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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, 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 (IRS Employer Identification No.)
of 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 August 4, 1999, 4,212,530.
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HPSC, INC.
INDEX
PAGE
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PART I -- FINANCIAL INFORMATION
Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31,
1998............................................................................ 3
Condensed Consolidated Statements of Income for Each of the Three and Six
Months Ended June 30, 1999 and June 30, 1998..................................... 4
Condensed Consolidated Statements of Cash Flows for Each of the Six Months
Ended June 30, 1999 and June 30, 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....................................................................... 14
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HPSC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share and share amounts)
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(UNAUDITED)
ASSETS
CASH AND CASH EQUIVALENTS........................................... $ 4,440 $ 4,583
RESTRICTED CASH..................................................... 13,125 9,588
INVESTMENT IN LEASES AND NOTES:
Lease contracts and notes receivable due in installments....... 327,416 293,211
Notes receivable............................................... 33,733 35,863
Retained interest in leases and notes sold..................... 14,795 14,500
Estimated residual value of equipment at end of lease term..... 16,749 14,830
Less unearned income........................................... (80,426) (73,019)
Less allowance for losses...................................... (8,117) (7,350)
Less security deposits......................................... (6,879) (6,756)
Deferred origination costs..................................... 7,719 6,696
--------- ---------
Net investment in leases and notes.................................. 304,990 277,975
--------- ---------
OTHER ASSETS:
Other assets................................................... 6,045 5,682
Refundable income taxes........................................ 743 774
--------- ---------
TOTAL ASSETS........................................................ $ 329,343 $ 298,602
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
REVOLVING CREDIT BORROWINGS......................................... $ 41,000 $ 49,000
SENIOR NOTES........................................................ 210,458 174,541
SENIOR SUBORDINATED NOTES........................................... 20,000 20,000
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES............................ 8,218 7,030
ACCRUED INTEREST.................................................... 1,212 1,285
INCOME TAXES:
Currently payable.............................................. 40 84
Deferred....................................................... 9,731 9,096
--------- ---------
TOTAL LIABILITIES................................................... 290,659 261,036
--------- ---------
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 4,679,530 shares in 1999 and 4,618,530
in 1998...................................................... 47 46
Additional paid-in capital..................................... 13,367 12,941
Retained earnings.............................................. 29,690 28,448
Less: Treasury Stock (at cost) 467,500 shares in 1999 and 368,000 (3,087) (2,230)
in 1998.............................................................
Deferred compensation.......................................... (872) (1,141)
Notes receivable from officers and employees................... (461) (498)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.......................................... 38,684 37,566
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......................... $ 329,343 $ 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 EACH OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(In thousands, except per share and share amounts)
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES:
Earned income on leases and notes.................. $ 9,578 $ 8,033 $ 18,838 $ 15,527
Gain on sales of leases and notes.................. 887 1,225 2,052 1,750
Provision for losses............................... (1,034) (681) (1,783) (1,265)
---------- ---------- ---------- ----------
Net Revenues............................................ 9,431 8,577 19,107 16,012
---------- ---------- ---------- ----------
EXPENSES:
Selling, general and administrative................ 4,044 3,991 8,629 7,202
Interest expense................................... 4,391 3,796 8,575 7,312
Interest income.................................... (103) (40) (206) (68)
---------- ---------- ---------- ----------
Net operating expenses.................................. 8,332 7,747 16,998 14,446
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 1,099 830 2,109 1,566
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Federal, Foreign and State:
Current....................................... 71 30 143 56
Deferred...................................... 317 338 635 637
Additional paid-in capital from exercise of
non-qualified stock options............. 63 -- 89 --
---------- ---------- ---------- ----------
TOTAL INCOME TAXES...................................... 451 368 867 693
---------- ---------- ---------- ----------
