<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 5, 1996
REGISTRATION NO. 333-12479
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
HEALTHCARE FINANCIAL PARTNERS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6799 52-1844418
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
--------------
2 WISCONSIN CIRCLE, SUITE 320
CHEVY CHASE, MARYLAND 20815
(301) 961-1640
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
JOHN K. DELANEY
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
HEALTHCARE FINANCIAL PARTNERS, INC.
2 WISCONSIN CIRCLE, SUITE 320
CHEVY CHASE, MARYLAND 20815
(301) 961-1640
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
G. WILLIAM SPEER, ESQ. TODD H. BAKER, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY STEPHANIE TSACOUMIS, ESQ.
SIXTEENTH FLOOR GIBSON, DUNN & CRUTCHER LLP
191 PEACHTREE STREET, N.E. ONE MONTGOMERY STREET, SUITE 3100
ATLANTA, GEORGIA 30303 SAN FRANCISCO, CALIFORNIA 94104
(404) 572-6600 (415) 393-8200
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CROSS REFERENCE SHEET PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM
NO. FORM S-1 CAPTION CAPTION OR LOCATION IN PROSPECTUS
---- ---------------- ---------------------------------
<C> <S> <C>
1. Forepart of the
Registration Statement Facing Page of the Registration Statement; Cross
and Outside Front Cover Reference Sheet; Outside Front Cover Page
Page of Prospectus......
2. Inside Front and Outside
Back Cover Pages of
Prospectus.............. Inside Front and Outside Back Cover Pages
3. Summary Information,
Risk Factors and Ratio
of Earnings to Fixed
Charges................. Prospectus Summary; Risk Factors
4. Use of Proceeds......... Use of Proceeds; Certain Transactions
5. Determination of
Offering Price.......... Outside Front Cover Page; Underwriting
6. Dilution................ Dilution
7. Selling Security
Holders................. Not Applicable
8. Plan of Distribution.... Outside Front Cover Page; Underwriting
9. Description of
Securities to be
Registered.............. Description of Capital Stock
10. Interests of Named
Experts and Counsel..... Legal Matters; Experts
11. Information with Respect
to the Registrant....... Prospectus Summary; Risk Factors; Dividend
Policy; Capitalization; Pro Forma Financial
Information; Management's Discussion and
Analysis of Pro Forma Financial Condition and
Pro Forma Results of Operations; Selected
Historical Financial Data; Management's
Discussion and Analysis of Historical Financial
Condition and Historical Results of Operations;
Business; Management; Certain Transactions;
Principal Stockholders; Description of Capital
Stock; Shares Eligible for Future Sale;
Underwriting; Financial Statements
12. Disclosure of Commission
Position on
Indemnification for
Securities Act
Liabilities............. Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER 6, 1996
2,100,000 SHARES
[LOGO OF HEALTHCARE FINANCIAL APPEARS HERE]
COMMON STOCK
All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Offering") are being sold by HealthCare Financial
Partners, Inc. (the "Company"). Prior to the Offering, there has been no public
market for the Common Stock. It is currently anticipated that the initial
public offering price will be between $12.00 and $14.00 per share. See
"Underwriting" for a discussion of factors to be considered in determining the
initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the trading symbol "HCFP," subject to official notice of issuance.
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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<S> <C> <C> <C>
Per Share................................. $ $ $
Total (3)................................. $ $ $
</TABLE>
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(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
315,000 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $ , Underwriting Discount will total $ and Proceeds
to Company will total $ . See "Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefor at the offices
of Montgomery Securities on or about , 1996.
-----------
Montgomery Securities Stifel, Nicolaus & Company
Incorporated
, 1996
<PAGE>
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
----------------
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial information for the first
three quarters of each fiscal year.
----------------
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors,"
appearing elsewhere in this Prospectus, and the financial statements and notes
thereto. Unless the context otherwise requires, the information set forth in
this Prospectus gives effect to the proposed transactions described herein
under "--The Reorganization," and the term "Company" refers to HealthCare
Financial Partners, Inc. and its consolidated partnerships and subsidiaries
after giving effect to such transactions. Unless otherwise indicated, the
information set forth in this Prospectus does not give effect to the exercise
of the Underwriters' over-allotment option. All information set forth in this
Prospectus reflects the amendment and restatement of the Company's Certificate
of Incorporation, which, among other things, increased the number of authorized
shares, and gives retroactive effect to a 4.56 to 1 split of the Common Stock,
effected in the form of a stock dividend on September 13, 1996.
THE COMPANY
HealthCare Financial Partners, Inc. (the "Company") is a specialty finance
company offering asset-based financing to healthcare service providers, with a
primary focus on clients operating in sub-markets of the healthcare industry,
including long-term care, home healthcare and physician practices. The Company
also provides asset-based financing to clients in other sub-markets of the
healthcare industry, including pharmacies, durable medical equipment suppliers,
hospitals, mental health providers, rehabilitation companies and disease state
management companies. The Company targets small and middle market healthcare
service providers with financing needs in the $100,000 to $10 million range in
healthcare sub-markets which have favorable characteristics for working capital
financing, such as those where growth, consolidation or restructuring appear
likely in the near to medium term. Management believes, based on its industry
experience, that the Company's healthcare industry expertise and specialized
information systems, combined with its responsiveness to clients, willingness
to finance relatively small transactions, and flexibility in structuring
transactions, give it a competitive advantage in its target markets over
commercial banks, diversified finance companies and traditional asset-based
lenders. See "Business." From its inception in 1993 through September 30, 1996,
the Company has advanced $495.7 million to its clients in 166 transactions,
including $299.5 million advanced during the nine months ended September 30,
1996. The Company had 102 clients as of September 30, 1996, of which 35 were
affiliates of one or more other clients. The average amount outstanding per
client or affiliated client group at September 30, 1996 was approximately
$863,000. For the year ended December 31, 1995, the Company's pro forma net
income was $1.5 million, and for the nine month period ended September 30, 1996
the Company's pro forma net income was $2.0 million. See "Pro Forma Financial
Information." For the nine months ended September 30, 1996, the Company's
annualized yield on finance receivables (total interest and fee income divided
by average finance receivables for the period) was 18.0%. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results
of Operations" for a discussion of the effect of a change of portfolio
composition on expected yields.
At September 30, 1996, 58.7% of the Company's portfolio consisted of finance
receivables from businesses in the long-term care and home healthcare sub-
markets. Estimated expenditures in 1995 for the long-term care, home healthcare
and physician practice sub-markets, which the Company currently emphasizes,
collectively constituted approximately $306 billion of the over $1 trillion
U.S. healthcare market. These sub-markets are highly fragmented, and companies
operating in these sub-markets generally have significant working capital
finance requirements. The Company's clients operating in these sub-markets tend
to be smaller, growing companies with limited access to traditional sources of
working capital financing from commercial banks, diversified finance companies
and asset-based lenders because many such lenders have not developed the
healthcare industry expertise needed to underwrite smaller healthcare service
companies or the specialized systems necessary to track and monitor healthcare
accounts receivable transactions. Some of the Company's clients are also
constrained from obtaining financing from more traditional working capital
sources, due to their
3
<PAGE>
inadequate equity capitalization, limited operating history, lack of
profitability, or financing needs below commercial bank size requirements. As
an asset-based lender, the Company provides financing to its clients based
principally on an assessment of the net collectible value of client receivables
from third-party payors. See "Business--Market for Healthcare Receivables
Financing."
The Company currently provides financing to its clients through (i) revolving
lines of credit secured by accounts receivable (the "ABL Program"), (ii)
advances against accounts receivable (the "AR Advance Program"), and (iii) to a
lesser extent, term loans secured by accounts receivable and other assets,
generally in conjunction with financing provided under either the ABL Program
or the AR Advance Program. In all cases, the accounts receivable are
obligations of third-party payors, such as federal and state Medicare and
Medicaid programs and other government financed programs ("Government
Programs"), commercial insurance companies, health maintenance organizations
and other managed healthcare concerns, self-insured corporations and, to a
limited extent, other healthcare service providers. Under both the ABL Program
and AR Advance Program, the Company generally advances only 65% to 85% of the
Company's estimate of the net collectible value of client receivables from
third-party payors. The Company's credit risk is mitigated by the Company's
ownership of or security interest in the remaining balance of such receivables
("Excess Collateral"). Clients continue to bill and collect the accounts
receivable, subject to lockbox collection and sweep arrangements established
for the benefit of the Company. The Company uses its proprietary information
systems to monitor its clients' accounts receivable base on a daily basis and
to assist its clients in improving and streamlining their billing and
collection efforts with respect to such receivables. The Company conducts
extensive due diligence on potential clients for all its financing programs and
follows written underwriting and credit policies in providing financing to
clients. To date, the Company has not incurred any credit losses, although it
periodically makes provisions for possible future losses in the ordinary course
of its business. See "Business--Financing Programs."
The Company has developed low cost means of marketing its services on a
nationwide basis to selected healthcare sub-markets. The Company primarily
markets its services by telemarketing to prospective clients identified by the
Company, advertising in industry specific periodicals and participating in
industry trade shows. The Company also markets its services by developing
referral relationships with accountants, lawyers, venture capital firms,
billing and collection companies and investment banks. The Company's clients
also assist the Company's marketing efforts by providing referrals and
references.
To date, the Company has funded its activities primarily through a bank line
of credit, partnership capital and stockholders' equity. Recently, the Company
received a commitment from ING (U.S.) Capital Corporation ("ING") for $100
million of financing under an investment grade, asset-backed commercial paper
program (the "proposed CP Facility").
The Company is a Delaware corporation which was organized in April, 1993 and
commenced its business in September, 1993. Until September 13, 1996 the
Company's name was HealthPartners Financial Corporation. On that date its
corporate name was changed to HealthCare Financial Partners, Inc. The Company's
principal executive offices are located at 2 Wisconsin Circle, Suite 320, Chevy
Chase, Maryland 20815, and its telephone number is (301)961-1640.
4
<PAGE>
STRATEGY
The Company's goal is to be the leading finance company in its targeted sub-
markets of the healthcare services industry. The Company's strategy for growth
is based on the following key elements (see "Business-- Strategy"):
. Target sub-markets within the healthcare industry that have favorable
characteristics for working capital financing, such as fragmented sub-
markets experiencing growth, consolidation or restructuring;
. Focus on healthcare service providers with financing needs of between
$100,000 and $10 million, a market that has been under served by
commercial banks, diversified finance companies, traditional asset-based
lenders and other competitors of the Company;
. Introduce new financial products to leverage the Company's existing
expertise in healthcare finance and its origination, underwriting and
servicing capabilities within its target sub-markets; and
. Enhance the Company's credit risk management and improve servicing
capabilities through continued development of information management
systems, which can also be used to assist the Company's clients in
managing the growth of their businesses.
THE REORGANIZATION
Since inception, the Company has conducted its operations principally in its
capacity as the general partner of HealthPartners Funding, L.P. ("Funding") and
HealthPartners DEL, L.P. ("DEL"). Management concluded that the Company's
future financial position and results of operations would be enhanced if the
Company directly owned the portfolio assets of each of these limited
partnerships. Therefore, the transactions described below (the
"Reorganization") have been or will be effected by the Company prior to or
simultaneously with the completion of the Offering. See "Pro Forma Financial
Information" and "Certain Transactions."
Effective as of September 1, 1996, Funding acquired all of the net assets of
DEL, consisting principally of finance receivables, for $486,630 in cash, which
amount approximated the fair value of DEL's net assets. Following the
acquisition, DEL distributed the purchase price to its partners and was
dissolved. The purpose of the transaction was to consolidate the assets of DEL
and Funding in anticipation of the acquisition by the Company of the limited
partnership interests of Funding described below. See "Certain Transactions."
Effective upon completion of the Offering, the Company will acquire from
HealthPartners Investors, L.L.C. ("HP Investors"), the sole limited partner of
Funding, all of the limited partnership interests in Funding, which will be
paid from the proceeds of the Offering. The purchase price for such limited
partnership interests will be $21.8 million, which represents the limited
partner's interest in the net assets of Funding and which approximates both the
fair value and book value of the net assets. See "Use of Proceeds." Effective
upon consummation of the acquisition of the limited partnership interests of
Funding, the Company will cause Funding to be liquidated and dissolved, and all
of its net assets at the date of transfer, consisting principally of advances
made under the ABL Program and the AR Advance Program (an aggregate of $79.6
million at September 30, 1996), will be transferred to the Company. The Company
intends to form a special purpose, bankruptcy remote subsidiary in connection
with the proposed CP Facility and to transfer certain assets to such subsidiary
as collateral for loans made under the proposed CP Facility. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Results of
Operations--Liquidity and Capital Resources." The principal purposes of the
Company's acquisition of Funding are (i) to consolidate ownership of such
assets and related business operations in the Company, a single entity with
greater access to the public and private capital markets, (ii) to simplify the
corporate and management structures of the Company by eliminating its general
partnership interest in Funding and the concomitant management responsibilities
of the Company as a general partner of Funding, and (iii) to allow the Company
to realize the return on the assets transferred to the Company which otherwise
would have been paid to HP Investors as the limited partner of Funding prior to
the transfer of the ownership of such assets to the Company. See "Certain
Transactions."
5
<PAGE>
In connection with the liquidation of Funding, Farallon Capital Partners,
L.P. ("Farallon") and RR Capital Partners, L.P. ("RR Partners"), the only two
members of HP Investors, will exercise warrants for the purchase of an
aggregate of 379,998 shares of Common Stock acquired on December 28, 1994 for
an aggregate payment of $500, which represented the fair value of the warrants
at that date. No additional consideration will be paid in connection with the
exercise of the warrants. HP Investors transferred the warrants to Farallon and
RR Partners in contemplation of the liquidation of Funding.
In anticipation of the Offering and the liquidations of Funding and DEL,
Fleet Financial Corporation ("Fleet") has consented to the assignment to the
Company of the agreements relating to the lines of credit (the "Bank Facility")
made available to Funding and DEL (up to $31,250,000 and $3,750,000,
respectively), which will enable the Company to borrow from Fleet up to $50
million (an increase of $15 million from the previous levels) on the same terms
as previously extended to Funding and DEL. See "Business--Capital Resources."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........ 2,100,000 shares
Common Stock to be outstanding after the
Offering.................................. 5,899,991 shares(1)
Use of Proceeds............................ Of the net proceeds of the Offering, $21.8
million will be used to acquire the limited
partnership interests in Funding and the
remainder will be used for general corporate
purposes.
Nasdaq National Market symbol.............. "HCFP"
</TABLE>
- --------
(1) Does not include 750,000 shares of Common Stock reserved for issuance
pursuant to the HealthCare Financial Partners, Inc. 1996 Stock Incentive
Plan (the "Incentive Plan"), of which options to purchase 300,000 shares
have been granted (but are not presently exercisable). See "Management-
Stock Incentive Plan." Also does not include an option to purchase 38,381
shares of Common Stock granted outside the Incentive Plan on November 1,
1995, which option is presently exercisable.
6
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following sets forth summary unaudited pro forma financial information
derived from the unaudited pro forma financial information included elsewhere
in this Prospectus. The summary unaudited pro forma statements of operations
give effect to the Reorganization as if it had occurred at the beginning of the
respective periods. The summary unaudited pro forma balance sheet data as of
September 30, 1996 have been prepared as if the Offering and the Reorganization
had occurred on September 30, 1996.
The summary unaudited pro forma financial information does not purport to
present the actual financial position or results of operations of the Company
had the transactions and events assumed therein in fact occurred on the dates
specified, nor is it necessarily indicative of the results of operations that
may be achieved in the future. The summary unaudited pro forma financial
information is based on certain assumptions and adjustments further described
herein. See "Pro Forma Financial Information" and "Management's Discussion and
Analysis of Pro Forma Financial Condition and Pro Forma Results of Operations."
PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA FOR
THE NINE MONTH
PERIOD ENDED
PRO FORMA FOR SEPTEMBER 30,
THE YEAR ENDED ---------------------
DECEMBER 31, 1995 1995 1996
----------------- ---------- ----------
<S> <C> <C> <C>
Fee and interest income
Fee income........................... $4,814,504(1) $2,814,792 $6,077,290
Interest income...................... 403,659 163,365 2,211,007
---------- ---------- ----------
Total fee and interest income...... 5,218,163 2,978,157 8,288,297
Interest expense....................... 634,556 253,360 2,304,331
---------- ---------- ----------
Net fee and interest income........ 4,583,607 2,724,797 5,983,966
Provision for losses on receivables.... 217,388 217,388 613,116
---------- ---------- ----------
Net fee and interest income after
provision for losses on
receivables....................... 4,366,219 2,507,409 5,370,850
Operating expenses..................... 2,096,297 1,207,438 2,282,245
Other income........................... 224,691 186,512 171,651
---------- ---------- ----------
Income before income taxes............. 2,494,613 1,486,483 3,260,256
Income taxes........................... 972,899 579,728 1,271,500
---------- ---------- ----------
Net income............................. $1,521,714 $ 906,755 $1,988,756
========== ========== ==========
Pro forma net income per share (2)..... $ .26 $ .15 $ .33
========== ========== ==========
Pro forma weighted average shares
outstanding (2)....................... 5,938,372 5,938,372 5,938,372
</TABLE>
7
<PAGE>
PRO FORMA BALANCE SHEET DATA
<TABLE>
<CAPTION>
PRO FORMA AS OF
SEPTEMBER 30,
1996
---------------
<S> <C>
Total assets.................................................. $84,761,090
Net finance receivables....................................... 78,174,688
Client holdbacks.............................................. 16,212,360
Bank Facility................................................. 42,607,630
Stockholders' equity.......................................... 24,171,167
Total liabilities............................................. 60,589,923
OTHER DATA
Number of clients being provided financing at period end (3).. 102
Allowance for losses on receivables as a percentage of finance
receivables.................................................. 1.3%
Yield on finance receivables (4)(5)........................... 18.0%
Total operating expenses as a percentage of average assets
(5).......................................................... 4.6%
</TABLE>
- --------
(1) Includes $430,000 of fees resulting from the acquisition of certain
receivables from MediMax Receivables Funding II, L.P. ("MediMax"). See
"Management's Discussion and Analysis of Pro Forma Financial Condition and
Pro Forma Results of Operations--Overview."
(2) Pro forma net income per share was computed by dividing pro forma net
income by the pro forma weighted average shares outstanding, which gives
effect to the Offering and to a dilutive outstanding stock option.
(3) Includes 35 clients who are affiliates of one or more other clients.
(4) Fee and interest income divided by monthly average finance receivables.
(5) Calculated on an annualized basis.
8
<PAGE>
RISK FACTORS
Investment in the Company's Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, together with the other information included in this Prospectus,
before purchasing the shares of Common Stock offered hereby.
RISK OF NONPAYMENT AND CLIENT FRAUD
The Company's ability to fully recover amounts due under the AR Advance
Program and the ABL Program may be adversely affected by, among other things,
the financial failure of the Company's clients or their third-party payors,
fraud (e.g., the purchase of fraudulent receivables from a client),
misrepresentation, conversion of account proceeds by clients (e.g., client
misappropriation of account proceeds in violation of the terms of the ABL
Program or AR Advance Program), third-party payor disputes, and third-party
claims with respect to security interests. All of these risks are exacerbated
by concentrations of clients or third-party payors at any time. Accordingly,
the Company makes provisions for losses on finance receivables by establishing
an allowance for losses. In evaluating the adequacy of the allowance,
management of the Company considers trends in past-due accounts, historical
charge-off and recovery rates, credit risk indicators, economic conditions,
on-going credit evaluations, overall portfolio size, average client balances,
Excess Collateral and underwriting policies, among other items. Many of these
considerations involve significant estimation by management and are subject to
rapid changes which may be unforeseen and could result in immediate increased
losses and material adjustments to the allowance. Historically, the Company
has experienced no losses on finance receivables, but there is no assurance
that the Company will not experience losses on finance receivables in the
future, and such future losses could be significant and may vary from current
reserve estimates. The Company does not maintain insurance covering credit
losses. In addition, the amount of provisions for losses on finance
receivables may be either greater or less than actual future charge-offs of
finance receivables relating to these provisions. See "Business--Credit Loss
Policy and Experience" and "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations--Provision and
Allowance for Possible Losses on Receivables."
DILUTION OF CLIENT RECEIVABLES; GOVERNMENT RIGHT OF OFFSET
Dilution of accounts receivable occurs when such receivables are not fully
collectible for reasons other than a third-party payor's financial inability
to pay (such as disagreements as to appropriate reimbursement for services
provided). Dilution with respect to any client's receivables increases the
risk that the Company will be unable to collect amounts advanced by the
Company to the client. The Company generally advances funds to its clients up
to a specified percentage of the Company's estimate of the net collectible
value of such client's receivables. In order to determine its estimate of the
net collectible value of a prospective client's receivables, the Company works
with third-party claim verifiers to contact third-party payors and reviews
historical collection factors by types of third-party payors. Should dilution
occur with respect to any client in an amount greater than the Excess
Collateral with respect to such client, the Company will typically need to
look to newer accounts receivable generated by such client or to other rights
the Company may have for the collection of the outstanding obligation to the
Company. If no such new accounts receivable are forthcoming or the Company is
unsuccessful in pursuing such other rights, the Company may incur a loss. Some
dilution occurs with respect to most, if not all, clients and may be more
significant with respect to Medicare and Medicaid receivables as a result of
the government's right of offset. The Company's historical dilution has not
exceeded its Excess Collateral. However, the Company does not generally
monitor the extent of dilution once advances to clients have been recouped.
Federal and state government agencies, in accordance with Medicare and
Medicaid statutes and regulations, have broad rights to audit a healthcare
service provider and offset any amounts it determines were overpaid to such
provider on any claims against payments due on other current, unrelated
claims. This right of offset could create losses to the extent the Company has
made advances against the accounts receivable for such unrelated claims. The
Company monitors collections on a daily basis but may not be able to react
quickly enough to dilution to cover resulting losses through collections on
newer accounts receivable generated by the relevant client. See "Business--
Operations."
9
<PAGE>
CONCENTRATION OF CLIENT BASE AND THIRD-PARTY PAYOR BASE
At September 30, 1996, approximately 27.4% of the Company's finance
receivables were concentrated in receivables from two clients or groups of
affiliated clients, Southhampton Hospital and Unison Healthcare Corporation.
Adverse conditions affecting any of these clients could have a material
adverse effect on the Company's ability to collect advances to such clients.
At and for the nine month period ended September 30, 1996, Southampton
Hospital accounted for approximately 15% of the Company's finance receivables
and 12.4% of the Company's total fee and interest income for this period. The
loss of this client could have a material adverse effect on the Company's
results of operations and financial condition. The Company's client
concentration has decreased as the number of its clients have increased over
time, however, there can be no assurance that such concentration will continue
to decrease in the future.
At September 30, 1996, approximately 44.6% of the accounts receivable that
the Company had purchased or that were pledged to the Company were payable
under Government Programs. Any situation which would result in the inability
of the federal and state governments to fully fund such programs could have a
material adverse effect on the Company and its ability to collect advances to
such clients. See "Business--Operations."
INABILITY TO COLLECT HEALTHCARE RECEIVABLES DIRECTLY FROM MEDICARE AND
MEDICAID
With certain limited exceptions, federal law prohibits payment of amounts
owed to healthcare providers under the Medicare and/or Medicaid programs to
any entity other than providers. Except pursuant to a court order, the Company
is unable to force collection directly against third-party payors in a
Government Program. Accordingly, the Company is unable to collect receivables
payable under Government Programs directly, and, instead, the Company requires
that Medicare and Medicaid proceeds be paid to a segregated lockbox account
under the control of the client, the collected balances of which are then
swept to the Company via wire transfer on a daily basis. The Company must
closely monitor its clients' collection efforts to ensure compliance with the
foregoing procedures. At September 30, 1996, approximately 44.6% of the
accounts receivable that the Company had purchased or that were pledged to the
Company were payable under Government Programs. Although to date the Company
has been successful in monitoring the collection of government-based
receivables from its clients in accordance with their contractual obligations,
there can be no assurance that the Company will continue to be successful in
monitoring such collection activities in the future. See "Business--
Operations."
RISKS RELATED TO LOWER CREDIT GRADE BORROWERS
The Company focuses its marketing efforts on small and middle market
healthcare service providers. Some of these providers may be unable to obtain
financing from more traditional credit sources, such as commercial banks.
Advances made to these types of clients may entail a higher risk of loss than
advances made to clients who are able to utilize traditional credit sources.
While the Company employs underwriting criteria and monitoring procedures to
mitigate the higher risks inherent in advances made to some of its clients, no
assurance can be given that such criteria or procedures will afford adequate
protection against such risks. See "Business--Operations." In the event that
collection of amounts due under the AR Advance Program and the ABL Program are
less than anticipated, the Company's results of operations and financial
condition could be adversely affected.
RISK OF FAILURE TO RENEW FUNDING SOURCES
The Company requires substantial capital to finance its business.
Consequently, the Company's ability to grow and the future of its operations
will be affected by the availability and the terms of financing. In addition
to proceeds from the Offering, the Company expects to fund its future
financing activities principally from (i) the $100 million proposed CP
Facility, which will have a five-year term, and (ii) the $50 million Bank
Facility, which will expire on March 9, 1998, subject to automatic renewals
for one-year periods thereafter unless terminated by Fleet. Prior to March
1995, the Company financed its operations solely through equity. The use of
borrowings under the Bank Facility financed the Company's growth after March
1995. The Company's pro forma debt-to-equity ratio (without giving effect to
the Offering) was approximately 1.4 to 1 at December 31, 1995 and 2.0 to 1 at
September 30, 1996. The Company's debt-to-equity ratio is expected to increase
as a result of its reliance on the proposed CP Facility and the Bank Facility
to finance its continued growth. While the Company expects to be able to
obtain or renew these facilities and to have continued access to other sources
of credit after the expiration of these facilities, there is no assurance that
such financing will be available, or, if available, that it will be on terms
favorable to the Company. In the event the Company is not able to obtain or
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<PAGE>
renew the proposed CP Facility or the Bank Facility or find alternative
financing for its activities, the Company would be forced to curtail or cease
its ABL Program and AR Advance Program, which action would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Capital Resources" and "Management's Discussion and
Analysis of Pro Forma Financial Condition and Pro Forma Results of Operations--
Liquidity and Capital Resources."
RISK OF CONTROL BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, the Company's executive officers and
directors and stockholders holding 5% or more of the Common Stock will
beneficially own 3,755,470 shares of Common Stock representing 63.7% of the
outstanding shares of Common Stock. Consequently, such stockholders will have
substantial influence on the operations of the Company, and, if they act
together, will be able effectively to control all matters requiring approval by
the Company's stockholders, including the election of all directors and the
approval of any business combination involving the Company. Control by these
stockholders could limit the price that certain investors might be willing to
pay in the future for shares of Common Stock. See "Principal Stockholders" and
"Description of Capital Stock--Special Provisions of the Certificate of
Incorporation and Bylaws."
RISK OF INABILITY OF THE COMPANY TO CONTINUE ITS GROWTH STRATEGY
The Company's growth strategy is principally dependent upon its ability to
increase its finance receivables by making advances against accounts receivable
meeting its underwriting standards. No assurance is given that the rate of
growth experienced by the Company to date will be sustainable or is indicative
of future results. See "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations." Of the Company's
clients at December 31, 1995, 12.9% were no longer being financed by the
Company at September 30, 1996, due primarily to competition, consolidation in
the healthcare industry and clients' ability to self finance. Of the nine
clients which comprised the 12.9% which have left since 1995, five refinanced
their receivables with other sources, three terminated their relationship with
the Company because they were sold and one repaid the Company with internally
generated funds. See "Business--Operations." Therefore, the Company's ability
to further implement its strategy for continued growth is largely dependent
upon its ability to attract and retain new clients in a competitive market. The
Company's growth is also dependent on the business growth of its clients, which
may be affected by a number of factors not within the Company's control. See
"Business--Strategy." At September 30, 1996, 58.7% of the Company's portfolio
consisted of finance receivables of long-term care and home healthcare
businesses. If demand for working capital financing in either of these sub-
markets declines, the Company's ability to increase its finance receivables
could be adversely affected. In the event the Company is unable to continue to
attract new clients, such inability could have a material adverse effect on the
Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH NEW PRODUCT OFFERINGS
The Company may in the future provide services not previously offered by it
to healthcare industry clients, or offered only on a limited basis, such as
financing in the form of term loans and financing secured by real estate,
equipment and inventory. See "Business--Strategy." The Company has either very
limited or no experience with these new services, and there is no assurance
that the Company will be able to market these new services successfully or that
the return on these services will be consistent with the Company's historical
financial results.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of members of its senior management, particularly John K.
Delaney, the Company's Chairman, President and Chief Executive Officer; Ethan
D. Leder, the Company's Vice-Chairman and Executive Vice President; and Edward
P. Nordberg, Jr., the Company's Senior Vice President-Legal and Financial
Affairs and Secretary, as well as other officers and key personnel, many of
whom would be difficult to replace. The future success of the Company also
depends on its ability to identify, attract and retain additional qualified
technical and managerial personnel, particularly with experience in healthcare
financing. Although the Company has employment agreements with Messrs.
11
<PAGE>
Delaney, Leder and Nordberg, the loss of Messrs. Delaney, Leder or Nordberg or
other officers and key personnel could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
does not maintain key man life insurance on any officers. See "Management."
RISKS ASSOCIATED WITH INABILITY TO SUCCESSFULLY COMPETE
The Company competes with numerous commercial banks, diversified finance
companies, asset-based lenders and specialty healthcare finance companies.
Many of these competitors have greater financial and other resources than the
Company and may have significantly lower cost of funds. This disparity in cost
of funds ranges from approximately 1% to 5% and reflects commercial banks'
access to deposits and other low cost sources of capital and other
competitors' greater access to the capital markets. Competition can take many
forms, including the pricing of financing, the timeliness and responsiveness
in processing a prospective client's application, and customer service. The
Company's competitors target the same type of healthcare service providers as
those targeted by the Company and, with the exception of most specialty
healthcare finance companies, generally have operated in the markets serviced
by the Company for a longer period of time than the Company. If the Company is
unable to successfully compete, its financial position and results of
operations would be adversely affected. See "Business--Competition."
LIMITED OPERATING HISTORY
The Company commenced its business in September, 1993. Management has
limited operating results on which to base any expectations regarding future
performance of the Company's business. There is no assurance that the Company
will continue to be profitable, increase its volume of finance receivables
and/or maintain its lack of credit losses. See "Management's Discussion and
Analysis of Pro Forma Financial Condition and Pro Forma Results of
Operations."
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
The Company's healthcare finance business is subject to numerous federal and
state laws and regulations, which, among other things, may (i) require the
Company to obtain and maintain certain licenses and qualifications, (ii) limit
the interest rates, fees and other charges that the Company is allowed to
collect, (iii) limit or prescribe certain other terms of its finance
receivables arrangements with clients, and (iv) subject the Company to certain
claims, defenses and rights of offset. Although the Company believes that it
is currently in compliance with statutes and regulations applicable to its
business, there can be no assurance that the Company will be able to maintain
such compliance without incurring significant expense. The failure to comply
with such statutes and regulations could have a material adverse effect upon
the Company. Furthermore, the adoption of additional statutes and regulations,
changes in the interpretation and enforcement of current statutes and
regulations, or the expansion of the Company's business into jurisdictions
that have adopted more stringent regulatory requirements than those in which
the Company currently conducts business could have a material adverse effect
upon the Company. See "--Risk of Adverse Effect of Healthcare Reform" and
"Business--Government Regulation."
RELIANCE ON REIMBURSEMENTS BY THIRD-PARTY PAYORS
The Company's clients receive payment for services rendered to patients from
third-party payors (including health maintenance organizations, managed care
concerns and other insurers), large corporations (which may be self-insured),
other healthcare providers and patients themselves, and from Government
Programs. The clients rely on prompt payments from third-party payors to
enable them to satisy their obligations to the Company under the AR Advance
Program and the ABL Program. The healthcare industry is experiencing a trend
toward cost containment, as government and other third-party payors seek to
impose lower reimbursement and utilization rates and negotiate reduced payment
schedules with healthcare providers. Such cost containment could adversely
affect the ability of the Company's clients to make payments owed to the
Company, which would have an adverse impact on the Company's business and
financial performance.
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
In addition to extensive existing government healthcare regulation (see
"Business--Government Regulation"), there are numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services, including a number of proposals that
would significantly
12
<PAGE>
limit reimbursement under Government Programs. It is not clear at this time
what proposals, if any, will be adopted or, if adopted, what effect such
proposals would have on the Company's business. Aspects of certain of these
healthcare proposals, such as cutbacks in Government Programs, containment of
healthcare costs on an interim basis by means that could include a short-term
freeze on prices charged by healthcare providers, a restructuring of the way
in which Medicare pays for certain services, and permitting greater state
flexibility in the administration of Medicaid, could adversely affect the
Company.
There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
Government Programs will not have an adverse effect on the Company or that
payments under Government Programs will remain at levels comparable to present
levels or will be sufficient to cover the costs allocable to patients eligible
for reimbursement pursuant to such programs. Concern about the potential
effects of the proposed reform measures has contributed to the volatility of
prices of securities of companies in healthcare and related industries, and
may similarly affect the price of the Company's Common Stock in the future.
In addition, certain private reform efforts have been instituted throughout
the healthcare industry, including the capitation of certain healthcare
expenditures. Capitation is the pre-payment of certain healthcare costs by
third-party payors (typically health maintenance organizations and other
managed healthcare concerns), based upon a predetermined monthly fee for the
aggregate patient lives under any given healthcare provider's care. The
healthcare provider then provides healthcare to such patients when and as
needed, and assumes the risk that its prepayments will cover its costs and
provide a profit for all of such services rendered. Since capitation
essentially eliminates the clients' accounts receivable that are the primary
source of payment for the Company's finance receivables, capitation could
materially adversely affect the Company's business, financial condition and
results of operations. See "--Failure to Comply with Government Regulations"
and "Business--Government Regulation."
RESTRICTIVE DEBT COVENANTS
The Bank Facility contains financial and operating covenants, including the
requirement that the Company maintain an adjusted tangible net worth of more
than $5.0 million, and a ratio of debt to equity of not more than 3.0 to 1.0.
In addition, under the Bank Facility the Company is not allowed to have at any
time a cumulative negative cash flow (as defined in the Bank Facility) in
excess of $1.0 million. At September 30, 1996, on a pro forma basis, assuming
the use of the net proceeds of the Offering as described herein, the Company
had an adjusted tangible net worth of approximately $24.2 million and the
Company's ratio of debt to equity was approximately 1.8 to 1.0. The Company
anticipates that intercreditor arrangements to be entered into in connection
with the proposed CP Facility will exclude borrowings under the proposed CP
Facility from debt for purposes of calculation of the debt-to-equity ratio.
The Bank Facility also includes certain limitations on the ability of the
Company to consolidate, merge or transfer all or substantially all of its
assets, incur debt, create liens on its property, make capital expenditures,
dispose of assets or make investments. Under the terms of the proposed CP
Facility, ING will have the option to refuse to make any advances in the event
the Company fails to maintain a tangible net worth of at least $20.0 million
and to refuse to make advances in excess of $50.0 million in the event the
Company fails to maintain a tangible net worth of at least $25.0 million. See
"Business--Capital Resources."
Future financing agreements, including the proposed CP Facility, may also
contain similar financial and operating covenants. The foregoing limitations
in the Bank Facility and any future financing agreements could adversely
affect the Company's ability to implement its growth strategy. Failure to
comply with the obligations contained in these agreements could result in an
event of default under such agreements which could permit acceleration of the
indebtedness under the Bank Facility, the proposed CP Facility or any future
financing agreements.
13
<PAGE>
GENERAL ECONOMIC RISKS
The Company's business could be affected by general economic conditions in
the United States, and any sustained period of economic slowdown or recession
could materially adversely affect the Company's business, financial condition
and results of operations. The risks to which the Company's business is
subject become more acute during an economic slowdown or recession because
fewer accounts receivable may be generated by clients, resulting in decreased
fees for the Company. In addition, the financial ability of certain third-
party payors to pay outstanding accounts receivable and of clients to pay
outstanding advances may be impaired, resulting in increased credit losses.
Further, some of the Company's clients are startup or less mature ventures
that may be more susceptible to economic slowdowns or recessions.
NO DIVIDENDS
The Company has not paid any cash dividends to date and does not intend to
pay cash dividends in the foreseeable future. The Company intends to retain
earnings to finance the development and expansion of its business. In
addition, the Bank Facility and the proposed CP Facility do, and future
financing arrangements may, impose minimum net worth covenants, debt-to-equity
covenants and other limitations that could restrict the Company's ability to
pay dividends. See "--Restrictive Debt Covenants" and "Dividend Policy."
POSSIBLE ADVERSE IMPACT ON TRADING PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering, the Company will have 5,899,991 shares of
Common Stock outstanding (6,214,991 shares if the Underwriters' over-allotment
is exercised in full). All of the shares of Common Stock sold in the Offering
will be freely tradeable without restriction under the Securities Act of 1933,
as amended (the "Securities Act"), except for any shares purchased by existing
affiliates of the Company, which shares will be subject to the resale
limitations of Rule 144 as promulgated under the Securities Act ("Rule 144").
All of the remaining shares of Common Stock held by existing stockholders will
be "restricted" securities as that term is defined in Rule 144. Subject to the
180 day lock-up agreement and a certain other agreement restricting seven of
the Company's existing stockholders from selling Common Stock, each of which
is described below, these "restricted" securities will be eligible for sale
pursuant to Rule 144 in the public market following the consummation of the
Offering. Additional shares of Common Stock, including shares issuable upon
exercise of employee stock options, will also become eligible for sale in the
public market from time to time. In addition, certain stockholders and members
of senior management have been granted certain registration rights relating to
shares of Common Stock held by them for sale under the Securities Act.
However, the Company, all of its officers and directors and certain other
stockholders, who in the aggregate own 3,755,470 shares of Common Stock, have
agreed that, for a period of 180 days after the date of this Prospectus, they
will not, without the prior written consent of the Underwriters, offer to
sell, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock (the
"180 day lock-up agreement"). Further, five of the existing stockholders of
the Company, who in the aggregate own 3,205,977 shares of Common Stock, have
agreed that, without the prior written consent of the Company, they will not
effect any sales of Common Stock for a period of 18 months after expiration of
the 180 day lock-up agreement in excess of the volume limitations provided
under Rule 144 (the "Rule 144 Sale Agreement"). Following the Offering and
upon the expiration of the 180 day lock-up agreement and the Rule 144 Sale
Agreement, sales of substantial amounts of the Company's Common Stock in the
public market pursuant to Rule 144 or otherwise, or the availability of such
shares for sale, could adversely affect the prevailing market price of the
Common Stock and impair the Company's ability to raise additional capital
through the sale of equity securities. See "Shares Eligible for Future Sale."
ABSENCE OF PUBLIC MARKET; POSSIBLE FLUCTUATIONS OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock. There can be no assurance that an active trading market for the
Common Stock will develop or that, if developed, it will be sustained after
the Offering or that it will be possible to resell the shares of Common Stock
at or above the initial public offering price. The market price of the Common
Stock could be subject to significant fluctuations in
14
<PAGE>
response to the Company's operating results and other factors. In addition,
the stock market in recent years has experienced extreme price and volume
fluctuations that often have been unrelated or disproportionate to the
operating performance of companies. Such fluctuations, and general economic
and market conditions, may adversely affect the market price of the Common
Stock.
SUBSTANTIAL DILUTION TO NEW INVESTORS
Based upon an assumed initial public offering price of $13.00 per share,
purchasers of the Common Stock offered hereby will experience immediate
dilution in net tangible book value of Common Stock in the amount of $8.90.
See "Dilution."
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE
In addition to the Common Stock, the Company's Amended and Restated
Certificate of Incorporation authorizes the issuance of up to 10,000,000
shares of "blank check" preferred stock. Following the Offering, there will be
no shares of preferred stock outstanding, and the Company has no present
intention to issue any shares of preferred stock. However, since the rights
and preferences of any class or series of preferred stock may be set by the
Board of Directors in its sole discretion, the rights and preferences of any
such preferred stock may be superior to those of the Common Stock, and thus
may adversely affect the rights of holders of Common Stock. The ability to
issue preferred stock could have the effect of delaying or preventing a change
in control of the Company. See "Description of Capital Stock--Preferred
Stock."
POSSIBLE ANTI-TAKEOVER EFFECTS
Certain provisions of the Delaware General Corporation Law and the Company's
Amended and Restated Certificate of Incorporation may be deemed to have anti-
takeover effects and may delay or prevent a takeover attempt that a
stockholder of the Company might consider to be in the best interests of the
Company or its stockholders. These provisions include authorized blank check
preferred stock, limitations on the persons who may call a special meeting of
stockholders, a classified Board of Directors, the ability of the directors to
fill vacancies on the Board of Directors and advance notice requirements for
stockholder proposals and director nominees. The Company has also elected to
be subject to Section 203 of the Delaware General Corporation Law which
prohibits certain business transactions involving certain stockholders without
the approval of the Board of Directors or stockholders. See "Description of
Capital Stock--Special Provisions of the Certificate of Incorporation and
Bylaws."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS
This Prospectus contains certain statements that are "forward-looking
statements." Those statements include, among other things, the discussions of
the Company's business strategy and expectations concerning the Company's
market position, future operations, margins, profitability, funding sources,
liquidity and capital resources. Investors in the Common Stock offered hereby
are cautioned that reliance on any forward-looking statement involves risks
and uncertainties, and that although the Company believes that the assumptions
on which the forward-looking statements contained herein are based are
reasonable, any of those assumptions could prove to be inaccurate, and as a
result, the forward-looking statements based on those assumptions also could
be incorrect. The uncertainties in this regard include, but are not limited
to, those identified in the risk factors discussed above. In light of these
and other uncertainties, the inclusion of a forward-looking statement herein
should not be regarded as a representation by the Company that the Company's
plans and objectives will be achieved.
15
<PAGE>
USE OF PROCEEDS
Assuming an initial public offering price of $13.00 per share, the net
proceeds to be received by the Company from the issuance and sale of the
Common Stock offered hereby, after deducting the underwriting discount and
estimated offering expenses, are estimated to be approximately $24.9 million
(approximately $28.7 million if the over-allotment option granted to the
Underwriters is exercised in full).
The Company intends to use $21.8 million of the net proceeds from the
Offering to acquire the limited partnership interests in Funding and the
remainder for general corporate purposes, including acquisition of finance
receivables, and payment of general and administrative expenses. See
"Capitalization" and "Certain Transactions." Pending such uses, the net
proceeds will be invested in short-term, interest bearing securities.
DIVIDEND POLICY
The Company intends to retain all future earnings for the operation and
expansion of its business, and does not anticipate paying cash dividends in
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon the Company's results of operations, financial
condition and capital requirements and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's Board
of Directors may consider. In addition, the Bank Facility and the proposed CP
Facility do, and future financing arrangements may, impose minimum net worth
covenants, debt-to-equity covenants and other limitations that could restrict
the Company's ability to pay dividends. See "Risk Factors--Restrictive Debt
Covenants."
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<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
as of September 30, 1996 giving effect to the elimination of transactions
among DEL, Funding and the Company. Pro forma capitalization as adjusted gives
effect to the Offering and the application of $21.8 million of the estimated
net proceeds therefrom to acquire the limited partnership interests in
Funding, assuming an initial public offering price of $13.00 per share for the
Common Stock. This table should be read in conjunction with the unaudited pro
forma financial information appearing elsewhere in this Prospectus. See "Use
of Proceeds" and "Description of Capital Stock."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
----------------------------
PRO FORMA AS
PRO FORMA ADJUSTED
------------ --------------
<S> <C> <C>
Bank Facility...................................... $ 42,607,630 $ 42,607,630
============ ============
EQUITY
Limited partner capital in Funding(1).............. $22,314,662 --
Stockholders' equity (deficit)
Preferred stock, $0.01 par value 10,000,000
shares authorized; none outstanding.............
Common stock, $.01 par value; 30,000,000 shares
authorized; 3,799,991 shares outstanding, pro
forma; 5,899,991 shares outstanding, pro forma
as adjusted(2).................................. 38,000 59,000
Additional paid-in capital....................... 24,868,000
Retained earnings (deficit)...................... (755,833) (755,833)
------------ ------------
Total stockholders' equity (deficit)............... (717,833) 24,171,167
------------ ------------
Total equity....................................... $21,596,829 $24,171,167
============ ============
</TABLE>
- --------
(1)Includes undistributed net income.
(2) Does not include 750,000 shares of Common Stock reserved for issuance
pursuant to the Incentive Plan, of which options to purchase 300,000
shares have been granted (but are not presently exercisable). See
"Management-Stock Incentive Plan." Also does not include an option to
purchase 38,381 shares of Common Stock granted outside of the Incentive
Plan on November 1, 1995, which option is presently exercisable.
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<PAGE>
DILUTION
The pro forma net tangible book value (deficit) of the Company as of
September 30, 1996, giving effect to the Reorganization, was $(717,833) or
$(0.19) per common share. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the pro forma number of shares of Common Stock outstanding. After giving
effect to the sale by the Company of 2,100,000 shares of Common Stock (at an
assumed initial public offering price of $13.00 per share) and the application
of the estimated net proceeds therefrom, the pro forma net tangible book value
of the Company at September 30, 1996 would have been $24,171,167 or $4.10 per
share. This represents an immediate increase in net tangible book value of
$4.29 per share to existing stockholders and an immediate dilution in net
tangible book value of $8.90 per share to purchasers of Common Stock in the
Offering ("New Investors"). The following table illustrates the dilution in
net tangible book value per share to New Investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................ $13.00
Pro forma tangible book value (deficit) per share at September
30, 1996...................................................... $(0.19)
Increase per share attributable to New Investors............... 4.29
------
Pro forma net tangible book value per share after the Offering... 4.10
------
Net tangible book value dilution per share to New Investors...... $ 8.90
======
</TABLE>
The following table sets forth, on a pro forma basis, as of September 30,
1996, the difference between existing stockholders and New Investors with
respect to the number of shares purchased from the Company, the total
consideration paid to the Company and the average price paid per share, giving
pro forma effect to the sale of Common Stock offered hereby at an assumed
offering price of $13.00:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE PAID
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.......... 3,799,991 64.4% $ 8,371 .03% $ --
New Investors.................. 2,100,000 35.6 27,300,000 99.97 13.00
--------- ----- ----------- ------
Total........................ 5,899,991 100.0% $27,308,371 100.00%
========= ===== =========== ======
</TABLE>
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<PAGE>
PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Statements of Operations for the nine month periods
ended September 30, 1995 and 1996 and the year ended December 31, 1995 and the
Unaudited Pro Forma Balance Sheet as of September 30, 1996 give effect to: (i)
the sale by the Company of 2,100,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $13.00 per share and (ii) the use
of substantially all of the net proceeds of the Offering to acquire the
limited partnership interests in Funding. The planned acquisition of Funding
will be for cash and the amounts paid will reflect the fair value of the
limited partnership interests acquired, which will also approximate book
value. It is assumed such transactions had occurred on September 30, 1996 as
to the Pro Forma Balance Sheet, and the beginning of the respective periods as
to the Pro Forma Statements of Operations. The pro forma information does not
necessarily indicate what the Company's results of operations would have been
had such transactions occurred at the beginning of such periods.
PRO FORMA STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
HEALTHCARE FINANCIAL
PARTNERS, INC.
AND DEL
(COMBINED) FUNDING PRO FORMA PRO FORMA,
(HISTORICAL) (HISTORICAL) ADJUSTMENTS(1) AS ADJUSTED
-------------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Fee and interest income
Fee income..................... $ 565,512 $4,248,992(2) $4,814,504(2)
Interest income................ 403,659 403,659
---------- ---------- ----------
Total fee and interest income.. 565,512 4,652,651 5,218,163
Interest expense................. 79,671 554,885 634,556
---------- ---------- ----------
Net fee and interest income.... 485,841 4,097,766 4,583,607
Provision for losses on
receivables..................... 45,993 171,395 217,388
---------- ---------- ----------
Net fee and interest income
after provision for losses on
receivables................... 439,848 3,926,371 4,366,219
Operating expenses............... 1,472,240 1,024,057 $ (400,000)(a) 2,096,297
Other income..................... 1,221,837 (997,146)(a) 224,691
---------- ---------- ------------ ----------
Income before income taxes
(benefit)....................... 189,445 2,902,314 (597,146) 2,494,613
Income taxes (benefit)........... (5,892) 978,791 (b) 972,899
---------- ---------- ------------ ----------
Net income....................... $ 195,337 $2,902,314 $ (1,575,937) $1,521,714
========== ========== ============ ==========
Pro forma net income per share
(3)............................. $ .26
==========
Pro forma weighted average shares
outstanding (3)................. 5,938,372
</TABLE>
19
<PAGE>
PRO FORMA STATEMENTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1995
---------------------------------------------------------------
HEALTHCARE FINANCIAL
PARTNERS, INC.
AND DEL
(COMBINED) FUNDING PRO FORMA PRO FORMA,
(HISTORICAL) (HISTORICAL) ADJUSTMENTS(1) AS ADJUSTED
-------------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Fee and interest income
Fee income............ $ 395,780 $2,419,012 $2,814,792
Interest income....... 163,365 163,365
--------- ---------- ----------
Total fee and
interest income.... 395,780 2,582,377 2,978,157
Interest expense........ 45,526 207,834 253,360
--------- ---------- ----------
Net fee and interest
income............... 350,254 2,374,543 2,724,797
Provision for losses on
receivables............ 45,993 171,395 217,388
--------- ---------- ----------
Net fee and interest
income after
provision for losses
on receivables....... 304,261 2,203,148 2,507,409
Operating expenses...... 769,537 737,901 $ (300,000)(a) 1,207,438
Other income............ 652,092 (465,580)(a) 186,512
--------- ---------- ----------- ----------
Income before income
taxes.................. 186,816 1,465,247 (165,580) 1,486,483
Income taxes............ 579,728 (b) 579,728
--------- ---------- ----------- ----------
Net income.............. $ 186,816 $1,465,247 $ (745,308) $ 906,755
========= ========== =========== ==========
Pro forma net income per
share (3).............. $ 0.15
==========
Pro forma weighted
average shares
outstanding (3)........ 5,938,372
<CAPTION>
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
---------------------------------------------------------------
HEALTHCARE FINANCIAL
PARTNERS, INC.
AND DEL
(COMBINED) FUNDING PRO FORMA PRO FORMA,
(HISTORICAL) (HISTORICAL) ADJUSTMENTS(1) AS ADJUSTED
-------------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Fee and interest income
Fee income............ $ 842,458 $5,234,832 $6,077,290
Interest income....... 2,211,007 2,211,007
--------- ---------- ----------
Total fee and
interest income.... 842,458 7,445,839 8,288,297
Interest expense........ 156,957 2,147,374 2,304,331
--------- ---------- ----------
Net fee and interest
income............... 685,501 5,298,465 5,983,966
Provision for losses on
receivables............ 75,311 537,805 613,116
--------- ---------- ----------
Net fee and interest
income after
provision for losses
on receivables....... 610,190 4,760,660 5,370,850
Operating expenses...... 1,371,819 1,226,393 $ (315,967)(a) 2,282,245
Other income............ 1,007,987 (836,336)(a) 171,651
--------- ---------- ----------- ----------
Income before income
taxes (benefit) ....... 246,358 3,534,267 (520,369) 3,260,256
Income taxes (benefit).. (13,268) 1,284,768 (b) 1,271,500
--------- ---------- ----------- ----------
Net income.............. $ 259,626 $3,534,267 $(1,805,137) $1,988,756
========= ========== =========== ==========
Pro forma net income per
share (3).............. $ .33
==========
Pro forma weighted
average shares
outstanding (3)........ 5,938,372
</TABLE>
20
<PAGE>
PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------------------------------------------
HEALTHCARE
FINANCIAL
PARTNERS, INC.
