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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 MARCH 31, 1999 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
incorporation or organization) Identification No.)
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 4, 1999, 4,172,030.
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HPSC, INC.
INDEX
PAGE
PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998............................................... 3
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 1999 and March 31, 1998................ 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and March 31, 1998................ 5
Notes to Condensed Consolidated Financial Statements................... 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 9
PART II -- OTHER INFORMATION
Other Information..................................................... 13
Signatures............................................................ 13
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HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
MARCH 31, DECEMBER 31,
1999 1998
-------- -----------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS .......................................... $ 7,178 $ 4,583
RESTRICTED CASH .................................................... 10,844 9,588
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments ...... 300,466 293,211
Notes receivable .............................................. 32,725 35,863
Retained interest in leases and notes sold .................... 14,061 14,500
Estimated residual value of equipment at end of lease term .... 15,400 14,830
Less unearned income .......................................... (73,937) (73,019)
Less allowance for losses ..................................... (7,565) (7,350)
Less security deposits ........................................ (6,835) (6,756)
Deferred origination costs .................................... 6,753 6,696
-------- --------
Net investment in leases and notes ................................. 281,068 277,975
-------- --------
OTHER ASSETS:
Other assets .................................................. 5,968 5,682
Refundable income taxes ....................................... 741 774
-------- --------
TOTAL ASSETS ....................................................... $305,799 $298,602
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS ........................................ $ 41,000 $ 49,000
SENIOR NOTES ....................................................... 189,273 174,541
SENIOR SUBORDINATED NOTES .......................................... 20,000 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ........................... 6,612 7,030
ACCRUED INTEREST ................................................... 1,656 1,285
INCOME TAXES:
Currently payable ............................................. 100 84
Deferred ...................................................... 9,414 9,096
-------- --------
TOTAL LIABILITIES .................................................. 268,055 261,036
-------- --------
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 4,633,530 shares
in 1999 and 4,618,530 in 1998 ................................. 46 46
Additional paid-in capital .................................... 13,091 12,941
Retained earnings ............................................. 29,042 28,448
Less: Treasury Stock (at cost) 448,000 shares in 1999 and
368,000 in 1998 ............................................... (2,913) (2,230)
Deferred compensation ......................................... (1,060) (1,141)
Notes receivable from officers and employees .................. (462) (498)
-------- --------
TOTAL STOCKHOLDERS' EQUITY ......................................... 37,744 37,566
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................... $305,799 $298,602
======== ========
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, 1999 AND MARCH 31, 1998
(in thousands, except per share and share amounts)
(unaudited)
THREE MONTHS ENDED
--------------------------
MARCH 31, MARCH 31,
1999 1998
-------- --------
REVENUES:
Earned income on leases and notes ............. $ 9,260 $ 7,493
Gain on sales of leases and notes ............. 1,165 525
Provision for losses .......................... (749) (584)
---------- ----------
Net Revenues ...................................... 9,676 7,434
---------- ----------
EXPENSES:
Selling, general and administrative ........... 4,585 3,210
Interest expense .............................. 4,184 3,517
Interest income ............................... (103) (28)
---------- ----------
Net operating expenses ............................ 8,666 6,699
---------- ----------
INCOME BEFORE INCOME TAXES ........................ 1,010 735
---------- ----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current ..................................... 72 26
Deferred .................................... 318 299
Additional paid-in capital from exercise
of non-qualified stock options ........... 26 --
---------- ----------
TOTAL INCOME TAXES ................................ 416 325
---------- ----------
NET INCOME ........................................ $ 594 $ 410
========== ==========
BASIC NET INCOME PER SHARE ........................ $ 0.16 $ 0.11
