LEASES AND NOTES:
Lease contracts receivable and notes receivable due in installments 126,569 103,531
Estimated residual value of equipment at end of lease term 9,284 9,321
Less unearned income (22,419) (16,924)
Less allowance for losses (4,601) (4,595)
Less security deposits (3,136) (2,639)
Deferred origination costs 3,324 2,499
------------ ------------
Net investment in leases and notes 109,021 91,193
------------ ------------
OTHER ASSETS:
Deferred expense and other assets 2,741 2,154
Refundable income taxes 28 1,446
------------ ------------
TOTAL ASSETS $118,489 $ 103,148
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE TO BANKS $ 32,846 $ 16,500
NOTES PAYABLE - TREASURY STOCK PURCHASE 0 4,500
ACCOUNTS PAYABLE 1,978 2,450
ACCRUED INTEREST 368 293
INCOME TAXES:
Currently payable 500 20
Deferred 4,089 5,539
SENIOR NOTES 45,456 41,024
------------ ------------
TOTAL LIABILITIES $ 85,237 $ 70,326
============ ============
STOCKHOLDERS' EQUITY:
PREFERRED STOCK, $1.00 par value;
authorized 5,000,000 shares; issued - None -- --
COMMON STOCK, $.01 par value; 15,000,000 shares authorized;
issued and outstanding 5,574,712 shares in 1995 and
5,574,395 shares in 1994 56 56
TREASURY STOCK (at cost) 1,225,182 shares (5,023) (5,023)
Additional paid-in capital 15,916 15,916
Retained earnings 24,914 24,601
Cumulative foreign currency translation adjustments (545) (552)
------------ ------------
35,318 34,998
Less deferred ESOP and SESOP compensation (2,066) (2,176)
------------ ------------
Total Stockholders' Equity 33,252 32,822
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $118,489 $103,148
============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
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HPSC, INC.
CONSOLIDATED STATEMENTS OF INCOME
FOR EACH OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 24, 1994
(in thousands, except per share and share amounts)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- --------------------------------
Sept., 30, Sept., 24, Sept., 30, Sept., 24,
1995 1994 1995 1994
---------- ---------- ---------- ----------
REVENUES:
Earned Income on Leases and notes $ 3,417 $ 2,776 $ 9,564 $ 9,443
Provisions for losses (336) (164) (877) (524)
---------- ---------- ---------- ----------
Net Revenues 3,081 2,612 8,687 8,919
---------- ---------- ---------- ----------
EXPENSES:
Selling, general and administrative 1,537 1,705 4,537 5,237
Interest, net 1,397 792 3,636 2,998
---------- ---------- ---------- ----------
Total expenses 2,934 2,497 8,173 8,235
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES: 147 115 514 684
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current 496 699 1,652 1,957
Deferred (438) (654) (1,450) (1,689)
---------- ---------- ---------- ----------
TOTAL INCOME TAXES 58 45 202 268
---------- ---------- ---------- ----------
NET INCOME $ 89 $ 70 $ 312 $ 416
========== ========== ========== ==========
NET INCOME PER SHARE $ .02 $ .01 $ .08 $ .08
========== ========== ========== ==========
SHARES USED TO COMPUTE
INCOME PER SHARE 3,903,462 4,994,964 3,837,218 4,987,022
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
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HPSC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR EACH OF THE NINE MONTHS ENDED SEPTEMBER 30, 1995
AND SEPTEMBER 24, 1994
(in thousands)
(unaudited)
Sept., 30, Sept., 24,
1995 1994
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 312 $ 416
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 492 324
Deferred income taxes (1,450) (1,689)
Provision for losses on lease contracts
and notes receivable 877 524
Increase (decrease) in accrued interest 75 (3,129)
(Decrease) in accounts payable (472) (74)
Increase (decrease) in accrued income taxes 480 (211)
Decrease in refundable income taxes 1,418 1,481
(Increase)decrease in other assets (309) 234
---------- ----------
Cash provided by (used in) operating activities 1,423 (1,702)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (445) (528)
Lease contracts receivable and notes receivable (23,908) 23,088
Estimated residual value of equipment 37 2,772
Unearned income 5,495 (6,245)
Security deposits 497 (245)
Deferred origination costs (825) 576
---------- ----------
Cash (used in) provided by investing activities (19,149) 19,418
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Notes (16,733) (72,248)
Repayments of Subordinated Debt --- (20,000)
Repayment of notes payable to banks --- (1,130)
Repayment of notes payable treasury stock purchase (4,500) ---
Proceeds from issuance of Senior Notes 21,165 70,000
Proceeds from revolving notes payable to banks 16,346 ---
Decrease (increase) in restricted cash 2,346 (9,215)
Debt issuance costs (325) (823)
Contribution to Employee Stock Ownership Plan 110 99
Other 7 (373)
---------- ----------
Cash provided by (used in) financing activities 18,416 (33,690)
---------- ----------
Net increase (decrease) in cash and cash equivalents 690 (15,974)
Cash and cash equivalents at beginning of period 419 16,600
---------- ----------
Cash and cash equivalents at end of period $ 1,109 $ 626
========== ==========
Supplemental disclosures of cash flow information
Interest paid $ 3,372 $ 5,721
Income taxes paid 688 1,618
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED
FINANCIAL STATEMENTS.