AND DEL
(COMBINED) FUNDING PRO FORMA THE COMPANY
(HISTORICAL) (HISTORICAL) ADJUSTMENTS(4) PRO FORMA
-------------- ------------ -------------- -----------
<S> <C> <C> <C> <C>
Assets
Cash and cash
equivalents........... $ 2,464,578 $ 2,527,151 (a)(b)(c) $ 4,991,729
Finance receivables.... 79,566,908 79,566,908
Less:
Allowance for losses
on receivables...... 1,035,992 1,035,992
Unearned discount
fees................ 356,228 356,228
---------- ----------- ----------- -----------
Net finance receiv-
ables.............. 78,174,688 78,174,688
Prepaid expenses and
other................. $ 645,504 1,110,260 (161,091)(d) 1,594,673
---------- ----------- ----------- -----------
Total assets............ $ 645,504 $81,749,526 $ 2,366,060 $84,761,090
========== =========== =========== ===========
Liabilities and equity
Line of credit......... $42,607,630 $42,607,630
Client holdbacks....... 16,212,360 16,212,360
Accounts payable to
clients............... 645,067 645,067
Accounts payable and
accrued expenses...... $1,316,150 402,461 $ (593,745)(d) 1,124,866
---------- ----------- ----------- -----------
Total liabilities....... 1,316,150 59,867,518 (593,745) 60,589,923
Equity
Partners' capital....... 47,187 21,882,008 (47,187)(a)
(22,314,662)(c)
432,654 (d)
Stockholders' equity
(deficit).............. (717,833) 24,889,000 (b) 24,171,167
---------- ----------- ----------- -----------
Total equity (deficit).. (670,646) 21,882,008 2,959,805 24,171,167
---------- ----------- ----------- -----------
Total liabilities and
equity................. $ 645,504 $81,749,526 $ 2,366,060 $84,761,090
========== =========== =========== ===========
</TABLE>
- --------
(1) Pro Forma Statements of Operations adjustments reflect the following:
(a) The elimination of transactions between the Company and Funding, which
consist of management fees paid/received and the elimination of the
Company's income from its investment in Funding. (b) The provisions for
income taxes (at an estimated effective tax rate of 39%) for DEL and
Funding which previously were not subject to such taxes as
partnerships.
(2) Includes $430,000 of fees resulting from the acquisition of certain
receivables from MediMax. See "Management's Discussion and Analysis of
Pro Forma Financial Condition and Pro Forma Results of Operations--
Overview."
(3) Pro forma net income per share was computed by dividing pro forma net
income by the pro forma weighted average shares outstanding, which gives
effect to the Offering and includes 379,998 shares of Common Stock to be
issued pursuant to the exercise of warrants in connection with the
Reorganization.
(4) Pro forma Balance Sheet adjustments reflect the following:
(a) Debit to partners' capital $ 47,187
Credit to cash $ 47,187
Liquidation of limited partnership interests in DEL.
(b) Debit to cash $24,889,000
Credit to stockholders' equity $ 24,889,000
Net proceeds of the Offering
(c) Debit to partners' capital $22,314,662
Credit to cash $ 22,314,662
Use of net proceeds of the Offering to acquire the limited partnership
interests in Funding.
(d) Debit to accounts payable and
accrued expenses $ 593,745
Credit to prepaid expenses and other $ 161,091
Credit to partners' capital $ 432,654
Elimination of intercompany accounts (management fees) and general partner's
capital.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
PRO FORMA FINANCIAL CONDITION AND
PRO FORMA RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information
under "Pro Forma Financial Information" and the combined financial statements,
including the notes thereto, of HealthCare Financial Partners, Inc. and DEL,
and the financial statements of Funding, including the notes thereto, appearing
elsewhere in this Prospectus.
OVERVIEW
The Company is a specialty finance company offering asset-based financing to
healthcare service providers, with a primary focus on clients operating in sub-
markets of the healthcare industry, including long-term care, home healthcare
and physician practices. The Company targets small and middle market healthcare
service providers with financing needs in the $100,000 to $10 million range in
those healthcare sub-markets where growth, consolidation or restructuring
appear likely in the near to medium term. From its inception in September, 1993
through September 30, 1996, the Company has advanced $495.7 million to its
clients in 166 transactions, including $299.5 million advanced during the nine
months ended September 30, 1996. The Company had 102 clients as of September
30, 1996, of which 35 were affiliates of one or more clients. The average
amount outstanding per client or affiliated client group at September 30, 1996
was approximately $863,000. For the year ended December 31, 1995, the Company's
pro forma net income was $1.5 million, and for the nine month period ended
September 30, 1996 the Company's pro forma net income was $2.0 million. See
"Pro Forma Financial Information."
From its inception in September, 1993 through the year ended December 31,
1995, the Company principally originated finance receivables through the AR
Advance Program. The AR Advance Program was characterized by high and varying
yields, as a result of the differing terms of AR Advance Program transactions
negotiated with individual clients. The yield on finance receivables generated
under the AR Advance Program was 26.9% during the year ended December 31, 1995,
and 19.7% during the nine months ended September 30, 1996. By September 30,
1996, the finance receivables originated through the Company's ABL Program had
grown to 42.1% of total finance receivables, as the Company focused its
marketing efforts on larger balance, prime-rate based ABL Program advances to
more creditworthy borrowers. ABL Program advances are characterized by lower
overall yields than AR Advance Program advances, but provide the Company with
the opportunity to expand the range of potential clients while reducing costs
as a percentage of finance receivables. The yield on finance receivables
generated under the ABL Program was 15.2% during the nine months ended
September 30, 1996 (on an annualized basis). The Company anticipates that
finance receivables generated under the ABL Program will account for a
significant majority of its finance receivables in future periods. As a result,
the Company's overall yield on finance receivables, which was 18.0% for the
nine months ended September 30, 1996 (on an annualized basis), is expected to
decline gradually (assuming a stable interest rate environment) to approach the
yields generated by the ABL Program.
In September 1995, the Company purchased certain finance receivables of
healthcare service providers of MediMax, an unrelated third party in the
business of providing advances against accounts receivable in a manner similar
to the AR Advance Program. The Company paid $7.5 million for such receivables,
net of purchase discount of $430,000. The discount was taken into income during
the fourth quarter of 1995 when the receivables were collected. Certain of the
healthcare service providers subsequently elected to become clients of the
Company.
22
<PAGE>
The following table provides certain unaudited pro forma financial
information as of and for the periods indicated. The Pro Forma Statements of
Operations and Other Data reflect the Reorganization described on page 5 and
are prepared on the same basis as the Pro Forma Financial Information
preceding.
<TABLE>
<CAPTION>
PRO FORMA FOR PRO FORMA FOR THE
THE YEAR ENDED NINE MONTH PERIOD
DECEMBER 31, ENDED SEPTEMBER 30,
----------------------- -----------------------
1994 1995 1995 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
PRO FORMA STATEMENTS OF OP-
ERATIONS
Fee and interest income:
Fee income................ $ 291,752 $ 4,814,504(1) $ 2,814,792 $ 6,077,290
Interest income........... 2,770 403,659 163,365 2,211,007
---------- ----------- ----------- -----------
Total fee and interest
income................. 294,522 5,218,163 2,978,157 8,288,297
Interest expense............ 3,975 634,556 253,360 2,304,331
---------- ----------- ----------- -----------
Net fee and interest
income................. 290,547 4,583,607 2,724,797 5,983,966
Provision for losses on
receivables................ 328,894 217,388 217,388 613,116
---------- ----------- ----------- -----------
Net fee and interest
income after provision
for losses on
receivables............ (38,347) 4,366,219 2,507,409 5,370,850
Operating expenses.......... 485,831 2,096,297 1,207,438 2,282,245
Other income................ 289,994 224,691 186,512 171,651
---------- ----------- ----------- -----------
Income (loss) before income
taxes...................... (234,184) 2,494,613 1,486,483 3,260,256
Income taxes................ 972,899 579,728 1,271,500
---------- ----------- ----------- -----------
Pro forma net income
(loss)..................... $ (234,184) $ 1,521,714 $ 906,755 $ 1,988,756
========== =========== =========== ===========
Pro forma net income (loss)
per share.................. $ (.04) $ .26 $ .15 $ .33
========== =========== =========== ===========
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
----------------------- -----------------------
1994 1995 1995 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OTHER DATA
Finance receivables--AR
Advance Program............ $6,236,663 $32,443,023 $22,588,760 $46,064,079
Finance receivables--ABL
Program.................... 6,270,629 5,073,933 33,502,829
---------- ----------- ----------- -----------
Total finance
receivables............ $6,236,663 $38,713,652 $27,662,693 $79,566,908
========== =========== =========== ===========
</TABLE>
- --------
(1) Includes $430,000 of fees resulting from the acquisition of certain
receivables from MediMax. See""--Overview"
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to the Nine Months Ended
September 30, 1995
Total fee and interest income increased from $3.0 million for the nine
months ended September 30, 1995 to $8.3 million for the nine months ended
September 30, 1996, an increase of 178.3%. The increase principally resulted
from an increase of $46.2 million in average finance receivables outstanding
due to the Company's introduction of the ABL Program during the last quarter
of 1995 and a corresponding increase of $28.4 million in ABL Program
receivables from September 30, 1995 to September 30, 1996. Interest earned
from the ABL Program increased from $163,366 for the nine month period ended
September 30, 1995 to $2.2 million for the nine month period ended September
30, 1996, which accounted for $2.0 million of the $5.3 million growth in total
fee and interest income between the periods. The Company increased its client
base in the AR Advance Program from 63 clients at September 30, 1995 to 73
clients at September 30, 1996. Additionally, existing clients increased their
average borrowings from the Company in the first nine months of 1996 as
compared to the same period in the prior year. Because the annualized yield
declined markedly from 26.3% in the nine month period ended September 30, 1995
to 18.0% in the same period of 1996, the increase in fee and interest income
was due to growth in the volume of finance receivables, and was somewhat
offset by the decline in yield. The yield for the nine month period ended
September 30, 1996 was lower due to a substantially greater volume of ABL
23
<PAGE>
Program finance receivables outstanding during the nine month period ended
September 30, 1996, which have lower yields when compared to the finance
receivables in the AR Advance Program. Interest expense increased from $253,360
for the nine month period ended September 30, 1995 to $2.3 million for the
comparable period in 1996. However, the Company's average cost of borrowed
funds decreased from 12.2% for the nine months ended September 30, 1995 to
10.2% for the nine months ended September 30, 1996. This increase in interest
expense was the result of higher average borrowings required to support the
Company's growth. Prior to March 1995, the Company's financing was solely
obtained through equity. The increase in leverage financed the Company's growth
after March 1995. Because of the Company's overall growth in finance
receivables and increased leverage, net fee and interest income increased from
$2.7 million for the nine months ended September 30, 1995 to $6.0 million for
the comparable period in 1996. The increased interest expense from increased
borrowings, combined with a lower yield on finance receivables, resulted in a
significant decrease in the annualized net interest margin from 24.1% for the
nine months ended September 30, 1995 to 13.0% for the nine months ended
September 30, 1996.
The Company's provisions for losses on receivables increased from $217,388
for the nine month period ended September 30, 1995 to $613,116 for the nine
month period ended September 30, 1996. This increase is attributable to an
increase in outstanding finance receivables and an increase in the Company's
average client balances, which are among the factors considered by the Company
in assessing the adequacy of its allowance for losses on receivables. The
Company experienced no credit losses in either nine month period.
Operating expenses increased from $1.2 million for the nine month period
ended September 30, 1995 to $2.3 million for the comparable period in 1996, an
89.0% increase. This increase was the result of an 88.8% increase in
compensation and benefits due to hiring additional personnel a 28.7% increase
in rent due to leasing of additional space, an 85.9% increase in professional
fees due to growth in financing activities, and increases in other operating
expenses, all relating to the expansion of the Company's operations.
Other income for the nine month period decreased slightly from $186,512 for
the nine month period ended September 30, 1995 to $171,651 for the same period
in 1996, due to the termination of a servicing arrangement with a client.
Net income increased from $906,755 for the nine month period ended September
30, 1995 to $2.0 million for the comparable period in 1996, a 119.3% increase,
primarily as a result of the overall growth in the Company's finance
receivables as described above.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total fee and interest income increased from $294,522 for the year ended
December 31, 1994 to $5.2 million for the year ended December 31, 1995. This
increase was principally the result of an $15.8 million increase in average
finance receivables during 1995. The increase in finance receivables was a
result of the Company's ability to attract new clients and the Company's
ability to acquire additional finance receivables from existing clients. The
Company initiated the ABL Program in the third quarter of 1995. The Company had
no clients in the ABL Program in 1994. By December 31, 1995, it had 13 clients
participating in the ABL Program. The interest earned in the ABL Program
accounts for $383,752 of the $4.9 million growth in fee and interest income for
this period. Additionally the Company, through increased marketing efforts,
increased its client base in the AR Advance Program from 37 to 72 clients, a
94.6% increase. Acquisition of finance receivable also increased during this
period. Additionally, in September, 1995, the Company purchased the receivables
of certain clients of MediMax. The Company paid $7.5 million for such
receivables, net of a purchase discount of $430,000, which was included in
income in the fourth quarter of 1995. Since the annualized yield on finance
receivables increased from 21.6% at December 31, 1994 to 26.4% at December 31,
1995, the increase in total fee and interest income was due to both growth in
finance receivables and increase in yield. Interest expense increased from
$3,975 for the year ended December 31, 1994 to $634,556 for the year ended
December 31, 1995. This increase in interest expense was the result of the
commencement of borrowings under the Bank Facility, beginning in March 1995, to
support the Company's growth. The average cost of borrowed funds for the year
ended December 31, 1995 was 11.8%. Because of the Company's overall growth and
increased leverage, net fee
24
<PAGE>
and interest income increased from $290,547 for the period ended December 31,
1994, to $4.6 million for the period ended December 31, 1995. Despite this
increase in borrowings, and due to the increased yield on finance receivables,
the net interest margin increased from 21.5% for the year ended December 31,
1994, to 23.2% for the year ended December 31, 1995.
The Company's provision for credit losses decreased from $328,894 for the
year ended December 31, 1994 to $217,388 for the year ended December 31, 1995,
a 33.9% decrease. This decrease is primarily attributable to a decrease in the
Company's average client balances, one of the factors considered by the
Company in assessing the adequacy of its allowance for possible losses on
receivables. "See--Quarterly Financial Data." The Company experienced no
credit losses in either period.
Operating expenses increased from $485,831 for the year ended December 31,
1994 to $2.1 million for the year ended December 31, 1995, a 331.5% increase.
This increase was directly related to the expansion of the Company's
operations, and was the result of an increase of 510.2% in compensation and
benefits due to hiring additional personnel, 393.8% in professional fees due
to growth in financing activities, 121.4% in rent expense due to leasing of
additional space as well as increases in other operating expenses, all
relating to the expansion of the Company's operations.
Other income decreased from $289,994 for the year ended December 31, 1994 to
$224,691 for the year ended December 31, 1995, a 22.5% decrease, as a result
of reduced balances under a servicing arrangement with a client.
Net income increased from a loss of $234,184 for the year ended December 31,
1994 to net income of $1.5 million for the year ended December 31, 1995,
primarily as a result of the overall growth in the Company's finance
receivables described above.
QUARTERLY FINANCIAL DATA
The following table summarizes unaudited pro forma quarterly operating
results for the most recent seven fiscal quarters. The Pro Forma Quarterly
Financial Data reflect the Reorganization described on page 5 and are prepared
on the same basis as the Pro Forma Financial Information preceding.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------------------------
MARCH JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
31, 1995 1995 1995 1995 1996 1996 1996
-------- -------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Fee and interest income
Fee income............ $707,666 $802,421 $1,304,704 $1,999,713 $1,869,433 $2,090,853 $2,117,004
Interest income....... 9,366 50,376 103,624 240,293 411,703 792,307 1,006,997
-------- -------- ---------- ---------- ---------- ---------- ----------
Total fee and
interest income.... 717,032 852,797 1,408,328 2,240,006 2,281,136 2,883,160 $3,124,001
Interest expense........ 3,883 108,895 140,582 381,196 580,030 801,126 923,175
-------- -------- ---------- ---------- ---------- ---------- ----------
Net fee and interest
income............... 713,149 743,902 1,267,746 1,858,810 1,701,106 2,082,034 2,200,826
Provision for losses on
receivables............ 217,388 343,155 53,646 216,315
-------- -------- ---------- ---------- ---------- ---------- ----------
Net fee and interest
income after
provision for losses
on receivables....... 713,149 526,514 1,267,746 1,858,810 1,357,951 2,028,388 1,984,511
Operating expenses...... 361,666 288,880 556,892 888,859 676,627 809,392 796,226
Other income............ 45,377 47,857 93,278 38,179 10,000 8,000 153,651
-------- -------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 396,860 285,491 804,132 1,008,130 691,324 1,226,996 1,341,936
Income taxes............ 154,776 111,341 313,611 393,171 269,617 478,528 523,355
-------- -------- ---------- ---------- ---------- ---------- ----------
Pro forma net income.... $242,084 $174,150 $ 490,521 $ 614,959 $ 421,707 $ 748,468 818,581
======== ======== ========== ========== ========== ========== ==========
</TABLE>
25
<PAGE>
The Company's quarterly results of operations are not generally affected by
seasonal factors.
The Company's historical methodology for assessing the adequacy of its
allowance for possible losses on receivables focused, in significant part, on
the average per client amount of finance receivables outstanding. This caused
the quarterly provisions for losses on receivables to fluctuate as average
client balances varied due to the Company's growth and the mix of finance
receivables generated from the ABL Program and the AR Advance Program changed
over time. Given the current level of the allowance, the Company does not
anticipate that the provision for losses on receivables in future quarterly
periods will reflect the level of variability experienced historically. In
future periods, the Company anticipates that quarterly provisions will be made
primarily based on changes in overall portfolio size and composition, and, to
the extent required, based on analysis of credit risks in particular
transactions.
The results of operations for the quarter ended December 31, 1995 were
impacted by the Company's acquisition of certain assets from MediMax. See "--
Overview."
EXCESS COLLATERAL AND CLIENT HOLDBACKS
The Company's primary protection against credit losses is the Excess
Collateral, which consists of client accounts receivable due from third-party
payors which collateralize advances under the ABL Program and against which
the Company makes advances under the AR Purchase Program. The Company obtains
a first priority security interest in all of the client's accounts receivable,
including receivables not financed by the Company. As a result, amounts paid
or advanced to clients with respect to specific accounts receivable are cross-
collateralized by the Company's security interest in other accounts receivable
of the client. In addition, the Company frequently obtains a security interest
in other assets of a client and maintains a provision for losses on
receivables.
Under the ABL Program, the Company will extend credit only up to a maximum
percentage, ranging from 65% to 85%, of the estimated net collectible value of
the accounts receivable due from third-party payors. The Company obtains a
first priority security interest in all of a client's accounts receivable, and
may apply payments received with respect to the full amount of the client's
accounts receivable to offset any amounts due from the client. The estimated
net collectible value of a client's accounts receivable thus exceeds at any
time amounts advanced under the ABL Program secured by such accounts
receivable.
Under the AR Advance Program, the Company purchases a client's accounts
receivable at a discount from the estimated net collectible value of the
accounts receivable. The Company will advance only 65% to 85% of the purchase
price of any batch of accounts receivable purchased. The excess of the
purchase price for a batch of receivables over the amount advanced with
respect to such batch (a "client holdback") is treated as a reserve and
provides additional security to the Company, insofar as holdback amounts may
be applied to offset amounts due with respect to the related batch of client
receivables, or any other batch of client receivables. As is the case with the
ABL Program, the Company obtains a first priority security interest in all of
the client's accounts receivable.
In addition, under both programs the Company frequently obtains a security
interest in other assets of a client and may have recourse against personal
assets of the principals or parent company of a client. See "Risk Factors--
Dilution of Client Receivables; Government Right of Offset."
The Company's results of operations are affected by its collections of
client accounts receivable. The Company's turnover of its finance receivables,
calculated by dividing total collections of client accounts receivable for
each of the following quarters by the average month-end balance of finance
receivables during such quarter, was 3.7x for the quarter ended March 31,
1995, 2.5x for the quarter ended June 30, 1995, 2.8x for the quarter ended
September 30, 1995, 2.8x for the quarter ended December 31, 1995, 2.4x for the
quarter ended March 31, 1996, 2.4x for the quarter ended June 30, 1996, and
3.7x for the quarter ended September 30, 1996.
26
<PAGE>
PROVISION AND ALLOWANCE FOR POSSIBLE LOSSES ON RECEIVABLES
The Company regularly reviews its outstanding advances and purchased accounts
receivable to determine the adequacy of its allowance for possible losses on
receivables. To date, the Company has experienced no credit losses. The
allowance for possible losses on receivables is maintained at an amount
estimated to be sufficient to absorb future losses, net of recoveries, inherent
in the finance receivables. In evaluating the adequacy of the allowance,
management of the Company considers trends in healthcare sub-markets, past-due
accounts, historical charge-off and recovery rates, credit risk indicators,
economic conditions, on-going credit evaluations, overall portfolio size,
average client balances, Excess Collateral, and underwriting policies, among
other items. As of September 30, 1996, the Company's general reserve was
$1,035,992, or 1.3% of finance receivables. To the extent that management deems
specific finance receivable advances to be wholly or partially uncollectible,
the Company establishes a specific loss reserve equal to any such amount. At
September 30, 1996, the Company had no specific reserves. In the opinion of
management, based on a review of the Company's portfolio, the reserve for
losses on receivables is adequate at this time. See "--Quarterly Financial
Data."
LIQUIDITY AND CAPITAL RESOURCES
Cash flows resulting from operating activities have provided sources of cash
amounting to $185,016 and $3.8 million for the years ended December 31, 1994
and 1995, respectively; and $2.5 million and $3.0 million for the nine month
periods ended September 30, 1995 and 1996, respectively. The most significant
source of cash from operating activities is derived from the Company's
generation of net fee and interest income from its finance receivables, and the
more significant uses of cash from internal operating activities are derived
from cash payments for compensation and employee benefits, rent expense, and
professional fees. As the Company's number of clients and resulting business
opportunities have grown, the Company has primarily used cash in the
acquisition of finance receivables under its AR Advance Program and ABL
Program. The Company's financing activities have provided the necessary source
of funds for the acquisition of receivables. These financing activities have
occurred from both debt and equity sources. The debt financing has been
generated from draws on the Bank Facility. The sources of equity financing have
been primarily from limited partner capital contributions. The Company
increased its outstanding balances under the Bank Facility by $17.8 million
during the year ended December 31, 1995, and increased these balances by $10.0
million and $24.7 million during the nine month periods ended September 30,
1995 and 1996, respectively. The Bank Facility was not available during the
year ended December 31, 1994 and the Company relied upon its equity sources to
provide the necessary funds to acquire finance receivables during that year.
The limited partners provided capital contributions of $5.4 million and $7.6
million during the years ended December 31, 1994 and 1995, respectively, and
$6.7 million and $12.1 million during the nine month periods ended September
30, 1995 and 1996, respectively. During such periods, the limited partners also
received cash distributions from their capital accounts of $145,843 and $2.4
million during the years ended December 31, 1994 and 1995, respectively; and
$1.2 million and $6.5 million during the nine month periods ended September 30,
1995 and 1996, respectively. Recently, the Company also received a commitment
from ING for $100 million of financing under the proposed CP Facility.
In conjunction with the Reorganization and in contemplation of the Offering,
at the request of the Company, Fleet increased the committed line of credit
under the Bank Facility from $35 million to $50 million. The Bank Facility is a
revolving line of credit. The interest rates payable by the Company under the
Bank Facility adjust, based on the prime rate of Fleet National Bank ("Fleet's
prime rate"); however, the Company has the option to borrow any portion of the
Bank Facility over $500,000 based on the 30-day, three-month or six-month LIBOR
plus 3.0%. As of September 30, 1996, $42.6 million was outstanding under the
Bank Facility. The Bank Facility contains financial and operating covenants,
including the requirement that the Company maintain an adjusted tangible net
worth of not less than $5.0 million and a ratio of total debt to equity of not
more than 3.0 to 1.0. The Company anticipates that intercreditor arrangements
to be entered into in connection with the proposed CP Facility will exclude
borrowings under the proposed CP Facility from debt for purposes of calculating
the debt-to-equity ratio. At September 30, 1996, the Company had an adjusted
tangible net worth of approximately $24.2 million and the Company's ratio of
total debt to equity was approximately 1.8 to 1.0. The expiration date for the
Bank Facility is March 9, 1998, subject to automatic renewal for one-year
periods thereafter unless terminated by Fleet. See "Risk Factors--Risk of
Failure to Renew Funding Sources" and "Business--Capital Resources."
27
<PAGE>
Under the terms of the proposed CP Facility, the Company will be able to
borrow up to $100 million. The proposed CP Facility will require the Company
to transfer advances and related receivables under its ABL Program or its AR
Advance Program which meet certain criteria to a bankruptcy remote, special
purpose subsidiary of the Company. The special purpose subsidiary will pledge
the finance receivables transferred by the Company to Holland Limited
Securitization Inc., a commercial paper conduit which is an affiliate of ING
(the "Conduit"). The Conduit will lend against such pledged assets through the
issuance of commercial paper. The proposed CP Facility will require the
maintenance of a minimum overcollateralization percentage of 125%. Under the
proposed CP Facility, ING can refuse to make any advances in the event the
Company fails to maintain a tangible net worth of at least $20 million and to
make advances in excess of $50 million in the event the Company fails to
maintain a tangible net worth of at least $25 million. The maturity date for
the proposed CP Facility will be five years from the closing of such facility.
However, after three years, the program may be terminated by the Company
without penalty. See "Risk Factors--Restrictive Debt Covenants" and
"Business--Capital Resources."
The Company requires substantial capital to finance its business.
Consequently, the Company's ability to grow and the future of its operations
will be affected by the availability and the terms of financing. In addition
to the proceeds from the Offering, the Company expects to fund its future
financing activities principally from (i) the proposed CP Facility, which will
have a five-year term and (ii) the Bank Facility, which expires on March 9,
1998, subject to automatic renewals for one-year periods thereafter unless
terminated by Fleet. While the Company expects to be able to obtain or renew
these facilities and to have continued access to other sources of credit after
expiration of these facilities, there is not assurance that such financing
will be available, or, if available, that it will be on terms favorable to the
Company. See "Risk Factors--Risk of Failure to Renew Funding Sources".
INTEREST RATE SENSITIVITY
Interest rate sensitivity refers to the change in interest spread between
the yield on the Company's portfolio and the cost of funds necessary to
finance the portfolio (i.e., the Bank Facility and the proposed CP Facility)
resulting from changes in interest rates. To the extent that interest income
and interest expense do not respond equally to changes in interest rates, or
that all rates do not change uniformly, earnings are affected. The interest
rates charged on the ABL Program adjust based upon changes in the prime rate.
The fees charged on the AR Advance Program are fixed at the time of any
advance against a batch of receivables, although such fees may increase
depending upon the timing of collections of receivables within the batch. The
interest rates on the Company's term loans are generally fixed at origination
for stated maturities generally of one year or less. The interest rates
payable by the Company under the Bank Facility adjust, based on Fleet's prime
rate; however, the Company has the option to borrow any portion of the Bank
Facility over $500,000 based on the 30-day, three-month or six-month LIBOR
plus 3.0%. The interest rate on the proposed CP Facility will adjust based
upon changes in commercial paper rates. Because the Company expects to finance
most of the ABL Program activity through the proposed CP Facility, there
exists some interest rate risk since the interest rate on advances to the
Company's clients under the ABL Program will adjust based on the prime rate,
and the interest rate on most of the Company's liabilities under the proposed
CP Facility will adjust based on commercial paper rates. Such limited interest
rate sensitivity on the ABL Program portfolio is not expected to have a
material effect on the Company's net interest income if interest rates change.
Additionally, because the AR Advance Program portfolio's fees are generally
fixed and will be financed with both the proposed CP Facility and the Bank
Facility which adjust with changes in commercial paper rates and the prime
rate, respectively, there exists interest rate sensitivity with respect to the
AR Advance portfolio which, if interest rates increase significantly, could
have a material adverse effect on the Company's net interest income. However,
this interest rate sensitivity is mitigated by the fact that the Company does
not make long-term commitments in the AR Advance Program and therefore retains
substantial flexibility to negotiate fees based on changes in interest rates.
Interest rate sensitivity also exists with respect to the Company's term loans
which at September 30, 1996 constituted less than 3.6% of the Company's
assets.
INFLATION
Inflation has not had a significant effect on the Company's operating
results to date.
28
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data. The
selected historical statements of operations and balance sheet data presented
below were derived from the combined financial statements of HealthCare
Financial Partners, Inc. and DEL as of and for the period from inception
(April 22, 1993) through December 31, 1993, the two years ended December 31,
1994 and 1995 and for the nine month periods ended September 30, 1995 and
1996, and of Funding as of and for the period from inception (September 12,
1994) through December 31, 1994, the year ended December 31, 1995, and for the
nine month periods ended September 30, 1995 and 1996. Operating results for
the nine months ended September 30, 1996 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1996. The data
set forth below should be read in conjunction with "Management's Discussion
and Analysis of Historical Financial Condition and Historical Results of
Operation" and the combined financial statements, including the notes thereto,
of HealthCare Financial Partners, Inc. and DEL, and the financial statements
of Funding, including the notes thereto, appearing elsewhere in this
Prospectus.
HEALTHCARE FINANCIAL PARTNERS, INC. AND DEL COMBINED
<TABLE>
<CAPTION>
AT OR FOR THE
AT OR FOR THE NINE MONTH
YEAR ENDED PERIOD ENDED
AT OR FOR THE PERIOD FROM DECEMBER 31, SEPTEMBER 30,
INCEPTION (APRIL 22, 1993) --------------------- ---------------------
THROUGH DECEMBER 31, 1993 1994 1995 1995 1996
-------------------------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Fee income............. $ 856 $ 13,036 $ 565,512 $ 395,780 $ 842,458
Interest expense....... -- 3,975 79,671 45,526 156,957
-------- --------- ---------- ---------- ---------
Net fee income......... 856 9,061 485,841 350,254 685,501
Provision for losses on
receivables........... 18,745 2,102 45,993 45,993 75,311
-------- --------- ---------- ---------- ---------
Net fee income after
provision for losses
on receivables........ (17,889) 6,959 439,848 304,261 610,190
Operating expenses..... 30,204 439,514 1,472,240 769,537 1,371,819
Other income (loss).... 23,772 106,609 1,221,837 652,092 1,007,987
-------- --------- ---------- ---------- ---------
Income (loss) before
income taxes.......... (24,321) (325,946) 189,445 186,816 246,358
Income taxes
(benefit)............. -- -- (5,892) -- (13,268)
-------- --------- ---------- ---------- ---------
Net income
(loss)(1)(2).......... $(24,321) $(325,946) $ 195,337 $ 186,816 $ 259,626
======== ========= ========== ========== =========
Pro forma provision for
income taxes(1)....... $ 73,884 $ 96,080
---------- ---------
Pro forma net
income(1)............. $ 115,561 $ 150,278
========== =========
BALANCE SHEET DATA
Finance receivables.... $115,454 $ 279,148 $2,552,441 $2,167,884 $ --
Allowance for losses on
receivables........... 18,475 20,847 66,840 66,840 --
Total assets........... 329,588 344,850 2,669,939 2,009,403 645,504
Client holdbacks....... 21,729 112,374 814,607 666,945 --
Line of credit......... -- -- 1,433,542 798,840 --
Total liabilities...... 203,534 558,759 2,795,404 2,036,495 1,316,150
Limited partners'
capital............... 155,410 144,857 415,305 465,177 47,187
Stockholders' deficit.. (29,356) (358,766) (540,770) (492,269) (717,833)
</TABLE>
29
<PAGE>
FUNDING
<TABLE>
<CAPTION>
AT OR FOR THE
NINE MONTH
AT OR FOR THE PERIOD ENDED
AT OF FOR THE PERIOD FROM YEAR ENDED SEPTEMBER 30,
INCEPTION (SEPTEMBER 12, 1994) DECEMBER 31, -----------------------
THROUGH DECEMBER 31, 1994 1995 1995 1996
------------------------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Fee income............. $ 278,716 $ 4,248,992(3) $ 2,419,012 $ 5,234,832
Interest income........ 2,770 403,659 163,365 2,211,007
---------- ----------- ----------- -----------
Total fee and interest
income............... 281,486 4,652,651 2,582,377 7,445,839
Interest expense....... -- 554,885 207,834 2,147,374
---------- ----------- ----------- -----------
Net fee and interest
income............... 281,486 4,097,766 2,374,543 5,298,465
Provision for losses on
receivables........... 326,792 171,395 171,395 537,805
---------- ----------- ----------- -----------
Net fee and interest
income after
provision for losses
on receivables....... (45,306) 3,926,371 2,203,148 4,760,660
Operating expenses..... 166,317 1,024,057 737,901 1,226,393
---------- ----------- ----------- -----------
Net income (loss) (1)
(2)................... $ (211,623) $ 2,902,314 $ 1,465,247 $ 3,534,267
========== =========== =========== ===========
Pro forma provision for
income taxes (1)...... $ 1,131,902 $ 571,446 $ 1,378,364
----------- ----------- -----------
Pro forma net income
(1)................... $ 1,770,412 $ 893,801 $ 2,155,903
=========== =========== ===========
BALANCE SHEET DATA
Finance receivables.... $6,012,475 $37,164,708 $25,494,809 $79,566,908
Allowance for losses on
receivables........... 326,792 498,187 498,187 1,035,992
Total assets........... 7,754,522 38,979,184 27,669,229 81,749,526
Client holdbacks....... 2,362,800 8,175,870 5,131,116 16,212,360
Line of credit......... -- 16,374,318 9,178,359 42,607,630
Total liabilities...... 2,629,651 26,140,008 15,899,478 59,867,518
Partners' capital...... 5,124,871 12,839,176 11,769,751 21,882,008
</TABLE>
- --------
(1) Net income for HealthCare Financial Partners, Inc. and DEL combined is
presented with DEL on a partnership reporting basis for tax purposes and
net income for Funding is presented on a partnership reporting basis for
tax purposes (i.e. no provision for income tax included in their
historical financial statements). A pro forma tax rate of 39% was applied
to calculate the pro forma income tax provision and the pro forma net
income amounts.
(2) Historical earnings per share is not presented because it is not
meaningful due to the partnership reporting basis for DEL and Funding and
to the Reorganization. See "Pro Forma Financial Information" for pro forma
net income per share information.
(3) Includes $430,000 of fees resulting from the acquisition of certain
receivables from MediMax. See "Management's Discussion and Analysis of Pro
Forma Financial Condition and Pro Forma Results of Operations--Overview."
30
<PAGE>
MANAGEMENT'S DISCUSSION ANDANALYSIS OF HISTORICAL FINANCIAL CONDITION AND
HISTORICAL RESULTS OF OPERATIONS
Due to the structure of the Company's operations prior to the
Reorganization, the Company's historical financial condition and results of
operations will not be comparable to the Company's future operations following
the Reorganization and the Offering. The following discussion only pertains to
the Company's historical financial condition and results of operations, and
therefore should be read in conjunction with "Selected Historical Financial
Data," the combined financial statements, including the notes thereto of
HealthCare Financial Partners, Inc. and DEL, and the financial statements,
including the notes thereto of Funding. See "Pro Forma Financial Information"
and "Management's Discussion and Analysis of Pro Forma Financial Condition and
Pro Forma Results of Operations."
HEALTHCARE FINANCIAL PARTNERS, INC. AND DEL COMBINED RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Total fee income increased from $395,780 for the nine month period ended
September 30, 1995 to $842,458 for the nine month period ended September 30,
1996, a 112.9% increase. This increase was the result of an increase of $2.3
million in average finance receivables for the nine month period ended
September 30, 1996, compared to the nine month period ended September 30,
1995. This increase in finance receivables was due to increased marketing
efforts to new clients and acquisition of additional finance receivables from
existing clients during this period. Since the annualized yield on finance
receivables increased from 14.7% at September 30, 1995 to 31.6% at September
30, 1996, the increase in total fee and interest income was due to growth in
finance receivables and an increase in yield. Interest expense increased from
$45,526 for the nine month period ended September 30, 1995 to $156,957 for the
comparable period in 1996, a 244.8% increase. This increase in interest
expense was the result of higher average borrowings to support the growth of
HealthCare Financial Partners, Inc. and DEL. Prior to March 1995, HealthCare
Financial Partners, Inc. and DEL financed their operations solely through
equity. The use of borrowings financed the growth of HealthCare Financial
Partners, Inc. and DEL after March 1995. The average cost of funds decreased
from 11.3% for the nine months ended September 30, 1995 to 9.3% for the nine
months ended September 30, 1996. Because of the overall growth of HealthCare
Financial Partners, Inc. and DEL and increased leverage, net fee and interest
income increased from $350,254 for the nine month period ended September 30,
1995 to $685,501 for the nine month period ended September 30, 1996, a 95.7%
increase. The increase in the yield on finance receivables coupled with a
lower cost of funds resulted in an increase of 280 basis points in the
annualized net interest margin from 22.9% for the nine months ended September
30, 1995 to 25.7% for the nine months ended September 30, 1996.
The provision for losses on receivables increased from $45,993 for the nine
month period ended September 30, 1995 to $75,311 for the nine month period
ended September 30, 1996, a 63.7% increase. This increase is primarily
attributable to an increase in outstanding finance receivables. Neither
HealthCare Financial Partners, Inc. nor DEL experienced credit losses in
either nine month period.
Operating expenses increased from $769,537 for the nine month period ended
September 30, 1995 to $1.4 million for the comparable period in 1996, a 78.3%
increase. This increase was a result of increases of 88.8% in compensation and
benefits due to hiring additional personnel, 28.7% in rent expense due to the
leasing of additional space, 50.5% in professional fees due to growth in
financing activities, as well increases in other operating expenses which were
necessary to support the expansion of the operations of HealthCare Financial
Partners, Inc. and DEL.
Other income, consisting primarily of amounts paid by Funding as management
fees and partnership income, increased from $652,092 for the nine month period
ended September 30, 1995 to $1.0 million for the nine month period ended
September 30, 1996, an increase of 54.6%, as a result of the expansion of
Funding's operations.
Net income increased from $186,816 for the nine month period ended September
30, 1995 to net income of $259,626 for the comparable period in 1996, a 39.0%
increase, primarily as a result of the growth in finance receivables and other
income as set forth above.
31
<PAGE>
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total fee income increased from $13,036 for the year ended December 31, 1994
to $565,512 for the year ended December 31, 1995. This increase was the result
of a $1.4 million increase in the average outstanding finance receivables for
1995 compared to 1994 due to increased marketing efforts to new clients and
the acquisition of additional finance receivables from existing clients during
this period. Additionally, the annualized yield on finance receivables
increased from 11.5% in 1994 to 36.9% in 1995. Thus, the growth in total fee
and interest income was due to both the growth in the average outstanding
finance receivables and the increase in the annualized yield. The increase in
interest expense from $3,975 for the year ended December 31, 1994 to $79,671
for the year ended December 31, 1995, was the result of the commencement of
borrowings to support growth. Net fee and interest income increased from
$9,061 for the year ended December 31, 1994 to $485,841 for the year ended
December 31, 1995. This increase was attributable both to the overall growth
in finance receivables, and to the increase in the net interest margin from
8.0% for the year ended December 31, 1994 to 31.7% for the year ended December
31, 1995. The average cost of funds for the year ended December 31, 1995 was
11.3%.
The provision for losses on receivables increased from $2,102 for the year
ended December 31, 1994 to $45,993 for the year ended December 31, 1995. This
increase is primarily attributable to the increase in its outstanding finance
receivables. Neither HealthCare Financial Partners, Inc. nor DEL experienced
credit losses in either period.
Operating expenses increased from $439,514 for the year ended December 31,
1994 to $1.5 million for the year ended December 31, 1995. These increases
were the direct result of the increased level of activity in the year ended
December 31, 1995. During that period, compensation and benefits increased
510.2%, due to hiring additional personnel, rent expense increased 121.4% due
to the leasing of additional space and professional fees increased 156.3% due
to growth in financing activities. Other operating expenses increased as well.
Other income increased from $106,609 for the year ended December 31, 1994 to
$1.2 million for the year ended December 31, 1995, as a result of the
expansion of HealthCare Financial Partners, Inc., and DEL's operations.
Net income increased from a loss of $325,946 for the year ended December 31,
1994 to net income of $195,337, for the year ended December 31, 1995, a 159.9%
increase, primarily as a result of the growth in finance receivables and other
income described above.
Year Ended December 31, 1994 Compared to Period Ended December 31, 1993
Because HealthCare Financial Partners, Inc. and DEL had only limited
operations for the period ended December 31, 1993, period-to-period
comparisons are not meaningful.
FUNDING RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Total fee and interest income increased from $2.6 million for the nine month
period ended September 30, 1995 to $7.4 million for the nine month period
ended September 30, 1996, a 188.3% increase. This increase was principally the
result of Funding's introduction of the ABL Program and the corresponding
increase of $21.8 million in average ABL Program finance receivables for the
nine month period ended September 30, 1996. At September 30, 1995, Funding had
recently initiated the ABL Program and had only 11 clients participating in
the program. By September 30, 1996, Funding had 37 clients participating in
the ABL Program. The interest earned in the ABL Program accounted for $2.0
million of the $4.9 million growth in fee and interest income. Additionally,
through increased marketing efforts, Funding increased its client base in the
AR Advance Program during this period from 63 to 73 clients, a 15.9% increase.
Acquisition of finance receivables from existing clients also increased during
this period. Since the annualized yield on finance receivables declined from
24.9% to 17.2%, the increase in fee and interest income was due to growth in
finance receivables, somewhat offset by the decrease in yield. Interest
expense increased from $207,834 for the nine month period ended September 30,
1995 to $2.1 million for the comparable period in 1996. This increase in
interest expense was the result of higher average borrowings required to
support Funding's growth. The average cost of funds decreased from 12.5% for
the nine months ended September 30, 1995, to 10.3% for the nine months ended
September 30, 1996. Prior to March,
32
<PAGE>
1995, Funding financed its operations solely through equity. The use of
borrowings financed Funding's growth after March 1995. Because of Funding's
overall growth and increased leverage, net fee and interest income increased
from $2.4 million for the nine month period ended September 30, 1995 to $5.3
million for the nine month period ended September 30, 1996, a 123.1% increase.
The increase in borrowings, combined with a lower yield on finance
receivables, resulted in a decrease in the annualized net interest margin,
from 22.9% for the nine months ended September 30, 1995 to 12.2% for the nine
months ended September 30, 1996.
Funding's provision for losses on receivables increased from $171,395 for
the nine month period ended September 30, 1995 to $537,805 for the nine month
period ended September 30, 1996, a 213.8% increase. This increase is
principally attributable to an increase in outstanding finance receivables.
Funding experienced no credit losses in either nine month period.
Operating expenses increased from $737,901 for the nine month period ended
September 30, 1995 to $1.2 million for the comparable period in 1996, a 66.2%
increase. This increase was the result of an increase of 107.5% in
professional fees due to growth in financing activities and a 32.5% increase
in licensing fees as well as increases in other operating expenses, all
relating to the expansion of Funding's operations.
Net income increased from $1.5 million for the nine month period ended
September 30, 1995 to $3.5 million for the comparable period in 1996, a 141.2%
increase. This increase was a direct result of overall growth in Funding's
finance receivables described above, as well as Funding's purchase of DEL's
assets. See "Certain Transactions".
Year Ended December 31, 1995 Compared to Period Ended December 31, 1994
Total fee and interest income increased from $281,486 for the period
December 31, 1994 to $4.7 million for the year ended December 31, 1995.
Average outstanding finance receivables for 1995 increased by $14.4 million as
compared with 1994. Several factors contributed to this increase: (i) Funding
commenced operations in September, 1994; (ii) the partner's invested capital
in Funding grew from $5.1 million at December 31, 1994 to $12.8 million at
December 31, 1995; (iii) Funding initiated the ABL Program in 1995; and (iv)
in September 1995, Funding purchased certain receivables of MediMax. See
"Management's Discussion and Analysis of Pro Forma Financial Condition and Pro
Forma Results of Operations--Overview." The annualized yield on finance
receivables increased from 21.9% in 1994 to 25.6% in 1995. Thus, the increase
in total fee and interest income can be attributed to increases in both yield
and volume. Prior to March 1995, Funding financed its operations solely
through equity. The use of borrowings financed the Company's growth after
March, 1995. As a result, interest expense increased from $0 for the period
ended December 31, 1994 to $554,885 for the year ended December 31, 1995. The
average cost of funds for the year ended December 31, 1995 was 11.9%. Net fee
and interest income increased from $281,486 for the period ended December 31,
1994 to $4.1 million for the year ended December 31, 1995. Although Funding
did not have any interest expense in 1994, the annualized net interest margin
increased slightly from 21.9% in 1994 to 22.5% in 1995. This increase in net
interest margin was due to the increase in the yield on finance receivables.
The increase in net fee and interest income can be attributed to growth in
both volume and yield.
Funding's provision for losses on receivables decreased from $326,792 for
the period ended December 31, 1994 to $171,395 for the year ended December 31,
1995. This decrease is primarily attributable to a decrease in average client
balances. Funding experienced no credit losses in either period.
Operating expenses increased from $166,317 for the period ended December 31,
1994 to $1.0 million for the year ended December 31, 1995. This increase
resulted from Funding's commencement of operations in September 1994 and to
the increase in expenses necessary to support the increase in Funding's
operations. Funding experienced an increase of 233.3% in management fees,
1,364.6% in professional fees due to growth in financing activities, 559.0% in
licensing fees and increases in other operating costs, all related to the
expansion of Funding's operations. Funding only operated for four months in
1994.
Net income increased from a loss of $211,623 for the period ended December
31, 1994 to net income of $2.9 million for the year ended December 31, 1995, a
direct result of overall growth in Funding's finance receivables described
above.
OTHER INFORMATION
For other information regarding the financial condition and results of
operations of HealthCare Financial Partners, Inc., DEL and Funding see
"Management's Discussion and Analysis of Pro Forma Financial Condition and Pro
Forma Results of Operations."
33
<PAGE>
BUSINESS
GENERAL
The Company is a specialty finance company offering asset-based financing to
healthcare service providers, with a primary focus on clients operating in
sub-markets of the healthcare industry, including long-term care, home
healthcare and physician practices. The Company also provides asset-based
financing to clients in other sub-markets of the healthcare industry,
including pharmacies, durable medical equipment suppliers, hospitals, mental
health providers, rehabilitation companies and disease state management
companies. The Company targets small and middle market healthcare service
providers with financing needs in the $100,000 to $10 million range in
healthcare sub-markets which have favorable characteristics for working
capital financing, such as those where growth, consolidation or restructuring
appear likely in the near to medium term. Management believes that the
Company's healthcare industry expertise and specialized information systems,
combined with its responsiveness to clients, willingness to finance relatively
small transactions, and flexibility in structuring transactions, give it a
competitive advantage in its target markets over commercial banks, diversified
finance companies and traditional asset-based lenders. From its inception in
1993 through September 30, 1996, the Company has advanced $495.7 million to
its clients in 166 transactions, including $299.5 million advanced during the
nine months ended September 30, 1996. The Company had 102 clients as of
September 30, 1996, of which 35 were affiliates of one or more other clients.
The average amount outstanding per client at September 30, 1996 was
approximately $863,000. For the year ended December 31, 1995, the Company's
pro forma net income was $1.5 million, and for the nine month period ended
September 30, 1996 the Company's pro forma net income was $2.0 million. See
"Pro Forma Financial Information." For the nine months ended September 30,
1996, the Company's annualized yield on finance receivables was 18.0%.
HEALTHCARE INDUSTRY
According to Healthcare Financing Administration ("HCFA") estimates, total
domestic healthcare expenditures for 1995 exceeded $1.0 trillion, or 14.2% of
gross domestic product, compared to expenditures of $428.2 billion or 10.2% of
gross domestic product in 1985. The annual compound growth rate of healthcare
expenditures from 1985 to 1995 was 8.9%. The breakdown of estimated healthcare
expenditures for 1995 is as follows (dollars in billions):
<TABLE>
<CAPTION>
HEALTHCARE INDUSTRY SEGMENT ESTIMATED 1995 EXPENDITURES
--------------------------- ---------------------------
<S> <C>
Acute Care (hospitals)........................... $ 364.5
Physician Services............................... 198.0
Other Medical Non-Durables....................... 84.7
Long-Term Care (nursing homes)................... 80.2
Other Professional Services...................... 62.9
Insurance--net of healthcare costs............... 51.9
Dental Services.................................. 42.9
Home Healthcare.................................. 27.9
Government Public Health......................... 27.9
Other Personal Care.............................. 22.7
Research......................................... 15.9
Construction..................................... 14.2
Vision Products and Other Medical Durables....... 13.9
--------
Total.......................................... $1,007.6
========
</TABLE>
- --------
Source: HCFA, Office of the Actuary.
The Company believes that there are several distinct trends that will
continue to fuel the demand for and the dollar value of healthcare services in
the United States and the demand for the Company's services, including: (i)
dramatic change driven by governmental and market forces which have put
pressure on healthcare service providers to reduce healthcare delivery costs
and increase efficiency, often resulting in short-term working capital
requirements by such providers as their businesses grow; (ii) favorable
demographic trends, including both the general increase in the U.S. population
and the aging of the U.S. population, which should increase the size of the
Company's principal target markets; (iii) growth, consolidation and
restructuring of
34
<PAGE>
fragmented sub-markets of healthcare, including long-term care, home
healthcare and physician services; and (iv) advances in medical technology,
which have increased demand for healthcare services by expanding the types of
diseases that can be effectively treated and by extending the population's
life expectancy.
According to HCFA, total annual expenditures in the long-term care market
grew from $30.7 billion in 1985 to an estimated $80.2 billion in 1995, and are
projected to grow to $121.2 billion by the year 2000. The Company's long-term
care clients include single nursing home operators (1-2 homes), small nursing
home chains (3-10 homes) and regional nursing home chains (11-50 homes).
According to the Guide to the Nursing Home Industry published by HCIA, Inc.,
the long-term care industry remains widely diversified and fragmented, with
all nursing home chains controlling only 34.5% of the market, and the largest
20 chains constituting only 18.0% of the market.
According to HCFA, total annual home healthcare expenditures grew from $5.6
billion in 1985 to an estimated $27.9 billion in 1995, and are projected to
grow to $45.9 billion by the year 2000. According to the National Association
of Health Care, the number of Medicare certified home health agencies has
grown from 5,983 in 1985 to 9,120 in 1995. The home healthcare business
remains highly fragmented, with only a small percentage of such companies
having any significant market share.
According to HCFA, the physician services market grew from $83.6 billion in
1985 to an estimated $198.0 billion in 1995, and is projected to grow to
$309.8 billion by the year 2000. The American Medical Association ("AMA")
reports that approximately 720,325 physicians are actively involved in patient
care in the U.S., with a growing number participating in multi-specialty or
single-specialty groups. According to the AMA, as of 1995, there were 19,787
physician groups with three or more physicians, while over two-thirds of all
physicians still work in practices of one or two persons.
MARKET FOR HEALTHCARE RECEIVABLES FINANCING
Businesses generally utilize working capital or accounts receivable
financing to bridge the shortfall between the turnover of current assets and
the maturity of current liabilities. A business will often experience this
shortfall during periods of revenue growth because cash flow from new revenues
lags behind cash outlays required to produce new revenues. For example, a
growing labor intensive business will often need to fund payroll obligations
before payments are received on new services provided or products produced.
Many of the Company's clients are labor intensive and growing and therefore
require accounts receivable financing to fund their growth.
In addition to the Company, working capital financing for small and middle
market healthcare service providers is currently provided by several different
sources. Some commercial banks and diversified finance companies have formed
groups or divisions to provide working capital financing for healthcare
service providers. Such groups or divisions generally focus on providing
financing to companies with borrowing needs in excess of $5 million, and often
require more extensive collateral in addition to accounts receivable to secure
such financing. As a general matter, these lenders typically have been less
willing to provide financing to healthcare service providers of the types
served by the Company because such lenders have not developed the healthcare
industry expertise needed to underwrite smaller healthcare service companies
or the specialized systems necessary for tracking and monitoring healthcare
receivables transactions, which are different from traditional accounts
receivable finance transactions. Several independent healthcare finance
companies that have raised funds through securitization programs also provide
financing to healthcare service providers. However, many of the financing
programs offered by such securitization companies are often rigid and
cumbersome for healthcare service providers to implement because, among other
things, securitization programs typically impose more stringent and inflexible
qualification requirements on borrowers and also impose concentration and
other limitations on the asset portfolio, as a result of rating agency and
other requirements.
Management believes that the growth in healthcare expenditures, the
consolidation of certain segments of the healthcare market, and the
reorganization of the healthcare delivery system (caused by both cost
containment pressures and the introduction of new products and services), will
have positive effects on the demand for the Company's services since they in
many cases will increase the working capital needs of the Company's clients.