========== ==========
SHARES USED TO COMPUTE BASIC NET INCOME PER SHARE . 3,765,517 3,651,451
DILUTED NET INCOME PER SHARE ...................... $ 0.14 $ 0.10
========== ==========
SHARES USED TO COMPUTE DILUTED NET INCOME PER SHARE 4,340,639 4,098,166
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 EACH OF THE THREE MONTHS ENDED MARCH 31, 1999 AND MARCH 31, 1998
(in thousands)
(unaudited)
MARCH 31, MARCH 31,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ......................................................... $ 594 $ 410
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization ...................................... 1,142 897
Increase in deferred income taxes .................................. 318 299
Restricted stock and option compensation ........................... 150 50
Gain on sale of lease contracts and notes receivable ............... (1,165) (525)
Provision for losses on lease contracts and notes receivable ....... 749 584
Increase (decrease) in accrued interest ............................ 371 (657)
Increase (decrease) in accounts payable and accrued liabilities .... 74 (1,565)
Increase (decrease) in accrued income taxes ........................ 16 (35)
Decrease in refundable income taxes ................................ 33 1,078
Increase in other assets ........................................... (154) (51)
-------- --------
Cash provided by operating activities ................................... 2,128 485
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due
in installments .................................................. (39,813) (35,260)
Portfolio receipts, net of amounts included in income .............. 20,006 14,029
Proceeds from sales of lease contracts and notes
receivable due in installments ................................... 9,829 4,566
Net decrease in notes receivable ................................... 3,114 2,853
Net increase in security deposits .................................. 79 184
Net increase in other assets ....................................... (142) (117)
Net decrease in loans to employees ................................. 36 24
-------- --------
Cash used in investing activities ....................................... (6,891) (13,721)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes .......................................... (18,337) (12,670)
Proceeds from issuance of senior notes, net of debt issue costs .... 33,069 25,310
Net proceeds (repayments) of revolving credit borrowings ........... (8,000) 2,000
Purchase of treasury stock ......................................... (683) (203)
Increase in restricted cash ........................................ 1,256 392
Exercise of employee stock options ................................. 53 --
-------- --------
Cash provided by financing activities ................................... 7,358 14,829
-------- --------
Net increase in cash and cash equivalents ............................... 2,595 1,593
Cash and cash equivalents at beginning of period ........................ 4,583 2,137
-------- --------
Cash and cash equivalents at end of period .............................. $ 7,178 $ 3,730
======== ========
Supplemental disclosures of cash flow information:
Interest paid ...................................................... $ 3,696 $ 4,089
Income taxes paid .................................................. 43 17
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 1998
account balances have been reclassified to conform with 1999 presentation. Such
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, Supplemental Employee Stock Ownership Plan (see Note 3), restricted shares
issued under the Company's Incentive Stock Plans, treasury stock, or any shares
issuable upon the exercise of outstanding stock options. Diluted net income per
share includes the weighted average number of stock options and contingently
issuable restricted shares under the Company's Incentive Stock Plans outstanding
as calculated under the treasury stock method, but not unallocated shares under
the Company's ESOP and SESOP.
3. In April 1998, the Company canceled its Supplemental Employee Stock
Ownership Plan ("SESOP"). The Company had originally issued 350,000 shares of
common stock to this plan in July 1994 in consideration of a promissory note in
the principal amount of $1,225,000. No contributions or allocations had been
made to any participant accounts. The shares issued to the SESOP were retired
and the promissory note canceled.
4. In February 1999, the Company extended certain 5-year options which
were scheduled to expire. As a result, the Company recognized additional
compensation expense of $68,000 in the quarter ended March 31, 1999.
5. Pursuant to the terms of the HPSC Bravo Funding Corp. ("Bravo")
revolving credit facility, as amended, Bravo had Senior Notes of $69,627,000
outstanding at March 31, 1999. Bravo incurs interest at various rates in the
commercial paper market and enters into interest rate swap agreements to assure
fixed rate funding. At March 31, 1999, Bravo had 20 separate swap contracts with
BankBoston with a total notional value of $67,001,000. These interest rate swaps
are matched swaps, and as such, are accounted for using settlement accounting.
