<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
------------ ------------
COMMISSION FILE NUMBER: 0-21425
HEALTHCARE FINANCIAL PARTNERS, INC.
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-184418
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2 WISCONSIN CIRCLE, SUITE 320
CHEVY CHASE, MARYLAND 20815
---------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
(301) 961-1640
---------------------------
(Registrant's telephone
number including area code)
Indicate by check mark whether the Registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock ($.01 par value) 6,214,991 as of April 30, 1997
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 (Unaudited)................................................ 1
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1997 and March 31, 1996 (Unaudited)....................... 2
Condensed Consolidated Statements of Stockholders' Equity for the
year and three months ended December 31, 1996 and March 31, 1997 (Unaudited)..... 3
Statements of Cash Flows for the three months
ended March 31, 1997 and March 31, 1996 (Unaudited).............................. 4
Notes to Condensed Consolidated Financial Statements (Unaudited)................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Unaudited)........................ 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 16
Item 2. Changes in Securities............................................................ 16
Item 3. Defaults Upon Senior Securities.................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders.............................. 16
Item 5. Other Information................................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................................. 16
SIGNATURES................................................................................ 17
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HEALTHCARE FINANCIAL PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS MARCH 31, DECEMBER 31,
1997 1996
------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 12,278,086 $ 11,734,705
Finance receivables 116,788,160 89,328,928
Less:
Allowance for losses on receivables 1,228,992 1,078,992
Unearned discount fees 1,249,541 723,804
------------ ------------
Net finance receivables 114,309,627 87,526,132
Accounts receivable from related parties 5,576
Property and equipment 262,107 223,397
Prepaid expenses and other 2,393,557 1,783,279
------------ ------------
Total assets $129,243,377 $101,273,089
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Line of credit $ 33,538,765 $ 21,829,737
Commercial paper facility 44,769,505 37,209,098
Client holdbacks 12,621,653 11,739,326
Accounts payable to clients 519,553 1,020,131
Amounts due to related parties 8,024,124 317,993
Accounts payable and accrued expenses 1,509,839 1,925,504
Notes payable 133,431 126,389
Accrued interest 284,527 383,935
------------ ------------
Total liabilities 101,401,397 74,552,113
Stockholders' equity
Preferred stock, par value $.01 per
share; 10,000,000 shares
authorized; none outstanding
Common stock, par value $.01 per
share; 30,000,000 shares
authorized; 6,214,991 shares
issued and outstanding 62,150 62,150
Paid-in-capital 26,704,234 26,704,234
Retained equity (deficit) 1,075,596 (45,408)
------------ ------------
Total stockholders' equity 27,841,980 26,720,976
------------ ------------
Total liabilities and equity $129,243,377 $101,273,089
============ ============
</TABLE>
See accompanying notes.
1
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1997 1996
-------------- ------------
<S> <C> <C>
Fee and interest income:
Discount fees $1,676,684 $1,460,004
Commitment fees 305,949 186,342
Other fees 587,778 230,363
Interest income 1,917,922 404,427
---------- ----------
Total fee and interest income 4,488,333 2,281,136
Interest expense 1,133,156 580,030
---------- ----------
Net fee and interest income 3,355,177 1,701,106
Provision for loss on receivables 150,000 343,155
---------- ----------
Net fee and interest income after
provision for losses on receivables 3,205,177 1,357,951
Operating expenses:
Compensation and benefits 771,538 225,414
Commissions 30,421 71,786
Professional fees 173,417 105,751
Occupancy 47,509 37,682
Other 843,598 235,994
---------- ----------
Total operating expenses 1,866,483 676,627
Other income 429,399 10,000
---------- ----------
Income (loss) before deduction of
preacquisition earnings and income taxes 1,768,093 691,324
Deduction of preacquisition earnings 959,756
---------- ----------
Income (loss) before income taxes 1,768,093 (268,432)
Income taxes 647,089
---------- ----------
Net income (loss) $1,121,004 $ (268,432)
========== ==========
Net income per share $.18
==========
Weighted average shares outstanding 6,214,991
==========
</TABLE>
See accompanying notes.
