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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 JUNE 30, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______________________ to _______________________
Commission file number 0-11618
HPSC, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 04-2560004
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
60 STATE STREET, BOSTON, MASSACHUSETTS 02109
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 720-3600
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
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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 AUGUST 1, 1996, 4,686,530 .
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HPSC, INC.
INDEX
PART 1 -- FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets as of June 30, 1996, and
December 31, 1995 ................................................. 3
Consolidated Statements of Income for each of the three and six
months ended June 30, 1996 and June 30, 1995 ...................... 4
Consolidated statements of Cash Flows for each of the three and six
months ended June 30, 1996 and June 30, 1995 ...................... 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
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3
HPSC, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
ASSETS
June 30, December 31,
1996 1995
--------- ---------
CASH AND CASH EQUIVALENTS $ 1,038 $ 861
RESTRICTED CASH 6,018 5,610
INVESTMENT IN LEASES AND NOTES:
Lease contracts receivable and notes receivable due in installments 132,429 115,364
Notes receivable due in installments 35,785 25,325
Estimated residual value of equipment at end of lease term 9,313 9,206
Less unearned income (31,463) (25,875)
Less allowance for losses (4,694) (4,512)
Less security deposits (3,944) (3,427)
Deferred origination costs 4,576 3,805
--------- ---------
Net investment in leases and notes 142,002 119,886
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OTHER ASSETS:
Deferred expense and other assets 3,453 3,294
Refundable income taxes -- 1,088
---------
TOTAL ASSETS $ 152,511 $ 130,739
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE TO BANKS $ 54,243 $ 42,070
NOTES PAYABLE AND ACCRUED LIABILITIES 1,419 3,537
ACCRUED INTEREST 653 339
INCOME TAXES:
Currently payable 517 368
Deferred 3,544 4,613
SENIOR NOTES 58,420 46,453
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TOTAL LIABILITIES 118,796 97,380
========= =========
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 4,786,530 shares in 1996 and
4,786,530 shares in 1995 44 44
TREASURY STOCK (at cost) 100,000 shares (410) (410)
Additional paid-in capital 11,315 11,315
Retained earnings 24,832 24,476
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35,425
Less deferred ESOP and SESOP compensation (2,066) (2,066)
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Total Stockholders' Equity 33,715 33,359
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 152,511 $ 130,739
========= =========
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 SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
(in thousands, except per share and share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
REVENUES:
Earned Income on Leases and notes $ 4,547 $ 3,203 $ 8,403 $ 6,147
Provisions for losses (452) (264) (800) (541)
----------- ----------- ----------- -----------
Net Revenues 4,095 2,939 7,603 5,606
----------- ----------- ----------- -----------
EXPENSES:
Selling, general and administrative 1,867 1,520 3,514 3,000
Interest, net 1,894 1,195 3,503 2,239
----------- ----------- ----------- -----------
Total expenses 3,761 2,715 7,017 5,239
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES: 334 224 586 367
----------- ----------- ----------- -----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current 650 506 1,300 1,156
Deferred (520) (418) (1,070) (1,012)
----------- ----------- ----------- -----------
TOTAL INCOME TAXES 130 88 230 144
----------- ----------- ----------- -----------
NET INCOME $ 204 $ 136 $ 356 $ 223
=========== =========== =========== ===========
NET INCOME PER SHARE $ .05 $ .04 $ .09 $ .06
=========== =========== =========== ===========
SHARES USED TO COMPUTE
INCOME PER SHARE 4,069,795 3,838,116 4,049,423 3,830,185
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 SIX MONTHS ENDED JUNE 30, 1996 AND JUNE 30, 1995
(in thousands)
(unaudited)
June 30, June 30,
1996 1995
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 356 $ 223
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,587 972
Deferred income taxes (1,069) (1,012)
Provision for losses on lease contracts
and notes receivable 800 541
Increase in accrued interest 314 52
(Decrease) increase in accounts payable (2,118) 132