Monthly cash settlements on the swap agreements are recognized in income as they
accrue. In the case where the notional value of the interest rate swap
agreements significantly exceeds the outstanding underlying debt, the excess
swap agreements would be marked-to-market through income until new borrowings
are incurred which would be subject to such swap agreements. All interest rate
swap agreements entered into by the Company are for other than trading purposes.
6. Pursuant to the terms of the HPSC Capital Funding Inc. ("Capital")
Lease Receivable Purchase Agreement, as amended, Capital had Senior Notes
outstanding of $112,259,000 at March 31, 1999, and in connection with this
facility had 15 separate interest rate swap agreements with BankBoston with a
total notional value of $109,671,000. These interest rate swaps are matched
swaps, and as such, are accounted for using settlement accounting. Monthly cash
settlements on the swap agreements are recognized in income as they accrue. In
the case where the notional value of the interest rate swap agreements
significantly exceeds the outstanding underlying debt, the excess swap
agreements would be marked-to-market through income until new borrowings are
incurred which would be subject to such swap agreements. All interest rate swap
agreements entered into by the Company are for other than trading purposes.
7. On March 31, 1999, the Company had restricted cash of $5,844,000 under
the Bravo facility and $5,000,000 under the Capital facility. All such
restricted cash is reserved for debt service.
8. In March 1999, the Third Amended and Restated Revolving Loan Agreement
with BankBoston as Managing Agent (the "Revolving Loan Agreement") was extended
on the same terms and conditions through May 14, 1999 providing availability of
up to
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$86,000,000. It is anticipated the Company will execute an amended Revolving
Loan Agreement for $90,000,000 in May 1999, which will provide the Company with
availability through May 2000.
9. In March 1999, the Company entered into an additional secured, fixed
rate, fixed term loan agreement with Springfield Institution for Savings. The
Company borrowed $5,011,000 at 6.50%, subject to certain recourse and
performance covenants.
10. The Financial Accounting Standards Board ("FASB") has issued SFAS No.
130, "Reporting Comprehensive Income". This statement, adopted January 1, 1998,
establishes standards for reporting and presenting comprehensive income and its
components. Comprehensive income equals net income for each of the three month
periods ended March 31, 1999 and March 31, 1998.
11. A summary of information about the Company's operations by segment for
each of the three months ended March 31, 1999 and 1998 is as follows:
COMMERCIAL
LICENSED AND
(in thousands) PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL
------------ ---------- -----
FOR THE THREE MONTHS ENDED MARCH 31, 1999
Earned income on leases and notes ...................... $ 8,087 $ 1,173 $ 9,260
Gain on sales of leases and notes ...................... 1,165 -- 1,165
Provision for losses ................................... (720) (29) (749)
Selling, general and administrative expenses ........... (4,189) (396) (4,585)
-------- ------- --------
Net profit contribution ................................ 4,343 748 5,091
Total assets ........................................... 270,122 35,677 305,799
FOR THE THREE MONTHS ENDED MARCH 31, 1998
Earned income on leases and notes ...................... 6,236 1,257 7,493
Gain on sales of leases and notes ...................... 525 -- 525
Provision for losses ................................... (549) (35) (584)
Selling, general and administrative expenses ........... (2,829) (381) (3,210)
-------- ------- --------
Net profit contribution ................................ 3,383 841 4,224
Total assets ........................................... 210,116 33,842 243,958
The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
FOR THE THREE MONTHS ENDED MARCH 31, 1999 1998
(in thousands) ------- -------
Net segment profit contribution ........................ $ 5,091 $ 4,224
Interest expense ....................................... (4,184) (3,517)
Interest income on cash balances ....................... 103 28
------- -------
Income before income taxes ............................. $ 1,010 $ 735
Other Segment Information - The Company derives substantially all of its
revenues from domestic customers. As of March 31, 1999, 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
8.5% of the total portfolio of that segment. The licensed professional financing
segment relies on certain vendors to provide referrals to the company, but for
the quarter ended March 31, 1999, no one vendor accounted for greater than 14%
of the Company's lease originations.