Historically, these trends have affected different sub-markets of the
healthcare industry at different times. The Company expects these trends to
continue, thereby providing the Company with long-term growth opportunities.
35
<PAGE>
STRATEGY
The Company's goal is to be the leading finance company in its targeted sub-
markets of the healthcare services industry. The Company's strategy for growth
is based on the following key elements:
Target sub-markets within the healthcare industry that have favorable
characteristics for working capital financing, such as fragmented sub-markets
experiencing growth, consolidation or restructuring. At September 30, 1996,
58.7% of the Company's portfolio consisted of finance receivables from
businesses in the long-term care and home healthcare sub-markets, and
management believes that growth, consolidation and restructuring in these sub-
markets will continue to provide opportunities for the Company to expand. By
continuing to focus on these sub-markets and by expanding its financing of the
physician practice sub-market, the Company seeks to achieve attractive returns
while controlling overall credit risk. In the future different healthcare sub-
markets may experience increased demand for working capital, and the Company
intends to be in a position to move into these new markets as opportunities
arise.
Focus on healthcare service providers with financing needs of between
$100,000 and $10 million, a market that has been under served by commercial
banks, diversified finance companies, traditional asset-based lenders and
other competitors of the Company. Most commercial banks, diversified finance
companies and traditional asset-based lenders have typically focused on
providing financing to companies with borrowing needs in excess of $5 million.
While actively pursuing healthcare service providers with borrowing needs of
between $5 and $10 million, the Company primarily targets for its ABL Program
clients that desire to borrow less than $5 million, and for its AR Advance
Program clients that desire to borrow less than $1 million. The Company
believes that its target market is much larger, in terms of the number of
available financing opportunities, and is less competitive than the market
servicing larger borrowing needs, thereby producing growth opportunities at
attractive rates.
Introduce new financial products to leverage the Company's existing
expertise in healthcare finance and its origination, underwriting and
servicing capabilities within its target sub-markets. The Company employs
significant resources in the origination, underwriting and servicing of
clients in its target sub-markets. To further deepen its penetration of these
sub-markets, the Company intends to offer additional financing products such
as cash flow loans and loans secured by equipment, inventory, real estate or
stock. The Company intends to originate these products directly as an adjunct
to its existing ABL Program and AR Advance Program relationships, or as part
of cooperative arrangements with other lenders where the origination and
servicing relationship will remain with the Company. The Company will seek to
selectively introduce such products to existing and new clients beginning in
the first quarter of 1997, depending upon the needs of its clients, general
economic conditions, the Company's resources and other relevant factors. The
Company seeks to enhance its competitive position with respect to existing and
new clients by meeting their changing financing needs with a broader array of
financial products. These products will enable the Company to diversify its
revenue stream and enhance its growth opportunities.
Enhance the Company's credit risk management and improve servicing
capabilities through continued development of information management systems,
which can also be used to assist the Company's clients in managing the growth
of their businesses. The Company has developed proprietary information systems
that effectively monitor its assets and which also serve as valuable tools to
the Company's smaller less sophisticated clients in managing their working
capital resources and streamlining their billing and collection efforts. The
Company believes that this "servicing" capability provides a competitive
advantage by strengthening relationships with clients, providing early
identification of dilution of client accounts receivable, and increasing the
Company's understanding of its clients' operational needs.
FINANCING PROGRAMS
General. The Company provides asset-based financing to healthcare service
providers primarily through the AR Advance Program and ABL Program.
36
<PAGE>
Accounts Receivable Advance Program. Under the AR Advance Program, the
Company purchases, on a revolving basis, a specified batch of a client's
accounts receivable owed to such client from third-party payors. The purchase
price for each batch of receivables is the estimated net collectible value of
such batch less a purchase discount, comprised of funding and servicing fees.
The purchase discount can be either a one-time fee for each batch of
receivables purchased or a periodic fee based on the average outstanding
balance of a batch of receivables ranging from one to five percent of the net
collectible value of such batch. With each purchase of a batch of receivables,
the Company advances to the client 65%-85% (exclusive of the purchase
discount) of the purchase price of such batch. The Company assigns a
collection period to batches of receivables purchased which period generally
ranges from 60 to 120 days from the purchase date depending on the type of
receivables purchased. The excess of the purchase price for a batch of
receivables over the amount advanced with respect to such batch (a "client
holdback") is treated as a reserve and provides additional security to the
Company. The Company targets smaller healthcare service providers for its AR
Advance Program, for which commitments are generally less than $1 million and
terms are generally for one year with renewal options. The average annualized
yield on the AR Advance Program for the nine months ended September 30, 1996
was 19.7%. As of September 30, 1996, the Company was financing 75 clients in
its AR Advance Program.
Asset-Based Lending Program. Under the ABL Program, the Company offers
healthcare service providers revolving lines of credit secured by accounts
receivable. The terms of the Company's ABL Program permit a client to borrow,
on a revolving basis, 65%-85% (exclusive of interest and fees) of the
estimated net collectible value of the client's accounts receivable due from
third-party payors, which are pledged to the Company. The Company charges its
clients a base floating interest rate ranging from one to three percent (above
the then applicable prime rate) and a variety of other fees which may include
a loan management fee, a commitment fee, a set-up fee, and an unused line fee,
which fees collectively range from one to four percent. The Company targets
larger healthcare service providers for its ABL Program, for which the minimum
commitment amount is $1 million and the maximum commitment amount is $10
million. The Company's advances under its ABL Program are recourse to the
client and generally have a term of one to three years. The average annualized
yield on the ABL Program for the nine months ended September 30, 1996 was
15.3%. As of September 30, 1996, the Company was financing 37 clients in its
ABL Program, and the ABL Program constituted 42.1% of total finance
receivables. At September 30, 1996, 10 clients were in both the ABL Program
and AR Advance Program. The ABL Program has grown rapidly since inception,
and, based on the Company's analysis of the needs of its clients, the Company
expects that it will comprise an increasing percentage of the Company's total
assets within the next several years. ABL Program loans are characterized by
lower overall yields, but provide the Company with the opportunity to expand
the range of potential clients while reducing costs as a percentage of finance
receivables.
Term Loans. To a lesser degree, from time to time the Company also provides
its clients with fixed rate term loans secured by their receivables or other
assets, generally in conjunction with either an ABL Program or AR Advance
Program. At September 30, 1996, the Company had approximately $2.9 million in
term loans outstanding, issued under 14 separate term loans, which amount
outstanding represented less than 3.6% of the Company's assets. The average
annualized yield on such term loans for the nine months ended September 30,
1996 was 14.1%.
37
<PAGE>
The following table sets forth on a pro forma basis the Company's portfolio
activity at or for the periods indicated:
PORTFOLIO ACTIVITY
<TABLE>
<CAPTION>
AS OF AND FOR THE QUARTER ENDED
-----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1995 1995 1995 1995 1996 1996 1996
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Finance Receivables--AR
Advance Program........ $11,461,264 $14,603,602 $22,588,760 $33,446,520 $36,664,745 $39,989,071 $46,064,079
Finance Receivables--ABL
Program................ -- 1,581,478 5,073,933 6,270,629 20,783,045 25,924,458 33,502,829
Total Clients--AR
Advance Program........ 37 52 63 72 68 74 75
Number of New Clients--
AR Advance Program..... 9 18 21 16 14 12 2
Total Clients--ABL
Program................ -- 4 11 13 22 24 37
Number of New Clients--
ABL Program............ -- 4 7 2 9 2 13
Average Finance
Receivables Outstanding
Per Client:
AR Advance Program..... $ 309,764 $ 280,839 $ 358,552 $ 464,535 $ 539,187 $ 540,393 $ 614,188
ABL Program............ -- 395,370 461,267 482,356 864,684 1,080,186 905,482
</TABLE>
OPERATIONS
Marketing. The Company has developed low cost means of marketing its
services on a nationwide basis to selected healthcare sub-markets. The Company
primarily markets its services by telemarketing to prospective clients
identified by the Company, advertising in industry specific periodicals and
participating in industry trade shows. While the healthcare industry is large
and diverse, the Company has been able to identify prospective clients through
the retention of experienced marketing personnel with specific industry
expertise and through analyses of selective information on the healthcare
industry. At September 30, 1996, the Company employed a staff of eight sales
and marketing representatives. The Company maintains a satellite marketing
office in Boca Raton, Florida. Marketing personnel are compensated with a base
salary plus performance bonuses. The Company's clients also assist the
Company's marketing efforts by providing referrals and references. The Company
has and will continue to rely primarily on direct marketing efforts to
generate new clients for its services.
The Company also markets its services by developing referral relationships
with accountants, lawyers, venture capital firms, billing and collection
companies and investment banks (which typically are professionals focusing on
the healthcare industry and who have a pre-existing relationship with a
prospective client). The Company usually does not pay a fee for referrals from
professional firms. However, the Company has closed transactions with clients
through referrals from independent brokers that generally specialize in the
healthcare industry, which brokers have been paid a one-time brokerage
commission upon the closing of a transaction. While not a primary focus of its
marketing efforts, the Company expects to continue to generate referrals
through independent brokers.
Underwriting and Monitoring. The Company follows written underwriting and
credit policies, and its credit committee, consisting of senior officers of
the Company, must unanimously approve a transaction before the Company enters
into either an ABL Program, AR Advance Program or term loan with a prospective
client. The Company's underwriting policies require a due diligence review of
the prospective client, its principals, its financial condition and strategic
position, including a review of all available financial statements and other
financial information, legal documentation and operational matters, as well as
a detailed examination of its accounts receivable, accounts payable, billing
and collection systems and procedures and management information systems. Such
a review is conducted after the Company and the prospective client execute a
non-binding term sheet, which requires the prospective client to pay a due
diligence deposit to defray the Company's expenses. The Company's due
diligence review is supervised by the sponsoring member of the credit
committee, and is conducted by either an in-house field auditor or third-party
consulting underwriters that have been approved by the credit committee. Such
third-party underwriters are either certified public accountants or
consultants with healthcare industry experience. The Company independently
confirms certain matters with respect to the prospective client's business and
the collectibility of its accounts receivable and any other collateral
38
<PAGE>
by conducting public record searches, and, where appropriate, by contacting
third-party payors about the prospective client's receivables.
In order to determine its estimate of the net collectible value of a
prospective client's accounts receivable, the Company works with third-party
claim verifiers, who conduct extensive due diligence to evaluate the
receivables likely to be received within a defined collection period. Net
collectible value due diligence typically includes: a review of historical
collections by type of third-party payor; a review of remittance advice and
information relating to claim denials (including explanations of benefits); a
review of claims files and related medical records; and an analysis of billing
and collections staff and procedures. In addition, third-party payors are
contacted. Such third-party claim verifiers are also generally used on a
periodic basis to determine the net collectible value of a client's accounts
receivable. Claim verifiers include healthcare billing and collection
companies, healthcare accounting firms with expertise in reviewing cost
reports filed with Medicaid and Medicare, and specialized consultants with
expertise in certain sub-markets of the healthcare industry. Claim verifiers
are pre-approved by the Company's credit committee. When deemed necessary by
the Company for credit approval, the Company may obtain corporate or personal
guaranties or other collateral in connection with the closing of a
transaction.
The Company monitors the collections of client accounts receivable and its
finance receivables on a daily basis. Each client is assigned an account
manager, who receives draw and advance requests, posts collections and serves
as the primary contact between the Company and the client. All draw or advance
requests must be approved by the Company's senior credit officer or a member
of the Company's credit committee. At September 30, 1996, the Company employed
seven account managers in its Chevy Chase, Maryland headquarters. The
Company's proprietary information systems enable the Company to monitor each
client's account, as well as permit management to evaluate and mitigate
against risks on a portfolio basis. See "--Information Systems." In addition,
the Company conducts audits of the client's billing and collection procedures,
financial condition and operating strategies at least annually, and more
frequently if warranted, particularly with respect to the ABL Program, where
audits are usually conducted on a quarterly basis. Such audits are conducted
by in-house field auditors or by third-party consulting underwriters.
Documentation. The Company's documentation for the ABL Program and AR
Advance Program is described below.
ABL Program. Advances under the ABL Program are made pursuant to a loan and
security agreement ("ABL Agreement"), a note, and ancillary documents. ABL
Agreements generally have stated terms of one year, with automatic one-year
extensions, and provide for payment of liquidated damages to the Company in
the event of early termination by the client. Under the ABL Program, the
Company generally advances only 65% to 85% of the Company's estimate of the
net collectible value of client receivables from third-party payors. As
security for such advances, the Company is granted a first priority security
interest in all of the client's then-existing and future accounts receivable,
and frequently obtains a security interest in inventory, goods, general
intangibles, equipment, deposit accounts, cash, other assets and proceeds (the
"Collateral").
Clients who borrow under the ABL Program are subject to a number of negative
covenants set forth in the ABL Agreement, including covenants limiting
additional borrowings, restricting the client's ability to pledge assets,
prohibiting payment by the client of dividends or management fees or returning
capital to investors, and imposing minimum net worth and, if applicable,
minimum census requirements. In the event of a client default, all debt owing
under the ABL Agreement may be accelerated and the Company may exercise its
rights, including foreclosing on the Collateral.
AR Advance Program. Advances under the AR Advance Program are made pursuant
to a Receivables Purchase and Sale Agreement (the "AR Agreement") and are
structured as purchases of eligible accounts receivable designated from time
to time on a "batch" basis. AR Agreements provide for the Company's purchase
of eligible accounts receivable offered by the client from time to time to the
Company. AR Agreements generally have stated terms of one to three years, with
automatic one-year extensions. The client is required to
39
<PAGE>
sell to the Company a minimum amount of eligible accounts receivable each
month during the term of an AR Agreement; however, the Company's total
investment in eligible accounts receivable under an AR Agreement is limited to
a specified "commitment" amount. The Company may accept or reject in its
discretion any portion of eligible accounts receivable offered for sale by the
client to the Company. Although accounts receivable purchased by the Company
under the AR Advance Program are assigned to the Company pursuant to the AR
Agreement, the client retains its rights to receive payment and to make claims
with respect to Government Program-related receivables.
The purchase price for each batch of eligible accounts receivable under the
AR Advance Program is the estimated net collectible value of the such
receivables less a purchase discount, comprised of funding and servicing fees.
An amount equal to 65% to 85% of the purchase price is paid to the client; the
Company retains the balance of the purchase price as a reserve, held as
additional security for the client's obligations under the AR Agreement. The
reserve is released to the client (i) upon receipt by the Company of payments
relating to the receivables in an amount equal to the estimated net
collectible value of the receivables or (ii) upon expiration of the collection
period assigned to the respective batch of receivables, except that if the
Company has not received payments at least equal to the purchase price for the
receivables, then the Company may at its option either (x) offset any
shortfall against reserves relating to any other batch or from amounts due to
the client from the sale of other batches, or (y) require the client to
replace the uncollected receivables with substitute eligible accounts
receivable.
The AR Agreement also contemplates that the client may grant to the Company
a security interest in other assets of the client as may be mutually agreed.
In addition, pursuant to the AR Agreement, the client agrees to indemnify the
Company for all losses arising out of or relating to the AR Agreement.
Under the AR Agreement, the client covenants to notify payors of the sale of
accounts receivable to the Company and to assist the Company in collecting
payments on the purchased receivables and causing such payments to be remitted
to the Company. The client agrees to instruct all payors that payments are to
be made to such lockbox or other account as the Company may direct.
Collection Procedures. The Company's cash collection procedures vary by (i)
the type of program provided by the Company, either the AR Advance Program or
the ABL Program, and (ii) the type of accounts receivable due and owing to
clients from either insurance companies and health maintenance organizations
("Commercial Insurers"), Government Programs, or in certain limited
circumstances, other healthcare service providers.
Receivables due and owing from Government Programs are subject to certain
laws and regulations not applicable to commercial insurers. Except in certain
limited cases, Medicare and Medicaid laws and regulations provide that
payments for services rendered under Government Programs can only be made to
the healthcare service provider that has rendered the services. See "Risk
Factors--Inability to Collect Healthcare Receivables Directly From Medicare
and Medicaid."
With respect to the ABL Program, clients continue to bill and collect
accounts receivable in the ordinary course of business. Clients are required
to maintain a lockbox account and a related depository account. If Government
Program-related receivables are involved, the lockbox is maintained in the
name of the client and the depository account is maintained in the name of the
Company. If no such receivables are involved, both the lockbox and the
depository account are maintained in the name of the Company. In each case,
all of the client's collections are required to be directed to the lockbox,
and all items of payment received in the lockbox are deposited daily into the
depository account. The Company applies funds received in the depository
account on a daily basis to reduce outstanding indebtedness under the ABL
Agreement. Collections received directly by clients are required to be
immediately remitted to the lockbox.
With respect to the AR Advance Program, clients continue to bill and collect
accounts receivable in the ordinary course of business; provided, however,
that subject to certain limitations applicable to Government
40
<PAGE>
Program-related receivables, the Company retains the right to assume the
billing and collection process upon notice to the client. The Company
maintains a general lockbox in the Company's name into which payments with
respect to all receivables purchased from clients in the AR Advance Program,
other than Government Program-related receivables, are required to be
remitted. If a client in the AR Advance Program generates Government Program-
related receivables, the client is required to establish a lockbox in the
client's name into which payments on such receivables are to be directed.
Balances from all lockboxes maintained in connection with the AR Advance
Program are swept on a daily basis to the Company.
The following table sets forth the percentages of the Company's finance
receivables in the AR Advance Program and the ABL Program as of September 30,
1996 by type of third-party payor.
FINANCE RECEIVABLES BY THIRD-PARTY PAYOR TYPE
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------
AR
ADVANCE ABL TOTAL
PROGRAM PROGRAM RECEIVABLES
------- ------- -----------
<S> <C> <C> <C>
Third Party
Payors
- -----------
Commercial Insurers/Contract Claims................ 60.5% 31.8% 49.7%
Government Programs:
Medicare......................................... 18.0 32.6 23.5
Medicaid......................................... 12.3 35.6 21.1
---- ---- ----
Total Government Programs...................... 30.3 68.2 44.6
Other Healthcare Service Providers................. 9.2 -- 5.7
</TABLE>
CLIENTS
The Company's client base is diversified. As of September 30, 1996, the
Company was servicing clients located in 33 states across the country, in a
number of different sub-markets of the healthcare industry, with a
concentration in the long-term care and home healthcare industries.
PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
--------------------------------------------
NUMBER OF PERCENT OF FINANCE PERCENT OF
CLIENTS(1) CLIENTS RECEIVABLES PORTFOLIO
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Industry Group
- --------------
Home Healthcare .................. 36 35.2% $17,846,755 22.4%
Long-Term Care.................... 24 23.5 24,057,407 30.2
Physician Practice................ 12 11.8 2,595,417 3.3
Mental Health..................... 11 10.8 10,249,922 12.9
Rehabilitation.................... 7 6.8 4,815,458 6.1
Durable Medical Equipment......... 6 5.9 1,582,061 2.0
Diagnostic........................ 2 2.0 187,531 0.2
Hospital.......................... 2 2.0 13,621,889 17.1
Other............................. 2 2.0 4,610,468 5.8
--- ----- ----------- -----
Total........................... 102 100.0% $79,566,908 100.0%
=== ===== =========== =====
Program Breakdown
- -----------------
AR Advance Program................ 75 67.0% $46,064,079 57.9%
ABL Program....................... 37 33.0 33,502,829 42.1
--- ----- ----------- -----
Total........................... 112 100.0% $79,566,908 100.0%
=== ===== =========== =====
</TABLE>
- --------
(1) At September 30, 1996, ten clients were in both the AR Advance Program
and ABL Program.
41
<PAGE>
CAPITAL RESOURCES
Sources of capital available to the Company to fund advances under the ABL
Program and advances against accounts receivable under the AR Advance Program
have included the Bank Facility, partnership equity, stockholders' equity, and
upon the closing of the proposed CP Facility, will include the CP Facility.
Bank Facility. The Bank Facility is a revolving line of credit for up to $50
million. The interest rates payable by the Company under the Bank Facility
adjust, based on Fleet's prime rate; however, the Company has the option to
borrow any portion of the Bank Facility over $500,000 based on the 30-day,
three-month or six-month LIBOR plus 3.0%. The Bank Facility contains certain
financial covenants which must be maintained by the Company in order to obtain
funds. The expiration date for the Bank Facility is March 9, 1998, subject to
automatic renewal for one-year periods thereafter unless terminated by Fleet.
See "Risk Factors--Risk of Failure to Renew Funding Sources."
Proposed CP Facility. Under the terms of the proposed CP Facility, the
Company will be able to borrow up to $100 million. The Company will form a
bankruptcy remote, special purpose corporation to which the Company will
transfer loans and receivables which meet certain conditions and as to which
the Company will make certain representations and warranties. The special
purpose corporation will pledge the loans and receivables to a commercial
paper conduit sponsored by ING which will lend against such assets through the
issuance of commercial paper. The maturity date for the proposed CP Facility
will be five years from closing. However, after three years, the program may
be terminated by ING without penalty. See "Management's Discussion and
Analysis of Pro Forma Financial Condition and Pro Forma Results of
Operations--Liquidity and Capital Resources." See "Risk Factors--Risk of
Failure to Renew Funding Sources."
CREDIT LOSS POLICY AND EXPERIENCE
The Company regularly reviews its outstanding loan advances and purchased
accounts receivable to determine the adequacy of its allowance for credit
losses. To date, the Company has experienced no credit losses. The allowance
for credit losses on receivables is maintained at the amount estimated to be
sufficient to absorb future losses, net of recoveries, inherent in the finance
receivables. In evaluating the adequacy of the allowance, management of the
Company considers trends in past-due accounts, historical charge-off and
recovery rates, credit risks indicators, economic conditions, on-going credit
evaluations, overall portfolio size, average client balances, Excess
Collateral, and underwriting policies, among other items. As of September 30,
1996, the Company's general reserve was $1,035,992 or 1.3% of finance
receivables. To the extent that management deems specific advances to be
wholly or partially uncollectible, the Company establishes a specific loss
reserve equal to any such amount. The Company has not established any specific
reserves. Based on a review of the Company's portfolio, management believes
that the Company's reserve for losses on receivables is adequate at this time.
INFORMATION SYSTEMS
The Company owns a proprietary information system to monitor both the ABL
Program and the AR Advance Program which it refers to as the Receivables
Tracking System (the "RTS"). The RTS was developed by Creative Information
Systems, Inc., a stockholder of the Company. The RTS gives the Company the
ability to track and reconcile both asset-based loans under the ABL Program
and receivables that the Company advances against under the AR Advance
Program.
With respect to the ABL Program, the amount of any advances, collections and
adjustments are entered manually into the RTS by the Company's account
managers on a daily basis. With respect to the AR Advance Program, certain
client parameters are entered manually into the RTS, and more detailed
information on each batch of receivables is generally entered electronically
based on pre-established formats tailored to the client's software systems.
Upon the collection of funds advanced under the AR Advance Program,
information about such collections are entered into the RTS by the Company's
account managers who then apply the funds by directing the RTS to search its
data base to locate the receivable and batch that has received a payment.
The RTS generates daily, weekly and monthly reports summarizing the current
status of each batch of receivables in the AR Advance Program, and indicating
draws and collections, trend analysis, and interest and
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<PAGE>
fee charges for management's review. The RTS is also able to generate reports
for the Company's lenders with respect to pledged loans and batches of
receivables, along with concentrations in the Company's ABL Program and AR
Advance Program portfolios by client and third-party payor type.
Certain reports generated through the RTS, including cash application
detail, batch summary and trend analysis reports, can also be used to assist
the Company's clients in monitoring changes in their cash flow and managing
the growth of their businesses. These reports are provided to all of the
Company's clients on a weekly basis, and are generally relied upon as a
management tool more frequently by smaller clients in the AR Advance Program,
which tend to have less sophisticated management information systems.
The RTS utilizes a Compaq Proliant 1500 production server, with RAID 5 back-
up technology (three hard disk back-ups) and other redundant back-up systems,
on a Novell netware operating system. The Company also operates a second
server with Novell netware supporting certain accounting and administrative
functions.
COMPETITION
The Company encounters significant competition in its healthcare finance
business from numerous commercial banks, diversified finance companies, asset-
based lenders and specialty healthcare finance companies. Additionally,
healthcare service providers often seek alternative sources of financing from
a number of sources, including venture capital firms, small business
investment companies, suppliers and individuals. As a result, the Company
competes with a significant number of local and regional sources of financing
and several large national competitors. Many of these competitors have greater
financial and other resources than the Company and may have significantly
lower cost of funds. Competition can take many forms, including, among others,
the pricing of financing, transaction structuring (e.g., securitization vs.
portfolio lending), timeliness and responsiveness in processing a client's
financing application, and customer service.
GOVERNMENT REGULATION
The Company's healthcare finance business is subject to federal and state
regulation and supervision and is required to be licensed or registered in
various states. In addition, the Company is subject to applicable usury and
other similar laws in the jurisdictions where the Company operates. These laws
generally limit the amount of interest and other fees and charges that a
lender may contract for, charge or receive in connection with a loan.
Applicable local law typically establishes penalties for violations of these
laws in that jurisdiction. These penalties could include the forfeiture to the
lender of usurious interest contracted for, charged or received and, in some
cases, all principal as well as all interest and other charges that the lender
has charged or received.
In addition to the inability of the Company to directly collect receivables
under Government Programs and the right of payors under such programs to
offset against unrelated receivables, the Company's healthcare finance
business is indirectly affected by healthcare regulation to the extent that
any of its clients' failure to comply with such regulation affects such
clients' ability to collect receivables or repay loans made by the Company.
See "Risk Factors--Dilution of Receivables; Government Right of Offset." The
most significant healthcare regulations that could potentially affect the
Company are: (i) certificate of need regulation, which many states require
upon the provision of new health services, particularly for long-term care and
home healthcare companies; (ii) Medicare-Medicaid fraud and abuse statutes,
which prohibit, among other things, the offering, payment, solicitation, or
receipt of remuneration, directly or indirectly, as an inducement to refer
patients to facilities owned by physicians if such facilities receive
reimbursement from Medicare or Medicaid; and (iii) other prohibitions of
physician self-referral that have been promulgated by the states.
Certificate of Need Regulation. Many states regulate the provision of new
health care service or acquisition of healthcare equipment through Certificate
of Need or similar programs. The Company believes these requirements have had
a limited effect on its business, although there can be no assurance that
future changes in those laws will not adversely affect the Company.
Additionally, repeal of existing regulations of this type in jurisdictions
where the Company's customers have met the specific requirements could
adversely affect the
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Company since such customers could face increased competition. In addition,
there is no assurance that expansion of the Company's health care financing
business within the nursing home and home care industries will not be
increasingly affected by regulations of this type.
Medicare-Medicaid Fraud and Abuse Statutes. The Department of Health and
Human Services ("HHS") has increased its enforcement efforts under the
Medicare-Medicaid fraud and abuse statutes in cases where physicians own an
interest in a facility to which they refer their patients for treatment or
diagnosis. These statutes prohibit the offering, payment, solicitation or
receipt of remuneration, directly or indirectly, as an inducement to refer
patients for services reimbursable in whole or in part by the Medicare-
Medicaid programs. HHS has taken the position that distributions of profits
from corporations or partnerships to physician investors who refer patients to
the entity for a procedure which is reimbursable under Medicare or Medicaid
may be prohibited by the statute. Since the Company's clients often rely on
prompt payment from the Government Program to satisfy their obligations to the
Company, reduced or denied payments under the Government Programs could have
an adverse effect on the Company's business. See "Risk Factors--Reliance on
Reimbursements by Third-Party Payors."
Further Regulation of Physician Self-Referral. Additional regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements whereby physicians are compensated, directly or indirectly,
for referring patients to such healthcare facilities. In 1988, legislation
entitled the "Ethics in Patient Referrals Act" (H.R. 5198) was introduced
which would have prohibited Medicare payments for all patient services
performed by an entity which a patient's referring physician had an investment
interest. As enacted, the law prohibited only Medicare payments for patient
services performed by a clinical laboratory. The Comprehensive Physician
Ownership and Referral Act (H.R. 345), which was enacted by Congress in 1993
as part of the Deficit Reduction Package, is more comprehensive than H.R. 5198
and covers additional medical services including medical imaging radiation
therapy, physical rehabilitation and others. A variety of existing and pending
state laws currently limit the extent to which a physician may profit from
referring patients to a facility in which that physician has a proprietary or
ownership interest. Many states also have laws similar to the Medicare fraud
and abuse statute which are designed to prevent the receipt or payment of
consideration in connection with the referral of a patient. Finance
receivables resulting from a referral in violation of these laws could be
denied from payment which could adversely affect the Company. See "Risk
Factors--Reliance on Reimbursements by Third Party Payors."
LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation although it
is involved from time to time in routine litigation incidental to its
business.
EMPLOYEES
As of September 30, 1996, the Company employed 26 people on a full-time
basis. The Company believes that its relations with employees are good.
PROPERTY
The Company's headquarters occupy approximately 7,000 square feet at 2
Wisconsin Circle, Chevy Chase, Maryland. This space is provided under the
terms of a lease that expires in April, 2001, with a five-year renewal option.
The current cost is approximately $14,000 per month. In addition, the Company
leases a small satellite office in Boca Raton, Florida. The Company believes
that its current facilities are adequate for its existing needs and that
additional suitable space will be available as required.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as of
September 30, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John K. Delaney................ 33 Chairman of the Board, Chief Executive
Officer, President and Director
Ethan D. Leder................. 33 Vice-Chairman of the Board, Executive Vice
President and Director
Edward P. Nordberg, Jr......... 36 Senior Vice President--Legal and Financial
Affairs, Secretary and Director
Hilde M. Alter................. 55 Treasurer
Michael G. Gardullo............ 38 Vice President and Senior Credit Officer
Steven M. Curwin............... 38 Vice President and General Counsel
Jeffrey P. Hoffman............. 35 Vice President and Portfolio Manager
John F. Dealy (1)(2)(3)........ 57 Director
Geoffrey E. D. 40
Brooke (1)(2)(3).............. Director
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Nominated Director.
John K. Delaney serves as Chairman of the Board, Chief Executive Officer,
President and Director of the Company. Mr. Delaney co-founded the Company in
1993 and has served as Chairman of the Board, Chief Executive Officer and
President since the formation of the Company. From 1990 through 1992, Mr.
Delaney co-owned and operated American Home Therapies, Inc., a provider of
home care and home infusion therapy services, which was sold in 1992. Prior to
1990, Mr. Delaney was a practicing attorney with Shaw, Pittman, Potts &
Trowbridge in Washington, D.C. Mr. Delaney received his A.B. degree from
Columbia University in 1985 and his J.D. degree from the Georgetown University
Law Center in 1988.
Ethan D. Leder serves as Vice-Chairman of the Board, Executive Vice
President and Director of the Company. Mr. Leder co-founded the Company in
1993 and has served as Vice-Chairman of the Board and Executive Vice President
since the formation of the Company. From 1993 through September, 1996, Mr.
Leder also served as Treasurer to the Company. From 1990 through 1992, Mr.
Leder co-owned and operated American Home Therapies, Inc., a provider of home
care and home infusion therapy services, which was sold in 1992. Prior to
1990, Mr. Leder was engaged in the private practice of law in Baltimore,
Maryland and Washington, D.C. Mr. Leder received his B.A. degree from Johns
Hopkins University in 1984 and his J.D. degree from the Georgetown University
Law Center in 1987.
Edward P. Nordberg, Jr. serves as Senior Vice President-Legal and Financial
Affairs, Secretary and Director of the Company. Mr. Nordberg co-founded the
Company in 1993 and has served as Senior Vice President and Secretary of the
Company since the formation of the Company. From 1993 through April 1996, Mr.
Nordberg also served as General Counsel of the Company. Prior to 1993, Mr.
Nordberg was a practicing attorney with Williams & Connolly in Washington,
D.C. Mr. Nordberg received his B.A. degree from Washington College in 1982,
his M.B.A. degree from Loyola College in 1985, and his J.D. degree from the
Georgetown University Law Center in 1989.
Hilde M. Alter serves as Treasurer of the Company. Ms. Alter joined the
Company in September, 1996. From 1981 to joining the Company, Ms. Alter was a
partner with the accounting firm of Keller, Bruner & Co. in Bethesda,
Maryland. Ms. Alter is a certified public accountant. Ms. Alter received her
B.A. degree from American University in 1966.
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<PAGE>
Michael G. Gardullo serves as Vice President and Senior Credit Officer of
the Company. Mr. Gardullo joined the Company in February, 1996. From June,
1995 to joining the Company, Mr. Gardullo was a Senior Account
Executive/Manager at The FINOVA Group in King of Prussia, Pennsylvania. From
1993 to 1995, Mr. Gardullo was Vice President and Regional Credit Manager at
LaSalle Business Credit, an affiliate of ABN AMRO Bank, N.V., in Baltimore,
Maryland. From 1991 to 1993, Mr. Gardullo was Vice President and Manager,
respectively, at StanChart Business Credit in Baltimore, Maryland and London,
England. From 1982 through 1991, Mr. Gardullo held various management and
operational positions at several asset-based lending institutions. Mr.
Gardullo received his B.S. degree from Seton Hall University in 1981 and his
M.B.A. degree from Rutgers University in 1982.
Steven M. Curwin serves as Vice President and General Counsel of the
Company. Mr. Curwin joined the Company in August, 1996, and has served as a
full-time consultant to the Company since May, 1996. From September, 1994 to
joining the Company, Mr. Curwin was a practicing attorney with Shulman,
Rogers, Gandal, Pordy & Ecker, P.A. in Rockville, Maryland. From January, 1989
to August, 1994, Mr. Curwin was a practicing attorney with Dewey Ballantine in
Washington, D.C. Mr. Curwin received his B.A. degree from Franklin & Marshall
College in 1980 and his J.D. degree from the Boston University School of Law
in 1985.
Jeffrey P. Hoffman serves as Vice President and Portfolio Manager of the
Company. Mr. Hoffman joined the Company in September, 1996. From 1994 to
joining the Company, Mr. Hoffman was a Vice President-Senior Loan Officer and
from 1990 to 1993, Mr. Hoffman was a Vice President-Senior Underwriter at
Fleet Capital Corporation and its predecessor companies, Shawmut Capital
Corporation and Barclays Business Credit, in Glastonbury, Connecticut and New
York, New York. From 1988 through 1990, Mr. Hoffman was an assistant vice
president with Bankers Trust Company in New York, New York. From 1982 through
1988, Mr. Hoffman held various management positions with Bank of Boston, in
New York, New York. Mr. Hoffman received his B.A. degree from Adelphi
University in 1982 and his M.B.A. degree from Adelphi University in 1987.
John F. Dealy has agreed to become a Director of the Company upon completion
of the Offering. Mr. Dealy has been President of The Dealy Strategy Group, a
management consulting firm, since 1983. In addition, Mr. Dealy has been Senior
Counsel to Shaw, Pittman, Potts & Trowbridge in Washington, D.C. since 1982,
as well as a professor in the Georgetown University School of Business since
1982. Mr. Dealy is currently a director of the First Maryland Bancorp. From
1976 to 1982, Mr. Dealy was President of Fairchild Industries, Inc. Prior to
1976, Mr. Dealy held a number of management positions at Fairchild Industries,
Inc. Mr. Dealy received his B.S. degree from Fordham College in 1961 and his
L.L.B. degree from the New York University School of Law in 1964.
Geoffrey E. D. Brooke has agreed to become a Director of the Company upon
completion of the Offering. Dr. Brooke is Senior Member, Rothschild Bioscience
Unit, a division of Rothschild Asset Management Limited, and is responsible
for its venture capital operations in the Asian Pacific region. Mr. Brooke
resides in Australia. Prior to joining Rothschild, from June, 1992 to
September, 1996, Dr. Brooke was the President of MedVest, Inc., a healthcare
venture capital firm in Washington, D.C. which he co-founded with Johnson &
Johnson, Inc. Prior to co-founding MedVest, Inc., Dr. Brooke managed the life
sciences portfolio of a publicly traded group of Australian venture capital
funds. Dr. Brooke is licensed in clinical medicine by the Medical Board of
Victoria, Australia. Dr. Brooke earned his medical degree from the University
of Melbourne, Australia and a M.B.A. from IMD in Lausanne, Switzerland.
Pursuant to the Company's Amended and Restated Certificate of Incorporation,
the Board of Directors has been divided into three classes. Class I will
consist of Messrs. Nordberg and Brooke whose terms will expire at the annual
meeting of stockholders in 1997; Class II will consist of Mr. Leder whose term
will expire at the annual meeting of stockholders in 1998; and Class III will
consist of Messrs. Delaney and Dealy whose terms will expire at the annual
meeting of stockholders in 1999.
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<PAGE>
COMMITTEES OF THE BOARD OF DIRECTORS
Upon consummation of the Offering, the Board of Directors will establish a
Compensation Committee and an Audit Committee. The Compensation Committee,
which will be comprised of Messrs. Dealy and Brooke, will have the authority
to determine compensation for the Company's executive officers and to
administer the Incentive Plan. Messrs. Dealy and Brooke are "disinterested
persons" within the meaning of Rule 16b-3, as amended from time to time, under
the Exchange Act and "outside directors" within the meaning of Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code"). The Audit
Committee, which will be comprised of Messrs. Dealy and Brooke, will have the
authority to make recommendations concerning the engagement of independent
public accountants, review with the independent public accountants the plan
and results of the audit engagement, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls.
DIRECTOR COMPENSATION
Outside directors are paid $2,000 per meeting. Upon election to the Board of
Directors, outside directors are granted options to purchase 10,000 shares of
Common Stock at the then-prevailing fair market value, and are granted options
to purchase 5,000 shares of Common Stock at the then-prevailing fair market
value annually thereafter. See "--Director Plan" for a description of the
material terms of these options.
EXECUTIVE COMPENSATION
The following table presents certain information concerning compensation
earned for services rendered in all capacities to the Company for the year
ended December 31, 1995 by the Chief Executive Officer and each of the other
executive officers whose salary and bonus exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION(S) SALARY(1) BONUS COMPENSATION(2) COMPENSATION (2)
- ------------------------------ --------- ------- --------------- ----------------
<S> <C> <C> <C> <C>
John K. Delaney............. $196,538 $94,166 $-- $--
Chairman, Chief Executive
Officer and President
Ethan D. Leder.............. 196,539 94,166 -- --
Vice Chairman of the Board
and Executive Vice
President
Edward P. Nordberg, Jr...... 169,038 94,166 -- --
Senior Vice President and
Secretary
</TABLE>
- --------
(1) Includes $60,000, $60,000 and $30,000 paid to Messrs. Delaney, Leder and
Nordberg, respectively, pursuant to a certain Support Services Agreement
described in "Certain Transactions."
(2) Certain of the Company's executive officers receive benefits in addition
to salary and cash bonuses. The aggregate amount of such benefits,
however, do not exceed the lesser of $50,000 or 10% of the total annual
salary and bonus of such executive officer.
No options to purchase the Company's Common Stock were granted under the
Incentive Plan prior to September 13, 1996. See "--Stock Incentive Plan." An
option to purchase 38,381 shares of Common Stock was granted to a consultant
of the Company on November 1, 1995 outside of the Incentive Plan at an
exercise price of $2.61 per share.
EMPLOYMENT AND NON-COMPETITION AGREEMENTS
Mr. Delaney serves as Chairman of the Board, President and Chief Executive
Officer of the Company pursuant to the terms of an employment agreement which
continues in effect until January 1, 2001. On the first
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<PAGE>
anniversary of the date of the employment agreement, and on each anniversary
date thereafter, the employment period is extended for an additional one-year
period, unless the Company or Mr. Delaney notifies the other of its or his
intention not to extend the employment period. Under the terms of the
employment agreement, Mr. Delaney presently receives an annual salary of
$240,000. Commencing January 1, 1997, Mr. Delaney will receive an annual
salary which is not less than the greater of (i) $300,000 or (ii) any
subsequently established base salary, in either case increased annually by not
less than 50% of the annual increase in the Consumer Price Index for Urban
Wage Earners and Clerical Workers ("CPI-W"). Commencing on March 31, 1997, and
on the last day of each calendar quarter thereafter during the term of the
employment agreement, Mr. Delaney will be paid a quarterly bonus of $25,000,
provided that the Company has achieved profitability for such quarter. In the
event the Company has not achieved profitability in a quarter in any calendar
year but the Company's profits in any subsequent quarter of that year are
equal to the losses in all prior quarters of that year plus one dollar,
Mr. Delaney will be paid his then current quarterly bonus, plus any bonus
amount not paid for any prior unprofitable quarter of that year. In the event
the Company terminates Mr. Delaney's employment without cause, Mr. Delaney
will be entitled to receive his compensation and benefits for the remainder of
the term of the employment agreement. The first three years of such payments
of compensation and benefits is guaranteed and not subject to reduction or
offset. In the event Mr. Delaney's employment is terminated, he will be
restricted from competing with the Company for 18 months.
Mr. Leder serves as Vice-Chairman of the Board and Executive Vice President
of the Company pursuant to the terms of an employment agreement which
continues in effect until January 1, 2001. On the first anniversary of the
date of the employment agreement, and on each anniversary date thereafter, the
employment period is extended for an additional one-year period, unless the
Company or Mr. Leder notifies the other of its or his intention not to extend
the employment period. Under the terms of the employment agreement, Mr. Leder
presently receives an annual salary of $240,000. Commencing January 1, 1997,
Mr. Leder will receive an annual salary which is not less than the greater of
(i) $275,000 or (ii) any subsequently established base salary, in either case
increased annually by not less than 50% of the annual increase in the CPI-W.
Commencing on March 31, 1997, and on the last day of each calendar quarter
thereafter during the term of the employment agreement, Mr. Leder will be paid
a quarterly bonus of $25,000, provided that the Company has achieved
profitability for such quarter. In the event the Company has not achieved
profitability in a quarter in any calender year but the Company's profits in
any subsequent quarter of that year are equal to the losses in all prior
quarters of that year plus one dollar, Mr. Leder will be paid his then current
quarterly bonus, plus any bonus amount not paid for any prior unprofitable
quarter of that year. In the event the Company terminates Mr. Leder's
employment without cause, Mr. Leder will be entitled to receive his
compensation and benefits for the remainder of the term of the employment
agreement. The first three years of such payments of compensation and benefits
is guaranteed and not subject to reduction or offset. In the event Mr. Leder's
employment is terminated, he will be restricted from competing with the
Company for 18 months.
Mr. Nordberg serves as Senior Vice President--Legal and Financial Affairs
and Secretary of the Company pursuant to the terms of an employment agreement
which continues in effect until January 1, 2001. On the first anniversary of
the date of the employment agreement, and on each anniversary date thereafter,
the employment period is extended for an additional one-year period, unless
the Company or Mr. Nordberg notifies the other of its or his intention not to
extend the employment period. Under the terms of the employment agreement, Mr.
Nordberg presently receives an annual salary of $210,000. Commencing January
1, 1997, Mr. Nordberg will receive an annual salary which is not less than the
greater of (i) $250,000 or (ii) any subsequently established base salary, in
either case increased annually by not less than 50% of the annual increase in
the CPI-W. In the event the Company terminates Mr. Nordberg's employment
without cause, Mr. Nordberg will be entitled to receive his compensation and
benefits for the remainder of the term of the employment agreement. The first
three years of such payments of compensation and benefits is guaranteed and
not subject to reduction or offset. In the event Mr. Nordberg's employment is
terminated, he will be restricted from competing with the Company for 18
months.
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<PAGE>
STOCK INCENTIVE PLAN
The Company maintains the HealthCare Financial Partners, Inc. 1996 Stock
Incentive Plan (the "Incentive Plan"). The Board of Directors has reserved
750,000 shares of Common Stock for issuance pursuant to awards that may be
made under the Incentive Plan, subject to adjustment as provided therein.
Awards under the Incentive Plan are determined by a committee of no less
than two members of the Board of Directors (the "Committee"), the members of
which are selected by the Board of Directors. Upon consummation of the
Offering, Messrs. Dealy and Brooke will serve as members of the Committee. The
full membership of the Board of Directors currently serves as the Committee.
Key employees, officers, directors and consultants of the Company or an
affiliate are eligible for awards under the Incentive Plan. The Incentive Plan
permits the Committee to make awards of shares of Common Stock, awards of
derivative securities related to the value of the Common Stock and certain
cash awards to eligible persons. These discretionary awards may be made on an
individual basis, or pursuant to a program approved by the Committee for the
benefit of a group of eligible persons. The Incentive Plan permits the
Committee to make awards of a variety of equity-based incentives, including
(but not limited to) stock awards, options to purchase shares of Common Stock
and to sell shares of Common Stock back to the Company, stock appreciation
rights, so-called "cash-out" or "limited stock appreciation rights" (which the
Committee may make exercisable in the event of certain changes in control of
the Company or other events), phantom shares, performance incentive rights,
dividend equivalent rights and similar rights (together, "Stock Incentives").
The number of shares of Common Stock as to which a Stock Incentive is granted
and to whom any Stock Incentive is granted, and all other terms and conditions
of a Stock Incentive, is determined by the Committee, subject to the
provisions of the Incentive Plan. The terms of particular Stock Incentives may
provide that they terminate, among other reasons, upon the holder's
termination of employment or other status with respect to the Company and any
affiliate, upon a specified date, upon the holder's death or disability, or
upon the occurrence of a change in control of the Company. Stock Incentives
may also include exercise, conversion or settlement rights to a holder's
estate or personal representative in the event of the holder's death or
disability. At the Committee's discretion, Stock Incentives that are held by
an employee who suffers a termination of employment may be cancelled,
accelerated, paid or continued, subject to the terms of the applicable Stock
Incentive agreement and to the provisions of the Incentive Plan. Stock
Incentives generally are not transferable or assignable during a holder's
lifetime.
The maximum number of shares of Common Stock with respect to which options
or stock appreciation rights may be granted during any fiscal year of the
Company as to certain eligible recipients shall not exceed 100,000, to the
extent required by Section 162(m) of the Code for the grant to qualify as
qualified performance-based compensation.
The number of shares of Common Stock reserved for issuance in connection
with the grant or settlement of Stock Incentives or to which a Stock Incentive
is subject, as the case may be, and the exercise price of each option are
subject to adjustment in the event of any recapitalization of the Company or
similar event, effected without the receipt of consideration. In the event of
certain corporate reorganizations and similar events, Stock Incentives may be
substituted, cancelled, accelerated, cashed-out or otherwise adjusted by the
Committee, provided such adjustment is not inconsistent with the express terms
of the Incentive Plan or the applicable Stock Incentive agreement.
On September 13, 1996, the Company granted incentive stock options to
purchase an aggregate of 189,000 shares of Common Stock at an exercise price
of $11.05 per share. All current, full-time employees, other than Messrs.
Delaney, Leder and Nordberg, were granted these options. Each option is
subject to a maximum ten-year term, but becomes vested and exercisable only on
and after the seventh anniversary of the date of grant; however, if the
Offering is successfully consummated, these options will vest and become
exercisable in 25% increments on each anniversary of the grant date,
commencing on September 13, 1997. In addition, on September 13, 1996, each of
Messrs. Delaney, Leder and Nordberg was granted incentive stock options to
purchase 37,000 shares of Common Stock at an exercise price equal to the
initial public offering price of the Common Stock in the
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Offering. These options are contingent upon the consummation of the Offering
and will vest and become exercisable in 20% increments on each anniversary of
the grant date, commencing on September 13, 1997.
DIRECTOR PLAN
The Company maintains the HealthCare Financial Partners, Inc. 1996 Director
Incentive Plan (the "Director Plan"). The Board of Directors has reserved
100,000 shares of Common Stock for issuance pursuant to awards that may be
made under the Director Plan, subject to adjustment as provided therein.
Awards under the Director Plan are determined by the express terms of the
Director Plan. Rules, regulations and interpretations necessary for the
ongoing administration of the Director Plan will be made by the full
membership of the Board of Directors.
Only non-employee directors of the Company are eligible to participate in
the Director Plan. The Director Plan contemplates three types of non-statutory
option awards: (a) initial appointment awards that are granted upon a non-
employee director's initial appointment to the Board of Directors providing an
option to purchase 10,000 shares of Common Stock at a per share exercise price
equal to the then fair market value of a share of Common Stock; (b) annual
service awards that are granted to each non-employee director who continues to
serve as a non-employee director as of each annual meeting of the stockholders
of the Company following his or her initial appointment providing an option to
purchase 5,000 shares of Common Stock at a per share exercise price equal to
the then fair market value of a share of Common Stock; and (c) discount awards
under which each non-employee director also has the opportunity to elect
annually, subject to rules established by the Board of Directors, to forego
receipt of cash retainer and fees for scheduled meetings of the Board of
Directors and committees thereof that would otherwise be paid during each
fiscal year of the Company, and in lieu thereof that director be granted an
option to acquire shares of Common Stock with an exercise price per share
equal to 50% of the then fair market value of a share of Common Stock. The
number of shares of Common Stock subject to any option of this type granted
for a fiscal year is determined by taking the amount of cash foregone by the
director for the fiscal year in question and dividing that amount by the per
share option exercise price.
Each option granted pursuant to the Director Plan is immediately vested;
becomes exercisable 12 months following the date of grant; and expires upon
the earlier to occur of the tenth anniversary of the grant date or 18 months
following the director's termination of service upon the Board of Directors
for any reason. The options generally are not transferable or assignable
during a holder's lifetime.
The number of shares of Common Stock reserved for issuance upon exercise of
options granted under the Director Plan, the number of shares of Common Stock
subject to outstanding options and the exercise price of each option are
subject to adjustment in the event of any recapitalization of the Company or
similar event, effected without the receipt of consideration. The number of
shares of stock subject to options granted in connection with initial
appointments or as annual service awards are also subject to adjustment in
such events. In the event of certain corporate reorganizations and similar
events, the options may be adjusted or cashed-out, depending upon the nature
of the event.
As of the date of this Prospectus, no options had been granted under the
Director Plan, but each of Messrs. Dealy and Brooke will receive initial
appointment grants upon their election to the Board of Directors.
INDEMNIFICATION ARRANGEMENTS
The Company has entered into indemnification agreements pursuant to which it
has agreed to indemnify certain of its directors and officers against
judgments, claims, damages, losses and expenses incurred as a result of the
fact that any director or officer, in his capacity as such, is made or
threatened to be made a party to any suit or proceeding. Such persons will be
indemnified to the fullest extent now or hereafter permitted by the Delaware
General Corporation Law (the "DGCL"). The indemnification agreements also
provide for the advancement of certain expenses to such directors and officers
in connection with any such suit or proceeding. The Company's Amended and
Restated Certificate of Incorporation and Amended and Restated Bylaws provide
for the indemnification of the Company's directors and officers to the fullest
extent permitted by the DGCL. See "Description of Capital Stock--Special
Provisions of the Certificate of Incorporation and Bylaws."
50
<PAGE>
CERTAIN TRANSACTIONS
Effective as of September 1, 1996, Funding acquired all of the assets of DEL
consisting principally of client receivables, for $486,630 in cash, which
amount approximated the fair value of DEL's net assets, and assumed all of
DEL's liabilities. DEL subsequently distributed the remaining proceeds from
the sale pro-rata (i) to John K. Delaney, Ethan D. Leder and Edward P.
Nordberg, Jr., the sole limited partners of DEL and each a director and
officer of the Company, in the amounts of $197,044, $197,044 and $98,522,
respectively, in respect of their limited partnership interests, and (ii)
$1,188 to the Company in respect of its general partnership interest. DEL was
subsequently dissolved.
The amount paid by Funding for the assets of DEL was equal to the book value
or net investment of DEL in the assets transferred, consisting principally of
client receivables. The objective was for DEL to recognize no gain or loss on
the transaction. The purpose of the transaction was to consolidate the assets
of DEL and Funding in anticipation of the Offering and the acquisition by the
Company of the limited partnership interests of Funding described below. The
cost to the Company and each of Messrs. Delaney, Leder and Nordberg for their
interests in DEL were $7,869, $427,735, $426,897 and $81,400, respectively,
and the Company and such persons each had received, prior to the sale,
distributions from DEL in respect of their interests in the amounts of $6,681,
$230,661, $229,823, and $82,878, respectively.
Effective upon completion of the Offering, the Company will acquire from HP
Investors, the sole limited partner of Funding, all of the limited partnership
interests in Funding. The purchase price for such limited partnership
interests will be $21.8 million which will be paid from the proceeds of the
Offering. Such purchase price approximates both the fair value and book value
of the net assets. See "Use of Proceeds." HP Investors paid $24.8 million in
cash for its limited partnership interests and, through September 30, 1996 had
received income distributions in respect of its limited partnership interests
aggregating $5.4 million and limited partner capital distributions of $2.5
million. HP Investors will also receive its limited partner share of
undistributed profits of Funding through the date of transfer of its limited
partnership interest to the Company.