2
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------------
LIMITED RETAINED TOTAL
PARTNER'S COMMON PAID-IN EARNINGS EQUITY
CAPITAL STOCK CAPITAL (DEFICIT) TOTAL (DEFICIT)
-------------- ---------- --------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995
(combined) $ 415,305 $34,200 $ - $ (574,970) $ (540,770) $ (125,465)
Issuance of 2,415,000 shares
of $.01 par value common stock 24,150 26,708,034 26,732,184 26,732,184
Conversion of common stock
warrants to 379,998 shares of $.01
par value common stock 3,800 (3,800)
Net distributions to partners (415,305) (415,305)
Net income 529,562 529,562 529,562
--------- ------- ----------- ----------- ----------- -----------
Balance at December 31, 1996
(consolidated) 62,150 26,704,234 (45,408) 26,720,976 26,720,976
Net income 1,121,004 1,121,004 1,121,004
--------- ------- ----------- ----------- ----------- -----------
Balance, March 31, 1997 $ $62,150 $26,704,234 $ 1,075,596 $27,841,980 $27,841,980
(consolidated) ========= ======= =========== =========== =========== ===========
</TABLE>
See accompanying notes.
3
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------
1997 1996
--------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,121,004 $ (268,432)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:
Depreciation 22,414 6,707
Provision for losses on receivables 150,000 343,155
Deferred income taxes (97,845)
Preacquisition earnings 959,756
Changes in assets and liabilities:
Decrease (increase) in accounts receivable from related parties 8,029,700 (204,799)
Increase in prepaid expenses and other (512,433) (192,738)
Decrease in cash overdraft (35,150)
(Decrease) increase in accrued interest (99,408) 214,872
(Decrease) increase in accounts payable and accrued expenses (916,243) 192,706
------------ ------------
Net cash provided by operating activities 7,697,189 1,016,077
INVESTING ACTIVITIES
Increase in finance receivables, net (26,051,168) (16,679,402)
Addition of net cash from Funding 2,140,316
Purchase of property and equipment, net (61,124) (13,371)
------------ ------------
Net cash used in investing activities (26,112,292) (14,552,457)
FINANCING ACTIVITIES
Net borrowings under line of credit 11,709,028 13,320,862
Net borrowings under commercial paper facility 7,560,407
Decrease in notes payable to related parties (75,000)
Increase (decrease) in notes payable 7,042 (1,024)
(Distributions to) contributions from limited partners, net (317,993) 3,428,039
------------ ------------
Net cash provided by financing activities 18,958,484 16,672,877
------------ ------------
Net increase in cash and cash equivalents 543,381 3,136,497
Cash and cash equivalents at beginning of period 11,734,705
------------
Cash and cash equivalents at end of period $ 12,278,086 $ 3,136,497
============ ============
Supplemental disclosure of cash flow information:
Cash payments for interest $ 1,232,564 $ 515,706
============ ============
</TABLE>
See accompanying notes.
4
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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 issued 2,415,000 shares of common stock, including
underwriters over allotment, in an initial public offering (offering) in
November 1996. In connection with 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. Effective upon the completion of the offering, the
Company used the proceeds of the offering to acquire, using the purchase method
of accounting, all the limited partnership interests in HealthPartners Funding,
L.P. (Funding) and Funding was liquidated (the acquisition) (See Note 3). The
amount paid to acquire the limited partnership interest approximated both the
fair value and the book value of Funding at the date of the acquisition. Prior
to the offering and the acquisition of Funding by the Company, the Company owned
a 1% general partner interest in HealthPartners DEL, L.P. (DEL) and Funding. In
addition, the majority owners of the Company owned all of the limited
partnership interests of DEL. Prior to the offering, the Company's principal
activity was its interest in Funding. Additionally, the Company provided
operational and management support to Funding for a fee. Funding's principal
activities were, and now the Company'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 financial statements of the Company for 1996 are consolidated assuming the
acquisition of Funding occurred as of January 1, 1996 under the provisions of
Accounting Research Bulletin No. 51. The deduction of preacquisition earnings
reflects the operations of Funding and DEL allocated to the limited partners of
Funding and DEL prior to the acquisition.