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12. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" was issued. This Statement establishes new accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. This statement will be effective for the first quarter of the
Company's year ended December 31, 2000. The Company is evaluating the impact of
this statement on its consolidated results of operations.
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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,
1999 was $9,260,000 (including approximately $1,173,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $7,493,000 (including approximately $1,257,000 from ACFC) for the
three months ended March 31, 1998. The increase of 24% was due principally to
increases in net investment in leases and notes in 1999 over 1998. The increase
in net investment resulted in part from a higher level of originations in the
first quarter of 1999 of $40,277,000 compared to $39,185,000 for the first
quarter of 1998. Gains on sales of leases and notes were $1,165,000 in the three
months ended March 31, 1999 compared to $525,000 for the comparable 1998
quarter. The increase in gains on sales of leases and notes was caused by
improved margins on a higher level of asset sales activity in the first quarter
of 1999 compared to the first quarter of 1998.
Interest expense (net of interest income) for the first quarter of 1999 was
$4,081,000 (44% of earned income) compared to $3,489,000 (47% of earned income)
in the comparable 1998 period. The increase in net interest expense was
primarily due to a 27% increase in debt levels from March 31, 1998 to March 31,
1999. These higher debt levels resulted primarily from borrowings to finance a
higher level of contract originations.
Net financing margin (earned income less net interest expense) for the
first quarter of 1999 was $5,179,000 (56% of earned income) compared to
$4,004,000 (53% of earned income) for the first quarter of 1998. The increase in
amount was due to higher earnings on a higher balance of earning assets. The
increase in percentage of earned income was due to lower interest rate debt in
1999 as compared to the same period in 1998.
The provision for losses for the first quarter of 1999 was $749,000 (8% of
earned income) compared to $584,000 (8% of earned income) in the first quarter
of 1998. The increase in the comparable three month periods were due to growth
in the portfolio along with the Company's continuing evaluation of its portfolio
quality, loss history and allowance for losses.
The allowance for losses at March 31, 1999 was $7,565,000 (2.7% of net
investment in leases and notes) compared to $5,617,000 (2.5% of net investment
in leases and notes) at March 31, 1998. Net charge offs for the three months
ended March 31, 1999 were $534,000 compared to $459,000 for the same period
ended March 31, 1998.
Selling, general and administrative expenses for the three months ended
March 31, 1999 were $4,585,000 (50% of earned income) compared to $3,210,000
(43% of earned income) in the comparable 1998 period. The increase was caused by
increased staffing and sales, advertising, and marketing related costs required
to support higher levels of owned and managed assets. The increase was further
caused by increased compensation and related costs associated with the extension
of certain five-year stock options which were scheduled to expire.
The Company's income before income taxes for the quarter ended March 31,
1999 was $1,010,000 compared to $735,000 in the same period in 1998. The
provision for income taxes was $416,000 (41% of income before income taxes)
compared to $325,000 (44% of income before income taxes) in the first quarter of
1998. The decrease in the income tax rate from 1998 to 1999 was due to
approximately $50,000 in expenses incurred by the Company in the first quarter
of 1998 ($0 in 1999) related to the continuing wind-down of the Company's
Canadian operation which were not deductible in computing the income tax
provision.
The Company's net income for the three months ended March 31, 1999 was
$594,000 ($0.14 diluted net income per share) compared to $410,000 ($0.10
diluted net income per share) for the three months ended March 31, 1998. The
increase resulted from higher earned income on leases and notes and higher gains
on asset sales, 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, 1999, the Company had $18,022,000 in cash, cash equivalents
and restricted cash as compared to $14,171,000 at December 31, 1998. As
described in Note 7 to the Company's condensed consolidated financial statements
included in this report on
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Form 10-Q, $10,844,000 was restricted pursuant to financing agreements as of
March 31, 1999, compared to $9,588,000 at December 31, 1998.