Effective upon the acquisition of the limited partnership interests of
Funding, the Company will cause Funding to be liquidated and dissolved and all
of its net assets at the date of transfer, consisting principally of advances
made under the ABL Program and the ABL Advance Program ($79.6 million at
September 30, 1996), will be transferred to the Company. The principal
purposes of the Company's acquisition of Funding are (i) to consolidate
ownership of such assets and related business operations in the Company, a
single entity with greater access to the public and private capital markets,
(ii) to simplify the corporate and management structures of the Company by
eliminating its general partnership interest in Funding and the concomitant
management responsibilities of the Company as a general partner of Funding,
and (iii) to allow the Company to realize the return on the assets transferred
to the Company which otherwise would have been paid to HP Investors as the
limited partner of Funding prior to the transfer of the ownership of such
assets to the Company.
In connection with the liquidation of Funding, Farallon and RR Partners will
exercise warrants for the purchase of 379,998 shares of Common Stock, which
warrants were acquired by Farallon and a predecessor of RR Partners on
December 28, 1994 for an aggregate payment of $500, and subsequently assigned
to HP Investors. HP Investors transferred the warrants to Farallon and RR
Partners in contemplation of the liquidation of Funding. No additional
consideration will be paid in connection with the exercise of such warrants.
There is no affiliation between the Company and Farallon and RR Partners other
than the ownership of the warrants and 169,495 shares of Common Stock. The
warrants were issued to provide equity ownership in the Company to the warrant
holders and as a means of further strengthening the business relationship
between the parties.
Pursuant to a Software License Agreement (the "Software License Agreement"),
dated as of August 31, 1993, by and between Ampro Financial Corporation
("Ampro") and the Company, Ampro granted to the Company a non-exclusive
perpetual license to use the RTS. In October, 1995, Ampro sold and assigned
its rights and obligations in the Software License Agreement to Creative
Information Systems, LLC ("Creative"), a stockholder of the Company. Ampro is
controlled by the spouse of the principal member of Creative. See "Principal
Stockholders." For the fiscal year ended December 31, 1995, the Company paid
an aggregate of
51
<PAGE>
$100,000 in license fees pursuant to the Software License Agreement, or $8,333
per month. From January 1, 1996 through August 31, 1996, the Company has
continued to license the RTS from Creative for $8,333 per month. Pursuant to a
Software Purchase and License Agreement, dated as of September 1, 1996, by and
between the Company and Creative, the Company acquired the RTS from Creative
for $25,000 in cash, payable in three equal consecutive monthly installments,
and granted back to Creative a non-exclusive perpetual license to use the RTS.
Pursuant to a Support Services Agreement (the "Support Services Agreement"),
dated as of October 1, 1994, by and between the Company and The Leddel Group,
a general partnership ("Leddel") (the sole partners of which are Messrs.
Delaney, Leder and Nordberg), Leddel: (i) leased to the Company approximately
2,500 square feet of office space in Washington, D.C. for $7,500 per month;
(ii) rented to the Company the use of certain office equipment for $2,500 per
month; and (iii) provided to the Company certain professional services,
including legal and consulting services, for a fee of $2,500 per month. For
the fiscal year ended December 31, 1995, the Company paid an aggregate of
$150,000 to Leddel. Although not the result of arms-length negotiation, the
amounts paid to Leddel represented the parties' best estimates of market rates
for such office space, equipment and services. The Support Services Agreement
expired on December 31, 1995.
On September 15, 1996, the Company entered into an Advisory Services
Agreement with The Dealy Strategy Group ("DSG"), a consulting firm controlled
by John F. Dealy, who will become a director of the Company upon completion of
the Offering, for DSG to provide business advisory services to the Company for
the period from January 1, 1997 through December 31, 1998. In consideration of
such services, the Company will pay DSG $50,000 per year, payable quarterly,
and granted DSG options to purchase 15,000 shares of Common Stock at a price
of $11.05 per share. Such options vest in increments of 1,875 shares at the
end of each quarter while DSG is furnishing business advisory services,
commencing with the quarter ending March 31, 1997, and are exercisable for a
period of ten years from the date of grant.
Although not dissatisfied with the performance of McGladrey & Pullen, LLP,
the Company's Board of Directors determined that, in contemplation of becoming
a publicly-owned company, the Company would be better served by the engagement
of a big-six accounting firm. Accordingly, the Company replaced McGladrey &
Pullen, LLP, with Ernst & Young, LLP, as the Company's independent accountants
for the year beginning January 1, 1996. The reports of McGladrey & Pullen,
LLP, for the years ended December 31, 1995 and 1994 did not contain an adverse
opinion or disclaimer of opinion and were not qualified as to uncertainty,
audit scope or accounting principles. During such years there was no
disagreement with McGladrey & Pullen, LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. During the Company's two most recent fiscal years and during the
current fiscal year prior to its engagement, neither the Company nor anyone
acting on its behalf consulted Ernst & Young, LLP, regarding either the
application of accounting principles to a specified transaction (either
completed or proposed) or the type of audit opinion that might be rendered on
the Company's financial statements.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of September 30, 1996,
and as adjusted to reflect the Reorganization and completion of the Offering,
by: (i) each person or entity known by the Company to own beneficially five
percent or more of the outstanding Common Stock, (ii) each member and proposed
member of the Board of Directors of the Company, (iii) each executive officer
of the Company, and (iv) all executive officers of the Company and all members
and proposed members of the Board of Directors as a group. Unless otherwise
indicated, the address of the stockholders as beneficially owing more than
five percent of the Common Stock listed below is that of the Company's
principal executive offices. Except as indicated in the footnotes to the
table, the persons and entities named in the table have sole voting and
investment power with respect to all shares beneficially owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING THE OFFERING
NAME OF --------------------------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ----------- --------------------- ----------
<S> <C> <C> <C> <C>
John K. Delaney.................... 731,113 19.24% 731,113 12.39%
Ethan D. Leder..................... 731,113 19.24 731,113 12.39
Edward P. Nordberg, Jr............. 731,113 19.24 731,113 12.39
John F. Dealy(1)................... -- -- -- --
Geoffrey E. D. Brooke(2)........... -- -- -- --
JMR Capital Partners, Inc.(3)...... 506,319 13.32 506,319 8.58
Creative Information Systems,
LLC(4)............................ 506,319 13.32 506,319 8.58
Farallon Capital Partners,
L.P.(5)........................... 466,237 12.27 466,237 7.90
R.R. Partners, L.P.(5)............. 83,256 2.19 83,256 1.41
All directors and executive
officers as a group
(9 persons)(6).................... 2,193,339 57.72 2,193,339 37.18
</TABLE>
- --------
(1) The business address of Mr. Dealy is 2300 N Street, N.W., Washington, D.C.
20037.
(2) The business address of Mr. Brooke is 1568 Springhill Road, McLean,
Virginia 22102.
(3) The business address of JMR Capital Partners, Inc. is 3201 Broad Branch
Terrace, N.W., Washington D.C. 20008.
(4) The business address of Creative Information Systems, LLC is 5151 Beltline
Road, Suite 1201, Dallas, Texas 75240.
(5) The business address of each of these entities is One Maritime Plaza,
Suite 1325, San Francisco, California 94111.
(6) For information concerning options granted to the directors and executive
officers of the Company, see "--Stock Incentive Plan" and "--Director
Plan."
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of blank check
preferred stock, par value $.01 per share. As of the date of this Prospectus,
there are 3,799,991 shares of Common Stock outstanding and held of record by
13 stockholders and no shares of preferred stock are issued and outstanding.
COMMON STOCK
General
Holders of shares of Common Stock are entitled to share ratably in such
dividends as may be declared by the Board of Directors and paid by the Company
out of funds legally available therefor, subject to prior rights of
outstanding shares of any preferred stock and certain restrictions under
agreements governing the Company's indebtedness. See "Dividend Policy,"
"Management's Discussion and Analysis of Pro Forma Financial Condition and Pro
Forma Results of Operations--Liquidity and Capital Resources," and "Business--
Capital Resources." In the event of any dissolution, liquidation or winding up
of the Company, holders of shares of Common Stock are entitled to share
ratably in assets remaining after payment of all liabilities and liquidation
preferences, if any.
Except as otherwise required by law, the holders of Common Stock are
entitled to one vote per share on all matters voted on by stockholders,
including the election of directors. The holders of a majority of Common Stock
represented at a meeting of stockholders can elect all of the directors to be
elected at such meeting.
Holders of shares of Common Stock have no preemptive, cumulative voting,
subscription, redemption or conversion rights. The currently outstanding
shares of Common Stock are fully paid and nonassessable, and the shares of
Common Stock to be outstanding upon completion of the Offering will be fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to the rights of any series of preferred stock which
the Company may issue in the future.
Transfer Agent and Registrar
Upon consummation of the Offering, the registrar and transfer agent for the
Common Stock will be First Union National Bank of North Carolina.
PREFERRED STOCK
The Board of Directors may, without further action by the Company's
stockholders, from time to time, authorize the issuance of shares of preferred
stock in one or more classes or series and may, at the time of issuance,
determine the powers, rights, preferences, qualifications and limitations of
any such class or series. Satisfaction of any dividend preferences on
outstanding shares of preferred stock would reduce the amount of funds
available for the payment of dividends on Common Stock. Also, holders of
preferred stock would be entitled to receive a preference payment in the event
of any liquidation, dissolution or winding up of the Company before any
payment is made to the holders of Common Stock. Under certain circumstances,
the issuance of such preferred stock may render more difficult or tend to
discourage a merger, tender offer or proxy contest, the assumption of control
by a holder of a large block of the Company's securities or the removal of
incumbent directors.
SPECIAL PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS.
The Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and the Amended and Restated Bylaws ("Bylaws") of the Company
include certain provisions that could have anti-takeover effects. The
provisions are intended to enhance the likelihood of continuity and stability
in the composition of, and in the policies formulated by, the Board of
Directors. These provisions also are intended to help ensure that the Board of
Directors, if confronted by an unsolicited proposal from a third party that
has
54
<PAGE>
acquired a block of stock of the Company, will have sufficient time to review
the proposal, to develop appropriate alternatives to the proposal, and to act
in what the Board of Directors believes to be the best interests of the
Company and its stockholders. The foregoing provisions of the Certificate of
Incorporation may not be amended or repealed by the stockholders of the
Company except upon the vote, at a regular or special stockholders' meeting,
of the holders of at least a majority of the outstanding shares of each class
of the Company's capital stock then entitled to vote thereon.
The following is a summary of the provisions of the Certificate of
Incorporation and Bylaws and is qualified in its entirety by reference to such
documents in the respective forms filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
Amendment of Bylaw Provisions
The Certificate of Incorporation provides that Bylaw provisions may be
adopted, altered, amended or repealed only by the affirmative vote of (i) at
least a majority of the members of the Board of Directors who are elected by
the holders of Common Stock or (ii) at least a majority of the outstanding
shares of each class of the Company's capital stock then entitled to vote
thereon.
Classified Board of Directors
The Certificate of Incorporation provides for a Board of Directors divided
into three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
stockholders to change the composition of the Board of Directors in a short
period of time. At least two annual meetings of stockholders, instead of one,
will generally be required to effect a change in a majority of the Board of
Directors. See "Management."
Number of Directors; Filling Vacancies; Removal
The Certificate of Incorporation provides that the Board of Directors will
consist of at least three and no more than ten members (plus such number of
directors as may be elected from time to time pursuant to the terms of any
series of preferred stock that may be issued and outstanding from time to
time). The number of directors constituting the entire Board of Directors may
be changed only by an amendment to the applicable provision of the Certificate
of Incorporation (which will require the vote of the holders of at least a
majority of each class of the Company's outstanding voting securities then
entitled to vote thereon). The Bylaws provide that the Board of Directors,
acting by a majority vote of the directors then in office, may fill any newly
created directorships or vacancies on the Board of Directors.
Under Delaware law, in the case of a corporation having a classified board,
stockholders may remove a director only for cause. This provision, when
coupled with the provision of the Bylaws authorizing the Board of Directors to
fill vacant directorships, will preclude a stockholder from removing incumbent
directors without cause and simultaneously gaining control of the Board of
Directors by filling the vacancies created by such removal with its own
nominees.
Special Meetings of Stockholders
The Bylaws and Certificate of Incorporation provide that special meetings of
stockholders may be called by a majority of the Board of Directors, the
Chairman of the Board or any holder or holders of at least 40% of any class of
the Company's outstanding capital stock then entitled to vote at the meeting.
Advance Notice Requirements for Stockholder Proposals and Director Nominees
The Bylaws establish an advance notice procedure with regard to business
proposed to be submitted by a stockholder at any annual or special meeting of
stockholders of the Company, including the nomination of candidates for
election as directors. The procedure provides that a notice of proposed
stockholder business must
55
<PAGE>
be timely given in writing to the Secretary of the Company prior to the
meeting. In all cases, to be timely, notice relating to an annual meeting must
be received at the principal executive office of the Company not less than 120
days before the first anniversary of the prior year's annual meeting.
Notice to the Company from a stockholder who proposes to nominate a person
at a meeting for election as a director must contain all information relating
to such person that is required to be disclosed in solicitations of proxies
for election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, including such
person's written consent to being named in the proxy statement as a nominee
and to serving as a director if elected.
The chairman of a meeting of stockholders may determine that a person is not
nominated in accordance with the nomination procedure, in which case such
person's nomination will be disregarded. If the chairman of a meeting of
stockholders determines that other business has not been properly brought
before such meeting in accordance with the Bylaw procedures, such business
will not be conducted at the meeting. Nothing in the nomination procedure or
the business will preclude discussion by any stockholder of any nomination or
business properly made or brought before the annual or any other meeting in
accordance with the foregoing procedures.
Limitations on Directors' Liability
The Company's Certificate of Incorporation provides that, to the fullest
extent permitted by Delaware law, no director shall be liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty as a
director. By virtue of these provisions, a director of the Company is not
personally liable for monetary damages for a breach of such director's
fiduciary duty except for liability for (i) breach of the duty of loyalty to
the Company or to its stockholders, (ii) acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
dividends or stock repurchases or redemptions that are unlawful under the DGCL
and (iv) any transaction from which such director receives an improper
personal benefit. In addition, the Certificate of Incorporation provides that
if the DGCL is amended to authorize the further elimination or limitation of
the liability of a director, then the liability of the directors will be
eliminated or limited to the fullest extent permitted by the DGCL, as amended.
Delaware Statute
The Company has elected to be subject to Section 203 of the DGCL ("Section
203"). Under Section 203, certain transactions and business combinations
between a corporation and an "interested stockholder" owning 15% or more of
the corporation's outstanding voting stock are restricted for a period of
three years from the date the stockholder becomes an interested stockholder.
Generally, Section 203 prohibits significant business transactions such as a
merger with, disposition of assets to, or receipt of disproportionate
financial benefits by, the interested stockholder, or any other transaction
that would increase the interested stockholder's proportionate ownership of
any class or series of the Company's capital stock unless: (i) the transaction
resulting in a person's becoming an interested stockholder, or the business
combination, has been approved by the Board of Directors before the person
becomes an interested stockholder, (ii) the interested stockholder acquires
85% or more of the outstanding voting stock of the Company in the same
transaction that makes it an interested stockholder, or (iii) on or after the
date the person becomes an interested stockholder, the business combination is
approved by the Board of Directors or by the holders of at least two-thirds of
the Company's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, 5,899,991 shares of Common Stock will be
outstanding. Of these shares, 2,100,000 shares sold in the Offering will be
freely tradeable without restriction or further registration under the
Securities Act, except that any shares purchased by "affiliates" of the
Company, as that term is defined in Rule 144 ("Affiliates"), may generally
only be sold in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
All of the remaining 3,799,991 shares of Common Stock held by existing
stockholders are deemed "Restricted Shares" under Rule 144. Subject to the 180
day lock-up agreement and the Rule 144 Sale Agreement, the Restricted Shares
will be eligible for sales pursuant to Rule 144 in the public market following
the consummation of the Offering.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially
owned Restricted Shares for at least two years is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater
of 1% of the then outstanding shares of Common Stock (approximately 58,999
shares immediately after the Offering), or the average weekly trading volume
in the Common Stock in the Nasdaq National Market during the four calendar
weeks preceding the date on which notice of such sale is filed under Rule 144.
In addition, under Rule 144(k), a person who is not an Affiliate and has not
been an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least three years may resell such
shares without compliance with the foregoing requirements. In calculating the
two and three year holding periods described above, a holder of Restricted
Shares can include the holding periods of a prior owner who was not an
Affiliate.
However, the Company, all of its officers and directors and certain other
stockholders, who in the aggregate own 3,755,470 shares of Common Stock, have
agreed to sign the 180 day lock-up agreement. Further, five of the existing
stockholders of the Company, who in the aggregate own 3,205,977 shares of
Common Stock, have agreed that, without the prior written consent of the
Company, they will not effect any sales of Common Stock, for a period of 18
months after expiration of the 180 day lock-up agreement, in excess of the
volume limitations provided in Rule 144.
OPTIONS
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the date of this Prospectus, subject
only to the manner of sale provisions of Rule 144, and by Affiliates under
Rule 144 without compliance with its two-year minimum holding period, subject
to certain limitations. The Company intends to file one or more registration
statements on Form S-8 under the Securities Act to register all of the 850,000
shares of Common Stock subject to outstanding stock options and Common Stock
issuable pursuant to the Company's stock option plans which do not qualify for
an exemption under Rule 701 from the registration requirements of the
Securities Act. The Company expects to file these registration statements as
soon as practicable after the closing of the Offering, and such registration
statements are expected to become effective upon filing. Shares covered by
these registration statements will thereupon be eligible for sale in the
public markets, subject to the lock-up agreements described above, if
applicable.
REGISTRATION RIGHTS
Commencing six months after the completion of the Offering, holders of a
total of 3,755,470 shares of Common Stock will be entitled to certain rights
with respect to registration of such shares under the Securities Act.
Registration of such shares under the Securities Act would result in the
shares becoming freely tradeable without restriction under the Securities Act
(except for shares purchased by Affiliates of the Company) immediately upon
the effectiveness of such registration, subject to the 180 day lock-up
agreement and the Rule 144 Sale Agreement referenced above.
There has been no public market for the Common Stock of the Company and no
prediction can be made as to the effect, if any, that market sales of shares
or the availability of such shares for sale will have on the market price of
the Common Stock. Sales of substantial amounts of Common Stock in the public
market could adversely affect the market price of the Common Stock.
57
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities and
Stifel, Nicolaus & Company, Incorporated (the "Representatives"), have
severally agreed, subject to the terms and conditions contained in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discount set forth on the cover
page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain conditions precedent,
and that the Underwriters are committed to purchase all of such shares if any
are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Montgomery Securities..............................................
Stifel, Nicolaus & Company, Incorporated...........................
---------
Total............................................................ 2,100,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to initially offer the Common Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $ per share, and the Underwriters may
allow, and such dealers may reallow, a concession of not more than $ per
share to certain other dealers. The concession to selected dealers and the
reallowances to other dealers may be changed by the Representatives and, after
the public offering, the offering price and other selling terms may be changed
by the Representatives. The Common Stock is offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject an order in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 315,000 additional shares of Common Stock to cover over-allotments,
if any, at the offering price less the underwriting discount set forth on the
cover page of this Prospectus. To the extent that the Underwriters exercise
this option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the table above. The Underwriters may purchase such
shares only to cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or contribute to payments the Underwriters may be required
to make in respect thereof.
All of the Company's officers and directors and certain stockholders, who in
the aggregate hold 3,755,470 shares of Common Stock, have agreed that they
will not, without the prior written consent of the Representatives, directly
or indirectly offer to sell, sell or otherwise dispose of any shares of Common
Stock of the Company owned by them for a period of 180 days after the date of
this Prospectus. In addition, the Company has agreed that for a period of 180
days after the date of this Prospectus, it will not, without the prior written
consent of the Representatives, directly or indirectly offer to sell, sell,
issue, distribute or otherwise dispose of any equity securities or securities
convertible into or exercisable for equity securities or any options, rights
or warrants with respect to any equity securities, except that the Company
may, without such consent, grant options and securities pursuant to employee
benefit plans described in this Prospectus and issue Common Stock upon the
exercise of outstanding options.
58
<PAGE>
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price will be determined by
negotiations between management and the Underwriters. Among the factors to be
considered in such negotiation are the history of, and the prospects for, the
Company and the industry in which it competes, an assessment of management,
the Company's past and present operations, its past and present earnings and
the trend of such earnings, the prospects for future earnings of the Company,
the present state of the Company's development, the general condition of the
securities market at the time of the Offering and the market price of publicly
traded common stock of comparable companies in recent periods.
The Company has been advised by the Representatives that each of the
Representatives currently intends to make a market in the Common Stock.
However, the Representatives are not obligated to do so and may discontinue
any market making activities at any time without notice. Accordingly, no
assurance can be given with respect to the development or liquidity of any
trading market for the Common Stock.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Powell, Goldstein, Frazer & Murphy, Atlanta, Georgia. Certain legal
matters in connection with the Offering will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The combined financial statements of HealthCare Financial Partners, Inc. and
HealthPartners DEL, L.P. and the financial statements of HealthPartners
Funding, L.P., as of June 30, 1996 and for the six month period ended June 30,
1996 appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their reports
thereon appearing elsewhere herein, and are included in reliance upon such
reports given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of HealthCare Financial Partners, Inc. and
HealthPartners DEL, L.P. as of December 31, 1995 and 1994 and for the years
ended December 31, 1995 and 1994 and for the period from April 22, 1993 to
December 31, 1993 and the financial statements of HealthPartners Funding, L.P.
as of December 31, 1995 and 1994 and for the year ended December 31, 1995 and
for the period September 12, 1994 to December 31, 1994 included in this
Prospectus and Registration Statement have been audited by McGladrey & Pullen,
LLP, independent auditors, as indicated in their reports with respect thereto,
and are included herein in reliance upon the authority of said firm as experts
in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement," which term shall include all amendments, exhibits, annexes and
schedules thereto) under the Securities Act with respect to the shares of
Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement. Certain items are omitted
in accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement, including exhibits,
schedules and reports filed as part thereof. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Judiciary
Plaza, Room 1024, Washington, D.C. 20549 and at the Commission's Regional
Offices located at the Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material may be obtained at prescribed
rates by mail from the public reference section of the Commission at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. The Commission
maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with
Commission, including the Company. The address is http://www.sec.gov.
59
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
Report of Independent Auditors, Ernst & Young LLP........................ F-3
Report of Independent Auditors, McGladrey & Pullen, LLP.................. F-4
Combined Balance Sheets as of December 31, 1994 and 1995, and June 30,
1996.................................................................... F-5
Combined Statements of Operations for the period from April 22, 1993
(Date of Inception) through December 31, 1993, the years ended December
31, 1994 and 1995 and for the six month period ended June 30, 1996 and
for the six month period ended June 30, 1995 (unaudited)................ F-6
Combined Statements of Equity for the period from April 22, 1993 (Date of
Inception) through December 31, 1993, the years ended December 31, 1994
and 1995 and for the six month period ended June 30, 1996............... F-7
Combined Statements of Cash Flows for the period from April 22, 1993
(Date of Inception) through December 31, 1993, the years ended December
31, 1994 and 1995 and for the six month period ended June 30, 1996 and
for the six month period ended June 30, 1995 (unaudited)................ F-8
Notes to Financial Statements............................................ F-9
HEALTHPARTNERS FUNDING, L.P.
Report of Independent Auditors, Ernst & Young LLP........................ F-14
Report of Independent Auditors, McGladrey & Pullen, LLP.................. F-15
Balance Sheets as of December 31, 1994 and 1995, and June 30, 1996....... F-16
Statements of Operations for the period from September 12, 1994 (Date of
Inception) through December 31, 1994, the year ended December 31, 1995
and for the six month period ended
June 30, 1996 and for the six month period ended June 30, 1995
(unaudited)............................................................. F-17
Statements of Partners' Capital for the period from September 12, 1994
(Date of Inception) through December 31, 1994, the year ended December
31, 1995 and for the six month period ended
June 30, 1996 .......................................................... F-18
Statements of Cash Flows for the period from September 12, 1994 (Date of
Inception) through December 31, 1994, the year ended December 31, 1995
and for the six month period ended
June 30, 1996 and for the six month period ended June 30, 1995
(unaudited)............................................................. F-19
Notes to Financial Statements............................................ F-20
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
Unaudited Combined Balance Sheet as of September 30, 1996................ F-25
Unaudited Combined Statements of Operations for the nine month period
ended September 30, 1995 and 1996....................................... F-26
Combined Statements of Equity for the period from April 22, 1993 (Date of
Inception) through December 31, 1993, the years ended December 31, 1994
and 1995 and for the nine month period ended September 30, 1996
(unaudited)............................................................. F-27
Unaudited Combined Statements of Cash Flows for the nine month period
ended September 30, 1995 and 1996....................................... F-28
Unaudited Notes to Combined Financial Statements......................... F-29
HEALTHPARTNERS FUNDING, L.P.
Unaudited Balance Sheet as of September 30, 1996......................... F-34
Unaudited Statements of Operations for the nine month period
ended September 30, 1995 and 1996....................................... F-35
Statements of Partners' Capital for the period from September 12, 1994
(Date of Inception) through December 31, 1994, the year ended December
31, 1995 and for the nine month period ended September 30, 1996
(unaudited)............................................................. F-36
Unaudited Statements of Cash Flows for the nine month period ended
September 30, 1995 and 1996............................................. F-37
Unaudited Notes to Financial Statements.................................. F-38
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
HealthCare Financial Partners, Inc.
HealthPartners DEL, L.P.
We have audited the accompanying combined balance sheet of HealthCare
Financial Partners, Inc. and HealthPartners DEL, L.P. as of June 30, 1996 and
the related combined statements of operations, equity, and cash flows for the
six month period then ended. These financial statements are the responsibility
of management of the Company and the Partnership. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of HealthCare
Financial Partners, Inc. and HealthPartners DEL, L.P. as of June 30, 1996, and
the combined results of their operations and their cash flows for the six
month period then ended in conformity with generally accepted accounting
principles.
Washington, D.C. Ernst & Young LLP
September 13, 1996
F-3
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
HealthCare Financial Partners, Inc.
We have audited the accompanying combined balance sheets of HealthCare
Financial Partners, Inc. and HealthPartners DEL, L.P., a limited partnership,
as of December 31, 1995 and 1994 and the related combined statements of
operations, equity, and cash flows for each of the years in the two year
period ended December 31, 1995 and the period from inception April 22, 1993
through December 31, 1993. These financial statements are the responsibility
of management of the Company and the Partnership. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of HealthCare
Financial Partners, Inc. and HealthPartners DEL, L.P. as of December 31, 1995
and 1994, and the results of their operations and their cash flows for each of
the years in the two year period ended December 31, 1995, and the period from
inception April 22, 1993 through December 31, 1993, in conformity with
generally accepted accounting principles.
Richmond, Virginia McGladrey & Pullen, LLP
September 13, 1996
F-4
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................... $ 6,978
Finance receivables......................... 279,148 $2,552,441 $5,493,815
Less:
Allowance for losses on receivables....... 20,847 66,840 142,151
Unearned discount fees.................... 12,064 55,676 73,135
--------- ---------- ----------
Net finance receivables................. 246,237 2,429,925 5,278,529
Accounts receivable from related parties.... 129,696
Property and equipment...................... 47,814 76,140 135,514
Prepaid expenses and other.................. 43,821 34,178 99,197
--------- ---------- ----------
Total assets............................ $ 344,850 $2,669,939 $5,513,240
========= ========== ==========
LIABILITIES AND EQUITY
Cash overdraft.............................. $ 35,150 $ 5,786
Line of credit.............................. 1,433,542 3,529,776
Client holdbacks............................ $ 112,374 814,607 1,371,443
Amounts due to limited partnership.......... 256,891 149,537 296,472
Accounts payable to related parties......... 80,588 159,444 335,109
Accounts payable and accrued expenses....... 33,906 94,335 67,077
Notes payable to related parties............ 75,000 75,000
Notes payable............................... 21,198 83,267
Accrued interest............................ 12,591 26,959
--------- ---------- ----------
Total liabilities....................... 558,759 2,795,404 5,715,889
Equity
Limited partners' capital................. 144,857 415,305 463,598
Stockholders' deficit:
Common stock, par value $.01 per share;
30,000,000 shares authorized; 3,419,993
shares issued and outstanding............ 34,200 34,200 34,200
Retained deficit.......................... (392,966) (574,970) (700,447)
--------- ---------- ----------
Total stockholders' deficit............. (358,766) (540,770) (666,247)
--------- ---------- ----------
Total equity deficit.................... (213,909) (125,465) (202,649)
--------- ---------- ----------
Total liabilities and equity............ $ 344,850 $2,669,939 $5,513,240
========= ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1993
(DATE OF
INCEPTION) SIX MONTH PERIOD
THROUGH YEAR ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ------------------------ --------------------
1993 1994 1995 1995 1996
-------------- ----------- ----------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Fee income:
Discount fees......... $ 856 $ 12,460 $ 469,964 $117,411 $423,229
Origination fees...... 81,500
Other fees............ 576 95,548 47,181 102,420
-------- ----------- ----------- -------- --------
Total fee income........ 856 13,036 565,512 164,592 607,149
Interest expense........ 3,975 79,671 21,941 112,096
-------- ----------- ----------- -------- --------
Net fee income.......... 856 9,061 485,841 142,651 495,053
Provision for losses on
receivables............ 18,745 2,102 45,993 45,993 75,311
-------- ----------- ----------- -------- --------
Net fee income (loss)
after provision for
losses on receivables.. (17,889) 6,959 439,848 96,658 419,742
Operating expenses:
Compensation and bene-
fits................. 2,434 152,600 931,189 254,073 481,370
Occupancy............. 6,000 70,794 156,720 60,144 98,663
Professional fees..... 10,000 60,060 153,948 32,907 67,884
Other................. 11,770 156,060 230,383 115,829 210,052
-------- ----------- ----------- -------- --------
Total operating ex-
penses................. 30,204 439,514 1,472,240 462,953 857,969
Other income:
Income (loss) from
limited partnership.. (303,385) 597,146 18,730 392,770
Management fees from
affiliates........... 120,000 400,000 200,000 200,000
Management fees from
others............... 16,910 286,023 224,691 83,723
Other................. 6,862 3,971 9,511 18,000
-------- ----------- ----------- -------- --------
Total other income...... 23,772 106,609 1,221,837 311,964 610,770
-------- ----------- ----------- -------- --------
Income (loss) before
income taxes
(benefit).............. (24,321) (325,946) 189,445 (54,331) 172,543
Income taxes (benefit).. (5,892) (13,268)
-------- ----------- ----------- -------- --------
Net income (loss)....... $(24,321) $ (325,946) $ 195,337 $(54,331) $185,811
======== =========== =========== ======== ========
Unaudited pro forma da-
ta:
Income taxes.......... $ 73,884 $ 67,292
----------- --------
Net income............ $ 115,561 $105,251
=========== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
--------------------------------------
LIMITED
PARTNERS' COMMON PAID-IN RETAINED TOTAL
CAPITAL STOCK CAPITAL DEFICIT TOTAL EQUITY
--------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 1,710 shares
of $1.00 par value
common stock at April
22, 1993............... $ 1,710 $ (1,335) $ 375 $ 375
Capital contributions... $ 150,000 150,000
Net income (loss)....... 5,410 (29,731) (29,731) (24,321)
--------- ------- ------ --------- --------- ---------
Balance at December 31,
1993................... 155,410 1,710 (31,066) (29,356) 126,054
Issuance of 379,998
common stock warrants.. $ 500 500 500
Conversion of $1.00 par
value shares to $.01
par value shares....... (1,693) 1,693
Issuance of 3,418,283
shares of $.01 par
value common stock..... 34,183 (2,193) (24,494) 7,496 7,496
Capital contributions... 123,830 123,830
Net income (loss)....... 11,460 (337,406) (337,406) (325,946)
Distributions to
partners............... (145,843) (145,843)
--------- ------- ------ --------- --------- ---------
Balance at December 31,
1994................... 144,857 34,200 (392,966) (358,766) (213,909)
Capital contributions... 89,021 89,021
Net income (loss)....... 377,341 (182,004) (182,004) 195,337
Distributions to
partners............... (195,914) (195,914)
--------- ------- ------ --------- --------- ---------
Balance at December 31,
1995................... 415,305 34,200 (574,970) (540,770) (125,465)
Net income (loss)....... 311,288 (125,477) (125,477) 185,811
Distributions to
partners............... (262,995) (262,995)
--------- ------- ------ --------- --------- ---------
Balance at June 30,
1996................... $ 463,598 $34,200 $ -- $(700,447) $(666,247) $(202,649)
========= ======= ====== ========= ========= =========
</TABLE>
See accompanying notes.
F-7
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 22, 1993
(DATE OF
INCEPTION) SIX MONTH PERIOD
THROUGH YEAR ENDED DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ------------------------ ------------------------
1993 1994 1995 1995 1996
-------------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...... $ (24,321) $ (325,946) $ 195,337 $ (54,331) $ 185,811
Adjustments to
reconcile net income
(loss) to net cash
provided by (used in)
operations:
Depreciation.......... 742 11,817 17,309 6,645 29,231
Provision for losses
on receivables....... 18,745 2,102 45,993 45,993 75,311
Losses (earnings) of
unconsolidated
limited partnership.. 303,385 (597,146) (18,730) (392,770)
Deferred income tax
benefit.............. (17,067)
Changes in assets and
liabilities:
Decrease (increase)
in accounts
receivable from
related parties..... (89,490) 89,490 (129,696) 129,696
Decrease (increase)
in prepaid expenses
and other........... (43,821) 26,710 (1,050) (65,019)
Increase (decrease)
in cash overdraft... 35,150 (29,364)
Increase (decrease)
accrued interest.... 12,591 14,368
Increase (decrease)
in accounts payable
to related parties.. 100,000 (19,412) 78,856 451,142 175,665
Increase (decrease)
in accounts payable
and accrued
expenses............ 1,547 32,359 60,429 28,637 (27,258)
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) operating
activities........... 7,223 49,974 (271,534) 458,306 95,671
INVESTING ACTIVITIES....
Increase in finance
receivables, net...... (86,744) (67,966) (1,527,448) (1,535,443) (2,367,079)
Decrease (increase) in
investment in limited
partnership........... (46,494) 489,792 151,008 539,705
Purchase of property
and equipment, net.... (17,684) (42,689) (45,635) (5,153) (88,605)
--------- ----------- ----------- ----------- -----------
Net cash used in in-
vesting activities... (104,428) (157,149) (1,083,291) (1,389,588) (1,915,979)
FINANCING ACTIVITIES....
Net borrowings under
line of credit........ 1,433,542 936,353 2,096,234
Increase (decrease) in
notes payable to
related parties....... 75,000 250 (75,000)
Increase in notes
payable............... 21,198 62,069
Issuance of common
stock and warrants.... 375 7,996
(Distributions to)
contributions from
partners, net......... 150,000 (22,013) (106,893) 69,392 (262,995)
--------- ----------- ----------- ----------- -----------
Net cash provided by
(used in) financing
activities........... 225,375 (14,017) 1,347,847 1,005,995 1,820,308
--------- ----------- ----------- ----------- -----------
Net increase (decrease)
in cash and cash
equivalents........... 128,170 (121,192) (6,978) 74,713
Cash and cash
equivalents at
beginning of period... 128,170 6,978 6,978
--------- ----------- ----------- ----------- -----------
Cash and cash
equivalents at end of
period................ $ 128,170 $ 6,978 $ -- $ 81,691 $ --
========= =========== =========== =========== ===========
Supplemental disclosure
of cash flow
information:
Cash payments for
interest............. $ -- $ 3,975 $ 67,080 $ 21,941 $ 97,728
========= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-8
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED JUNE 30, 1996
AND YEARS ENDED DECEMBER 31, 1995 AND 1994
AND PERIOD FROM APRIL 22, 1993 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1993
1. NATURE OF BUSINESS
HealthCare Financial Partners, Inc. (Company), which was incorporated and
previously doing business as HealthPartners Financial Corporation from
inception to September 13, 1996, was formed in 1993 under the laws of the
state of Delaware. The Company owns a 1% general partner interest in Health
Partners DEL, L.P. (DEL) and HealthPartners Funding, L.P. (Funding). In
addition, the majority owners of the Company own all of the limited
partnership interests of DEL. The Company's principal activity is its interest
in Funding. Additionally, the Company provides operational and management
support to Funding for a fee. Funding's principal activities are purchasing
accounts receivable from health care providers throughout the United States
and providing financing to health care providers under asset-based lending
arrangements.
The combined financial statements include the accounts and operations of the
Company and DEL. The financial statements are combined as a result of common
control and management between the two entities. All transactions between the
Company and DEL have been eliminated in preparation of the combined financial
statements. The Company accounts for its investment in Funding on the equity
basis, as the Company does not have sufficient control to warrant
consolidation.
Under the terms of its partnership agreement, DEL will cease to exist
December 31, 2020, unless an event of dissolution shall occur prior to such
time (see Note 9). The limited partners' liability is limited to the capital
they have contributed.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
FINANCE RECEIVABLES
Purchased finance receivables are recorded at the contractual purchase
amount, less the discount fee (the "amount purchased"). The difference between
the amount purchased and the amount paid to acquire such receivables is
reflected as client holdbacks. In the event purchased receivables become
delinquent, DEL has certain rights of offset to apply client holdbacks (or
future fundings) against delinquent accounts receivable.
ALLOWANCE FOR LOSSES ON RECEIVABLES
The allowance for losses on receivables is maintained at the amount
estimated to be sufficient to absorb future losses, net of recoveries,
inherent in the finance receivables. The provision for losses on receivables
is the periodic cost of maintaining an adequate allowance. In evaluating the
adequacy of the allowance, management considers trends in past-due accounts,
historical charge-off and recovery rates, credit risk indicators, economic
conditions, on-going credit evaluations, overall portfolio size, average
client balances, excess collateral, and underwriting policies, among other
items.
Additionally, client holdbacks are available to offset losses on
receivables. And, under certain circumstances, credit losses can be offset
against client holdbacks related to other financings.
F-9
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment, principally computer and related peripherals, are
stated at cost less accumulated depreciation ($48,255, $29,868, and $12,559 at
June 30, 1996, December 31, 1995 and 1994, respectively). Depreciation expense
is computed primarily using the straight-line method.
CLIENT HOLDBACKS
Client holdbacks represent the excess of the net recorded amount of
purchased receivables over the amount advanced. In its purchase agreements
with clients, the Company retains the right to apply any past-due or
uncollectible amounts against these holdbacks. Holdbacks are assigned to
specific purchased receivables. The client holdbacks are payable upon
collection of the respective purchased receivable amount.
REVENUE RECOGNITION
Discount fees may be charged at closing or periodically based on the
outstanding receivable balance and are recognized in income under methods that
approximate the effective interest method.
Origination fees are charged at closing to cover the direct closing costs of
the contract, and are recognized in income under a method that approximates
the effective interest method.
INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred-tax assets and
liabilities are determined based on differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities (i.e. temporary differences) and are measured at the enacted rates
that will be in effect when these temporary differences reverse. Net deferred
taxes are not material to the combined financial statements.
DEL has elected partnership reporting status under the Internal Revenue
Code. Accordingly, taxable income or loss is allocated to the partners in
accordance with the partnership agreement and is reported on the individual
partner's income tax return. Therefore, no provision for income tax is
included in the historical financial statements for DEL.
EARNINGS PER SHARE
Earnings per share is not presented because it is not meaningful due to the
partnership reporting basis of DEL and to the reorganization as described in
Note 9.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PRO FORMA INCOME TAXES (UNAUDITED)
Federal and state income tax laws require that the income or loss of DEL, a
partnership, be included in the income tax returns of the partners.
Accordingly, income taxes for DEL are not included in the historical combined
financial statements of the Company. Assuming the completion of the proposed
initial public offering (see Note 9), the operations of DEL will be subject to
corporate income taxes. Accordingly, for informational purposes, the
statements of operations include disclosure of pro forma adjustments for
income taxes which would have been recorded if DEL had been a corporation,
based on the tax laws in effect during those periods.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements furnished reflect all
adjustments, consisting solely of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the Company's
F-10
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
results of operations and cash flows for the six-month period ended June 30,
1995. The results of operations for the six-month period ended June 30, 1995
are not necessarily indicative of the operating results of the Company for the
entire year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet,
for which it is practicable to estimate that value. Due to the short-term
nature and the variable rates of all the Company's financial instruments,
there are no significant differences between recorded values and fair values.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued FASB
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (the Statement). The Statement encourages companies to
recognize expense for stock-based awards based on their fair value on the date
of grant, however, the Statement allows companies to continue the existing
intrinsic value method of accounting provided that pro forma disclosures are
made of what net income and earnings per share would have been had the fair
value method been used. The Company will continue with the intrinsic value
method of accounting for stock-based awards. As of June 30, 1996, there was no
impact to the Company's financial statements from the adoption of the
Statement.
3. ALLOWANCE FOR LOSSES ON RECEIVABLES
Activity in the allowance for losses on receivables was as follows:
<TABLE>
<CAPTION>
APRIL 22, 1993 YEAR ENDED SIX MONTHS ENDED
(DATE OF INCEPTION) DECEMBER 31, JUNE 30,
THROUGH --------------- --------------------
DECEMBER 31, 1993 1994 1995 1995 1996
------------------- ------- ------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Beginning of period..... $18,745 $20,847 $20,847 $ 66,840
Provision for losses on
receivables............ $18,745 2,102 45,993 45,993 75,311
------- ------- ------- ------- --------
End of period........... $18,745 $20,847 $66,840 $66,840 $142,151
======= ======= ======= ======= ========
</TABLE>
4. LINE OF CREDIT
DEL maintains a revolving line of credit with a bank. The line matures on
March 9, 1998; however, it will be automatically renewed each year for a one-
year period if not terminated by the bank, which requires six months notice,
or by DEL. The line of credit is collateralized by DEL's purchased finance
receivables.
DEL has the ability to borrow up to $3,750,000 as of June 30, 1996. The rate
of interest charged under the agreement is the bank's base rate of interest,
as defined, plus 1.5%, or the revolving credit LIBOR rate plus 3% determined
at the option of DEL upon each additional draw, subject to certain
limitations. As of June 30, 1996 and December 31, 1995, the weighted average
interest rate was 9.2% and 9.7%, respectively. DEL pays an unused line fee
monthly of one twelfth of 0.5% on the amount by which the facility cap
sublimit exceeds the average amount outstanding during the preceding month.
(See Note 9 for amendment to line of credit agreement subsequent to June 30,
1996.)
DEL is required to comply with certain financial covenants throughout the
year. DEL was not in compliance with the debt to adjusted tangible net worth
ratio requirement of ten-to-one at June 30, 1996. DEL has received a waiver
for this covenant as of June 30, 1996.
F-11
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. EQUITY
On December 28, 1994, the Company issued warrants providing the right to
receive 379,998 shares of the Company's common stock for $500 of consideration
which, in the opinion of management, approximated the fair value of the
warrants at that date. The warrants will be exercised in connection with the
reorganization described in Note 9.
On November 1, 1995, the Company issued stock options to purchase 38,381
shares of the Company's common stock at an exercise price of $2.61 per share.
The stock options expire in 2005.
6. LEASE COMMITMENTS
The Company leases office space under noncancelable operating leases. The
future minimum lease payments as of June 30, 1996 were as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 84,633
1997.............................................................. 160,494
1998.............................................................. 139,410
1999.............................................................. 143,471
2000.............................................................. 147,531
Thereafter........................................................ 49,628
--------
$725,167
========
</TABLE>
Rent expense for the six month period ended June 30, 1996, for the years
ended December 31, 1995 and 1994, and for the period from April 22, 1993
through December 31, 1993 was $ 69,000, $ 156,720, $ 70,794, and $ 6,000,
respectively.
7. RELATED PARTY TRANSACTIONS
The Company has an agreement with Funding, whereby Funding pays a monthly
management fee for operational and management support provided. Management
fees under this agreement were $200,000, $400,000 and $120,000 for the six
month period ended June 30, 1996, and the years ended December 31, 1995 and
1994, respectively.
Additionally, DEL has entered into an agreement with Funding whereby certain
purchased finance receivables of Funding are assigned to DEL with risks and
rewards of ownership. All purchased receivables outstanding as of June 30,
1996 were assigned from Funding under the agreement.
8. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
Concentrations of credit as of the respective period ends were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF FINANCE
NUMBER RECEIVABLES
OF CLIENTS OUTSTANDING
---------- -----------
<S> <C> <C>
June 30, 1996....................................... 5 48%
December 31, 1995................................... 2 35%
December 31, 1994................................... 3 71%
</TABLE>
Additionally, the Company earned fee revenue in excess of 10% of total fee
revenue from two customers, aggregating 22% of total revenue, for the six
month period ended June 30, 1996.
F-12
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. REORGANIZATION AND INITIAL PUBLIC OFFERING
The Company expects to issue 2,100,000 shares of common stock in an initial
public offering (offering). In contemplation of the offering, the Company
increased its authorized common shares from 1,000,000 shares to 30,000,000 and
effected a 4.56-to-1 split of the common stock in the form of a stock
dividend, including outstanding warrants and options, on September 13, 1996.
Shares of common stock outstanding for all periods presented have been
retroactively restated to give effect to the stock split. The Company also
authorized 10,000,000 shares of preferred stock. The rights and preferences of
the preferred stock are established by the Board of Directors in its sole
discretion. The specific rights and preferences have not been established and
no preferred stock has been issued.
On September 13, 1996, the Company adopted the HealthCare Financial Partners
1996 Stock Incentive Plan (the Incentive Plan). The Company has reserved
750,000 shares for issuance under the Incentive Plan. Pursuant to the adoption
of the Incentive Plan, the Company granted options thereunder to all current,
full-time employees other than the senior executive officers of the Company to
purchase an aggregate of 189,000 shares of common stock at an exercise price
of $11.05 per share. The options are exercisable seven years after the grant
date and are subject to a maximum ten year term. If the offering is
successful, however, the options will vest and become exercisable in 25%
increments at each anniversary of the grant date, commencing on September 13,
1997. Also, under the Incentive Plan, the Company granted 37,000 options on
September 13, 1996 to each of the three senior executive officers of the
Company at an exercise price equal to the initial offering price. These
options are contingent upon the completion of the offering and will vest and
become exercisable in 25% increments on each anniversary date of the grant
date, commencing on September 13, 1997.
Also on September 13, 1996, the Company adopted the HealthCare Financial
Partners, Inc. 1996 Director Incentive Plan (the Director Plan). The Company
has reserved 100,000 shares of common stock for issuance pursuant to awards
under the Director Plan. No shares have been granted under the Director Plan.
Effective as of September 1, 1996, in contemplation of the offering, Funding
acquired, using the purchase method of accounting, the assets of DEL,
consisting principally of client receivables, by assuming DEL's liabilities
and paying $472,369 in cash. The cash payment approximated the fair value and
book value of DEL's net assets. Immediately following the acquisition, DEL was
dissolved.
Effective upon the completion of the offering, the Company will acquire from
proceeds of the offering, using the purchase method of accounting, all limited
partnership interests in Funding and the partnership will be liquidated. The
amount paid to acquire the limited partnership interest is expected to
approximate both the fair value and the book value of Funding at the date of
acquisition.
In anticipation of the offering and the liquidations of Funding and DEL, the
bank that had previously provided lines of credit to those entities has
consented to the assignment to the Company of the agreements related to those
lines of credit and agreed to increase the aggregate credit facilities from
$35 million to $50 million. In July 1996, the Company began negotiations with
an international financial institution for financing under an investment
grade, asset-backed commercial paper program and expects to finalize the terms
of the agreement prior to the closing of the initial public offering. Under
the proposed terms of the commercial paper program, the Company will be able
to borrow up to $100 million.
F-13
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
HealthPartners Funding, L.P.
We have audited the accompanying balance sheet of HealthPartners Funding,
L.P., a limited partnership, as of June 30, 1996 and the related statements of
operations, partners' capital, and cash flows for the six month period then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthPartners Funding,
L.P. as of June 30, 1996, and the results of its operations and its cash flows
for the six month period then ended in conformity with generally accepted
accounting principles.
Washington, D.C.
September 13, 1996 Ernst & Young LLP
F-14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Partners
HealthPartners Funding, L.P.
We have audited the accompanying balance sheets of HealthPartners Funding,
L.P, a limited partnership, as of December 31, 1995 and 1994 and the related
statements of operations, partners' capital, and cash flows for the year ended
December 31, 1995 and the period from inception September 12, 1994 through
December 31, 1994. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HealthPartners Funding,
L.P. as of December 31, 1995 and 1994, and the results of its operations and
its cash flows for the year ended December 31, 1995 and the period from
inception September 12, 1994 through December 31, 1994, in conformity with
generally accepted accounting principles.
Richmond, Virginia McGladrey & Pullen, LLP
September 13, 1996
F-15
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents.................... $1,963,089 $ 2,140,316 $ 2,288,754
Finance receivables.......................... 6,012,475 37,164,708 60,419,714
Less:
Allowance for losses on receivables...... 326,792 498,187 819,677
Unearned discount fees................... 141,228 388,010 407,245
---------- ----------- -----------
Net finance receivables................ 5,544,455 36,278,511 59,192,792
Accounts receivable from related parties..... 195,790 159,444 335,109
Prepaid expenses and other................... 51,188 400,913 530,065
---------- ----------- -----------
Total assets............................... $7,754,522 $38,979,184 $62,346,720
========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Line of credit............................... $16,374,318 $31,876,467
Client holdbacks............................. $2,362,800 8,175,870 9,186,561
Accounts payable to related parties.......... 334,475
Accounts payable to clients.................. 239,032 1,045,043 920,693
Accounts payable and accrued expenses........ 27,819 71,530 87,299
Accrued interest............................. 138,772 243,306
---------- ----------- -----------
Total liabilities............................ 2,629,651 26,140,008 42,314,326
Partners' capital............................ 5,124,871 12,839,176 20,032,394
---------- ----------- -----------
Total liabilities and partners' capital.... $7,754,522 $38,979,184 $62,346,720
========== =========== ===========
</TABLE>
See accompanying notes.
F-16
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 12,
1994
(DATE OF
INCEPTION) SIX MONTH PERIOD
THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, ----------------------
1994 1995 1995 1996
------------- ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Fee and interest income:
Discount fees.............. $ 268,584 $3,472,592 $1,148,210 $2,708,656
Commitment fees............ 506,401 167,744 359,227
Other fees................. 10,132 269,999 29,541 285,254
Interest income............ 2,770 403,659 59,742 1,204,010
--------- ---------- ---------- ----------
Total fee and interest
income.................. 281,486 4,652,651 1,405,237 4,557,147
Interest expense............. 554,885 90,837 1,269,060
--------- ---------- ---------- ----------
Net fee and interest income.. 281,486 4,097,766 1,314,400 3,288,087
Provision for losses on
receivables................. 326,792 171,395 171,395 321,490
--------- ---------- ---------- ----------
Net fee and interest income
(loss) after provision for
losses on receivables....... (45,306) 3,926,371 1,143,005 2,966,597
Operating expenses:
Commissions................ 7,466 103,505 33,338 223,478
Management fees paid to
general partner........... 120,000 400,000 200,000 200,000
Professional fees.......... 14,692 215,178 53,524 175,348
Licensing fees............. 16,242 107,038 36,024 59,382
Other...................... 7,917 198,336 64,707 169,843
--------- ---------- ---------- ----------
Total operating expenses..... 166,317 1,024,057 387,593 828,051
--------- ---------- ---------- ----------
Net income (loss)............ (211,623) 2,902,314 755,412 2,138,546
Net income allocable to
limited partners............ 91,762 2,305,168 736,682 1,745,776
--------- ---------- ---------- ----------
Net income (loss) allocable
to general partner.......... $(303,385) $ 597,146 $ 18,730 $ 392,770
========= ========== ========== ==========
Unaudited pro forma data:
Income taxes............... $1,131,902 $ 834,033
---------- ----------
Net income................. $1,770,412 $1,304,513
========== ==========
</TABLE>
See accompanying notes.