Increase in accrued income taxes 149 491
Decrease in refundable income taxes 1,088 950
Increase (decrease) in other assets 12 (531)
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Cash provided by operating activities 1,119 1,818
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on capital lease (40) (24)
Proceeds from sale of receivables 3,179 --
Lease contracts receivable and notes receivable (32,043) (12,578)
Estimated residual value of equipment (107) 124
Unearned income 6,288 3,026
Security deposits 517 315
Purchase of furniture & equipment (396) (93)
Initial direct costs incurred (1,973) (1,100)
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Cash (used in) investing activities (24,575) (10,330)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Notes (13,057) (11,832)
Repayment of notes payable treasury stock purchase -- (3,750)
Proceeds from issuance of Senior Notes 25,024 16,082
Proceeds from revolving notes payable to banks 12,173 6,996
(Increase) decrease in restricted funds (408) 1,508
Debt issuance costs (121) (310)
Contribution to Employee Stock Ownership Plan -- 110
Other 22 33
-------- --------
Cash provided by financing activities 23,633 8,837
-------- --------
Net increase in cash and cash equivalents 177 325
Cash and cash equivalents at beginning of period 861 419
-------- --------
Cash and cash equivalents at end of period $ 1,038 $ 744
======== ========
Supplemental disclosures of cash flow information
Interest paid $ 3,055 $ 2,157
Income taxes paid 150 120
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 1995 account balances have been
reclassed to conform with 1996 presentation.
2. Interest expense is net of interest income of $58,000 and $140,000 for the
three months ended and $119,000 and $235,000 for the six months ended June 30,
1996 and June 30, 1995, respectively.
3. For the three months ended June 30, 1996, and June 30, 1995, the earnings per
share computation assumes 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 ("ESOP"). The ESOP holds
240,348 shares that have not yet been funded or allocated to specific
participant accounts. These unallocated shares have not been included in
earnings per share calculations. There was no allocation of shares from the
Supplemental ESOP, which holds 350,000 shares.
4. On June 30, 1996, the Company had $6,018,000 in restricted cash of which
$3,927,000 was reserved for debt service and $2,091,000 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 and
the HPSC Bravo Funding Corp. ("Bravo") revolving credit facility.
5. In connection with the Bravo revolving credit facility, the Company had
$45,834,000 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 into interest rate swap agreements to assure
fixed rate funding. At June 30, 1996, Bravo had ten separate swap contracts with
the Bank of Boston with a total notional value of $47,304,000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter Ended June 30, 1996 Compared to Quarter Ended June 30, 1995
The Company's net income for the second quarter of 1996 was $204,000 or $.05 per
share compared to $136,000 or $.04 per share for 1995. For the six months ended
June 30, 1996, net income was $356,000 or $.09 per share compared to $223,000 or
$.06 per share in 1995. The increases in both the quarter and six month periods
of 1996 over 1995 were due to higher earned income from leases and notes offset
by increases in the provision for losses, higher selling, general and
administrative expenses and higher interest costs.
Earned income on leases and notes for the second quarter of 1996 was $4,547,000,
compared to $3,203,000 in 1995. For the six months ended June 30, 1996, earned
income was $8,403,000 compared to $6,147,000 in 1995. The increases in both the
quarter and six month periods were due primarily to the increases in the net
investment of leases and notes. The Company's volume of new financings for the
second quarter of 1996 was $23,350,000 compared to $13,500,000 in 1995. For the
six month period new financings were $43,636,000 in 1996 compared to $28,186,000
in 1995.
The provision for losses was $452,000 in the quarter ended June 30, 1996,
compared to $264,000 for the comparable period in 1995. For the six month period
in 1996, the provision for losses was $800,000 compared to $541,000 in 1995.
These increases are the result of higher levels of new financings in 1996.
Selling, general and administrative costs for the second quarter of 1996 were
$1,867,000 as compared to $1,520,000 in 1995, an increase of 23%. For the six
months ended June 30, 1996, selling, general and administrative expenses were
$3,514,000 as compared to $3,000,000 in 1995. These increases reflect the
increased staffing, systems and support costs required by the higher volumes of
financing activity.