Cash provided by operating activities was $2,128,000 for the three months
ended March 31, 1999 compared to $485,000 for the three months ended March 31,
1998. The significant components of cash provided by operating activities for
the three months ended March 31, 1999, as compared to the same period in 1998,
were an increase in accounts payable and accrued liabilities of $74,000 as
compared to a decrease of $1,565,000 for the same period in 1998, an increase in
accrued interest of $371,000 as compared to a decrease of $657,000 from the
prior period, offset by a decrease in refundable income taxes of $33,000 in 1999
compared to $1,078,000 for the same period in 1998.
Cash used in investing activities was $6,891,000 for the three months ended
March 31, 1999 compared to $13,721,000 for the three months ended March 31,
1998. The significant components of cash used in investing activities for the
first three months of 1999 compared to the same period in 1998 were an increase
in originations of lease contracts and notes receivable to $39,813,000 from
$35,260,000, offset by an increase in portfolio receipts to $20,006,000 from
$14,029,000, along with an increase in proceeds from sales of lease contracts
and notes receivable of $9,829,000 in 1999 compared to $4,566,000 in the
comparable period ended March 31, 1998.
Cash provided by financing activities for the three months ended March 31,
1999 was $7,358,000 compared to $14,829,000 for the three months ended March 31,
1998. The significant components of cash provided by financing activities for
the first three months of 1999 as compared to 1998 were an increase in proceeds
from issuance of senior notes, net of debt issuance costs, to $33,069,000 from
$25,310,000, and an increase in restricted cash balances of $1,256,000 compared
to $392,000, offset by higher repayments of senior notes of $18,337,000 for the
three months ended March 31, 1999 compared to $12,670,000 for the three months
ended March 31, 1998 as well as net repayments of revolving credit borrowings of
$8,000,000 in the first quarter of 1999 compared to net proceeds from revolving
credit borrowings of $2,000,000 in the same period in 1998.
The Company executed a Third Amended and Restated Revolving Credit
Agreement with BankBoston as Agent Bank on March 16, 1998 (the "Revolver
Agreement") providing the Company with availability up to $100,000,000 through
March 16, 1999. In March 1999, the agreement was extended under the same terms
and conditions through May 14, 1999, providing availability up to $86,000,000.
Under the Revolver Agreement, the Company may borrow at variable rates of prime
and at LIBOR plus 1.35% to 1.50%, depending upon certain performance covenants.
At March 31, 1999, the Company had $41,000,000 outstanding under this facility
and $45,000,000 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. It is anticipated
that the Company will execute an amended Revolver Agreement for $90,000,000 in
May 1999 which will provide the Company with availability through May 2000.
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 Capital
Markets Assurance Corporation ("CapMAC", subsequently acquired by MBIA in
February, 1998). The Bravo Facility provides the Company with available
borrowings up to $225,000,000, of which $67,500,000 may be utilized for sales of
financing contracts. 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 its interests in these assets to a
commercial paper conduit entity. Bravo incurs interest at variable rates in the
commercial paper market and enters into interest rate swap agreements to assure
fixed rate funding. Monthly settlements of principal and interest payments are
made from the collection of payments on Bravo's portfolio. The Company is the
servicer of the Bravo portfolio, subject to the Company meeting certain
covenants. The required monthly payments of principal and interest to purchasers
of the commercial paper are guaranteed by CapMAC pursuant to the terms of the
facility. At March 31, 1999, Bravo had $51,474,000 outstanding from sales of
receivables under the sale accounting portion of the Bravo Facility and
$69,627,000 of indebtedness outstanding under the loan portion of the Bravo
Facility. In connection with this facility, the Company had 29 separate interest
rate swap agreements with BankBoston with a total notional value of
$110,223,000.