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 $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 in March 1997, the Company formed HealthCare Financial Partners-
Funding II, L.P. (Funding II), a limited partnership in which HCFP Funding II,
Inc., a wholly owned subsidiary of the Company, is the General Partner. The
limited partner in Funding II is an affiliate of existing shareholders. Funding
II has been established to expand the Company's secured term lending program.
Effective April 1, 1997, the Company formed HealthCare Analysis Corporation, a
wholly owned subsidiary, to perform due diligence and ongoing audits on its
clients.
5
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION (CONTINUED)
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. The preparation of
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. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results for the year ending
December 31, 1997. The notes to the consolidated financial statements contained
in the Annual Report on Form 10-K for the year ended December 31, 1996 should be
read in conjunction with these condensed consolidated financial statements.
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. As of March 31, 1997 cash and
cash equivalents include $8 million of cash held for Funding II, a related
entity. The corresponding amount is included in amounts due to related parties.
EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common and
common equivalent shares outstanding, including dilutive stock options. Earnings
per share are not presented for periods prior to December 31, 1996 because they
are not meaningful due to the partnership reporting basis of DEL and Funding and
to the reorganization and offering described in Note 1.
3. PURCHASE OF FUNDING
Effective upon the completion of the offering described in Note 1, the Company
acquired, using the purchase method of accounting, the limited partnership
interest in Funding, consisting primarily of finance receivables and related
borrowings. The amount paid to acquire Funding, net of cash acquired, of
$16,200,000 approximated both the fair value and book value of Funding at the
date of acquisition.
6
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. PURCHASE OF FUNDING (CONTINUED)
The financial statements of the Company for 1996 are consolidated assuming the
acquisition of Funding occurred as of January 1, 1996 under the provisions of
Accounting Research Bulletin No. 51. The pro forma results of operations
following reflect the operating results of the Company for the quarter ended
March 31, 1997 and 1996 as if the acquisition of Funding had occurred on January
1, 1996, and Funding's operations were included with the Company.
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net fee and interest income $3,355,177 $1,701,106
Provision for losses on receivables 150,000 343,155
Net operating expenses 2,084,173 936,244
---------- ----------
Net income $1,121,004 $ 421,707
========== ==========
</TABLE>
The stand-alone results of operations of Funding for the three months ended
March 31, 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C>
Net fee and interest income $1,475,592
Provision for losses on receivables 360,358
Net operating expenses 401,641
----------
Income before income taxes and deduction
of preacquisition earnings $ 713,593
==========
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share", which is
effective for the year ended December 31, 1997 for the Company. The SFAS changes
the way primary and fully diluted earnings per share will be computed. The
Company is currently evaluating the impact of the SFAS on the Company's earnings
per share information.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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
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.
The Company had 143 clients as of March 31, 1997, of which 72 were affiliates of
one or more clients. The average amount outstanding per client or affiliated
client group at March 31, 1997 was approximately $1.2 million. For the three
month period ended March 31, 1996, the Company's pro forma net income was
$421,707, and for the three month period ended March 31, 1997, the Company's net
income was $1.1 million. (The Company used the proceeds of its initial public
offering on November 21, 1996 (the "Offering") to acquire limited partnership
interests in partnerships it formerly managed for a fee. As a result, the
Company believes that net income for the three month period ended March 31, 1996
is more accurately presented on a pro forma basis. See --"The Reorganization".)
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 (the
"STL Program"), often in conjunction with financing provided under either the
ABL Program or the AR Advance Program. The yield on finance receivables
generated under each of the ABL Program, AR Advance Program and STL Program for
the three month period ended March 31, 1997, was 16.5%, 16.5% and 23.1%,
respectively. The yield on finance receivables generated under the ABL Program
and AR Advance Program for the three month period ended March 31, 1996, was
14.8% and 20.1%, respectively. The Company had no STL Program finance
receivables outstanding for the three month period ended March 31, 1996. By
March 31, 1997, the finance receivables originated through the Company's ABL
Program had grown to 54.0% of total finance receivables, as the Company focused
its marketing efforts on larger balance, prime-rate based ABL Program advances
to more creditworthy borrowers. The Company anticipates that finance receivables
generated under the ABL Program will account for a significant majority of its
finance receivables in future periods. Based upon the Company's introduction of
new financial products, the Company expects that loans under the STL Program
will comprise an increasing percentage of the Company's assets within the
foreseeable future. While base interest rates on such loans are expected to be
less than the yields generated from both the AR Advance Program and ABL Program,
term loans under the STL Program may also include warrants or success fees that
could enhance the effective yields on such loans.