NET INCOME.............................................. $ 648 $ 462 $ 1,242 $ 873
========== ========== ========== ==========
BASIC NET INCOME PER SHARE.............................. $ 0.17 $ 0.12 $ 0.33 $ 0.24
========== ========== ========== ==========
SHARES USED TO COMPUTE BASIC NET
INCOME PER SHARE...................................... 3,778,684 3,714,784 3,772,101 3,683,117
DILUTED NET INCOME PER SHARE............................ $ 0.15 $ 0.11 $ 0.29 $ 0.21
========== ========== ========== ==========
SHARES USED TO COMPUTE DILUTED
NET INCOME PER SHARE.................................. 4,351,858 4,245,374 4,350,406 4,125,698
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 SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
(In thousands)
(unaudited)
JUNE 30, JUNE 30,
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income................................................. $ 1,242 $ 873
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 2,342 1,974
Deferred income taxes...................................... 635 636
Restricted stock and option compensation................... 232 973
Gain on sales of lease contracts and notes receivable...... (2,052) (1,750)
Provision for losses on lease contracts and notes receivable 1,783 1,265
Increase (decrease) in accrued interest.................... (73) 108
Increase in accounts payable and accrued liabilities....... (426) (1,909)
Decrease in accrued income taxes........................... (44) (66)
Decrease in refundable income taxes........................ 31 2,386
(Increase) decrease in other assets........................ (135) 80
--------- --------
Cash provided by (used in) operating activities................. 3,535 4,570
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Origination of lease contracts and notes receivable due in
installments.............................................. (91,465) (77,500)
Portfolio receipts, net of amounts included in income...... 36,159 27,535
Proceeds from sales of lease contracts and notes receivable
due in installments....................................... 18,891 14,317
Net decrease in notes receivable........................... 2,020 1,750
Net increase in security deposits.......................... 123 445
Net increase in other assets............................... (298) (223)
Net (increase) decrease in loans to employees.............. 37 (139)
--------- --------
Cash (used in) investing activities............................. (34,533) (33,815)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of senior notes.................................. (36,300) (24,543)
Proceeds from issuance of senior notes, net of debt issue 72,217 44,337
costs.....................................................
Net proceeds (repayments) of revolving credit borrowings... (8,000) 8,000
Purchase of treasury stock................................. (857) (203)
Increase in restricted cash................................ 3,537 1,303
Repayment of employee stock ownership plan promissory note. 105 105
Exercise of employee stock options......................... 153 315
-------- --------
Cash provided by financing activities........................... 30,855 29,314
-------- --------
Net increase (decrease) in cash and cash equivalents............ (143) 69
Cash and cash equivalents at beginning of period................ 4,583 2,137
-------- --------
Cash and cash equivalents at end of period...................... $ 4,440 $ 2,206
======== ========
Supplemental disclosures of cash flow information:
Interest paid.............................................. $ 7,328 $ 6,964
Income taxes paid.......................................... 119 35
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 six months ended June 30, 1999.
5. Pursuant to the terms of the HPSC Bravo Funding Corp. ("Bravo")
revolving credit facility, as amended, Bravo had Senior Notes of $95,422,000
outstanding at June 30, 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 June 30, 1999, Bravo had 23 separate interest rate swap
contracts with BankBoston with a total notional value of $92,557,000. 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. In April 1999, the HPSC Capital Funding, Inc. ("Capital") revolving
credit facility was renewed under the same terms and conditions, providing
available borrowings up to $125,000,000. Pursuant to the terms of the Lease
Receivable Purchase Agreement, as amended, Capital had Senior Notes outstanding
of $102,751,000 at June 30, 1999, and in connection with this facility had 15
separate interest rate swap agreements with BankBoston with a total notional
value of $102,661,000. 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 June 30, 1999, the Company had restricted cash of $6,801,000 under
the Bravo facility and $6,324,000 under the Capital facility. All such
restricted cash is reserved for debt service.
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8. In May 1999, an amended Revolving Loan Agreement was executed with
BankBoston as Managing Agent (the "Revolving Loan Agreement") on the same terms
and conditions through May 2000, providing availability to the Company of up to
$90,000,000.
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, subject to certain recourse and performance
covenants.
10. In April 1999, the Company entered into a secured, fixed rate, fixed
term loan agreement with Cambridge Savings Bank. The Company borrowed
$5,861,000, subject to certain recourse and performance covenants.
11. 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 six month
periods ended June 30, 1999 and June 30, 1998.
