<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1997
REGISTRATION NO. 333-24611
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------
AMENDMENT
NO. 1 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)
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DELAWARE 6799 52-1844418
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION
INCORPORATION OR CLASSIFICATION CODE NUMBER)
ORGANIZATION) NUMBER)
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
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. SUZANNE TODD BAKER, ESQ.STEPHANIE TSACOUMIS, ESQ.
ROBERTS, ESQ. POWELL, GOLDSTEIN, GIBSON, DUNN & CRUTCHER LLPONE MONTGOMERY
FRAZER & MURPHY LLP SIXTEENTH STREET, SUITE 3100 SAN FRANCISCO,
FLOOR191 PEACHTREE STREET, N.E. CALIFORNIA 94104(415) 393-8200
ATLANTA, GEORGIA 30303 (404) 572-
6600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO 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, 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. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par value..... 3,737,500 $15.125 $10,784,125 $3,268(3)
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</TABLE>
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(1) Includes 487,500 shares subject to the Underwriters' over-allotment
option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1993.
(3) Pursuant to Rule 457(a), a registration fee of $13,289 was paid on April
4, 1997 upon the filing of this Registration Statement with respect to
3,024,500 shares of Common Stock (such fee was calculated based on a per
share maximum offering price of $14.50, pursuant to Rule 457(c)).
---------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
+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 STATE 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 MAY 23, 1997
3,250,000 SHARES
[LOGO OF HEALTHCARE FINANCIAL PARTNERS APPEARS HERE]
COMMON STOCK
Of the 3,250,000 shares of Common Stock, $.01 par value (the "Common Stock"),
offered hereby, (the "Offering"), 2,500,000 shares are being sold by HealthCare
Financial Partners, Inc. (the "Company") and 750,000 shares are being sold by
the Selling Stockholders. See "Principal and Selling Stockholders." The Company
will not receive any of the proceeds from the sale of the shares by the Selling
Stockholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"HCFP." On May 21, 1997, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $16.125 per share. See "Price Range
of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 10 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 Proceeds to
Public Discount(1) Company(2) Selling Stockholders
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<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
Total(3)................. $ $ $ $
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</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 $400,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 487,500 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 $ , the Underwriting
Discount will total $ , the Proceeds to Company will total $ and the
Proceeds to Selling Stockholders 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 , 1997.
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MONTGOMERY SECURITIES
LEHMAN BROTHERS
ABN AMRO CHICAGO CORPORATION
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK
ON NASDAQ IN ACCORDANCE WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
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 and other information incorporated by reference herein. Unless the
context otherwise requires, the information set forth in this Prospectus gives
effect to the transactions described herein under "The Reorganization," which
were completed in November 1996, in connection with the Company's initial
public offering of Common Stock (the "Initial Public Offering"), and the term
"Company" refers to HealthCare Financial Partners, Inc. and its former
partnerships and consolidated 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.
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, disease state
management companies and other providers of finance and management services to
the healthcare industry. 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 March 31, 1997, the Company has advanced
$891.5 million to its clients in over 200 transactions, including $225.0
million advanced during the three months ended March 31, 1997. The Company had
143 clients as of March 31, 1997, of which 72 were affiliates of one or more
other clients. The average amount outstanding per client or affiliated client
group at March 31, 1997 was approximately $1.2 million. For the years ended
December 31, 1995 and 1996, the Company's pro forma net income was $1.5 million
and $3.0 million, respectively, and for the three months ended March 31, 1996,
the Company's pro forma net income was $421,707. See "Pro Forma Financial
Information." For the three months ended March 31, 1997, the Company's
consolidated net income was $1.1 milion. See "Selected Financial Information."
For the three months ended March 31, 1997, the Company's yield on finance
receivables (total interest and fee income divided by average finance
receivables for the period) was 17.2%. See "Management's Discussion and
Analysis of Historical Financial Condition and Historical Results of
Operations" for a discussion of the effect of a change of portfolio composition
on expected yields.
At March 31, 1996, 52.6% of the Company's portfolio consisted of finance
receivables from businesses in the long-term care and home healthcare sub-
markets. Estimated expenditures in 1996 for the long-term care, home healthcare
and physician practice sub-markets, which the Company currently emphasizes,
collectively constituted approximately $334.9 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
3
<PAGE>
obtaining financing from more traditional working capital sources, due to their
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) 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. 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."
In late 1996, the Company began to expand its STL Program. As part of this
expansion, the Company obtained a commitment from an affiliate of Farallon
Capital Management, LLC ("Farallon"), a fund manager, to provide up to $20
million to fund secured term loans to healthcare providers through a limited
partnership of which a wholly-owned subsidiary of the Company is the general
partner. See "--Recent Developments." Affiliates of Farallon are Selling
Stockholders in the Offering. See "Principal and Selling Stockholders."
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.
Prior to the Initial Public Offering, the Company funded its activities
primarily through a bank line of credit, partnership capital and stockholders'
equity. On December 5, 1996 the Company entered into a financing arrangement
with ING Baring (U.S.) Capital Markets, Inc. ("ING") for $100 million of
financing under an investment grade, asset-backed commercial paper program (the
"CP Facility").
The Company is a Delaware corporation which was organized in April 1993 and
commenced its business in September 1993. 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;
. Seek to make strategic acquisitions of and investments in businesses
which are engaged in the same or similar business as the Company or which
are engaged in lines of business complementary to the Company's business;
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
Prior to the Initial Public Offering, the Company 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 and the transactions described below (the
"Reorganization") were effected by the Company prior to or simultaneously with
the Initial Public 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 Initial Public Offering, the Company
acquired from HealthPartners Investors, LLC ("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
Initial Public 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 Capital Partners L.P.
("FCP") 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, which warrants were acquired on
5
<PAGE>
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 FCP 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 (the "Bank Facility") 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 on a revolving basis. See "Business--
Capital Resources."
RECENT DEVELOPMENTS
In May 1997, the Company obtained a proposal from an institutional lender
which would allow the Company to securitize certain loans under its STL
Program. Under the proposal STL Program loans which meet certain criteria would
first be transferred to a single purpose bankruptcy remote corporation formed
by the Company and subsequently would be sold to a trust formed pursuant to a
trust agreement among the Company, the single purpose corporation and an
independent trustee. The purchase price for the loans would be provided in part
by the institutional lender through the purchase of certificates of
participation issued by the trust. Under the proposal, the principal amount of
the certificates of participation purchased by the institutional lender would
not exceed 88% of the principal amount of the STL Program loans held by the
trust, subject to a $50 million maximum. Interest would accrue on the
certificates of participation at a rate equal to LIBOR plus 3.75%. Consummation
of this arrangement is subject to a number of conditions, including mutually
satisfactory documentation.
Also in May 1997, the Company acquired a portfolio of 13 performing loans of
a type similar to loans made by the Company under its ABL Program, with a total
commitment value of $11.7 million. All of the acquired loans are secured by
accounts receivable and are made to companies in the rehabilitation, home
health care and medical transportation industries. The purchase price paid for
the portfolio was $8.2 million, which approximated the then current outstanding
balances of such loans.
In March 1997, to obtain funding for an expanded STL Program, the Company
formed a Delaware limited partnership known as HealthCare Financial Partners--
Funding II, L.P. ("Funding II"). An affiliate of Farallon has a 99% limited
partnership interest in Funding II, and a wholly-owned subsidiary of the
Company has a 1% general partnership interest in such partnership. The limited
partner has committed to provide up to $20 million to Funding II to fund STL
Program loans made to healthcare providers. 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 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. Under the terms of the partnership agreement, the Company has
the right to acquire the loans made by Funding II at any time for 100% of book
value thereof. Upon dissolution of Funding II, the Company is required to pay
to the limited partner an amount equal to 10% of the limited 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. As of May 20, 1997, a
total of six secured term loans in an aggregate amount of $14.5 million had
been made by Funding II.
In April 1997, Funding II executed a letter of intent with Shattuck Hammond
Partners ("SHP") providing for the acquisition by Funding II of a 9.9% non-
voting preferred stock interest in SHP for a purchase price of $5.75 million.
SHP is a privately held, healthcare-focused investment bank with
6
<PAGE>
offices in New York, San Francisco and Atlanta. SHP employs 28 investment
banking professionals who provide financial advisory services to healthcare
companies nationwide. SHP had revenues of approximately $20 million in 1996.
The purchase by Funding II of this minority interest is subject to completion
of due diligence and mutually satisfactory documentation and is expected to be
consummated in July 1997. The right of Funding II to acquire this interest is
assignable to the Company. SHP's broad client list includes a number of well
known academic medical centers and a large number of growing entrepreneurial
healthcare service providers. In addition to a preferred return on the
investment, the Company believes that an ownership interest in SHP will provide
an additional distribution channel for the Company's products and that SHP will
be able to assist the Company in developing new financial products for the
healthcare market.
In January 1997, the Company, through one of its wholly-owned subsidiaries,
provided a $3.3 million subordinated term loan to Health Charge Corporation, a
Delaware corporation ("Health Charge"), due January 2002 (subject to certain
mandatory prepayment provisions) which is secured by a second lien on all of
the assets of Health Charge and by a pledge of all of the issued and
outstanding shares of voting capital stock of such corporation. Health Charge
provides financing and accounts receivable and medical records management
services to hospitals. Financing is provided to patients by Health Charge in
the form of a line of credit made available upon the issuance of a credit card.
The line of credit can be utilized by hospital patients to pay hospital
charges. Health Charge currently has approximately 5,000 active cardholders.
The 14 hospitals currently using the services offered by Health Charge are
generally larger than the healthcare service providers currently targeted by
the Company. The Company believes that its relationship with Health Charge will
provide joint marketing opportunities. As part of the transaction with Health
Charge, the Company received a warrant to purchase approximately 30% of the
capital stock of Health Charge at an aggregate exercise price equal to the
greater of $100,000 or an amount equal to 1 1/2% per annum of the outstanding
balance of the term loan during any quarter in which Health Charge is
profitable, and a right of first refusal to match any offer made by a third
party to acquire Health Charge.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............. 2,500,000 shares
Common Stock offered by the Selling
Stockholders................................... 750,000 shares
Common Stock to be outstanding after the
Offering....................................... 8,714,991 shares(1)
Use of Proceeds................................. To finance the anticipated growth of the
Company's ABL Program, AR Advance
Program and STL Program. The balance of
the net proceeds will be used for
general corporate purposes, which may
include strategic acquisitions and
investments. See "Use of Proceeds."
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"). Options to purchase 472,750 shares have been
granted under the Incentive Plan (of which 1,875 are presently
exercisable). See "Management--Stock Incentive Plan." Also does not
include 100,000 shares of Common Stock reserved for issuance pursuant to
the HealthCare Financial Partners, Inc. 1996 Director Incentive Plan,
under which options to purchase 22,510 shares have been granted (none of
which is presently exercisable). See "Management--Director 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.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
The following sets forth summary unaudited pro forma statements of operations
derived from the unaudited pro forma financial information for the years ended
December 31, 1995 and 1996, and for the three months ended March 31, 1996
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. Management believes the
pro forma information giving effect to the Reorganization is the most
meaningful presentation of the Company's operating results. The summary
unaudited consolidated statement of operations for the three months ended March
31, 1997 and the balance sheet data as of March 31, 1997 are taken from the
Company's historical financial statements.
The summary unaudited pro forma statements of operations do not purport to
present the actual results of operations of the Company had the transactions
and events assumed therein in fact occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved
in the future. The summary unaudited pro forma statements of operations are
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."
SUMMARY STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA HISTORICAL
FOR THE YEAR ENDED FOR THE FOR THE
DECEMBER 31, THREE MONTHS ENDED THREE MONTHS ENDED
------------------------ MARCH 31, MARCH 31,
1995 1996 1996 1997
---------- ---------- ------------------- ------------------
<S> <C> <C> <C> <C>
Fee and interest income
Fee income............ $4,814,504(1) $8,518,215 $1,869,433 $2,570,411
Interest income....... 403,659 3,497,756 411,703 1,917,922
---------- ---------- ---------- ----------
Total fee and interest
income............... 5,218,163 12,015,971 2,281,136 4,488,333
Interest expense........ 634,556 3,408,562 580,030 1,133,156
---------- ---------- ---------- ----------
Net fee and interest
income............... 4,583,607 8,607,409 1,701,106 3,355,177
Provision for losses on
receivables............ 217,388 656,116 343,155 150,000
---------- ---------- ---------- ----------
Net fee and interest
income after
provision for losses
on receivables....... 4,366,219 7,951,293 1,357,951 3,205,177
Operating expenses...... 2,096,297 3,326,994 676,627 1,866,483
Other income............ 224,691 233,982 10,000 429,399
---------- ---------- ---------- ----------
Income before income
taxes.................. 2,494,613 4,858,281 691,324 1,768,093
Income taxes............ 972,899 1,894,730 269,617 647,089
---------- ---------- ---------- ----------
Net income.............. $1,521,714 $2,963,551 $ 421,707 $1,121,004
========== ========== ========== ==========
Net income per
share(2)............... $ 0.26 $ 0.50 $ 0.07 $ 0.18
Weighted average shares
outstanding(2)......... 5,938,372 5,945,276 5,938,372 6,214,991
</TABLE>
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(Footnotes appear on next page)
8
<PAGE>
BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1997
--------------
<S> <C>
Total assets................................................... $129,243,377
Finance receivables............................................ 116,788,160
Client holdbacks............................................... 12,621,653
Line of credit................................................. 33,538,765
Commercial paper............................................... 44,769,505
Total liabilities.............................................. 101,401,397
Stockholders' equity........................................... 27,841,980
OTHER DATA
Number of clients being provided financing at period end(3).... 143
Yield on finance receivables(4)................................ 17.2%
Net interest and fee margin.................................... 12.8%
Finance receivable turnover ratio(5)........................... 2.6x
Allowance for losses on receivables as a percentage of finance
receivables................................................... 1.1%
Total operating expenses as a percentage of average assets..... 6.5%
</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 for the years ended December 31, 1995 and
1996 and for the three months ended March 31, 1996 was computed by dividing
pro forma net income by the pro forma weighted average shares outstanding,
which gives effect to the Reorganization.
(3) Includes 72 clients who are affiliates of one or more other clients.
(4) Fee and interest income divided by monthly average finance receivables.
(5) Calculated for the quarter ended March 31, 1997 by dividing total
collections of client accounts receivable for the quarter by the average
month-end balance of finance receivables during such quarter.
9
<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.
This Prospectus contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). 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 reasonable, any of the assumptions
could prove to be inaccurate, and as a result, the forward-looking statements
based on the assumptions also could be incorrect. The uncertainties in this
regard include, but are not limited to, those identified in the risk factors
discussed below. 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.
RISK OF NONPAYMENT AND CLIENT FRAUD
The Company's ability to fully recover amounts due under the AR Advance
Program, the ABL Program and the STL 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, AR Advance Program or the STL 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. In addition, loans under the STL Program may be
secured by other types of collateral, such as real estate, equipment,
inventory and stock. There can be no assurance that the proceeds from the sale
of such collateral resulting from a loan default under the STL Program would
be sufficient to pay the outstanding balance of such loan. 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
10
<PAGE>
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 track such activity and, therefore, knows only that it has
not exceeded its Excess Collateral. 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."
CONCENTRATION OF CLIENT BASE AND THIRD-PARTY PAYOR BASE
At March 31, 1997, approximately 18.0% of the Company's finance receivables
were concentrated in receivables from two clients or groups of affiliated
clients, Southampton Hospital and HPC America, Inc. Adverse conditions
affecting any of these clients could have a material adverse effect on the
Company's ability to collect advances to such clients. For the three months
ended March 31, 1997, HPC America, Inc. accounted for approximately 10.3% of
the Company's finance receivables and 7.6% 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 March 31, 1997, approximately 49.8% 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 March 31, 1997, approximately 49.8% 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."
11
<PAGE>
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, the ABL Program or the
STL 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 this Offering, the Company expects to fund its future
financing activities principally from (i) the $100 million CP Facility, which
will expire on December 5, 2001, (ii) the $35 million Bank Facility, which
will expire on March 9, 1998, subject to automatic renewals for one-year
periods thereafter unless terminated by Fleet, and (iii) Funding II with
respect to which funding commitments expire on February 21, 1999. Prior to
March 1995, the Company financed its operations solely through equity. While
the Company expects to be able to obtain new financing facilities or renew
these existing financing 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 renew the CP Facility or the Bank Facility or find alternative financing
for its activities, such as the financing available through Funding II, the
Company would be forced to curtail or cease its ABL Program, AR Advance
Program and STL 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
The Company's executive officers and directors and stockholders holding 5%
or more of the Common Stock will beneficially own 2,424,833 shares of Common
Stock representing 27.8% of the outstanding shares of Common Stock upon
completion of this Offering. 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 and Selling
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, 1996, 5% were no longer being financed by
the Company at March 31, 1997, due primarily to competition, consolidation in
the healthcare industry and clients' ability to self finance. Of the four
clients which comprised the 5% which have left since 1996, two refinanced
their receivables with other
12
<PAGE>
sources, one terminated its relationship with the Company because it was 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 March 31, 1997, 52.6% 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 has recently begun to provide services not previously offered by
it to healthcare industry clients, or offered only on a limited basis, such as
financing under its STL Program, and may in the future seek to introduce other
new products and services. See "Business--Strategy." The Company has either
very limited or no experience with these new products and services, and there
is no assurance that the Company will be able to market these new products and
services successfully or that the return on these products and 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 and Chief Executive Officer; Ethan D. Leder,
the Company's Vice-Chairman and President; and Edward P. Nordberg, Jr., the
Company's Executive Vice President and Chief Financial Officer, 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. 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.
13
<PAGE>
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 satisfy 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 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
14
<PAGE>
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
exclusive of its borrowings under the CP Facility. 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
March 31, 1997, the Company was in compliance with all of such covenants.
Under the Bank Facility, borrowings under the CP Facility are excluded from
debt for purposes of calculation of the Bank Facility 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 CP Facility, ING
has 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 may also contain similar financial and operating
covenants. The foregoing limitations in the Bank Facility and the CP 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 CP Facility or any future financing agreements.
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
15
<PAGE>
expansion of its business. In addition, the Bank Facility and the 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
Following this Offering, the Company will have 8,714,991 shares of Common
Stock outstanding. All of the shares of Common Stock sold in this Offering and
2,415,000 shares of Common Stock sold in the Initial Public Offering are
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 are subject to the resale limitations
of Rule 144 as promulgated under the Securities Act ("Rule 144"). All of the
remaining shares of outstanding Common Stock are "restricted" securities as
that term is defined in Rule 144. Subject to the 90-day lock-up agreement and
a certain other agreements 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 this 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, certain of its officers and directors and certain other stockholders,
who in the aggregate will own 3,005,470 shares of Common Stock after this
Offering, have agreed that, for a period of 90 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 "90-day lock-up agreement"), except that the Company may grant
options and issue shares of Common Stock under the Company's existing option
plans and may issue Common Stock in acquisition transactions not involving a
public offering. Further, five of the existing stockholders of the Company,
who in the aggregate will own 2,605,977 shares of Common Stock after this
Offering, have agreed that, without the prior written consent of the Company,
they will not effect any sales of Common Stock prior to November 21, 1998 in
excess of the volume limitations provided under Rule 144 (the "Rule 144 Sale
Agreement"). Following this Offering and upon the expiration of the 90-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."
POSSIBLE FLUCTUATIONS OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in 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.
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
16
<PAGE>
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."
USE OF PROCEEDS
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 $37.7 million
(approximately $43.4 million if the over-allotment option granted to the
Underwriters is exercised in full), assuming a public offering price of
$16.125 per share. The Company will not receive any of the proceeds from the
sale of shares of Common Stock by the Selling Stockholders.
The Company intends to use the net proceeds from this Offering to finance
anticipated growth of the Company's ABL Program, AR Advance Program and STL
Program and for general corporate purposes, including possible strategic
acquisitions and investments. The Company does not currently have any
agreement, arrangement or understanding regarding any such acquisition except
for the letter of intent between Funding II and SHP concerning the acquisition
of an interest in SHP. See "Prospectus Summary--Recent Developments." Pending
such uses, the net proceeds to the Company will be used to partially repay
amounts then due under the Bank Facility. The line of credit under the Bank
Facility will remain available to the Company. See "Business--Capital
Resources" for a description of the interest rates, the maturity date and
other terms applicable to the Bank Facility.
PRICE RANGE OF COMMON STOCK
The Common Stock is listed for trading on the Nasdaq National Market under
the trading symbol "HCFP." As of April 3, 1997, based upon the number of
holders of record and an estimate of the number of individual participants
represented by security position listings, the Company had approximately 600
stockholders. The following table sets forth the high and low sales prices of
the Common Stock as reported by the Nasdaq National Market for each of the
quarters indicated:
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ------ -------
<S> <C> <C>
1996
Fourth (from November 21, 1996).......................... $14.00 $12.125
1997
First.................................................... $19.00 $12.375
Second (through May 21, 1997)............................ $16.50 $ 9.75
</TABLE>
On May 21, 1997, the closing sale price of the Common Stock, as reported on
the Nasdaq National Market, was $16.125.
17
<PAGE>
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 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."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1997 and as adjusted to give effect to this Offering at an assumed public
offering price of $16.125 per share. See "Use of Proceeds" and "Description of
Capital Stock."
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-----------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Bank Facility.......................................... $33,538,765 $33,538,765
CP Facility............................................ 44,769,505 44,769,505
----------- -----------
Total borrowings................................ $78,308,270 $78,308,270
=========== ===========
Stockholders' equity
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none outstanding......................... $ -- $ --
Common stock, $.01 par value; 30,000,000 shares
authorized; 6,214,991 shares outstanding; 8,714,991
shares outstanding as adjusted(1).................... 62,150 87,150
Additional paid-in capital............................ 26,704,234 64,374,546
Retained earnings..................................... 1,075,596 1,075,596
----------- -----------
Total stockholders' equity......................... $27,841,980 $65,537,292
=========== ===========
</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"). Options to purchase 472,750 shares have been
granted under the Incentive Plan (of which 1,875 are presently
exercisable). See "Management--Stock Incentive Plan." Also does not include
100,000 shares of Common Stock reserved for issuance pursuant to the
HealthCare Financial Partners, Inc. 1996 Director Incentive Plan, under
which options to purchase 22,510 shares have been granted (none of which is
presently exercisable). See "Management--Director 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.
18
<PAGE>
PRO FORMA FINANCIAL INFORMATION
As a result of the Reorganization, management believes a discussion and
analysis of the Company's financial condition and results of operations is
most effectively presented on a pro forma basis for the two years ended
December 31, 1995 and 1996. To provide a context for this discussion and
analysis, the following information reflects pro forma statements of
operations for each of the years in the two year period ended December 31,
1996 as if the Reorganization had occurred as of the beginning of those
operating 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)............... $ 0.26
Pro forma weighted
average shares
outstanding(3)......... 5,938,372
</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 partnership.