In March 1997, in order to fund the Company's expansion of the STL Program,
the Company formed HealthCare Financial Partners-Funding II, L.P. ("Funding II")
and obtained a $20.0 million commitment from Farallon Capital Management, LLC
("Farallon") to fund secured term loans made by Funding II to healthcare
providers. Affiliates of Farallon are shareholders of the Company. See --"The
Reorganization". This commitment expires on February 21, 1999. Utilizing funds
available under this partnership structure to make STL Program loans will
provide liquidity to the Company for the initial stages of the STL Program
without requiring the Company to incur significant additional credit risk. Cash
available for distribution from the partnership (other than cash received upon
the sale or refinancing of the loans or principal repayments) is distributed 20%
to the Company and 80% to Farallon, the limited partner, with preference given
to the limited partner until such partner receives a cumulative, compounded
return of 10% per annum on invested capital. Cash received from the sale or
refinancing or repayment of the loans is distributed 99% to the limited partner
and 1% to the general partner. The Company has the right to acquire the loans
made by Funding II at any
8
<PAGE>
time for 100% of the book value thereof. Upon dissolution and liquidation of
Funding II, the Company is required to pay the limited partner an amount equal
to 10% of such partner's maximum invested capital. If there is any successor to
the business of Funding II which is not an affiliate of the Company, the limited
partner is entitled to receive 10% of the equity of such successor. The Company
has guaranteed the obligations of the general partner under the partnership
agreement.
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 REORGANIZATION
Prior to the Offering, the Company conducted its operations principally in its
capacity as the general partner of two limited partnerships it formerly managed
for a fee, 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 and the transactions
described below (the "Reorganization") were effected by the Company prior to or
simultaneously with the Offering.
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.
Effective upon completion of the Offering, the Company acquired from
HealthPartners Investors, L.L.C. ("HP Investors"), the sole limited partner of
Funding, all of the limited partnership interests in Funding and paid the $21.8
million purchase price for such assets from the proceeds of the Offering. Such
purchase price represented the limited partner's interest in the net assets of
Funding and approximated both the fair value and book value of the net assets.
Funding was subsequently 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 were transferred to the Company.
In connection with the liquidation of Funding, Farallon and RR Capital
Partners, L.P. ("RR Partners"), the only two members of HP Investors, exercised
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 was 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 November 1996, Fleet Capital Corporation ("Fleet") made available to the
Company a line of credit which prior to such time had been available to Funding.
This line of credit currently enables the Company to borrow from Fleet up to $35
million. See "--Liquidity and Capital Resources."
FINANCIAL INFORMATION
The following discussion should be read in conjunction with the condensed
consolidated financial statements, including the notes thereto, of HealthCare
Financial Partners, Inc.
9
<PAGE>
RESULTS OF OPERATIONS
Three Month Period ended March 31, 1997 Compared to the Three Month Period Ended
March 31, 1996
Total fee and interest income increased from $2.3 million for the three month
period ended March 31, 1996 to $4.5 million for the three month period ended
March 31, 1997, an increase of 96.8%. The increase principally resulted from an
increase of $55.4 million in average finance receivables outstanding due in
part to the Company's growth in the ABL Program and its introduction of the STL
Program during the last quarter of 1996. Interest earned from the STL and ABL
Programs increased from $404,427 for the three month period ended March 31, 1996
to $1.9 million for the three month period ended March 31, 1997, which accounted
for $1.5 million of the $2.2 million growth in total fee and interest income
between the periods. The Company increased its client base in the AR Advance
Program from 68 clients at March 31, 1996 to 77 clients at March 31, 1997.