F-17
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED TOTAL
PARTNER PARTNERS PARTNERS' CAPITAL
---------- ----------- -----------------
<S> <C> <C> <C>
Capital contributions at September
12, 1994 (Date of Inception)...... $ 52,900 $ 5,290,000 $ 5,342,900
Net income (loss).................. (303,385) 91,762 (211,623)
Capital distributions.............. (6,406) (6,406)
---------- ----------- -----------
Balance at December 31, 1994....... (256,891) 5,381,762 5,124,871
Capital contributions.............. 75,000 7,500,000 7,575,000
Net income......................... 597,146 2,305,168 2,902,314
Capital distributions.............. (564,792) (2,198,217) (2,763,009)
---------- ----------- -----------
Capital at December 31, 1995....... (149,537) 12,988,713 12,839,176
Capital contributions.............. 70,000 7,000,000 7,070,000
Net income......................... 392,770 1,745,776 2,138,546
Capital distributions.............. (609,705) (1,405,623) (2,015,328)
---------- ----------- -----------
Capital at June 30, 1996........... $ (296,472) $20,328,866 $20,032,394
========== =========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 12,
1994
(DATE OF
INCEPTION) SIX MONTH PERIOD
THROUGH YEAR ENDED ENDED JUNE 30,
DECEMBER 31, DECEMBER 31, -------------------------
1994 1995 1995 1996
------------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)...... $ (211,623) $ 2,902,314 $ 755,412 $ 2,138,546
Adjustments to reconcile
net income (loss) to
net cash provided by
operations:
Provision for losses
on receivables....... 326,792 171,395 171,395 321,490
Amortization of
organization costs... 1,870 18,857 9,429 8,786
Changes in assets and
liabilities:
Decrease (increase) in
accounts receivable
from related
parties.............. (195,790) 36,346 (336,540) (175,665)
Increase in prepaid
expenses and other... (53,058) (368,582) (194,629) (137,938)
Increase (decrease) in
accounts payable to
clients.............. 239,032 806,011 1,014,493 (124,350)
Increase (decrease) in
accounts payable to
related parties...... 334,475 (129,696)
Increase in accrued
interest............. 127,824 104,534
Increase (decrease) in
accounts payable and
accrued expenses..... 27,819 54,659 31,118 (189,010)
----------- ------------ ----------- ------------
Net cash provided by
operating activities.. 135,042 4,083,299 1,450,678 1,816,697
INVESTING ACTIVITIES
Increase in finance
receivables, net...... (3,508,447) (25,092,381) (7,287,476) (22,225,080)
FINANCING ACTIVITIES
Net borrowings under
line of credit........ 16,374,318 2,931,153 15,502,149
Partners' capital
contributions......... 5,342,900 7,575,000 2,727,000 7,070,000
Partners' capital
distributions......... (6,406) (2,763,009) (888,833) (2,015,328)
----------- ------------ ----------- ------------
Net cash provided by
financing activities.. 5,336,494 21,186,309 4,769,320 20,556,821
----------- ------------ ----------- ------------
Net increase (decrease)
in cash and cash
equivalents........... 1,963,089 177,227 (1,067,478) 148,438
Cash and cash
equivalents at
beginning of period... 1,963,089 1,963,089 2,140,316
----------- ------------ ----------- ------------
Cash and cash
equivalents at end of
period................ $ 1,963,089 $ 2,140,316 $ 895,611 $ 2,288,754
=========== ============ =========== ============
Supplemental disclosure
of cash flow
information
Cash payments for
interest............. $ -- $ 416,113 $ 90,837 $ 1,164,526
=========== ============ =========== ============
</TABLE>
See accompanying notes.
F-19
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1996 AND
YEAR ENDED DECEMBER 31, 1995 AND
THE PERIOD FROM SEPTEMBER 12, 1994 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1994
1. NATURE OF BUSINESS
HealthPartners Funding, L.P., a limited partnership (the Partnership), was
formed as a limited partnership under the laws of the state of Delaware on
September 12, 1994. HealthCare Financial Partners, Inc., which was
incorporated and previously doing business as HealthPartners Financial
Corporation from inception to September 13, 1996, (Company), owns 1% of the
Partnership. The limited partners are Farallon Capital Partners, Limited
Partnership, which owns 84% of the Partnership and RR Capital Partners,
Limited Partnership, which owns 15% of the Partnership. On March 28, 1996, the
limited partners assigned their interest to HealthPartners Investors L.L.C.
The Partnership's principal activity is purchasing accounts receivable from
health care providers throughout the United States and providing financing to
health care providers under asset-based lending agreements.
The Partnership shall continue to operate until the earliest of the
following dates: (i) December 31, 1997, unless extended to December 31, 1998
at the election, prior to June 30, 1997, of Limited Partner having capital
accounts the aggregate value of which exceeds 50% of the value of all Limited
Partners capital accounts as of such date, or (ii) the date on which a
Partnership disabling event occurs. However, the General Partner may terminate
the Partnership on 90-days written notice to each of the Limited Partners.
(See Note 8.)
The Limited Partners' liability is limited to the capital they have
contributed to the Partnership.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
FINANCE RECEIVABLES
Purchased finance receivables are recorded at the contractual amount, less
the discount fee (the "amount purchased"). The difference between the amount
purchased and the amount paid to acquire such receivables is reflected as
client holdbacks. In the event purchased receivables become delinquent, the
Partnership has certain rights of offset to apply client holdbacks (or future
fundings) against delinquent accounts receivable.
Asset-based lending is provided in the form of either a term note or
revolving line of credit. The amount of credit granted is based on a
predetermined percentage of the customer's total accounts receivable, and the
notes are secured by the accounts receivable.
ALLOWANCE FOR LOSSES ON RECEIVABLES
The allowance for losses on receivables is maintained at the amount
estimated to be sufficient to absorb future losses, net of recoveries,
inherent in the finance receivables. The provision for credit losses is the
periodic cost of maintaining an adequate allowance. In evaluating the adequacy
of the allowance, management considers trends in past due accounts, historical
charge-off and recovery rates, credit risk indicators, economic conditions,
on-going credit evaluations, overall portfolio size, average client balances,
excess collateral, and underwriting policies, among other items.
Additionally, client holdbacks are available to offset losses on
receivables. And, under certain circumstances, credit losses can be offset
against client holdbacks related to other financings.
The Partnership performs a loan-by-loan review for all asset-based loans to
identify loans to be charged off.
F-20
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CLIENT HOLDBACKS
Client holdbacks represent the excess of the net recorded amount of
purchased receivables over the amount advanced. In its purchase agreements
with clients, the Partnership retains the right to apply any past-due or
uncollectible amounts against these holdbacks. Holdbacks are assigned to
specific purchased receivables. The client holdbacks are payable upon
collection of the respective purchased receivable amount.
REVENUE RECOGNITION
Discount fees may be charged at closing or periodically based on the
outstanding receivable balance and are recognized in income under methods that
approximate the effective interest method.
Commitment fees are charged at closing to cover the direct closing costs of
the contract, and are recognized in income under a method that approximates
the effective interest method.
Accrual of interest income on asset-based loans is suspended when a loan is
contractually delinquent for 90 days or more. The accrual is resumed when the
loan becomes contractually current, and past due interest income is recognized
at that time.
NET INCOME ALLOCATION
Net income and loss are allocated between the General Partner and the
Limited Partners pursuant to the terms of the partnership agreement.
Generally, this results in an allocation of 20% to the General Partner, as a
preferred distribution, and the remaining 80% among the general and limited
partners pro rata, in accordance with their respective partnership
percentages. The 20% preferred distribution to the General Partner is
calculated on net income from operations excluding interest on overnight
investments. The preferred distribution may increase based upon the General
Partner's performance. Once the limited partners have received a 20% return on
their invested capital, net income is then distributed 40% to the General
Partner and 60% to the Limited Partners.
INCOME TAXES
The Partnership elected partnership reporting status under the Internal
Revenue Code. Accordingly, taxable income or loss, is allocated to the
partners in accordance with the partnership agreement and is reported on the
individual partner's income tax return. Therefore, no provision for income tax
is included in the historical financial statement.
EARNINGS PER SHARE
Earnings per share is not presented because it is not meaningful due to the
partnership reporting basis and to the planned initial public offering
described in Note 8.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements furnished reflect all
adjustments, consisting solely of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the Partnership's
results of operations and cash flows for the six-month period ended June 30,
1995. The results of operations for the six-month period ended June 30, 1995
are not necessarily indicative of the operating results of the Partnership for
the entire year.
F-21
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA INCOME TAXES (UNAUDITED)
Federal and state income tax laws require that the income or loss of the
Partnership be included in the income tax returns of the partners.
Accordingly, income taxes are not included in the historical financial
statements. Assuming the completion of the proposed initial public offering
(see Note 8), the operations of the Partnership will be subject to corporate
income taxes. Accordingly, for informational purposes, the statement of
operations includes disclosure of pro forma adjustments for income taxes which
would have been recorded if the Partnership had been a corporation, based on
the tax laws in effect during those periods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet,
for which it is practicable to estimate that value. Due to the short-term
nature and the variable rates of all the Partnership's financial instruments,
there are no significant differences between recorded values and fair values.
3. FINANCE RECEIVABLES
Finance receivables consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1994 1995 1996
---------- ----------- -----------
<S> <C> <C> <C>
Purchased accounts receivable............... $5,957,515 $29,890,582 $34,495,256
Asset-based loans........................... 6,270,629 25,924,458
Advances to clients......................... 47,536 856,277
Other....................................... 7,424 147,220
---------- ----------- -----------
Total finance receivables................. $6,012,475 $37,164,708 $60,419,714
========== =========== ===========
</TABLE>
4. ALLOWANCE FOR LOSSES ON RECEIVABLES
Activity in the allowance for losses on receivables was as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 12,
1994
(DATE OF
INCEPTION) YEAR ENDED SIX MONTHS
THROUGH DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, ENDED --------------------
1994 1995 1995 1996
------------- ------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Beginning of period........... $326,792 $326,792 $498,187
Provision for losses on
receivables.................. $326,792 171,395 171,395 321,490
-------- -------- -------- --------
End of period................. $326,792 $498,187 $498,187 $819,677
======== ======== ======== ========
</TABLE>
5. LINE OF CREDIT
The Partnership maintains a revolving line of credit with a bank. The line
matures on March 9, 1998, however, it will be automatically renewed each year
for a one-year period if not terminated by the bank, which requires six months
notice, or by the Partnership. The line of credit is collateralized by the
finance receivables of the Partnership.
F-22
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Partnership has the ability to borrow up to $31,250,000 as of June 30,
1996. As of June 30, 1996, the Partnership was granted a one day overline
accomodation up to $32,000,000 from the bank. The rate of interest charged
under the agreement is the bank's base rate of interest, as defined, or the
revolving credit LIBOR rate plus 3% determined at the option of the
Partnership upon each additional draw, subject to certain limitations. As of
June 30, 1996 and December 31, 1995, the weighted average interest rate was
8.8% and 9.6%, respectively. The Partnership pays an unused line fee monthly
of one twelfth of 0.5% on the amount by which the facility cap sublimit
exceeds the average amounts outstanding during the preceding month. (See Note
8 for amendment to line of credit agreement subsequent to June 30, 1996.)
The Partnership is required to comply with certain financial covenants
throughout the year. The Partnership was in compliance with all financial
covenants at June 30, 1996.
6. RELATED PARTY TRANSACTIONS
The Partnership has an agreement with the General Partner whereby the
Partnership pays a monthly management fee for operational and management
support provided. Management fees under this agreement were $200,000, $400,000
and $120,000 for the six month period ended June 30, 1996, the year ended
December 31, 1995 and the period from September 12, 1994 through December 31,
1994, respectively. The General Partner is required to maintain a 1% capital
account balance in the Partnership. The General Partner was not in compliance
with this requirement. However, the Partnership has granted a waiver to the
General Partner as of June 30, 1996.
The Partnership pays a licensing fee to a stockholder of the General Partner
for use of computer software. Amounts paid for the six month period ended June
30, 1996, the year ended December 31, 1995, and the period from September 12,
1994 through December 31, 1994 were $47,000, $63,000, and $16,000,
respectively.
7. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
At June 30, 1996, the Partnership has committed lines of credit to its
customers of $37,850,000 of which approximately $13,200,000 was unused. The
Partnership extends credit based upon qualified client receivables outstanding
and is subject to contractual collateral and loan-to-value ratios.
Concentrations of credit as of the respective period ends were as follows:
<TABLE>
<CAPTION>
PERCENTAGE
OF FINANCE
NUMBER RECEIVABLES
OF CLIENTS OUTSTANDING
---------- -----------
<S> <C> <C>
June 30, 1996....................................... 3 39%
December 31, 1995................................... 3 38%
December 31, 1994................................... 4 73%
</TABLE>
The number of clients generating fee revenue in excess of 10% of the total
fee revenue, and the respective aggregate percentages of fee revenue earned
from those clients, were as follows:
<TABLE>
<CAPTION>
AGGREGATE
PERCENTAGE
NUMBER OF TOTAL FEE
OF CLIENTS REVENUE
---------- ------------
<S> <C> <C>
June 30, 1996...................................... 2 23%
December 31, 1995.................................. 2 25%
December 31, 1994.................................. 4 64%
</TABLE>
F-23
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. SUBSEQUENT EVENTS AND INITIAL PUBLIC OFFERING
In connection with a planned initial public offering (offering) of common
stock by the Company, effective as of September 1, 1996, Funding acquired,
using the purchase method of accounting, the assets of DEL, consisting
principally of client receivables, by assuming DEL's liabilities and paying
$472,369 in cash. The cash payment approximated the fair value and book value
of DEL's net assets. Immediately following the acquisition, DEL was dissolved.
Effective upon the completion of the offering, the Company will acquire from
proceeds of the offering, using the purchase method of accounting, all limited
partnership interests in Funding and the partnership will be liquidated. The
amount paid to acquire the limited partnership interest is expected to
appropriate both the fair value and the book value of Funding at the date of
the acquisition.
In anticipation of the offering and the liquidations of Funding and DEL, the
bank that had previously provided lines of credit to those entities has
consented to the assignment to the Company of the agreements related to these
lines of credit and agreed to increase the aggregate credit facility from $35
million to $50 million. In July 1996, the Company began negotiations with an
international financial institution for financing under an investment grade,
asset-backed commercial paper program and expects to finalize the terms of the
agreement in conjunction with the closing of the initial public offering.
Under the proposed terms of the commercial paper program, the Company will be
able to borrow up to $100 million.
F-24
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
Property and equipment........................................... $ 210,682
Prepaid expenses and other....................................... 434,822
---------
Total assets................................................. $ 645,504
=========
LIABILITIES AND EQUITY
Cash overdraft................................................... $ 11,171
Amounts due to limited partnership............................... 432,654
Accounts payable to related parties.............................. 593,745
Accounts payable and accrued expenses............................ 144,099
Notes payable.................................................... 134,481
---------
Total liabilities............................................ 1,316,150
Equity
Limited partners' capital...................................... 47,187
Stockholders' deficit:
Common stock, par value $.01 per share; 30,000,000 shares
authorized; 3,419,993 shares issued and outstanding........... 34,200
Retained deficit............................................... (752,033)
---------
Total stockholders' deficit.................................. (717,833)
---------
Total equity deficit......................................... (670,646)
---------
Total liabilities and equity................................. $ 645,504
=========
</TABLE>
See accompanying notes.
F-25
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED STATEMENTS OF OPERATIONS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED SEPTEMBER
30,
------------------
1995 1996
-------- ---------
<S> <C> <C>
Fee income:
Discount fees............................................ $312,090 $ 589,194
Origination fees......................................... 124,000
Other fees............................................... 83,690 129,264
-------- ---------
Total fee income........................................... 395,780 842,458
Interest expense........................................... 45,526 156,957
-------- ---------
Net fee income............................................. 350,254 685,501
Provision for losses on receivables........................ 45,993 75,311
-------- ---------
Net fee income after provision for losses on receivables... 304,261 610,190
Operating expenses:
Compensation and benefits................................ 437,444 826,059
Occupancy................................................ 92,194 118,656
Professional fees........................................ 54,452 81,970
Other.................................................... 185,447 345,134
-------- ---------
Total operating expenses................................... 769,537 1,371,819
Other income:
Income from limited partnership.......................... 165,580 520,369
Management fees from affiliates.......................... 300,000 315,967
Management fees from others.............................. 137,146
Other.................................................... 49,366 171,651
-------- ---------
Total other income......................................... 652,092 1,007,987
-------- ---------
Income before income taxes (benefit)....................... 186,816 246,358
Income taxes (benefit)..................................... (13,268)
-------- ---------
Net income................................................. $186,816 $ 259,626
======== =========
Unaudited pro forma data:
Income taxes............................................. $ 96,080
---------
Net income............................................... $ 150,278
=========
</TABLE>
See accompanying notes.
F-26
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' DEFICIT
--------------------------------------
LIMITED
PARTNERS' COMMON PAID-IN RETAINED TOTAL
CAPITAL STOCK CAPITAL DEFICIT TOTAL EQUITY
--------- ------- ------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 1,710 shares
of $1.00 par value
common stock at April
22, 1993............... $ 1,710 $ (1,335) $ 375 $ 375
Capital contributions... $ 150,000 150,000
Net income (loss)....... 5,410 (29,731) (29,731) (24,321)
--------- ------- ------ --------- --------- ---------
Balance at December 31,
1993................... 155,410 1,710 (31,066) (29,356) 126,054
Issuance of 379,998
common stock warrants.. $ 500 500 500
Conversion of $1.00 par
value shares to $.01
par value shares....... (1,693) 1,693
Issuance of 3,418,283
shares of $.01 par
value common stock..... 34,183 (2,193) (24,494) 7,496 7,496
Capital contributions... 123,830 123,830
Net income (loss)....... 11,460 (337,406) (337,406) (325,946)
Distributions to
partners............... (145,843) (145,843)
--------- ------- ------ --------- --------- ---------
Balance at December 31,
1994................... 144,857 34,200 (392,966) (358,766) (213,909)
Capital contributions... 89,021 89,021
Net income (loss)....... 377,341 (182,004) (182,004) 195,337
Distributions to
partners............... (195,914) (195,914)
--------- ------- ------ --------- --------- ---------
Balance at December 31,
1995................... 415,305 34,200 (574,970) (540,770) (125,465)
Net income (loss)
(unaudited)............ 436,689 (177,063) (177,063) 259,626
Distributions to
partners (unaudited)... (804,807) (804,807)
--------- ------- ------ --------- --------- ---------
Balance at September 30,
1996 (unaudited)....... $ 47,187 $34,200 $ -- $(752,033) $(717,833) $(670,646)
========= ======= ====== ========= ========= =========
</TABLE>
See accompanying notes.
F-27
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
COMBINED STATEMENTS OF CASH FLOWS UNAUDITED
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED SEPTEMBER 30,
----------------------
1995 1996
----------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ........................................... $ 186,816 $ 259,626
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation......................................... 10,264 50,135
Provision for losses on receivables.................. 45,993 75,311
Income from unconsolidated limited partnership....... (165,580) (520,369)
Changes in assets and liabilities:
Decrease in accounts receivable from related
parties............................................ 112,369
Increase in prepaid expenses and other.............. (15,528) (429,907)
Decrease in cash overdraft.......................... (23,979)
Decrease accrued interest........................... (12,591)
Increase in accounts payable to related parties..... 6,552 434,301
Increase in accounts payable and accrued expenses... 67,958 75,157
----------- ---------
Net cash provided by operating activities............ 136,475 20,053
INVESTING ACTIVITIES...................................
Increase in finance receivables, net.................. (1,296,664) (929,040)
Decrease in investment in limited partnership......... 362,859 803,486
Purchase of property and equipment, net............... (5,153) (184,677)
Sale of assets of DEL, net............................ 447,044
----------- ---------
Net cash provided by (used in) investing activities.. (938,958) 136,813
FINANCING ACTIVITIES...................................
Net borrowings under line of credit................... 798,840 609,658
Increase (decrease) in notes payable to related
parties.............................................. 250 (75,000)
Increase in notes payable............................. 113,283
(Distributions to) contributions from partners, net... 144,858 (804,807)
----------- ---------
Net cash provided by (used in) financing activities.. 943,948 (156,866)
----------- ---------
Net increase in cash and cash equivalents............. 141,465 --
Cash and cash equivalents at beginning of period...... 6,978
----------- ---------
Cash and cash equivalents at end of period............ $ 148,443 $ --
=========== =========
Supplemental disclosure of cash flow information:
Cash payments for interest........................... $ 49,053 $ 170,754
=========== =========
</TABLE>
See accompanying notes.
F-28
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1996
AND 1995--UNAUDITED
1. NATURE OF BUSINESS
HealthCare Financial Partners, Inc. (Company), which was incorporated and
previously doing business as HealthPartners Financial Corporation from
inception to September 13, 1996, was formed in 1993 under the laws of the state
of Delaware. The Company owns a 1% general partner interest in Health Partners
DEL, L.P. (DEL) and a 1% general partner interest in HealthPartners Funding,
L.P. (Funding). In addition, the majority owners of the Company owned all of
the limited partnership interests of DEL. The Company's principal activity is
its interest in Funding. Additionally, the Company provides operational and
management support to Funding for a fee. Funding's principal activities are
purchasing accounts receivable from health care providers throughout the United
States and providing financing to health care providers under asset-based
lending arrangements.
The combined financial statements include the accounts and operations of the
Company and DEL. The financial statements are combined as a result of common
control and management between the two entities. All transactions between the
Company and DEL have been eliminated in preparation of the combined financial
statements. The Company accounts for its investment in Funding on the equity
basis, as the Company does not have sufficient control to warrant
consolidation.
Under the terms of its partnership agreement, DEL will cease to exist
December 31, 2020, unless an event of dissolution shall occur prior to such
time. Effective September 1, 1996, the net assets of DEL were sold to Funding
in contemplation of an initial public offering (see Note 9). The limited
partners' liability is limited to the capital they have contributed.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
FINANCE RECEIVABLES
Purchased finance receivables are recorded at the contractual purchase
amount, less the discount fee (the "amount purchased"). The difference between
the amount purchased and the amount paid to acquire such receivables is
reflected as client holdbacks. In the event purchased receivables become
delinquent, DEL has certain rights of offset to apply client holdbacks (or
future fundings) against delinquent accounts receivable.
ALLOWANCE FOR LOSSES ON RECEIVABLES
The allowance for losses on receivables is maintained at the amount estimated
to be sufficient to absorb future losses, net of recoveries, inherent in the
finance receivables. The provision for losses on receivables is the periodic
cost of maintaining an adequate allowance. In evaluating the adequacy of the
allowance, management considers trends in past-due accounts, historical charge-
off and recovery rates, credit risk indicators, economic conditions, on-going
credit evaluations, overall portfolio size, average client balances, excess
collateral, and underwriting policies, among other items.
Additionally, client holdbacks are available to offset losses on receivables.
And, under certain circumstances, credit losses can be offset against client
holdbacks related to other financings.
F-29
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment, principally computer and related peripherals, are
stated at cost less accumulated depreciation of $62,992 at September 30, 1996.
Depreciation expense is computed primarily using the straight-line method.
CLIENT HOLDBACKS
Client holdbacks represent the excess of the net recorded amount of
purchased receivables over the amount advanced. In its purchase agreements
with clients, the Company retains the right to apply any past-due or
uncollectible amounts against these holdbacks. Holdbacks are assigned to
specific purchased receivables. The client holdbacks are payable upon
collection of the respective purchased receivable amount.
REVENUE RECOGNITION
Discount fees may be charged at closing or periodically based on the
outstanding receivable balance and are recognized in income under methods that
approximate the effective interest method.
Origination fees are charged at closing to cover the direct closing costs of
the contract, and are recognized in income under a method that approximates
the effective interest method.
INCOME TAXES
The Company uses the liability method of accounting for income taxes as
required by Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred-tax assets and
liabilities are determined based on differences between the financial
statement carrying amounts and the tax basis of existing assets and
liabilities (i.e. temporary differences) and are measured at the enacted rates
that will be in effect when these temporary differences reverse. Net deferred
taxes are not material to the combined financial statements.
DEL has elected partnership reporting status under the Internal Revenue
Code. Accordingly, taxable income or loss is allocated to the partners in
accordance with the partnership agreement and is reported on the individual
partner's income tax return. Therefore, no provision for income tax is
included in the historical financial statements for DEL.
EARNINGS PER SHARE
Earnings per share is not presented because it is not meaningful due to the
partnership reporting basis of DEL and to the reorganization as described in
Note 9.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
PRO FORMA INCOME TAXES
Federal and state income tax laws require that the income or loss of DEL, a
partnership, be included in the income tax returns of the partners.
Accordingly, income taxes for DEL are not included in the historical combined
financial statements of the Company. Assuming the completion of the proposed
initial public offering (see Note 9), the operations of DEL will be subject to
corporate income taxes. Accordingly, for informational purposes, the
statements of operations include disclosure of pro forma adjustments for
income taxes which would have been recorded if DEL had been a corporation,
based on the tax laws in effect during those periods.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements furnished reflect all
adjustments, consisting solely of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the Company's
F-30
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
interim financial statements as of and for the nine-month periods ended
September 30, 1995 and 1996. The results of operations for the nine-month
periods ended September 30, 1995 and 1996 are not necessarily indicative of
the operating results of the Company for the entire year.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet,
for which it is practicable to estimate that value. Due to the short-term
nature and the variable rates of all the Company's financial instruments,
there are no significant differences between recorded values and fair values.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board (FASB) issued FASB
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" (the Statement). The Statement encourages companies to
recognize expense for stock-based awards based on their fair value on the date
of grant, however, the Statement allows companies to continue the existing
intrinsic value method of accounting provided that pro forma disclosures are
made of what net income and earnings per share would have been had the fair
value method been used. The Company will continue with the intrinsic value
method of accounting for stock-based awards. As of September 30, 1996, there
was no impact to the Company's financial statements from the adoption of the
Statement.
3. ALLOWANCE FOR LOSSES ON RECEIVABLES
Activity in the allowance for losses on receivables was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1996
-------- ---------
<S> <C> <C>
Beginning of period......................................... $ 20,847 $ 66,840
Provision for losses on receivables......................... 45,993 75,311
Sale of receivables (see note 9)............................ (142,151)
-------- ---------
End of period............................................... $ 66,840 $ --
======== =========
</TABLE>
4. LINE OF CREDIT
Through August 31, 1996, DEL maintained a revolving line of credit with a
bank. The line of credit was collateralized by DEL's purchased finance
receivables. DEL had the ability to borrow up to $3,750,000. The rate of
interest charged under the agreement was the bank's base rate of interest, as
defined, plus 1.5%, or the revolving credit LIBOR rate plus 3% determined at
the option of DEL upon each additional draw, subject to certain limitations.
DEL paid an unused line fee monthly of one twelfth of 0.5% on the amount by
which the facility cap sublimit exceeded the average amount outstanding during
the preceding month.
In anticipation of the offering and the liquidations of Funding and DEL (see
note 9), the bank that had previously provided lines of credit to DEL has
consented to the assignment to the Company of the agreements related to the
lines of credit and agreed to increase the aggregate credit facilities from
$35 million to $50 million under substantially the same terms and conditions.
F-31
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. EQUITY
On December 28, 1994, the Company issued warrants providing the right to
receive 379,998 shares of the Company's common stock for $500 of consideration
which, in the opinion of management, approximated the fair value of the
warrants at that date. The warrants will be exercised in connection with the
reorganization described in Note 9.
On November 1, 1995, the Company issued stock options to purchase 38,381
shares of the Company's common stock at an exercise price of $2.61 per share.
The stock options expire in 2005. See Note 9 for additional equity
transactions in contemplation of the reorganization and initial public
offering.
6. LEASE COMMITMENTS
The Company leases office space under noncancelable operating leases. The
future minimum lease payments as of September 30, 1996 were as follows:
<TABLE>
<S> <C>
1996.............................................................. $ 42,317
1997.............................................................. 160,494
1998.............................................................. 139,410
1999.............................................................. 143,471
2000.............................................................. 147,531
Thereafter........................................................ 49,628
--------
$682,851
========
</TABLE>
Rent expense for the nine month periods ended September 30, 1996 and 1995
was $118,656 and $92,194 respectively.
7. RELATED PARTY TRANSACTIONS
The Company has an agreement with Funding, whereby Funding pays a monthly
management fee for operational and management support provided. Management
fees under this agreement were $315,967 and $300,000 for the nine month
periods ended September 30, 1996 and 1995, respectively.
Additionally, DEL entered into an agreement with Funding whereby certain
purchased finance receivables of Funding are assigned to DEL with risks and
rewards of ownership. All purchased receivables outstanding were assigned from
Funding under the agreement.
8. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company earned fee revenue in excess of 10% of total fee revenue from
two customers, aggregating 38% of total revenue, for the nine month period
ended September 30, 1995, and from one customer, comprising 10.5% of total
revenue, for the nine month period ended September 30, 1996.
F-32
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
HEALTHPARTNERS DEL, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. REORGANIZATION AND INITIAL PUBLIC OFFERING
The Company expects to issue 2,100,000 shares of common stock in an initial
public offering (offering). In contemplation of the offering, the Company
increased its authorized common shares from 1,000,000 shares to 30,000,000 and
effected a 4.56-to-1 split of the common stock in the form of a stock
dividend, including outstanding warrants and options, on September 13, 1996.
Shares of common stock outstanding for all periods presented have been
retroactively restated to give effect to the stock split. The Company also
authorized 10,000,000 shares of preferred stock. The rights and preferences of
the preferred stock are established by the Board of Directors in its sole
discretion. The specific rights and preferences have not been established and
no preferred stock has been issued.
On September 13, 1996, the Company adopted the HealthCare Financial Partners
1996 Stock Incentive Plan (the Incentive Plan). The Company has reserved
750,000 shares for issuance under the Incentive Plan. Pursuant to the adoption
of the Incentive Plan, the Company granted options thereunder to all current,
full-time employees other than the senior executive officers of the Company to
purchase an aggregate of 189,000 shares of common stock at an exercise price
of $11.05 per share. The options are exercisable seven years after the grant
date and are subject to a maximum ten year term. If the offering is
successful, however, the options will vest and become exercisable in 25%
increments at each anniversary of the grant date, commencing on September 13,
1997. Also, under the Incentive Plan, the Company granted 37,000 options on
September 13, 1996 to each of the three senior executive officers of the
Company at an exercise price equal to the initial offering price. These
options are contingent upon the completion of the offering and will vest and
become exercisable in 25% increments on each anniversary date of the grant
date, commencing on September 13, 1997.
Also on September 13, 1996, the Company adopted the HealthCare Financial
Partners, Inc. 1996 Director Incentive Plan (the Director Plan). The Company
has reserved 100,000 shares of common stock for issuance pursuant to awards
under the Director Plan. No shares have been granted under the Director Plan.
On September 1, 1996, in contemplation of the offering, Funding acquired,
using the purchase method of accounting, the assets of DEL, consisting
principally of client receivables, by assuming DEL's liabilities and paying
$486,630 in cash. The cash payment approximated the fair value and book value
of DEL's net assets. Immediately following the acquisition, DEL ceased
operations. The limited partner capital remaining at September 30, 1996
represents amounts to be paid to the limited partners of DEL upon liquidation
of DEL.
Effective upon the completion of the offering, the Company will acquire from
proceeds of the offering, using the purchase method of accounting, all limited
partnership interests in Funding and the partnership will be liquidated. The
amount paid to acquire the limited partnership interest is expected to
approximate both the fair value and the book value of Funding at the date of
acquisition.
In July 1996, the Company began negotiations with an international financial
institution for financing under an investment grade, asset-backed commercial
paper program and expects to finalize the terms of the agreement prior to the
closing of the initial public offering. The Company has received a lending
commitment from the international financial institution of $100 million under
the commercial paper program.
F-33
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
BALANCE SHEET
UNAUDITED
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
ASSETS
Cash and cash equivalents......................................... $ 2,464,578
Finance receivables............................................... 79,566,908
Less:
Allowance for losses on receivables........................... 1,035,992
Unearned discount fees........................................ 356,228
-----------
Net finance receivables..................................... 78,174,688
Accounts receivable from related parties.......................... 559,032
Prepaid expenses and other........................................ 551,228
-----------
Total assets.................................................... $81,749,526
===========
LIABILITIES AND PARTNERS' CAPITAL
Line of credit.................................................... $42,607,630
Client holdbacks.................................................. 16,212,360
Accounts payable to clients....................................... 645,067
Accounts payable and accrued expenses............................. 99,341
Accrued interest.................................................. 303,120
-----------
Total liabilities................................................. 59,867,518
Partners' capital................................................. 21,882,008
-----------
Total liabilities and partners' capital......................... $81,749,526
===========
</TABLE>
See accompanying notes.
F-34
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF OPERATIONS UNAUDITED
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30,
-----------------------
1995 1996
----------- -----------
<S> <C> <C>
Fee and interest income:
Discount fees....................................... $1,976,870 $ 4,516,217
Commitment fees..................................... 243,289 384,230
Other fees.......................................... 198,853 334,385
Interest income..................................... 163,365 2,211,007
----------- -----------
Total fee and interest income..................... 2,582,377 7,445,839
Interest expense...................................... 207,834 2,147,374
----------- -----------
Net fee and interest income........................... 2,374,543 5,298,465
Provision for losses on receivables................... 171,395 537,805
----------- -----------
Net fee and interest income after provision for losses
on receivables....................................... 2,203,148 4,760,660
Operating expenses:
Commissions......................................... 65,368 336,570
Management fees paid to general partner............. 300,000 315,967
Professional fees................................... 89,240 185,191
Licensing fees...................................... 75,788 100,418
Other............................................... 207,505 288,247
----------- -----------
Total operating expenses.............................. 737,901 1,226,393
----------- -----------
Net income............................................ 1,465,247 3,534,267
Net income allocable to limited partners.............. 1,299,667 3,013,898
----------- -----------
Net income allocable to general partner............... $ 165,580 $ 520,369
=========== ===========
Unaudited pro forma data:
Income taxes........................................ $ 1,378,364
-----------
Net income.......................................... $ 2,155,903
===========
</TABLE>
See accompanying notes.
F-35
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
GENERAL LIMITED TOTAL
PARTNER PARTNERS PARTNERS' CAPITAL
---------- ----------- -----------------
<S> <C> <C> <C>
Capital contributions at September
12, 1994 (Date of Inception)...... $ 52,900 $ 5,290,000 $ 5,342,900
Net income (loss).................. (303,385) 91,762 (211,623)
Capital distributions.............. (6,406) (6,406)
---------- ----------- -----------
Balance at December 31, 1994....... (256,891) 5,381,762 5,124,871
Capital contributions.............. 75,000 7,500,000 7,575,000
Net income......................... 597,146 2,305,168 2,902,314
Capital distributions.............. (564,792) (2,198,217) (2,763,009)
---------- ----------- -----------
Capital at December 31, 1995....... (149,537) 12,988,713 12,839,176
Capital contributions (unaudited).. 120,000 12,000,000 12,120,000
Net income (unaudited)............. 520,369 3,013,898 3,534,267
Capital distributions (unaudited).. (923,486) (5,687,949) (6,611,435)
---------- ----------- -----------
Capital at September 30, 1996
(unaudited)....................... $ (432,654) $22,314,662 $21,882,008
========== =========== ===========
</TABLE>
See accompanying notes.
F-36
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTH PERIOD
ENDED SEPTEMBER 30,
-------------------------------
1995 1996
------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................... $ 1,465,247 $ 3,534,267
Adjustments to reconcile net income to net
cash provided by operations:
Provision for losses on receivables.......... 171,395 537,805
Amortization of organization costs........... 16,675 13,240
Changes in assets and liabilities:
Decrease (increase) in accounts receivable
from related parties........................ 195,790 (382,261)
Increase in prepaid expenses and other....... (133,486) (134,293)
Increase (decrease) in accounts payable to
clients..................................... 443,511 (399,976)
Increase (decrease) in accounts payable to
related parties............................. 13,556 (334,475)
Increase in accrued interest................. 164,347
Increase in accounts payable and accrued
expenses.................................... 151,084 2,418
------------ ------------
Net cash provided by operating activities..... 2,323,772 3,001,072
INVESTING ACTIVITIES
Increase in finance receivables, net.......... (16,140,245) (31,928,444)
Acquisition of assets of DEL, net............. (447,044)
------------ ------------
Net cash used in investing activities......... (16,140,245) (32,375,488)
FINANCING ACTIVITIES
Net borrowings under line of credit........... 9,178,359 24,190,112
Partners' capital contributions............... 6,565,000 12,120,000
Partners' capital distributions............... (1,385,367) (6,611,435)
------------ ------------
Net cash provided by financing activities..... 14,357,992 29,698,677
------------ ------------
Net increase in cash and cash equivalents..... 541,519 324,261
Cash and cash equivalents at beginning of
period....................................... 1,963,089 2,140,316
------------ ------------
Cash and cash equivalents at end of period.... $ 2,504,608 $ 2,464,577
============ ============
Supplemental disclosure of cash flow
information
Cash payments for interest................... $ 207,834 $ 1,983,027
============ ============
</TABLE>
See accompanying notes.
F-37
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996 AND FOR THE NINE MONTH PERIOD ENDEDSEPTEMBER 30, 1996
AND 1995--UNAUDITED
1. NATURE OF BUSINESS
HealthPartners Funding, L.P., a limited partnership (the Partnership), was
formed as a limited partnership under the laws of the state of Delaware on
September 12, 1994. HealthCare Financial Partners, Inc., which was
incorporated and previously doing business as HealthPartners Financial
Corporation from inception to September 13, 1996, (Company), owns 1% of the
Partnership. The limited partners are Farallon Capital Partners, Limited
Partnership, which owns 84% of the Partnership and RR Capital Partners,
Limited Partnership, which owns 15% of the Partnership. On March 28, 1996, the
limited partners assigned their interest to HealthPartners Investors L.L.C.
The Partnership's principal activity is purchasing accounts receivable from
health care providers throughout the United States and providing financing to
health care providers under asset-based lending agreements.
The Partnership shall continue to operate until the earliest of the
following dates: (i) December 31, 1997, unless extended to December 31, 1998
at the election, prior to June 30, 1997, of Limited Partner interests having
capital accounts the aggregate value of which exceeds 50% of the value of all
Limited Partners capital accounts as of such date, or (ii) the date on which a
Partnership disabling event occurs. However, the General Partner may terminate
the Partnership on 90-days written notice to each of the Limited Partners.
(See Note 8.)
The Limited Partners' liability is limited to the capital they have
contributed to the Partnership.
2. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash and other liquid financial
instruments with an original maturity of three months or less.
FINANCE RECEIVABLES
Purchased finance receivables are recorded at the contractual amount, less
the discount fee (the "amount purchased"). The difference between the amount
purchased and the amount paid to acquire such receivables is reflected as
client holdbacks. In the event purchased receivables become delinquent, the
Partnership has certain rights of offset to apply client holdbacks (or future
fundings) against delinquent accounts receivable.
Asset-based lending is provided in the form of either a term note or
revolving line of credit. The amount of credit granted is based on a
predetermined percentage of the customer's total accounts receivable, and the
notes are secured by the accounts receivable.
ALLOWANCE FOR LOSSES ON RECEIVABLES
The allowance for losses on receivables is maintained at the amount
estimated to be sufficient to absorb future losses, net of recoveries,
inherent in the finance receivables. The provision for credit losses is the
periodic cost of maintaining an adequate allowance. In evaluating the adequacy
of the allowance, management considers trends in past due accounts, historical
charge-off and recovery rates, credit risk indicators, economic conditions,
on-going credit evaluations, overall portfolio size, average client balances,
excess collateral, and underwriting policies, among other items.
Additionally, client holdbacks are available to offset losses on
receivables. And, under certain circumstances, credit losses can be offset
against client holdbacks related to other financings.
The Partnership performs a loan-by-loan review for all asset-based loans to
identify loans to be charged off.
F-38
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CLIENT HOLDBACKS
Client holdbacks represent the excess of the net recorded amount of
purchased receivables over the amount advanced. In its purchase agreements
with clients, the Partnership retains the right to apply any past-due or
uncollectible amounts against these holdbacks. Holdbacks are assigned to
specific purchased receivables. The client holdbacks are payable upon
collection of the respective purchased receivable amount.
REVENUE RECOGNITION
Discount fees may be charged at closing or periodically based on the
outstanding receivable balance and are recognized in income under methods that
approximate the effective interest method.
Commitment fees are charged at closing to cover the direct closing costs of
the contract, and are recognized in income under a method that approximates
the effective interest method.
Accrual of interest income on asset-based loans is suspended when a loan is
contractually delinquent for 90 days or more. The accrual is resumed when the
loan becomes contractually current, and past due interest income is recognized
at that time.
NET INCOME ALLOCATION
Net income and loss are allocated between the General Partner and the
Limited Partners pursuant to the terms of the partnership agreement.
Generally, this results in an allocation of 20% to the General Partner, as a
preferred distribution, and the remaining 80% among the general and limited
partners pro rata, in accordance with their respective partnership
percentages. The 20% preferred distribution to the General Partner is
calculated on net income from operations excluding interest on overnight
investments. The preferred distribution may increase based upon the General
Partner's performance. Once the limited partners have received a 20% return on
their invested capital, net income is then distributed 40% to the General
Partner and 60% to the Limited Partners.
INCOME TAXES
The Partnership elected partnership reporting status under the Internal
Revenue Code. Accordingly, taxable income or loss, is allocated to the
partners in accordance with the partnership agreement and is reported on the
individual partner's income tax return. Therefore, no provision for income tax
is included in the historical financial statement.
EARNINGS PER SHARE
Earnings per share is not presented because it is not meaningful due to the
partnership reporting basis and to the planned initial public offering
described in Note 8.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements furnished reflect all
adjustments, consisting solely of normal recurring accruals, which are, in the
opinion of management, necessary for a fair presentation of the Partnership's
interim financial statements as of and for the nine-month periods ended
September 30, 1995 and 1996. The results of operations for the nine-month
periods ended September 30, 1995 and 1996 are not necessarily indicative of
the operating results of the Partnership for the entire year.
F-39
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA INCOME TAXES
Federal and state income tax laws require that the income or loss of the
Partnership be included in the income tax returns of the partners.
Accordingly, income taxes are not included in the historical financial
statements. Assuming the completion of the proposed initial public offering
(see Note 8), the operations of the Partnership will be subject to corporate
income taxes. Accordingly, for informational purposes, the statement of
operations includes disclosure of pro forma adjustments for income taxes which
would have been recorded if the Partnership had been a corporation, based on
the tax laws in effect during those periods.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure of fair value information
about financial instruments, whether or not recognized on the balance sheet,
for which it is practicable to estimate that value. Due to the short-term
nature and the variable rates of all the Partnership's financial instruments,
there are no significant differences between recorded values and fair values.
3. FINANCE RECEIVABLES
Finance receivables consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
<S> <C>
Purchased accounts receivable..................................... $46,064,079
Asset-based loans................................................. 33,502,829
-----------
Total finance receivables....................................... $79,566,908
===========
</TABLE>
4. ALLOWANCE FOR LOSSES ON RECEIVABLES
Activity in the allowance for losses on receivables was as follows:
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
SEPTEMBER 30,
-----------------------
1995 1996
-----------------------
<S> <C> <C>
Beginning of period.................................... $ 326,792 $ 498,187
Provision for losses on receivables.................... 171,395 537,805
---------- ------------
End of period.......................................... $ 498,187 $ 1,035,992
========== ============
</TABLE>
F-40
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. LINE OF CREDIT
Prior to September 1996, the Partnership maintained a revolving line of
credit with a bank, and had the ability to borrow up to $31,250,000. Effective
September 5, 1996, and in conjunction with the purchase of a limited
partnership (See Note 8), the aggregate credit facility under the line was
amended to $50,000,000 The rate of interest charged under the agreement is the
bank's base rate of interest, as defined, or the revolving credit LIBOR rate
plus 3% determined at the option of the Partnership upon each additional draw,
subject to certain limitations. As of September 30, 1996 the weighted average
interest rate was 9.1%. The Partnership pays an unused line fee monthly of one
twelfth of 0.5% on the amount by which the facility cap sublimit exceeds the
average amounts outstanding during the preceding month. The line of credit is
collateralized by the finance receivables of the Partnership.
The Partnership is required to comply with certain financial covenants
throughout the year. The Partnership was in compliance with all financial
covenants at September 30, 1996.
6. RELATED PARTY TRANSACTIONS
The Partnership has an agreement with the General Partner whereby the
Partnership pays a monthly management fee for operational and management
support provided. Management fees under this agreement were $315,967 and
$300,000 for the nine month period ended September 30, 1996 and 1995. The
General Partner is required to maintain a 1% capital account balance in the
Partnership. The General Partner was not in compliance with this requirement.
However, the Partnership has granted a waiver to the General Partner as of
September 30, 1996.
The Partnership pays a licensing fee to a stockholder of the General Partner
for use of computer software. Amounts paid for the nine month period ended
September 30, 1996 and 1995 were $100,418 and 75,788, respectively.
7. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
At September 30, 1996, the Partnership has committed lines of credit to its
customers of $58,100,000 of which approximately $26,700,000 was unused. The
Partnership extends credit based upon qualified client receivables outstanding
and is subject to contractual collateral and loan-to-value ratios.
Concentration of credit as of the period end was:
<TABLE>
<CAPTION>
PERCENTAGE
OF FINANCE
NUMBER RECEIVABLES
OF CLIENTS OUTSTANDING
---------- -----------
<S> <C> <C>
September 30, 1996.................................. 3 31%
</TABLE>
The number of clients generating fee revenue in excess of 10% of the total
fee revenue, and the aggregate percentage of fee revenue earned from those
clients, was as follows:
<TABLE>
<CAPTION>
AGGREGATE
PERCENTAGE
NUMBER OF TOTAL FEE
OF CLIENTS REVENUE
---------- ------------
<S> <C> <C>
September 30, 1996................................. 1 13%
</TABLE>
F-41
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. PURCHASE ACQUISITION AND INITIAL PUBLIC OFFERING
In connection with a planned initial public offering (offering) of common
stock by the Company, effective as of September 1, 1996, Funding acquired,
using the purchase method of accounting, the assets of Health Partners DEL
L.P. ("DEL"), consisting principally of client receivables, by assuming DEL's
liabilities and paying $486,630 in cash. The cash payment approximated the
fair value and book value of DEL's net assets. The pro forma results of
operations reflect the results of the Partnership as if the Partnership had
purchased DEL as of the beginning of the respective periods and, accordingly,
DEL's operations were included with Funding:
<TABLE>
<CAPTION>
FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER
30,
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net fee and interest income........................... $ 2,724,797 $ 5,983,966
Provision for loses on receivables.................... (217,388) (613,116)
Net operating expenses................................ (586,512) (1,127,879)
----------- -----------
Net income.......................................... $ 1,920,897 $ 4,242,971
=========== ===========
</TABLE>
Effective upon the completion of the offering, the Company will acquire from
proceeds of the offering, using the purchase method of accounting, all limited
partnership interests in Funding and the Partnership will be liquidated. The
amount paid to acquire the limited partnership interest is expected to
approximate both the fair value and the book value of Funding at the date of
the acquisition.
In July 1996, the Company began negotiations with an international
financial institution for financing under an investment grade, asset-backed
commercial paper program and expects to finalize the terms of the agreement in
conjunction with the closing of the initial public offering. The Company has
received a lending commitment from the international financial institution of
$100 million under the commercial paper program.
F-42
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus in connection with the offer made hereby and, if given or
made, such information or representations must not be relied upon as having
been so authorized by the Company or any of the Underwriters. This Prospectus
does not constitute an offer to sell or a solicitation of an offer to buy any
of the securities offered hereby to any person or by anyone in any jurisdiction
in which it is unlawful to make such offer or solicitation. Neither the deliv-
ery of this Prospectus nor any sale made hereunder shall, under any circum-
stances, create any implication that there has been no change in the affairs of
the Company or that the information contained herein is correct as of any time
subsequent to the date hereof.
------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Pro Forma Financial Information.......................................... 19
Management's Discussion and Analysis of Pro Forma Financial Condition and
Pro Forma Results of Operations......................................... 22
Selected Historical Financial Data....................................... 29
Management's Discussion and Analysis of Historical Financial Condition
and Historical Results of Operations.................................... 31
Business................................................................. 34
Management............................................................... 45
Certain Transactions..................................................... 51
Principal Stockholders................................................... 53
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 58
Legal Matters............................................................ 59
Experts.................................................................. 59
Additional Information................................................... 59
Index to Financial Statements............................................ F-1
</TABLE>
Until , 1996 (25 days after the date of this Prospectus), all dealers ef-
fecting transactions in the shares offered hereby, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in addi-
tion to the obligation of dealers to deliver a Prospectus when acting as Under-
writers and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2,100,000 SHARES
[LOGO OF HEALTHCARE FINANCIAL PARTNERS APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
MONTGOMERY SECURITIES
STIFEL, NICOLAUS & COMPANY
Incorporated
, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses, other than underwriting discounts
and commissions, to be borne by HealthCare Financial Partners, Inc. (the
"Company") in connection with the issuance and distribution of the Common
Stock being registered:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---- --------
<S> <C>
Securities and Exchange Commission registration fee................... $ 11,659
NASD filing fee....................................................... 3,881
Nasdaq National Market listing fee.................................... 32,250
Blue Sky fees and expenses............................................ 8,000
Printing and engraving expenses....................................... 110,000
Legal fees and expenses............................................... 220,000
Accounting fees and expenses.......................................... 100,000
Transfer Agent and Registrar fee...................................... 10,000
Miscellaneous......................................................... 4,210
--------
Total............................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is organized under the laws of the State of Delaware. The
Delaware General Corporation Law, as amended (the "DGCL"), provides that a
Delaware corporation has the power generally to indemnify its directors,
officers, employees and other agents (each, a "Corporate Agent") against
expenses and liabilities (including amounts paid in settlement) in connection
with any proceeding involving such person by reason of his being a Corporate
Agent, other than a proceeding by or in the right of the corporation, if such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and, with respect to any
criminal proceeding, such person had no reasonable cause to believe his
conduct was unlawful. In the case of an action brought by or in the right of
the corporation, indemnification of a Corporate Agent against expenses is
permitted if such person acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation;
however, no indemnification is permitted in respect of any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the Court of Chancery or the
court in which such proceeding was brought shall determine upon application
that despite the adjudication of liability, but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
such indemnification. To the extent that a Corporate Agent has been successful
on the merits of such proceeding, whether or not by or in the right of the
corporation, or in the defense of any claim, issue or matter therein, the
corporation is required to indemnify the Corporate Agent for expenses in
connection therewith. Expenses incurred by a Corporate Agent in connection
with a proceeding may, under certain circumstances, be paid by the corporation
in advance of the final disposition of the proceeding as authorized by the
board of directors. The power to indemnify and advance the expenses under the
DGCL does not exclude other rights to which a Corporate Agent may be entitled
to under the certificate of incorporation, bylaws, agreement, vote of
stockholders or disinterested directors or otherwise.
Under the DGCL, a Delaware corporation has the power to purchase and
maintain insurance on behalf of any Corporate Agent against any liabilities
asserted against and incurred by him in such capacity, whether or not the
corporation has the power to indemnify him against such liabilities under the
DGCL.
As permitted by the DGCL, the Company's Amended and Restated Certificate of
Incorporation contains provisions which limit the personal liability of
directors for monetary damages for breach of their fiduciary duties as
directors except to the extent such limitation of liability is prohibited by
the DGCL. In accordance with the
II-1
<PAGE>
DGCL, these provisions do not limit the liability of any director for any
breach of the director's duty of loyalty to the Company or its stockholders;
for acts of omissions not in good faith or which involve intentional
misconduct or a knowing violation of law; for certain unlawful payments of
dividends or stock repurchases under Section 174 of the DGCL; or for any
transaction from which the director derives an improper personal benefit.
These provisions do not limit the rights of the Company or any stockholder to
seek an injunction or any other non-monetary relief in the event of a breach
of a director's fiduciary duty. In addition, these provisions apply only to
claims against a director arising out of his role as a director and do not
relieve a director from liability for violations of statutory law, such as
certain liabilities imposed on a director under the federal securities laws.
In addition, the Company's Amended and Restated Certificate of Incorporation
and Amended and Restated Bylaws provide for the indemnification of Corporate
Agents for certain expenses, judgments, fines and payments incurred by them in
connection with the defense or settlement of claims asserted against them in
their capacities as Corporate Agents to the fullest extent authorized by the
DGCL. The Company expects to purchase directors and officers liability
insurance in order to limit its exposure to liability for indemnification of
directors and officers.
