HDR Research Note

HPSC, Inc. (HDR)
By: Richard W. West, CFA

HPSC, INC. ANNOUNCES DISCOVERY OF EMPLOYEE DEFALCATION

NO IMPACT ON CURRENT OPERATIONS

MANAGEMENT PROJECTS DILUTED EPS OF $0.23 TO $0.25 FOR 2ND QTR. - IN LINE WITH EXPECTATIONS

STRONG BUY RECOMMENDATION REITERATED

HPSC, Inc., announced on June 17, 2002 the discovery of an act of fraud that was perpetrated by an employee of the company's asset-backed lending subsidiary, American Commercial Finance Corporation (ACFC). An employee diverted approximately $5.0 million by fraudulent transactions with a single factoring customer over a period of the last four to five years. The Company indicated that because of this fraudulent act, the financial statements for the affected years will in all probability be restated. We expect that the restatement reflecting this event will mainly affect the balance sheet and cash flow statements on the restated financials, covering the total amount of funds embezzled. However, considering the net margins on factoring business, we expect that the affect on net income to be negligible in the individual years. Management indicated that a portion of the loss could be recovered through insurance and the possible recovery of assets.

HPSC also projected diluted earnings per share for the second quarter ending June 30, 2002 to be in the range of $0.23 to$0.25 as compared to diluted earnings per share of $0.11 in the second quarter of 2001. Lastly, HPSC has obtained an extension of its current revolving loan facility to August 5, 2002.

SUMMARY and CONCLUSION:

Any fraud perpetrated against corporations is a shock, however, after the discovery of the act, PricewaterhouseCoopers completely investigated the incident. PricewaterhouseCoopers also reviewed HPSC's internal controls with HPSC to insure that procedures are in place to deter any future reoccurrence of similar fraudulent acts. This act is past, and outside of additional auditing and legal expenses, it appears that this will have no material effect on current or future earnings. The fact that management has projected diluted earnings per share of $0.23 to $0.25 for the second quarter validates our estimated diluted earnings per share of $0.98 for the entire year 2002.

The common stock of HPSC recently hit a recovery high close at $10.00 a share and the stock is presently trading at this level. The bad news is out and the good news is that the core business going forward is not materially affected. We reiterate our strong BUY RECOMMENDATION and our price target over the next twelve to eighteen months of $14.00 to $16.00 a share.

J.M.Dutton & Associates, LLC. John M. Dutton, President and Supervisory Analyst, 1129 Manning Drive, Suite 310, El Dorado Hills, CA 95762 Phone (916) 941-4985, Fax (978) 418-6422 Email: [email protected] Web site: www.JMDutton.com

Information, opinions or recommendations contained in this research note are submitted solely for advisory and information purposes. The information used and statements of fact made have been obtained from sources considered reliable but we neither guarantee nor represent the completeness or accuracy. Such information and the opinions expressed are subject to change without notice. This research note is not intended as an offering or a solicitation of an offer to buy or sell the securities mentioned or discussed. Neither the Firm, its principals, nor the assigned analysts own or trade shares of any company covered. The Firm does not accept any equity compensation. Anyone may enroll a company for research coverage, which costs US $25,000 prepaid for one-year. Reports are performed on behalf of the public, and are not a service to any company. The analysts are responsible only to the public, and are paid in advance to eliminate pecuniary interests and insure independence. Please read full disclosure and other reports and notes on the Company at www.JMDutton.com.