Additionally, existing clients increased their average borrowings from the
Company in three month period ended March 31, 1997 as compared to the prior
year. Because the yield on finance receivables declined from 18.6% for the three
month period ended March 31, 1996 to 17.2% for the three month period ended
March 31, 1997, 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 on finance receivables for the three month period ended March 31, 1997
was lower due to a substantially greater volume of ABL Program finance
receivables outstanding during the three month period ended March 31, 1997,
which have lower yields when compared to the finance receivables historically
generated in the AR Advance Program. Interest expense increased from $580,030
for the three month period ended March 31, 1996 to $1.1 million for the three
month period ended March 31, 1997. However the Company's average cost of
borrowed funds decreased from 8.9% for the three month period ended March 31,
1996 to 6.6% for the three month period ended March 31, 1997. This increase in
interest expense was the result of higher average borrowings required to support
the Company's growth. Because of the Company's overall growth in finance
receivables and lower interest cost, net fee and interest income increased
97.2%, from $1.7 million for the three month period ended March 31, 1996 to $3.4
million for the three month period ended March 31, 1997. The increased
borrowings, combined with a lower yield on finance receivables, resulted in a
decrease in the annualized net interest margin from 13.6% for the three month
period ended March 31, 1996 to 12.8% for the three month period ended March 31,
1997.
The Company's provisions for losses on receivables decreased from $343,155 for
the three month period ended March 31, 1996 to $150,000 for the three month
period ended March 31, 1997. This decrease is attributable to the growth of the
Company's allowance over the last two years, the Company's lack of necessity for
chargeoffs and the size of the Company's average client balance which remained
at approximately $1.2 million, 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 period.
Operating expenses increased from $676,627 for the three month period ended
March 31, 1996 to $1.9 million for the three month period ended March 31, 1997,
a 175.9% increase. This increase was the result of a 242.3% increase in
compensation and benefits due to hiring additional personnel, a 64.0% increase
in professional fees, a 26.1% increase in rent expense as well as increases in
other operating expenses, all relating to the expansion of the Company's
operations.
Other income increased from $10,000 for the three month period ended March 31,
1996 to $429,399 for the three month period ended March 31, 1997, mainly
attributable to the Company hiring personnel and
10
<PAGE>
charging clients for legal and due diligence functions performed internally.
During the three month period ended March 31, 1996, the Company outsourced such
activities.
Net income increased, on a historical basis, from a loss of $268,432 for the
three month period ended March 31, 1996, to net income of $1.1 million for the
three month period ended March 31, 1997. However, in recognition of the
Company's Reorganization, management believes a discussion and analysis of the
Company's net income is most effectively presented on a pro forma basis.
The following table summarizes unaudited pro forma operating results for the
three month period ended March 31, 1996 and the unaudited historical operating
results for the three month period ended March 31, 1997. The pro forma three
month quarterly financial data reflects the Reorganization and is prepared as if
the Reorganization had occurred on January 1, 1996. The proforma adjustments for
the three month period ended March 31, 1996 are the elimination of the deduction
for preacquisition earnings to limited partners and the proforma provision for
income taxes because earnings attributable to DEL and Funding are presented on a
partnership reporting basis for tax purposes (i.e., no provision for income tax
is included in the historical financial statements in the limited partners
allocation of earnings). A pro forma tax rate of 39% was applied to calculate
the proforma income tax provision and the proforma net income amounts.
<TABLE>
<CAPTION>
HISTORICAL PROFORMA
----------- -----------
MARCH 31, MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Fee and interest income
Fee income $2,570,411 $1,869,433
Interest income 1,917,922 411,703
---------- ----------
Total fee and interest income 4,488,333 2,281,136
Interest expense 1,133,156 580,030
---------- ----------
Net fee and interest income 3,355,177 1,701,106
Provision for losses on receivables 150,000 343,155
---------- ----------
Net fee and interest income after
provision for losses on receivables 3,205,177 1,357,951
Operating expenses 1,866,483 676,627
Other income 429,399 10,000
---------- ----------
Income before income taxes 1,768,093 691,324
Income taxes 647,089 269,617
---------- ----------
Pro forma net income $1,121,004 $ 421,707
========== ==========
</TABLE>
Net income increased from $421,707 income (as shown on a proforma basis in
1996) for the three month period ended March 31, 1996 to $1.1 million for the
three month period ended March 31, 1997, a 165.8% increase, primarily as a
result of the overall growth in the Company's finance receivables as described
above.