In addition, the Company has entered into indemnification agreements with
each of its officers and directors, the form of which is filed as Exhibit 10.6
to this Registration Statement.
Reference is made to Sections 102(b)(7) and 145 of the DGCL in connection
with the above summary of indemnification, insurance and limitation of
liability.
The purpose of these provisions is to assist the Company in retaining
qualified individuals to serve as officers, directors or other Corporate
Agents of the Company by limiting their exposure to personal liability for
serving as such.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since its inception, the Company has issued and sold (without payment of any
selling commission to any person), the following unregistered securities:
1. In connection with the organization of the Company on April 23, 1993,
the Company issued an aggregate of 1,710 shares of common stock to four
persons, three of whom are executive officers, for an aggregate
consideration of $375.
2. On December 28, 1994, the Company issued an aggregate of 3,418,283
shares of common stock to a total of 13 persons, four of whom were existing
stockholders, for an aggregate consideration of $7,496.25.
3. On December 28, 1994, the Company issued warrants to purchase an
aggregate of 379,998 shares of common stock to Farallon Capital Partners,
L.P. and Tinicum Partners, L.P. for an aggregate consideration of $500.
Tinicum Partners, L.P. subsequently assigned its warrants to RR Capital
Partners, L.P. as of December 1, 1995. Each of Farallon Capital Partners,
L.P. and RR Capital Partners, L.P. subsequently assigned their warrants to
HealthPartners Investors, LLC. as of March 28, 1996. As of November 5,
1996, HealthPartners Investors, LLC transferred warrants to purchase
322,423 shares of Common Stock to Farallon Capital Partners, L.P. and
warrants to purchase 57,575 shares of Common Stock to RR Capital Partners,
L.P. On November 1, 1995, the Company issued an option to purchase 38,381
shares of common stock to Steven Silver, a consultant to the Company, at an
option exercise price of $2.61 per share.
4. On September 13, 1996, options to purchase an aggregate of 300,000
shares of common stock were granted under the Company's 1996 Incentive
Stock Plan (the "Incentive Plan") to certain officers and employees of the
Company (25 persons in total). For a description of this transaction and
the Incentive Plan, see "Management--Incentive Stock Plan" in the
Prospectus filed as a part of this Registration Statement. The Company will
file a Registration Statement on Form S-8 with the Securities and Exchange
Commission within 90 days after the completion of the Offering to cover
sales of shares of common stock under the Incentive Plan.
5. From time to time, the Company has issued notes to certain limited
partnerships to finance its working capital purposes.
All issuances of securities described above were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act of
1933 as transactions by an issuer not involving a public offering or Rule 701
promulgated under the Securities Act. All of the securities were acquired by
the recipients for investment and with no view toward the resale or
distribution thereof. In each instance, the recipient was either an employee
of the Company or a sophisticated investor, the offers and sales were made
without any public solicitation and the stock certificates bear restrictive
legends. No underwriter was involved in the transactions and no commissions
were paid.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement.
2.1 --Form of Assignment and Assumption of Partnership Interest between
the Company, HP Funding, Inc. and HealthPartners Investors L.L.C.,
together with four of related shareholders agreement.
3.1 --Amended and Restated Certificate of Incorporation of the Company.*
3.2 --Amended and Restated Bylaws of the Company.*
4.1 --Specimen Common Stock certificate.
4.2 --See Exhibits 3.1 and 3.2 for the provisions of the Company's Amended
and Restated Certificate of Incorporation and Amended and Restated
Bylaws governing the rights of holders of securities of the Company.
5.1 --Opinion of Powell, Goldstein, Frazer & Murphy.
10.1 --Employment Agreement, dated as of January 1, 1996, between the
Company and John K. Delaney, as amended September 19, 1996.*
10.2 --Employment Agreement, dated as of January 1, 1996, between the
Company and Ethan D. Leder, as amended September 19, 1996.*
10.3 --Employment Agreement, dated as of January 1, 1996, between the
Company and Edward P. Nordberg, Jr.*
10.4 --HealthCare Financial Partners, Inc. 1996 Incentive Stock Plan,
together with form of Incentive Stock Option award.*
10.5 --HealthCare Financial Partners, Inc. 1996 Director Stock Option
Plan.*
10.6 --Form of Indemnification Agreement between the Company and each of
its directors and executive officers.*
10.7 --Form of Registration Rights Agreement between the Company and
certain stockholders.
10.8 --Marketing Services Agreement, dated as of November 1, 1995, among
HealthPartners Funding L.P., the Company and Steven Silver and
assignment by Steven Silver to Medical Marketing and Services, Inc.
dated January 1, 1996.*
10.9 --Loan and Security Agreement, dated as of March 9, 1995, between
Fleet Capital Corporation (as successor to Shawmut Capital
Corporation) and HealthPartners Funding, L.P., as amended May 22,
1996.*
10.10 --Office Lease, dated January 4, 1996, between Two Wisconsin Circle
Joint Venture and the Company, as amended on July 26, 1996 and August
13, 1996.*
10.11 --Software Purchase and License Agreement, dated as of September 1,
1996, between Creative Systems, L.L.C. and the Company.*
10.12 --Amended and Restated Limited Partnership Agreement of HealthPartners
Funding, L.P., dated as of December 1, 1995, among the Company,
Farrallon Capital Partners L.P. and RR Capital Partners, L.P., as
amended and assigned on March 28, 1996.*
10.13 --Commitment Letter dated October 24, 1996, from ING (U.S.) Capital
Corporation to HealthCare Financial Partners, Inc. together with the
related term sheet related to the proposed CP Facility.*
21.1 --List of Subsidiaries of the Registrant.*
23.1 --Consent of Powell, Goldstein, Frazer & Murphy (included in its
opinion filed as Exhibit 5.1).
23.2 --Consent of Ernst & Young LLP.
23.3 --Consent of McGladrey & Pullen, LLP.
23.4 --Consent of John Dealy.*
23.5 --Consent of Geoffrey E.D. Brooke.*
24.1 --Power of Attorney (included in the signature page in Part II of the
Registration Statement).*
</TABLE>
- --------
* Previously filed.
II-3
<PAGE>
(b) Financial Statement Schedules:
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable, and therefore have been
omitted.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the underwriters at the closing
specified in the underwriting agreement, certificates in such denominations
and registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF CHEVY
CHASE, STATE OF MARYLAND, ON THE 5TH DAY OF NOVEMBER, 1996.
HealthCare Financial Partners, Inc.
By:/s/ Edward P. Nordberg, Jr.
----------------------------------
EDWARD P. NORDBERG, JR.
SENIOR VICE PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE 5TH DAY OF NOVEMBER, 1996.
SIGNATURE TITLE
John K. Delaney* Chairman of the Board, President,
- ------------------------------------- Chief Executive Officer and
JOHN K. DELANEY Director (principal executive
officer)
Ethan D. Leder* Vice Chairman of the Board,
- ------------------------------------- Executive Vice President and
ETHAN D. LEDER Director
/s/ Edward P. Nordberg, Jr. Senior Vice President--Legal and
- ------------------------------------- Financial Affairs, Secretary and
EDWARD P. NORDBERG, JR. Director (principal financial
officer)
Treasurer (principal accounting
Hilde M. Alter* officer)
- -------------------------------------
HILDE M. ALTER
*By: /s/ Edward P. Nordberg, Jr.
---------------------------------
EDWARD P. NORDBERG, JR.
ATTORNEY-IN-FACT
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
1.1 --Form of Underwriting Agreement.
2.1 --Form of Assignment and Assumption of Partnership Interest
between the Company, HP Funding, Inc. and HealthPartners
Investors L.L.C., together with four of related shareholders
agreement.
3.1 --Amended and Restated Certificate of Incorporation of the
Company.*
3.2 --Amended and Restated Bylaws of the Company.*
4.1 --Specimen Common Stock certificate.
4.2 --See Exhibits 3.1 and 3.2 for the provisions of the Company's
Amended and Restated Certificate of Incorporation and Amended
and Restated Bylaws governing the rights of holders of
securities of the Company.
5.1 --Opinion of Powell, Goldstein, Frazer & Murphy.
10.1 --Employment Agreement, dated as of January 1, 1996, between
the Company and John K. Delaney, as amended September 19,
1996.*
10.2 --Employment Agreement, dated as of January 1, 1996, between
the Company and Ethan D. Leder, as amended September 19,
1996.*
10.3 --Employment Agreement, dated as of January 1, 1996, between
the Company and Edward P. Nordberg, Jr.*
10.4 --HealthCare Financial Partners, Inc. 1996 Incentive Stock
Plan, together with form of Incentive Stock Option award.*
10.5 --HealthCare Financial Partners, Inc. 1996 Director Stock
Option Plan.*
10.6 --Form of Indemnification Agreement between the Company and
each of its directors and executive officers.*
10.7 --Form of Registration Rights Agreement between the Company and
certain stockholders.
10.8 --Marketing Services Agreement, dated as of November 1, 1995,
among HealthPartners Funding L.P., the Company and Steven
Silver and assignment by Steven Silver to Medical Marketing
and Services, Inc. dated January 1, 1996.*
10.9 --Loan and Security Agreement, dated as of March 9, 1995,
between Fleet Capital Corporation (as successor to Shawmut
Capital Corporation) and HealthPartners Funding, L.P., as
amended May 22, 1996.*
10.10 --Office Lease, dated January 4, 1996, between Two Wisconsin
Circle Joint Venture and the Company, as amended on July 26,
1996 and August 13, 1996.*
10.11 --Software Purchase and License Agreement, dated as of
September 1, 1996, between Creative Systems, L.L.C. and the
Company.*
10.12 --Amended and Restated Limited Partnership Agreement of
HealthPartners Funding, L.P., dated as of December 1, 1995,
among the Company, Farrallon Capital Partners L.P. and RR
Capital Partners, L.P., as amended and assigned on March 28,
1996.*
10.13 --Commitment Letter dated October 24, 1996, from ING (U.S.)
Capital Corporation to HealthCare Financial Partners, Inc.
together with the related term sheet related to the proposed
CP Facility.*
21.1 --List of Subsidiaries of the Registrant.*
23.1 --Consent of Powell, Goldstein, Frazer & Murphy (included in
its opinion filed as Exhibit 5.1).
23.2 --Consent of Ernst & Young LLP.
23.3 --Consent of McGladrey & Pullen, LLP.
23.4 --Consent of John Dealy.*
23.5 --Consent of Geoffrey E.D. Brooke.*
24.1 --Power of Attorney (included in the signature page in Part II
of the Registration Statement).*
</TABLE>
- --------
* Previously filed.
<PAGE>
EXHIBIT 1.1
2,100,000 Shares
HealthCare Financial Partners, Inc.
Common Stock
UNDERWRITING AGREEMENT
__________, 1996
MONTGOMERY SECURITIES
STIFEL, NICOLAUS & COMPANY, INCORPORATED
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Dear Sirs:
SECTION 1.
Introductory. HealthCare Financial Partners, Inc., a Delaware
------------
corporation (the "Company"), proposes to issue and sell 2,100,000 pursuant to
the terms of this Agreement shares of its authorized but unissued Common Stock
(the "Common Stock") to the several underwriters named in Schedule A annexed
hereto (the "Underwriters"). Said aggregate of 2,100,000 shares are herein
called the "Firm Common Shares." In addition, the Company proposes to grant to
the Underwriters an option to purchase up to 315,000 additional shares of Common
Stock (the "Optional Common Shares"), as provided in Section 4 hereof. The Firm
Common Shares and, to the extent such option is exercised, the Optional Common
Shares are hereinafter collectively referred to as the "Common Shares."
Montgomery Securities and Stifel, Nicolaus & Company, Incorporated are acting as
representatives of the Underwriters and in such capacity are hereinafter
referred to the "Representatives."
You have advised the Company that the Underwriters propose to make a
public offering of their respective portions of the Common Shares on the
effective date of the registration statement hereinafter referred to, or as soon
thereafter as in your judgment is advisable.
<PAGE>
The Company hereby confirms its agreements with respect to the
purchase of the Common Shares by the Underwriters as follows:
SECTION 2.
Representations and Warranties of the Company The Company hereby
---------------------------------------------
represents and warrants to the several Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-12479) with
respect to the Common Shares has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and the
rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The Company has prepared and has filed or proposes to file prior to
the effective date of such registration statement an amendment or amendments to
such registration statement, which amendment or amendments have been or will be
similarly prepared. There have been delivered to you two signed copies of such
registration statement and amendments, together with two copies of each exhibit
filed therewith. Conformed copies of such registration statement and amendments
(but without exhibits) and of the related preliminary prospectus have been
delivered to you in such reasonable quantities as you have requested for each of
the Underwriters. The Company will next file with the Commission one of the
following: (i) prior to effectiveness of such registration statement, a further
amendment thereto, including the form of final prospectus, or (ii) a final
prospectus in accordance with Rules 430A and 424(b) of the Rules and
Regulations. As filed, such amendment and form of final prospectus, or such
final prospectus, shall include all Rule 430A Information (as hereinafter
defined) and, except to the extent that you shall agree in writing to a
modification, shall be in all substantive respects in the form furnished to you
prior to the date and time that this Agreement was executed and delivered by the
parties hereto, or, to the extent not completed at such date and time, shall
contain only such specific additional information and other changes (beyond that
contained in the latest Preliminary Prospectus (as hereinafter defined)) as the
Company shall have previously advised you in writing would be included or made
therein.
The term "Registration Statement" as used in this Agreement shall mean
such registration statement at the time such registration statement becomes
effective and, in the event any post-effective amendment thereto becomes
effective prior to the First Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended; provided, however, that such
term shall also include (i) all Rule 430A Information deemed to be included in
such registration statement at the time such registration statement becomes
effective as provided by Rule 430A of the Rules and Regulations and (ii) any
registration statement filed pursuant to Rule 462(b) of the Rules and
Regulations relating to the Common Shares. The term "Preliminary Prospectus"
shall mean any preliminary prospectus referred to in the preceding paragraph and
any preliminary prospectus included in the Registration Statement at the time it
becomes effective that omits Rule 430A Information. The term "Prospectus" as
used in this Agreement shall mean the prospectus relating to the Common Shares
in the form in which it is first filed with the Commission pursuant to Rule
424(b) of the Rules and Regulations or, if no filing pursuant to Rule 424(b) of
the Rules and Regulations is required, shall mean the form of final prospectus
included in the Registration Statement at the time such registration statement
becomes effective. The term "Rule 430A Information" means information with
respect to the Common Shares and the offering thereof permitted to be omitted
from the Registration Statement when it becomes effective pursuant to Rule 430A
of the Rules and Regulations.
(b) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all
2
<PAGE>
material respects to the requirements of the Act and the Rules and Regulations
and, as of its date, has not included any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading; and
at the time the Registration Statement becomes effective, and at all times
subsequent thereto up to and including each Closing Date hereinafter mentioned,
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, will contain all material statements and information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, will include any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading; provided, however, that no
representation or warranty contained in this subsection 2(b) shall be applicable
to information contained in or omitted from any Preliminary Prospectus, the
Registration Statement, the Prospectus or any such amendment or supplement in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter, directly or through the
Representatives, specifically for use in the preparation thereof.
(c) The Company does not own or control, directly or indirectly,
any corporation, partnership, joint venture, association or other entity other
than [insert names of subsidiaries]. The Company and each of its subsidiaries
have been duly incorporated and are validly existing as corporations in good
standing under the laws of their respective jurisdictions of incorporation, with
full power and authority (corporate and other) to own and lease their properties
and conduct their respective businesses; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of all claims, liens, charges
and encumbrances; the Company and each of its subsidiaries is in possession of
and operating in compliance with all authorizations, licenses, permits,
consents, certificates and orders material to the conduct of their respective
businesses, all of which are valid and in full force and effect; the Company and
each of its subsidiaries are duly qualified to do business and in good standing
as foreign corporations in each jurisdiction in which the ownership or leasing
of properties or the conduct of their respective businesses requires such
qualification, except for jurisdictions in which the failure to so qualify would
not have a material adverse impact upon the condition (financial or otherwise),
business, properties, results of operations or prospects of the Company or the
subsidiary; and to the knowledge of the Company no proceeding has been
instituted in any such jurisdiction, revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification.
(d) The Company has an authorized and outstanding capital stock as
set forth under the heading "Capitalization" in the Prospectus; the issued and
outstanding shares of Common Stock have been duly authorized and validly issued,
are fully paid and nonassessable, have been issued in compliance with all
federal and state securities laws, were not issued in violation of or subject to
any preemptive rights or other rights to subscribe for or purchase securities,
and conform to the description thereof contained in the Prospectus. All issued
and outstanding shares of capital stock of each subsidiary of the Company have
been duly authorized and validly issued and are fully paid and nonassessable.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, neither the Company nor any subsidiary has outstanding any options
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the HealthCare
Financial Partners, Inc. 1996 Stock Incentive Plan and the HealthCare Financial
Partners, Inc. 1996 Director Incentive Plan (collectively, the "Plans"), and the
options or other rights granted and exercised thereunder, set forth in the
3
<PAGE>
Prospectus, accurately and fairly presents the information required to be shown
with respect to such plans, options and rights.
(e) Each of the Company and its subsidiaries is conducting its
business so as to comply in all material respects with all applicable federal
and state laws, rules, regulations, decisions, directives and orders (including,
without limitation, the Social Security Act of 1935, as amended (the "Social
Security Act") and all rules and regulations, decisions, directives, rulings and
guidelines adopted thereunder).
(f) The Common Shares to be sold by the Company have been duly
authorized and, when issued, delivered and paid for in the manner set forth in
this Agreement, will be duly authorized, validly issued, fully paid and
nonassessable, and will conform to the description thereof contained in the
Prospectus. No preemptive rights or other rights to subscribe for or purchase
exist with respect to the issuance and sale of the Common Shares by the Company
pursuant to this Agreement. No stockholder of the Company has any right which
has not been waived to require the Company to register the sale of any shares
owned by such stockholder under the Act in the public offering contemplated by
this Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and sale of
the Common Shares to be sold by the Company as contemplated herein.
(g) The Company has full legal right, power and authority to enter
into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, except as enforceability may be limited by general
equitable principles, bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally. The making and performance of
this Agreement by the Company and the consummation of the transactions herein
contemplated will not violate any provisions of the certificate of incorporation
or bylaws, or other organizational documents, of the Company or any of its
subsidiaries, and will not conflict with, result in the breach or violation of,
or constitute, either by itself or upon notice or the passage of time or both, a
default under any agreement, mortgage, deed of trust, lease, franchise, license,
indenture, permit or other instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries or
any of its properties may be bound or affected, any statute or any authori-
zation, judgment, decree, order, rule or regulation of any court or any
regulatory body, administrative agency or other governmental body applicable to
the Company or any of its subsidiaries or any of its properties. No consent,
approval, authorization or other order of any court, regulatory body,
administrative agency or other governmental body is required for the execution
and delivery by the Company of this Agreement or the consummation by the Company
of the transactions contemplated by this Agreement, except for compliance with
the Act, the Blue Sky laws applicable to the public offering of the Common
Shares by the several Underwriters and the clearance of such offering with the
National Association of Securities Dealers, Inc. (the "NASD").
(h) Ernst & Young, LLP and McGladrey & Pullen, LLP, who have
expressed their opinion with respect to the financial statements and schedules
filed with the Commission as a part of the Registration Statement and included
in the Prospectus and in the Registration Statement, are independent accountants
as required by the Act and the Rules and Regulations.
(i) The financial statements and schedules of the Company and
HealthPartners Funding, L.P. and the related notes thereto, included in the
Registration Statement and the Prospectus present fairly the financial position
of the Company and
4
<PAGE>
HealthPartners DEL, L.P. and of HealthPartners Funding, L.P. as of the
respective dates of such financial statements and schedules, and the results of
operations and changes in financial position of the Company and HealthPartners
DEL, L.P. and HealthPartners Funding, L.P. for the respective periods covered
thereby. Such statements, schedules and related notes have been prepared in
accordance with generally accepted accounting principles applied on a consistent
basis as certified by the independent accountants named in subsection 2(h). No
other financial statements or schedules are required to be included in the
Registration Statement. The selected financial data set forth in the Prospectus
under the captions "Capitalization," "Pro Forma Financial Information" and
"Selected Historical Financial Data" fairly present the information set forth
therein on the basis stated in the Registration Statement. The statistical and
financial information presented in tabular form included in the Prospectus
present fairly the information purported to be shown thereby at the respective
dates thereof and for the respective periods covered thereby and are consistent
with the consolidated financial statements included therein to the extent they
are derived from such statements.
(j) Neither the Company nor any of its subsidiaries is in violation
or default of any provision of its certificate of incorporation or bylaws, or
other organizational documents, or, except as to breaches or defaults which
individually or in the aggregate would not be material to the Company, is in
breach of or default with respect to any provision of any agreement, judgment,
decree, order, mortgage, deed of trust, lease, franchise, license, indenture,
permit or other instrument to which it is a party or by which it or any of its
properties are bound; and there does not exist any state of facts which
constitutes an event of default on the part of the Company or any such
subsidiary as defined in such documents or which, with notice or lapse of time
or both, would constitute such an event of default.
(k) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to the
Registration Statement by the Act or by the Rules and Regulations which have not
been described or filed as required. The contracts so described in the
Prospectus are in full force and effect on the date hereof; and neither the
Company nor any of its subsidiaries, nor to the best of the Company's knowledge,
any other party, is in breach of or default under any of such contracts.
(l) There are no legal or regulatory, administrative or
governmental investigations, audits, actions, suits or proceedings pending or,
to the best of the Company's knowledge, threatened or contemplated to which the
Company or any of its subsidiaries is or may be a party or of which property
owned or leased by the Company or any of its subsidiaries is or may be the
subject, or discrimination matters, which investigations, audits, actions, suits
or proceedings might, individually or in the aggregate, prevent or adversely
affect the transactions contemplated by this Agreement or have a material
adverse impact on the condition (financial or otherwise), properties, business,
results of operations or prospects of the Company and its subsidiaries taken as
a whole; and no labor disturbance by the employees of the Company or any of its
subsidiaries exists or is imminent which might be expected to have a material
adverse impact on the condition (financial or otherwise), properties, business,
results of operations or prospects of the Company and its subsidiaries taken as
a whole. Neither the Company nor any of its subsidiaries is a party or subject
to the provisions of any material injunction, judgment, decree or order of any
court, regulatory body, administrative agency or other governmental body.
(m) The Company or the applicable subsidiary has good and
marketable title to all the properties and assets reflected as owned in the
financial statements hereinabove described (or described in the Prospectus),
including the Receivables Tracking System, subject to no lien, mortgage, pledge,
charge or encumbrance of any kind except (i) those, if any, reflected in such
financial statements (or described in the Prospectus), or (ii) those which are
not material in amount and do not adversely affect the use made and proposed to
be made of
5
<PAGE>
such property by the Company and its subsidiaries. The Company or the
applicable subsidiary holds its leased properties under valid and binding
leases, with such exceptions as are not materially significant in relation to
the business of the Company. Except as disclosed in the Prospectus, the Company
owns or leases all such properties as are necessary to its operations as now
conducted or as proposed to be conducted.
(n) Since the respective dates as of which information is given
in the Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its subsidi-
aries have not incurred any material liabilities or obligations, indirect,
direct or contingent, or entered into any material verbal or written agreement
or other transaction which is not in the ordinary course of business; (ii) the
Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
windstorm, accident or other calamity, whether or not covered by insurance;
(iii) the Company has not paid or declared any dividends or other distributions
with respect to its capital stock and neither the Company nor any of its
subsidiaries is not in default in the payment of principal or interest on any
outstanding debt obligations; (iv) there has not been any change in the capital
stock (other than upon the sale of the Common Shares hereunder) or indebtedness
material to the Company and its subsidiaries (other than in the ordinary course
of business); and (v) there has not been any material adverse change in the
condition (financial or otherwise), business, properties, results of operations
or prospects of the Company and its subsidiaries taken as a whole.
(o) The Company and its subsidiaries have sufficient trademarks,
trade names, patent rights, mask works, copyrights, licenses, approvals and
governmental authorizations to conduct their businesses as now conducted; the
expiration of any trademarks, trade names, patent rights, mask works,
copyrights, licenses, approvals or governmental authorizations would not have a
material adverse impact on the condition (financial or otherwise), business,
properties, results of operations or prospects of the Company and its
subsidiaries; and the Company has no knowledge of any material infringement by
it of trademark, trade name rights, patent rights, mask works, copyrights,
licenses, trade secret or other similar rights of others, and to the knowledge
of the Company there is no claim being made against the Company or its
subsidiaries taken as a whole regarding trademark, trade name, patent, mask
work, copyright, license, trade secret or other infringement which could have a
material adverse impact on the condition (financial or otherwise), business,
properties, results of operations or prospects of the Company and its
subsidiaries taken as a whole.
(p) The Company and its subsidiaries have all governmental
licenses, certifications, permits, consents, orders, approvals and other
authorizations necessary to carry on their respective businesses, and all such
licenses, certifications, permits, consents, orders, approvals and
authorizations are in full force and effect and the Company and its subsidiaries
are in compliance therewith and neither the Company nor any subsidiary has
received notice of any proceeding or action relating to the revocation or
modification of any such license, certification, permit, consent, order,
approval or authorization. The Company has not been advised, and has no reason
to believe, that either it or any of its subsidiaries is not conducting business
in compliance with all applicable laws, rules and regulations of the
jurisdictions in which it is conducting business, including, without limitation,
all applicable local, state and federal environmental laws and regulations;
except where failure to be so in compliance would not have a material adverse
impact on the condition (financial or otherwise), business, properties, results
of operations or prospects of the Company and its subsidiaries taken as a whole.
(q) As of the First Closing Date, each of the transactions
described in the Prospectus under the caption "Prospectus Summary -- The
Reorganization" (collectively, the "Reorganization Transactions") shall have
been consummated, and the Company and its
6
<PAGE>
subsidiaries shall have complied with each of their obligations in connection
therewith and satisfied all conditions thereto and neither the Company nor any
subsidiary shall have received notice of any proceeding or action challenging or
relating to revocation, rescission, modification or amendment of any of the
Reorganization Transactions. Neither the Company nor any of its subsidiaries
shall have assumed, in connection with any of the Reorganization Transactions,
any liabilities other than those expressly assumed by the Company under (i) the
bank facility described in the Prospectus under the caption "Management's
Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results
of Operations" (the "Bank Facility") and (ii) the commercial paper facility
described in the Prospectus under the caption "Business -- Capital Resources"
(the "CP Facility"). The Reorganization Transactions will qualify as a tax-free
reorganization under the Internal Revenue Code of 1986, as amended.
As of the First Closing Date, the CP Facility shall be in place and
all agreements relating to the CP Facility (including those described in the
Prospectus) shall have been executed and the closing thereof consummated, and
the CP Facility shall be in full force and effect and available for borrowings
by the Company pursuant to the terms thereof in amounts up to an aggregate of
$100 million. As of the First Closing Date, the Bank Facility shall be in full
force and effect and available for borrowings by the Company pursuant to the
terms thereof in amounts up to an aggregate of $50 million. Neither the Company
nor any of its subsidiaries as of each Closing Date shall be in violation or
default of any provision of the CP Facility or the Bank Facility.
As of the First Closing Date, the intercreditor arrangements described
in the Prospectus under the caption "Management's Discussion and Analysis of Pro
Forma Financial Condition and Pro Forma Results of Operations" shall have been
executed and shall be in full force and effect and the Company and its
subsidiaries shall be in compliance therewith and neither the Company nor any
subsidiary shall have received notice of any proceeding or action relating to
the revocation, rescission, modification or amendment of any such intercreditor
arrangement.
As of each Closing Date, the Company and its subsidiaries shall have
obtained all consents, approvals and other authorizations of any party necessary
to consummate the Reorganization Transactions and the transactions contemplated
by this Agreement and to permit performance by the Company and its subsidiaries
of each of their respective obligations in connection therewith (including but
not limited to consent from Fleet Financial Corporation), and all such consents,
approvals and authorizations shall be in full force and effect and the Company
and its subsidiaries shall be in compliance therewith and neither the Company
nor any subsidiary shall have received notice of any proceeding or action
relating to the revocation, rescission, modification or amendment of any such
consent, approval or authorization.
(r) The Company and its subsidiaries have filed all necessary
federal, state and foreign income and franchise tax returns and have paid all
taxes shown as due thereon or have received valid extension with respect to such
filings; and the Company has no knowledge of any tax deficiency which has been
or might be asserted or threatened against the Company which could have a
material adverse impact on the condition (financial or otherwise), business,
properties, results of operations or prospects of the Company and its
subsidiaries.
(s) The Company is not an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(t) The Company has not distributed and will not distribute prior
to the First Closing Date (as defined herein) any offering material in
connection with the offering and sale
7
<PAGE>
of the Common Shares other than the Prospectus, the Registration Statement and
the other materials permitted by the Act.
(u) Each of the Company and its subsidiaries maintains insurance of
the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company or its subsidiaries against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(v) Neither the Company nor any of its subsidiaries has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
(w) The Company has not taken and will not take, directly or
indirectly, any action designed to or that might be reasonably expected to cause
or result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(x) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except for loans, advances or guarantees disclosed in the Prospectus or not
required to be disclosed in the Prospectus which meet the standards set forth in
Instruction 3 to paragraph (c) of Item 404 of Regulation S-K.
(y) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) The Company has obtained (i) from each of the stockholders
listed on Schedule B hereto a Lock-Up Agreement (as defined in Section 7(c)(v)
hereof), in a form approved by you and your counsel, and (ii) from each of the
stockholders listed on Schedule C hereto a Rule 144 Sale Agreement (as defined
in Section 7(c)(v) hereof), in a form approved by you and your counsel.
(aa) The Common Shares have been approved for listing, subject to
official notice of issuance, on the Nasdaq National Market.
(bb) Any certificate signed by any officer of the Company and
delivered to you or counsel for the Representatives shall be deemed a
representation and warranty by the Company to each Underwriter as to the
matters covered thereby.
SECTION 3.
Representations and Warranties of the Underwriters. The
--------------------------------------------------
Representatives, on behalf of the several Underwriters, represent and warrant to
the Company that the information
8
<PAGE>
set forth (i) on the cover page of the Prospectus with respect to price,
underwriting discounts and commissions and terms of offering, (ii) in the
stabilization legend on the inside front cover page of the Prospectus, and
(iii) under "Underwriting" in the Prospectus was furnished to the Company
by and on behalf of the Underwriters for use in connection with the prepa-
ration of the Registration Statement and the Prospectus and is correct in
all material respects. The Representatives represent and warrant that they
have been authorized by each of the other Underwriters as the Representatives
to enter into this Agreement on its behalf and to act for it in the manner
herein provided.
SECTION 4.
Purchase, Sale and Delivery of Common Shares. On the basis of the
--------------------------------------------
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to issue and sell to
the Underwriters 2,100,000 of the Firm Common Shares. The Underwriters agree,
severally and not jointly, to purchase from the Company the number of Firm
Common Shares described below. The purchase price per share to be paid by the
several Underwriters to the Company shall be equal to the initial price to the
public per share less an amount per share equal to the per share underwriting
discount. The initial price to the public, which shall be a fixed price, and
the underwriting discount will be determined by separate agreement between the
Company and the Representatives in substantially the form set forth as Schedule
D hereto (the "Price Determination Agreement"). The Price Determination
Agreement may take the form of an exchange of any standard form of written
telecommunication between the Company and the Representatives and shall specify
such applicable information as indicated in Schedule D hereto. From and after
the date of the execution and delivery of the Price Determination Agreement,
this Agreement shall be deemed to incorporate the Price Determination Agreement.
Except as provided in Section 11 hereof, the obligation of each
Underwriter to the Company shall be to purchase from the Company at the price
set forth in the Price Determination Agreement, the number of Firm Common Shares
set forth opposite the name of such Underwriter in Schedule A hereto.
Delivery of certificates for the Firm Common Shares to be purchased by
the Underwriters and payment therefor shall be made at the offices of Montgomery
Securities, 600 Montgomery Street, San Francisco, California (or such other
place as may be agreed upon by the Company and the Representatives) at such time
and date, not later than the third (or, if the Firm Common Shares are priced, as
contemplated by Rule 15c6-1(c) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), after 4:30 p.m. Washington, D.C. Time, the fourth)
full business day following the first date that any of the Common Shares are
released by you for sale to the public, as you shall designate by at least 48
hours prior notice to the Company (or at such other time and date, not later
than one week after such third, or fourth, as the case may be, full business day
as may be agreed upon by the Company and the Representatives) (the "First
Closing Date"); provided, however, that if the Prospectus is at any time prior
to the First Closing Date recirculated to the public, the First Closing Date
shall occur upon the later of the third full business day following the first
date that any of the Common Shares are released by you for sale to the public or
the date that is 48 hours after the date on which the Prospectus has been so
recirculated.
Delivery of certificates for the Firm Common Shares shall be made by
or on behalf of the Company to you, for the respective accounts of the
Underwriters with respect to the Firm Common Shares to be sold by the Company,
against payment by you, for the accounts of the several Underwriters, of the
purchase price therefor by wire transfer of immediately available funds to the
order of the Company. The certificates for the Firm
9
<PAGE>
Common Shares shall be registered in such names and denominations as you shall
have requested at least two full business days prior to the First Closing Date,
and shall be made available for checking and packaging on the business day
preceding the First Closing Date at a location in New York, New York, as may be
designated by you. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the obligations of
the Underwriters.
In addition, on the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate of 315,000 Optional
Common Shares at the purchase price per share to be paid for the Firm Common
Shares, for use solely in covering any over-allotments made by you for the
account of the Underwriters in the sale and distribution of the Firm Common
Shares. The option granted hereunder may be exercised at any time (but not more
than once) within 30 days after the first date that any of the Common Shares are
released by you for sale to the public, upon notice by you to the Company
setting forth the aggregate number of Optional Common Shares as to which the
Underwriters are exercising the option, the names and denominations in which the
certificates for such shares are to be registered and the time and place at
which such certificates will be delivered. Such time of delivery (which may not
be earlier than the First Closing Date), being herein referred to as the "Second
Closing Date," shall be determined by you, but if at any time other than the
First Closing Date shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. The number of Optional
Common Shares to be purchased by each Underwriter shall be determined by
multiplying the number of Optional Common Shares to be sold by the Company
pursuant to such notice of exercise by a fraction, the numerator of which is the
number of Firm Common Shares to be purchased by such Underwriter as set forth
opposite its name in Schedule A and the denominator of which is 315,000 (subject
to such adjustments to eliminate any fractional share purchases as you in your
discretion may make). Certificates for the Optional Common Shares will be made
available for checking and packaging on the business day preceding the Second
Closing Date at a location in New York, New York, as may be designated by you.
The manner of payment for and delivery of the Optional Common Shares shall be
the same as for the Firm Common Shares purchased from the Company as specified
in the two preceding paragraphs. At any time before lapse of the option, you
may cancel such option by giving written notice of such cancellation to the
Company. If the option is canceled or expires unexercised in whole or in part,
the Company will deregister under the Act the number of Option Shares as to
which the option has not been exercised.
You have advised the Company that each Underwriter has authorized you
to accept delivery of its Common Shares, to make payment and to receipt
therefor. You, individually and not as the Representatives of the Underwriters,
may (but shall not be obligated to) make payment for any Common Shares to be
purchased by any Underwriter whose funds shall not have been received by you by
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
Delivery of the Common Shares by the Company to the several Under-
writers and acceptance of payment therefor from the several Underwriters by
the Company shall constitute a representation and warranty of the Company that
the representations and warranties set forth in this Agreement were true and
correct as of the date hereof and that such representations and warranties
remain true and correct as of the First Closing Date and as of the Second
Closing Date (with the same force and effect as if such representations and
warranties were made on each such date).
10
<PAGE>
Subject to the terms and conditions hereof, the Underwriters propose
to make a public offering of their respective portions of the Common Shares as
soon after the effective date of the Registration Statement as in the judgment
of the Representatives is advisable and at the public offering price set forth
on the cover page of and on the terms set forth in the Prospectus.
SECTION 5.
Covenants of the Company. The Company covenants and agrees that:
------------------------
(a) The Company will use its best efforts to cause the Registration
Statement and any amendment thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective. If the Registration Statement has become or becomes effective
pursuant to Rule 430A of the Rules and Regulations, or the filing of the
Prospectus is otherwise required under Rule 424(b) of the Rules and Regulations,
the Company will file the Prospectus, properly completed, pursuant to the
applicable paragraph of Rule 424(b) of the Rules and Regulations within the time
period prescribed and will provide evidence satisfactory to you of such timely
filing. The Company will promptly advise you in writing (i) of the receipt of
any comments of the Commission, (ii) of any request of the Commission for
amendment of or supplement to the Registration Statement (either before or after
it becomes effective), any Preliminary Prospectus or the Prospectus or for
additional information, (iii) when the Registration Statement shall have become
effective, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the institution
of any proceedings for that purpose. If the Commission shall enter any such
stop order at any time, the Company will use its best efforts to obtain the
lifting of such order at the earliest possible moment. The Company will not
file any amendment or supplement to the Registration Statement (either before or
after it becomes effective), any Preliminary Prospectus or the Prospectus of
which you have not been furnished with a copy a reasonable time prior to such
filing or to which you reasonably object or which is not in compliance with the
Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration Statement
or the Prospectus which in your judgment may be necessary or advisable to enable
the several Underwriters to continue the distribution of the Common Shares and
will use its best efforts to cause the same to become effective as promptly as
possible. The Company will fully and completely comply with the provisions of
Rule 430A of the Rules and Regulations with respect to information omitted from
the Registration Statement in reliance upon such Rule.
(c) If at any time during the nine-month period referred to in
Section 10(a)(3) of the Act during which a prospectus relating to the Common
Shares is required to be delivered under the Act, any event occurs, as a result
of which the Prospectus, including any amendments or supplements, would include
an untrue statement of a material fact, or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, or if it is necessary at any time to amend the Prospectus, including
any amendments or supplements, to comply with the Act or the Rules and
Regulations, the Company will promptly advise you thereof and will promptly
prepare and file with the Commission, at its own expense, an amendment or
supplement which will correct such statement or omission or an amendment or
supplement which will effect such compliance and will use its best efforts to
cause the same to become effective as soon as possible; and, in case any
Underwriter is required to deliver a prospectus after such nine-month period,
the Company upon request, but at the expense of such Underwriter, will promptly
prepare such amendment or amendments to the Registration Statement and such
Prospectus or Prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act.
11
<PAGE>
(d) As soon as practicable, but not later than 45 days after the end
of the first quarter ending after one year following the "effective date of the
Registration Statement" (as defined in Rule 158(c) of the Rules and Regulations)
or 90 days if the first quarter ending after such one year period is the fourth
quarter of the Company's fiscal year, the Company will make generally available
to its security holders an earnings statement (which need not be audited)
covering a period of 12 consecutive months beginning after the effective date of
the Registration Statement which will satisfy the provisions of the last
paragraph of Section 11(a) of the Act.
(e) During such period as a prospectus is required by law to be
delivered in connection with sales by an Underwriter or dealer, the Company, at
its expense, but only for the nine-month period referred to in Section 10(a)(3)
of the Act, will furnish to you or mail to your order copies of the Registration
Statement, the Prospectus, the Preliminary Prospectus and all amendments and
supplements to any such documents in each case as soon as available and in such
quantities as you may request, for the purposes contemplated by the Act.
(f) The Company shall cooperate with you and your counsel in order
to qualify or register the Common Shares for sale under (or obtain exemptions
from the application of) the Blue Sky laws of such jurisdictions as you
designate, will comply with such laws and will continue such qualifications,
registrations and exemptions in effect so long as reasonably required for the
distribution of the Common Shares. The Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of process in
any such jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise you
promptly of the suspension of the qualification or registration of (or any such
exemption relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such purpose,
and in the event of the issuance of any order suspending such qualification,
registration or exemption, the Company, with your cooperation, will use its best
efforts to obtain the withdrawal thereof.
(g) During the period of five years hereafter, the Company will
furnish to the Representatives and, upon request of the Representatives, to each
of the other Underwriters: (i) as soon as practicable after the end of each
fiscal year, copies of the Annual Report of the Company containing the balance
sheet of the Company as of the close of such fiscal year and statements of
income, stockholders' equity and cash flows for the year then ended and the
opinion thereon of the Company's independent public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement, Annual
Report on Form 10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any securities
exchange; and (iii) as soon as available, copies of any report or communication
of the Company mailed generally to holders of its Common Stock.
(h) During the period of 180 days after the first date that any of
the Common Shares are released by you for sale to the public, without the prior
written consent of either Montgomery Securities or each of the Representatives
(which consent may be withheld at the sole discretion of the Montgomery
Securities or the Representatives, as the case may be), the Company will not,
directly or indirectly, offer to sell, sell, contract to sell, issue, grant
options to purchase or otherwise dispose of any shares of Common Stock or other
equity securities of the Company, or any securities convertible into or
exchangeable for any shares of Common Stock or other equity securities of the
Company, or publicly announce any intention to do any of the foregoing, except
for issuances of shares of Common Stock by the Company pursuant to the exercise
of outstanding options or similar rights to purchase shares of Common Stock
under the stock compensation plans and arrangements disclosed in the Prospectus.
12
<PAGE>
(i) The Company will apply the net proceeds of the sale of the
Common Shares sold by it in accordance with its statements under the caption
"Use of Proceeds" in the Prospectus.
(j) The Company will use its best efforts to qualify or register its
Common Stock for sale in non-issuer transactions under (or obtain exemptions
from the application of) the Blue Sky laws of the State of California (and
thereby permit market making transactions and secondary trading in the Company's
Common Stock in California), will comply with such Blue Sky laws and will
continue such qualifications, registrations and exemptions in effect for a
period of five years after the date hereof.
(k) The Company and its subsidiaries will conduct their business in
compliance in all material respects with all applicable federal and state laws,
rules, regulations, decisions, directives and orders.
(l) The Company will use its best efforts to (i) have the Common
Shares registered under the Exchange Act concurrently with the effectiveness of
the Registration Statement; (ii) list, subject to official notice of issuance,
the Common Shares on the Nasdaq National Market concurrently with the
effectiveness of the Registration Statement; and (iii) maintain the listing of
the Common Shares on the Nasdaq National Market subsequent to the Closing Date.
(m) The Company will comply with all provisions of all undertakings
contained in the Registration Statement.
(n) The Company will use its best efforts to comply with, or cause
to be complied with, the conditions precedent to the several obligations of the
Underwriters specified in Section 7 hereof.
(o) The Company will file with the Commission such reports on Form
SR as may be required pursuant to Rule 463 under the Act.
The foregoing covenants and agreements shall apply to any
successor of the Company.
SECTION 6.
Payment of Expenses. Whether or not the transactions contemplated
-------------------
hereunder are consummated or this Agreement becomes effective or is terminated,
the Company agrees to pay all costs, fees and expenses incurred in connection
with the performance of its obligations hereunder and in connection with the
transactions contemplated hereby, including without limiting the generality of
the foregoing, (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the issuance
and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of
the Company's counsel and the Company's independent accountants, (v) all costs
and expenses incurred in connection with the preparation, printing, filing,
shipping and distribution of the Registration Statement, each Preliminary
Prospectus and the Prospectus (including all exhibits and financial statements)
and all amendments and supplements provided for herein, this Agreement, the
Agreement Among Underwriters, the Selected Dealers Agreement (if applicable),
the Underwriters' Questionnaire, the Underwriters' Power of Attorney and the
Blue Sky memoranda, (vi) all filing fees, attorneys' fees and expenses incurred
by the Company or the Underwriters in connection with qualifying or registering
(or obtaining exemptions from the qualification or registration of) all or any
part of the Common Shares for offer and sale under the Blue Sky
13
<PAGE>
laws, (vii) the filing fee of the NASD, and (viii) all other fees, costs and
expenses referred to in Item 13 of the Registration Statement. Except as
provided in this Section 6, Section 8 and Section 10 hereof, the Underwriters
shall pay all of their own expenses, including the fees and disbursements of
their counsel (excluding those relating to qualification, registration or
exemption under the Blue Sky laws and the Blue Sky memoranda referred to above).
SECTION 7.
Conditions of the Obligations of the Underwriters. The obligations of
-------------------------------------------------
the several Underwriters to purchase and pay for the Firm Common Shares on the
First Closing Date and the Optional Common Shares on the Second Closing Date
shall be subject to the accuracy of the representations and warranties on the
part of the Company herein set forth as of the date hereof and as of the First
Closing Date or the Second Closing Date, as the case may be, to the accuracy of
the statements of Company officers made pursuant to the provisions hereof, to
the performance by the Company of its obligations hereunder, and to the
following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m., (or, in the case of a registration statement filed pursuant to
Rule 462(b) of the Rules and Regulations relating to the Common Shares, not
later than 10:00 p.m.), Washington, D.C. Time, on the date of this Agreement, or
at such later time as shall have been consented to by you; if the filing of the
Prospectus, or any supplement thereto, is required pursuant to Rule 424(b) of
the Rules and Regulations, the Prospectus shall have been filed in the manner
and within the time period required by Rule 424(b) of the Rules and Regulations;
and prior to such Closing Date, no stop order suspending the effectiveness of
the Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending or, to the knowledge of
the Company or you, shall be contemplated by the Commission; and any request of
the Commission for inclusion of additional information in the Registration
Statement, or otherwise, shall have been complied with to your satisfaction.
(b) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, (i) there shall not have been any
change in the capital stock of the Company or any of its subsidiaries or any
material change in the indebtedness (other than in the ordinary course of
business) of the Company or any of its subsidiaries, (ii) except as set forth or
contemplated by the Registration Statement or the Prospectus, no material verbal
or written agreement or other transaction shall have been entered into by the
Company or any of its subsidiaries, which is not in the ordinary course of
business or which could reasonably be expected to result in a material reduction
in the future earnings of the Company and its subsidiaries, (iii) no loss or
damage (whether or not insured) to the property of the Company or any of its
subsidiaries shall have been sustained which materially and adversely affects
the condition (financial or otherwise), business, properties, results of
operations or prospects of the Company and its subsidiaries, (iv) no legal or
governmental action, suit or proceeding affecting the Company or any of its
subsidiaries which is material to the Company and its subsidiaries or which
affects or may affect the transactions contemplated by this Agreement shall have
been instituted or threatened, and (v) there shall not have been any material
change in the condition (financial or otherwise), business, properties, results
of operations, prospects or management of the Company and its subsidiaries which
makes it impractical or inadvisable in the judgment of the Representatives to
proceed with the public offering or purchase the Common Shares as contemplated
hereby.
(c) There shall have been furnished to you, as Representatives of
the Underwriters, on each Closing Date, in form and substance satisfactory to
you, except as otherwise expressly provided below:
14
<PAGE>
(i) An opinion of Powell, Goldstein, Frazer & Murphy, counsel
for the Company, addressed to the Underwriters and dated the First Closing Date,
or the Second Closing Date, as the case may be, to the effect that:
(1) Each of the Company and [list subsidiaries] (the
"Subsidiaries") has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business
as a foreign corporation and is in good standing in all other
jurisdictions where the ownership or leasing of properties or the
conduct of its business requires such qualification, except for
jurisdictions in which the failure to so qualify would not have a
material adverse effect on the business or financial condition of
the Company and its Subsidiaries taken as a whole (a "Materail
Adverse Effect"), and has full corporate power and authority to
own its properties and conduct its business as described in
the Prospectus;
(2) The authorized, issued and outstanding capital stock
of the Company is as set forth under the caption "Capitalization"
in the Prospectus; all necessary and proper corporate proceedings
have been taken in order to authorize validly such authorized
Common Stock; all outstanding shares of Common Stock (including
the Firm Common Shares and any Optional Common Shares) have been
duly and validly authorized and issued, are fully paid and
nonassessable, have been issued in compliance with federal and
state securities laws, were not issued in violation of or subject
to any preemptive rights or other rights to subscribe for or
purchase any securities and conform to the description thereof
contained in the Prospectus; without limiting the foregoing,
there are no preemptive or other rights to subscribe for or
purchase any of the Common Shares to be sold by the Company
hereunder; and the Common Shares have been authorized for listing
on the Nasdaq National Market;
(3) All of the issued and outstanding shares of the
Subsidiaries have been duly and validly authorized and issued,
are fully paid and nonassessable and are owned of record by the
Company to the knowledge of such counsel free and clear of all
liens, encumbrances, equities, claims, security interests, voting
trusts or other defects of title whatsoever;
(4) The certificates evidencing the Common Shares to be
delivered hereunder are in due and proper form under Delaware
law, and when duly countersigned by the Company's transfer agent
and registrar, and delivered to you or upon your order against
payment of the agreed consideration therefor in accordance with
the provisions of this Agreement, the Common Shares represented
thereby will be duly authorized and validly issued, fully paid
and nonassessable and will conform in all respects to the
description thereof contained in the Prospectus;
(5) Except as disclosed in the Prospectus, to the best of
such counsel's knowledge there are no outstanding options,
warrants or other rights calling for the issuance of, and no
commitments, plans or arrangements to issue, any shares of
capital stock of the Company or any
15
<PAGE>
security convertible into or exchangeable for capital stock of
the Company;
(6)(a) The Registration Statement has become effective
under the Act, and, to the best of such counsel's knowledge,
no stop order suspending the effectiveness of the
Registration Statement or preventing the use of the
Prospectus has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated
by the Commission; any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) of the Rules
and Regulations has been made in the manner and within the
time period required by such Rule 424(b);
(b) The Registration Statement, the Prospectus and
each amendment or supplement thereto (except for the
financial statements and schedules included therein as to
which such counsel need express no opinion) comply as to
form in all material respects with the requirements of the
Act and the Rules and Regulations;
(c) To the best of such counsel's knowledge, no
franchises, leases, contracts, agreements or documents of a
character required to be disclosed in the Registration
Statement or Prospectus or to be filed as exhibits to the
Registration Statement which are not disclosed or filed, as
required; and
(d) To the best of such counsel's knowledge, there
are no legal or governmental actions, suits or proceedings
pending or threatened against the Company which are required
to be described in the Prospectus which are not described as
required.
(7) The Company has full right, power and authority
to enter into this Agreement and to sell and deliver the
Common Shares to be sold by it to the several Underwriters;
this Agreement has been duly and validly authorized by all
necessary corporate action by the Company, has been duly and
validly executed and delivered by and on behalf of the
Company, and is a valid and binding agreement of the Company
in accordance with its terms, except as enforceability may
be limited by (i) general equitable principles and the
discretion of the court before any proceeding therefor may
be brought (regardless of whether enforceability is
considered in a proceeding at law or in equity) and (ii)
bankruptcy, insolvency, reorganization, moratorium or other
laws affecting creditors' rights generally and except as to
any rights to indemnity or contribution for liabilities
arising under the Act as to which no opinion need be
expressed; and no approval, authorization, order, consent,
registration, filing, qualification, license or permit of or
with any court, regulatory, administrative or other
governmental body is required for the execution and delivery
of this Agreement by the Company or the consummation of the
transactions contemplated by this Agreement, except such as
have been obtained and are in full force and effect under
the Act and such as may be required under applicable Blue
Sky laws in connection with the purchase and distribution of
the Common Shares by the Underwriters and the clearance of
such offering with the NASD;
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(8) The execution and performance of this Agreement
and the consummation of the transactions herein contemplated
will not conflict with, result in the breach of, or
constitute, either by itself or upon notice or the passage
of time or both, a default under, any agreement, mortgage,
deed of trust, lease, franchise, license, indenture, permit
or other instrument identified to such counsel in a
certificate of the President of the Company as being
material to the Company and the Subsidiaries which could
reasonably be expected to have a Material Adverse Effect or
violate any of the provisions of the certificate of
incorporation or bylaws, of the Company or any of its
Subsidiaries or, so far as is known to such counsel, violate
any statute, judgment, decree, order, rule or regulation of
any court or governmental body having jurisdiction over the
Company or any of its subsidiaries or any of its or their
property;
(9) Neither the Company nor any Subsidiary is in
violation of its certificate of incorporation or its bylaws,
or other organizational documents, or to the best of such
counsel's knowledge, in breach of or default with respect to
any provision of any agreement, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other
instrument identified to such counsel in a certificate of
the President of the Company as being material to the
Company and the Subsidiaries, except where such breach or
default would not have a Materially Adverse Effect, and the
Company and its subsidiaries are in compliance with the
Social Security Act and, to the best of such counsel's
knowledge, are in compliance with all other laws and all
rules, regulations, judgments, decrees, orders and statutes
of any court or jurisdiction to which they are subject,
except where noncompliance would not materially adversely
affect the Company and its Subsidiaries;
(10) To the best of such counsel's knowledge, no
holders of securities of the Company have rights which have
not been waived to the registration of shares of Common
Stock or other securities, because of the filing of the
Registration Statement by the Company or the offering
contemplated hereby;
(11) No transfer taxes are required to be paid in
connection with the sale and delivery of the Common Shares
to the Underwriters hereunder;
(12) The Company has all governmental licenses,
permits, consents, orders, approvals and other
authorizations necessary to carry on its business as
described in the Prospectus, except where failure to have
such governmental licenses, permits, consents, orders,
approvals and other authorizations could not reasonably be
expected to have a Material Adverse Effect; such licenses,
permits, consents, orders, approvals and authorizations are
in full force and effect, and the Company and the
Subsidiaries are in compliance therewith;
(13) The information in the Prospectus under the
captions "Risk Factors--Government Regulations", "Risk
Factors--Inability to Collect Healthcare Receivables
Directly from Medicare and Medicaid," "Rick Factors--
Dilution of Client Receivables; Government Right of Offset,"
"Business--Government Regulation" and "Description of
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Capital Stock" has been reviewed by counsel and, to the
extent that such information constitutes matters of law or
legal conclusions, is correct in all material respects.