12. A summary of information about the Company's operations by segment for
each of the three and six month periods ended June 30, 1999 and 1998 is as
follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------------- -------------------------------------
COMMERCIAL COMMERCIAL
LICENSED AND LICENSED AND
(in thousands) PROFESSIONAL INDUSTRIAL PROFESSIONAL INDUSTRIAL
FINANCING FINANCING TOTAL FINANCING FINANCING TOTAL
------------ ---------- ----- ------------ ---------- -----
1999
- ----
Earned income on leases and notes.............. $ 8,473 $ 1,105 $ 9,578 $ 16,560 $ 2,278 $ 18,838
Gain on sales of leases and notes.............. 887 -- 887 2,052 -- 2,052
Provision for losses........................... (1,021) (13) (1,034) (1,741) (42) (1,783)
Selling, general and administrative expenses... (3,619) (425) (4,044) (7,808) (821) (8,629)
------- ------- ------- -------- ------- --------
Net profit contribution........................ 4,720 667 5,387 9,063 1,415 10,478
Total assets................................... 295,942 33,401 329,343
1998
- ----
Earned income on leases and notes.............. 6,816 1,217 8,033 13,053 2,474 15,527
Gain on sales of leases and notes.............. 1,225 -- 1,225 1,750 -- 1,750
Provision for losses........................... (641) (40) (681) (1,190) (75) (1,265)
Selling, general and administrative expenses... (3,607) (384) (3,991) (6,437) (765) (7,202)
------- ------- ------- -------- ------- --------
Net profit contribution........................ 3,793 793 4,586 7,176 1,634 8,810
Total assets................................... 228,488 31,330 259,818
The following reconciles net segment profit contribution as reported above to
total consolidated income before income taxes:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(in thousands) 1999 1998 1999 1998
---- ---- ---- ----
Net segment profit contribution................. $ 5,387 $ 4,586 $10,478 $ 8,810
Interest expense................................ (4,391) (3,796) (8,575) (7,312)
Interest income on cash balances................ 103 40 206 68
------- ------- ------- -------
Income before income taxes...................... $ 1,099 $ 830 $ 2,109 $ 1,566
Other Segment Information - The Company derives substantially all of its
revenues from domestic customers. As of June 30, 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 10%
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 six months ended June 30, 1999, no one vendor accounted for greater than 11%
of the Company's lease originations.
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13. 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, 2001. 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 June 30,
1999 was $9,578,000 (including approximately $1,105,000 from the Company's
commercial lending subsidiary, American Commercial Finance Corporation ("ACFC"))
as compared to $8,033,000 (including approximately $1,217,000 from ACFC) for the
three months ended June 30, 1998. Earned income for the six months ended June
30, 1999 was $18,838,000 (including approximately $2,278,000 from ACFC) compared
to $15,527,000 (including approximately $2,474,000 from ACFC) for the comparable
period in 1998. The increase of 19% for the three month period and 21% for the
six month period was due principally to increases in net investment in leases
and notes in 1999 over 1998. The increase in net investment in both periods
resulted in part from a higher level of originations in the second quarter of
1999 of $49,810,000 compared to $41,818,000 for the second quarter of 1998 and
$90,087,000 for the first six months ended June 30, 1999 compared to $81,003,000
in the corresponding 1998 period. Gains on sales of leases and notes were
$887,000 in the three months ended June 30, 1999 compared to $1,225,000 for the
comparable 1998 quarter. The decrease in gains on sales of leases and notes was
due to a lower level of asset sales activity in the second quarter of 1999 as
compared to the second quarter of 1998. For the six months ended June 30, 1999,
gains on sales of leases and notes were $2,052,000 compared to $1,750,000 for
the six months ended June 30, 1998. The increase for the six month period was
caused by 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 second quarter of 1999
was $4,288,000 (45% of earned income) compared to $3,756,000 (47% of earned
income) in the comparable 1998 period. For the first six months ended June 30,
1999, net interest expense was $8,369,000 (44% of earned income) compared to
$7,244,000 (47% of earned income) in the six months ended June 30, 1998. The
increase in net interest expense was primarily due to a 29% increase in debt
levels from June 30, 1998 to June 30, 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
second quarter of 1999 was $5,290,000 (55% of earned income) compared to
$4,277,000 (53% of earned income) for the second quarter of 1998. For the six
month period ended June 30, 1999, net financing margin increased to $10,469,000
(56% of earned income) from $8,283,000 (53% of earned income) in 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 second quarter of 1999 was $1,034,000 (11%
of earned income) compared to $681,000 (8% of earned income) in the second
quarter of 1998. The provision for losses for the six months ended June 30, 1999
was $1,783,000 (9% of earned income) compared to $1,265,000 (8% of earned
income) in the comparable period in 1998. The increase is 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 June 30, 1999 was $8,117,000 (2.7% of net
investment in leases and notes) compared to $5,858,000 (2.4% of net investment
in leases and notes) at June 30, 1998. Net charge offs for the six months ended
June 30, 1999 were $1,019,000 compared to $941,000 for the same period ended
June 30, 1998.