(2) Included $430,000 of fees resulting from the acquisition of certain
receivables of 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, after giving
effect to the Reorganization.
19
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
HEALTHCARE FINANCIAL
PARTNERS, INC.
(CONSOLIDATED) PRO FORMA PRO FORMA,
(HISTORICAL) ADJUSTMENTS(1) AS ADJUSTED
-------------------- -------------- -----------
<S> <C> <C> <C>
Fee and interest income
Fee income................. $ 8,518,215 $ 8,518,215
Interest income............ 3,497,756 3,497,756
----------- -----------
Total fee and interest
income.................... 12,015,971 12,015,971
Interest expense............. 3,408,562 3,408,562
----------- -----------
Net fee and interest
income.................... 8,607,409 8,607,409
Provision for losses on
receivables................. 656,116 656,116
----------- -----------
Net fee and interest income
after provision for losses
on receivables............ 7,951,293 7,951,293
Operating expenses........... 3,326,994 3,326,994
Other income................. 233,982 233,982
----------- -----------
Income before deduction of
preacquisition earnings and
income taxes................ 4,858,281 4,858,281
Deduction of preacquisition
earnings.................... 4,289,859 $(4,289,859)(a)
----------- ----------- -----------
Income before income taxes... 568,422 4,289,859 4,858,281
Income taxes................. 38,860 1,855,870 (b) 1,894,730
----------- ----------- -----------
Net income................... $ 529,562 $ 2,433,989 $ 2,963,551
=========== =========== ===========
Pro forma net income per
share(2).................... $ 0.50
Pro forma weighted average
shares outstanding(2)....... 5,945,276
</TABLE>
- --------
(1) Pro Forma Statements of Operations adjustments reflect the following:
(a) The elimination of preacquisition earnings allocated to limited
partners of Funding and DEL.
(b) The provisions for income taxes (at an estimated effective rate of 39%)
on the pro forma earnings of the consolidated Company, including those
of DEL and Funding which were previously not subject to income taxes as
partnerships.
(2) Pro forma net income per share was computed by dividing pro forma net
income by the pro forma weighted average shares outstanding, after giving
effect to the Reorganization.
20
<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,
the consolidated financial statements, including the notes thereto, of
HealthCare Financial Partners, Inc. 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 December 31, 1996, the Company has advanced $666.5
million to its clients in over 200 transactions, including $470.3 million
advanced during the year ended December 31, 1996. The Company had 130 clients
as of December 31, 1996, of which 64 were affiliates of one or more clients.
The average amount outstanding per client or affiliated client group at
December 31, 1996 was approximately $1.0 million. For the year ended December
31, 1995, the Company's pro forma net income was $1.5 million, and for the
year ended December 31, 1996 the Company's pro forma net income was $3.0
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 19.2% during the year ended December 31, 1996. By December 31, 1996,
the finance receivables originated through the Company's ABL Program had grown
to 52.9% 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 17.1% during the year ended December 31,
1996. 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 18.4% for the year ended December 31, 1996, 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.
21
<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 and are prepared on the
same basis as the preceding Pro Forma Financial Information.
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
PRO FORMA STATEMENTS OF
OPERATIONS
Fee and interest income:
Fee income................ $ 291,752 $ 4,814,504(1) $ 8,518,215
Interest income........... 2,770 403,659 3,497,756
------------- -------------- --------------
Total fee and interest
income................... 294,522 5,218,163 12,015,971
Interest expense............ 3,975 634,556 3,408,562
------------- -------------- --------------
Net fee and interest
income................... 290,547 4,583,607 8,607,409
Provision for losses on
receivables................ 328,894 217,388 656,116
------------- -------------- --------------
Net fee and interest
income (loss) after
provision for losses on
receivables.............. (38,347) 4,366,219 7,951,293
Operating expenses.......... 485,831 2,096,297 3,326,994
Other income................ 289,994 224,691 233,982
------------- -------------- --------------
Income (loss) before income
taxes...................... (234,184) 2,494,613 4,858,281
Income taxes................ 972,899 1,894,730
------------- -------------- --------------
Net income (loss)........... $ (234,184) $ 1,521,714 $ 2,963,551
============= ============== ==============
Pro forma net income (loss)
per share.................. $ (0.04) $ 0.26 $ 0.50
Pro forma weighted average
shares outstanding......... 5,938,372 5,938,372 5,945,276
<CAPTION>
AS OF DECEMBER 31,
-----------------------------------------------
1994 1995 1996
------------- -------------- --------------
<S> <C> <C> <C>
OTHER DATA
Finance receivables--AR
Advance Program............ $ 6,236,663 $ 32,443,023 $ 42,076,211
Finance receivables--ABL
Program.................... 6,270,629 47,252,717(2)
------------- -------------- --------------
Total finance
receivables.............. $ 6,236,663 $ 38,713,652 $ 89,328,928
============= ============== ==============
</TABLE>
- --------
(1) Includes $430,000 of fees resulting from the acquisition of certain
receivables from MediMax. See "Overview."
(2) Includes approximately $2.5 million of STL Program loans.
RESULTS OF OPERATIONS
Year ended December 31, 1996 Compared to the Year Ended December 31, 1995
Total fee and interest income increased from $5.2 million for the year ended
December 31, 1995 to $12.0 million for the year ended December 31, 1996, an
increase of 130.3%. The increase principally resulted from an increase of $45.6
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 $41.0 million in ABL Program receivables from
December 31, 1995 to December 31, 1996. Interest earned from the ABL Program
increased from $403,659 for the year ended December 31, 1995 to $3.5 million
for the year ended December 31, 1996, which accounted for $3.1 million of the
$6.8 million growth in total fee and interest income between the periods. The
Company increased its client base in the AR Advance Program from 72 clients at
December 31, 1995 to 84 clients at December 31, 1996. Additionally, existing
clients increased their average borrowings from the Company in 1996 as compared
to the prior year. Because the yield on finance receivables declined markedly
from 26.4% in
22
<PAGE>
the year ended December 31, 1995 to 18.4% in the year ended December 31, 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 on finance receivables for the year ended December 31, 1996 was lower
due to a substantially greater volume of ABL Program finance receivables
outstanding during the year ended December 31, 1996, which have lower yields
when compared to the finance receivables in the AR Advance Program. Interest
expense increased from $634,556 for the year ended December 31, 1995 to $3.4
million for 1996. However, the Company's average cost of borrowed funds
decreased from 11.8% for the year ended December 31, 1995 to 9.7% for the year
ended December 31, 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.
Subsequent to March 1995, the Company increasingly relied on borrowed funds to
finance its growth. Because of the Company's overall growth in finance
receivables and increased leverage, net fee and interest income increased from
$4.6 million for the year ended December 31, 1995 to $8.6 million for the year
ended December 31, 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 23.2% for the
year ended December 31, 1995 to 13.2% for the year ended December 31, 1996.
The Company's provisions for losses on receivables increased from $217,388
for the year ended December 31, 1995 to $656,116 for the year ended December
31, 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 period.
Operating expenses increased from $2.1 million for the year ended December
31, 1995 to $3.3 million for the year ended December 31, 1996, a 58.7%
increase. This increase was the result of a 36.1% increase in compensation and
benefits due to hiring additional personnel as well as increases in other
operating expenses, all relating to the expansion of the Company's operations.
Other income increased slightly from $224,691 for the year ended December
31, 1995 to $233,982 for the year ended December 31, 1996.
Net income increased from $1.5 million for the year ended December 31, 1995
to $3.0 million for the year ended December 31, 1996, a 94.8% 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 a $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 receivables 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
23
<PAGE>
ended December 31, 1995. This increase in interest expense was the result of
the commencement of borrowings, 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 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 "--Pro Forma Statements of Operations." The Company experienced no credit
losses in either year.
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.
PRO FORMA QUARTERLY FINANCIAL DATA
The following table summarizes unaudited pro forma quarterly operating
results for the fiscal quarters presented. The Pro Forma Quarterly Financial
Data reflect the Reorganization and are prepared on the same basis as the Pro
Forma Financial Information preceding.
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1995 1995 1996 1996 1996 1996
--------- -------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <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 $2,440,925
Interest income........ 9,366 50,376 103,624 240,293 411,703 792,307 1,006,997 1,286,749
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Total fee and interest
income................ 717,032 852,797 1,408,328 2,240,006 2,281,136 2,883,160 3,124,001 3,727,674
Interest expense........ 3,883 108,895 140,582 381,196 580,030 801,126 923,175 1,104,231
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Net fee and interest
income................ 713,149 743,902 1,267,746 1,858,810 1,701,106 2,082,034 2,200,826 2,623,443
Provision for losses on
receivables............ 217,388 343,155 53,646 216,315 43,000
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
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 2,580,443
Operating expenses...... 361,666 288,880 556,892 888,859 676,627 809,392 796,226 1,044,749
Other income............ 45,377 47,857 93,278 38,179 10,000 8,000 153,651 62,331
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Income before income
taxes.................. 396,860 285,491 804,132 1,008,130 691,324 1,226,996 1,341,936 1,598,025
Income taxes............ 154,776 111,341 313,611 393,171 269,617 478,528 523,355 623,230
-------- -------- ---------- ---------- ---------- ---------- ---------- ----------
Net income.............. $242,084 $174,150 $ 490,521 $ 614,959 $ 421,707 $ 748,468 $ 818,581 $ 974,795
======== ======== ========== ========== ========== ========== ========== ==========
</TABLE>
See "Management's Discussion and Analysis of Historical Financial Condition
and Historical Results of Operations" for information concerning the three
months ended March 31, 1997.
24
<PAGE>
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 Company's quarterly results of operations are not generally affected by
seasonal factors. 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 in its ABL Program
and its AR Advance Program 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 Advance 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."
Under the STL Program, the Company's term loans to clients are secured by
liens 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
25
<PAGE>
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, 3.7x for the quarter ended September 30, 1996, and 3.5x for the quarter
ended December 31, 1996.
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 December 31, 1996, the Company's general
reserve was $1,078,992 or 1.2% 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 December 31, 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows resulting from operating activities have provided sources of cash
amounting to $185,016, $3.8 million and $6.2 million ($1.9 million after
giving effect to the limited partners' preacquisition earnings) for the years
ended December 31, 1994, 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 and the sale of commercial
paper through the CP Facility. The sources of equity financing were primarily
from limited partner capital contributions prior to the Reorganization and the
Initial Public Offering. Subsequent to the Initial Public 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 $17.8 million during the year ended December 31,
1995 and by $4.0 million during the year ended December 31, 1996. The smaller
increase in 1996 reflects the availability of the CP Facility. 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, $7.6 million and $12.0 million during
the years ended December 31, 1994, 1995 and 1996, respectively. During those
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 $6.5 million prior to the Initial Public
Offering. Subsequent to the Initial Public Offering all of the limited
partners' capital was returned to them. On December 5, 1996, the Company
entered into an agreement with ING for $100 million of financing under the CP
Facility. As of December 31, 1996, $37.2 million of commercial paper was
outstanding under the CP Facility.
26
<PAGE>
In conjunction with the Reorganization and in contemplation of the Initial
Public Offering, at the request of the Company, Fleet increased the committed
line of credit under the Bank Facility from $35 million to $50 million. This
commitment was reduced to $35 million on January 1, 1997. 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 December
31, 1996, $21.8 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 exclude borrowings under the CP Facility from
debt for purposes of calculating the debt-to-equity ratio. At December 31,
1996, 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-year periods thereafter unless terminated by
Fleet, which requires six months prior written notice. See "Risk Factors--Risk
of Failure to Renew Funding Sources" and "Business--Capital Resources."
Under the terms of the CP Facility, the Company is able to borrow up to $100
million. As of December 31, 1996, 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 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 December 31, 1996, $37.2 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 December 31, 1996,
the Company was in compliance with all of its covenants under the CP Facility.
The maturity date for the CP Facility is December 5, 2001. However, the
commercial paper program may be terminated by the Company at any time after
December 5, 1999, 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 this Offering, the Company expects to fund its future
financing activities principally from (i) the CP Facility, which expires on
December 5, 2001, (ii) the Bank Facility, which expires on March 9, 1998,
subject to automatic renewals for one-year periods thereafter unless
terminated by Fleet, and (iii) Funding II with respect to which the funding
commitment expires on February 21, 1999. While the Company expects to be able
to obtain new financing facilities or renew these existing financing
facilities and to have continued access to other sources of credit after
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. 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 CP
27
<PAGE>
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 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 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 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
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
December 31, 1996 constituted less than 2.5% of the Company's assets. Interest
rate sensitivity with respect to STL Program loans should be mitigated in the
future as adjustable rates are expected to be charged on most new loans.
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 and for the years ended December 31,
1994 and 1995, and the consolidated financial statements of HealthCare
Financial Partners, Inc. as of and for the year ended December 31, 1996, and as
of and for the three months ended March 31, 1996 and 1997, and the financial
statements of Funding as of and for the period from inception (September 12,
1994) through December 31, 1994, and for the year ended December 31, 1995. The
data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Historical Financial Condition and Historical
Results of Operations" and the combined financial statements, including the
notes thereto, of HealthCare Financial Partners, Inc. and DEL, the financial
statements of Funding, including the notes thereto, and the consolidated
financial statements of HealthCare Financial Partners, Inc., including the
notes thereto, appearing elsewhere in this Prospectus.
HEALTHCARE FINANCIAL PARTNERS, INC.
<TABLE>
<CAPTION>
AS OF OR FOR
THE PERIOD
FROM INCEPTION AS OF OR FOR THE YEAR ENDED DECEMBER AS OF OR FOR THE
(APRIL 22, 1993) 31, THREE MONTHS ENDED MARCH 31,
THROUGH -------------------------------------- -----------------------------
DECEMBER 31, 1993 1994 1995 1996 1996 1997
(COMBINED) (COMBINED) (COMBINED) (CONSOLIDATED) (CONSOLIDATED) (CONSOLIDATED)
----------------- ---------- ---------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA
Fee and interest
income................. $ 856 $ 13,036 $ 565,512 $12,015,971 $ 2,281,136 $ 4,488,333
Interest expense........ 3,975 79,671 3,408,562 580,030 1,133,156
-------- --------- ---------- ----------- ----------- ------------
Net fee and interest
income............... 856 9,061 485,841 8,607,409 1,701,106 3,355,177
-------- --------- ---------- ----------- ----------- ------------
Provision for losses on
receivables............ 18,745 2,102 45,993 656,116 343,155 150,000
-------- --------- ---------- ----------- ----------- ------------
Net fee and interest
income (loss) after
provision for losses
on receivables....... (17,889) 6,959 439,848 7,951,293 1,357,951 3,205,177
Operating expenses...... 30,204 439,514 1,472,240 3,326,994 676,627 1,866,483
Other income............ 23,772 106,609 1,221,837 233,982 10,000 429,399
-------- --------- ---------- ----------- ----------- ------------
Income (loss) before
deduction of
preacquisition earnings
and income taxes
(benefit).............. (24,321) (325,946) 189,445 4,858,281 691,324 1,768,093
Deduction of
preacquisition
earnings............... 4,289,859 959,756
Income taxes (benefit).. (5,892) 38,860 647,089
-------- --------- ---------- ----------- ----------- ------------
Net income
(loss)(1)(2)........... $(24,321) $(325,946) $ 195,337 $ 529,562 (268,432) $ 1,121,004
======== ========= ========== =========== =========== ============
Pro forma provision for
income taxes(1)........ $ 73,884
Pro forma net
income(1).............. $ 115,561
Net income per share.... $ 0.13 $ 0.18
Weighted average shares
outstanding............ 4,064,071 6,214,991
BALANCE SHEET DATA
Finance receivables..... $115,454 $ 279,148 $2,552,441 $89,328,928 $58,231,682 $116,788,160
Allowance for losses on
receivables............ 18,475 20,847 66,840 1,078,992 908,182 1,228,992
Total assets............ 329,588 344,850 2,669,939 101,273,089 60,619,446 129,243,377
Client holdbacks........ 21,729 112,374 814,607 11,739,326 10,718,100 12,621,653
Line of credit.......... 1,433,542 21,829,737 31,128,722 33,538,765
Commercial paper ....... 37,209,098 44,769,505
Total liabilities....... 203,534 558,759 2,795,404 74,552,113 43,636,845 101,401,397
Total equity (deficit).. 126,054 (213,909) (125,465) 26,720,976 16,982,601 27,841,980
</TABLE>
29
<PAGE>
FUNDING
<TABLE>
<CAPTION>
AS OF OR FOR THE
PERIOD FROM
INCEPTION AS OF OR FOR THE
(SEPTEMBER 12, 1994) YEAR ENDED
THROUGH DECEMBER 31,
DECEMBER 31, 1994 1995
-------------------- ----------------
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA
Fee income.............................. $ 278,716 $ 4,248,992(3)
Interest income......................... 2,770 403,659
---------- -----------
Total fee and interest income.......... 281,486 4,652,651
Interest expense........................ 554,885
---------- -----------
Net fee and interest income............ 281,486 4,097,766
Provision for losses on receivables..... 326,792 171,395
---------- -----------
Net fee and interest income (loss)
after provision for losses on
receivables........................... (45,306) 3,926,371
Operating expenses...................... 166,317 1,024,057
---------- -----------
Net income (loss)(1)(2)................. $ (211,623) $ 2,902,314
========== ===========
Pro forma provision for income
taxes(2)............................... $ 1,131,902
Pro forma net income(2)................. $ 1,770,412
BALANCE SHEET DATA
Finance receivables..................... $6,012,475 $37,164,708
Allowance for losses on receivables..... 326,792 498,187
Total assets............................ 7,754,522 38,979,184
Client holdbacks........................ 2,362,800 8,175,870
Line of credit.......................... 16,374,318
Total liabilities....................... 2,629,651 26,140,008
Partners' capital....................... 5,124,871 12,839,176
</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 for periods prior to 1996 are not presented
because they are 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 AND
ANALYSIS 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 are not comparable to the Company's operations following the
Reorganization and the Initial Public Offering, which include the results of
operations of Funding, acquired subsequent to the Initial Public 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, the consolidated financial statements of HealthCare Financial
Partners, Inc., 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. RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31,
1996
Total fee and interest income increased from $2.3 million for the three
months ended March 31, 1996 to $4.5 million for the three months 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 months ended March 31, 1996
to $1.9 million for the three months 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 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. 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 the three months ended March 31, 1997 as compared to the
corresponding period in the prior year. The yield on finance receivables
generated under each of the ABL Program, AR Advance Program and STL Program
for the three months 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 months ended March 31, 1996, was 14.8%
and 20.1%, respectively. The Company had no STL Program finance receivables
outstanding for the three months ended March 31, 1996. By March 31, 1997, the
finance receivables originated through the Company's ABL Program had grown to
54.1% of total finance receivables, as the Company focused its marketing
efforts on larger balance, prime-rate based ABL Program advances to more
creditworthy borrowers. The increase in fee and interest income was due to
growth in the volume of finance receivables. This increase was somewhat offset
by the decline in the weighted average yield on the finance receivables
portfolio from 18.6% for the three months ended March 31, 1996 to 17.2% for
the three months ended March 31, 1997. The yield on finance receivables for
the three months ended March 31, 1997 was lower due to the substantially
greater volume of ABL Program finance receivables outstanding during the three
months 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 months ended March 31, 1996 to
$1.1 million for the three months ended March 31, 1997. However the Company's
average cost of borrowed funds decreased from 8.9% for the three months ended
March 31, 1996 to 6.6% for the three months 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 months ended March 31,
1996 to $3.4 million for the three months 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 13.9% for the three months
ended March 31, 1996 to 12.8% for the three months ended March 31, 1997.
31
<PAGE>
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.
The Company's provisions for losses on receivables decreased from $343,155
for the three months ended March 31, 1996 to $150,000 for the three months
ended March 31, 1997. This decrease is attributable to the growth of the
Company's allowance for losses on receivables 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. 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 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.
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
and 2.6x for the quarter ended March 31, 1997.
Operating expenses increased from $676,627 for the three months ended March
31, 1996 to $1.9 million for the three months 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 months ended March 31,
1996 to $429,399 for the three months ended March 31, 1997, mainly
attributable to the Company hiring personnel and charging clients for legal
and due diligence functions performed internally. During the three months
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 months ended March 31, 1996, to net income of $1.1 million for the three
months ended March 31, 1997. However, in recognition of the 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 months ended March 31, 1996 and the unaudited historical operating
results for the three months 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 pro forma adjustments for
the three months ended March 31, 1996 are the elimination of the deduction for
preacquisition earnings to limited partners and the pro forma 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 pro forma income tax provision and the pro forma net income amounts.
32
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------------
1996 1997
---------- ------------
(PRO
FORMA) (HISTORICAL)
<S> <C> <C>
Fee and interest income
Fee income............................................ $1,869,433 $2,570,411
Interest income....................................... 411,703 1,917,922
---------- ----------
Total fee and interest income........................ 2,281,136 4,488,333
Interest expense....................................... 580,030 1,133,156
---------- ----------
Net fee and interest income........................... 1,701,106 3,355,177
Provision for losses on receivables.................... 343,155 150,000
---------- ----------
Net fee and interest income after provision for losses
on receivables....................................... 1,357,951 3,205,177
Operating expenses..................................... 676,627 1,866,483
Other income........................................... 10,000 429,399
---------- ----------
Income before income taxes............................. 691,324 1,768,093
Income taxes........................................... 269,617 647,089
---------- ----------
Net income............................................. $ 421,707 $1,121,004
========== ==========
</TABLE>
Net income increased from $421,707 income (as shown on a pro forma basis in
1996) for the three months ended March 31, 1996 to $1.1 million for the three
months 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.
Cash flows resulting from operating activities have provided sources of cash
amounting to $1.0 million and $7.7 million for the three months ended March 31,
1996 and 1997, respectively. The Company increased its outstanding balances
under the Bank Facility by $13.3 million during the three months ended March
31, 1996 and by $11.7 million during the three months ended March 31, 1997. At
March 31, 1997, the Company was in compliance with all of its covenants under
the Bank Facility. The lesser increase in 1997 reflects the availability of the
CP Facility. The Company increased its outstanding balance under the CP
Facility by $7.6 million in the three months ended March 31, 1997. The CP
Facility was not available in the three months ended March 31, 1996. As of
March 31, 1997, $44.8 million of commercial paper was outstanding under the CP
Facility. At March 31, 1997 the Company was in compliance with all of its
covenants under the CP Facility, and, in order to reduce unused line fees under
the CP Facility, the Company maintained a $50 million borrowing limit which can
be increased by the Company in $25 million increments to $100 million upon
notice to ING. Prior to the Reorganization the limited partners provided
capital contributions of $4.0 million during the three months ended March 31,
1996 and the limited partners also received cash distributions from their
capital accounts of $571,961 during the three months ended March 31, 1996.