Interest expense for the second quarter of 1996 was $1,894,000 as compared to
$1,195,000 in 1995, an increase of 58%. For the six months ended June 30, 1996,
interest expense was $3,503,000 compared to $2,239,000 in 1995, an increase of
56%. These increases were primarily due to a 63% increase in debt levels from
1995 to 1996.
The Company's income before income taxes in the second quarter of 1996 was
$334,000, compared to $224,000 in 1995. For the six months ended June 30, 1996,
income before income taxes was $586,000 compared to $367,000 in 1995. 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 June 30, 1996, the Company had $7,056,000 in cash, cash equivalents and
restricted cash as compared to $6,471,000 at the end of 1995. As described in
Note 4 to the Company's consolidated financial statements included in this
report on Form 10-Q, $6,018,000 of such cash was restricted pursuant to
financing agreements as of June 30, 1996. Cash provided by operating activities
was $1,119,000 for the six months ended June 30, 1996 compared to cash provided
by operating activities of $1,818,000 in the same period of 1995. Cash used in
investing activities was $24,575,000 for the six months ended June 30, 1996
compared to cash used in investing activities of $10,330,000 in the same
period for 1995.
As of June 30, 1996, the Company, entered into a sale agreement with two banks
under which it transferred $2,817,000 in assets to them subject to certain
recourse covenants and servicing of these assets by the Company. A net gain of
approximately $240,000 was recognized in connection with these transactions and
is included in earned income from leases and notes for the period.
At June 30, 1996 the Company's Revolving Loan Agreement provided for loans of up
to $60,000,000, with $51,500,000 outstanding, and $8,500,000 available for
borrowing, subject to certain borrowing base calculations. In July 1996, the
Revolving Loan Agreement was amended to increase the availability to
$75,000,000. The Company continues to utilize HPSC Bravo Funding Corp. ("Bravo")
and at June 30, 1996 had $45,834,000 of loans outstanding under this $50,000,000
revolving credit facility.
Management believes that the Company's liquidity is adequate to meet current
obligations and projected levels of financings and operations. In order to
finance adequately its anticipated growth, the Company will continue to seek to
raise 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 4. Submission of Matters to a Vote of the Security Holders
a. The Annual Meeting of Stockholders was held on May 16, 1996.
b. Not applicable.
c. The stockholders elected the following two persons to serve as
Class I Directors.
FOR WITHHELD
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Lowell P. Weicker, Jr. 4,197,013 22,500
Thomas M. McDougal 4,213,013 6,500
To ratify the appointment of Coopers & Lybrand L.L.P. as independent
auditors of the Company for the fiscal year ended December 31, 1996:
FOR AGAINST ABSTAIN NO VOTE
--- ------- ------- -------
4,187,613 19,850 12,050 0
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits:
10.6 Third Amendment to the Amended and Restated Revolving
Credit Agreement dated as of March 29, 1996, by and
among HPSC, Inc., The First National Bank of Boston,
individually and as Agent, and Bank of America
Illinois, individually and as Co-Agent.
10.7 Fourth Amendment to the Amended and Restated
Revolving Credit Agreement dated as of July 29, 1996,
by and among HPSC, Inc., The First National Bank of
Boston, individually and as Agent, and Bank of
America Illinois, individually and as Co-Agent.
27. Financial Data Schedule
b) Reports on Form 8-K:
During the period for which this report
is filed, the Company filed with the Commission the following
report on Form 8-K:
The Company reported on June 19, 1996 the
resignation of Coopers & Lybrand L.L.P. as the Company's
independent auditors and the engagement of Deloitte & Touche
LLP as the Company's new independent auditors.
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: August 14, 1996 HPSC, INC.
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(Registrant)
By: /s/ John W. Everets
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John W. Everets
Chief Executive Officer
Chairman of the Board
By: /s/ Rene Lefebvre
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Rene Lefebvre
Vice President
Chief Financial Officer
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