EXCESS COLLATERAL AND CLIENT HOLDBACKS
The Company's primary protection against credit losses is its security
interest in 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 Advance Program. The Company obtains a first priority
11
<PAGE>
security interest in all of the client's accounts receivable, including
receivables not financed by the Company ("Excess Collateral"). 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 an allowance 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.
Under the STL Program, the Company's term loans to clients are secured by a
lien on various types of collateral, such as accounts receivable, real estate,
equipment, inventory and stock, depending on the circumstances of each loan and
the availability of collateral.
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 2.4x for the quarter ended March 31, 1996,
2.4x for the quarter ended June 30, 1996, 3.7x for the quarter ended September
30, 1996, 3.5x for the quarter ended December 31, 1996 and 2.6x for the quarter
ended March 31, 1997.
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 March 31, 1997, the Company's reserve was $1,228,992 or 1.1%
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 such amount. At March 31, 1997, the
Company had no specific reserves. In the opinion of management, based on a
review of the
12
<PAGE>
Company's portfolio, the reserve for losses on receivables is adequate at this
time, although there can be no assurance that such reserve will be adequate in
the future.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows resulting from operating activities have provided sources of cash
amounting to $1.0 million and $7.7 million for the quarters ended March 31, 1996
and 1997, 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 and STL Programs. 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. As
of March 31, 1997, debt sources of capital available to the Company to fund
advances under the ABL Program, advances against accounts receivable under the
AR Advance Program and loans under the STL Program were a revolving line of
credit (the "Bank Facility") with Fleet, and an investment-grade asset backed
commercial paper program (the "CP Facility") with ING Baring (U.S.) Capital
Markets, Inc. ("ING"). The sources of equity financing were primarily from
limited partner capital contributions prior to the Reorganization and the
Offering. See "The Reorganization". Subsequent to the Offering, the limited
partnership interest was purchased using a significant portion of the offering
proceeds, the limited partnership was dissolved and its assets transferred to
the Company. The Company increased its outstanding balances under the Bank
Facility by $13.3 million during the quarter ended March 31, 1996 and by $11.7
million during the quarter ended March 31, 1997. The lesser increase in 1997
reflects the availability of the CP Facility. On December 5, 1996, the Company
entered into an agreement with ING for $100 million of financing under the CP
Facility. The Company increased its outstanding balance under the CP Facility by
$7.6 million in the quarter ended March 31, 1997. The CP Facility was not
available in the quarter ended March 31, 1996. The limited partners provided
capital contributions of $4.0 million during the quarter ended March 31, 1996
and the limited partners also received cash distributions from their capital
accounts of $571,961 during the quarter ended March 31, 1996. Subsequent to the
Offering all of the limited partners' capital was returned to them.
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 in an integral multiple of $500,000
based on the one-month, two-month, three-month or six-month LIBOR plus 3.0%. As
of March 31, 1997, $33.5 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. 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. The intercreditor arrangements entered into in
connection with the CP Facility excludes borrowings under the CP Facility from
debt for purposes of calculating the debt-to-equity ratio. At March 31, 1997,
the Company was in compliance with all of its covenants under the Bank Facility.
The expiration date for the Bank Facility is March 9, 1998, subject to automatic
renewal for one-quarter periods thereafter unless terminated by Fleet, which
requires six months prior written notice.
Under the terms of the CP Facility, the Company is able to borrow up to $100
million. As of March 31, 1997, in order to reduce unused line fees under the CP
Facility the Company maintained a $50 million borrowing limit under the CP
Facility which limit can be increased by the Company in $25 million increments
to $100 million upon notice to ING. The CP Facility requires the Company to
transfer advances and related
13
<PAGE>
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 pledges 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 lends against such pledged
assets through the issuance of commercial paper. As of March 31, 1997, $44.8
million of commercial paper was outstanding under the CP Facility. The CP
Facility requires the maintenance of a minimum overcollateralization percentage
of 125%. Under the 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. At March 31, 1997, the
Company was in compliance with all of its covenants under the CP Facility. The
maturity date for the CP Facility is March 5, 2001. However, the commercial
paper program may be terminated by the Company at anytime after March 5, 1999,
without penalty.