Selling, general and administrative expenses for the three months ended
June 30, 1999 were $4,044,000 (42% of earned income) compared to $3,991,000 (50%
of earned income) in the comparable 1998 period. For the six month period ended
June 30, 1999, selling, general and administrative expenses were $8,629,000 (46%
of earned income) compared to $7,202,000 (46% of earned income) for the same
period in 1998. The increase was caused by increased staffing and sales,
advertising, and marketing related costs required to support higher levels of
owned and managed assets, offset by increased capitalization of initial direct
costs due to a higher level of contract originations in the second quarter 1999
as compared to 1998.
The Company's income before income taxes for the quarter ended June 30,
1999 was $1,099,000 compared to $830,000 in the same period in 1998. For the six
months ended June 30, 1999, income before income taxes was $2,109,000 compared
to $1,566,000 in the 1998 period. For the quarter ended June 30, 1999, the
provision for income taxes was $451,000 (41% of income before income taxes)
compared to $368,000 (44% of income before income taxes) in the second quarter
of 1998. For the six months ended June 30, 1999, the provision for income taxes
was $867,000 (41% of income before income taxes) compared to $693,000 (44% of
income
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before income taxes) in the 1998 period. The decrease in the income tax rate
from 1998 to 1999 was due to approximately $117,000 in expenses incurred by the
Company in the first six months 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 June 30, 1999 was
$648,000 ($0.15 diluted net income per share) compared to $462,000 ($0.11
diluted net income per share) for the three months ended June 30, 1998. For the
six months ended June 30, 1999, the Company's net income was $1,242,000 ($0.29
diluted net income per share) compared to $873,000 ($0.21 diluted net income per
share) for the six months ended June 30, 1998. The increase for the six month
period 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 June 30, 1999, the Company had $17,565,000 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 Form 10-Q, $13,125,000 was restricted pursuant to financing
agreements as of June 30, 1999, compared to $9,588,000 at December 31, 1998.
Cash provided by operating activities was $3,535,000 for the six months
ended June 30, 1999 compared to $4,570,000 for the six months ended June 30,
1998. The significant components of cash provided by operating activities for
the six months ended June 30, 1999 as compared to the same period in 1998 were
an increase in accounts payable and accrued liabilities of $426,000 as compared
to an increase of $1,909,000 for the same period in 1998, as well as a decrease
in refundable income taxes of $31,000 in 1999 compared to $2,386,000 for the
same period in 1998.
Cash used in investing activities was $34,533,000 for the six months ended
June 30, 1999 compared to $33,815,000 for the six months ended June 30, 1998.
The significant components of cash used in investing activities for the first
six months of 1999 compared to the same period in 1998 were an increase in
originations of lease contracts and notes receivable to $91,465,000 from
$77,500,000, offset by an increase in portfolio receipts to $36,159,000 from
$27,535,000, along with an increase in proceeds from sales of lease contracts
and notes receivable of $18,891,000 in 1999 compared to $14,317,000 in the
comparable period ended June 30, 1998.
Cash provided by financing activities for the six months ended June 30,
1999 was $30,855,000 compared to $29,314,000 for the six months ended June 30,
1998. The significant components of cash provided by financing activities for
the first six months of 1999 as compared to 1998 were an increase in proceeds
from issuance of senior notes, net of debt issuance costs, to $72,217,000 from
$44,337,000, and an increase in restricted cash balances of $3,537,000 compared
to $1,303,000, offset by higher repayments of senior notes of $36,300,000 for
the six months ended June 30, 1999 compared to $24,543,000 for the six months
ended June 30, 1998 as well as net repayments of revolving credit borrowings of
$8,000,000 in the first six months of 1999 compared to net proceeds from
revolving credit borrowings of $8,000,000 in the same period in 1998.
