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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, 1996
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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
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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
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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 NOVEMBER 1, 1996, 4,686,530.
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HPSC, INC.
INDEX
PART 1 -- FINANCIAL INFORMATION PAGE
Consolidated Balance Sheets as of September 30, 1996, and
December 31, 1995 ............................................... 3
Consolidated Statements of Income for each of the three and
nine months ended September 30, 1996 and September 30, 1995 ..... 4
Consolidated statements of Cash Flows for the nine months ended
September 30, 1996 and September 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 .......................................... 9
Signatures ...................................................... 9
Exhibits
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HPSC, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(unaudited)
ASSETS
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Sept. 30, December 31,
1996 1995
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CASH AND CASH EQUIVALENTS $ 715 $ 861
RESTRICTED CASH 6,751 5,610
INVESTMENT IN LEASES AND NOTES:
Lease contracts receivable and notes receivable due in installments 144,534 115,364
Notes receivable due in installments 25,064 25,325
Estimated residual value of equipment at end of lease term 9,309 9,206
Less unearned income (32,009) (25,875)
Less allowance for losses (4,789) (4,512)
Less security deposits (4,148) (3,427)
Deferred origination costs 4,463 3,805
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Net investment in leases and notes 142,424 119,886
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OTHER ASSETS:
Deferred expense and other assets 3,372 3,294
Refundable income taxes --- 1,088
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TOTAL ASSETS $153,262 $130,739
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LIABILITIES AND STOCKHOLDERS' EQUITY
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NOTES PAYABLE TO BANKS $ 58,574 $ 42,070
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 1,308 3,537
ACCRUED INTEREST 508 339
INCOME TAXES:
Currently payable 783 368
Deferred 3,053 4,613
SENIOR NOTES 54,968 46,453
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TOTAL LIABILITIES 119,194 97,380
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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 25,080 24,476
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36,029 35,425
Less deferred ESOP and SESOP compensation (1,961) (2,066)
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Total Stockholders' Equity 34,068 33,359
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $153,262 $130,739
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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, 1996
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AND SEPTEMBER 30, 1995
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(in thousands, except per share and share amounts)
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
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Sept 30, Sept 30, Sept 30, Sept 30,
1996 1995 1996 1995
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REVENUES:
Earned Income on Leases and notes $ 5,044 $ 3,417 $ 13,447 $ 9,564
Provisions for losses (424) (336) (1,224) (877)
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Net Revenues 4,620 3,081 12,223 8,687
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EXPENSES:
Selling, general and administrative 2,066 1,537 5,580 4,537
Interest, net 2,146 1,397 5,649 3,636
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Total expenses 4,212 2,934 11,229 8,173
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INCOME BEFORE INCOME TAXES: 408 147 994 514
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PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current 650 496 1,950 1,652
Deferred (490) (438) (1,560) (1,450)
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TOTAL INCOME TAXES 160 58 390 202
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NET INCOME $ 248 $ 89 $ 604 $ 312
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NET INCOME PER SHARE $ .06 $ .02 $ .15 $ .08
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SHARES USED TO COMPUTE
INCOME PER SHARE 4,145,270 3,903,462 4,107,313 3,837,218
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, 1996 AND SEPTEMBER 30, 1995
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(in thousands)
(unaudited)
Sept 30, Sept 30,
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 604 $ 312
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,818 1,558
Deferred income taxes (1,560) (1,450)
Provision for losses on lease contracts
and notes receivable 1,224 877
Increase in accrued interest 169 75
(Decrease) in accounts payable (2,229) (472)
Increase in accrued income taxes 415 480
Decrease in refundable income taxes 1,088 1,418
Increase (decrease) in other assets 67 (309)
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Cash provided by operating activities 2,596 2,489
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CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on capital lease (60) (36)
Proceeds from sale of receivables 14,086 --
Lease contracts receivable and notes receivable (47,968) (23,908)
Estimated residual value of equipment (103) 37
Unearned income 10,126 5,495
Security deposits 721 497
Purchase of furniture & equipment (563) (409)
Initial direct costs incurred (2,888) (1,891)
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Cash (used in) investing activities (26,649) (20,215)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Senior Notes (20,825) (16,733)
Repayment of notes payable treasury stock purchase -- (4,500)
Proceeds from issuance of Senior Notes 29,340 21,165
Proceeds from revolving notes payable to banks 16,504 16,346
(Increase) decrease in restricted funds (1,141) 2,346
Debt issuance costs (128) (325)
Contribution to Employee Stock Ownership Plan 105 110
Other 52 7
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Cash provided by financing activities 23,907 18,416
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Net (decrease) increase in cash and cash equivalents (146) 690
Cash and cash equivalents at beginning of period 861 419
Cash and cash equivalents at end of period $ 715 $ 1,109
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Supplemental disclosures of cash flow information
Interest paid $ 5,127 $ 3,372
Income taxes paid 675 688
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THE CONSOLIDATED FINANCIAL STATEMENTS.