Subsequent to the Initial Public Offering all of the limited partners' capital
was returned to them.
Interest rate sensitivity during the three months ended March 31, 1997 did
not change materially from the interest rate sensitivity during the year ended
December 31, 1996. See "Management's Discussion and analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations."
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total fee income increased from $565,512 for the year ended December 31, 1995
to $12.0 million for the year ended December 31, 1996. This increase was the
result of an increase of $63.9 million in average finance receivables for the
year ended December 31, 1996, compared to the year ended December 31, 1995.
This increase in finance receivables was due to the acquisition of the net
assets of
33
<PAGE>
Funding as well as increased marketing efforts to new clients and acquisition
of additional finance receivables from existing clients during this period.
Since the yield on finance receivables decreased from 33.1% at December 31,
1995 to 18.4% at December 31, 1996, the increase in total fee and interest
income was due primarily to growth in finance receivables. Interest expense
increased from $79,671 for the year ended December 31, 1995 to $3.4 million
for the year ended December 31, 1996. 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 year ended December 31, 1995 to 9.7% for the year ended December 31, 1996.
Because of the overall growth of HealthCare Financial Partners, Inc. and DEL
and increased leverage, net fee and interest income increased from $485,841
for the year ended December 31, 1995 to $8.6 million for the year ended
December 31, 1996. The decrease in the yield on finance receivables, although
mitigated by a lower cost of funds, resulted in a decrease in net interest
margin from 28.1% for the year ended December 31, 1995 to 13.2% for the year
ended December 31, 1996.
The provision for losses on receivables increased from $45,993 for the year
ended December 31, 1995 to $656,116 for the year ended December 31, 1996. This
increase is primarily attributable to an increase in outstanding finance
receivables. Neither HealthCare Financial Partners, Inc. nor DEL experienced
credit losses in either year.
Operating expenses increased from $1.5 million for the year ended December
31, 1995 to $3.3 million for the year ended December 31, 1996, a 126.0%
increase. This increase was a result of increases of 36.1% in compensation and
benefits due to hiring additional personnel, 84.4% 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 prior to the Reorganization, decreased from $1.2
million for the year ended December 31, 1995 to $233,982 for the year ended
December 31, 1996, as a result of the inclusion of Funding's operations with
those of HealthCare Financial Partners due to the Reorganization and the
elimination of intercompany income and expenses.
Net income increased from $195,337 for the year ended December 31, 1995 to
$529,562 for the year ended December 31, 1996, (after giving effect to the
exclusion of the limited partners' income prior to the acquisition of
Funding), a 171.1% increase, primarily as a result of the growth in finance
receivables and other income as set forth above.
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 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 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%.
34
<PAGE>
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
Year Ended December 31, 1995 Compared to Period Ended December 31, 1994
Total fee and interest income increased from $281,486 for the period ended
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.
35
<PAGE>
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."
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, disease state management companies
and other providers of finance and management services to the healthcare
industry. 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 March 31, 1997, the Company has advanced
$891.5 million to its clients in over 200 transactions, including $225.0
million advanced during the three months ended March 31, 1997. The Company had
143 clients as of March 31, 1997, of which 72 were affiliates of one or more
other clients. The average amount outstanding per affiliated client group at
March 31, 1997 was approximately $1.2 million. For the years ended December
31, 1995 and 1996, the Company's pro forma net income was $1.5 million and
$3.0 million, respectively, and for the three months ended March 31, 1996, the
Company's pro forma net income was $421,707. For the three months ended
March 31, 1997 the Company's consolidated net income was $1.1 million. For the
three months ended March 31, 1997, the Company's yield on finance receivables
was 17.2%.
HEALTHCARE INDUSTRY
According to Healthcare Financing Administration ("HCFA") estimates, total
domestic healthcare expenditures for 1996 exceeded $1.0 trillion, or 14.5% of
gross domestic product, compared to expenditures of $428.2 billion or 10.2% of
gross domestic product in 1985. The annual compound
36
<PAGE>
growth rate of healthcare expenditures from 1985 to 1996 was 8.8%. The
breakdown of estimated healthcare expenditures for 1996 is as follows (dollars
in billions):
<TABLE>
<CAPTION>
ESTIMATED 1996
EXPENDITURES
--------------
<S> <C>
HEALTHCARE INDUSTRY SEGMENT
Acute Care (hospitals)........................................ $ 390.1
Physician Services............................................ 216.3
Other Medical Non-Durables.................................... 91.0
Long-Term Care (nursing homes)................................ 87.2
Other Professional Services................................... 69.8
Insurance-net of healthcare costs............................. 55.3
Dental Services............................................... 45.9
Home Healthcare............................................... 31.4
Government Public Health...................................... 29.7
Other Personal Care........................................... 24.9
Research...................................................... 16.5
Construction.................................................. 14.7
Vision Products and Other Medical Durables.................... 14.4
--------
Total....................................................... $1,087.2
========
</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 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 $87.2 billion in 1996, 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. in
1996, 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 $31.4 billion in 1996, 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 $216.3 billion in 1996, and is projected to grow to
$309.8 billion by the year 2000. The American Medical Association ("AMA")
reports that, as of December 31, 1995, approximately 562,000 physicians were
actively involved in patient care in the U.S., with a growing number
participating in multi-specialty
37
<PAGE>
or single-specialty groups. According to the AMA, as of December 31, 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.
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 March 31, 1997, 52.6%
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
38
<PAGE>
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 and to meet the changing financial needs of new and existing
clients with a broader array of financial products, the Company has recently
begun to offer additional financing products such as STL Program loans secured
by equipment, inventory, real estate or stock. The Company has not yet
standardized the terms of STL Program loans, but attempts to structure them to
meet the needs of particular clients. Term loans under the STL Program may
also include warrants or success fees that could enhance the effective yields
on such loans. The Company originates these products directly and through
Funding II, as an adjunct to its existing ABL Program and AR Advance Program
relationships or on a stand-alone basis. The Company introduced the STL
Program in late 1996 and expects to continue to selectively introduce new
products to existing and new clients, depending upon the needs of its clients,
general economic conditions, the Company's resources and other relevant
factors. In some cases, the Company anticipates that new products may be
introduced as part of cooperative arrangements with other lenders where the
origination and servicing relationship will remain with the Company. The
Company's objective in offering new products is to diversify its revenue
stream and enhance its growth opportunities.
Seek to make strategic acquisitions of and investments in businesses which
are engaged in the same or similar business as the Company or which are
engaged in lines of businesses which are complementary to the Company's
business. Because of the growth of the Company's core finance receivables
business, the Company increasingly is offered opportunities to invest in, or
acquire interests in, health care service businesses that are involved in
financial services, receivables management, outsourcing, or financial and
administrative infrastructure development activities. The Company believes
that businesses in these areas are synergistic with the Company's core lending
business and could allow the Company to leverage its expertise in healthcare
to meet the needs of the Company's customer base. In January 1997, as part of
this strategy, the Company provided a $3.3 million loan to Health Charge and
in connection therewith obtained warrants to acquire a 30% interest in Health
Charge and a right of first refusal to match any offer made to acquire Health
Charge. Health Charge provides financing and accounts receivable and medical
records management services to hospitals. See "Recent Developments." The
Company will also seek to take advantage of appropriate opportunities to
acquire portfolios of loans backed by healthcare receivables and to invest in
or acquire companies in the same or similar lines of business as the Company.
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.
39
<PAGE>
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.
AR 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 yield on the AR Advance Program for the three
months ended March 31, 1997 was 16.5%. As of March 31, 1997, the Company was
financing 77 clients in its AR Advance Program and the AR Advance Program
constituted 35.7% of total finance receivables.
ABL 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 generally $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 yield on
the ABL Program for the three months ended March 31, 1997 was 16.5%. As of
March 31, 1997, the Company was financing 60 clients in its ABL Program, and
the ABL Program constituted 54.1% of total finance receivables. At March 31,
1997, nine 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.
STL Program. The Company also provides its clients with term loans secured
by their receivables or other assets, such as real property, equipment,
inventory and stock, often in conjunction with either the ABL Program or AR
Advance Program. At March 31, 1997, the Company had approximately $11.9
million in term loans outstanding, issued under 20 separate term loans, which
amount outstanding represented 10.2% of the Company's assets. The average
yield on such term loans for the three months ended March 31, 1997 was 23.1%.
Based upon the Company's introduction of new financial products,
40
<PAGE>
the Company expects that loans under the STL Program will comprise an
increasing percentage of the Company's assets within the next several years.
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, Funding II was
formed as part of the Company's expansion of the STL Program. The limited
partner of Funding II has committed $20.0 million of invested capital to fund
secured term loans made by Funding II to healthcare providers. 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 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 following table sets forth the Company's portfolio activity at or for
the periods indicated:
PORTFOLIO ACTIVITY(1)
<TABLE>
<CAPTION>
AS OF AND FOR THE QUARTERS ENDED
--------------------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1995 1995 1995 1995 1996 1996 1996 1996 1997
----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <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 $42,076,211 $41,745,378
Finance
Receivables ABL
Program......... $ -- $ 1,581,478 $ 5,073,933 $ 6,270,629 $20,783,045 $25,924,458 $33,502,829 $47,252,717(2) $63,119,993
Finance
Receivables STL
Program......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $11,922,789
Total Clients AR
Advance
Program......... 37 52 63 72 68 74 75 84 77
Number of New
Clients AR
Advance
Program......... 9 18 21 16 14 12 2 17 5
Total Clients ABL
Program......... -- 4 11 13 22 24 37 53 60
Number of New
Clients ABL
Program......... -- 4 7 2 9 2 13 18 20
Total Clients STL
Program......... -- -- -- -- -- -- -- -- 20(3)
Number of New
Clients STL
Program......... -- -- -- -- -- -- -- -- 14
Average Finance
Receivables
Outstanding Per
Client:
AR Advance
Program........ $ 309,764 $ 280,839 $ 358,552 $ 464,535 $ 539,187 $ 540,393 $ 614,188 $ 500,907 $ 542,148
ABL Program..... $ -- $ 395,370 $ 461,267 $ 482,356 $ 944,684 $ 1,080,186 $ 905,482 $ 891,561(2) $ 1,052,000
STL Program..... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 596,139
</TABLE>
- --------
(1) Activity is on a pro forma basis for periods prior to 1996, giving effect
to the Reorganization.
(2) Includes approximately $2.5 million of STL Program loans.
(3) Includes six clients previously included in the ABL Program.
41
<PAGE>
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 March 31, 1997, the Company employed a staff of eight sales and
marketing representatives. 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 each transaction which is proposed for
the ABL Program, AR Advance Program or STL Program 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. The
Company's due diligence review also includes a detailed examination of its
accounts receivable, accounts payable, billing and collection systems and
procedures and management information systems and other potential collateral.
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 by
conducting public record searches, and, where appropriate, by contacting
third-party payors about the prospective client's receivables. For loans
primarily secured by real property, the Company requires third-party
appraisals prior to making such loans.
In order to enhance its underwriting capabilities and reduce its reliance on
third parties, the Company recently formed a new subsidiary, HealthCare
Analysis Corporation ("HCAC"). The initial focus of HCAC will be to provide
underwriting and due diligence services for the Company in connection with
proposed transactions. In the future, HCAC may provide such services to third
parties for a fee.
In order to determine its estimate of the net collectible value of a
prospective client's accounts receivable, the Company uses both in-house
auditors and 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
42
<PAGE>
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 March 31, 1997, 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.
The Company grades performing STL Program loans on a scale of 1 to 4, with
Grade 1 assigned to those loans involving the least amount of risk. The
grading system is intended to reflect the performance of a borrower's
business, the collateral coverage of the loan and other factors considered
relevant. Each loan is initially graded based on the financial performance of
the borrower and other specific risk factors associated with the borrower,
including growth, collateral coverage, capitalization, quality of management,
value of intangible assets and availability of working capital. All new loans
are assigned a grade 3 for a period of six months in the absence of an
extraordinary event during that period. After the initial six months, loans
are assigned a grade of 1 to 4. Thereafter, all loans are reviewed and graded
on at least a quarterly basis.
Non-performing loans are graded on a scale of N1 or N2. Grade N1 is assigned
to those non-performing loans which the Company believes may be brought back
into compliance by the borrower's current management. Non-performing loans
assigned Grade N2 involve a higher probability of liquidation of collateral
securing the loan and greater involvement by the Company's management.
Performing loans are generally serviced by the Company's account managers,
with loans in grade 4 being serviced in some cases by a member of the
Company's loan workout group, which currently consists of the Company's Chief
Financial Officer and Senior Credit Officer. Non-performing loans are placed
on the Company's watch list and are serviced by a member of the loan workout
group.
Documentation. The Company's documentation for the ABL Program, AR Advance
Program and STL 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 to three years, 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.
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, prohibiting the client's
43
<PAGE>
ability to pledge assets, restricting 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 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 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 client holdback, held as
additional security for the client's obligations under the AR Agreement. The
client holdback 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 client holdbacks 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.
STL Program. Currently, the Company's documentation for loans under the STL
Program is tailored to the needs of the particular borrower and the type of
available collateral. As the STL Program is expanded, the Company anticipates
that the documentation will become more standardized.
Collection Procedures. The Company's cash collection procedures vary by (i)
the type of program provided by the Company 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."
44
<PAGE>
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 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.
With respect to the STL Program, clients make periodic interest and/or
principal payments, generally monthly. The Company will undertake collection
efforts if such payments are not made on a timely basis. See "--Underwriting
and Monitoring."
The following table sets forth the percentages of the Company's finance
receivables in the AR Advance Program and the ABL and STL Programs combined as
of March 31, 1997 by type of third-party payor.
FINANCE RECEIVABLES BY THIRD-PARTY PAYOR TYPE
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-------------------------------
AR ABL AND STL
ADVANCE PROGRAMS TOTAL
PROGRAM COMBINED RECEIVABLES
------- ----------- -----------
<S> <C> <C> <C>
THIRD PARTY PAYORS
Commercial Insurers/Contract Claims............. 48.5% 50.9% 50.2%
Government Programs:
Medicare...................................... 29.0 27.0 27.6
Medicaid...................................... 22.5 22.1 22.2
---- ---- ----
Total Government Programs..................... 51.5 49.1 49.8
==== ==== ====
</TABLE>
CLIENTS
The Company's client base is diversified. As of March 31, 1997, the Company
was servicing clients located in 36 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.
45
<PAGE>
PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
---------------------------------------------
NUMBER OF PERCENT OF FINANCE PERCENT OF
CLIENTS(1) CLIENTS RECEIVABLES PORTFOLIO
---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
INDUSTRY GROUP
Home Healthcare.................. 51 35.6% $ 28,849,629 24.7%
Long-Term Care................... 42 29.4 32,593,960 27.9
Mental Health.................... 15 10.5 15,386,350 13.2
Physician Practice............... 13 9.1 7,513,358 6.4
Rehabilitation................... 10 7.0 6,131,306 5.3
Durable Medical Equipment........ 3 2.1 700,060 0.6
Hospital......................... 3 2.1 11,239,646 9.6
Diagnostic....................... 2 1.4 17,637 0.0
Disease State Management......... 2 1.4 7,018,293 6.0
Other............................ 2 1.4 7,337,921 6.3
--- ----- ------------ -----
Total.......................... 143 100.0% $116,788,160 100.0%
=== ===== ============ =====
PROGRAM BREAKDOWN
AR Advance Program............... 77 49.1% $ 41,745,378 35.7%
ABL Program...................... 60 38.2 63,119,993 54.1
STL Program...................... 20 12.7 11,922,789 10.2
--- ----- ------------ -----
Total.......................... 157 100.0% $116,788,160 100.0%
=== ===== ============ =====
</TABLE>
- --------
(1) At March 31, 1997, nine clients were in both the AR Advance Program and ABL
Program and five clients were in both the STL Program and ABL Program.
CAPITAL RESOURCES
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 have included the Bank Facility, partnership
equity, stockholders' equity, and the CP Facility. 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.
Bank Facility. The Bank Facility is a revolving line of credit for up to $35
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 in an integral multiple of $500,000
based on the one-month, two-month, 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, upon six months prior written notice.
See "Risk Factors--Risk of Failure to Renew Funding Sources."
CP Facility. Under the terms of the CP Facility, the Company may borrow up to
$100 million. The Company formed a bankruptcy remote, special purpose
corporation to which the Company has transferred loans and receivables which
meet certain conditions required by the CP Facility. The special purpose
corporation pledges the loans and receivables to the Conduit which lends
against such assets through the issuance of commercial paper. The maturity date
for the CP Facility is December 5, 2001. However, the program may be terminated
by the Company at any time after December 5, 1999, 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."
Funding II. The limited partner of Funding II has committed $20.0 million of
invested capital to fund STL Program loans made by Funding II to healthcare
providers. This commitment expires on February 21, 1999. 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
46
<PAGE>
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. 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 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.
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 March 31,
1997, the Company's general reserve was $1,228,992 or 1.1% 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. At March 31, 1997, the Company had no 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,
receivables that the Company advances against under the AR Advance Program,
and loans made under the STL 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 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
47
<PAGE>
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 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.
48
<PAGE>
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 March 31, 1997, the Company employed 35 people on a full-time basis.
The Company believes that its relations with employees are good.
PROPERTY
The Company's headquarters occupy approximately 8,000 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 $17,000 per month. The Company believes that
its current facilities are adequate for its existing needs and that additional
suitable space will be available as required.
49
<PAGE>
MANAGEMENT
The executive officers and directors of the Company and their ages as of May
20, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John K. Delaney(1)........ 34 Chairman of the Board, Chief Executive Officer
and Director
Ethan D. Leder(1)......... 34 Vice-Chairman of the Board, President and
Director
Edward P. Nordberg, 37 Executive Vice President, Chief Financial
Jr.(1)................... Officer and Director
Hilde M. Alter............ 55 Treasurer and Chief Accounting Officer
Steven M. Curwin.......... 38 Senior Vice President, General Counsel and
Secretary
Michael G. Gardullo....... 38 Vice President and Senior Credit Officer
Jeffrey P. Hoffman........ 36 Vice President and Portfolio Manager
Debra M. Van Alstyne...... 45 Vice President, Deputy General Counsel and
Assistant Secretary
Howard T. Widra........... 28 Vice President and Senior Analyst
Chris J. Woods............ 46 Vice President and Chief Information Officer
James L. Buxbaum.......... 41 President of HealthCare Analysis Corporation (a
subsidiary of the Company)
John F. Dealy(2)(3)....... 57 Director
Geoffrey E.D. 41 Director
Brooke(2)(3).............
</TABLE>
- --------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
John K. Delaney serves as Chairman of the Board, Chief Executive Officer and
a Director of the Company. Mr. Delaney co-founded the Company in 1993 and
served as Chairman of the Board, Chief Executive Officer and President from
the formation of the Company until March 1997. 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, President and a
Director of the Company. Mr. Leder co-founded the Company in 1993 and served
as Vice-Chairman of the Board and Executive Vice President from the formation
of the Company until March 1997. 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 Executive Vice President, Chief Financial
Officer and a Director of the Company. Mr. Nordberg co-founded the Company in
1993 and served as a Senior Vice President and Secretary of the Company from
the formation of the Company until March 1997. 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.
50
<PAGE>
Hilde M. Alter serves as Treasurer and Chief Accounting Officer 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.
Steven M. Curwin serves as Senior Vice President, General Counsel and
Secretary of the Company. Mr. Curwin joined the Company in August 1996, and
has served as a Vice President from August 1996 and 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.
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.
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 the State
University of New York at Albany in 1982 and his M.B.A. degree from Adelphi
University in 1987.
Debra M. Van Alstyne serves as Vice President, Deputy General Counsel and
Assistant Secretary of the Company. Ms. Van Alstyne joined the Company in
March 1997. From July 1993 through July 1995, Ms. Van Alstyne was an attorney-
advisor, and from August 1995 until joining the Company in March 1997, Ms. Van
Alstyne was a Senior Attorney, with the Division of Corporate Finance of the
Securities and Exchange Commission. From January 1993 until July 1993, Ms. Van
Alstyne was a practicing attorney with the law firm of Gibson Hoffman &
Panzione in Los Angeles, California, and from April 1992 until January 1993,
she was a practicing attorney with the law firm of Aprahamian & Ducote in
Newport Beach, California. Ms. Van Alstyne received her B.A. degree from the
University of California, Irvine, California in 1974, and received her J.D.
degree from UCLA School of Law, Los Angeles, California in 1977.
Howard T. Widra serves as Vice President and Senior Analyst of the Company.
Mr. Widra joined the Company in January 1997. From June 1996 until joining the
Company, Mr. Widra was a consultant to America Long Lines, Inc., a long
distance phone carrier. From October 1993 until May 1996, Mr. Widra was a
practicing attorney with Steptoe & Johnson, LLP in Washington, D.C. Mr. Widra
received his B.A. degree from the University of Michigan in 1990 and his J.D.
degree from Harvard Law School in 1993.
Chris J. Woods serves as Vice President and Chief Information Officer of the
Company. Mr. Woods joined the Company in March 1997. From 1991 to the time Mr.
Woods joined the Company, he was an independent technical consultant for
clients primarily in the health care and telecommunications
51
<PAGE>
industries. In 1983, Mr. Woods co-founded a technical consulting company and
served as Executive Vice President of such company until his departure in
1991. Prior to 1983, Mr. Woods worked for Control Data Corporation. Mr. Woods
received his B.S. degrees in Computer Science and Geology from the State
University of New York at Buffalo in 1972.
James L. Buxbaum serves as President of HealthCare Analysis Corporation, a
wholly-owned subsidiary of the Company. Mr. Buxbaum became President of that
company in March 1997. From October 1993 until March 1997, Mr. Buxbaum was
President of J.L. Buxbaum, Inc., a mergers and acquisition consulting company
in Baltimore, Maryland. From November 1989 to October 1993, he was a partner
with the accounting firm of Wolpoff & Company in Baltimore, Maryland. Mr.
Buxbaum received his B.B.A. degree from George Washington University in 1977
and is a certified public accountant.