In rendering such opinion, such counsel may rely, as to
matters of local law, on opinions of local counsel, and as to matters
of fact, on certificates of officers of the Company and of
governmental officials, in which case their opinion is to state that
they are so doing and that the Underwriters are justified in relying
on such opinions or certificates and copies of said opinions or
certificates are to be attached to the opinion or delivered
concurrently therewith. Such counsel shall also include a statement to
the effect that nothing has come to such counsel's attention that
would cause such counsel to believe that either at the effective date
of the Registration Statement or at the applicable Closing Date the
Registration Statement or the Prospectus, or any such amendment or
supplement, contains any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
(ii) Such opinion or opinions of Gibson, Dunn & Crutcher
LLP, counsel for the Underwriters dated the First Closing Date or the
Second Closing Date, as the case may be, with respect to the
incorporation of the Company, the sufficiency of all corporate
proceedings and other legal matters relating to this Agreement, the
validity of the Common Shares, the Registration Statement and the
Prospectus and other related matters as you may reasonably require,
and the Company shall have furnished to such counsel such documents
and shall have exhibited to them such papers and records as they may
reasonably request for the purpose of enabling them to pass upon such
matters. In connection with such opinions, such counsel may rely on
representations or certificates of officers of the Company and
governmental officials.
(iii) A certificate of the Company executed by the
Chairman, President and Chief Executive Officer and Senior Vice
President--Legal and Financial Affairs of the Company, dated the First
Closing Date or the Second Closing Date, as the case may be, to the
effect that:
(1) The representations and warranties of the
Company set forth in Section 2 hereof are true and correct as of
the date of this Agreement and as of the First Closing Date or
the Second Closing Date, as the case may be, and the Company has
complied with all the agreements and satisfied all the conditions
on its part to be performed or satisfied on or prior to such
Closing Date;
(2) The Commission has not issued any order
preventing or suspending the use of the Prospectus or any
Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and
to the best of the knowledge of the respective signers, no
proceedings for that purpose have been instituted or are pending
or contemplated under the Act;
(3) Each of the respective signers of the
certificate has carefully examined the Registration Statement and
the Prospectus; in his or her opinion and to the best of his or
her knowledge, the Registration Statement and the Prospectus and
any amendments or supplements
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thereto contain all statements required to be stated therein
regarding the Company and its subsidiaries; and neither the
Registration Statement nor the Prospectus nor any amendment or
supplement thereto includes any untrue statement of a material
fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not
misleading;
(4) Since the initial date on which the Registration
Statement was filed, no agreement, written or oral, or
transaction has been entered into, and no event has occurred
which should have been set forth in an amendment to the
Registration Statement or in a supplement to or amendment of any
prospectus which has not been disclosed in such a supplement or
amendment;
(5) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, and
except as disclosed in or contemplated by the Prospectus, there
has not been any material adverse change or any development
involving a material adverse change in the condition (financial
or otherwise), business, properties, results of operations,
prospects or management of the Company and its subsidiaries; and
no legal or governmental action, suit or proceeding is pending or
threatened against the Company or its subsidiaries which is
material to the Company and its subsidiaries, whether or not
arising from transactions in the ordinary course of business, or
which may adversely affect the transactions contemplated by this
Agreement; since such dates and except as so disclosed, neither
the Company nor any of its subsidiaries has entered into any
verbal or written agreement or other transaction which is not in
the ordinary course of business or which could reasonably be
expected to result in a material reduction in the future earnings
of the Company or incurred any material liability or obligation,
direct, contingent or indirect, made any change in its capital
stock, made any material change in its short-term debt or funded
debt or repurchased or otherwise acquired any of the Company's
capital stock; and the Company has not declared or paid any
dividend, or made any other distribution, upon its outstanding
capital stock payable to stockholders of record on a date prior
to the First Closing Date or Second Closing Date; and
(6) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus and except
as disclosed in or contemplated by the Prospectus, the Company
and its subsidiaries have not sustained a material loss or damage
by strike, fire, flood, windstorm, accident or other calamity
(whether or not insured).
(iv) On the date this Agreement is executed and also on the First
Closing Date and the Second Closing Date, a letter addressed to you,
as Representatives of the Underwriters, from Ernst & Young LLP and
McGladrey & Pullen, LLP, independent accountants, the first one to be
dated the date of this Agreement, the second one to be dated the First
Closing Date and the third one (in the event of a second closing) to
be dated the Second Closing Date, in form and substance satisfactory
to you.
(v) On or before the First Closing Date, agreements from
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(a) the stockholders listed on Schedule B hereto, in form
and substance satisfactory to you, confirming that for a period of 180
days after the first date that any of the Common Shares are released
by you for sale to the public, such person will not, directly or
indirectly, offer to sell, sell, contract to sell, grant any option to
sell (including, without limitation, any short sale), pledge,
establish an open "put equivalent position" within the meaning of Rule
16a-1(h) of the Exchange Act, transfer, assign or otherwise dispose of
any shares of Common Stock or any securities convertible into or
exchangeable for any shares of Common Stock, or any option, warrant or
other right to acquire any shares of Common Stock, or publicly
announce any intention to do any of the foregoing, without the prior
written consent of either Montgomery Securities or each of the
Representatives, which consent may be withheld at the sole discretion
of Montgomery Securities or each of the Representatives, as the case
may be (the "Lock-Up Agreements"), and
(b) the stockholders listed in Schedule C hereto, in form
and substance satisfactory to you, confirming that for a period of 180
days after expiration of the Lock-Up Agreement, such person will not,
directly or indirectly, effect any sales of Common Stock in excess of
the volume limitation provided in Rule 144(c) under the Act, without
the prior written consent of either Montgomery Securities or each of
the Representatives, which consent may be withheld at the sole
discretion of Montgomery Securities or each of the Representatives, as
the case may be (the "Rule 144 Sale Agreements").
All such opinions, certificates, letters and documents shall be in
compliance with the provisions hereof only if they are satisfactory to you and
to Gibson, Dunn & Crutcher LLP, counsel for the Underwriters. The Company shall
furnish you with such manually signed or conformed copies of such opinions,
certificates, letters and documents as you request. Any certificate signed by
any officer of the Company and delivered to the Representatives or to counsel
for the Underwriters shall be deemed to be a representation and warranty by the
Company to the Underwriters as to the statements made therein.
If any condition to the Underwriters' obligations hereunder to be
satisfied prior to or at the First Closing Date is not so satisfied, this
Agreement at your election will terminate upon notification by you as
Representatives to the Company without liability on the part of any Underwriter
or the Company, except for the expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in Section
10 hereof.
SECTION 8.
Reimbursement of Underwriters' Expenses. Notwithstanding any other
---------------------------------------
provisions hereof, if this Agreement shall be terminated by you pursuant to
Section 7 hereof, or if the sale to the Underwriters of the Common Shares at the
First Closing is not consummated because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse you and the other Underwriters
upon demand for all out-of-pocket expenses that shall have been reasonably
incurred by you and them in connection with the proposed purchase and the sale
of the Common Shares, including but not limited reasonable fees and
disbursements of counsel, printing expenses, travel expenses, postage, telegraph
charges and telephone charges relating directly to the offering contemplated by
the Prospectus. Any such termination shall be without liability of any party to
any other party except that the provisions of this Section 8, Section 6 and
Section 10 shall at all times be effective and shall apply.
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SECTION 9.
Effectiveness of Registration Statement. Each of you and the Company
---------------------------------------
will use its respective best efforts to cause the Registration Statement to
become effective, to prevent the issuance of any stop order suspending the
effectiveness of the Registration Statement and, if such stop order be issued,
to obtain as soon as possible the lifting thereof.
SECTION 10.
Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act against any losses, claims, damages, liabilities or expenses,
joint or several, to which such Underwriter or such controlling person may
become subject, under the Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such losses, claims, damages, liabilities or
expenses (or actions in respect thereof as contemplated below) arise out of or
are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or the omission or alleged omission to state in any of them a material fact
required to be stated therein or necessary to make the statements in any of them
not misleading, or (ii) any inaccuracy in the representations and warranties of
the Company contained herein or (iii) any failure of the Company to perform its
obligations hereunder or under law; and will reimburse each Underwriter and each
such controlling person for any legal and other expenses as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the Company
will not be liable in any such case to the extent that any such loss, claim,
damage, liability or expense arises out of or is based upon an untrue statement
or alleged untrue statement or omission or alleged omission made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto in reliance upon and in conformity with the
information furnished to the Company pursuant to Section 3 hereof. In addition
to its other obligations under this Section 10(a), the Company agrees that, as
an interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission, or any inaccuracy in the
representations and warranties of the Company herein or failure to perform its
obligations hereunder, all as described in this Section 10(a), it will reimburse
each Underwriter on a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the Company's
obligation to reimburse each Underwriter for such expenses and the possibility
that such payments might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such interim reimbursement
payment is so held to have been improper, each Underwriter shall promptly return
it to the Company together with interest, compounded daily, determined on the
basis of the prime rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by Bank of America NT&SA,
San Francisco, California (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement will be in addition to any liability which the
Company may otherwise have to the Underwriters.
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(b) Each Underwriter will severally indemnify and hold harmless the
Company, each of its directors, each of its officers who signed the Registration
Statement and each person, if any, who controls the Company within the meaning
of the Act, against any losses, claims, damages, liabilities or expenses to
which the Company, or any such director, officer or controlling person may
become subject, under the Act, the Exchange Act, or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of such Underwriter), insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof as contemplated below)
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, in reliance upon and in
conformity with the information furnished to the Company pursuant to Section 3
hereof; and will reimburse the Company, or any such director, officer or
controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer or controlling person in connection with
investigating, defending, settling, compromising or paying any such loss, claim,
damage, liability, expense or action. In addition to its other obligations
under this Section 10(b), each Underwriter severally agrees that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding arising out of or based upon any statement or omission, or any
alleged statement or omission, described in this Section 10(b) which relates to
information furnished to the Company pursuant to Section 3 hereof, it will
reimburse the Company (and, to the extent applicable, each officer, director,
controlling person) on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such claim,
action, investigation, inquiry or other proceeding, notwithstanding the absence
of a judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company (and, to the extent
applicable, each officer, director or controlling person thereof) for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the Company
(and, to the extent applicable, each officer, director, or controlling person
thereof) shall promptly return such payment to the Underwriters together with
interest, compounded daily, determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to the Company within 30 days
of a request for reimbursement, shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have to the Company.
(c) Promptly after receipt by an indemnified party under this Section
10 of notice of the commencement of any action, such indemnified party will, if
a claim in respect thereof is to be made against an indemnifying party under
this Section 10, notify the indemnifying party in writing of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party for
contribution or otherwise than under the indemnity agreement contained in this
Section 10 or to the extent it is not prejudiced as a proximate result of such
failure. In case any such action is brought against any indemnified party and
such indemnified party seeks or intends to seek indemnity from an indemnifying
party, the indemnifying party will be entitled to participate in, and, to the
extent that it may wish, jointly with all other indemnifying parties similarly
notified, to assume the defense thereof with counsel reasonably satisfactory to
such indemnified party; provided, however, if the defendants in any such action
include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably
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concluded that there may be a conflict between the positions of the indemnifying
party and the indemnified party in conducting the defense of any such action or
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of its election so to assume the defense of such action and approval by
the indemnified party of counsel, the indemnifying party will not be liable to
such indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed such counsel in
connection with the assumption of legal defenses in accordance with the proviso
to the immediately preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel, approved by the Representatives in the case of paragraph (a),
representing the indemnified parties who are parties to such action) or (ii) the
indemnifying party shall not have employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a reasonable
time after notice of commencement of the action, in each of which cases the fees
and expenses of counsel shall be at the expense of the indemnifying party.
(d) If the indemnification provided for in this Section 10 is
required by its terms but is for any reason held to be unavailable to or
otherwise insufficient to hold harmless an indemnified party under paragraphs
(a), (b) or (c) in respect of any losses, claims, damages, liabilities or
expenses referred to herein, then each applicable indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of any losses, claims, damages, liabilities or expenses referred to herein (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company and the Underwriters from the offering of the Common Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Underwriters in connection with the statements or omissions
or inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The respective relative benefits received by
the Company and the Underwriters shall be deemed to be in the same proportion,
in the case of the Company as the total price paid to the Company for the Common
Shares sold by it to the Underwriters (net of underwriting commissions but
before deducting expenses) bears to the total price to the public set forth on
the cover of the Prospectus, and in the case of the Underwriters as the
underwriting commissions received by them bears to the total price to the public
set forth on the cover of the Prospectus. The relative fault of the Company and
the Underwriters shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact or the inaccurate or the
alleged inaccurate representation and/or warranty relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in subparagraph (c) of
this Section 10, any legal or other fees or expenses reasonably incurred by such
party in connection with investigating or defending any action or claim. The
provisions set forth in subparagraph (c) of this Section 10 with respect to
notice of commencement of any action shall apply if a claim for contribution is
to be made under this subparagraph (d); provided, however, that no additional
notice shall be required with respect to any action for which notice has been
given under subparagraph (c) for purposes of indemnification. The Company and
the Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 10 were determined solely by pro rata
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allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 10, no Underwriter shall be
required to contribute any amount in excess of the amount of the total
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public. No person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 11 are several in proportion to their respective
underwriting commitments and not joint.
(e) It is agreed that any controversy arising out of the operation of
the interim reimbursement arrangements set forth in Sections 10(a) and 10(b)
hereof, including the amounts of any requested reimbursement payments and the
method of determining such amounts, shall be settled by arbitration conducted
under the provisions of the Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration
Procedure of the NASD. Any such arbitration must be commenced by service of a
written demand for arbitration or written notice of intention to arbitrate,
therein electing the arbitration tribunal. In the event the party demanding
arbitration does not make such designation of an arbitration tribunal in such
demand or notice, then the party responding to said demand or notice is
authorized to do so. Such an arbitration would be limited to the operation of
the interim reimbursement provisions contained in Sections 10(a) and 10(b)
hereof and would not resolve the ultimate propriety or enforceability of the
obligation to reimburse expenses which is created by the provisions of such
Sections 10(a) and 10(b) hereof.
SECTION 11.
Default of Underwriters. It shall be a condition to this Agreement
-----------------------
and the obligation of the Company to sell and deliver the Common Shares
hereunder, and of each Underwriter to purchase the Common Shares in the manner
as described herein, that, except as hereinafter in this paragraph provided,
each of the Underwriters shall purchase and pay for all the Common Shares agreed
to be purchased by such Underwriter hereunder upon tender to the Representatives
of all such shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Common Shares hereunder on
either the First or Second Closing Date and the aggregate number of Common
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase on such Closing Date does not exceed 10% of the total number of Common
Shares which the Underwriters are obligated to purchase on such Closing Date,
the non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Common Shares which such
defaulting Underwriters agreed but failed to purchase on such Closing Date. If
any Underwriter or Underwriters so default and the aggregate number of Common
Shares with respect to which such default occurs is more than the above
percentage and arrangements satisfactory to the Representatives and the Company
for the purchase of such Common Shares by other persons are not made within 48
hours after such default, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter or the Company except for the expenses to
be paid by the Company pursuant to Section 6 hereof and except to the extent
provided in Section 10 hereof.
In the event that Common Shares to which a default relates are to be
purchased by the non-defaulting Underwriters or by another party or parties, the
Representatives or the Company shall have the right to postpone the First or
Second Closing Date, as the case may be, for not more than five business days in
order that the necessary changes in the Registration Statement, Prospectus and
any other documents, as well as any other arrangements, may be effected. As
used in this Agreement, the term "Underwriter" includes any person substituted
24
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for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 12.
Effective Date. This Agreement shall become effective immediately as
--------------
to Sections 6, 8, 10, 13 and 15 and, as to all other provisions, (i) if at the
time of execution of this Agreement the Registration Statement has not become
effective, at 2:00 P.M., California time, on the first full business day
following the effectiveness of the Registration Statement, or (ii) if at the
time of execution of this Agreement the Registration Statement has been declared
effective, at 2:00 P.M., California time, on the first full business day
following the date of execution of this Agreement; but this Agreement shall
nevertheless become effective at such earlier time after the Registration
Statement becomes effective as you may determine on and by notice to the Company
or by release of any of the Common Shares for sale to the public. For the
purposes of this Section 12, the Common Shares shall be deemed to have been so
released upon the release for publication of any newspaper advertisement
relating to the Common Shares or upon the release by you of telegrams (i)
advising Underwriters that the Common Shares are released for public offering,
or (ii) offering the Common Shares for sale to securities dealers, whichever may
occur first.
SECTION 13.
Termination. Without limiting the right to terminate this Agreement
-----------
pursuant to any other provision hereof:
(a) This Agreement may be terminated by the Company by notice to you
or by you by notice to the Company at any time prior to the time this Agreement
shall become effective as to all its provisions, and any such termination shall
be without liability on the part of the Company to any Underwriter (except for
the expenses to be paid or reimbursed by the Company pursuant to Sections 6 and
8 hereof and except to the extent provided in Section 10 hereof) or of any
Underwriter to the Company (except to the extent provided in Section 10 hereof).
(b) This Agreement may also be terminated by you prior to the First
Closing Date by notice to the Company (i) if additional material governmental
restrictions, not in force and effect on the date hereof, shall have been
imposed upon trading in securities generally or minimum or maximum prices shall
have been generally established on the New York Stock Exchange or on the
American Stock Exchange or in the over the counter market by the NASD, or
trading in securities generally shall have been suspended on either such
Exchange or in the over the counter market by the NASD, or a general banking
moratorium shall have been established by federal, New York or California
authorities, (ii) if an outbreak of major hostilities or other national or
international calamity or any substantial change in political, financial or
economic conditions shall have occurred or shall have accelerated or escalated
to such an extent, as, in the judgment of the Representatives, to affect
adversely the marketability of the Common Shares, (iii) if any adverse event
shall have occurred or shall exist which makes untrue or incorrect in any
material respect any statement or information contained in the Registration
Statement or Prospectus or which is not reflected in the Registration Statement
or Prospectus but should be reflected therein in order to make the statements or
information contained therein not misleading in any material respect, or (iv) if
there shall be any action, suit or proceeding pending or threatened, or there
shall have been any development or prospective development involving
particularly the business or properties or securities of the Company or the
transactions contemplated by this Agreement, which, in the reasonable judgment
of the Representatives, may materially and adversely affect the Company's
business or earnings and makes it impracticable or inadvisable to offer or sell
the Common Shares.
25
<PAGE>
Any termination pursuant to this subsection (b) shall be without liability on
the part of any Underwriter to the Company or on the part of the Company to any
Underwriter (except for expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in Section
10 hereof.
(c) This Agreement shall also terminate at 5:00 P.M., California
time, on the tenth full business day after the Registration Statement shall have
become effective if the initial public offering price of the Common Shares shall
not then as yet have been determined as provided in Section 4 hereof. Any
termination pursuant to this subsection (c) shall without liability on the part
of any Underwriter to the Company or on the part of the Company to any
Underwriter (except for expenses to be paid or reimbursed by the Company
pursuant to Sections 6 and 8 hereof and except to the extent provided in Section
10 hereof.]
SECTION 14.
Representations and Indemnities to Survive Delivery. The respective
---------------------------------------------------
indemnities, agreements, representations, warranties and other statements of the
Company, of its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of any Underwriter or the Company or any
of its or their partners, officers or directors or any controlling person, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
SECTION 15.
Notices. All communications hereunder shall be in writing and, if
-------
sent to the Representatives shall be mailed, delivered or telegraphed and
confirmed to you at 600 Montgomery Street, San Francisco, California 94111,
Attention: Kathleen Smythe, with a copy to Gibson, Dunn & Crutcher LLP, One
Montgomery Street, San Francisco, California 94104, Attention: Todd H. Baker,
Esq.; and if sent to the Company shall be mailed, delivered or telegraphed and
confirmed to the Company at 2 Wisconsin Circle, Chevy Chase, Maryland 20815,
Attention: John K. Delaney, with a copy to Powell, Goldstein, Frazer & Murphy,
191 Peachtree Street, N.W., Atlanta, Georgia 30303, Attention: G. William
Speer. The Company or you may change the address for receipt of communications
hereunder by giving notice to the others.
SECTION 16.
Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto, including any substitute Underwriters pursuant
to Section 11 hereof, and to the benefit of the officers and directors and
controlling persons referred to in Section 10, and in each case their respective
successors, personal representatives and assigns, and no other person will have
any right or obligation hereunder. No such assignment shall relieve any party
of its obligations hereunder. The term "successors" shall not include any
purchaser of the Common Shares as such from any of the Underwriters merely by
reason of such purchase.
SECTION 17.
Representation of Underwriters. You will act as Representatives for
------------------------------
the several Underwriters in connection with all dealings hereunder, and any
action under or in respect of this Agreement taken by you jointly or by
Montgomery Securities, as Representatives, will be binding upon all the
Underwriters.
SECTION 18.
<PAGE>
Partial Unenforceability. The invalidity or unenforceability of any
------------------------
Section, paragraph or provision of this Agreement shall not affect the validity
or enforceability of any other Section, paragraph or provision hereof. If any
Section, paragraph or provision of this Agreement is for any reason determined
to be invalid or unenforceable, there shall be deemed to be made such minor
changes (and only such minor changes) as are necessary to make it valid and
enforceable.
SECTION 19.
Applicable Law. This Agreement shall be governed by and construed in
--------------
accordance with the internal laws (and not the laws pertaining to conflicts of
laws) of the State of California.
SECTION 20.
General. This Agreement constitutes the entire agreement of the
-------
parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and you.
27
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon it
will become a binding agreement between among the Company and the several
Underwriters including you, all in accordance with its terms.
Very truly yours,
-----------------------------------
HealthCare Financial Partners, Inc.
By
--------------------------------
President
28
<PAGE>
The foregoing Underwriting Agreement
is hereby confirmed and accepted by
us in San Francisco, California as of
the date first above written.
MONTGOMERY SECURITIES
STIFEL, NICOLAUS & COMPANY, INCORPORATED
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By MONTGOMERY SECURITIES
By:
------------------------------
Managing Director
29
<PAGE>
Number of Firm
Common Shares
Name of Underwriter to be Purchased
------------------- ---------------
Montgomery Securities ...........................
Stifel, Nicolaus & Company Incorporated .........
TOTAL 2,100,000
30
<PAGE>
SCHEDULE B
Stockholders of the Company that will
sign Lock-Up Agreements
John K. Delaney
Ethan D. Leder
Edward P. Nordberg, Jr.
HealthPartners Investors, LLC
JMR Capital Partners, Inc.
Creative Information Systems, LLC
31
<PAGE>
SCHEDULE C
Stockholders of the Company that will
sign Rule 144 Sale Agreements
John K. Delaney
Ethan D. Leder
Edward P. Nordberg, Jr.
JMR Capital Partners, Inc.
Creative Information Systems, LLC
32
<PAGE>
SCHEDULE D
__________, 19__
PRICE DETERMINATION AGREEMENT
Referring to Section 4 of the Underwriting Agreement dated
__________, 19__, between the Company and the Underwriters as therein defined
with respect to the purchase and sale of the Common Shares, we hereby confirm
our agreement that the initial public offering price of the Common Shares shall
be $_____ per share; that the underwriting discount shall be $_____ per share;
and that the purchase price to be paid by the several Underwriters for the
Common Shares to be purchased from the Company shall be $_____ per share.
This Agreement may be executed in various counterparts which together
shall constitute one and the same Agreement.
MONTGOMERY SECURITIES
STIFEL, NICOLAUS & COMPANY, INC.
By Montgomery Securities]
By
-------------------------------------
Acting on behalf of the several Underwriters
named in Schedule A to the Underwriting
Agreement
----------------------------------------
By
-------------------------------------
Acting on behalf of the Company
33
<PAGE>
EXHIBIT 2.1
Draft: 10/31/96
ASSIGNMENT AND ASSUMPTION AGREEMENT
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Assignment and
Assumption") is dated as of _____________________, 1996 by and among
HealthPartners Investors, LLC, a Delaware limited liability company
("Assignor"), HP Funding, Inc., a Delaware corporation ("Assignee") and
HealthCare Financial Partners, Inc., a Delaware corporation (the "General
Partner").
WITNESSETH:
WHEREAS, by virtue of its purchase of the limited partnership
interests previously held by Farallon Capital Partners, L.P. and RR Capital
Partners, L.P. pursuant to that certain Assignment and Assumption of Partnership
Interests dated as of March 28, 1996, Assignor is the sole limited partner of
that certain Delaware limited partnership known as "HEALTHPARTNERS FUNDING,
L.P." (the "Partnership"), which is currently governed by that certain Amended
and Restated Limited Partnership Agreement dated as of December 1, 1995 by and
between Assignor, as limited partner, and the General Partner, as general
partner (the "Partnership Agreement"); and
WHEREAS, all capitalized terms used but not otherwise defined herein
shall have the respective meanings given them in the Partnership Agreement; and
WHEREAS, Assignor desires to assign to Assignee Assignor's entire
limited partnership interest as the sole limited partner of the Partnership (the
"Partnership Interest"), and Assignee desires to acquire the Partnership
Interest and in consideration therefor to pay to Assignor the Purchase Price (as
defined in Section 2 below).
WHEREAS, Assignee is a wholly-owned subsidiary of the General Partner.
WHEREAS, pursuant to a Roll-Up Agreement, dated as of _______________,
1996 (the "Roll-Up Agreement") between the Partnership, Assignee and the General
Partner, immediately following the Closing hereunder the Partnership shall
be terminated and dissolved and the assets of the Partnership distributed to
Assignee.
WHEREAS, the General Partner contemplates making an initial public
offering of it its common stock (the "IPO") before December 31, 1996 the
proceeds of which will be applied, inter alia, to pay in full the Purchase
----- ----
Price.
WHEREAS, Farallon Capital Partners, L.P., and RR Capital Partners,
L.P. (together, the "Farallon Parties") and Assignee intend to enter into a
Registration Rights Agreement, dated as of the date hereof (the "Registration
Rights Agreement"), pursuant to which Assignee agrees to register upon demand
certain shares of Assignee's common stock held by the Farallon Parties.
WHEREAS, the Farallon Parties, the General Partner and John K.
Delaney, Ethan D. Leder, and Edward P. Nordberg, Jr., (the "Principals") intend
to enter into a Shareholders Agreement, dated as of the date hereof (the
"Shareholders Agreement") under which the Farallon Parties are given certain
rights.
<PAGE>
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Sale. Subject to Section 2 hereof, effective on the Closing Date:
----
(i) Assignor hereby assigns, sells, transfers, conveys and sets over to Assignee
all of Assignor's right, title and interest in and to the Partnership Interest,
including, without limitation, all of Assignor's interest in the capital, the
Profits and Losses arising on or after the Closing Date, and all rights to
receive distributions of money, Profits and other assets from the Partnership;
provided, however, that Assignor retains all rights to the Profits and other
amounts which accrue for the period ending on the Closing Date, and (ii)
Assignee assumes and shall be solely responsible for the due and timely
performance of all obligations of Assignor under the Partnership Agreement.
Assignor hereby represents and warrants to Assignee that Assignor has not
heretofore assigned, sold, transferred, conveyed or hypothecated the Partnership
Interest in whole or in part, to any person or entity, and further represents
and warrants to Assignee that it owns the Partnership Interest free and clear of
all liens, claims, charges and other encumbrances.
2. Purchase Price. The aggregate purchase price payable by Assignee
--------------
in consideration for the assignment and transfer of the Partnership Interest by
Assignor shall be an amount equal to Assignor's unreturned capital plus
Assignor's share of accrued but undistributed profits as of the Closing Date
(the "Purchase Price"). The Purchase Price shall be paid as follows:
(a) Payment on Closing Date. On the Closing Date, Assignee shall pay
-----------------------
to Assignor $__________, which represents an estimate of the Purchase Price.
(b) Post-Closing Adjustments. Within 60 days after Closing, the
------------------------
General Partner will prepare and promptly deliver to Assignor a final accounting
(which shall include all supporting information) of: (i) Partnership income and
expenses, profits and allocations through the Closing Date and (ii) the
calculation of the Purchase Price. The final accounting shall be subject to
dispute resolution as follows: (I) Assignor shall have 60 days to review the
final accounting; (II) if Assignor disputes the final accounting, Assignor and
the General Partner shall attempt in good faith to resolve the dispute for 30
days and if they fail to so resolve the dispute within such 30-day period, each
will promptly appoint an accounting firm (the expenses of which shall be paid by
the party appointing such accounting firm) which two firms will have 30 days to
resolve any dispute (and any dispute so resolved shall be binding); (III) if the
two accounting firms fail to resolve such dispute within 30 days, then those two
accounting firms shall mutually appoint a third accounting firm to promptly
resolve the remaining disputed items whose determination shall be binding (and
whose expenses shall be shared evenly). An adjustment payment shall be made by
Assignee (if Assignee has not paid the full Purchase Price) or Assignor (if
Assignor has received in excess of the Purchase Price) immediately following and
in accordance with the determinations made under such final accounting or
dispute resolution, as applicable.
(c) Calculations. For purposes of determining the Purchase Price, the
------------
following rules shall apply:
-2-
<PAGE>
(i) All fees and expenses incurred in connection with this
Agreement, the Transaction Documents and the IPO shall be charged to and paid by
the General Partner and shall be "General Partner Expenses" and not "Partnership
Expenses" (as defined in Section 2.06 of the Partnership Agreement).
(ii) the Partnership's fiscal year shall be deemed to end on
the Closing Date and all calculations of income, profit and loss and all other
allocations shall be made through such date.
(iii) Assignor's unreturned capital shall not be reduced by any
reserve or other charge of any kind except for reserves or charges related to
specific losses; provided that if any such amount against which a reserve was so
taken is subsequently collected, the Assignee shall promptly notify Assignor
thereof and pay to Assignor the full amount which would have been payable under
this Agreement as if no such reserve had ever been taken.
3. Conditions. The obligations of the Assignor under this Assignment
----------
and Assumption are subject to the fulfillment of each of the following
conditions, unless waived by the Assignor in writing, at or before the closing
(the "Closing"; and the date on which the Closing occurs is the "Closing Date")
of the sale and transfer of the Partnership Interest.
(a) Representations and Warranties. The representations and
------------------------------
warranties of the General Partner and Assignee contained in this Assignment and
Assumption shall be true in all material respects on and as of the Closing Date
with the same force and affect as though made on and as of the Closing Date.
(b) Performance of Agreements. The General Partner and Assignee shall
-------------------------
have performed and complied with all of its covenants and other obligations
contained in this Assignment and Assumption, the Roll-Up Agreement, the
Registration Rights Agreement, the Shareholders Agreement and the other
Transaction Documents required to be performed or complied with at or before the
Closing Date.
(c) IPO. The IPO shall have occurred and been consummated.
---
(d) Roll-Up. Assignee, the General Partner and the Partnership shall
-------
have executed and delivered the Roll-Up Agreement and the transactions
contemplated thereunder, including without limitation the transfer of the
properties, assets, rights, business, contracts, goodwill and liabilities of the
Partnership to the Assignee (such transfer, collectively the "Roll-Up") shall
occur simultaneously herewith.
(e) Consents. All consents required in connection with this
--------
Assignment and Assumption, the Roll-Up Agreement, the Registration Rights
Agreement, the Shareholders Agreement, the exercise of the Warrants and the
agreements and other documents executed in connection therewith (collectively,
the "Transaction Documents") and the transactions contemplated thereby
(including without limitation the consent to this Agreement and Assumption from
Fleet (attached as Exhibit 3(e)) shall have been received by the Assignee,
the General Partner and Assignor.
-3-
<PAGE>
(f) Registration Rights Agreement. The Farallon Parties and the
-----------------------------
General Partner shall have executed and delivered the Registration Rights
Agreement related to the shares of General Partner Common Stock owned (or to be
owned) by the Farallon Parties in the form attached as Exhibit 3(f).
(g) Shareholders Agreement. The Farallon Parties, the General Partner
----------------------
and the Principals shall have entered into the Shareholders Agreement in the
form attached as Exhibit 3(g).
(h) Purchase Price. Assignor shall have received payment of the
--------------
Purchase Price payable under Section 2 hereof.
(i) Resolutions. The General Partner and Assignee shall have duly
-----------
adopted Board and Shareholder resolutions approving the Transaction Documents
and the transactions contemplated thereby, and Assignor shall have received from
the chief executive officers of the General Partner and Assignee a certificate
certifying: (i) adoption of such resolutions; (ii) the Certificate of
Incorporation and Bylaws; and (iii) the incumbency of officers.
4. Representations and Warranties of Assignee. The General Partner
------------------------------------------
and Assignee represent and warrant to Assignor as of the date hereof and as of
the Closing Date as follows:
(a) Corporate Existence and Power. Each of the General Partner and
-----------------------------
Assignee (i) is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and (ii) has
all necessary corporate power and authority to execute and deliver each of the
Transaction Documents to which it is a party and to consummate the transactions
contemplated thereby.
(b) Capitalization. As of the date of this Assignment and Assumption,
--------------
3,799,991 shares of Common Stock of the General Partner and -0- shares of
Preferred Stock of the General Partner (together with the Common Stock, the
"Company Stock") are outstanding, all of which shares have been duly authorized,
validly issued and are fully paid and nonassessable. Except for such Company
Stock, there are no shares of capital stock or other equity securities of the
General Partner outstanding. The Farallon Parties collectively own of record
549,493 shares of Common Stock which shall equal 14.46% of the total shares of
Common Stock (assuming exercise of the Farallon Warrants referred to in Section
4(d)) of the General Partner outstanding immediately before the closing of the
IPO (determined on a fully diluted basis).
(c) No Other Rights. Except as described in the Registration
---------------
Statement filed by the General Partner in connection with the IPO, (1) there are
no preemptive or similar rights on the part of any holder of any class of
securities of the General Partner, and (2) no options, warrants, conversion or
other rights, agreements or commitments of any kind are outstanding that
obligate the General Partner, contingently or otherwise, to issue, sell,
purchase, return or redeem any shares of its capital stock of any class or any
securities convertible into or exchangeable for any such shares or that give any
individual or entity the right to receive any benefits or rights substantially
similar to any enjoyed by or accruing to holders of shares of capital stock of
the General Partner, and no authorization therefor has been given. No shares of
capital stock of the General Partner are held in the General Partner treasury
and no shares of capital stock of the General Partner are reserved for issuance
for those rights set forth on Schedule 3(c). There are no
-4-
<PAGE>
voting trusts, stockholder agreements, proxies or other agreements or
understandings in effect with respect to the voting or transfer of any of the
Company Stock. The Company Stock has not been issued in violation of any
purchase option, call, right of first refusal or preemptive or similar rights.
(d) Exercise of Warrant. There is sufficient Common Stock authorized
-------------------
and reserved for issuance by the General Partner for the exercise by Assignor of
the Warrants granting Assignor the right to purchase an aggregate of 379,998
shares of Common Stock of the General Partner (the "Farallon Warrants"). The
Farallon Warrants were duly granted and are legal, valid and binding on the
General Partner. The 379,998 shares of Common Stock issuable upon the exercise
of the Warrants will be duly authorized, validly issued and fully paid and
non-assessable.
(e) Authorization; Binding Effect. The execution and delivery by
-----------------------------
each of the General Partner and Assignee of each of the Transaction Documents to
which it is or may become a party, the performance by it of its obligations
under the Transaction Documents and the consummation of the transactions
contemplated hereby and thereby has been duly authorized by all necessary
corporate action. This Assignment and Assumption has been duly executed and
delivered by the General Partner and Assignee, and each of the Transaction
Documents to which the General Partner or Assignee is or may become a party is,
or when executed and delivered in accordance with this Assignment and Assumption
will be, legal, valid and binding obligations of the General Partner or
Assignee, as the case may be, enforceable against it in accordance with its
terms.
(f) Contravention. Neither the execution, delivery and performance of
-------------
this Assignment and Assumption or the other Transaction Documents by the General
Partner or Assignee nor the consummation of the transactions contemplated hereby
and thereby will (with or without notice or lapse of time or both) (ii) conflict
with, violate or breach any provision of the certificate or incorporation or
bylaws of the General Partner or Assignee, (iii) violate, conflict with or
result in a breach of any writ, judgment, injunction, order, decree or award of
any governmental body by which either the General Partner or Assignee or their
respective properties may be bound or affected, or (iii) conflict with, result
in a default under, or give rise to a right of termination, cancellation, or
acceleration or to a loss of a benefit under any material agreement to which
Assignee or the General Partner is a party or by which Assignee or the General
Partner or their respective properties may be bounded or affected.
(g) Approvals. No authorization, consent, order or approval of,
---------
notice to or registration or filing with, or any other action by any person,
entity or governmental body is required in connection with (a) the due execution
and delivery by Assignee or the General Partner of any of the Transaction
Documents to which either is or may become a party, (b) the consummation of the
transactions contemplated by the Transaction Documents, or (c) the performance
by Assignee and the General Partner of their obligations under the Transaction
Documents.
(h) Holders of Record. Of the 169,495 shares of Common Stock
-----------------
of the General Partner owned of record by the Farallon Parties (the "Farallon
Shares"), which excludes the 379,998 shares of Common Stock of the General
Partner issued or to be issued in connection with the exercise of the Farallon
Warrants, (i) 169,498 shares were held of record by Cash Flow Management, L.P.
from December 28, 1994 to January 31, 1996; (ii) 144,073 shares were held of
record by Farallon Capital Partners, L.P. and 25,422 shares were held of record
by R.R. Capital Partners, L.P., from January 31, 1996 to April 1, 1996, (iii)
169,495 shares were held of record by HealthPartners Investors, LLC from April
1, 1996 to November 5, 1996 and (iv) from and after November 5, 1996, 143,814
shares were held of record by Farallon Capital Partners, L.P. and 25,081 shares
were held of record by R.R. Capital Partners, L.P.. During the period which it
held the Farallon Shares, Cash Flow Management L.P. held approximately 4.5 % of
the General Partner's Common Stock on a fully diluted basis,
-5-
<PAGE>
Of the 379,998 shares of Common Stock of the General Partner issuable upon
exercise of the Farallon Warrants (i) 322,998 shares were held of record by
Farallon Capital Partners, L.P. from December 28, 1994 to March 28, 1996;
(ii) 57,000 shares were held of record by Tinicum Partners, L.P. from December
28, 1994 to December 1, 1995; (iii) 37,000 shares were held of record by R R
Capital Partners, L.P. from December 1, 1995 to March 28, 1996; (iv) 379,998
shares were held of record by Assignor from March 28, 1996 to November 5, 1996
and (v) from and after November 5, 1996 322,423 shares were held of record by
Farallon Capital Partners, L.P. and 57,575 shares were held of record by R R
Capital Partners, L.P.
5. Acceptance of Assignment. Assignee hereby accepts the assignment
------------------------
of the Partnership Interest, and agrees to be bound by all of the terms and
conditions of the Partnership Agreement applicable to Limited Partners.
Assignee hereby represents for the benefit of Assignor and the Partnership that
it is acquiring the Partnership Interest for its own account and not with a view
to the resale or distribution thereof, and agrees that it will not transfer,
sell or dispose of, or offer to transfer, sell or dispose of, all or any portion
of the Partnership Interest to any person or persons in any manner that would
violate or cause the Partnership or the General Partner to violate applicable
Federal or state securities laws.
6. Covenants.
---------
(a) Legal Expenses. Promptly after the Closing, the General Partner
--------------
shall pay all reasonable costs and expenses, including without limitation, all
reasonable legal fees, incurred by Assignor with respect to the preparation,
negotiation, execution and enforcement of the Transaction Documents.
(b) Further Assurances. Each party shall promptly upon request by the
------------------
other party correct any defect or error that may be discovered in any Sale
Document or in the execution, acknowledgment or recordation of any Sale
Document.
7. Release. The General Partner agrees and acknowledges that
-------
Assignor has fully performed all commitments and obligations under the
Partnership Agreement and has no further commitments, obligations or liabilities
thereunder except only any obligation under Section 2 hereof following a final
accounting to return excess payments received. Assignor agrees that from and
after the Closing Date it has no further rights under the Partnership Agreement
except the right to receive the Purchase Price provided herein which shall
continue in full force and effect.
8. Applicable Law. This Assignment and Assumption shall be
--------------
interpreted, construed and enforced in accordance with the laws of the State of
Delaware.
9. Successors and Assigns. This Assignment and Assumption shall be
----------------------
binding upon and shall inure to the benefit of Assignor, the General Partner and
Assignee and their respective legal representatives, successors and assigns. The
Farallon Parties which are not signatories to this Agreement are nevertheless
third party beneficiaries hereof.
10. Severability. Should any party of this Assignment and Assumption
------------
for any reason be declared or held invalid, unenforceable or illegal, such
invalidity, unenforceability, or illegality shall not affect the validity of any
remaining portion, which remaining portion shall remain in force and effect as
if this Assignment and Assumption had been executed with the invalid,
unenforceable or illegal portion thereof eliminated.
-6-
<PAGE>
11. Integration. This Assignment and Assumption contains the final
-----------
and entire agreement between the parties thereto with respect to the assignment
and transfer of the Partnership Interest, and is intended to be an integration
of all prior negotiations and understandings. The parties make no
representations, warranties, covenants, express or implied, except as expressly
set forth herein. No change or modification of this Assignment and Assumption
shall be valid unless the same is in writing and is signed by the party against
which it is sought to be enforced.
12. No Waiver; Remedies. No failure or delay by any party in
-------------------
exercising any right, power or privilege under this Assignment and Assumption
will operate as a waiver of the right, power or privilege. A single or partial
exercise of any right, power or privilege will not preclude any other or further
exercise of the right, power or privilege or the exercise of any other right,
power or privilege. The rights and remedies provided in this Assignment and
Assumption will be cumulative and not exclusive of any rights or remedies
provided by law.
13. Counterparts. This Assignment and Assumption may be executed in
------------
counterparts, each of which shall constitute an original and both of which, when
taken together, shall constitute a single instrument.
14. Descriptive Headings. The headings in this Assignment and
--------------------
Assumption are included for convenience of reference only and will not affect in
any way the meaning or interpretation of this Assignment and Assumption.
15. Termination. This Assignment and Assumption and all obligations
-----------
hereunder shall terminate on December 31, 1996, unless on or prior to such date
Assignee shall have consummated the IPO.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Assignment and Assumption of Partnership Interest as of the date first
above written.
ASSIGNOR:
HEALTHPARTNERS INVESTORS, LLC
a Delaware limited liability company
By: Farallon Capital Management, L.L.C., its Manager
By: ________________________________
Name:
Title:
ASSIGNEE:
HP FUNDING, INC.,
a Delaware corporation
By: ________________________________
Name:
Title:
GENERAL PARTNER:
HEALTHCARE FINANCIAL PARTNERS, INC.
a Delaware corporation
By: ________________________________
Name:
Title:
-8-
<PAGE>
CONSENT
The undersigned, in its capacity as general partner of HealthPartners
Funding, L.P., hereby consents to the assignment and assumption pursuant to the
foregoing Assignment and Assumption of a Partnership Interest, and to the
substitution of Assignee as a Limited Partner in the Partnership.
IN WITNESS WHEREOF, the undersigned has executed this Consent as of the
_____ day of November, 1996.
ATTEST: HEALTHCARE FINANCIAL PARTNERS, INC.
(Seal) a Delaware corporation
By: ____________________ By: __________________________________
Name: Name:
Title: Title:
-9-
<PAGE>
EXHIBIT 3(e)
FLEET CONSENT
-------------
-10-
<PAGE>
EXHIBIT 3(f)
REGISTRATION RIGHTS AGREEMENT
-----------------------------
-11-
<PAGE>
EXHIBIT 3(g)
SHAREHOLDERS AGREEMENT
----------------------
-12-
<PAGE>
DRAFT of 10/31/96
SHAREHOLDERS AGREEMENT
----------------------
SHAREHOLDERS AGREEMENT made as of November ____, 1996 by and among
HealthCare Financial Partners, Inc., a Delaware corporation (the "Company"),
Farallon Capital Partners, L.P., a California limited partnership ("FCP"), RR
Capital Partners, L.P., a Delaware limited partnership ("RR" and together with
FCP the "Farallon Holders"), and John K. Delaney, Ethan D. Leder, and Edward P.
Nordberg, Jr., (collectively, the "Principals").
WHEREAS, the Farallon Holders currently hold 169,495 shares of common
stock of the Company (the "Common Stock") and warrants (the "Warrants") to
purchase another 379,998 shares of Common Stock (such shares, together with any
securities issued in respect of such shares by reason of any stock split, stock
dividend, recapitalization, reorganization or similar event, are hereinafter
referred to as the "Farallon Shares").
WHEREAS, the Company plans to make an Initial Public Offering of
Common Stock on or around November 21, 1996.
WHEREAS, Health Partners Investors, LLC, a Delaware limited liability
company, HP Investors, HP Funding, Inc., a wholly owned subsidiary of the
Company, and the Company are entering into that certain Assignment and
Assumption Agreement dated the date hereof and execution and delivery of this
Agreement is a condition to HP Investors' agreement to consummate the
transactions contemplated hereunder.
WHEREAS, terms used herein have the meanings stated in Section 3.
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties agree as follows:
Section 1. Covenants. For so long as the Farallon Holders, the
---------
Farallon Affiliates and the Farallon Transferees collectively hold at least
295,000 of the Farallon Shares as constituted on the date of this Agreement,
then the following shall apply:
(a) No Affiliated Transactions. The Company shall not engage
--------------------------
in any transaction with any Principal or any Principal Affiliate unless (i) such
transaction is upon fair and reasonable terms no less favorable to the Company
than it would obtain in a comparable arm's length transaction with a person who
is not one of the Principals or a Principal Affiliate or (ii) with respect to
any transaction involving a Principal or a Principal Affiliate in its capacity
as an employee of the Company, such transaction is fair and reasonable and
consistent with the policies of the Company which are applied to all of its
employees.
(b) No Cheap Stock. The Company and each entity in which the
--------------
Company owns any interest shall not issue or grant any Equity Right to any
Principal or Principal Affiliate unless at
-14-
<PAGE>
such time the Principal or the Principal Affiliate, as the case may be, pays to
the Company in cash in full the fair market value of such Equity Right;
provided, however, this provision shall not apply to the issue, grant or
exercise of an option to purchase 37,000 shares of Common Stock to each of the
Principals or to the grant of an Equity Right (provided payment is required
under the terms of a grant) to any person at not less than the fair market value
of such Equity Right on the date of grant.
(c) Issuance to Principals. In the event that the Company
----------------------
fails to consummate an Initial Public Offering on or before December 31, 1996,
if after the Warrant Exercise Date (i) the Company sells shares of Common Stock
to any of the Principals or Principal Affiliates or to Richard I. Metcalf or J.
Mitchell Reese or any of their respective family members (including parents,
siblings and children) or any entity directly or indirectly controlled by either
of such persons (collectively, the "Existing Shareholders"), or (ii) the Company
issues any securities convertible into shares of Common Stock to any of the
Existing Shareholders or (iii) the Company issues any option, warrant or other
right to purchase shares of Common Stock to any Existing Shareholders
(collectively, the "Additional Equity Rights"), then the Farallon Holders shall
be issued identical Additional Equity Rights except that such issue shall be for
a number of shares such that each Farallon Holder's percentage ownership of the
Company represented by the Warrant Shares immediately prior to the issuance of
the Additional Equity Rights to the Existing Shareholders shall be preserved (as
determined on a fully diluted basis assuming exercise and conversion of all
Additional Equity Rights of the Company including without limitation those
issued to the Existing Shareholders); provided, however, that if the Existing
Shareholders provide any consideration to the Company in exchange for any such
Additional Equity Rights, then such issuance of such Additional Equity Rights to
each Farallon Holder shall be conditioned upon the receipt by the Company of
cash consideration from such Farallon Holder in an amount equal to the same
consideration per share received by the Company from the Existing Shareholders
for such Additional Equity Rights. The Company shall notify the Farallon Holders
of the occurrence of any event described in clauses (i), (ii) and (iii) hereof.
(d) Tag-Along Rights. If any Principal or Principal Affiliate
----------------
from time to time proposes to sell any stock of the Company (a "Selling Party"),
-------------
then
(i) the Selling Party (or the related Principal if any
Principal Affiliate is the Selling Party) shall promptly notify each Farallon
Holder thereof in writing including all material terms and conditions thereof;
(ii) each Farallon Holder shall have 20 days to elect to
sell up to the portion (calculated as the percentage of such Farallon Holder's
Farallon Shares as equals the percentage of the Selling Party's stock of the
Company which is proposed to be sold) of its Farallon Shares on the same terms
and conditions;
(iii) the sales by the Selling Party and the Farallon
Holders (with respect to the Farallon Shares the Farallon Holders elect to sell)
shall occur simultaneously (and the sale by the Selling Party shall not occur
unless the sale by the Farallon Holders (with respect to the Farallon Shares
such Farallon Holders elect to sell) also occurs.
-15-
<PAGE>
Section 2. Rule 144 Reporting
------------------
(a) With a view to making available the benefits of certain
rules and regulations of the Commission which may permit the sale by the
Farallon Holders to the public without registration, the Company agrees, but
only after and for so long as the Company becomes subject to the requirements of
Section 13 or 15(d) of the Securities Exchange Act, to:
(i) Make and keep public information available as those
terms are understood and defined in Rule 144 under the Securities Act and all
such information required to sell securities under Rule 144, at all times from
and after 10 days following the effective date of the Initial Public Offering;
(ii) File with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Securities and Exchange Act at any time after it has become subject to such
reporting requirements; and
(iii) So long as any Farallon Holder owns any restricted
securities, as such term is defined in Rule 144 ("Restricted Securities"),
furnish to such Farallon Holder forthwith upon its request a written statement
by the Company as to its compliance with the reporting requirements of Rule 144
and of the Securities Act and the Securities and Exchange Act, a copy of the
most recent annual or quarterly report of the Company, and such other reports
and documents so filed as the Farallon Holder may reasonably request in availing
itself of any rule or regulation of the Commission allowing the Farallon Holder
to sell any such Restricted Securities without registration.
(b) In the event any Farallon Holder sells any Restricted
Securities under Rule 144, such Farallon Holder shall comply with all
requirements of Rule 144 and of the Securities Act in connection with such sale
and shall furnish to the Company and the Company's stock transfer agent an
opinion of counsel reasonably satisfactory to the Company to the effect that all
such requirements have been complied with.
Section 3. Certain Definitions. As used in this Agreement, the
-------------------
following terms shall have the following respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"COMMON STOCK" has the meaning stated in the first recital of this
Agreement.
"COMPANY" has the meaning stated in the heading of this Agreement.
"EQUITY RIGHT" means: (i) any class, series or type of the Company's
stock or securities ("Company Securities"), (ii) securities or instruments
------------------
convertible into any Company Securities,(ii)
-16-
<PAGE>
any options, warrants or rights to acquire any Company Securities, and (iv) any
"phantom" or similar rights with respect to any Company Securities.
"FARALLON HOLDER" shall have the meaning stated in the heading of this
Agreement.
"FARALLON AFFILIATE" means with respect to any Farallon Holder
each entity, directly or indirectly, controlled by, under common control with or
controlling such Farallon Holder [and each entity controlled or managed by
Farallon Partners, L.L.C. or Farallon Capital Management, L.L.C.]