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HPSC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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 $56,000 and $84,000 for the
three months, and $175,000 and $319,000 for the nine months, ended September
30, 1996 and September 30, 1995, respectively.
3. For the three months ended September 30, 1996, and September 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 210,348 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 has been no allocation of shares from
the Supplemental ESOP, which holds 350,000 shares.
4. On September 30, 1996, the Company had $6,751,000 in restricted cash of which
$4,059,000 was reserved for debt service and $2,692,000 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
on January 31, 1995 with the HPSC Bravo Funding Corp. ("Bravo") revolving credit
facility.
5. In connection with the Bravo revolving credit facility, the Company had
$45,726,000 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 September 30, 1996, Bravo had eleven separate swap
contracts with the Bank of Boston with a total notional value of $47,611,000.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Quarter and Nine Months Ended September 30, 1996 Compared to Quarter and Nine
Months Ended September 30, 1995
The Company's net income for the third quarter of 1996 was $248,000 or $.06 per
share compared to $89,000 or $.02 per share for 1995. For the nine months ended
September 30, 1996, net income was $604,000 or $.15 per share compared to
$312,000 or $.08 per share in 1995. The increases in both the quarter and nine
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 third quarter of 1996 was $5,044,000,
compared to $3,417,000 in 1995. For the nine months ended September 30, 1996,
earned income was $13,447,000 compared to $9,564,000 in 1995. The increases in
both the quarter and nine 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 third quarter of 1996 was $22,389,000 compared to $17,843,000 in 1995.
For the nine month period new financings were $66,026,000 in 1996 compared to
$46,030,000 in 1995.
The provision for losses was $424,000 in the quarter ended September 30, 1996,
compared to $336,000 for the comparable period in 1995. For the nine month
period in 1996, the provision for losses was $1,224,000 compared to $877,000 in
1995. These increases are the result of higher levels of new financings in 1996.
Selling, general and administrative costs for the third quarter of 1996 were
$2,066,000 as compared to $1,537,000 in 1995, an increase of 34%. For the nine
months ended September 30, 1996, selling, general and administrative expenses
were $5,580,000 as compared to $4,537,000 in 1995. These increases reflect the
increased staffing, systems and support costs required by the higher volumes of
financing activity.
Interest expense for the third quarter of 1996 was $2,146,000 as compared to
$1,397,000 in 1995, an increase of 54%. For the nine months ended September 30,
1996, interest expense was $5,649,000 compared to $3,636,000 in 1995, an
increase of 55%. These increases were primarily due to a 45% increase in debt
levels from 1995 to 1996.
The Company's income before income taxes in the third quarter of 1996 was
$408,000, compared to $147,000 in 1995. For the nine months ended September 30,
1996, income before income taxes was $994,000 compared to $514,000 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 September 30, 1996, the Company had $7,466,000 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, $6,751,000 of such cash was restricted pursuant to
financing agreements as of September 30, 1996. Cash provided by operating
activities was $2,596,000 for the nine months ended September 30, 1996 compared
to cash provided by operating activities of $2,489,000 in the same period of
1995. Cash used in investing activities was $26,649,000 for the nine months
ended September 30, 1996 compared to cash used in investing activities of
$20,215,000 in the same period for 1995.
Through September 30, 1996, the Company, entered into several sale agreements
under which it transferred a total of $12,630,000 in assets to two savings banks
subject to certain recourse covenants and servicing of these assets by the
Company. A net gain of approximately $885,000 was recognized in connection with
these transactions and is included in earned income from leases and notes for
the nine month period.
At September 30, 1996 the Company's Revolving Loan Agreement provided for loans
of up to $75,000,000, with $56,000,000 outstanding, and $19,000,000 available
for borrowing, subject to certain borrowing base calculations. The Company
continues to utilize HPSC Bravo Funding Corp. ("Bravo") and at September 30,
1996 had $45,726,000 of loans outstanding under this $50,000,000 revolving
credit facility. Effective November 5, 1996, this facility was increased to
$100,000,000 and amended to provide that up to $30,000,000 of such facility may
be used for sales of receivables from Bravo.
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 6. Exhibits and Reports on Form 8-K
a) Exhibits:
11. Computation of Earnings per Share
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, 1996.
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 12, 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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