In March, 1999, the Company entered into an additional fixed rate, fixed
term loan agreement with Springfield Institution for Savings ("SIS"). The
Company borrowed $5,011,000 at 6.5%, subject to certain recourse and performance
covenants. The Company had $7,387,000 outstanding under all loan agreements with
SIS at March 31, 1999.
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In March 1997, the Company completed a $20,000,000 offering of unsecured
senior subordinated notes due 2007 bearing interest at a fixed rate of 11% (the
"Note Offering"). The Note Offering was completed on the terms and conditions
described in Amendment No. 2 to the Company's Registration Statement No.
333-20733 on Form S-1. The Company received approximately $18,300,000 in net
proceeds from the Note Offering and used such proceeds to repay, in part,
amounts outstanding under the Revolver Agreement.
In April 1998, 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").
The revolving credit facility (the "Capital Facility") provides the Company with
available borrowings up to $150,000,000. Under the terms of the Capital
Facility, Capital, to which the Company may sell 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. At March 31, 1999, the Company had $15,195,000
outstanding from sales of receivables and $112,259,000 of borrowings outstanding
from loans under the Capital Facility. In connection with this facility, the
Company had 17 separate interest rate swap agreements with BankBoston with a
total notional value of $123,526,000.
Management believes that the Company's liquidity, resulting from the
availability of credit under the Revolver Agreement, the Bravo Facility, the
Capital Facility, the Note Offering, and the loans from SIS, 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 adequately its
anticipated growth, the Company will continue to seek to raise additional
capital from bank and non-bank sources, make selective use of asset sale
transactions and use its current credit facilities. 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.
YEAR 2000 ISSUES
The year 2000 issue relates to the inability of computer applications to
distinguish between years with the same last two digits in different centuries
such as 1900 and 2000. In 1996, the Company, along with its subsidiary, ACFC,
began a review to assess the year 2000 readiness of all of its information
technology (IT) systems. In 1998, the Company expanded this review to include
non-IT systems, including embedded software such as the Company's telephone
system, as well as the systems of third parties who are important business
partners with the Company.
The Company is heavily reliant on integrated IT systems for providing much
of its day-to-day operations, including application processing, underwriting,
billing and collections, as well as much of the financial and operational
reporting to management. The Company has performed a complete review of all
relevant computer systems. Based on its internal review, the Company believes
that substantially all of its internal IT systems are year 2000 compliant. The
Company has also obtained written assurances from all providers of its IT
software and systems as to the year 2000 compliance of each of these systems.
The Company believes that the loss of any ancillary systems as to which the
Company is not assured of year 2000 compliance would not cause major business
disruption.
The Company is monitoring the year 2000 progress of its major service
providers of non-IT systems, including embedded systems and software, as well as
of its third party business partners such as banking institutions and customers.
In 1998, the Company began a review of the systems of major customers of its
subsidiary, ACFC. The Company continues to work to obtain written assurances
from all such identified third parties. In situations where any of these third
parties is not yet compliant, the Company will closely monitor such parties'
plans to implement the changes necessary to become compliant.
The Company's target is to complete its year 2000 compliance review by the
second quarter 1999. The Company does not separately track the internal costs
associated with the year 2000 project. All such costs, which primarily consist
of payroll and IT related consulting costs, have been expensed as incurred.
Expenses incurred to date associated with implementing the year 2000 review
process have not been material. The Company does not anticipate that any
remaining costs will have a material impact on the future financial position or
results of operations of the Company.
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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 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; the risk that the Company's or its customers' computer systems
will not be fully year 2000 compliant; 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, 1998,
contain additional information concerning such risk factors. Actual results in
the future could differ materially from those described in any forward-looking
statements as a result of the risk factors set forth above, and the risk factors
described in the Annual Report. HPSC cautions the reader, however, that such
list of risk factors may not be exhaustive. HPSC undertakes no obligation to
release publicly the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.
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HPSC, INC.
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 5 ARE OMITTED BECAUSE THEY ARE INAPPLICABLE.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule
b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months ended March
31, 1999.
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
Dated: May 13, 1999
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