"FARALLON TRANSFEREE" means each transferee of all or any of any
Farallon Holder's rights hereunder.
"INITIAL PUBLIC OFFERING" means the date of the closing of a public
offering pursuant to an effective Registration Statement filed under the
Securities Act covering the sale of common stock of the Company.
"PRINCIPAL" means John K. Delaney, Ethan D. Leder, and Edward P.
Nordberg, Jr.
"PRINCIPAL AFFILIATE" means with respect to any Principal, his family
members (including parents, siblings and children) and each entity directly or
indirectly controlled by such Principal.
The terms "REGISTER", "REGISTERED" and "REGISTRATION" shall refer to a
registration of the sale of securities of the Company effected by preparing and
filing a Registration Statement in compliance with the Securities Act and
applicable rules and regulations thereunder, which shall become effective.
"WARRANT" has the meaning stated in the first recital of this
Agreement.
"WARRANT EXERCISE DATE" means the date that the Warrants are
exercised.
"WARRANT SHARES" shall mean the shares of Common Stock received by the
Farallon Warrant Holders in connection with the exercise of the Warrants.
Section 4. Exercise of Warrants. FCP and RR shall exercise the
--------------------
Warrants in full on or prior to November ___, 1996.
Section 5. Termination. This Agreement and all obligations of the
-----------
parties hereunder (except for the obligation of the Company under Section 1(c)
hereof) shall terminate if the Assignment and Assumption Agreement terminates
pursuant to Section 15 thereof or on the third anniversary hereof.
-17-
<PAGE>
Section 6. Miscellaneous
-------------
(a) Amendments and Waivers. Except as otherwise provided
----------------------
herein, the provisions of this Agreement may be amended or modified only by a
writing signed by the parties hereto.
(b) Notices. All notices, statements, instructions or other
-------
communications or documents to be given under this Agreement or under any other
agreement or document delivered in connection with this Agreement, if any, shall
be in writing. They shall be delivered personally; or by mail in a sealed
envelope, first class postage prepaid and either certified or registered, return
receipt requested (notices mailed to or from places outside the United States
shall be mailed via air mail); or by telefax, telegraph, or other electronic
means, with a copy mailed as provided above; all to be addressed as set forth on
the signature pages hereof, or to such other address as may be designated from
time to time by notice given in the manner provided by this paragraph. Notices
to the Farallon Holders shall include a copy sent at the same time and by the
same means to Richards Spears Kibbe & Orbe, One Chase Manhattan Plaza, New York,
New York 10005 (Attention: William Q. Orbe). Notices delivered personally shall
be deemed given on the date delivered. Notices delivered by telefax, telegraph,
telex or other electronic means shall be deemed given on the date sent if the
confirming copy is mailed on the same date. Mailed notices shall be deemed given
on the date received as shown on the return receipt.
(c) Governing Law. This Agreement and each other agreement or
-------------
document delivered in connection with this Agreement, if any, shall be governed
by and construed in accordance with the laws of the State of Delaware.
(d) Assignment; binding effect. This Agreement shall be
--------------------------
binding upon and inure to the benefit of the parties and their respective heirs,
legal representatives, successors and permitted assigns.
(e) Headings. Headings are included in this Agreement for
--------
convenience of reference only. They are not a part of this Agreement. No
interpretation or construction of the Agreement shall be derived from or based
on headings.
(f) Entire agreement. This agreement; any other agreement or
----------------
document delivered in connection with this Agreement, if any; and the
accompanying Schedules, if any; state the entire agreement and understanding of
the parties on the subject matter of the Agreement, and supersede all previous
agreements, arrangements, communications and understandings relating to that
subject matter.
(g) Counterparts. This Agreement may be signed in two or more
------------
counterparts, each of which shall be deemed an original, with the same effect as
if all signatures were on the same document.
-18-
<PAGE>
(h) Relationship of parties. Nothing in this Agreement shall
-----------------------
be deemed to constitute any party a partner, joint venturer, employer, employee,
master, servant, principal or agent of any other party or of any other person.
(i) Additional documents, etc. In connection with this
--------------------------
Agreement and all transactions contemplated hereby, each party agrees without
further consideration to execute and deliver such additional documents and to
perform such additional acts as may be necessary to carry out and perform all of
the terms and conditions of this Agreement and all transactions contemplated
hereby. If a party fails to execute and deliver such additional documents or to
perform such additional acts, the then-current officers of the each other party
are hereby appointed attorneys-in-fact of the failing party to execute and
deliver such additional documents or to perform such additional acts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written.
HEALTHCARE FINANCIAL PARTNERS, INC.
Address:
By:______________________________
FARALLON CAPITAL PARTNERS, L.P.
Address:
c/o Farallon Capital By: Farallon Partners, L.L.C.
Management, L.L.C. its General Partner
One Maritime Plaza
Suite 1325 By:_________________________
San Francisco, CA 94111
Attn: Jason Fish
-19-
<PAGE>
RR CAPITAL PARTNERS, L.P.
Address:
c/o Farallon Capital By: Farallon Partners, L.L.C.
Management, L.L.C. its General Partner
One Maritime Plaza
Suite 1325 By:_________________________
San Francisco, CA 94111
Attn: Jason Fish
Address:
_________________________________
John K. Delaney
Address:
_________________________________
Ethan D. Leder
Address:
_________________________________
Edward P. Nordberg, Jr.
-20-
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
The Corporation is authorized to issue Common Stock and Preferred
Stock. The Board of Directors of the Corporation has authority to fix the number
of shares and the designation of any series of Preferred Stock and to determine
or alter the rights, preferences, privileges, and restrictions granted to or
imposed upon any unissued series of Preferred Stock.
This certificate and the shares represented hereby shall be subject to
all of the provisions of the Amended and Restated Certificate of Incorporation
of the Corporation and of the amendments thereto, by all of which the holder by
acceptance hereof is bound. The Corporation will furnish without charge to the
holders hereof upon request a statement of the powers, designations, preferences
and relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights as established, from time to time, by the Amended
and Restated Certificate of Incorporation of the Corporation and by any
certificate of designation, and the number of shares constituting each such
class and series. Any such request should be made at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - .......... Custodian ..............
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ..............................
in common (State)
UNIF TRF MIN ACT - ..........Custodian (until age ...)
(Cust)
.......... under Uniform Transfers
to Minors Act ....................
(State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
----------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
| |
| |
- ----------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ---------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------------------
X
-----------------------------------
X
-----------------------------------
THE SIGNATURES TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS
NOTICE: WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT,
OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By
------------------------------------------------------
THE SIGNATURE(S) MUST BE GUARANTEED BY ELIGIBLE GUARANTOR
INSTITUTION SUCH AS A SECURITIES BROKER/DEALER, COMMERCIAL
BANK, TRUST COMPANY, SAVINGS ASSOCIATION OR A CREDIT UNION
PARTICIPATING IN A MEDALLION PROGRAM.
KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR
DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO
THE ISSUANCE OF A REPLACEMENT CERTIFICATE
<PAGE>
+--------------+ +--------------+
| Number | | Shares |
+--------------+ +--------------+
HEALTHCARE FINANCIAL
P A R T N E R S
COMMON STOCK COMMON STOCK
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
$.01 PAR VALUE PER SHARE CUSIP 42219W 10 8
This Certifies that
SEE REVERSE FOR
CERTAIN DEFINITIONS
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
HealthCare Financial Partners, Inc. transferable in person or by duly authorized
Attorney upon surrender of this Certificate properly endorsed. This Certificate
and the shares represented hereby are issued and shall be subject to the
provisions of the Amended and Restated Certificate of Incorporation and Amended
and Restated By Laws of the Corporation (copies of which are on file with the
Secretary of the Corporation), to all of which the holder by acceptance hereof
asserts. This Certificate is not valid unless countersigned by the Transfer
Agent and registered by the Registrar.
Witness the Seal of the Corporation and signatures of its duly
authorized officers.
Dated:
/s/ Edward P. Nordberg, Jr. /s/ John K. Delaney
- --------------------------- [SEAL] ------------------------
SENIOR VICE PRESIDENT-- CHAIRMAN OF THE BOARD
LEGAL AND FINANCIAL AFFAIRS CHIEF EXECUTIVE OFFICER
AND SECRETARY AND PRESIDENT
COUNTERSIGNED AND REGISTERED:
FIRST UNION NATIONAL BANK OF NORTH CAROLINA
(CHARLOTTE, N.C.)
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
EXHIBIT 5
[LETTERHEAD OF POWELL, GOLDSTEIN, FRAZER & MURPHY APPEARS HERE]
November , 1996
HealthCare Financial Partners, Inc.
2 Wisconsin Circle, Suite 320
Chevy Chase, Maryland 20815
Gentlemen:
We have acted as counsel to HealthCare Financial Partners, Inc., a
Delaware corporation (the "Company"), in connection with the preparation and
filing by the Company of a Registration Statement on Form S-1, as amended,
(Registration No. 333-12479) (the "Registration Statement") relating to the
public offering of up to 2,415,000 shares of Common Stock, $.01 par value per
share (the "Common Stock"), of the Company.
We have examined copies of the Amended and Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Company, the Registration
Statement, and such other corporate records and documents as we deemed necessary
to form the basis for the opinion hereinafter expressed. In our examination of
such material, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
original documents of all copies submitted to us. As to various questions of
fact material to such opinion, we have relied upon statements and certificates
of officers and representatives of the Company and others.
Based upon the foregoing, we are of the opinion that all of the Common
Stock has been duly authorized and, when issued and sold in accordance with the
terms described in the Prospectus forming a part of the Registration Statement,
will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement, to the reference to us in the Prospectus and to the
filing of this opinion as an exhibit to any application made by or on behalf of
the Company or any dealer in connection with the registration of the Common
Stock under the securities or blue sky laws of any state or jurisdiction. In
giving such permission, we do not admit hereby that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Powell, Goldstein, Frazer & Murphy
--------------------------------------
POWELL, GOLDSTEIN, FRAZER & MURPHY
<PAGE>
EXHIBIT 10.7
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into the _____ day of November, 1996 by and between HealthCare Financial
Partners, Inc., a Delaware corporation, and the stockholders of the Company who
are parties hereto.
The parties hereto agree as follows:
1. Certain Definitions.
-------------------
For purposes of this Agreement, the following terms have the following
meanings when used herein:
(a) "Business Day" means any Monday, Tuesday, Wednesday, Thursday or
------------
Friday that is not a day on which banking institutions in New York, New York are
authorized by law, regulation or executive order to close.
(b) "Commission" means the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
(c) "Common Stock" means the Common Stock, par value $.01 per share,
------------
of the Company.
(d) "Company" means HealthCare Financial Partners, Inc., a Delaware
-------
corporation, and its successors and assigns.
(e) "Demand Registration" means any registration of Registrable
-------------------
Securities effected pursuant to Section 2 hereof.
(f) "Effective Date" means the effective date of the Company's
--------------
initial registration of Common Stock under the Securities Act.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended (or any similar successor federal statute), and the rules and
regulations thereunder, as in effect from time to time.
(h) "Holder" means a stockholder of the Company who is a party to
------
this Agreement, including such successors and assigns as acquire Registrable
Securities, directly or indirectly, from such Person. For purposes of this
Agreement, the Company may deem and treat the registered holder of a Registrable
Security as the Holder and absolute owner thereof.
(i) "Majority Registered Holders" means in the case of any
---------------------------
registration statement, the Holders of a majority of the Registrable Securities
proposed to be covered (or so covered) in such registration statement.
(j) "Majority Sellers" means (i) in the case of any offering or
----------------
proposed offering, the Holders of a majority of the Registrable Securities so
offered or proposed to be so offered, and (ii) in the
<PAGE>
case of any other offering or proposed offering pursuant to any Registration,
the Majority Registered Holders of the applicable registration statement.
(k) "Person" means any individual, partnership, corporation
------
(including a business trust), limited liability company, joint stock company,
trust, unincorporated association, joint venture, or other entity, or a
government or any political subdivision or agency.
(l) "Piggyback Registration" means any registration of Registrable
----------------------
Securities effected pursuant to Section 3 hereof.
(m) "Registrable Securities" means (i) the shares of Common Stock
----------------------
held by a Holder on the date hereof as shown on Annex A hereto and (ii) any
securities issued or issuable in respect of or in exchange for any of the shares
of Common Stock referred to in clause (i) above by way of a stock dividend or
other distribution on the Common Stock, stock split or combination of shares,
recapitalization, reclassification, merger, consolidation or exchange offer. For
purposes of this Agreement, a Registrable Security ceases to be a Registrable
Security when either (1) it has been effectively registered under the Securities
Act and sold or distributed to any Person pursuant to an effective registration
statement covering it or (2) it has been sold or distributed to any Person
pursuant to Rule 144.
(n) "Registration" means any Demand Registration or Piggyback
------------
Registration.
(o) "Rule 10b-6" means Rule 10b-6 promulgated by the Commission under
----------
the Exchange Act, as such Rule may be amended from time to time, or any similar
successor rule that may be promulgated by the Commission.
(p) "Rule 144", "Rule 145", "Rule 415", "Rule 424" and "Rule 462"
-------------------------------- -------- --------
mean, respectively, Rule 144, Rule 145, Rule 415, Rule 424 and Rule 462, each
promulgated by the Commission under the Securities Act, in each case as amended
from time to time, or any similar successor rule thereto that may be promulgated
by the Commission.
(q) "Securities Act" means the Securities Act of 1933, as amended (or
--------------
any similar successor federal statute), and the rules and regulations
thereunder, as the same are in effect from time to time.
2. Demand Registrations.
--------------------
(a) At any time after six months following the Effective Date, upon
written notice to the Company from any Holder of Registrable Securities
identified on Annex B hereto (the "Initiating Holder") requesting that the
Company effect, pursuant to this Section 2, the registration of such Initiating
Holder's Registrable Securities under the Securities Act having a market value
at the time of such notice of not less than $5,000,000 (which notice shall
specify the Registrable Securities so requested to be registered, the proposed
amounts thereof (which shall be Registrable Securities having a market value of
at least $5,000,000) and the intended method or methods of disposition by such
Initiating Holder (including whether or not the proposed offering is to be
underwritten)), the Company shall promptly (but in any event within 20 days)
give written notice of such requested registration to all Holders, and thereupon
the Company shall, as expeditiously as possible, use its best efforts to effect
the registration under the Securities Act of:
2
<PAGE>
(A) the Registrable Securities that the Initiating Holder has
requested the Company to register, for disposition in accordance with the
intended method or methods of disposition stated in their notice to the
Company; and
(B) all other Registrable Securities the Holders of which shall have
made a written request to the Company for registration thereof (which
request shall specify such Registrable Securities and the proposed amounts
thereof) within 15 days after the receipt of such written notice from the
Company,
all to the extent requisite to permit the disposition by Holders of the
securities then constituting Registrable Securities so to be registered;
provided, however, notwithstanding the foregoing provisions of this Section
- -------- -------
2(a), the Holders listed on Annex C shall be treated as one Holder for purposes
of determining the amount to be registered pursuant to this Section 2(a) and if
the Holders listed on Annex C request that the Company register for sale all the
remaining aggregate Registerable Securities then held by such Holders, the
market value of such securities shall be not less than $2,000,000, rather than
$5,000,000 as specified above.
(b) Frequency; Duration. The Company shall not be required to effect
-------------------
a Demand Registration pursuant to this Section 2: (i) if it shall have so
effected a Demand Registration during the previous six months or (ii) if the
Initiating Holder is a Holder identified on Annex C hereto and the Company shall
have at any prior time effected a Demand Registration at the request of any
Initiating Holder identified on Annex C or (iii) after the eighth anniversary
of the Effective Date; provided, however, that a Demand Registration shall not
-------- -------
be deemed to have been effected for purposes of Section 2(b)(i) or (ii) if the
applicable registration statement has not been declared effective and kept
effective until the earlier of (1) eight months following the date on which such
registration statement was declared effective and (2) the sale pursuant to such
registration statement of the Registrable Securities covered thereby; provided,
--------
however, if the Holders identified on Annex C first request registration of such
- -------
Holders' Registrable Securities pursuant to this Section 2 and solely because of
a cut-back by the managing underwriter or underwriters pursuant to Section 2(c)
hereof, some Registrable Securities are sold for the account of such Holders but
such Holders are unable to sell all such Registrable Securities with respect to
which such Holders requested registration, such Holders will not be deemed to
have made a demand for registration of Registrable Securities under this Section
2 and notwithstanding the foregoing provisions of this Section 2(b), the Company
will be obligated to effect one (but only one) additional Demand Registration
for such Holders on the terms set forth in this Section 2.
(c) Inclusion of Other Securities; Cut-Back. The Company shall not
---------------------------------------
register any securities other than (i) for its own account, or (ii) Registrable
Securities in any Demand Registration without the prior written consent of
Holders of a majority of the Registrable Securities requested to be included in
such Demand Registration. If any securities other than Registrable Securities
are so registered, securities to be registered by the Company for sale for its
own account with aggregate estimated net proceeds therefrom to the Company (at
the time of filing such registration statement) of up to $15,000,000 shall have
absolute priority over securities requested to be registered by Holders or third
parties.
Notwithstanding the provisions of Section 2(a) hereof, if the managing
underwriter or underwriters of a proposed underwritten offering of Registrable
Securities pursuant to Section 2(a) hereof (which may also include an offering
of securities for the account of the Company), deliver written advice to the
Holders requesting inclusion of their Registrable Securities stating that the
total mount or kind of securities that they and any other Persons (other than
the Company) seek to include in such offering would materially and adversely
affect the success of such offering, then the amount or kind of Registrable
Securities to be offered for the accounts of Holders shall be reduced pro rata
--- ----
based on the number of Registrable Securities then owed by the Holders to the
extent necessary to reduce the total amount of Registrable Securities to be
included in such offering to that recommended by such managing underwriter
3
<PAGE>
or underwriters (which amount may be zero); provided, however, that if the
-------- -------
amount of any kind of Registrable Securities to be offered for the accounts of
holders is reduced in accordance with this Section 2(c), the Company may not
include in such offering any securities other than (i) Registrable Securities
and (ii) securities, if any, that the Company is offering for sale for its own
account in a primary underwritten offering.
(d) Company's Right to Delay Registration. Notwithstanding the
-------------------------------------
foregoing, the Company may delay filing a registration statement, and may
withhold its efforts to cause the registration statement to become effective, if
the Company determines in good faith that such registration might (i) interfere
with or affect the negotiation or completion of any transaction that is being
contemplated by the Company (whether or not a final decision has been made to
undertake such transaction) at the time the right to delay is exercised, or (ii)
involve initial or continuing disclosure obligations that might not be in the
best interests of the Company's stockholders.
3. Piggyback Registrations.
-----------------------
(a) Effective Registration. If the Company proposes to file a
----------------------
registration statement under the Securities Act with respect to any class of
equity securities (other than in connection with the registration of equity
securities issued or issuable pursuant to an employee stock option, stock
purchase, stock bonus or similar plan or pursuant to a merger, exchange offer or
transaction of the type specified in Rule 145(a) under the Securities Act) at
any time on or prior to the eighth anniversary of the Effective Date, then the
Company shall give written notice of such proposed filing to the Holders at
least 20 days before the anticipated filing date, and such notice shall offer
the Holders the opportunity to register such amount of Registrable Securities as
each such Holder may request. The Company shall use its reasonable efforts to
cause the managing underwriter or underwriters of a proposed underwritten
offering to permit the inclusion therein of any Registrable Securities the
Holders of which request, within 15 days after receiving written notice of the
proposed filing from the Company, such inclusion, on the same terms and
conditions as any similar securities of the Company so included. Any Holder's
request for such inclusion may be withdrawn, in whole or in part, at any time
prior to the effective date of the registration statement for such offering.
(b) Cut-Backs. Notwithstanding the provisions of Section 3(a)
---------
hereof, if the managing underwriter or underwriters of a proposed underwritten
offering as described in such Section 3(a) deliver written advice to the Holders
requesting inclusion of their Registrable Securities stating that the total
amount or kind of securities that they and any other Persons seek to include in
such offering would materially and adversely affect the success of such
offering, then the amount or kind of Registrable Securities to be offered for
the accounts of Holders shall be reduced pro rata based on the number of
--- ----
Registrable Securities then owed by the Holders to the extent necessary to
reduce the total amount of Registrable Securities to be included in such
offering to that recommended by such managing underwriter or underwriters (which
amount may be zero); provided, however, that if the amount of any kind of
-------- -------
Registrable Securities to be offered for the accounts of Holders is reduced in
accordance with this Section 3(b), the Company may not include in such offering
any securities other than (i) Registrable Securities and (ii) securities, if
any, that the Company is offering for sale for its own account in a primary
underwritten offering.
4
<PAGE>
4. Holdback Agreements.
-------------------
(a) Restrictions on Public Sales by Holders of Registrable
------------------------------------------------------
Securities. To the extent not inconsistent with applicable law, each Holder of
Registrable Securities eligible for inclusion in a registration statement that
is timely notified in writing by the managing underwriter or underwriters of any
securities being registered in an underwritten offering (other than pursuant to
an employee stock option, stock purchase, stock bonus or similar plan, pursuant
to a merger, exchange offer or a transaction of the type specified in Rule
145(a) under the Securities Act or pursuant to a "shelf" registration), shall
not effect any public sale or distribution (including a sale pursuant to Rule
144) of any Registrable Securities that are similar to any such securities or
any Registrable Securities convertible into or exchangeable or exercisable for
any such securities, during the 10-day period prior to, and during the 90-day
period (or such shorter period as may be requested by the managing underwriter
or underwriters) beginning on, the effective date of the applicable registration
statement, except as part of such registration.
(b) Restrictions on Sales by the Company. The Company shall not
------------------------------------
effect any sale of any securities of the Company similar to any Registrable
Securities being offered in an underwritten offering under a registration
statement filed pursuant to this Agreement or any securities of the Company
convertible into or exchangeable or exercisable for any such Registrable
Securities, during the 10-day period prior to, and during the 90-day period (or
such shorter period as may be requested by the managing underwriter or
underwriters) beginning on, the effective date of the applicable registration
statement, except as part of such registration or pursuant to employee benefit
plans maintained by the Company at the beginning of such restricted period.
5. Registration Procedures.
-----------------------
(a) Company Procedures. Whenever the Company is required by this
------------------
Agreement to effect the registration of any Registrable Securities under the
Securities Act pursuant to a registration statement, the Company shall use its
best efforts to effect each such registration to permit the sale of such
Registrable Securities in accordance with the intended method or methods of
disposition thereof, and pursuant thereto the Company shall, as soon as
practicable:
(i) prepare and file with the Commission the requisite
registration statement to effect such registration and thereafter use its best
efforts to cause such registration statement to be declared effective as soon as
practicable and to remain continuously effective for the time period required by
this Agreement to the extent permitted under the Securities Act, provided that
--------
as soon as practicable but in no event later than three Business Days before
filing such registration statement, any related prospectus or any amendment or
supplement thereto, other than any amendment or supplement made solely as a
result of incorporation by reference of documents filed with the Commission
subsequent to the filing of such registration statement or a registration
statement filed pursuant to Rule 462 and the underwriters, if any, copies of all
such documents proposed to be filed, which documents shall be subject to the
review of such Holders and underwriters; the Company shall not file any
registration statement or amendment thereto or any prospectus or any supplement
thereto (other than any amendment or supplement made solely as a result of
incorporation by reference of documents filed with the Commission subsequent to
the filing of such registration statement) to which the managing underwriters of
the applicable offering, if any, or the Majority Registered Holders shall have
reasonably objected in writing within two Business Days after receipt of such
documents to the effect that such registration statement or amendment thereto or
prospectus or supplement thereto does not comply in all material respects with
the requirements of the Securities Act (provided that the foregoing shall not
--------
limit the right of any Holder whose Registrable Securities are covered by a
registration statement to reasonably object, within two Business Days after
receipt of such documents,
5
<PAGE>
to any particular information that is to be contained in such registration
statement, amendment, prospectus or supplement and relates specifically to such
Holder, including, without limitation, any information describing the manner in
which such Holder acquired such Registrable Securities and the intended method
or methods of distribution of such Registrable Securities), and if the Company
is unable to file any such document due to the objections of such underwriters
or such Holders, the Company shall use its best efforts to cooperate with such
underwriters and Holders to prepare, as soon as practicable, a document that is
responsive in all material respects to the reasonable objections of such
underwriters and Holders;
(ii) prepare and file with the Commission such amendments and post-
effective amendments to such registration statement as may be necessary to keep
such registration statement continuously effective and current for the period
required by this Agreement to the extent permitted under the Securities Act; and
cause each related prospectus to be supplemented by any prospectus supplement as
may be required, and as so supplemented to be filed pursuant to Rule 424; and
otherwise comply with the provisions of the Securities Act as may be necessary
to facilitate the disposition of all Registrable Securities covered by such
registration statement during the applicable period in accordance with the
intended method or methods of disposition by the Selling Holders thereof set
forth in such registration statement or such prospectus or prospectus
supplement;
(iii) notify the Holders and the managing underwriters, if any, of
the applicable offering (providing, if requested by any such Persons,
confirmation in writing) as soon as practicable after becoming aware of: (A) the
filing of any prospectus or prospectus supplement or the filing or effectiveness
(or anticipated date of effectiveness) of such registration statement or any
post-effective amendment thereto; (B) any request by the Commission for
amendments or supplements to such registration statement or the related
prospectus or for additional information; (C) the issuance by the Commission of
any stop order suspending the effectiveness of such registration statement or
the initiation of any proceedings for that purpose; (D) the receipt by the
Company of any notification with respect to the suspension of the qualification
or registration (or exemption therefrom) of any Registrable Securities for sale
in any jurisdiction in the United States or the initiation or threatening of any
proceeding for such purposes; or (E) the happening of any event that makes any
statement made in such registration statement or in any related prospectus,
prospectus supplement, amendment or document incorporated therein by reference
untrue in any material respect or that requires the making of any changes in
such registration statement or in any such prospectus, supplement, amendment or
other such document so that it will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein (in the case of any prospectus in
the light of the circumstances under which they were made) not misleading;
(iv) make every reasonable effort to obtain at the earliest possible
moment the withdrawal of any order or other action suspending the effectiveness
of any such registration statement or suspending the qualification or
registration (or exemption therefrom) of the Registrable Securities for sale in
any jurisdiction;
(v) if reasonably requested by the managing underwriters, if any,
of the applicable offering, or by the Majority Sellers, as soon as practicable
incorporate in a prospectus supplement or post-effective amendment such
information as such underwriters or the Majority Sellers, as the case may be,
agree should be included therein relating to the sale and offering of the
applicable Registrable Securities, including, without limitation, information
with respect to the number of Registrable Securities being sold to any
underwriters, the purchase price being paid therefor by any such underwriters
6
<PAGE>
and any other terms of the offering of the Registrable Securities; and make all
required filings of such prospectus supplement or post-effective amendment as
soon as practicable following receipt of notice of the matters to be
incorporated therein;
(vi) as soon as practicable after filing such documents with the
Commission, furnish to the Holders and each of the underwriters, if any, without
charge, at least one manually signed or conformed copy of such registration
statement and any post-effective amendment thereto, including financial
statements and schedules; and as soon as practicable after the request of any
Holder or underwriter, furnish to such Holder or underwriter, as the case may
be, at least one copy of any document incorporated by reference in such
registration statement or in any related prospectus, prospectus supplement or
amendment, together with all exhibits thereto (including those previously
furnished or incorporated by reference);
(vii) deliver to the Holders and to each of the underwriters, if any,
without charge, as many copies of the prospectus or prospectuses (including each
preliminary prospectus) and any amendment or supplement thereto as such Persons
may reasonably request; subject to Section 5(b)(i) hereof, the Company consents
to the use of any such prospectus or any amendment or supplement thereto by the
Holders and the underwriters, if any, in connection with the offering and sale
of the Registrable Securities covered by any such prospectus or any amendment or
supplement thereto;
(viii) prior to any public offering of Registrable Securities,
register or qualify (or obtain an exemption therefrom), or cooperate with the
Holders, the underwriters, if any, and their respective counsel in connection
with the registration or qualification (or exemption therefrom) of, such
Registrable Securities for offer and sale under the securities or blue sky laws
of such jurisdictions in the United States as the Holders or the underwriters,
if any, shall reasonably request in writing; keep each such registration or
qualification (or exemption therefrom) effective during the period during which
such registration statement is required to be kept effective pursuant to this
Agreement; and do any and all other acts and things reasonably necessary or
advisable to facilitate the disposition in such jurisdictions of the Registrable
Securities covered by such registration statement; provided that the Company
--------
shall not be required to qualify generally to do business in any jurisdiction
where it would not be required to qualify but for this Section 5(a)(viii);
(ix) cooperate with Holders participating in such registration and
the underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing the Registrable Securities to be sold; and enable such
Registrable Securities to be in such denominations and registered in such names
as the underwriters, if any, may request at least two Business Days prior to any
sale of Registrable Securities to the underwriters;
(x) use its best efforts to cause the Registrable Securities
covered by such registration statement to be registered with or approved by such
other governmental agencies or authorities in the United States as may be
reasonably necessary to enable the Holders or the underwriters, if any, to
consummate the disposition of such Registrable Securities;
(xi) as soon as practicable after the occurrence of any event
described in Section 5(a)(iii)(E) hereof, prepare a supplement or post-effective
amendment to such registration statement or to the related prospectus or any
document incorporated therein by reference, or file any other required document
so that, as thereafter delivered to the purchasers of the Registrable Securities
being sold
7
<PAGE>
thereunder, such prospectus shall not contain an untrue statement of a material
fact or omit to state any material fact necessary to make the statements therein
not misleading; if any event described in Section 5(a)(iii)(B) hereof occurs,
use its best efforts to cooperate with the Commission to prepare, as soon as
practicable, any amendment or supplement to such registration statement or such
related prospectus and any other additional information, or to take other action
that may have been requested by the Commission;
(xii) use its best efforts to cause all Common Stock constituting
Registrable Securities covered by such registration statement to be listed on
each securities exchange (or quotation system operated by a national securities
association) on which the Common Stock of the Company is then listed (or
included), if so requested by the Majority Registered Holders or the
underwriters, if any, and enter into customary agreements including, if
necessary, a listing application and indemnification agreement in customary
form, and provide a transfer agent for such Registrable Securities no later than
the effective date of such registration statement; use its best efforts to cause
any other Registrable Securities covered by such registration statement to be
listed (or included) on each securities exchange (or quotation system operated
by a national securities association) on which securities of the same class and
series, if any, are then listed (or included) (or on any exchange or quotation
system on which any Person other than a Holder shall have the right to have
securities of the same class and series, if any, listed or included), if so
requested by the Majority Registered Holders or the underwriters, if any, and
enter into customary agreements including, if necessary, a listing application
and indemnification agreement in customary form, and, if necessary, provide a
transfer agent for such securities no later than the effective date of such
registration statement;
(xiii) enter into customary agreements (including, in the case of an
underwritten offering, an underwriting agreement in customary form for the
managing underwriters with respect to issuers of similar market capitalization
and reporting and financial histories) and take all such other reasonable
actions in connection therewith in order to expedite or facilitate the
disposition of the Registrable Securities included in such registration
statement and, in the case of an underwritten offering: (A) make representations
and warranties to each Holder of Registrable Securities participating in such
offering and to each of the underwriters, in such form, substance and scope as
are customarily made to the managing underwriters by issuers of similar market
capitalization and reporting and financial histories and confirm the same to the
extent customary if and when requested; (B) obtain opinions of counsel to the
Company and updates thereof addressed to each Holder of Registrable Securities
participating in such offering and to each of the underwriters, such opinions
and updates to be in customary form and covering the matters customarily covered
in opinions obtained in underwritten offerings by the managing underwriters for
issuers of similar market capitalization and reporting and financial histories;
(C) obtain "comfort" letters and updates thereof from the Company's independent
certified public accountants addressed to each Holder of Registrable Securities
participating in such offering and to each of the underwriters, such letters to
be in customary form and covering matters of the type customarily covered in
"comfort" letters to the managing underwriters in connection with underwritten
offerings by them for issuers of similar market capitalization and reporting and
financial histories; (D) provide, in the underwriting agreement to be entered
into in connection with such offering, indemnification provisions and procedures
no less favorable than those set forth in Section 7 hereof with respect to all
parties to be indemnified pursuant to such Section 7; and (E) deliver such
customary documents and certificates as may be reasonably requested by the
Majority Sellers and the managing underwriters to evidence compliance with
clause (A) of this paragraph (xiv) and with any customary conditions contained
in the underwriting agreement entered into by the Company in connection with
such offering;
8
<PAGE>
(xiv) in the case of any non-underwritten offering: (A) obtain an
opinion of counsel to the Company at the time of effectiveness of such
registration statement covering such offering and an update thereof at the time
of effectiveness of any post-effective amendment to such registration statement
(other than by reason of incorporation by reference of documents filed with the
Commission) addressed to each Holder of any Registrable Securities covered by
such registration statement, covering matters that are no more extensive in
scope than would be customarily covered in opinions obtained in underwritten
offerings by issuers with similar market capitalization and reporting and
financial histories; (B) obtain a "comfort" letter from the Company's
independent certified public accountants at the time of effectiveness of such
registration statement and, upon the request of the Majority Sellers, updates
thereof, in each case addressed to each Holder of Registrable Securities
participating in such offering and covering matters that are no more extensive
in scope than would be customarily covered in "comfort" letters and updates
obtained in underwritten offerings by issuers with similar market capitalization
and reporting and financial histories; and (C) deliver a certificate of a senior
executive officer of the Company at the time of effectiveness of such
registration statement and, upon the request of the Majority Sellers, updates
thereof, such certificates to cover matters no more extensive in scope than
those matters customarily covered in officers' certificates delivered in
connection with underwritten offerings by issuers with similar market
capitalization and reporting and financial histories;
(xv) make available, for inspection by the Holders of the
Registrable Securities included in such registration, any underwriter
participating in any disposition of Registrable Securities pursuant to such
registration statement, and any attorney, accountant or other representative
retained by such selling Holders or by any such underwriter, all pertinent
financial and other records, pertinent corporate documents and properties of the
Company, and cause the Company's officers, directors and employees to supply all
information reasonably requested by any such underwriter, attorney, accountant
or other representative in connection with such registration;
(xvi) otherwise use its best efforts to comply with all applicable
rules and regulations of the Commission relating to such registration and the
distribution of the securities being offered (including, without limitation,
Rule 10b-6, with respect to which the Company shall also use its best efforts
timely to apprise each Holder of any bids and purchases by the Company, and of
any known bids and purchases by each "affiliated purchaser" (as defined in Rule
10b-6) of the Company, that would in the opinion of the Company be prohibited
under Rule 10b-6 in connection with a "distribution" (as so defined) by such
Holder) and make generally available to its security holders earning statements
satisfying the provisions of Section 11(a) of the Securities Act, no later than
60 days after the end of any 12-month period (or 90 days, if such period is a
fiscal year) commencing at the end of any fiscal quarter in which the
Registrable Securities are sold to underwriters in a firm commitment or best
efforts underwritten offering, or, if not sold to underwriters in such an
offering, beginning with the first month of the Company's first fiscal quarter
commencing after the effective date of such registration statement, which
earning statements shall cover such 12-month periods;
(xvii) cooperate and assist in any filings required to be made with
the National Association of Securities Dealers, Inc. and in the performance of
any customary or required due diligence investigation by any underwriter; and
(xviii) use its best efforts to take all other reasonable
steps necessary and appropriate to effect such registration in the manner
contemplated by this Agreement.
9
<PAGE>
(b) Holder Procedures.
-----------------
(i) Each Holder agrees, by acquisition of the Registrable
Securities that, upon receipt of any notice from the Company of the happening of
any event described in Section 5(a) paragraphs (iii)(B), (iii)(C), (iii)(D) or
(iii)(E) hereof, such Holder shall forthwith discontinue disposition of any
Registrable Securities (but, in the case of an event described in Section
5(a)(iii)(D), in the affected jurisdiction or jurisdictions only) covered by the
affected registration statement or prospectus until such Holder's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 5(a)
paragraphs (iii) or (xi) hereof or until such Holder is (it being agreed by the
Company that the underwriters, if any, shall also be) advised in writing (the
"Advice") by the Company that the use of the applicable prospectus may be
resumed. If the Company shall have given any such notice during a period when a
Demand Registration is in effect, the eight-month period mentioned in Section
3(b) hereof, shall be extended by the number of days from and including the date
of the giving of such notice to and including the date when each Holder of
Registrable Securities included in such Registration shall have received the
copies of the supplemented or amended prospectus contemplated by Section 5(a)
paragraphs (iii) or (xi) hereof or the Advice, as the case may be.
(ii) In connection with any underwritten public offering of
Registrable Securities pursuant to a Piggyback Registration or Demand
Registration, the managing underwriter or underwriters of such offering shall be
an investment banking firm selected by the Company which shall be reasonably
acceptable to the Majority Sellers.
6. Registration Expenses.
---------------------
All Registration Expenses, as hereinafter defined, in connection with a
Demand Registration in which no securities are registered for the account of the
Company, shall be prorated among and borne by the Holders of Registerable
Securities included in such Demand Registration based upon the number of shares
of Registrable Securities included in such Demand Registration. All
Registration Expenses in connection with a Piggyback Registration or with a
Demand Registration in which securities are registered for the account of the
Company, shall be borne by the Company. The term "Registration Expenses" shall
mean all expenses incident to the Company's performance of or compliance with
this Agreement, including without limitation all registration and filing fees,
fees and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications or registrations (or the obtaining of exemptions therefrom) of
the Registrable Securities), printing expenses (including expenses of printing
prospectuses), messenger and delivery expenses, internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), fees and disbursements of its counsel
and its independent certified public accountants (including the expenses of any
special audit or "comfort" letters required by or incident to such performance
or compliance), securities acts liability insurance (if the Company elects to
obtain such insurance), reasonable fees and expenses of any special experts
retained by the Company in connection with any registration hereunder;
reasonable fees and expenses of other Persons retained by the Company and up to
$10,000 of fees and expenses of one counsel chosen by the Majority Registered
Holders to represent the Holders with respect to such registration ("Holders'
Counsel"); provided that Registration Expenses shall not include any
--------
underwriting discounts, commissions or fees attributable to the sale of the
Registrable Securities or fees and expenses of counsel for any of the Holders
other than Holders' Counsel or out-of-pocket expenses of any of the
Holders.
10
<PAGE>
7. Indemnification; Contribution.
-----------------------------
(a) Indemnification by the Company. The Company shall indemnify, to
------------------------------
the full extent permitted by law, each Holder of Registrable Securities, its
officers, directors, employees and agents, each Person who controls such Holder
(within the meaning of the Securities Act) and any investment adviser thereof or
agent therefor, against all losses, claims, damages, liabilities and expenses
(including reasonable costs of investigation and legal expenses) arising out of
or based upon any untrue or alleged untrue statement of a material fact
contained in any registration statement covering any Registrable Securities, any
related prospectus or preliminary prospectus, or any amendment or supplement
thereto, or any omission or alleged omission to state in any thereof a material
fact required to be stated therein or necessary to make the statements therein
(in the case of a prospectus or prospectus supplement, in light of the
circumstances under which they were made) not misleading, except in each case
insofar, but only insofar, as the same arises out of or is based upon an untrue
statement or alleged untrue statement of a material fact or an omission or
alleged omission to state a material fact in such registration statement,
prospectus, preliminary prospectus, amendment or supplement, as the case may be,
made or omitted, as the case may be, in reliance upon and in conformity with
written information furnished to the Company by such Holder expressly for use
therein. This indemnity is in addition to any liability that the Company may
otherwise have. The Company shall, if requested by the managing underwriter or
underwriters of such offering, also indemnify any underwriters of the
Registrable Securities, selling brokers, dealer managers and similar securities
industry professionals participating in the distribution and their officers and
directors and each Person who controls such underwriters or other Persons
(within the meaning of the Securities Act) to the same extent as provided above
with respect to the indemnification of Holders and other specified Persons.
(b) Indemnification by Holders of Registrable Securities. In
----------------------------------------------------
connection with any registration statement covering Registrable Securities, each
Holder any of whose Registrable Securities are covered thereby shall furnish to
the Company in writing such information and affidavits with respect to such
Holder as the Company reasonably requests for use in connection with such
registration statement, any related prospectus or preliminary prospectus, or any
amendment or supplement thereto, and shall indemnify, to the full extent
permitted by law, the Company, the Company's directors, officers, employees and
agents, each Person who controls the Company (within the meaning of the
Securities Act) and any investment adviser thereof or agent therefor, against
all losses, claims, damages, liabilities and expenses (including reasonable
costs of investigation and legal expenses) arising out of or based upon any
untrue or alleged untrue statement of a material fact contained in any
registration statement covering any Registrable Securities, any related
prospectus or preliminary prospectus, or any amendment or supplement thereto, or
any omission or alleged omission to state in any thereof a material fact
required to be stated therein or necessary to make the statements therein (in
the case of a prospectus or prospectus supplement, in light of the circumstances
under which they were made) not misleading, in each case to the extent, but only
to the extent, that the same arises out of or is based upon an untrue statement
or alleged untrue statement of a material fact or an omission or alleged
omission to state a material fact in such registration statement or in such
related prospectus, preliminary prospectus, amendment or supplement, as the case
may be, made or omitted, as the case may be, in reliance upon and in conformity
with written information furnished to the Company by such Holder expressly for
use therein; provided, however, that in no event shall the liability of any
-------- -------
Holder for indemnification under this Section 7(b) exceed the proceeds received
by such Holder from the sale of Registrable Securities under the applicable
registration statement. This indemnity is in addition to any liability that a
Holder may otherwise have. Each Holder participating in an offering of
Registrable Securities shall, if requested by the managing underwriter or
underwriters of such offering, also indemnify any underwriters of such
Registrable Securities, selling brokers, dealer managers and similar
11
<PAGE>
securities industry professionals participating in the distribution of such
Registrable Securities and their officers and directors and each Person who
controls such underwriters or other Persons (within the meaning of the
Securities Act) to the same extent as provided above with respect to the
indemnification of the Company and other specified Persons.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
--------------------------------------
indemnification under this Section 7 agrees to give prompt written notice to the
indemnifying party after the receipt by such Person of any written notice of the
commencement of any action, suit, proceeding or investigation or threat thereof
made in writing for which such Person will claim indemnification or contribution
pursuant to this Agreement and, unless in the reasonable judgment of such
indemnified party a conflict of interest may exist between such indemnified
party and the indemnifying party with respect to such claim, permit the
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to such indemnified party. If the indemnifying party is not
entitled to, or elects not to, assume the defense of a claim, it shall not be
obligated to pay the reasonable fees and expenses of more than one counsel with
respect to such claim, unless in the reasonable judgment of counsel to such
indemnified party, expressed in a writing delivered to the indemnifying party, a
conflict of interest may exist between such indemnified party and any other
indemnified party with respect to such claim, in which event the indemnifying
party shall be obligated to pay the reasonable fees and expenses of such
additional counsel or counsels (which shall be limited to one counsel per
indemnified party, treating as one each Holder and any of its officers and
directors and each Person who controls such Holder). The indemnifying party
shall not be subject to any liability for any settlement made without its
consent, which consent shall not be unreasonably withheld.
(d) Contribution.
------------
(i) If the indemnification provided for in this Section 7 from
the indemnifying party is unavailable to an indemnified party hereunder in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then the indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party and indemnified parties in connection with the actions that resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations; provided, however, that in no event shall the
-------- -------
liability of any Holder or the Company, as the case may be, for contribution
under this Section 7(d) exceed the proceeds received by such Holder or the
Company, as the case may be, from the sale of Registrable Securities under the
applicable registration statement. The relative fault of such indemnifying
party and indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact, has been made by, or relates to information supplied by, such indemnifying
party or indemnified parties, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such action. The
amount paid or payable by a party as a result of the losses, claims, damages,
liabilities and expenses referred to above shall be deemed to include, subject
to the limitations set forth in Section 7(c) hereof, any legal or other fees or
expenses reasonably incurred by such party in connection with any investigation
or proceeding.
(ii) The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 7(d) were determined by pro
---
rata allocation or by any other method of allocation that does not take account
- ----
of the equitable considerations referred to in the immediately preceding
paragraph. No Person guilty of fraudulent misrepresentation (within the meaning
of Section
12
<PAGE>
11(f) of the Securities Act) shall be entitled to contribution from any Person
who was not guilty of such fraudulent misrepresentation.
(iii) If indemnification is available under this Section 7, the
indemnifying parties shall indemnify each indemnified party to the full extent
provided in Section 7(a) and Section 7(b) hereof without regard to the relative
fault of said indemnifying party or indemnified party or any other equitable
consideration provided for in this Section 7(d).
8. Participation in Underwritten Registrations
-------------------------------------------
No Person may participate in any underwritten registration hereunder
unless such Person (a) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements, (b) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements and (c) agrees to pay such Person's pro rata portion of all
--- ----
underwriting discounts and commissions and the fees and expenses of such
Person's counsel.
9. Cooperation with the Company.
----------------------------
Each Holder by the acceptance of Registrable Securities agrees to use
his or its best efforts to cooperate with the Company in all reasonable respects
in connection with the preparation and filing of Registrations hereunder in
which such Registrable Securities are included or requested to be included.
10. Miscellaneous.
-------------
(a) No Inconsistent Agreements. The Company shall not hereafter
--------------------------
enter into any agreement with respect to any of its securities that contains
provisions more favorable to the holders thereof than the provisions contained
in this Agreement without providing for the granting of comparable rights to the
Holders in this Agreement or that contains provisions that conflict with the
provisions hereof.
(b) Remedies. Each Holder of Registrable Securities, in addition to
--------
being entitled to exercise all rights in an action at law, including recovery of
damages, shall be entitled to specific performance of its rights under this
Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Provisions and hereby agrees to waive the defense in any action for
specific performance that a remedy at law would be adequate.
(c) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may not be amended, modified or supplemented, and
waivers or consents to departures from the provisions hereof may not be given
unless the company shall have obtained the prior written consent of (i) the
Holders of a majority of the securities then constituting Registrable Securities
and (ii) each Holder materially and adversely affected by such amendment,
modification, supplement, waiver or departure.
(d) Notices. All notices, requests, waivers, releases, consents, and
-------
other communications required or permitted by this Agreement (collectively,
"Notices") shall be in writing. Notices shall be deemed sufficiently given for
all purposes under this Agreement when delivered in person,
13
<PAGE>
when dispatched by telegram or (upon written confirmation of receipt) by
electronic facsimile transmission or (upon written confirmation of receipt),
when dispatched by a nationally recognized overnight courier service, or five
Business Days after being deposited in the mail, postage prepaid, if mailed. All
Notices shall be delivered as follows:
(i) if to a Holder of Registrable Securities, at the address
indicated for such Holder on the Company's stock register or at such other
address as such Holder may have furnished to the Company in writing; and
(ii) if to the Company, at:
HealthCare Financial Partners, Inc.
2 Wisconsin Circle
Suite 320
Chevy Chase, Maryland 20815
Attention: President
Telephone Number: (301) 961-1640
Fax Number: (301) 664-9860
with a copy to:
G. William Speer, Esq.
Powell, Goldstein, Frazer & Murphy
16th Floor
191 Peachtree Street, N.E.
Atlanta, Georgia 30303
Telephone Number: (404) 572-6722
Fax Number: (404) 572-5958
(e) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the parties
hereto, including any successors by merger to the Company.
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings; Construction. The headings in this Agreement are for
----------------------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. Unless the context otherwise requires, all references to
Sections are to Sections of this Agreement, "or" is inclusively disjunctive, and
words in the singular include the plural and vice versa. In computing any
---- -----
period of time specified in this Agreement, the date of the act or event from
which such period of time is to be measured shall be included, any such period
shall expire at 5:00 p.m., Washington, D.C. time, on the last day of such
period, and any such period denominated in months shall expire on the date in
the last month of such period that has the same numerical designation as the
date of the act or event from which such period is to be measured; provided,
--------
however, that if there is no date in the last month of such period that has the
- -------
same numerical
14
<PAGE>
designation as the date of such act or event, such period shall expire on the
last day of the last month of such period.
(h) Certain Adjustments. Notwithstanding anything to the contrary
-------------------
contained in this Agreement, the Board of Directors of the Company may make or
provide for such adjustments in the numbers of shares of Common Stock or other
Registrable Securities specified in any other provision of this Agreement
specifying a number or percentage of Registrable Securities, as the Board may
determine after consultation with those Holders that are Initial Holders (or, if
there are no such Holders, Holders holding a majority of the securities then
constituting Registrable Securities), is equitably required to prevent
diminution or enlargement of the rights of Holders that otherwise would result
from any stock dividend, stock split, combination of shares, recapitalization,
or other similar change in the capital structure of the Company.
(i) Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the internal laws of the State of Delaware, without regard to
the principles of conflicts of laws thereof.
(j) Severability. If one or more of the provisions contained herein,
------------
or the application thereof in any circumstance, is held invalid, illegal or
unenforceable in any respect, for any reason, the validity, legality and
enforceability of the remaining provisions contained herein shall not be in any
way affected or impaired thereby, and the provision held to be invalid, illegal
or unenforceable shall be reformed to the minimum extent necessary, and in a
manner as consistent with the purposes thereof as is practicable, so as to
render it valid, legal and enforceable, it being intended that all of the rights
and privileges of the Holders hereunder shall be enforceable to the fullest
extent permitted by law.
(k) Agreement. This Agreement is intended by the Company and the
---------
Holders to be a final expression thereof and is intended to be a complete and
exclusive statement of the agreement and understanding of the Company and the
Holders in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein. This Agreement supersedes all prior agreements and
understandings among the Company and any Holders with respect to such subject
matter.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
HEALTHCARE FINANCIAL PARTNERS, INC.
By:
-----------------------------------------
Name: John K. Delaney
Title: Chairman and Chief Executive
Officer
HOLDERS:
--------------------------------------------
John K. Delaney
--------------------------------------------
Ethan D. Leder
--------------------------------------------
Edward P. Nordberg, Jr.
FARALLON CAPITAL PARTNERS, L.L.C.
By: Farallon Partners, L.L.C.
its General Partner
By:
-----------------------------------------
Name:
Title:
RR CAPITAL PARTNERS, L.P.
By: Farallon Partners, L.L.C.
its General Partner
By:
-----------------------------------------
Name:
Title:
JMR CAPITAL PARTNERS
By:
-----------------------------------------
Name:
Title:
CREATIVE INFORMATION SYSTEMS, LLC
By:
-----------------------------------------
Name:
Title:
16
<PAGE>
ANNEX A
-------
Registrable Securities
Name of Holder and Address Shares of Common Stock Held
- -------------------------- ---------------------------
John K. Delaney 731,113
Ethan D. Leder 731,113
Edward P. Nordberg, Jr. 731,113
JMR Capital Partners 506,319
Creative Information Systems, LLC 506,319
Farallon Capital Partners, L.P. 466,237
RR Capital Partners, L.P. 83,256
17
<PAGE>
ANNEX B
-------
John K. Delaney
Ethan D. Leder
Edward P. Nordberg, Jr.
Farallon Capital Partners, L.P.
RR Capital Partners, L.P.
18
<PAGE>
ANNEX C
-------
Farallon Capital Partners, L.P.
RR Capital Partners, L.P.
19
<PAGE>
Exhibit 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated September 13, 1996 with respect to the combined
financial statements of HealthCare Financial Partners, Inc. and HealthPartners
DEL, L.P. and the financial statements of HealthPartners Funding, L.P. in
Amendment No. 2 to the Registration Statement (Form S-1 No. 333-12479) and the
related Prospectus of HealthCare Financial Partners, Inc. dated November 5,
1996.
/s/ ERNST & YOUNG LLP
Washington, D.C.
November 5, 1996
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated September 13, 1996 with respect to the combined
financial statements of HealthCare Financial Partners, Inc. and HealthPartners,
DEL, L.P. for the years ended December 31, 1995 and 1994 and the period from
inception April 22, 1993 to December 31, 1993 and the financial statements of
HealthPartners Funding, L.P. for the year ended December 31, 1995 and the period
from inception September 12, 1994 to December 31, 1994 included in the
Registration Statement No. 333-12479 on Form S-1 as amended, dated November 5,
1996, and the related Prospectus of HealthCare Financial Partners, Inc.
McGladrey & Pullen, LLP
/s/ McGladrey & Pullen, LLP
Richmond, Virginia
November 5, 1996
