HDR Research Note

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

HPSC ANNOUNCES RESULTS FOR SECOND QUARTER
NET INCOME UP 292% WHILE DILUTED EPS UP 300%
COMPANY COMPLETED NEW FINANCINGS
EARNINGS ON TARGET WITH ESTIMATES
STRONG BUY RECOMMENDATION REITERATED

HPSC, Inc., announced on August 7, 2002 a 292% increase in net income for the second quarter ended June 30, 2002, with net income of $1.05 million. This compares to $268,000 in the same quarter last year. Diluted EPS were $0.24 in the second quarter of 2002 versus $0.06 in the prior year period, an increase of 300%. Basic EPS were $0.26 in 2002's second quarter as compared to $0.07 in the same quarter last year. Net revenues in Q2 were $13.8 million, a 2% decrease from the $14.1 million reported in the second quarter of 2001; the lower Q2 revenues were the result of lower levels of asset sales activity and lower weighted-average implicit interest rates on financing contracts. Net operating expenses for Q2 were $12.1 million, an 11% improvement from the $13.6 million recorded in the same period last year.

For the first six months of 2002, net income was $1.9 million, a 117% increase over the $863,000 reported for the first half of 2001. Diluted EPS for the first half of 2002 were $0.44, a 100% increase, as compared to $0.20 reported for the same period last year. Basic EPS in the first half were $0.47, as compared to $0.22 in the first half of 2001. Net revenues declined 3% in the first half of 2002 to $26.3 million, versus net revenues of $27.2 million reported in the same period last year. The decline reflected lower interest rates received on the Company's portfolio and a decreased level of asset sales. Net operating expenses for the first six months of 2002 were $23.2 million, a 10% reduction from the $25.8 million reported for the same period last year.

The Company also announced that it had closed on new revolving credit facilities with Foothill Capital Corporation, a subsidiary of Wells Fargo Bank, as the managing agent for a bank group. The variable-rate lines of credit provide the Company and its subsidiary, ACFC, with committed facilities of up to $70 million to warehouse the Company's new lease and loan financing contracts and to provide financing support for portions of the Company's asset-based lending services provided through ACFC. The Company has also entered into a new financing arrangement with ING Capital LLC pursuant to which ING will provide the Company up to $20 million of financing collateralized by the Company's interest in its existing Bravo facility. These financings should adequately provide capital for HPSC to continue the growth in loans, revenues, and earnings for the balance of this year.

Once again the Company referred to the fact that on June 17, 2002, when it reported that it had discovered than an employee of its asset-based lending subsidiary, American Commercial Finance Corporation (ACFC) had perpetrated a defalcation by which approximately $5 million had been diverted from the Company over the last five years. The Company indicated that it has completed its formal investigation into this matter. As a result, the Company has restated its financial statements for the periods affected beginning in 1996 through the first quarter of 2002. The restated financial statements are now available and we will be reviewing and analyzing the impact of the defalcation in the restated statements in our up coming Research Update.

SUMMARY and CONCLUSION:

HPSC continues to deliver positive numbers. In addition to the growth in net income and earnings per share, the Company reported that:

For the second quarter of 2002, new financing contract originations increased 17.1% to $74.2 million as compared to $63.6 million in the second quarter of 2001;
For the first six months of 2002, the volume of the company's new originations, excluding ACFC, increased 10% to $135.0 million from $123.1 million as compared to the first six months of 2001;
The company's total gross portfolio of owned and managed lease contracts and notes receivable increased 6% to $858 million at the end of the second quarter of 2002, as compared a gross portfolio of $806 million at the end of 2001;
Unearned income increased 8% to $113 million at the end of the second quarter of 2002, from $105 million at the end of 2001.

Considering the current economic environment HPSC, Inc. stands out with its continued growth in revenues, earnings and assets. It is interesting to note that annualized earnings before interest, taxes depreciation and amortizations, (EBITDA) are estimated to be approximately $39.0 million for this year. Based on the current level of it stock, the market capitalization of HPSC is approximately $36.0 million which means investors purchasing HPSC at these levels are purchasing a stock that sells for less than 1X EBITDA. On a price earnings base with our estimated diluted EPS of $0.98 for this year, we believe the common stock of HPSC is selling at a compelling price earnings ration of 8.5x. With our expectation of HPSC?s continued growth in loan originations, net assets, revenues, and earnings in this current interest rate environment, the stock is grossly undervalued. While the stock is a low volume trader, positions carefully accumulated at these levels should provide above average capital gains.

We reiterate our STRONG BUY RECOMMENDATION and our price target over the next 12 to 18 months remains at $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.