Commencing in March 1997, funds committed by the limited partner in Funding II
became available to make secured term loans by Funding II under the STL Program.
The limited partner has committed $20 million of invested capital to fund STL
Program loans made by Funding II to healthcare providers. This commitment
expires on February 21, 1999. Utilizing such capital under this partnership
structure to fund such loans will allow the Company to expand the STL Program
without incurring the credit risk associated with concentration of clients in
the inception of the program. Cash available for distribution from the
partnership is distributed 20% to the Company and 80% to the limited partner,
with preference given to the limited partner until such partner receives a
cumulative, compounded return of 10% per annum on invested capital. The Company
has the option to acquire the loans made by Funding II at any time for 100% of
the book value thereof. Upon dissolution and liquidation of Funding II, the
Company is required to pay the limited partner an amount equal to 10% of such
partner's maximum invested capital.
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 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 with the batch. The interest rates on the Company's
term loans historically were 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 in an integral multiple of
$500,000 based on the one-month, two-month, three-month or six-month LIBOR plus
3.0%. The interest rate on the CP Facility adjusts based upon changes in
commercial paper rates. Because the Company expects to finance most of the ABL
Program activity through the CP Facility, there exists some interest rate
sensitivity since the interest rate on advances to the Company's clients under
ABL Program will adjust based on the prime rate, and the interest rate on most
of the Company's liabilities under the 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 the 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
14
<PAGE>
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 related to loans under the STL Program
exists to the extent that such loans have fixed interest rates; however, fixed
rate loans under the STL Program at March 31, 1997 constituted less than 2.5% of
the Company's assets. Such interest rate sensitivity with respect to STL Program
loans is expected to be minimized in the future as adjustable rates are charged
on most new loans.
INFLATION
Inflation has not had a significant effect on the Company's operating results
to date.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings -- Not Applicable
Item 2. Changes in Securities -- Not Applicable
Item 3. Defaults Upon Senior Securities -- Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders -- Not Applicable
Item 5. Other Information -- Not Applicable
Item 6. Exhibits and Reports on Form 8-K
The Company filed a report on Form 8-K March 13, 1997 under Item 5 of
Form 8-K to report the organization of HealthCare Financial
Partners -- Funding II, L.P.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
HEALTHCARE FINANCIAL PARTNERS, INC.
DATE: May 15, 1997 By: /s/ Edward P. Nordberg, Jr.
--------------------------------------------------
EDWARD P. NORDBERG, JR.
Executive Vice President and
Chief Financial Officer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 12,278,086 35,712
<SECURITIES> 0 0
<RECEIVABLES> 116,788,160 3,034,263
<ALLOWANCES> 2,478,533 112,162
<INVENTORY> 0 0
<CURRENT-ASSETS> 128,981,271 2,482,251
<PP&E> 375,292 119,378
<DEPRECIATION> (113,186) (36,574)
<TOTAL-ASSETS> 129,243,377 2,565,055
<CURRENT-LIABILITIES> 101,401,397 2,926,429
<BONDS> 0 0
0 0
0 0
<COMMON> 62,150 34,200
<OTHER-SE> 27,779,830 (395,574)
<TOTAL-LIABILITY-AND-EQUITY> 129,243,377 2,565,055
<SALES> 4,488,333 2,281,136
<TOTAL-REVENUES> 4,917,732 2,291,136
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,866,483 676,627
<LOSS-PROVISION> 150,000 343,155
<INTEREST-EXPENSE> 1,133,156 580,030
<INCOME-PRETAX> 1,768,093 691,324
<INCOME-TAX> 647,089 0
<INCOME-CONTINUING> 1,121,004 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 (959,756)
<NET-INCOME> 1,121,004 (268,432)
<EPS-PRIMARY> 0.18 0.00
<EPS-DILUTED> 0.18 0.00
</TABLE>
