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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 2002

OR

For the transition period from                              to                             

Commission file number 0-11618

HPSC, Inc.

(Exact name of registrant as specified in its charter)

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 ý    No o

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 $0.01 PER SHARE, SHARES OUTSTANDING AT AUGUST 2, 2002, 4,140,619.

HPSC, INC.

TABLE OF CONTENTS

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HPSC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share amounts)

(unaudited)

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 AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001

(in thousands, except per share and share amounts)

(unaudited)

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, 2002 AND 2001

(in thousands)

(unaudited)

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 (UNAUDITED)

1. Basis of Presentation

        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 2001 amounts have been reclassified to conform with the 2002 presentation. As discussed in Note 11 to the condensed consolidated financial statements, the Company has restated its financial statements for the three and six months ended June 30, 2001. These 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/A filed on August 14, 2002.

2. 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 ("ESOP"), restricted shares issued under the Company's Stock Incentive 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 common shares subject to stock options and contingently issuable restricted shares under the Company's Stock Incentive Plans outstanding as calculated under the treasury stock method, but not treasury stock or unallocated shares under the Company's ESOP.

3. Equipment Receivables 2000-1 Facility

        During 2001 the Company utilized approximately $91,374,000 of the prefunded restricted cash originally provided to the Company in December 2000 pursuant to the Equipment Receivables 2000-1 term securitization ("ER 2000-1") to fund the Company's financing activities. The remaining unused portion of the prefunded restricted cash of approximately $3,844,000 was used to prepay principal on the ER 2000-1 notes in April 2001. In addition, of the original $1,049,000 of ER 2000-1 note proceeds set aside to service the interest requirements on the prefunded debt, $768,000 was surplus and was released to the Company in April 2001.

        ER 2000-1 entered into interest rate swap contracts as a hedge against interest rate risk related to its variable-rate obligations on the ER 2000-1 Class A and Class B-1 notes. At June 30, 2002, the Company had a total of $167,765,000 outstanding related to off-balance sheet financing contracts sold to Equipment Receivables 2000-1 LLC I ("ER 2000-1 LLC I"). In connection with the amounts financed by ER 2000-1 LLC I through the issuance of its Class A and Class B-1 variable-rate notes, the Company had interest rate swap contracts assigned to third parties with a total notional value of $149,999,000. At June 30, 2002, the Company had a total of $121,858,000 of indebtedness outstanding, net of unamortized original issue discount, related to contracts pledged to Equipment Receivables 2000-1 LLC II ("ER 2000-1 LLC II"). In connection with the amounts financed by ER 2000-1 LLC II through the issuance of its Class A and Class B-1 variable-rate notes, the Company had interest rate swap contracts outstanding with a total notional value of $108,932,000.

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        In March 2001, the Company received proceeds of $4,909,000, plus accrued but unpaid interest thereon, upon the sale of the ER 2000-1 Class F notes. At the time of the sale, the notes had a remaining face value of approximately $6,060,000.

        The ER 2000-1 Class E notes, originally purchased by Credit Suisse First Boston ("CSFB") for 90% of face value in December 2000, were subsequently resold to a third party investor in May 2001 for approximately 100% of remaining face value. The Company received approximately $359,000 in proceeds from this sale. The remaining $230,000 in proceeds were retained by CSFB. This amount was treated by the Company as a discount on the ER 2000-1 notes.

4. Revolving Loan Facility

        In May 2001, the Company executed a Third Amendment to the Fourth Amended and Restated Credit Agreement with Fleet National Bank as Managing Agent providing availability to the Company of up to $83,500,000 through May 2002. In May 2002, the Company entered into a Fourth Amendment to the Fourth Amended and Restated Credit Agreement providing availability to the Company through June 2002. In June 2002, the Company executed the Fifth Amendment to the Fourth Amended and Restated Credit Agreement (the "Revolving Loan Agreement" or "Revolver"), providing availability to the Company of $75,000,000 through August 5, 2002. The Company utilizes borrowings under its Revolving Loan Agreement primarily to temporarily warehouse new financing contracts until permanent fixed-rate financing is available as well as to finance a portion of the loans generated by its ACFC subsidiary. Refer to Note 10 regarding subsequent events.