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HPSC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The information presented for the interim periods is unaudited, but
includes all adjustments (consisting only of normal recurring adjustments)
which, in the opinion of the Company, are necessary for a fair presentation
of the financial position, results of operations and cash flows for the
periods presented. The results for interim periods are not necessarily
indicative of results to be expected for the full fiscal year. Certain 1994
account balances have been reclassified to conform with 1995 presentation.
2. Interest expense is net of interest income of $84,000 and $113,000 for
the three months ended and $319,000 and $267,000 for the nine months ended
September 30, 1995 and September 24, 1994, respectively. Included in
interest expense is amortization of debt discount of $38,000 for the nine
months ended September 24, 1994.
3. The earnings per share computations assume the exercise of stock options
under the modified treasury stock method and includes only those shares
allocated to participant accounts in the Company's Employee Stock Ownership
Plan discussed in Note 5.
4. On September 30, 1995, the Company had $5,590,000 in restricted cash, of
which $3,077,000 was reserved for debt service and $2,513,000 was reserved
for credit enhancement pursuant to the terms of agreements entered into by
the Company on December 27, 1993, with respect to a $70,000,000
securitization transaction.
5. In June, 1995, the Board of Directors authorized and the Company made a
contribution of $110,000 to the Employee Stock Ownership Plan (ESOP) for
1994. This contribution had the effect of allocating 31,372 shares of common
stock of the Company to qualified participant accounts at the end of 1994.
The ESOP holds 240,348 shares that have not yet been funded or allocated to
specific participant accounts. There was no allocation of shares from the
Supplemental ESOP, which holds 350,000 unallocated shares. The unallocated
shares for the ESOP and the Supplemental ESOP have not been included in the
earnings-per-share calculations.
6. In connection with the HPSC Bravo Funding Corp. ("Bravo") revolving
credit facility, the Company had $20,609,000 of its Senior Notes subject to
interest rate swap agreements. Under the structure of the facility, Bravo
incurs interest at variable rates in the commercial paper market and enters
September 30, 1995, Bravo had five separate swap contracts with the Bank of
Boston with a total notional value of $21,085,000.
7. In May 1995, the Company executed a $50,000,000 amended and restated
revolving credit agreement with a bank group led by the First National Bank
of Boston as Agent Bank. The agreement is secured primarily by customer
receivables, expires on December 31, 1995, and contains certain financial and
other covenants. At September 30, 1995, the Company had $29,500,000
outstanding under this agreement and was in compliance with the terms and
conditions of the agreement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended September 30, 1995 Compared to Quarter Ended September 24,
1994
The Company's net income for the third quarter of 1995 was $89,000 or $.02
per share compared to $70,000 or $.01 per share for 1994. For the nine
months ended September 30, 1995, net income was $312,000 or $.08 per share
compared to $416,000 or $.08 per share in 1994. Per share calculations
exclude 1,225,182 shares carried as Treasury Stock at September 30, 1995;
there were no treasury shares in 1994. For the quarter ended September 30,
1995, the increase in net income resulted from an increase in earned income
from leases and notes and lower net selling, general and administrative costs
offset by a higher provision for losses and higher interest costs.
Earned income on leases and notes for the third quarter of 1995 was
$3,417,000 compared to $2,776,000 in 1994. For the nine months ended
September 30, 1995, earned income was $9,564,000 compared to $9,443,000 for
the comparable period in 1994. The increase in the third quarter was due
primarily to the continuing expansion of the portfolio as compared to the
prior year. For the nine month period, the increase in earned income was
caused by the sale of the Canadian portfolio in the second quarter of 1994
offset by a slightly larger portfolio of earning assets for the nine-month
period in 1995. The Company's volume of new financing for the third quarter
of 1995 was $17,843,000 compared to $9,185,000 for the same period in 1994.
For the nine month period, new financings were $46,030,000 for 1995 compared
to $20,129,000 for 1994.
The provision for losses was $336,000 in the quarter ended September 30,
1995, compared to $164,000 for the comparable period in 1994. For the nine
month period in 1995, the provision for losses was $877,000 compared to
$524,000 in 1994. These increases are the result of higher levels of new
financings in 1995.
Selling, general and administrative expenses for the quarter ended September
30, 1995, were $1,537,000 as compared to $1,705,000 for the comparable period
in 1994. For the nine month period in 1995, selling, general and
administrative expenses were $4,537,000 as compared to $5,237,000. These
decreases were the result of the decrease in Canadian expenses in 1995 and an
increase in initial direct cost capitalization due to the higher volume of
new financings in 1995 as compared to 1994.
Net interest expense for the third quarter of 1995 was $1,397,000 as
compared to $792,000 in the same period of 1994. This increase was due to
the higher outstanding debt levels needed to support the increased new
financing levels. For the nine month period, interest expense increased to
$3,636,000 in 1995 from $2,998,000 in 1994. This increase was the result of
higher debt levels in 1995.
The Company's income before income taxes in the third quarter of 1995 was
$147,000 compared to $115,000 in 1994. For the nine months ended September
30, 1995, income before income taxes was $514,000 compared to $684,000 in
1994. The effective tax rate remained approximately the same for all
periods.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(cont'd)
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had $6,699,000 in cash and cash
equivalents as compared to $8,355,000 at the end of 1994. As described in
Note 5 to the Company's consolidated financial statements included in this
report on Form 10-Q, $5,590,000 of such cash was restricted pursuant to
financing agreements as of September 30, 1995. Cash provided by operating
activities was $1,423,000 for the nine months ended September 30, 1995,
compared to cash used in operating activities of $1,702,000 in the same
period of 1994. Cash used in investing activities was $19,149,000 for the
nine months ended September 30, 1995 compared to cash provided by investing
activities of $19,418,000 in the same period for 1994. This change is due to
an increasing portfolio of earning assets in 1995 as compared to a decreasing
portfolio in 1994.
As of January 31, 1995, the Company, along with its newly-formed,
wholly-owned, special-purpose subsidiary, HPSC Bravo Funding Corp.
("Bravo") completed a $50,000,000 revolving credit facility structured and
guaranteed by Capital Markets Assurance Corporation ("CapMAC"). Under the
terms of the facility, Bravo, to which the Company has sold and may continue
to sell or contribute certain of its portfolio assets, pledges its interest
in these assets to a commercial-paper conduit entity. Bravo incurs interest
at variable rates in the commercial paper market and enters into interest
rate swap agreements to assure fixed rate funding. Monthly settlements of
principal and interest payments are made from the collection of payments on
Bravo's transactions. Additional sales to Bravo from HPSC may be made
subject to certain covenants regarding Bravo's portfolio performance and
borrowing base calculations.
The Company is the servicer of the Bravo portfolio, subject to meeting
certain covenants. The required monthly payments of principal and interest
to purchasers of the commercial paper are guaranteed by Cap MAC pursuant to
the terms of the agreement. Amounts outstanding under this agreement were
$20,609,000 at September 30, 1995.
In May, 1995, the Company executed an Amended and Restated Revolving Loan
Agreement increasing availability to $50 million. This new agreement will
expire at December 31, 1995. The Company is currently negotiating an
amendment to this agreement to extend the term and increase total
availability under the agreement. In order to adequately finance its
anticipated growth, the Company will continue to seek to raise additional
capital from bank and non-bank sources in 1995. The Company expects that it
will be able to obtain additional capital at competitive rates, but there can
be no assurance it will be able to do so.
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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, 1995.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, HPSC, Inc. has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: November 13, 1995 HPSC, INC.
----------------------------------------
(Registrant)
By: /s/ John W. Everets
----------------------------------------
John W. Everets
Chief Executive Officer
Chairman of the Board
By: /s/ Rene Lefebvre
----------------------------------------
Rene Lebebvre
Vice President
Chief Financial Officer
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