The Company executed a Third Amended and Restated Revolving Credit
Agreement with BankBoston as the Agent Bank (the "Revolver Agreement") on March
16, 1998 providing the Company with availability up to $100,000,000 through
March 16, 1999. In March 1999, the agreement was extended through May 1999,
providing availability up to $86,000,000. In May 1999, the Company executed the
Third Amendment to the Third Amended and Restated Revolving Credit Agreement.
The Third Amendment to the Revolver Agreement provides availability to the
Company of $90,000,000 under substantially the same terms and conditions,
through May 2000. 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 June 30, 1999, the Company had $41,000,000 outstanding
under this facility and $49,000,000 available for borrowing, subject to
borrowing base limitations. The outstanding borrowings under the Revolver
Agreement are not hedged and, therefore, are exposed to upward movements in
interest rates.
In March 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.
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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") provided the Company with
available borrowings up to $150,000,000. In April 1999, this revolving credit
facility was renewed under the same terms and conditions, providing available
borrowings up to $125,000,000. Under the terms of the Capital Facility, Capital,
to which the Company may sell or contribute certain of its portfolio assets from
time to time, pledges or sells its interests in these assets to Eagle, a
commercial paper conduit entity. Capital may borrow at variable rates in the
commercial paper market and may enter into interest rate swap agreements to
assure fixed rate funding. Monthly settlements of the borrowing base and any
applicable principal and interest payments are made from collections of
Capital's portfolio. The Company is the servicer of the Capital portfolio
subject to certain covenants. At June 30, 1999, the Company had $13,895,000
outstanding from sales of receivables and $102,751,000 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 $115,712,000.
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", 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 June 30, 1999, Bravo had $56,505,000 outstanding from sales of
receivables under the sale accounting portion of the Bravo Facility and
$95,422,000 of indebtedness outstanding under the loan portion of the Bravo
Facility. In connection with this facility, the Company had 34 separate interest
rate swap agreements with BankBoston with a total notional value of
$150,413,000.
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, subject to certain recourse and performance
covenants. The Company had $6,537,000 outstanding under all loan agreements with
SIS at June 30, 1999.
In April 1999, the Company entered into a fixed rate, fixed term loan
agreement with Cambridge Savings Bank ("CSB"). The Company borrowed $5,861,000,
subject to certain recourse and performance covenants. The Company had
$5,748,000 outstanding under the loan obligation with CSB at June 30, 1999.
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 and CSB, along with
cash obtained 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
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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's subsidiary, ACFC, began a review of the systems of its
major customers. Based on this review, ACFC does not anticipate any major
issues, however, in the event of a failure of a customers system, ACFC believes
it has adequate contingency plans and systems in place to ensure a continuity of
its business operations.
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.
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, 2, 3, AND 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 April 26, 1999
b) Not Applicable
c) The stockholders elected the following two persons to serve as Class I
Directors:
FOR WITHHELD
--- --------
Lowell P. Weicker, Jr...................3,904,162 19,649
Thomas M. McDougal......................3,919,162 4,649
The stockholders ratified the appointment of Deloitte & Touche LLP as
the independent auditors of the Company for the fiscal year ending
December 31, 1999:
FOR AGAINST ABSTAIN
--- ------- -------
3,916,162 5,149 2,500
d) Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
10.1 HPSC, Inc. Amended and Restated 1998 Stock Incentive Plan, dated
as of April 26, 1999.
10.2 First Amendment, dated as of April 26, 1999 to HPSC, Inc. Amended
and Restated 1995 Stock Incentive Plan
10.3 Second Amendment, dated as of April 26, 1999, to HPSC, Inc.
Supplemental Executive Retirement Plan dated as of January 1,
1997
10.4 Third Amendment to Third Amended and Restated Credit Agreement by
and among American Commercial Finance Corporation, HPSC, Inc.,
BankBoston, N.A. individually and as Agent, and each of the
lenders referred to therein, dated as of May 14, 1999.
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 May 24, 1999 the adoption of a First Amendment
to Rights Agreement as described in the Form 8-K.
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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: August 12, 1999
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