John F. Dealy became a Director of the Company in January 1997. Mr. Dealy
has been President of The Dealy Strategy Group, a management consulting firm,
since 1983. In addition, Mr. Dealy was Senior Counsel to Shaw, Pittman, Potts
& Trowbridge in Washington, D.C. from 1982 through 1996, 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 became a Director of the Company in January 1997. 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 consists
of Messrs. Nordberg and Brooke whose terms will expire at the annual meeting
of stockholders in 1997; Class II consists of Mr. Leder whose term will expire
at the annual meeting of stockholders in 1998; and Class III consists of
Messrs. Delaney and Dealy whose terms will expire at the annual meeting of
stockholders in 1999.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Executive Committee, a
Compensation Committee and an Audit Committee. The Executive Committee,
comprised of Messrs. Delaney, Leder and Nordberg, may exercise all of the
powers and authority of the Board of Directors during the periods between
regularly scheduled Board meetings, except that the Executive Committee may
not approve a merger or consolidation involving the Company, approve a sale of
all or substantially all of its assets, amend the Company's Certificate of
Incorporation or Bylaws, or authorize the issuance of capital stock of the
Company. The Compensation Committee, comprised of Messrs. Dealy and Brooke,
has 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, comprised of Messrs. Dealy and Brooke, has 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
52
<PAGE>
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 shown below to the Company for
the years ended December 31, 1995 and 1996 by the Chief Executive Officer and
each of the other executive officers whose annual compensation exceeded
$100,000 (the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ ----------------
AWARDS
----------------
NUMBER OF SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS YEAR SALARY(1) BONUS COMPENSATION OPTIONS COMPENSATION(2)
- ---------------------------- ---- --------- ------- ------------ ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
John K. Delaney......... 1996 $245,400 $ -- $ -- 37,000 $ --
Chairman, Chief 1995 196,538 94,166 -- -- --
Executive Officer and
President
Ethan D. Leder.......... 1996 242,502 -- -- 37,000 --
Vice Chairman of 1995 196,539 94,166 -- -- --
the Board and
Executive Vice
President
Edward P. Nordberg,
Jr..................... 1996 212,790 -- -- 37,000 --
Senior Vice President 1995 169,038 94,166 -- -- --
and Secretary
</TABLE>
- --------
(1) Includes $60,000, $60,000 and $30,000 paid to Messrs. Delaney, Leder and
Nordberg, respectively, in 1995 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 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 anniversary of the date of the
employment agreement, and on each anniversary date thereafter, the
53
<PAGE>
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,
prior to January 1, 1997, Mr. Delaney received an annual salary of $240,000.
Currently, Mr. Delaney receives 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 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 prior to January 1, 1997,
Mr. Leder received an annual salary of $240,000. Currently, Mr. Leder receives
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 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. 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 Executive Vice President and Chief Financial Officer
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,
prior to January 1, 1997, Mr. Nordberg received an annual salary of $210,000.
Currently, Mr. Nordberg receives 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.
54
<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 full-time employees, other than Messrs. Delaney,
Leder and Nordberg, were granted these options. Each option is subject to a
maximum 10-year term. The 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,
55
<PAGE>
each of Messrs. Delaney, Leder and Nordberg were granted incentive stock
options to purchase 37,000 shares of Common Stock at an exercise price of
$12.50. These options will vest and become exercisable in 20% increments on
each anniversary of the grant date, commencing on September 13, 1997.
The following table summarizes options granted during 1996 to the Named
Executives. The Company has not granted any stock appreciation rights. No other
Stock Incentives were granted or awarded in 1996.
OPTIONS GRANTED IN 1996
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
-------------------------------------------------- ----------------------------
PERCENT OF
SHARES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE PRICE EXPIRATION
NAME OPTIONS EMPLOYEES PER SHARE DATE 5% 10%
---- ---------- ------------- -------------- ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
John K. Delaney......... 37,000 12.33% $12.50 9/13/06 $290,864 $628,051
Ethan D. Leder.......... 37,000 12.33 12.50 9/13/06 290,864 628,051
Edward P. Nordberg,
Jr..................... 37,000 12.33 12.50 9/13/06 290,864 628,051
</TABLE>
The following table summarizes options exercised by the named executives
during 1996 and presents the value of unexercised options held by the Named
Executives at December 31, 1996.
AGGREGATED OPTION EXERCISES IN THE LAST YEAR AND
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
SHARES DECEMBER 31, 1996 AT DECEMBER 31, 1996
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John K. Delaney......... None None -- 37,000 $ -- $9,250
Ethan D. Leder.......... None None -- 37,000 -- 9,250
Edward P. Nordberg,
Jr..................... None None -- 37,000 -- 9,250
</TABLE>
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
56
<PAGE>
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.
Pursuant to the Director Plan, Dr. Brooke and Mr. Dealy each elected to
forego receipt of cash fees for 1997 and was granted an option to acquire
1,255 shares of Common Stock, at an exercise price of $6.375 per share. In
addition, pursuant to the Director Plan, Dr. Brooke and Mr. Dealy were each
granted options to purchase 10,000 shares of Common Stock at an exercise price
of $12.75 per share at the time of their initial appointment to the Board of
Directors in January 1997.
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."
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.
57
<PAGE>
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.
Upon completion of the Initial Public Offering, the Company acquired 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 was $21.8 million which was paid from the proceeds of the Initial
Public Offering. Such purchase price approximated both the fair value and book
value of the net assets. HP Investors paid $24.8 million in cash for its
limited partnership interests and, prior to the sale of its limited
partnership interests to the Company, HP Investors had received income
distributions in respect of its limited partnership interests aggregating $6.8
million and limited partner capital distributions of $3.0 million.
Effective upon the acquisition of the limited partnership interests of
Funding, Funding was 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 (approximately $16.2 million, net of
cash), was 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, FCP and RR Partners exercised
warrants for the purchase of 379,998 shares of Common Stock, which warrants
were acquired by FCP 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 FCP and RR Partners in contemplation of
the liquidation of Funding. No additional consideration was paid in connection
with the exercise of such warrants. There was no affiliation between the
Company and FCP 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.
In March 1997, the Company formed Funding II and an affiliate of Farallon
committed to invest up to $20.0 million to Funding II. See "Prospectus
Summary--Recent Developments."
In April 1997, the Company borrowed $3 million from Health Partners
Investors, II, LLC ("HPI"), an affiliate of Farallon and the sole limited
partner of Funding II. The loan bears interest at a rate of 12% per annum and
is payable on or before June 30, 1997. The Company also paid HPI a commitment
fee of 2% of the loan amount. This loan will be paid in full upon completion
of the Offering.
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 $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 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
58
<PAGE>
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, a director of the Company, 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, on June 21, 1996, the Company
dismissed McGladrey & Pullen, LLP, and subsequently decided to engage 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 and for the period January 1, 1996 through June
21, 1996 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.
59
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 31, 1997, and
as adjusted to give effect to this 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 of the Board of Directors of the
Company, (iii) each of the Named Executive Officers, (iv) all executive
officers of the Company and all members of the Board of Directors as a group,
and (v) each Selling Stockholder. 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 NUMBER OF THE OFFERING
NAME OF ---------------------- SHARES ----------------------
BENEFICIAL OWNER NUMBER PERCENT BEING OFFERED NUMBER PERCENT
---------------- ----------- ----------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
John K. Delaney......... 731,113 11.76% 70,000 661,113 7.59%
Ethan D. Leder.......... 731,113 11.76 70,000 661,113 7.59
Edward P. Nordberg,
Jr..................... 731,113 11.76 70,000 661,113 7.59
John F. Dealy(1)........ 1,875 * -- 1,875 *
Geoffrey E. D.
Brooke(2).............. -- -- -- -- --
JMR Capital Partners,
Inc.(3)................ 506,319 8.15 70,000 436,319 5.01
Creative Information
Systems, LLC(4)........ 506,319 8.15 320,000 186,319 2.14
Farallon Capital
Partners, L.P.(5)...... 466,237 7.50 127,273 338,964 3.89
RR Capital Partners,
L.P.(5)................ 83,256 1.34 22,727 60,529 *
All directors and
executive officers as a
group (13 persons)(6).. 2,198,514 35.37 1,988,514 22.82
</TABLE>
- --------
* Less than one percent
(1) The business address of Mr. Dealy is 2300 N Street, N.W., Washington, D.C.
20037.
(2) The business address of Dr. Brooke is 1 Collins Street, 10th Floor,
Melbourne, Victoria 3000, Australia.
(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 "Management--Stock Incentive Plan" and
"Management--Director Plan."
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 6,214,991 shares of Common Stock outstanding. 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,
60
<PAGE>
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
The registrar and transfer agent for the Common Stock is 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 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.
61
<PAGE>
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 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.
62
<PAGE>
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.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, 8,714,991 shares of Common Stock will be
outstanding. Of these shares, 5,665,000 shares 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
The remaining 3,049,991 shares of Common Stock which will be held by certain
existing stockholders upon completion of this Offering are deemed "Restricted
Shares" under Rule 144. Subject
63
<PAGE>
to the 90-day lockup 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 this 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 82,150
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, certain of its officers and directors and certain
other stockholders, who in the aggregate will own 3,005,470 shares of Common
Stock after this Offering, have agreed to sign the 90-day lock-up agreement.
Further, five of the existing stockholders of the Company, who in the
aggregate will own 2,605,977 shares of Common Stock upon completion of this
Offering, have agreed that, without the prior written consent of the Company,
they will not effect any sales of Common Stock prior to November 21, 1998 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 this 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
Holders who will own a total of 3,005,470 shares of Common Stock after this
Offering are 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 90-day lock-up agreement and the Rule 144 Sale
Agreement referenced above.
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.
64
<PAGE>
UNDERWRITING
Montgomery Securities, Lehman Brothers Inc. and ABN AMRO Chicago Corporation
(the "Underwriters"), have severally agreed, subject to the terms and
conditions set forth in the Underwriting Agreement, to purchase from the
Company and the Selling Stockholders the number of shares of Common Stock
indicated below opposite their respective names at the 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
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Montgomery Securities............................................
Lehman Brothers Inc..............................................
ABN AMRO Chicago Corporation.....................................
---------
Total........................................................ 3,250,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters propose initially to 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. After the public offering, the
offering price and other selling terms may be changed by the Underwriters. 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 Underwriters may offer the shares of Common Stock
through a selling group.
The Company and the Selling Stockholders have 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 375,000 and 112,500 additional
shares of Common Stock, respectively, to cover over-allotments, if any, at the
same price per share as the initial 3,250,000 shares to be purchased by the
Underwriters. 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 and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make
in respect thereof.
Holders who will own 3,005,470 shares of Common Stock after this Offering
have agreed, subject to certain limited exceptions, not to sell or offer to
sell, contract to sell, transfer the economic risk of ownership in, make any
short sale, pledge or otherwise dispose of the shares of Common Stock
currently held by them, or any securities exercisable or exchangeable for or
any other rights to purchase or acquire any shares of Common Stock for a
period of 90 days after the Effective Date without the prior written consent
of Montgomery Securities, other than shares sold in this Offering. Montgomery
Securities may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to these lock-up agreements. In
addition, the Company has agreed for that a period of 90 days after the
Effective Date it will not, without the prior written consent of Montgomery
Securities, issue, offer, sell, grant options to purchase or otherwise dispose
of any equity securities or securities convertible into, exercisable or
exchangeable for Common Stock or other equity securities, subject to certain
limited exceptions including granting of options and sales of shares under the
Company's existing option plans and issuance of Common Stock in acquisition
transactions not involving a public offering.
65
<PAGE>
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission (the "Commission") may limit the ability of
the Underwriters and certain selling group members to bid for and purchase the
Common Stock. As an exception to these rules, the Underwriters are permitted
to engage in certain transactions that stabilize the price of the Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with this Offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriters may
reduce that short position by purchasing Common Stock in the open market. The
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriters may also impose a penalty bid on certain selling group
members. This means that if the Underwriters purchase shares of Common Stock
in the open market to reduce the Underwriters' short position or to stabilize
the price of the Common Stock, they may reclaim the amount of the selling
concession from the selling group members who sold those shares as part of
this Offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security. Neither the Company nor either of
the Underwriters makes any representation or predictions as to the direction
or magnitude of any effect that the transactions described above may have on
the price of the Common Stock. In addition, neither the Company nor either of
the Underwriters makes any representation that the Underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
In connection with this Offering, the Underwriters and certain selling group
members (if any) or their respective affiliates who are qualified registered
market makers on the Nasdaq National Market may engage in passive market
making transactions in the Common Stock on the Nasdaq National Market in
accordance with Rule 103 of Regulation M under the Exchange Act during the one
business day period before commencement of offers of sales of the Common
Stock. The passive market making transactions must comply with applicable
volume and price limits and be identified as such. In general, a passive
market maker may display its bid at a price not in excess of the highest
independent bid for the security; however, if all independent bids are lowered
below the passive market maker's bid such bid must then be lowered when
certain purchase limits are exceeded.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Powell, Goldstein, Frazer & Murphy LLP, 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 consolidated financial statements of HealthCare Financial Partners, Inc.
as of December 31, 1996 and for the year ended December 31, 1996 appearing in
this Prospectus and Registration Statement have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
66
<PAGE>
The combined financial statements of HealthCare Financial Partners, Inc. and
HealthPartners DEL, L.P. as of December 31, 1995 and for the years ended
December 31, 1995 and 1994 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 is subject to the informational requirements of the Exchange
Act. In accordance with the Exchange Act, the Company files reports, proxy
statements and other information with the Commission. The reports, proxy
statements and other information can be inspected and copied at the public
reference facilities that the Commission maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of these
materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at the principal offices of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. Such documents may also be
obtained at the Web site maintained by the Commission (http://www.sec.gov).
The Company's Common Stock is quoted on the Nasdaq National Market and such
reports, proxy statements and other information may be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the Common Stock. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements made in the Prospectus concerning
the contents of any documents referred to herein are not necessarily complete.
With respect to each such document filed with the Commission as an exhibit to
the Registration Statement, reference is made to the exhibit for a more
complete description, and each such statement shall be deemed qualified in its
entirety by such reference.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HEALTHCARE FINANCIAL PARTNERS, INC.
Report of Independent Auditors, Ernst & Young LLP......................... F-2
Report of Independent Auditors, McGladrey & Pullen, LLP................... F-3
Balance Sheets as of December 31, 1996 and 1995........................... F-4
Statements of Operations for the years ended December 31, 1996, 1995, and
1994..................................................................... F-5
Statements of Equity for the years ended December 31, 1996, 1995 and
1994..................................................................... F-6
Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994..................................................................... F-7
Notes to Financial Statements............................................. F-8
HEALTHPARTNERS FUNDING, L.P.
Reports of Independent Auditors, McGladrey & Pullen, LLP.................. F-17
Balance Sheets as of December 31, 1995 and 1994........................... F-18
Statements of Operations for the year ended December 31, 1995 and the
period from September 12, 1994 (Date of Inception) through December 31,
1994..................................................................... F-19
Statements of Partners' Capital for the year ended December 31, 1995 and
the period from September 12, 1994 (Date of Inception) through December
31, 1994................................................................. F-20
Statements of Cash Flows for the year ended December 31, 1995 and the
period from September 12, 1994 (Date of Inception) through December 31,
1994..................................................................... F-21
Notes to Financial Statements............................................. F-22
HEALTHCARE FINANCIAL PARTNERS, INC.
Condensed Consolidated Balance Sheets at March 31, 1997 and December 31,
1996 (Unaudited)......................................................... F-27
Condensed Consolidated Statements of Operations for the three months ended
March 31, 1997 and March 31, 1996 (Unaudited)............................ F-28
Condensed Consolidated Statements of Equity for the year and three months
ended December 31, 1996 and March 31, 1997 (Unaudited)................... F-29
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 1997 and March 31, 1996 (Unaudited)............................ F-30
Notes to Condensed Consolidated Financial Statements (Unaudited).......... F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
HealthCare Financial Partners, Inc.
We have audited the accompanying consolidated balance sheet of HealthCare
Financial Partners, Inc. as of December 31, 1996, and the related consolidated
statements of operations, equity, and cash flows for the year then ended. These
financial statements are the responsibility of management of the Company. 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 consolidated financial position of HealthCare
Financial Partners, Inc. at December 31, 1996, and the consolidated results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Washington, D.C.
February 10, 1997
F-2
<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 the related combined statements of operations,
equity, and cash flows for each of the years in the two-year period ended
December 31, 1995. 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 the results of their operations and their cash flows for each of the years
in the two-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
McGladrey & Pullen, LLP
Richmond, Virginia
September 13, 1996
F-3
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
-------------- ----------
(CONSOLIDATED) (COMBINED)
<S> <C> <C>
ASSETS
Cash and cash equivalents........................... $ 11,734,705
Finance receivables................................. 89,328,928 $2,552,441
Less:
Allowance for losses on receivables............... 1,078,992 66,840
Unearned discount fees............................ 723,804 55,676
------------ ----------
Net finance receivables......................... 87,526,132 2,429,925
Accounts receivable from related parties............ 5,576 129,696
Property and equipment.............................. 223,397 76,140
Prepaid expenses and other.......................... 1,783,279 34,178
------------ ----------
Total assets.................................... $101,273,089 $2,669,939
============ ==========
LIABILITIES AND EQUITY
Cash overdraft...................................... $ 35,150
Line of credit...................................... $ 21,829,737 1,433,542
Commercial paper.................................... 37,209,098
Client holdbacks.................................... 11,739,326 814,607
Accounts payable to clients......................... 1,020,131
Amounts due to related parties...................... 317,993 308,981
Accounts payable and accrued expenses............... 1,925,504 94,335
Notes payable to related parties.................... 75,000
Notes payable....................................... 126,389 21,198
Accrued interest.................................... 383,935 12,591
------------ ----------
Total liabilities............................... 74,552,113 2,795,404
Equity
Limited partners' capital........................... 415,305
Stockholders' equity (deficit):
Preferred stock, par value $0.01 per share;
10,000,000 shares authorized; none outstanding...
Common stock, par value $.01 per share; 30,000,000
shares authorized; 6,214,991 and 3,419,993 shares
issued and outstanding, respectively............. 62,150 34,200
Paid-in-capital................................... 26,704,234
Retained deficit.................................. (45,408) (574,970)
------------ ----------
Total stockholders' equity (deficit)............ 26,720,976 (540,770)
------------ ----------
Total equity (deficit).......................... 26,720,976 (125,465)
------------ ----------
Total liabilities and equity.................... $101,273,089 $2,669,939
============ ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
-------------- ---------- ----------
(CONSOLIDATED) (COMBINED) (COMBINED)
<S> <C> <C> <C>
Fee and interest income:
Discount fees......................... $ 6,783,704 $ 469,964 $ 12,460
Commitment fees....................... 402,543
Other fees............................ 1,331,968 95,548 576
Interest income....................... 3,497,756
----------- ---------- ---------
Total fee and interest income........... 12,015,971 565,512 13,036
Interest expense........................ 3,408,562 79,671 3,975
----------- ---------- ---------
Net fee and interest income............. 8,607,409 485,841 9,061
Provision for losses on receivables..... 656,116 45,993 2,102
----------- ---------- ---------
Net fee and interest income after
provision for losses on receivables.... 7,951,293 439,848 6,959
Operating expenses:
Compensation and benefits............. 1,267,625 931,189 152,600
Commissions........................... 463,499
Professional fees..................... 283,935 153,948 60,060
Occupancy............................. 196,319 156,720 70,794
Licensing fees........................ 136,283
Other................................. 979,333 230,383 156,060
----------- ---------- ---------
Total operating expenses................ 3,326,994 1,472,240 439,514
Other income:
Management fees from affiliates....... 400,000 120,000
Management fees from others........... 224,691 286,023
Income (loss) from limited
partnership.......................... 597,146 (303,385)
Other................................. 233,982 3,971
----------- ---------- ---------
Total other income...................... 233,982 1,221,837 106,609
----------- ---------- ---------
Income (loss) before deduction of
preacquisition earnings and income
taxes (benefit)........................ 4,858,281 189,445 (325,946)
Deduction of preacquisition earnings.... 4,289,859
----------- ---------- ---------
Income (loss) before income taxes
(benefit).............................. 568,422 189,445 (325,946)
Income taxes (benefit).................. 38,860 (5,892)
----------- ---------- ---------
Net income (loss)....................... $ 529,562 $ 195,337 $(325,946)
=========== ========== =========
Net income per share.................... $ .13
===========
Weighted average shares outstanding..... 4,064,071
===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
STATEMENTS OF EQUITY
<TABLE>
<CAPTION>
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------
LIMITED TOTAL
PARTNERS' COMMON PAID-IN EQUITY
CAPITAL STOCK CAPITAL DEFICIT TOTAL (DEFICIT)
--------- ------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1994 (combined)........ $ 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 (combined)........ 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 (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
========= ======= =========== ========= =========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------------- ----------- ----------
(CONSOLIDATED) (COMBINED) (COMBINED)
<S> <C> <C> <C>
Operating activities
Net income (loss)..................... $ 529,562 $ 195,337 $(325,946)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operations:
Depreciation........................ 77,916 17,309 11,817
Provision for losses on
receivables........................ 656,116 45,993 2,102
Losses (earnings) of unconsolidated
limited partnership................ (597,146) 303,385
Deferred income taxes............... 351,127 (17,067)
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable from related parties.. 128,993 (129,696) 89,490
(Increase) decrease in prepaid
expenses and other............... (1,501,956) 26,710 (43,821)
(Decrease) increase in cash
overdraft........................ (35,150) 35,150
Increase in accrued interest...... 79,586 12,591
Increase (decrease) in amount due
to related parties............... 9,012 78,856 (19,412)
Increase in accounts payable and
accrued expenses................. 1,569,976 60,429 32,359
------------ ----------- ---------
Net cash provided by (used in)
operating activities............. 1,865,182 (271,534) 49,974
Investing activities
Increase in finance receivables, net.. (10,338,502) (1,527,448) (67,966)
Acquisition of Funding, net of cash
acquired............................. (16,138,888)
Decrease (increase) in investment in
limited partnership.................. 489,792 (46,494)
Purchase of property and equipment,
net.................................. (225,173) (45,635) (42,689)
------------ ----------- ---------
Net cash used in investing
activities....................... (26,702,563) (1,083,291) (157,149)
Financing activities
Net (payments) borrowings under line
of credit............................ (26,984,082) 1,433,542
Net borrowings under commercial
paper................................ 37,209,098
Decrease in notes payable to related
parties.............................. (75,000)
Increase in notes payable............. 105,191 21,198
Issuance of common stock and
warrants............................. 26,732,184 7,996
Distributions to partners, net........ (415,305) (106,893) (22,013)
------------ ----------- ---------
Net cash provided by (used in)
financing activities............. 36,572,086 1,347,847 (14,017)
------------ ----------- ---------
Net increase (decrease) in cash and
cash equivalents..................... 11,734,705 (6,978) (121,192)
Cash and cash equivalents at beginning
of period............................ 6,978 128,170
------------ ----------- ---------
Cash and cash equivalents at end of
period............................... $ 11,734,705 $ -- $ 6,978
============ =========== =========
Supplemental disclosure of cash flow
information:
Cash payments for interest.......... $ 3,037,218 $ 67,080 $ 3,975
============ =========== =========
Cash payments for income taxes...... $ 23,839
============
</TABLE>
See accompanying notes.
F-7
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS
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 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 11). 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. The financial statements
for years prior to 1996 are combined to include the accounts and operations of
the Company and DEL. The 1995 financial statements are combined as a result of
common control and management between the Company and DEL. All transactions
between the Company and DEL have been eliminated in preparation of the
combined financial statements. The Company accounted for its investment in
Funding on the equity basis, as the Company did not have sufficient control to
warrant consolidation.
Effective 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.
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
F-8
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
delinquent, the Company 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 client 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 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. The Company performs a loan-by-loan review for all asset-based loans to
identify loans to be charged off.
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.
Property and equipment
Property and equipment, principally computer and related peripherals, are
stated at cost less accumulated depreciation ($90,772, $29,868, and $12,559 at
December 31, 1996, 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.
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.
Other fees (management, termination and set-up fees) are recognized in
income over the periods earned under methods that approximate 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 of interest is
renewed when the loan becomes contractually current, and past due interest
income is recognized at that time.
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,
F-9
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
DEL elected partnership reporting status under the Internal Revenue Code.
Accordingly, taxable income or loss of DEL was allocated to the partners in
accordance with the partnership agreement and was 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 based on the weighted average number of common and
common equivalent shares outstanding, including dilutive stock options.
Earnings per share is not presented for periods prior to 1996 because it is
not meaningful due to the partnership reporting basis of DEL and to the
reorganization and offering described in Note 1.
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.
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.
Pro forma income taxes (unaudited)
Federal and state income tax laws require that the income and 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. Accordingly, for informational purposes,
the 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, would have resulted in pro forma income taxes of $73,884 and pro
forma net income of $115,561 for the year ended December 31, 1995.
3. FINANCE RECEIVABLES
Finance receivables consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
----------- ----------
<S> <C> <C>
Purchased accounts receivable...................... $42,076,211 $2,552,441
Asset-based loans.................................. 47,252,717
----------- ----------
$89,328,928 $2,552,441
=========== ==========
</TABLE>
F-10
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. ALLOWANCE FOR LOSSES ON RECEIVABLES
Activity in the allowance for losses on receivables was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
---------- ------- -------
<S> <C> <C> <C>
Beginning of period............................. $ 66,840 $20,847 $18,745
Allowance acquired from purchased finance re-
ceivables...................................... 356,036
Provision for losses on receivables............. 656,116 45,993 2,102
---------- ------- -------
End of period................................... $1,078,992 $66,840 $20,847
========== ======= =======
</TABLE>
5. BORROWINGS
On December 5, 1996, the Company committed to an asset-backed securitization
facility with Holland Limited Securitization, Inc. (HLS), a multi-seller
commercial paper issuer sponsored by ING Baring (U.S.) Capital Markets, Inc.
(ING). The Company has a total borrowing capacity under the facility of
$100,000,000, of which $50,000,000 is currently authorized for use. Increases
in the authorized borrowings under the facility are at the discretion of the
Company and are subject to over-collateralization levels. The securitization
facility expires in December 2001.
In connection with the facility, the Company formed a wholly owned
subsidiary, Wisconsin Circle Funding Corporation (Wisconsin) to purchase
receivables from the Company. Wisconsin pledges receivables on a revolving
line of credit with HLS. HLS issues commercial paper or other indebtedness to
fund the pledge of loans from Wisconsin. HLS is not affiliated with the
Company or its affiliates. At December 31, 1996, the outstanding balance of
loans under this facility was $37,209,098. The net assets of Wisconsin
totaling $10,637,000 are restricted as overcollateralization to the commercial
paper facility, including $7,568,000 of cash held at Wisconsin at December 31,
1996. Interest is payable on the line of credit based on certain commercial
paper rates. The weighted average rate paid in 1996 under the commercial paper
facility was 5.74%.
The Company maintains a revolving line of credit with a bank. The Company
had the ability to borrow up to $50,000,000 and $3,750,000 as of December 31,
1996 and 1995, respectively. As of January 1, 1997, the availability under the
line of credit was amended to $35,000,000. 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
Company. The line of credit is collateralized by the Company's purchased
finance receivables. 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 the Company upon each
additional draw, subject to certain limitations. As of December 31, 1996 and
1995, the weighted average interest rate was 10.3% and 9.7%, respectively. The
Company 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.
6. EQUITY AND STOCK PLANS
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.
F-11
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The options vest and become exercisable in 25% increments at each anniversary
of the grant date, commencing on September 13, 1997 and expire ten years from
date of grant. 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
($12.50 per share). These options vest and become exercisable in 20%
increments on each anniversary date of the grant date, commencing on September
13, 1997. No options granted were canceled or forfeited during 1996, nor are
any exercisable at December 31, 1996.
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 were granted under the Director Plan as of
December 31, 1996.
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, and are exercisable at December 31, 1996.
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 were exercised in connection with the
reorganization and offering described in Note 1.
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.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations in
accounting for its stock-based compensation plans. In accordance with APB 25,
no compensation cost has been recognized for the Company's stock options since
the exercise price equals the market price of the underlying stock on the date
of grant. In October 1995, the Financial Accounting Standards Board (FASB)
issued FASB Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (SFAS 123), which requires, for companies
electing to continue to follow the recognition provisions of APB 25, pro forma
disclosures of what net income and earnings per share would have been had the
recognition provisions of SFAS 123 been adopted. For proposes of pro forma
disclosure, the estimated fair value of the options is amortized to expense
over the option's vesting period. For the year ended December 31, 1996, the
Company's pro forma net income and earnings per share would have been $494,648
and $.12 per share, respectively. The effects of applying SFAS 123 for pro
forma disclosures are not likely to be representative of the effects for
future years.
For purposes of the pro forma disclosures above, the fair value of options
was estimated at the date of grant using a Black-Scholes option-pricing model
with the following weighted average assumptions: dividend yield 0%; volatility
factors of the expected market price of the Company's common stock of .623%;
risk-free interest rate of 6.0% and expected option lives of five years. The
weighted average fair value of options granted during 1996 were $6.76.
F-12
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS
The Company leases office space under noncancelable operating leases. The
future minimum lease payments as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
1997.............................................................. $160,494
1998.............................................................. 139,410
1999.............................................................. 143,471
2000.............................................................. 147,531
Thereafter........................................................ 62,035
--------
$652,941
========
</TABLE>
Rent expense for the year ended December 31, 1996, 1995 and 1994 was
$118,400, $156,720, and $70,790 respectively.
8. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. As stated in Note 2,
DEL and Funding were taxed as partnerships under the Internal Revenue Code.
Accordingly, income taxes are not material nor meaningful for years prior to
1996. Significant components of the Company's deferred tax assets and
liabilities as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Allowance for losses on receivables.............................. $381,462
Deferred tax liabilities
--------
Net deferred tax................................................. $381,462
========
</TABLE>
Significant components of the provision for income taxes for the year ended
December 31, 1996 were as follows:
<TABLE>
<S> <C>
Federal taxes................................................... $ 316,455
State taxes..................................................... 73,532
Deferred income taxes........................................... (351,127)
---------
Income taxes.................................................... $ 38,860
=========
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rates to income tax expense for the
year ended December 31, 1996 was:
<TABLE>
<S> <C>
Income tax at statutory federal tax rate........................ $ 193,264
State taxes, net of federal benefit............................. 26,261
Reversal of deferred tax asset valuation allowance.............. (183,218)
Other........................................................... 2,553
---------
Income taxes.................................................... $ 38,860
=========
</TABLE>
The reversal of the deferred tax asset valuation allowance results from the
Company's generation of sufficient taxable income to ensure the recoverability
of deferred tax assets arising from the deductible temporary differences.
F-13
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. RELATED PARTY TRANSACTIONS
Prior to the reorganization and offering, the Company had an agreement with
Funding, whereby Funding paid a monthly management fee for operational and
management support provided. Management fees under this agreement were
$400,000 and $120,000 for the years ended December 31, 1995 and 1994,
respectively.
Additionally, DEL had entered into an agreement with Funding whereby certain
purchased finance receivables of Funding were assigned to DEL along with the
risks and rewards of ownership. All purchased receivables outstanding as of
December 31, 1995 were assigned from Funding under the agreement.
Amounts due to or from related parties at December 31, 1996 and 1995 are
associated with the transactions between Funding, DEL and/or the limited
partners of Funding.
10. COMMITMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company earned fee revenue in excess of 10% of total fee revenue from
one client, aggregating 11% of total revenue for the year ended December 31,
1996.
At December 31, 1996, the Company has committed lines of credit to its
clients of approximately $84,600,000 of which approximately $37,400,000 was
unused. The Company 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>
December 31, 1996................................... 7 50%
December 31, 1995................................... 2 35%
December 31, 1994................................... 3 71%
</TABLE>
11. 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.
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 year ended
December 31, 1996 and 1995 as if the acquisition of Funding had occurred on
January 1, 1995, and Funding's operations were included with the Company.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net fee and interest income......................... $8,607,409 $4,583,607
Provision for losses on receivables................. 656,116 217,388
Net operating expenses.............................. 4,987,742 2,844,505
---------- ----------
Net income.......................................... $2,963,551 $1,521,714
========== ==========
</TABLE>
F-14
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The stand-alone results of operations of Funding for the period January 1,
1996 to November 26, 1996 (date of acquisition by the Company of Funding) were
as follows:
<TABLE>
<S> <C>
Net fee and interest income................................... $6,588,579
Provision for losses on receivables........................... 537,805
Net operating expenses........................................ 1,604,389
----------
Income before income taxes and deduction of preacquisition
earnings..................................................... $4,446,385
==========
</TABLE>
12. SUBSEQUENT EVENT
Subsequent to December 31, 1996, the Company formed HealthCare Financial
Funding--II, L.P. (Funding II), a limited partnership in which 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.
F-15
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. HEALTHCARE FINANCIAL PARTNERS, INC. (PARENT COMPANY ONLY) CONDENSED
FINANCIAL INFORMATION
<TABLE>
<S> <C>
BALANCE SHEET
ASSETS
Cash and cash equivalents.................................. $ 35,442
Investment in subsidiary................................... 26,986,465
Other...................................................... 3,373
------------
Total Assets............................................... $27,025,280
============
LIABILITIES AND EQUITY
Accounts payable and accrued expenses...................... $ 304,304
Stockholders' equity....................................... 26,720,976
------------
$27,025,280
============
STATEMENT OF OPERATIONS
Income..................................................... $ 1,401,025
Operating expenses......................................... 1,784,272
------------
Loss before income taxes and equity in undistributed
earnings of subsidiary.................................... (383,247)
Income taxes............................................... 27,358
------------
Loss before equity in undistributed earnings of
subsidiary................................................ (410,605)
Equity in undistributed earnings of subsidiary............. 940,167
------------
Net income................................................. $ 529,562
============
STATEMENT OF CASH FLOWS
OPERATING ACTIVITIES
Net income................................................. $ 529,562
Adjustments to reconcile net income to net cash provided by
operations:
Depreciation............................................. 54,401
Equity in undistributed earnings of subsidiary........... (940,167)
Other.................................................... 76,627
------------
Net cash used by operating activities...................... (279,577)
INVESTING ACTIVITIES
Increase in investment in subsidiary....................... (26,046,298)
Payment of amounts due to affiliates....................... (149,537)
Other...................................................... (221,330)
------------
Net cash used in investing activities...................... (26,417,165)
FINANCING ACTIVITIES
Issuance of common stock and warrants...................... 26,732,184
------------
Net cash provided by financing activities.................. 26,732,184
Increase in cash and cash equivalents...................... 35,442
Cash and cash equivalents at beginning of year.............
------------
Cash and cash equivalents at end of year................... $ 35,442
============
</TABLE>
F-16
<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.
McGladrey & Pullen, LLP
Richmond, Virginia
September 13, 1996
F-17
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................... $ 2,140,316 $1,963,089
Finance receivables..................................... 37,164,708 6,012,475
Less:
Allowance for losses on receivables................. 498,187 326,792
Unearned discount fees.............................. 388,010 141,228
----------- ----------
Net finance receivables........................... 36,278,511 5,544,455
Accounts receivable from related parties................ 159,444 195,790
Prepaid expenses and other.............................. 400,913 51,188
----------- ----------
Total assets.......................................... $38,979,184 $7,754,522
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Line of credit.......................................... $16,374,318
Client holdbacks........................................ 8,175,870 $2,362,800
Accounts payable to related parties..................... 334,475
Accounts payable to clients............................. 1,045,043 239,032
Accounts payable and accrued expenses................... 71,530 27,819
Accrued interest........................................ 138,772
----------- ----------
Total liabilities....................................... 26,140,008 2,629,651
Partners' capital....................................... 12,839,176 5,124,871
----------- ----------
Total liabilities and partners' capital............... $38,979,184 $7,754,522
=========== ==========
</TABLE>
See accompanying notes.
F-18
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 12, 1994
YEAR ENDED (DATE OF INCEPTION)
DECEMBER 31, THROUGH
1995 DECEMBER 31, 1994
------------ -------------------
<S> <C> <C>
FEE AND INTEREST INCOME:
Discount fees............................... $3,472,592 $ 268,584
Commitment fees............................. 506,401
Other fees.................................. 269,999 10,132
Interest income............................. 403,659 2,770
---------- ---------
Total fee and interest income............. 4,652,651 281,486
Interest expense.......................... 554,885
---------- ---------
Net fee and interest income............... 4,097,766 281,486
Provision for losses on receivables....... 171,395 326,792
---------- ---------
Net fee and interest income (loss) after
provision for losses on receivables...... 3,926,371 (45,306)
OPERATING EXPENSES:
Commissions................................. 103,505 7,466
Management fees paid to general
partner..................................... 400,000 120,000
Professional fees........................... 215,178 14,692
Licensing fees.............................. 107,038 16,242
Other....................................... 198,336 7,917
---------- ---------
Total operating expenses.................... 1,024,057 166,317
---------- ---------
Net income (loss)........................... 2,902,314 (211,623)
Net income allocable to limited partners.... 2,305,168 91,762
---------- ---------
Net income (loss) allocable to general part-
ner........................................ $ 597,146 $(303,385)
========== =========
UNAUDITED PRO FORMA DATA:
Income taxes................................ $1,131,902
----------
Net income.................................. $1,770,412
==========
</TABLE>
See accompanying notes.
F-19
<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
========= =========== ===========
</TABLE>
See accompanying notes.
F-20
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 12,
1994
(DATE OF INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1995 1994
------------ -------------------
<S> <C> <C>
Operating activities:
Net income (loss).......................... $ 2,902,314 $ (211,623)
Adjustments to reconcile net income (loss)
to net cash provided by operations:
Provision for losses on receivables...... 171,395 326,792
Amortization of organization costs....... 18,857 1,870
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable from related parties....... 36,346 (195,790)
Increase in prepaid expenses and oth-
er.................................... (368,582) (53,058)
Increase (decrease) in accounts payable
to clients............................ 806,011 239,032
Increase (decrease) in accounts payable
to related parties.................... 334,475
Increase in accrued interest........... 127,824
Increase (decrease) in accounts payable
and accrued expenses.................. 54,659 27,819
------------ -----------
Net cash provided by operating activities.. 4,083,299 135,042
Investing activities:
Increase in finance receivables, net..... (25,092,381) (3,508,447)
Financing activities:
Net borrowings under line of credit...... 16,374,318
Partners' capital contributions.......... 7,575,000 5,342,900
Partners' capital distributions.......... (2,763,009) (6,406)
------------ -----------
Net cash provided by financing activities.. 21,186,309 5,336,494
------------ -----------
Net increase (decrease) in cash and cash
equivalents............................... 177,227 1,963,089
Cash and cash equivalents at beginning of
period.................................... 1,963,089
------------ -----------
Cash and cash equivalents at end of
period.................................... $ 2,140,316 $ 1,963,089
============ ===========
Supplemental disclosure of cash flow
information:
Cash payments for interest............... $ 416,113 $ --
============ ===========
</TABLE>
See accompanying notes.
F-21
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS
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.
F-22
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-23
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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,
----------------------
1995 1994
----------- ----------
<S> <C> <C>
Purchased accounts receivable..................... $29,890,582 $5,957,515
Asset-based loans................................. 6,270,629
Advances to clients............................... 856,277 47,536
Other............................................. 147,220 7,424
----------- ----------
Total finance receivables....................... $37,164,708 $6,012,475
=========== ==========
</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 THROUGH
DECEMBER 31, DECEMBER 31,
1995 1994
------------ -------------------
<S> <C> <C>
Beginning of period..................... $326,792
Provision for losses on receivables..... 171,395 $326,792
-------- --------
End of period........................... $498,187 $326,792
======== ========
</TABLE>
F-24
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
The Partnership has the ability to borrow up to $18,500,000 as of December
31, 1995 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 plus 3%
determined at the option of the Partnership upon each additional draw, subject
to certain limitations. As of December 31, 1995 the weighted average interest
rate was 9.6%. 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 December 31, 1995.)
The Partnership is required to comply with certain financial covenants
throughout the year. The Partnership was in compliance with all financial
covenants at December 31, 1995.
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 $400,000 and
$120,000 for 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 December 31, 1995.
The Partnership pays a licensing fee to a stockholder of the General Partner
for use of computer software. Amounts paid for 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 December 31, 1995, the Partnership has committed lines of credit to its
customers of approximately $16,000,000 of which approximately $10,000,000 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>
December 31, 1995.................................. 3 38%
December 31, 1994.................................. 4 73%
</TABLE>
F-25
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
December 31, 1995................................. 2 25%
December 31, 1994................................. 4 64%
</TABLE>
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-26
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
ASSETS ------------ ------------
<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 STOCKHOLDERS' 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 stockholders' equity...... $129,243,377 $101,273,089
============ ============
</TABLE>
See accompanying notes.
F-27
<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 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:
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 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.
F-28
<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
(consolidated)......... $ $62,150 $26,704,234 $1,075,596 $27,841,980 $27,841,980
========= ======= =========== ========== =========== ===========
</TABLE>
See accompanying notes.
F-29
<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 (loss)................................... $ 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 ac-
crued 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 part-
ners, 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.
F-30
<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.
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
F-31
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
1. BASIS OF PRESENTATION--(CONTINUED)
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 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.
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>
F-32
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. PURCHASE OF FUNDING--(CONTINUED)
The stand-alone results of operations of Funding for the three months ended
March 31, 1996 were as follows:
<TABLE>
<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 earn-
ings.............................................................. $ 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.
F-33
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or tomake any representations other than those contained
in this Prospectus in connection with the offering made hereby and, if given or
made, such information or representations must not be relied upon as having
been so authorized by the Company, any Selling Stockholder 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 delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, 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............................................................. 10
Use of Proceeds.......................................................... 17
Price Range of Common Stock.............................................. 17
Dividend Policy.......................................................... 18
Capitalization........................................................... 18
Pro Forma Financial Information.......................................... 19
Management's Discussion and Analysis of Pro Forma Financial Condition and
Pro Forma Results of Operations......................................... 21
Selected Historical Financial Data....................................... 29
Management's Discussion and Analysis of Historical Financial Condition
and Historical Results of Operations.................................... 31
Business................................................................. 36
Management............................................................... 50
Certain Transactions..................................................... 57
Principal and Selling Stockholders....................................... 60
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Matters............................................................ 66
Experts.................................................................. 66
Additional Information................................................... 67
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,250,000 SHARES
[LOGO OF
HEALTHCARE FINANCIAL PARTNERS
APPEARS HERE]
COMMON STOCK
---------------
PROSPECTUS
---------------
MONTGOMERY SECURITIES
LEHMAN BROTHERS
ABN AMRO CHICAGO CORPORATION
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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................ $ 16,557
NASD filing fee.................................................... 4,886
Nasdaq National Market listing fee................................. 17,500
Blue Sky fees and expenses......................................... 6,000
Printing and engraving expenses.................................... 100,000
Legal fees and expenses............................................ 180,000
Accounting fees and expenses....................................... 50,000
Transfer Agent and Registrar fee................................... 5,000
Miscellaneous...................................................... 20,057
--------
Total............................................................ $400,000
========
</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 included by him in such capacity, whether or not the
corporation has the power to indemnify him against such liabilities under the
DGCL.
II-1
<PAGE>
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 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 purchases 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 Partners,
L.P. as of October 3, 1995. Each of Farallon Capital Partners, L.P. and RR
Partners, L.P. subsequently assigned their warrants to HealthPartners
Investors, L.L.C. as of March 28, 1996. 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 (24 persons in total). For a description of this
II-2
<PAGE>
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 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement.
2.1 --Assignment and Assumption of Partnership Interest, dated as of
November 21, 1996, between the Company and HealthPartners Investors
L.L.C.*
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 LLP.
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 November 27, 1996, between
Fleet Capital Corporation and HCFP Funding, Inc.***
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.*
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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 --Limited Partnership Agreement of HealthCare Financial Partners--
Funding II, L.P. dated as of March 5, 1997 between HCFP Funding II,
Inc., as general partner, and HealthPartners Investors, II, LLC, as
limited partner, and Guaranty Agreement dated as of March 5, 1997
between HealthCare Financial Partners, Inc. and HealthPartners
Investors II, LLC.**
10.14 --Receivables Loan and Security Agreement dated as of December 5, 1996
among Wisconsin Circle Funding Corporation, as Borrower, HCFP
Funding, Inc. as Servicer, Holland Limited Securitization, Inc., as
Lender, and ING Baring (U.S.) Capital Markets, Inc. and Purchase and
Contribution Agreement dated as of December 5, 1996 between HCFP
Funding, Inc. and Wisconsin Circle Funding Corporation.***
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.
24.1 --Power of Attorney (included in the signature page in Part II of the
Registration Statement).
</TABLE>
- --------
* Incorporated by reference to the document filed under the same Exhibit
number to the Company's Registration Statement on Form S-1 (No. 333-
12479).
** Incorporated by reference to Exhibit 99.1 to the Company's Current Report
on Form 8-K filed with the Commission on March 13, 1997.
*** Incorporated by reference to the document filed under the same Exhibit
number to the Company's Annual Report on Form 10-K filed with the
Commission on March 31, 1997.
**** Previously filed.
(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.
II-4
<PAGE>
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-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO ITS 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 23RD DAY OF MAY, 1997.
HealthCare Financial Partners, Inc.
/s/ Edward P. Nordberg, Jr.
By: ____________________________
EDWARD P. NORDBERG, JR.
EXECUTIVE VICE PRESIDENT
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT TO
THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON THE 23RD DAY OF MAY, 1997.
SIGNATURE TITLE
/s/ John K. Delaney* Chairman of the Board, Chief
- ------------------------------------- Executive Officer and
Director (principal executive
JOHN K. DELANEY officer)
/s/ Ethan D. Leder* Vice Chairman of the Board,
- ------------------------------------- President and Director
ETHAN D. LEDER
/s/ Edward P. Nordberg, Jr. Executive Vice President,
- ------------------------------------- Chief Financial Officer and
Director (principal financial
EDWARD P. NORDBERG, JR. officer)
/s/ Hilde M. Alter* Treasurer (principal
- ------------------------------------- accounting officer)
HILDE M. ALTER
/s/ John F. Dealy* Director
- -------------------------------------
JOHN F. DEALY
/s/ Geoffrey E.D. Brooke* Director
- -------------------------------------
GEOFFREY E.D. BROOKE
/s/ Edward P. Nordberg, Jr. May 23, 1997
*By: ___________________________
EDWARD P. NORDBERG, JR.
ATTORNEY-IN-FACT
II-6
<PAGE>
Draft of May 23, 1997
____________________ Shares
HealthCare Financial Partners, Inc.
Common Stock
Underwriting Agreement
dated [__], 1997
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Section 1. Representations and Warranties............................................ 2
A. Representations and Warranties of the Company............................. 2
Compliance with Registration Requirements............................... 2
Offering Materials Furnished to Underwriters............................ 3
Distribution of Offering Material By the Company........................ 3
The Underwriting Agreement.............................................. 3
Authorization of the Common Shares...................................... 3
No Applicable Registration or Other Similar Rights...................... 3
No Material Adverse Change.............................................. 3
Independent Accountants................................................. 4
Preparation of the Financial Statements................................. 4
Incorporation and Good Standing of the Company and its Subsidiaries..... 4
Capitalization and Other Capital Stock Matters.......................... 5
Stock Exchange Listing.................................................. 5
Non-Contravention of Existing Instruments; No Further Authorizations or
Approvals Required................................................ 5
No Material Actions or Proceedings...................................... 6
Intellectual Property Rights............................................ 6
All Necessary Permits, etc.............................................. 7
Title to Properties..................................................... 7
Tax Law Compliance...................................................... 7
Company Not an "Investment Company...................................... 7
Insurance............................................................... 7
No Price Stabilization or Manipulation.................................. 8
Related Party Transactions.............................................. 8
No Unlawful Contributions or Other Payments............................. 8
Company's Accounting System............................................. 8
B. Representations and Warranties of the Selling Stockholders................ 8
The Underwriting Agreement.............................................. 9
The Custody Agreement and Power of Attorney............................. 9
Title to Common Shares to be Sold; All Authorizations Obtained.......... 9
Delivery of the Common Shares to be Sold................................ 9
Non-Contravention; No Further Authorizations or Approvals Required...... 9
No Registration or Other Similar Rights................................. 10
No Further Consents, etc................................................ 10
Disclosure Made by Such Selling Stockholder in the Prospectus........... 10
No Price Stabilization or Manipulation.................................. 11
Confirmation of Company Representations and Warranties.................. 11
Section 2. Purchase, Sale and Delivery of Common Shares.............................. 11
The Firm Common Shares.................................................. 11
The First Closing Date.................................................. 11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
The Optional Common Shares; the Second Closing Date..................... 12
Public Offering of the Common Shares.................................... 12
Payment for the Common Shares........................................... 13
Delivery of the Common Shares........................................... 13
Delivery of Prospectus to the Underwriters.............................. 13
Section 3. Additional Covenants...................................................... 14
A. Covenants of the Company.................................................. 14
Section 4. Payment of Expenses....................................................... 17
Section 5. Conditions of the Obligations of the Underwriters......................... 17
Accountants' Comfort Letter............................................. 18
Compliance with Registration Requirements; No Stop Order; No Objection
from NASD......................................................... 18
No Material Adverse Change or Ratings Agency Change..................... 19
Opinion of Counsel for the Company...................................... 19
Opinion of Counsel for the Underwriters................................. 19
Officers' Certificate................................................... 19
Bring-Down Comfort Letter............................................... 20
Opinion of Counsel for the Selling Stockholders......................... 20
Selling Stockholders' Certificate....................................... 20
Selling Stockholders' Documents......................................... 20
Lock-Up Agreement from Certain Stockholders of the Company Other Than
Selling Stockholders.............................................. 20
Additional Documents.................................................... 20
Section 6. Reimbursement of Underwriters' Expenses................................... 21
Section 7. Effectiveness of this Agreement........................................... 21
Section 8. Indemnification........................................................... 21
Indemnification of the Underwriters..................................... 21
Indemnification of the Company, its Directors and Officers.............. 23
Notifications and Other Indemnification Procedures...................... 24
Settlements............................................................. 24
Section 9. Contribution.............................................................. 25
Section 10. Default of One or More of the Several Underwriters........................ 26
Section 11. Termination of this Agreement............................................. 27
Section 12. Representations and Indemnities to Survive Delivery....................... 27
Section 13. Notices................................................................... 28
Section 14. Successors................................................................ 29
Section 15. Partial Unenforceability.................................................. 29
Section 16. Governing Law Provisions.................................................. 29
Section 17. Failure of One or More of the Selling Stockholders to Sell and Deliver
Common Shares........................................................... 29
Section 18. General Provisions........................................................ 29
</TABLE>
ii
<PAGE>
Underwriting Agreement
________, 1997
MONTGOMERY SECURITIES
LEHMAN BROTHERS INC.
ABN AMRO CHICAGO CORPORATION
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
Introductory. HealthCare Financial Partners, Inc., a Delaware
corporation (the "Company"), proposes to issue and sell to the several
underwriters named in Schedule A (the "Underwriters") an aggregate of [__]
----------
shares of its Common Stock, par value $0.01 per share (the "Common Stock"); and
the stockholders of the Company named in Schedule B (collectively, the "Selling
----------
Stockholders") severally propose to sell to the Underwriters an aggregate of
[__] shares of Common Stock, each Selling Stockholder selling the number of
shares of Common Stock set forth opposite such Selling Stockholder's name on
Schedule B. The [__] shares of Common Stock to be sold by the Company and the
- ----------
[__] shares of Common Stock to be sold by the Selling Stockholders are
collectively called the "Firm Common Shares". In addition, the Company has
granted to the Underwriters an option to purchase up to an additional [__]
shares of Common Stock and the Selling Stockholders have severally granted to
the Underwriters an option to purchase up to an additional [__] shares of Common
Stock, each Selling Stockholder selling up to the amount set forth opposite such
Selling Stockholder's name in Schedule B, all as provided in Section 2. The
----------
additional [__] shares to be sold by the Company and the additional [__] shares
to be sold by the Selling Stockholders pursuant to such option are collectively
called the "Optional Common Shares". The Firm Common Shares and, if and to the
extent such option is exercised, the Optional Common Shares are collectively
called the "Common Shares".
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-l
(File No. 333-24611), which contains a form of prospectus to be used in
connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements, exhibits
and schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933 and the rules and regulations
promulgated thereunder (collectively, the "Securities Act"), including any
information deemed to be a part thereof at the time of effectiveness pursuant to
Rule 430A or Rule 434 under the Securities Act, is called the "Registration
Statement". Any registration statement filed by the Company pursuant to
Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration
Statement", and from and after the date and time of filing of the Rule 462(b)
Registration Statement the term "Registration Statement" shall include the
Rule 462(b) Registration Statement. Such prospectus, in the form first used by
the Underwriters to confirm sales of the Common Shares, is called the
"Prospectus"; provided, however, if the Company has, with the consent of
Montgomery Securities, elected to rely upon Rule 434 under the Securities Act,
the term "Prospectus" shall mean the Company's prospectus subject to completion
(each, a "preliminary prospectus") dated
1
<PAGE>
[__] (such preliminary prospectus is called the "Rule 434 preliminary
prospectus"), together with the applicable term sheet (the "Term Sheet")
prepared and filed by the Company with the Commission under Rules 434 and 424(b)
under the Securities Act and all references in this Agreement to the date of the
Prospectus shall mean the date of the Term Sheet. All references in this
Agreement to the Registration Statement, the Rule 462(b) Registration Statement,
a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or
supplements to any of the foregoing, shall include any copy thereof filed with
the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
The Company and each of the Selling Stockholders hereby confirms their
respective agreements with the Underwriters as follows:
Section 1. Representations and Warranties.
A. Representations and Warranties of the Company. The Company hereby
represents, warrants and covenants to each Underwriter and each Selling
Stockholder as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge
of the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed
by electronic transmission pursuant to EDGAR (except as may be
permitted by Regulation S-T under the Securities Act), was identical to
the copy thereof delivered to the Underwriters for use in connection
with the offer and sale of the Common Shares. Each of the Registration
Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective and
at all subsequent times, complied and will comply in all material
respects with the Securities Act and did not and will not contain 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. The Prospectus, as amended or supplemented, as
of its date and at all subsequent times, did not and will not contain
any untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading. The
representations and warranties set forth in the two immediately
preceding sentences do not apply to statements in or omissions from the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment thereto, or the Prospectus, or any amendments
or supplements thereto, made in reliance upon and in conformity with
information relating to any Underwriter furnished to the Company in
writing by the Representative expressly for use therein. There are no
2
<PAGE>
contracts or other documents required to be described in the Prospectus
or to be filed as exhibits to the Registration Statement which have not
been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company has
delivered to each Underwriter one complete manually signed copy of the
Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration
Statement (without exhibits) and preliminary prospectuses and the
Prospectus, as amended or supplemented, in such quantities and at such
places as each Underwriter has reasonably requested.
(c) Distribution of Offering Material By the Company. The Company
has not distributed and will not distribute, prior to the later of the
Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material
in connection with the offering and sale of the Common Shares other
than a preliminary prospectus, the Prospectus or the Registration
Statement.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting the rights and remedies of creditors or
by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly
authorized for issuance and sale pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement, will be
validly issued, fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There are
no persons with registration or other similar rights to have any equity
or debt securities registered for sale under the Registration Statement
or included in the offering contemplated by this Agreement, other than
the Selling Stockholders with respect to the Common Shares included in
the Registration Statement, except for such persons whose rights have
been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects,
whether or not arising from transactions in the ordinary course of
business, of the Company and its subsidiaries, considered as one entity
(any such change is called a "Material Adverse Change"); (ii) the
Company and its subsidiaries, considered as one entity, have not
incurred any material liability or obligation, indirect, direct or
contingent, not in the ordinary course of business nor entered into any
material transaction or agreement not in the ordinary course of
business; and (iii) there has been no dividend or distribution of any
kind declared, paid or made by the Company or, except for dividends
paid to the Company or other subsidiaries,
3
<PAGE>
any of its subsidiaries on any class of capital stock or repurchase or
redemption by the Company or any of its subsidiaries of any class of
capital stock.
(h) Independent Accountants. Ernst & Young, LLP and McGladrey &
Pullen, LLP, who have expressed their opinion with respect to the
financial statements (which term as used in this Agreement includes the
related notes thereto) and supporting schedules filed with the
Commission as a part of the Registration Statement and included in the
Prospectus, are independent public or certified public accountants as
required by the Securities Act and the Exchange Act.
(i) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the
consolidated financial position of the Company and its subsidiaries as
of and at the dates indicated and the results of their operations and
cash flows for the periods specified. The supporting schedules included
in the Registration Statement present fairly the information required
to be stated therein. Such financial statements and supporting
schedules have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the
periods involved, except as may be expressly stated in the related
notes thereto. No other financial statements or supporting schedules
are required to be included in the Registration Statement. The
financial data set forth in the Prospectus under the captions
"Prospectus Summary -- Summary Selected Financial Data", "Selected
Historical Financial Data," "Pro Forma Financial Information" and
"Capitalization" fairly present the information set forth therein on a
basis consistent with that of the audited financial statements
contained in the Registration Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus and, in the
case of the Company, to enter into and perform its obligations under
this Agreement. Each of the Company and each subsidiary is duly
qualified as a foreign corporation to transact business and is in good
standing in the State of Maryland and each other jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except for such
jurisdictions (other than the State of Maryland) where the failure to
so qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change. All of the issued and
outstanding capital stock of each subsidiary has been duly authorized
and validly issued, is fully paid and nonassessable and is owned by the
Company, directly or through subsidiaries, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or claim. The
Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries
listed in Exhibit 21.1 to the Registration Statement.
4
<PAGE>
(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" (other
than for subsequent issuances, if any, pursuant to employee benefit
plans described in the Prospectus or upon exercise of outstanding
options described in the Prospectus). The Common Stock (including the
Common Shares) conforms in all material respects to the description
thereof contained in the Prospectus. All of the issued and outstanding
shares of Common Stock (including the shares of Common Stock owned by
Selling Stockholders) have been duly authorized and validly issued, are
fully paid and nonassessable and have been issued in compliance with
federal and state securities laws. None of the outstanding shares of
Common Stock were issued in violation of any preemptive rights, rights
of first refusal or other similar rights to subscribe for or purchase
securities of the Company. There are no authorized or outstanding
options, warrants, preemptive rights, rights of first refusal or other
rights to purchase, or equity or debt securities convertible into or
exchangeable or exercisable for, any capital stock of the Company or
any of its subsidiaries other than those accurately described in the
Prospectus. The description of the Company's stock option, stock bonus
and other stock plans or arrangements, and the options or other rights
granted thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Stock (including the Common
Shares) is registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act") and is listed on the Nasdaq
National Market, and the Company has taken no action designed to, or
likely to have the effect of, terminating the registration of the
Common Stock under the Exchange Act or delisting the Common Stock from
the Nasdaq National Market, nor has the Company received any
notification that the Commission or the National Association of
Securities Dealers, Inc. (the "NASD") is contemplating terminating such
registration or listing.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of
its subsidiaries is in violation of its charter or by-laws or is in
default (or, with the giving of notice or lapse of time, would be in
default) ("Default") under any indenture, mortgage, loan or credit
agreement, note, contract, franchise, lease or other instrument to
which the Company or any of its subsidiaries is a party or by which it
or any of them may be bound, or to which any of the property or assets
of the Company or any of its subsidiaries is subject (each, an
"Existing Instrument"), except for such Defaults as would not,
individually or in the aggregate, result in a Material Adverse Change.
The Company's execution, delivery and performance of this Agreement and
consummation of the transactions contemplated hereby and by the
Prospectus (i) have been duly authorized by all necessary corporate
action and will not result in any violation of the provisions of the
charter or by-laws of the Company or any subsidiary, (ii) will not
conflict with or constitute a breach of, or Default under, or result in
the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries pursuant
to, or require the consent of any other part to, any Existing
Instrument, except for such conflicts, breaches, Defaults, liens,
charges or encumbrances as would not, individually
5
<PAGE>
or in the aggregate, result in a Material Adverse Change and (iii) will
not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any
subsidiary. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental or
regulatory authority or agency, is required for the Company's
execution, delivery and performance of this Agreement and consummation
of the transactions contemplated hereby and by the Prospectus, except
such as have been obtained or made by the Company and are in full force
and effect under the Securities Act, applicable state securities or
blue sky laws and from the National Association of Securities Dealers,
Inc. (the "NASD").
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of
the Company's knowledge, threatened (i) against or affecting the
Company or any of its subsidiaries, (ii) which has as the subject
thereof any officer or director of, or property owned or leased by, the
Company or any of its subsidiaries or (iii) relating to environmental
or discrimination matters, where in any such case (A) there is a
reasonable possibility that such action, suit or proceeding might be
determined adversely to the Company or such subsidiary and (B) any such
action, suit or proceeding, if so determined adversely, would
reasonably be expected to result in a Material Adverse Change or
adversely affect the consummation of the transactions contemplated by
this Agreement. No material labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the best of the
Company's knowledge, is threatened or imminent.
(o) Intellectual Property Rights. The Company and its subsidiaries
own or possess sufficient trademarks, trade names, patent rights,
copyrights, licenses, approvals, trade secrets and other similar rights
(collectively, "Intellectual Property Rights") reasonably necessary to
conduct their businesses as now conducted; and the expected expiration
of any of such Intellectual Property Rights would not result in a
Material Adverse Change. Neither the Company nor any of its
subsidiaries has received any notice of infringement or conflict with
asserted Intellectual Property Rights of others, which infringement or
conflict, if the subject of an unfavorable decision, would result in a
Material Adverse Change.
(p) All Necessary Permits, etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct their respective businesses, and neither
the Company nor any subsidiary has received any notice of proceedings
relating to the revocation or modification of, or noncompliance with,
any such certificate, authorization or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could result in a Material Adverse Change.
(q) Title to Properties. The Company and each of its subsidiaries
has good and marketable title to all the properties and assets
reflected as owned in the financial statements referred to in Section
l(A) (i) above in each case free and clear of any security interests,
mortgages, liens, encumbrances, equities, claims and other defects,
except such
6
<PAGE>
as do not materially and adversely affect the value of such property
and do not materially interfere with the use made or proposed to be
made of such property by the Company or such subsidiary. The real
property, improvements, equipment and personal property held under
lease by the Company or any subsidiary are held under valid and
enforceable leases, with such exceptions as are not material and do not
materially interfere with the use made or proposed to be made of such
real property, improvements, equipment or personal property by the
Company or such subsidiary.
(r) Tax Law Compliance. The Company and its consolidated
subsidiaries have filed all necessary federal, state and foreign income
and franchise tax returns or have properly requested extensions thereof
and have paid all taxes required to be paid by any of them and, if due
and payable, any related or similar assessment, fine or penalty levied
against any of them except as may be being contested in good faith and
by appropriate proceedings. The Company has made adequate charges,
accruals and reserves in the applicable financial statements referred
to in Section l(A)(i) above in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has
not been finally determined.
(s) Company Not an "Investment Company". The Company has been
advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company is not,
and after receipt of payment for the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act and
will conduct its business in a manner so that it will not become
subject to the Investment Company Act.
(t) Insurance. Each of the Company and its subsidiaries are
insured by recognized, financially sound and reputable institutions
with policies in such amounts and with such deductibles and covering
such risks as are generally deemed adequate and customary for their
businesses including, but not limited to, policies covering real and
personal property owned or leased by the Company and its subsidiaries
against theft, damage, destruction, acts of vandalism and earthquakes.
The Company has no reason to believe that it or any subsidiary will not
be able (i) to renew its existing insurance coverage as and when such
policies expire or (ii) to obtain comparable coverage from similar
institutions as may be necessary or appropriate to conduct its business
as now conducted and at a cost that would not result in a Material
Adverse Change. Neither of the Company nor any subsidiary has been
denied any insurance coverage which it has sought or for which it has
applied.
(u) No Price Stabilization or Manipulation. 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.
7
<PAGE>
(v) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required to be described in the Prospectus
which have not been described as required.
(w) No Unlawful Contributions or Other Payments. Neither the
Company nor any of its subsidiaries nor, to the best of the Company's
knowledge, any employee or agent of the Company or any subsidiary, has made
any contribution or other payment to any official of, or candidate for, any
federal, state or foreign office in violation of any law or of the character
required to be disclosed in the Prospectus.
(x) Company's Accounting System. The Company maintains a system of
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles as applied in the United States 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.
Any certificate signed by an officer of the Company and delivered to
the Underwriters or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
B. Representations and Warranties of the Selling Stockholders. Each Selling
Stockholder, as to itself only, severally, and not jointly and severally,
represents, warrants and covenants to each Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification hereunder may be limited by applicable law and except as the
enforcement hereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Stockholder and [__], as custodian
(the "Custodian"), relating to the deposit of the Common Shares to be sold
by such Selling Stockholder (the "Custody Agreement") and (ii) Power of
Attorney appointing certain individuals named therein as such Selling
Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent
set forth therein relating to the transactions contemplated hereby and by
the Prospectus (the "Power of Attorney"), has been duly authorized, executed
and delivered by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its
terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization,
8
<PAGE>
moratorium or other similar laws relating to or affecting the rights and
remedies of creditors or by general equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations
Obtained. Such Selling Stockholder has, and on the First Closing Date and
the Second Closing Date (as defined below) will have, good and valid title
to all of the Common Shares which may be sold by such Selling Stockholder
pursuant to this Agreement on such date and the legal right and power, and
all authorizations and approvals required by law and under its charter or
by-laws, partnership agreement or other organizational documents, if such
Selling Stockholder is not an individual, to enter into this Agreement and
its Custody Agreement and Power of Attorney, to sell, transfer and deliver
all of the Common Shares which may be sold by such Selling Stockholder
pursuant to this Agreement and to comply with its other obligations
hereunder and thereunder.-
(d) Delivery of the Common Shares to be Sold. Delivery of the
Common Shares which are sold by such Selling Stockholder pursuant to this
Agreement will pass good and valid title to such Common Shares, free and
clear of any security interest, mortgage, pledge, lien, encumbrance or other
claim.
(e) Non-Contravention; No Further Authorizations or Approvals
Required. The execution and delivery by such Selling Stockholder of, and the
performance by such Selling Stockholder of its obligations under, this
Agreement, the Custody Agreement and the Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a Default
under, or require the consent of any other party to, the charter or by-laws,
partnership agreement or other organizational documents of such Selling
Stockholder, if such Selling Stockholder is not an individual, or any other
agreement or instrument to which such Selling Stockholder is a party or by
which it is bound or under which it is entitled to any right or benefit, any
provision of applicable law or any judgment, order, decree or regulation
applicable to such Selling Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such Selling Stockholder. No consent, approval, authorization or other
order of, or registration or filing with, any court or other governmental
authority or agency, is required for the consummation by such Selling
Stockholder of the transactions contemplated in this Agreement, except such
as have been obtained or made and are in full force and effect under the
Securities Act, applicable state securities or blue sky laws and from the
NASD.
(f) No Registration or Other Similar Rights. Such Selling
Stockholder does not have any registration or other similar rights to have
any equity or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale".
(g) No Further Consents, etc.. Except for the (i) exercise by such
Selling Stockholder of certain piggyback registration rights pursuant to the
Registration Rights Agreement dated as of November, 1996 (which registration
rights have been duly exercised pursuant thereto), and (ii) consent of such
Selling Stockholder to the respective number of Common
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<PAGE>
Shares to be sold by all of the Selling Stockholders pursuant to this
Agreement no consent, approval or waiver is required under any instrument or
agreement to which such Selling Stockholder is a party or by which it is
bound or under which it is entitled to any right or benefit, in connection
with the offering, sale or purchase by the Underwriters of any of the Common
Shares which may be sold by such Selling Stockholder under this Agreement or
the consummation by such Selling Stockholder of any of the other
transactions contemplated hereby.
(h) Disclosure Made by Such Selling Stockholder in the Prospectus.
All information furnished by or on behalf of such Selling Stockholder in
writing expressly for use in the Registration Statement and Prospectus is,
and on the First Closing Date and the Second Closing Date will be, true,
correct, and complete in all material respects, and does not, and on the
First Closing Date and the Second Closing Date will not, contain any untrue
statement of a material fact or omit to state any material fact necessary to
make such information not misleading. Such Selling Stockholder confirms as
accurate the number of shares of Common Stock set forth opposite such
Selling Stockholder's name in the Prospectus under the caption "Principal
and Selling Stockholders" (both prior to and after giving effect to the sale
of the Common Shares).
(i) No Price Stabilization or Manipulation. Such Selling
Stockholder 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.
(j) Confirmation of Company Representations and Warranties. Such
Selling Stockholder is not prompted to sell shares of Common Stock by any
information concerning the Company which is not set forth in the
Registration Statement and the Prospectus.
Any certificate signed by or on behalf of any Selling Stockholder and
delivered to the Underwriters or to counsel for the Underwriters shall be deemed
to be a representation and warranty by such Selling Stockholder to each
Underwriter as to the matters covered thereby.
Section 2. Purchase, Sale and Delivery of Common Shares.
The Firm Common Shares. Upon the terms herein set forth, (i) the Company
agrees to issue and sell to the several Underwriters an aggregate of [__] Firm
Common Shares and (ii) the Selling Stockholders severally, and not jointly and
severally, agree to sell to the several Underwriters an aggregate of [__] Firm
Common Shares, each Selling Stockholder severally, and not jointly and
severally, selling the number of Firm Common Shares set forth opposite such
Selling Stockholder's name on Schedule B. On the
----------
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set
10
<PAGE>
forth, the Underwriters agree, severally and not jointly, to purchase from the
Company and the Selling Stockholders the respective number of Firm Common Shares
set forth opposite their names on Schedule A. The purchase price per Firm Common
----------
Share to be paid by the several Underwriters to the Company and the Selling
Stockholders shall be $[__] per share.
The First Closing Date. 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 to by the Company and the
Underwriters) at 6:00 a.m. San Francisco time, on [__], or such other time and
date not later than 10:30 a.m. San Francisco time, on [__] as the Underwriters
shall designate by notice to the Company (the time and date of such closing are
called the "First Closing Date"). The Company and the Selling Stockholders
hereby acknowledge[s] that circumstances under which the Underwriters may
provide notice to postpone the First Closing Date as originally scheduled
include, but are in no way limited to, any determination by the Company , the
Selling Stockholders or the Underwriters to recirculate to the public copies of
an amended or supplemented Prospectus or a delay as contemplated by the
provisions of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the Company
and the Selling Stockholders severally, and not jointly and severally, hereby
grant an option to the several Underwriters to purchase, severally and not
jointly, up to an aggregate of [__] Optional Common Shares from the Company and
the Selling Stockholders at the purchase price per share to be paid by the
Underwriters for the Firm Common Shares such number of shares of Common Stock
set forth below. The option granted hereunder is for use by the Underwriters
solely in covering any over-allotments in connection with the sale and
distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the Underwriters
to the Company and the Selling Stockholders, which notice may be given at any
time within 30 days from the date of this Agreement. Such notice shall set forth
(i) the aggregate number of Optional Common Shares as to which the Underwriters
are exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Underwriters and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, (a) each Underwriter agrees, severally and not
jointly, to purchase the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Underwriters may determine)
that bears the same proportion to the total number of Optional Common Shares to
be purchased as the number of Firm Common Shares set forth on Schedule A
----------
opposite the name of such Underwriter bears to the total number of Firm Common
Shares and (b) the Company and each Selling Stockholder agree, severally and not
jointly, to sell the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Underwriters may determine)
that bears the same proportion to the total number of Optional
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<PAGE>
Common Shares to be sold as the number of Optional Common Shares set forth in
Schedule B opposite the name of such Selling Stockholder (or, in the case of the
- ----------
Company, as the number of Optional Common Shares to be sold by the Company as
set forth in the paragraph "Introductory" of this Agreement) bears to the total
number of Optional Common Shares. The Underwriters may cancel the option at any
time prior to its expiration by giving written notice of such cancellation to
the Company and the Selling Stockholders.
Public Offering of the Common Shares. The Underwriters hereby advise
the Company and the Selling Stockholders that the Underwriters intend to offer
for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Underwriters, in
its sole judgment, has determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares to be sold
by the Company shall be made at the First Closing Date (and, if applicable, at
the Second Closing Date) by wire transfer of immediately available funds to the
order of the Company. Payment for the Common Shares to be sold by the Selling
Stockholders shall be made at the First Closing Date (and, if applicable, at the
Second Closing Date) by wire transfer of immediately available funds to the
order of the Custodian.
It is understood that Montgomery Securities has been authorized, for
its own account and the accounts of the several Underwriters, to accept delivery
of and receipt for, and make payment of the purchase price for, the Firm Common
Shares and any Optional Common Shares the Underwriters have agreed to purchase.
Montgomery Securities, individually, 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 Montgomery Securities 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.
Each Selling Stockholder hereby agrees that (i) it will pay all stock
transfer taxes, stamp duties and other similar taxes, if any, payable upon the
sale or delivery of the Common Shares to be sold by such Selling Stockholder to
the several Underwriters, or otherwise in connection with the performance of
such Selling Stockholder's obligations hereunder and (ii) the Custodian is
authorized to deduct for such payment any such amounts from the proceeds to such
Selling Stockholder hereunder and to hold such amounts for the account of such
Selling Stockholder with the Custodian under the Custody Agreement.
Delivery of the Common Shares. The Company and the Selling Stockholders
shall deliver, or cause to be delivered, to Montgomery Securities for the
accounts of the several Underwriters certificates for the Firm Common Shares to
be sold by them at the First Closing Date, against the irrevocable release of a
wire transfer of immediately available funds for the amount of the purchase
price therefor. The Company and the Selling Stockholders shall also deliver, or
cause to be delivered, to Montgomery Securities for the accounts of the several
Underwriters, certificates for the Optional Common Shares the Underwriters have
agreed to purchase from them at the First Closing Date or the Second Closing
Date, as the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of
12
<PAGE>
the purchase price therefor. The certificates for the Common Shares shall be in
definitive form and registered in such names and denominations as the
Underwriters shall have requested at least two full business days prior to the
First Closing Date (or the Second Closing Date, as the case may be) and shall be
made available for inspection on the business day preceding the First Closing
Date (or the Second Closing Date, as the case may be) at a location in New York
City as Montgomery Securities may designate. 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.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares of released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Underwriters shall request.
Section 3. Additional Covenants.
A. Covenants of the Company. The Company further covenants and
agrees with each Underwriter and each Selling Stockholder as follows:
(a) Review of Proposed Amendments and Supplements. During such
period beginning on the date hereof and ending on the later of the
First Closing Date or such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be
delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed
under Rule 462(b) under the Securities Act) or the Prospectus
(including any amendment or supplement through incorporation by
reference of any report filed under the Exchange Act), the Company
shall furnish to Montgomery Securities and each Selling Stockholder for
review a copy of each such proposed amendment or supplement, and the
Company shall not file any such proposed amendment or supplement to
which Montgomery Securities and each Selling Stockholder reasonably
objects.
(b) Securities Act Compliance. After the date of this
Agreement, the Company shall promptly advise the Underwriters and each
Selling Stockholder in writing (i) of the receipt of any comments of,
or requests for additional or supplemental information from, the
Commission, (ii) of the time and date of any filing of any post-
effective amendment to the Registration Statement or any amendment or
supplement to any preliminary prospectus or the Prospectus, (iii) of
the time and date that any post-effective amendment to the Registration
Statement becomes effective and (iv) of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereto or of any order
preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon
which it is listed for trading or included or designated for quotation,
or of the threatening or initiation of any proceedings for any of such
purposes. 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. Additionally,
13
<PAGE>
the Company agrees that it shall comply with the provisions of Rules
424(b), 430A and 434, as applicable, under the Securities Act and will
use its reasonable efforts to confirm that any filings made by the
Company under such Rule 424(b) were received in a timely manner by the
Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if in the
opinion of the Underwriters or counsel for the Underwriters it is
otherwise necessary to amend or supplement the Prospectus to comply
with law, the Company agrees to promptly prepare (subject to Section
3(A)(a) hereof), file with the Commission and furnish at its own
expense to the Underwriters and to dealers, amendments or supplements
to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with law.
(d) Copies of any Amendments and Supplements to the
Prospectus. The Company agrees to furnish the Underwriters, without
charge, during the Prospectus Delivery Period, as many copies of the
Prospectus and any amendments and supplements thereto as the
Underwriters may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Underwriters and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the Blue Sky or state securities laws of those
jurisdictions designated by the Underwriters, shall comply with such
laws and shall continue such qualifications, registrations and
exemptions in effect so long as required for the distribution of the
Common Shares. The Company shall not be required to qualify as a
foreign corporation or to take any action that would subject it to
general 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 the Underwriters 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
shall use its best efforts to obtain the withdrawal thereof at the
earliest possible moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described
under the caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
14
<PAGE>
(h) Earnings Statement. As soon as practicable, the Company
will make generally available to its security holders and to the
Underwriters an earnings statement (which need not be audited) covering
the twelve-month period ending [__] that satisfies the provisions of
Section 11(a) of the Securities Act.
(j) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and the Nasdaq National Market all reports and documents
required to be filed under the Exchange Act.
(k) Agreement Not To Offer or Sell Additional Securities.
During the period of 90 days following the date of the Prospectus, the
Company will not, without the prior written consent of Montgomery
Securities (which consent may be withheld at the sole discretion of
Montgomery Securities), directly or indirectly, sell, offer, contract
or grant any option to sell, pledge, transfer or establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of, or transfer, or announce the
offering of, or file any registration statement under the Securities
Act in respect of, any shares of Common Stock, options or warrants to
acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than
as contemplated by this Agreement with respect to the Common Shares);
provided, however, that the Company may issue shares of its Common
Stock (i) upon exercise of outstanding options under the HealthCare
Financial Partners, Inc. 1996 Stock Incentive Plan and the HealthCare
Financial Partners, Inc. 1996 Director Incentive Plan (collectively,
the "Plans") and the Company may grant options or similar rights to
acquire shares of the Common Stock under the Plans, or (ii) in
connection with merger or acquisition transactions not involving a
public offering.
(l) Future Reports to the Underwriters. During the period of
five years hereafter the Company will furnish to the Underwriters, c/o
Montgomery Securities at 600 Montgomery Street, San Francisco, CA
94111, Attention: Kathy Smythe: (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 or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form l0-K, Quarterly Report on Form l0-Q, Current
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 capital stock.
B. Covenants of the Selling Stockholders. Each Selling Stockholder,
as to itself only, severally, and not jointly and severally, further covenants
and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such
Selling Stockholder will not, without the prior written consent of
Montgomery Securities (which consent may be withheld in its sole
discretion), directly or indirectly, sell, offer, contract or grant any
option to sell (including without limitation any short sale), pledge,
transfer, establish an open "put equivalent position," within the
meaning of Rule 16a-l(h) under
15
<PAGE>
the Exchange Act, or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common
Stock currently or hereafter owned either of record or beneficially (as
defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's
intention to do any of the foregoing, for a period commencing on the
date hereof and continuing through the close of trading on the date 90
days after the date of the Prospectus.
(b) Delivery of Forms W-8 and W-9. To deliver to Montgomery
Securities prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Stockholder is a non-United States person) or Form W-9 (if the Selling
Stockholder is a United States Person).
Montgomery Securities, on behalf of the several Underwriters, may, in
its sole discretion, waive in writing the performance by the Company or any
Selling Stockholder of any one or more of the foregoing covenants or extend the
time for their performance.
Section 4. Payment of Expenses. The Company agrees to pay all costs,
fees and expenses incurred in connection with the performance of their
obligations hereunder and in connection with the transactions contemplated
hereby, including without limitation (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 by the Company to the
Underwriters, (iv) all fees and expenses of the Company's counsel, independent
public or certified public accountants and other advisors, (v) all costs and
expenses incurred in connection with the preparation, printing, filing, shipping
and distribution of the Registration Statement (including financial statements,
exhibits, schedules, consents and certificates of experts), each preliminary
prospectus and the Prospectus, and all amendments and supplements thereto, and
this Agreement, (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 laws, and, if
requested by the Underwriters, preparing and printing a "Blue Sky Survey" or
memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, (vii) the filing fees incident to,
and the reasonable fees and expenses of counsel for the Underwriters in
connection with, the NASD's review and approval of the Underwriters'
participation in the offering and distribution of the Common Shares, (viii) the
fees and expenses associated with including the Common Shares on the Nasdaq
National Market, and (ix) all other fees, costs and expenses referred to in Item
14 of Part II of the Registration Statement. Except as provided in this Section
4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their
own expenses, including the fees and disbursements of their counsel.
The Selling Stockholders severally, and not jointly and severally,
further agree with each Underwriter to pay (directly or by reimbursement) all
fees and expenses (not otherwise payable by the Company) incident to the
performance of their obligations under this Agreement which are not otherwise
specifically provided for herein, including but not limited to
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(i) fees and expenses of counsel and other advisors for such Selling
Stockholders (ii) fees and expenses of the Custodian and (iii) expenses and
taxes incident to the sale and delivery of the Common Shares to be sold by such
Selling Stockholders to the Underwriters hereunder (which taxes, if any, may be
deducted by the Custodian under the provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the Selling Stockholders, on the other hand.
Section 5. Conditions of the Obligations of the Underwriters. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the Selling Stockholders set forth in Sections 1(A) and 1(B) hereof as of the
date hereof and as of the First Closing Date as though then made and, with
respect to the Optional Common Shares, as of the Second Closing Date as though
then made, to the timely performance by the Company and the Selling Stockholders
of their respective covenants and other obligations hereunder, and to each of
the following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Underwriters shall have received from Ernst & Young LLP and McGladrey &
Pullen LLP, independent public or certified public accountants for the
Company, a letter dated the date hereof addressed to the Underwriters,
in form and substance satisfactory to the Underwriters , containing
statements and information of the type ordinarily included in
accountant's "comfort letters" to underwriters, delivered according to
Statement of Auditing Standards No. 72 (or any successor bulletin),
with respect to the audited and unaudited financial statements and
certain financial information contained in the Registration Statement
and the Prospectus.
(b) Compliance with Registration Requirements; No Stop Order;
No Objection from NASD. For the period from and after effectiveness of
this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A
under the Securities Act) in the manner and within the time
period required by Rule 424(b) under the Securities Act; or the
Company shall have filed a post-effective amendment to the
Registration Statement containing the information required by
such Rule 430A, and such post-effective amendment shall have
become effective; or, if the Company elected to rely upon Rule
434 under the Securities Act and obtained the Underwriter's
consent thereto, the Company shall have filed a Term Sheet with
the Commission in the manner and within the time period
required by such Rule 424(b);
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(ii) no stop order suspending the effectiveness of
the Registration Statement, any Rule 462(b) Registration
Statement, or any post-effective amendment to the Registration
Statement, shall be in effect and no proceedings for such
purpose shall have been instituted or threatened by the
Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and
arrangements.
(c) No Material Adverse Change or Ratings Agency Change.
For the period from and after the date of this Agreement and prior to
the First Closing Date and, with respect to the Optional Common Shares,
the Second Closing Date:
(i) in the reasonable judgment of the Underwriters
there shall not have occurred any Material Adverse Change; and
(ii) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any securities of the Company or any of
its subsidiaries by any "nationally recognized statistical
rating organization" as such term is defined for purposes of
Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of
the First Closing Date and the Second Closing Date the Underwriters
shall have received the favorable opinion of Powell, Goldstein, Frazer
& Murphy LLP, counsel for the Company, dated as of such Closing Date,
the form of which is attached as Exhibit A.
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(e) Opinion of Counsel for the Underwriters. On
each of the First Closing Date and the Second Closing Date the
Underwriters shall have received the favorable opinion of Gibson, Dunn
& Crutcher LLP, counsel for the Underwriters, dated as of such Closing
Date, with respect to the incorporation and good standing of the
Company, the sufficiency of all corporate proceedings and other legal
matters relating to this Agreement, the validity of the issuance of the
Common Shares, the Registration Statement and the Prospectus and other
related matters as you may reasonably require.
(f) Officers' Certificate. On each of the First
Closing Date and the Second Closing Date the Underwriters shall have
received a written certificate executed by the Chairman of the Board,
Chief Executive Officer or President of the Company and the Chief
Financial Officer or Chief Accounting Officer of the Company, dated as
of such Closing Date, to the effect set forth in subsections (b)(ii)
and (c)(ii) of this Section 5, and further to the effect that:
(i) for the period from and after the date of this
Agreement and prior to such Closing Date, there has not
occurred any Material Adverse Change;
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(ii) the representations, warranties and covenants
of the Company set forth in Section 1(A) of this Agreement are
true and correct with the same force and effect as though
expressly made on and as of such Closing Date; and
(iii) the Company has complied with all the
agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date.
(g) Bring-Down Comfort Letter. On each of the First
Closing Date and the Second Closing Date the Underwriters shall have
received from Ernst & Young, LLP and McGladrey & Pullen, LLP,
independent public or certified public accountants for the Company, a
letter dated such date, in form and substance satisfactory to the
Underwriters, to the effect that they reaffirm the statements made in
the letter furnished by them pursuant to subsection (a) of this Section
5, except that the specified date referred to therein for the carrying
out of procedures shall be no more than three business days prior to
the First Closing Date or Second Closing Date, as the case may be.
(h) Opinion of Counsel for the Selling Stockholders. On
each of the First Closing Date and the Second Closing Date the
Underwriters shall have received the favorable opinion of Richards,
Spears, Kibbe & Orbe and Powell, Goldstein, Frazer & Murphy LLP,
counsel for certain Selling Stockholders, respectively, dated as of
such Closing Date, the form of which is attached as Exhibit B.
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(i) Selling Stockholders' Certificate. On each of the
First Closing Date and the Second Closing Date the Underwriters shall
receive a written certificate executed by the Attorney-in-Fact of each
Selling Stockholder, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants
of such Selling Stockholder set forth in Section 1(B) of this
Agreement are true and correct with the same force and effect
as though expressly made by such Selling Stockholder on and as
of such Closing Date; and
(ii) such Selling Stockholder has complied with all
the agreements and satisfied all the conditions on its part to
be performed or satisfied at or prior to such Closing Date.
(j) Selling Stockholders' Documents. On the date hereof,
the Company and the Selling Stockholders shall have furnished for
review by the Underwriters copies of the Powers of Attorney and Custody
Agreements executed by each of the Selling Stockholders and such
further information, certificates and documents as the Underwriters may
reasonably request.
(k) Lock-Up Agreement from Certain Stockholders of the
Company Other Than Selling Stockholders. On the date hereof, the
Company shall have furnished to the Underwriters an agreement in the
form of Exhibit C hereto from the Stockholders of the Company set forth
---------
on Appendix A to Exhibit C, and such agreement shall be in full force
---------
and effect on each of the First Closing Date and the Second Closing
Date.
19
<PAGE>
(l) Additional Documents. On or before each of the First
Closing Date and the Second Closing Date, the Underwriters and counsel
for the Underwriters shall have received such information, documents
and opinions as they may reasonably require for the purposes of
enabling them to pass upon the issuance and sale of the Common Shares
as contemplated herein, or in order to evidence the accuracy of any of
the representations and warranties, or the satisfaction of any of the
conditions or agreements, herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by Montgomery
Securities by notice to the Company and the Selling Stockholders at any time on
or prior to the First Closing Date and, with respect to the Optional Common
Shares, at any time prior to the Second Closing Date, which termination shall be
without liability on the part of any party to any other party, except that
Section 4, Section 6, Section 8 and Section 9 shall at all times be effective
and shall survive such termination.
Section 6. Reimbursement of Underwriters' Expenses. If this Agreement
is terminated by Montgomery Securities pursuant to Section 5, Section 11 (but
only with respect to a termination as a result of a Material Adverse Change
relating to the Company) or Section 17, or if the sale to the Underwriters of
the Common Shares on the First Closing Date 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 the Underwriters (or such Underwriters as have terminated this
Agreement with respect to themselves), severally, upon demand for all out-of-
pocket expenses (the "Reimbursable Expenses") that shall have been reasonably
incurred by the Underwriters in connection with the proposed purchase and the
offering and sale of the Common Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage, facsimile
and telephone charges. In the event the sale to the Underwriters of the Common
Stock on the First Closing Date is not consummated because of any refusal,
inability or failure on the part of any Selling Stockholder to perform any
agreement herein or to comply with any provision hereof, such Selling
Shareholder shall reimburse the Underwriter (or such Underwriters as have
terminated this Agreement with respect to themselves), severally, upon demand
for all the Reimbursable Expenses.
Section 7. Effectiveness of this Agreement.
This Agreement shall not become effective until the later of (i) the
execution of this Agreement by the parties hereto and (ii) notification by the
Commission to the Company and the Representative of the effectiveness of the
Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated by any
party by notice to each of the other parties hereto, and any such termination
shall be without liability on the part of (a) the Company or the Selling
Stockholders to any Underwriter, except that the Company shall be obligated to
reimburse the expenses of the Underwriters pursuant to Sections 4 and 6 hereof,
(b) of any Underwriter to the Company or the Selling Stockholders, or (c) of any
party hereto to any other party except that the provisions of Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
Section 8. Indemnification.
(a) Indemnification of the Underwriters. The Company
agrees to indemnify and hold harmless each
20
<PAGE>
Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and
the Exchange Act against any loss, claim, damage, liability or expense,
as incurred, to which such Underwriter or such controlling person may
become subject, under the Securities 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 loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based
(i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule
430A or Rule 434 under the Securities Act, or the omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary to make the statements therein not misleading; or (ii) upon
any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company contained herein; or (iv)
in whole or in part upon any failure of the Company to perform its
respective obligations hereunder or under law; or (v) any act or
failure to act or any alleged act or failure to act by any Underwriter
in connection with, or relating in any manner to, the Common Stock or
the offering contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or action arising out
of or based upon any matter covered by clause (i) or (ii) above,
provided that the Company shall not be liable under this clause (v) to
the extent that a court of competent jurisdiction shall have determined
by a final judgment that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by Montgomery Securities) 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 foregoing
indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity
with written information furnished to the Company and the Selling
Stockholders by the Underwriters expressly for use in the Registration
Statement, any preliminary prospectus or the Prospectus (or any
amendment or supplement thereto); and provided, further, that with
respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom
the person asserting any loss, claim, damage, liability or expense
purchased Common Shares, or any person controlling such Underwriter, if
copies of the Prospectus were timely delivered to the Underwriter
pursuant to Section 2 and a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent
21
<PAGE>
or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if
the Prospectus (as so amended or supplemented) would have cured the
defect giving rise to such loss, claim, damage, liability or expense;
and provided, further, that the Company and the Selling Stockholders
may agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to the respective amounts of such
liability for which they shall be responsible. The indemnity agreement
set forth in this Section 8(a) shall be in addition to any liabilities
that the Company and the Selling Stockholders may otherwise have.
(b) Indemnification of the Company, its Directors and
Officers and Selling Stockholders. Each Underwriter agrees, severally
and not jointly, to indemnify and hold harmless the Company, each of
its directors, each of its officers who signed the Registration
Statement, the Selling Stockholders, each of its officers, partners and
each person, if any, who controls the Company or any Selling
Stockholder within the meaning of the Securities Act or the Exchange
Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director, officer, Selling
Stockholder, each of its officers, partners or controlling person may
become subject, under the Securities 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 loss, claim, damage, liability or expense (or actions
in respect thereof as contemplated below) arises out of or is based
upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or arises out
of or is 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 written
information furnished to the
Company and the Selling Stockholders by the Underwriters expressly for
use therein; and to reimburse the Company, or any such director,
officer, Selling Stockholder or controlling person for any legal and
other expense reasonably incurred by the Company, or any such director,
officer, Selling Stockholder or controlling person in connection with
investigating, defending, settling, compromising or paying any such
loss, claim, damage, liability, expense or action. The Company and each
of the Selling Stockholders hereby acknowledge that the only
information that the Underwriters have furnished to the Company and the
Selling Stockholders expressly for use in the Registration Statement,
any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto) are the statements set forth (A) as the last [two]
paragraphs on the inside front cover page of the Prospectus concerning
stabilization and passive market making by the Underwriters and (B) in
the table in the first paragraph and as the second paragraph under the
caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct. The indemnity agreement set forth in
this Section 8(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Selling Stockholder Indemnification. Each of the Selling
Stockholders severally, and not jointly and severally, agrees to
indemnify and hold harmless each Underwriter, its officers and
employees, and each person, if any, who controls any Underwriter within
the meaning of the Securities Act and the Exchange Act against any
loss, claim, damage, liability or expense, as incurred, to which such
Underwriter or such controlling person may become subject, under the
Securities 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 Selling Stockholder), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue or
alleged untrue statement of a material fact contained in the
Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto), or arises out of or is 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 written
information furnished by the respective Selling Stockholder to the
Company and the Underwriters expressly for use therein; (ii) in whole
or in part upon any inaccuracy in the representations and warranties of
such respective Selling Stockholder contained herein; or (iii) in whole
or in part upon any failure of such respective Selling Stockholder to
perform its respective obligations hereunder or under law, and to
reimburse each Underwriter and each such controlling person for any and
all expenses (including the fees and disbursements of counsel chosen by
Montgomery Securities) 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;
22
<PAGE>
(d) Notifications and Other Indemnification Procedures.
Promptly a after receipt by an indemnified party under this Section 8
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 8, 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 8 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 shall elect, jointly with
all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, 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 concluded that a conflict may arise 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 such indemnifying party's 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 8 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
separate counsel in accordance with the proviso to the next preceding
sentence (it being understood, however, that the indemnifying party
shall not be liable for the expenses of more than one separate counsel
(together with local counsel), approved by the indemnifying party
(Montgomery Securities in the case of Section 8(b) and Section 9),
representing the indemnified parties who are parties to such action) or
(ii) the indemnifying party shall not have employed counsel
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.
(e) Settlements. The indemnifying party under this Section 8
shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party
agrees to indemnify the indemnified party against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified
party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by
Section 8(c) hereof, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into
23
<PAGE>
more than 30 days after receipt by such indemnifying party of the
aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior
to the date of such settlement. No indemnifying party shall, without
the prior written consent of the indemnified party, effect any
settlement, compromise or consent to the entry of judgment in any
pending or threatened action, suit or proceeding in respect of which
any indemnified party is or could have been a party and indemnity was
or could have been sought hereunder by such indemnified party, unless
such settlement, compromise or consent includes an unconditional
release of such indemnified party from all liability on claims that are
the subject matter of such action, suit or proceeding.
Section 9. Contribution.
If the indemnification provided for in Section 8 is for any reason held
to be unavailable to or otherwise insufficient to hold harmless an indemnified
party in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then each indemnifying party shall contribute to the
aggregate amount paid or payable by such indemnified party, as incurred, as a
result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company, on the one hand, the Selling Stockholder, on
the other hand, and the Underwriters, on the other hand, from the offering of
the Common Shares pursuant to this `Agreement 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, on the one hand, the Selling
Stockholder, on the other hand, and the Underwriters, on the other hand, 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 relative benefits received by the Company, on the one hand,
the Selling Stockholder, on the other hand, and the Underwriters, on the other
hand, in connection with the offering of the Common Shares pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Common Shares pursuant to this Agreement
(before deducting expenses) received by the Company on the one hand and the
Selling Stockholders on the other hand, and the total underwriting discount
received by the Underwriters, in each case as set forth on the front cover page
of the Prospectus (or, if Rule 434 under the Securities Act is used, the
corresponding location on the Term Sheet) bear to the aggregate initial public
offering price of the Common Shares as set forth on such cover. The relative
fault of the Company, on the one hand, the Selling Stockholder, on the other
hand, and the Underwriters, on the other hand, shall be determined by reference
to, among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact or any
such inaccurate or alleged inaccurate representation or warranty relates to
information supplied by the Company on the one hand, the Selling Stockholder, on
the other hand, or the Underwriters, on the other hand, 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 Section 8(c), any legal or
other fees or expenses reasonably incurred by such party in
24
<PAGE>
connection with investigating or defending any action or claim. The provisions
set forth in Section 8(c) with respect to notice of commencement of any action
shall apply if a claim for contribution is to be made under this Section 9;
provided, however, that no additional notice shall be required with respect to
any action for which notice has been given under Section 8(c) for purposes of
indemnification.
The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 9
were determined by pro rata 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 this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall
be required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public nor shall any Selling Stockholder be
required to contribute in excess of the amount received. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities 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 9 are several, and not joint, in proportion
to their respective underwriting commitments as set forth opposite their names
in Schedule A. For purposes of this Section 9, each officer and employee of an
----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company. For purposes of
this Section 9, the liability of each Selling Stockholder shall be several, and
not joint and several, in proportion to the number of shares sold by each
Selling Stockholder set forth on Schedule B.
----------
Section 10. Default of One or More of the Several Underwriters. If, on
the First Closing Date or the Second Closing Date, as the case may be, any one
or more of the several Underwriters shall fail or refuse to purchase Common
Shares that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
----------
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representative with the consent of the non- defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representative and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 8 and
Section 9 shall at all times be effective and shall
25
<PAGE>
survive such termination. In any such case either the Representative or the
Company shall have the right to postpone the First Closing Date or the Second
Closing Date, as the case may be, but in no event for longer than seven days in
order that the required changes, if any, to the Registration Statement and the
Prospectus or any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
Section 11. Termination of this Agreement. Prior to the First Closing
Date this Agreement may be terminated by Montgomery Securities by notice given
to the Company and the Selling Stockholders if at any time (i) trading or
quotation in any of the Company's securities shall have been suspended or
limited by the Commission or by the Nasdaq Stock Market, or trading in
securities generally on either the Nasdaq Stock Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York or California authorities; (iii) there
shall have occurred any outbreak or escalation of national or international
hostilities or any crisis or calamity, or any change in the United States or
international financial markets, or any substantial change or development
involving a prospective substantial change in United States' or international
political, financial or economic conditions, as in the judgment of the
Underwriters is material and adverse and makes it impracticable to market the
Common Shares in the manner and on the terms described in the Prospectus or to
enforce contracts for the sale of securities; (iv) in the reasonable judgment
of the Underwriters there shall have occurred any Material Adverse Change; or
(v) the Company shall have sustained a loss by strike, fire, flood, earthquake,
accident or other calamity of such character as in the judgment of the
Underwriters may interfere materially with the conduct of the business and
operations of the Company regardless of whether or not such loss shall have been
insured. Any termination pursuant to this Section 11 shall be without liability
on the part of (a) the Company or the Selling Stockholders to any Underwriter,
except that the Company shall be obligated to reimburse the expenses of the
Underwriters and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any
Underwriter to the Company or the Selling Stockholders, or (c) of any party
hereto to any other party except that the provisions of Section 8 and Section 9
shall at all times be effective and shall survive such termination.
Section 12. Representations and Indemnities to Survive Delivery.
The respective indemnities, agreements, representations, warranties and
other statements of the Company, of its officers , of the Selling Stockholders
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, or the Selling Stockholders, as
the case may be, and will survive delivery of and payment for the Common Shares
sold hereunder and any termination of this Agreement.
26
<PAGE>
Section 13. Notices. All communications hereunder shall be in writing
and shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Underwriters:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
HealthCare Financial Partners, Inc.
2 Wisconsin Circle
Chevy Chase, MD 20815
Facsimile: (301) 664-9860
Attention: John K. Delaney
If to the Selling Stockholders:
[Custodian]
[address]
Facsimile: [__]
Attention: [__]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
Section 14. Successors. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives, and no
other person will have any right or obligation 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 15. Partial Unenforceability. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any
27
<PAGE>
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 16. Governing Law Provisions. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
Section 17. Failure of One or More of the Selling Stockholders to
Sell and Deliver Common Shares. If one or more of the Selling Stockholders shall
fail to sell and deliver to the Underwriters the Common Shares to be sold and
delivered by such Selling Stockholders at the First Closing Date pursuant to
this Agreement, then the Underwriters may at their option, by written notice
from Montgomery Securities to the Company and the Selling Stockholders, either
(i) terminate this Agreement without any liability on the part of any
Underwriter or, except as provided in Sections 4, 6, 8 and 9 hereof, the Company
or the Selling Stockholders, or (ii) purchase the shares which the Company and
other Selling Stockholders have agreed to sell and deliver in accordance with
the terms hereof. If one or more of the Selling Stockholders shall fail to sell
and deliver to the Underwriters the Common Shares to be sold and delivered by
such Selling Stockholders pursuant to this Agreement at the First Closing Date
or the Second Closing Date, then the Underwriters shall have the right, by
written notice from Montgomery Securities to the Company and the Selling
Stockholders, to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.
Section 18. General Provisions. 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 two
or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any
28
<PAGE>
preliminary prospectus and the Prospectus (and any amendments and supplements
thereto), as required by the Securities Act and the Exchange Act.
29
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
Very truly yours,
HEALTHCARE FINANCIAL PARTNERS, INC.
By:
-------------------------
[Title]
SELLING STOCKHOLDERS:
JOHN K. DELANEY
By:
------------------------------
ETHAN D. LEDER EDWARD P. NORDBERG, JR.
By: By:
------------------------------ ------------------------------
CREATIVE INFORMATION SYSTEMS, LLC
By:
------------------------------
(Attorney-in-fact)
FARALLON CAPITAL PARTNERS, L.P.
By:
------------------------------
(Attorney-in-fact)
30
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted
by the Underwriters in San Francisco, California as of the date first above
written.
MONTGOMERY SECURITIES
LEHMAN BROTHERS INC.
ABN AMRO Chicago Corporation
By MONTGOMERY SECURITIES
By:
31
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Underwriters Number of Firm Common
Shares To Be Purchased
<S> <C>
Montgomery Securities.................................. [__]
Lehman Brothers Inc.................................... [__]
ABN AMRO Chicago Corporation [__]
Total:...................................... [__]
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of Firm Common Maximum Number of Optional Common
Selling Stockholder Shares To Be Sold Shares To Be Sold
<S> <C> <C>
John K. Delaney
[address] [__] [__]
Attention: [__]....................
Ethan D. Leder
[address] [__] [__]
Attention: [__]....................
Edward P. Nordberg, Jr.
[address] [__] [__]
Attention: [__]....................
Creative Information Systems, LLC
[address] [__] [__]
Attention: [__]....................
Farallon Capital Partners, L.P.
[address] [__] [__]
Attention: [__]....................
RR Capital Partners, L.P. [__] [__]
JMR Capital Partners, L.P. [__] [__]
Total:..................... [__] [__]
============= ==============
</TABLE>
<PAGE>
EXHIBIT A
Opinion of counsel for the Company to be delivered pursuant to Section
5(e) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements
---------
thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation
to transact business and is in good standing in the State of Maryland
and in each other jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions (other than the
State of Maryland) where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a
Material Adverse Change.
(iv) Each significant subsidiary (as defined in Rule 405 under
the Securities Act) has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of
its incorporation, has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and, to the best knowledge of such counsel, is duly
qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions where the failure to
so qualify or to be in good standing would not, individually or in the
aggregate, result in a Material Adverse Change.
(v) All of the issued and outstanding capital stock of each
significant subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and is owned by the Company, directly or
through subsidiaries, to the best knowledge of such counsel, free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
any pending or threatened claim.
(vi) The authorized, issued and outstanding capital stock of
the Company (including the Common Stock) conform to the descriptions
thereof set forth in the Prospectus. All of the outstanding shares of
Common Stock (including the shares of Common Stock owned by Selling
Stockholders) have been duly authorized and validly issued, are fully
paid and nonassessable and, to the best of such counsel's knowledge,
have been issued in compliance with the registration and qualification
requirements of federal and state securities laws. The form of
certificate used to evidence the Common
A-1
<PAGE>
Stock is in due and proper form and complies with all applicable
requirements of the charter and by-laws of the Company and the General
Corporation Law of the State of Delaware. The description of the
Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted and exercised
thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) No stockholder of the Company or any other person has
any preemptive right, right of first refusal or other similar right to
subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of the Company or the General
Corporation Law of the State of Delaware or (ii) to the best knowledge
of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable
principles.
(ix) The Common Shares to be purchased by the Underwriters
from the Company have been duly authorized for issuance and sale
pursuant to the Underwriting Agreement and, when issued and delivered
by the Company pursuant to the Underwriting Agreement against payment
of the consideration set forth therein, will be validly issued, fully
paid and nonassessable.
(x) The Registration Statement and the Rule 462(b)
Registration Statement, if any, has been declared effective by the
Commission under the Securities Act. To the best knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if
any, has been issued under the Securities Act and no proceedings for
such purpose have been instituted or are pending or are contemplated or
threatened by the Commission. Any required filing of the Prospectus and
any supplement thereto pursuant to Rule 424(b) under the Securities Act
has been made in the manner and within the time period required by such
Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b)
Registration Statement, the Prospectus and each amendment or supplement
to the Registration Statement and the Prospectus, as of their
respective effective or issue dates (other than the financial
statements and supporting schedules included therein or in exhibits to
or excluded from the Registration Statement, as to which no opinion
need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
(xii) The Common Shares have been approved for listing on the
Nasdaq National Market.
A-2
<PAGE>
(xiii) The statements (i) in the Prospectus under the captions
"Risk Factors--Failure to Comply with Government Regulations", "Risk
Factors -- Inability to Collect Healthcare Receivables Directly from
Medicare and Medicaid," "Risk Factors -- Dilution of Client
Receivables; Government Right of Offset," "Description of Capital
Stock", "Business--Government Regulation", "Certain Relationships and
Related Transactions", "Shares Eligible for Future Sale" and (ii) in
Item 14 and Item 15 of the Registration Statement, insofar as such
statements constitute matters of law, summaries of legal matters, the
Company's charter or by-law provisions, documents or legal proceedings,
or legal conclusions, has been reviewed by such counsel and fairly
present and summarize, in all material respects, the matters referred
to therein.
(xiv) To the best knowledge of such counsel, there are no
legal or governmental actions, suits or proceedings pending or
threatened which are required to be disclosed in the Registration
Statement, other than those disclosed therein.
(xv) To the best knowledge of such counsel, there are no
Existing Instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by
reference as exhibits thereto; and the descriptions thereof and
references thereto are correct in all material respects.
(xvi) No consent, approval, authorization or other order of,
or registration or filing with, any court or other governmental
authority or agency, is required for the Company's execution, delivery
and performance of the Underwriting Agreement and consummation of the
transactions contemplated thereby and by the Prospectus, except as
required under the Securities Act, applicable state securities or blue
sky laws and from the NASD.
(xvii) The execution and delivery of the Underwriting
Agreement by the Company and the performance by the Company of its
obligations thereunder (other than performance by the Company of its
obligations under the indemnification section of the Underwriting
Agreement, as to which no opinion need be rendered) (i) have been duly
authorized by all necessary corporate action on the part of the
Company; (ii) will not result in any violation of the provisions of the
charter or by-laws of the Company or any subsidiary; (iii) will not
constitute a breach of, or Default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any of its subsidiaries pursuant to, any
Existing Instrument identified to such counsel in a certificate of the
President of the Company as being material to the Company; or (iv) to
the best knowledge of such counsel, will not result in any violation of
any law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment for
the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act.
(xix) Except as disclosed in the Prospectus, to the best
knowledge of such counsel, there are no persons with registration or
other similar rights to have any equity or
A-3
<PAGE>
debt securities registered for sale under the Registration Statement or
included in the offering contemplated by the Underwriting Agreement,
other than the Selling Stockholders, except for such rights as have
been duly waived.
(xx) To the best knowledge of such counsel, neither the
Company nor any subsidiary is in violation of its charter or by-laws or
any law, administrative regulation or administrative or court decree
applicable to the Company or any subsidiary or is in Default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any material Existing Instrument, except in each
such case for such violations or Defaults as would not, individually or
in the aggregate, result in a Material Adverse Change.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or schedules or other financial or statistical data
derived therefrom, included in the Registration Statement or the Prospectus or
any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the State of New York or the federal
law of the United States, to the extent they deem proper and specified in such
opinion, upon the opinion (which shall be dated the First Closing Date or the
Second Closing Date, as the case may be, shall be satisfactory in form and
substance to the Underwriters) of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the Underwriters;
provided, however, that such counsel shall further state that they believe that
they and the Underwriters are justified in relying upon such opinion of other
counsel, and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
A-4
<PAGE>
EXHIBIT B
The opinion of such counsel pursuant to Section 5(h) shall be rendered
to the Representative at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit B include any supplements thereto
---------
at the Closing Date.
(i) The Underwriting Agreement has been duly authorized,
executed and delivered by or on behalf of, and is a valid and binding
agreement of, such Selling Stockholder, enforceable in accordance with
its terms, except as rights to indemnification thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(ii) The execution and delivery by such Selling Stockholder
of, and the performance by such Selling Stockholder of its obligations
under, the Underwriting Agreement and its Custody Agreement and its
Power of Attorney will not contravene or conflict with, result in a
breach of, or constitute a default under, the charter or by-laws,
partnership agreement, trust agreement or other organizational
documents, as the case may be, of such Selling Stockholder, or, to the
best of such counsel's knowledge, violate or contravene any provision
of applicable law or regulation, or violate, result in a breach of or
constitute a default under the terms of any other agreement or
instrument to which such Selling Stockholder is a party or by which it
is bound, or any judgment, order or decree applicable to such Selling
Stockholder of any court, regulatory body, administrative agency,
governmental body or arbitrator having jurisdiction over such Selling
Stockholder.
(iii) Such Selling Stockholder and has the legal right and
power, and all authorizations and approvals required under its charter
and by-laws, partnership agreement or other organizational documents,
as the case may be, to enter into the Underwriting Agreement and its
Custody Agreement and its Power of Attorney, to sell, transfer and
deliver all of the Common Shares which may be sold by such Selling
Stockholder under the Underwriting Agreement and to comply with its
other obligations under the Underwriting Agreement, its Custody
Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of
such Selling Stockholder has been duly authorized, executed and
delivered by such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with
its terms, except as rights to indemnification thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles.
(v) Assuming that the Underwriters purchase the Common
Shares which are sold by such Selling Stockholder pursuant to the
Underwriting Agreement for value, in
B-1
<PAGE>
good faith and without notice of any adverse claim, the delivery of
such Common Shares pursuant to the Underwriting Agreement will pass
good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lien encumbrance or other claim.
(vi) To the best of such counsel's knowledge, no consent,
approval, authorization or other order of, or registration or filing
with, any court or governmental authority or agency, is required for
the consummation by such Selling Stockholder of the transactions
contemplated in the Underwriting Agreement, except as required under
the Securities Act, applicable state securities or blue sky laws, and
from the NASD.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, State of New York or the federal law
of the United States, to the extent they deem proper and specified in such
opinion, upon the opinion (which shall be dated the First Closing Date or the
Second Closing Date, as the case may be, shall be satisfactory in form and
substance to the Underwriters, shall expressly state that the Underwriters may
rely on such opinion as if it were addressed to them and shall be furnished to
the Representative) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of the Selling Stockholders and public officials.
B-2
<PAGE>
EXHIBIT C
To be attached.
<PAGE>
[LETTERHEAD OF POWELL, GOLDSTEIN, FRAZER & MURPHY LLP]
May 23, 1997
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. 333-24611) (the "Registration Statement") relating to the
public offering of up to 3,737,500 shares of Common Stock (the "Shares"), $.01
par value per share (the "Common Stock"), of the Company (including 487,500
shares subject to the Underwriters' other-allotment option). Of the Shares,
2,875,000 shares, including 375,000 shares subject to the Underwriters'
over-allotment option, (the "Company Shares") are being offered by the Company,
and 862,500 Shares, including 112,500 shares subject to the Underwriters'
over-allotment option, (the "Shareholder Shares") are being offered by certain
shareholders of the Company.
We have examined copies of the Amended and Restated Certificate of
Incorporation and the 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 documents, 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 the Company Shares are issued and sold
in accordance with the terms described in the Prospectus forming a part of the
Registration Statement, and when the Shareholder Shares are sold in accordance
therewith, the Shares will be validly issued, fully paid and non-assessable.
<PAGE>
HealthCare Financial Partners, Inc.
May 23, 1997
Page 2
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,
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
<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 report dated February 10, 1997 with respect to the consolidated
financial statements of HealthCare Financial Partners, Inc. in Amendment No. 1
to the Registration Statement on Form S-1 and the related Prospectus of
HealthCare Financial Partners, Inc. dated May 23,1997.
/s/ ERNST & YOUNG LLP
Washington, D.C.
May 22, 1997
<PAGE>
[LETTERHEAD OF MCGLADREY & PULLEN, LLP APPEARS HERE]
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 1 to the Registration
Statement of our reports, dated September 13, 1996, relating to the combined
financial statements of HealthCare Financial Partners, Inc. and Health Partners
DEL, L.P. and financial statements of HealthPartners Funding, L.P. and to the
reference to our Firm under the caption "Experts".
/s/ McGladrey & Pullen, LLP
Charlotte, North Carolina
May 23, 1997