5. Bravo Facility

        In February 2001, the Company repaid approximately $19,000,000 outstanding under the loan portion of the HPSC Bravo Funding, LLC ("Bravo") revolving credit facility (the "Bravo Facility") with proceeds received from the prefunding arrangement provided through the ER 2000-1 securitization. As of June 30, 2002, the Bravo Facility provided the Company with available borrowings of up to $365,000,000. In July 2002, total available borrowings under the Bravo Facility were increased to $385,000,000 under the same terms and conditions.

        At June 30, 2002, the Bravo Facility had total outstanding on-balance sheet debt of $187,571,000 as well as a total off-balance sheet amount outstanding of $121,871,000 related to sold financing contracts. Bravo incurs interest at variable-rates in the commercial paper market and enters into interest rate swap agreements to assure fixed-rate funding. In connection with these loans and sales, Bravo had interest rate swap contracts outstanding with a total notional value of $300,979,000 at June 30, 2002. Refer to Note 10 regarding subsequent events.

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6. Segment Information

        A summary of information about the Company's operations by segment for the three and six months ended June 30, 2002 and 2001 are as follows:

        The following reconciles net segment profit contribution as reported above to total consolidated income before income taxes:

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        Other Segment Information—The Company derives substantially all of its revenues from domestic customers. As of June 30, 2002, 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 11% of the total portfolio of that segment. The licensed professional financing segment relies on certain vendors to provide referrals to the Company. For the six months ended June 30, 2002, no one vendor accounted for greater than 6% of the Company's licensed professional financing originations.

7. Derivative Instruments

        At June 30, 2002, the Company had interest rate swap contracts outstanding hedging variable-rate exposures to on-balance sheet debt obligations and also had interest rate swap contracts assigned to non-consolidated entities for the purpose of hedging variable-rate exposures for sold, off-balance sheet financing contracts. The net fair value of the swap contracts hedging on-balance sheet debt obligations, which is recorded on the Company's balance sheet at June 30, 2002, was a liability of $8,307,000. The net fair value of the swap contracts hedging off-balance sheet amounts, which is not recorded on the Company's consolidated balance sheet, was a liability of $9,221,000 at June 30, 2002.

        Comprehensive income consists of unrealized gains and losses resulting from changes in the fair market value of cash flow hedges since the adoption of SFAS No. 133 on January 1, 2001. Details of the Company's comprehensive income (loss) for the six months ended June 30, 2002 and 2001 are as follows:

        During the six months ended June 30, 2002 and 2001, the Company's interest rate swaps effectively offset changes in the hedged portion of the cash flows of the Company's variable-rate debt obligations. The swap breakage costs included in net income in the above table relate to the after-tax effect of swap breakage costs realized during the current period. The total pretax cost to terminate the swap contracts for the six months ended June 30, 2002 and 2001 was $309,000 and $424,000, respectively, and is reflected as a component of selling, general and administrative expenses.

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8. Asset Sales

        The Company routinely sells leases and notes due in installments pursuant to securitization agreements. Under each of its securitization agreements, the Company continues to service the financing contracts sold, subject to complying with certain covenants. The Company believes that its servicing fee approximates its estimated servicing costs, but it has limited market basis to assess the fair value of its servicing asset. Accordingly, the Company has valued its servicing asset and deferred liability at zero. The Company recognizes servicing fee revenue as earned over the servicing period in proportion to its servicing costs.

        The following is a summary of certain cash flow activity received from and (paid to) securitization facilities for each of the six months ended June 30, 2002 and 2001:

        The following is a summary of the performance of the Company's total owned and managed financing contracts: