<PAGE>
-----------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR
THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________ TO __________
Commission file number: 0-21425
HEALTHCARE FINANCIAL
PARTNERS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1844418
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
2 Wisconsin Circle, Suite 320
Chevy Chase, Maryland 20815
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (301) 961-1640
-----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
-----------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.01 par value
-----------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- -----------
-----------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [ X ]
-----------
As of February 1, 1997, the aggregate market value of the Common Stock held by
non-affiliates of the Registrant was not less than $59,782,625.
-----------
As of February 1, 1997, there were 6,214,991 shares of Common Stock outstanding.
-----------
DOCUMENTS INCORPORATED BY REFERENCE: NONE
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
1996 FORM 10-K ANNUAL REPORT
----------------------------
TABLE OF CONTENTS
-----------------
PART I
------
Item 1 Business....................................................... 1
Item 2 Properties.....................................................17
Item 3 Legal Proceedings..............................................17
Item 4 Submission of Matters to a Vote of Security Holders............17
PART II
-------
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters...................................18
Item 6 Selected Financial Data........................................18
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.................21
Item 8 Financial Statements and Supplementary Data....................37
Item 9 Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure............62
PART III
--------
Item 10 Directors and Executive Officers of the Registrant.............63
Item 11 Executive Compensation.........................................67
Item 12 Security Ownership of Certain Beneficial
Owners and Management.........................................73
Item 13 Certain Relationships and Related Transactions.................75
PART IV
-------
Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................77
SIGNATURES....................................................................79
-----------------------
This Annual Report on Form 10-K for the year ended December 31, 1996, at the
time of filing with the Securities and Exchange Commission, modifies and
supersedes all prior documents filed pursuant to Sections 13, 14 and 15(d) of
the Securities Exchange Act of 1934 for purposes of any offers or sales of any
securities after the date of such filing pursuant to any Registration Statement
or Prospectus filed pursuant to the Securities Act of 1933 which incorporates by
reference this Annual Report.
<PAGE>
PART I
------
Item 1. Business
This Report contains certain statements that are "forward-looking
statements." Those statements include, among other things, the discussions of
the Company's business strategy and expectations concerning the Company's market
position, future operations, margins, profitability, funding sources, liquidity
and capital resources. Reliance on any forward-looking statement involves risks
and uncertainties, and although the Company believes that the assumptions on
which the forward-looking statements contained herein are based are reasonable,
any of those assumptions could prove to be inaccurate, and as a result, the
forward-looking statements based on those assumptions also could be incorrect.
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.
General
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. From its inception in 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
other 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 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Pro Forma Results of Operations." For the year ended
December 31, 1996, the Company's yield on finance receivables (total interest
and fee income divided by average finance receivables for the period) was 18.4%.
The Company's historical results include those of two former partnerships. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Reorganization."
The Company currently provides financing to its clients through (i)
revolving lines of credit secured by accounts receivable (the "ABL Program"),
(ii) advances against accounts receivable (the "AR Advance Program") and (iii)
to a lesser extent, term loans secured by accounts receivable and other assets
(the "STL Program"), often in conjunction with financing provided under either
the ABL Program or the AR Advance
1
<PAGE>
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.
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") which is secured by a
second lien on all of the assets of Health Charge Corporation and by a pledge of
all of the issued and outstanding shares of capital stock of such corporation.
Health Charge provides financing and accounts receivable and medical records
management services to hospitals. The financing is provided by Health Charge
through the issuance of credit cards which can be utilized by hospital patients
to pay hospital charges. The hospitals 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 afford joint marketing opportunities for them to offer their
respective services for each other's clients. 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 of $100,000,
and a right of first refusal to match any offer made by a third party to acquire
Health Charge.
In March 1997, to expand the STL Program, the Company formed a Delaware
limited partnership known as HealthCare Financial Partners - Funding II, L.P.
("Funding II"). An affiliate of Farallon Capital Partners, L.P., a shareholder
of the Company ("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 to healthcare providers.
Utilizing such capital under the partnership structure to fund such loans will
allow the Company to expand the STL Program without incurring the credit risk
associated with concentration of clients in the inception of the program. Cash
available for distribution from the partnership is distributed 20% to the
Company and 80% to the limited partner, with preference given to the limited
partner until such partner receives a cumulative, compounded return of 10% per
annum on invested capital. Under the terms of partnership agreement, the Company
has the right to acquire the loans made by Funding II at any time for 100% of
book value thereof. In addition, 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.
2
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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 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
Healthcare Industry Segment Expenditures
--------------------------- -------------
<S> <C>
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
============
------------------
Source: HCFA, Office of the Actuary.
</TABLE>
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., 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
3
<PAGE>
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 approximately 562,000 physicians are actively involved in patient
care in the U.S., with a growing number participating in multi-specialty or
single-specialty groups. According to the AMA, as of 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. This forward-
looking information could be significantly affected by important factors,
4
<PAGE>
including cost containment pressures and government regulation, which could
impact the magnitude and timing of the Company's 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 December 31, 1996, 52.3%
of the Company's portfolio consisted of finance receivables from businesses in
the long-term care and home healthcare sub-markets, and management believes that
growth, consolidation and restructuring in these sub-markets will continue to
provide opportunities for the Company to expand. By continuing to focus on these
sub-markets and by expanding its financing of the physician practice sub-market,
the Company seeks to achieve attractive returns while controlling overall credit
risk. In the future different healthcare sub-markets may experience increased
demand for working capital, and the Company intends to be in a position to move
into these new markets as opportunities arise.
Focus on healthcare service providers with financing needs of between
$100,000 and $10 million, a market that has been under served by commercial
banks, diversified finance companies, traditional asset-based lenders and other
competitors of the Company. Most commercial banks, diversified finance companies
and traditional asset-based lenders have typically focused on providing
financing to companies with borrowing needs in excess of $5 million. While
actively pursuing healthcare service providers with borrowing needs of between
$5 and $10 million, the Company primarily targets for its ABL Program clients
that desire to borrow less than $5 million, and for its AR Advance Program
clients that desire to borrow less than $1 million. The Company believes that
its target market is much larger, in terms of the number of available financing
opportunities, and is less competitive than the market servicing larger
borrowing needs, thereby producing growth opportunities at attractive rates.
Introduce new financial products to leverage the Company's existing
expertise in healthcare finance and its origination, underwriting and servicing
capabilities within its target sub-markets. The Company employs significant
resources in the origination, underwriting and servicing of clients in its
target sub-markets. To further deepen its penetration of these sub-markets 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 any of
such loans, but attempts to structure them to meet the needs of particular
clients. The Company originates these products directly and through Funding II,
as an adjunct to its existing ABL Program and AR Advance Program or on stand
alone basis. The Company introduced the STL Program in late 1996 and will
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. Such other new products may be
introduced as part of cooperative arrangements with other lenders where the
origination and servicing relationships will remain with the Company. The
Company's objective in offering new products is to diversify its revenue stream
and enhance its growth opportunities.
5
<PAGE>
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 lending business, the
Company is increasingly offered opportunities to invest in, or acquire interests
in, 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 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. The Company
will also seek to take advantage of favorable opportunities to acquire
portfolios of loans backed by healthcare receivables and to 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. 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.
Accounts Receivable Advance Program. Under the AR Advance Program, the
Company purchases, on a revolving basis, a specified batch of a client's
accounts receivable owed to such client from third-party payors. The purchase
price for each batch of receivables is the estimated net collectible value of
such batch less a purchase discount, comprised of funding and servicing fees.
The purchase discount can be either a one-time fee for each batch of receivables
purchased or a periodic fee based on the average outstanding balance of a batch
of receivables ranging from one to five percent of the net collectible value of
such batch. With each purchase of a batch of receivables, the Company advances
to the client 65%-85% (exclusive of the purchase discount) of the purchase price
of such batch. The Company assigns a collection period to batches of receivables
purchased which period generally ranges from 60 to 120 days from the purchase
date depending on the type of receivables purchased. The excess of the purchase
price for a batch of receivables over the amount advanced with respect to such
batch (a "client holdback") is treated as a reserve and provides additional
security to the Company. The Company targets smaller healthcare service
providers for its AR Advance Program, for which commitments are generally less
than $1 million and terms are generally for one year with renewal options. The
average yield on the AR Advance Program for the year ended December 31, 1996 was
19.2%. As of December 31, 1996, the Company was financing 84 clients in its AR
Advance Program and the AR Advance Program constituted 47.1% of total finance
receivables.
6
<PAGE>
Asset-Based Lending Program. Under the ABL Program, the Company offers
healthcare service providers revolving lines of credit secured by accounts
receivable. The terms of the Company's ABL Program permit a client to borrow, on
a revolving basis, 65%-85% (exclusive of interest and fees) of the estimated net
collectible value of the client's accounts receivable due from third-party
payors, which are pledged to the Company. The Company charges its clients a base
floating interest rate ranging from one to three percent (above the then
applicable prime rate) and a variety of other fees which may include a loan
management fee, a commitment fee, a set-up fee, and an unused line fee, which
fees collectively range from one to four percent. The Company targets larger
healthcare service providers for its ABL Program, for which the minimum
commitment amount is 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 year ended December 31, 1996 was 17.1%. As of December 31,
1996, the Company was financing 53 clients in its ABL Program, and the ABL
Program constituted 52.9% of total finance receivables. At December 31, 1996,
seven clients were in both the ABL Program including term loans 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. From time to time the Company also provides its clients with
fixed rate 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 December 31, 1996, the Company had
approximately $2.5 million in term loans outstanding, issued under eight
separate term loans, which amount outstanding represented less than 2.5% of the
Company's assets. The average yield on such term loans for the year ended
December 31, 1996 was 14.5%. 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 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 such capital under this partnership structure to
fund such loans will allow the Company to expand the STL Program without
incurring the credit risk associated with concentration of clients in the
inception of the program. Cash available for distribution from the partnership
is distributed 20% to the Company and 80% to the limited partner, with
preference given to the limited partner until such partner receives a
cumulative, compounded return of 10% per annum on invested capital. The Company
has the option to acquire the loans made by Funding II at any time for 100% of
the book value thereof. Upon dissolution and liquidation of Funding II, the
Company is required to pay the limited partner an amount equal to 10% of such
partner's maximum invested capital.
7
<PAGE>
The following table sets forth the Company's portfolio activity at or for
the periods indicated:
<TABLE>
<CAPTION>
Portfolio Activity(1)
As of and for the Quarters Ended
--------------------------------
March 31, June 30, Sept. 30, Dec. 31, March 31,
1995 1995 1995 1995 1996
-------- -------- -------- -------- --------
<S> <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
Finance Receivables ABL Program............ 1,581,478 5,073,933 5,270,629 20,783,045
Total Clients AR Advance Program........... 37 52 63 72 68
Number of New Clients AR Advance
Program ............................... 9 18 21 16 14
Total Clients ABL Program.................. 4 11 13 22
Number of New Clients ABL Program.......... 4 7 2 9
Average Finance Receivables Outstanding
Per Client:
AR Advance Program....................... $ 309,764 $ 280,839 $ 358,552 $ 464,535 $ 539,187
ABL Program.............................. 395,370 461,267 482,356 944,684
<CAPTION>
Portfolio Activity(1)
As of and for the Quarters Ended
--------------------------------
June 30, Sept. 30, Dec. 31,
1996 1996 1996
-------- -------- ----
<S> <C> <C> <C>
Finance Receivables AR Advance
Program ............................... $39,989,071 $46,064,079 $42,076,211
Finance Receivables ABL Program............ 25,924,458 33,502,829 47,252,717(2)
Total Clients AR Advance Program........... 74 75 84
Number of New Clients AR Advance
Program ............................... 12 2 17
Total Clients ABL Program.................. 24 37 53
Number of New Clients ABL Program.......... 2 13 18
Average Finance Receivables Outstanding
Per Client:
AR Advance Program....................... $ 540,393 $ 614,188 $ 500,907
ABL Program.............................. 1,080,186 905,482 891,561(2)
</TABLE>
- - -------------------
(1) Such activity is on a pro forma basis for periods prior to 1996, giving
effect to the Reorganization. See "--Management's Discussion and Analysis
of Financial Condition and Results of Operations - Reorganization".
(2) Includes $2.5 million of STL Program loans.
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 December 31,
1996, the Company employed a staff of eight sales and marketing
representatives. At December 31, 1996, the Company maintained a satellite
marketing office in Boca Raton, Florida which has since been closed.
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.
8
<PAGE>
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, as well as a
detailed examination of its accounts receivable, accounts payable, billing and
collection systems and procedures and management information systems. Such a
review is conducted after the Company and the prospective client execute a non-
binding term sheet, which requires the prospective client to pay a due diligence
deposit to defray the Company's expenses. The Company's due diligence review is
supervised by the sponsoring member of the credit committee, and is conducted by
either an in-house field auditor or third-party consulting underwriters that
have been approved by the credit committee. Such third-party underwriters are
either certified public accountants or consultants with healthcare industry
experience. The Company independently confirms certain matters with respect to
the prospective client's business and the collectibility of its accounts
receivable and any other collateral by conducting public record searches, and,
where appropriate, by contacting third-party payors about the prospective
client's receivables.
In order to determine its estimate of the net collectible value of a
prospective client's accounts receivable, the Company 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 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 December 31, 1996, the Company employed seven
account managers in its Chevy Chase, Maryland headquarters. The Company's
proprietary information systems enable the Company to monitor each client's
account, as well as permit management to evaluate and mitigate against risks on
a portfolio basis. See "--Information Systems." In addition, the Company
conducts audits of the client's billing and collection procedures, financial
condition and operating strategies at least annually, and more frequently if
warranted, particularly with respect to the ABL Program, where audits are
usually conducted on a quarterly basis. Such audits are conducted by in-house
field auditors or by third-party consulting underwriters.
9
<PAGE>
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 (the "Collateral").
Clients who borrow under the ABL Program are subject to a number of
negative covenants set forth in the ABL Agreement, including covenants limiting
additional borrowings, prohibiting the client's 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 the such
receivables less a purchase discount, comprised of funding and servicing fees.
An amount equal to 65% to 85% of the purchase price is paid to the client; the
Company retains the balance of the purchase price as a 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.
10
<PAGE>
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 generally tailored to the needs of the particular borrower. 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 "- Government
Regulation."
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.
11
<PAGE>
The following table sets forth the percentages of the Company's
finance receivables in the AR Advance Program and the ABL Program as of December
31, 1996 by type of third-party payor.
Finance Receivables by Third-Party Payor Type
<TABLE>
<CAPTION>
As of December 31, 1996
--------------------------------------
AR
Advance ABL Total
Program Program Receivables
--------- --------- ------------
<S> <C> <C> <C>
Third Party Payors
Commercial Insurers/Contract Claims..... 49.6% 54.4% 52.9%
Government Programs:
Medicare........................... 29.2 15.7 20.0
Medicaid........................... 21.2 29.9 27.1
---- ---- ----
Total Government Programs.......... 50.4 45.6 47.1
</TABLE>
Clients
The Company's client base is diversified. As of December 31, 1996, 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.
Portfolio Analysis
<TABLE>
<CAPTION>
As of December 31, 1996
-------------------------------------------------------
Number of Percent of Finance Percent of
Clients(1) Clients Receivables Portfolio
---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
Industry Group
- - --------------
Home Healthcare................... 46 35.4% $22,827,514 25.5%
Long-Term Care.................... 38 29.3 23,932,601 26.8
Physician Practice................ 15 11.5 5,339,196 6.0
Mental Health..................... 13 10.0 8,496,456 9.5
Rehabilitation.................... 7 5.4 5,144,348 5.7
Durable Medical Equipment......... 3 2.3 621,929 0.7
Diagnostic........................ 3 2.3 679,590 0.8
Hospital.......................... 2 1.5 11,421,698 12.8
Disease State Management.......... 2 1.5 5,775,670 6.5
Other............................. 1 0.8 5,089,926 5.7
- --- ---------- ------
Total........................ 130 100.0% 89,328,928 100.0%
===== ======= =========== ======
Program Breakdown
AR Advance Program................ 84 61.3% $42,076,211 47.1%
ABL Program(2).................... 53 38.7 47,252,717 52.9
----- ------ ----------- ------
Total........................ 137 100.0% $89,328,928 100.0%
===== ====== =========== ======
</TABLE>
- - -----------------
(1) At December 31, 1996, seven clients were in both the AR Advance Program and
ABL Program.
(2) Includes $2.5 million of STL Program loans.
12
<PAGE>
Capital Resources
As of December 31, 1996, sources of capital available to the Company
to fund advances under the ABL Program, advances against accounts receivable
under the AR Advance Program and loans under the STL Program were a revolving
line of credit (the "Bank Facility) with Fleet Capital Corporation ("Fleet"),
stockholders' equity, and an investment-grade asset backed commercial paper
program (the "CP Facility") with ING Baring (U.S.) Capital Markets, Inc.
("ING"). 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. See "Management's Discussion and Analysis of Pro Forma Financial
Condition and Pro Forma Results of Operations--Liquidity and Capital Resources."
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, which requires six months prior
written notice.
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.
Funding II. The limited partner has committed $20 million of invested
capital to fund STL Program loans made by Funding II to healthcare providers.
This commitment expires on February 21, 1999. Utilizing such capital under this
partnership structure to fund such loans will allow the Company to expand the
STL Program without incurring the credit risk associated with concentration of
clients in the inception of the program. Cash available for distribution from
the partnership is distributed 20% to the Company and 80% to the limited
partner, with preference given to the limited partner until such partner
receives a cumulative, compounded return of 10% per annum on invested capital.
The Company has the option to acquire the loans made by Funding II at any time
for 100% of the book value thereof. Upon dissolution and liquidation of Funding
II, the Company is required to pay the limited partner an amount equal to 10% of
such partner's maximum invested capital.
13
<PAGE>
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 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 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 December 31,
1996, 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, although there can be no assurance that
such reserve will be adequate in the future.
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
clients on a weekly basis, and are generally relied upon as a management tool
more frequently by smaller
14
<PAGE>
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.
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 "--Operations."
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
15
<PAGE>
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 client's
collection efforts to ensure compliance with the foregoing procedures. At
December 31, 1996, approximately 47.1% 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 "--Operations."
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. 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.
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.
Further Regulation of Physician Self-Referral. Additional regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements whereby physicians are compensated,
16
<PAGE>
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.
Employees
As of December 31, 1996, the Company employed 30 people on a full-time
basis. The Company believes that its relations with employees are good.
Item 2. Properties
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. In addition, as of December 31,
1996, the Company leased a small satellite office in Boca Raton, Florida. That
office has since been closed. The Company believes that its current facilities
are adequate for its existing needs and that additional suitable space will be
available as required.
Item 3. 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
17
<PAGE>
PART II
-------
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company is traded on Nasdaq National Market
under the symbol HCFP. The Company made its initial public offering on November
21, 1996 (the "Offering"), and therefore only traded since November 21, 1996.
The closing price range for the period from November 21, 1996 through December
31, 1996 varied from a low price of $12 1/8 to a high of $14.00. As of December
31, 1996 there were 6,214,991 shares outstanding.
As of March 28, 1997, there were 37 record holders of the Company's
Common Stock, and approximately 600 beneficial owners.
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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Item 6. Selected 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 HealthPartners DEL, L.P. (a former partnership,
"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 of HealthPartners Funding, L.P. (a
former partnership, "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 Financial Condition and 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
in Item 8.
18
<PAGE>
HealthCare Financial Partners, Inc.
(and DEL from inception through
December 31, 1995)
<TABLE>
<CAPTION>
At or for
the period At or for the
from inception (April Year Ended
22, 1993) through December 31, December 31,
------------------------------ ------------
1993 1994 1995 1996
(Combined) (Combined) (Combined) (Consolidated)
---------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Statement of Operations Data
Fee income.............................. $ 856 $13,036 $ 565,512 $12,015,971
Interest expense........................ 3,975 79,671 3,408,562
---------- -------- --------- -----------
Net fee income........................ 856 9,061 485,841 8,607,409
Provision for losses on
receivables............................. 18,745 2,102 45,993 656,116
------- -------- ---------- ----------
Net fee income after provision
for losses on receivables............ (17,889) 6,959 439,848 7,951,293
Operating expenses...................... 30,204 439,514 1,472,240 3,326,994
Other income............................ 3,772 106,609 1,221,837 233,982
--------- ------- --------- ----------
Income (loss) before deduction of
preacquisition earnings and income
taxes (benefit)....................... (24,321) (325,946) 189,445 4,858,281
Deduction of preacquisition
earnings.............................. 4,289,859
Income taxes (benefit).................. (5,892) 38,860
-------- --------- ------- ---------
Net income (loss)(1)(2)................. $(24,321) $(325,946) $195,337 $ 529,562
========= ========= ======= =========
Pro forma provision for
income taxes(1)....................... $73,884
Pro forma net income(1)................. $115,561
Net income per share $.13
Weighted average shares outstanding 4,064,071
Balance Sheet Data
Finance receivables..................... $115,454 $279,148 $2,552,441 $89,328,928
Allowance for losses on
receivables........................... 18,475 20,847 66,840 1,078,992
Total assets............................ 329,588 344,850 2,669,939 101,273,089
Client holdbacks........................ 21,729 112,374 814,607 11,739,326
Line of credit.......................... 1,433,542 21,829,737
Commercial paper ....................... 37,209,098
Total liabilities....................... 205,534 558,759 2,795,404 74,552,113
Total equity (deficit).................. 126,054 (213,909) (125,465) 26,720,976
</TABLE>
19
<PAGE>
Funding
<TABLE>
<CAPTION>
At or for the
period from
Inception At or for the
(September 12, 1994) Year Ended
through December 31,
December 31, 1994 1995
----------------- -----------
<S> <C> <C>
Statement 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 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(1).............. $ 1,131,902
Pro forma net income(1).............................. $ 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 is not presented because it is not meaningful
due to the partnership reporting basis for DEL and Funding and to the
Reorganization. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Pro Forma Results of Operations" 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
Financial Condition and Results of Operations--Overview."
20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 in 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 Results
of Operations".
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.
The Company is a Delaware corporation which was organized in April,
1993 and commenced its business in September, 1993. Until September 13, 1996 the
Company's name was HealthPartners Financial Corporation. On that date its
corporate name was changed to HealthCare Financial Partners, Inc.
21
<PAGE>
The Reorganization
Prior to the Offering, the Company conducted its operations
principally in its capacity as the general partner of Funding and DEL.
Management concluded that the Company's future financial position and results of
operations would be enhanced if the Company directly owned the portfolio assets
of each of these limited partnerships and the transactions described below (the
"Reorganization") were effected by the Company prior to or simultaneously with
the Offering. See "Certain Relationships and Related 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 Relationships and
Related Transactions."
Effective upon completion of the Offering, the Company acquired from
HealthPartners Investors, L.L.C. ("HP Investors"), the sole limited partner of
Funding, all of the limited partnership interests in Funding and paid the $21.8
million purchase price for such assets from the proceeds of the 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 and RR
Capital Partners, L.P. ("RR Partners"), the only two members of HP Investors,
exercised warrants for the purchase of an aggregate of 379,998 shares of Common
Stock acquired on December 28, 1994 for an aggregate payment of $500, which
represented the fair value of the warrants at that date. No additional
consideration was paid in connection with the exercise of the warrants. HP
Investors transferred the warrants to Farallon and RR Partners in contemplation
of the liquidation of Funding.
In November 1996, Fleet made available to the Company a line of
credit which prior to such time had been available to Funding. This line of
credit currently enables the Company to borrow from Fleet up to $35 million.
See "Business--Capital Resources."
Pro Forma Financial Information
In recognition of the Company's 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. To provide a
context for this, 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.
22
<PAGE>
Pro Forma Statements of Operations
<TABLE>
<CAPTION>
For the year ended December 31, 1995
-------------------------------------------------------------------------------------------
HealthCare Financial
Partners, Inc.
and DEL
(Combined) Funding Pro Forma Pro Forma,
(Historical) (Historical) Adjustments(1) As Adjusted
---------------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Fee and interest income
Fee income......................... $ 565,512 $4,248,992 (2) $4,814,504 (2)
Interest income.................... 403,659 403,659
---------- ---------- ----------
Total fee and interest income 565,512 4,652,651 5,218,163
Interest expense..................... 79,671 554,885 634,556
---------- ---------- ----------
Net fee and interest income........ 485,841 4,097,766 4,583,607
Provision for losses on
receivables.......................... 45,993 171,395 217,388
---------- ---------- ----------
Net fee and interest income
after provision for losses on
receivables...................... 439,848 3,926,371 4,366,219
Operating expenses................... 1,472,240 1,024,057 $ (400,000)(a) 2,096,297
Other income......................... 1,221,837 (997,146)(a) 224,691
--------- ---------- ------------ ----------
Income before income taxes
(benefit)............................ 189,445 2,902,314 (597,146) 2,494,613
Income taxes (benefit)............... (5,892) (978,791)(b) 972,899
------------ ---------- ------------ -----------
Net income........................... $ 195,337 $2,902,314 $(1,575,937) $1,521,714
========= ========= =========== =========
Pro forma net income per share (3)... $.26
====
Pro forma weighted average
shares outstanding (3)............... 5,938,372
=========
</TABLE>
- - --------------
(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 "--Overview".
(3) Pro forma net income per share was computed by dividing pro forma
net income by the pro forma weighted average shares outstanding,
which gives effect to the Reorganization.
23
<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)........ $.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, which
gives effect to the Reorganization.
The following discussion should be read in conjunction with the
information under "Selected Financial Data" 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 Item 8.
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 Pro Forma Statements of Operations preceding.
24
<PAGE>
<TABLE>
<CAPTION>
Pro Forma for the Year Ended
--------------------------------------------------------------
1994 1995 1996
----------------- ---------------- --------------------
Pro Forma Statements of Operations
<S> <C> <C> <C>
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
--------------- --------------- ---------------
Pro forma net income (loss).............................. $ (234,184) $ 1,521,714 $ 2,963,551
=============== =============== ===============
Pro forma net income (loss) per share.................... $ (.04) $ .26 $ .50
=============== =============== ===============
Pro forma weighted average shares outstanding............ 5,938,372 5,938,372 5,945,276
=============== =============== ===============
As of December 31,
---------------------------------------------------------------
1994 1995 1996
----------------- ---------------- ---------------
Other Data
Finance receivables--AR Advance Program.................. $ 6,236,663 $ 32,443,023 $ 42,076,211
Finance receivables--ABL Program(2)...................... 6,270,629 47,252,717
--------------- -------------- ------------
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 $2.5 million of STL Program loans.
Pro Forma 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
25
<PAGE>
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 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
26
<PAGE>
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 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 "--Quarterly Financial Data." 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.
27
<PAGE>
Pro Forma Quarterly Financial Data
The following table summarizes unaudited pro forma quarterly operating results
for the most recent eight fiscal quarters. 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,
1995 1995 1995 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fee and interest income
Fee income............................... $ 707,666 $ 802,421 $1,304,704 $1,999,713 $1,869,433
Interest income.......................... 9,366 50,376 103,624 240,293 411,703
---------- --------- ---------- ---------- ----------
Total fee and interest income......... 717,032 852,797 1,408,328 2,240,006 2,281,136
Interest expense........................... 3,883 108,895 140,582 381,196 580,030
---------- --------- ---------- ---------- ----------
Net fee and interest income.............. 713,149 743,902 1,267,746 1,858,810 1,701,106
Provision for losses on receivables........ 217,388 343,155
---------- --------- ---------- ---------- ----------
Net fee and interest income after
provision for losses on receivables... 713,149 526,514 1,267,746 1,858,810 1,357,951
Operating expenses......................... 361,666 288,880 556,892 888,859 676,627
Other income............................... 45,377 47,857 93,278 38,179 10,000
---------- -------------- -------------- -------------- ----------
Income before income taxes................. 396,860 285,491 804,132 1,008,130 691,324
Income taxes............................... 154,776 111,341 313,611 393,171 269,617
--------------- ---------- ---------- ---------- ----------
Pro forma net income....................... $ 242,084 $ 174,150 $ 490,521 $ 614,959 $ 421,707
========= ======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
For the Quarters Ended
June 30, Sept. 30 Dec. 31
1996 1996 1996
-------- -------- ------
<S> <C> <C> <C>
Fee and interest income
Fee income............................... $2,090,853 $2,117,004 $2,440,925
Interest income.......................... 792,307 1,006,997 1,286,749
---------- ---------- ----------
Total fee and interest income......... 2,883,160 3,124,001 3,727,674
Interest expense........................... 801,126 923,175 1,104,231
---------- ---------- ----------
Net fee and interest income.............. 2,082,034 2,200,826 2,623,443
Provision for losses on receivables........ 53,646 216,315 43,000
---------- ---------- ----------
Net fee and interest income after
provision for losses on receivables... 2,028,388 1,984,511 2,580,443
Operating expenses......................... 809,392 796,226 1,044,749
Other income............................... 8,000 153,651 62,331
----------- ------------ -----------
Income before income taxes................. 1,226,996 1,341,936 1,598,025
Income taxes............................... 478,528 523,355 623,230
---------- ---------- -----------
Pro forma net income....................... $ 748,468 $ 818,581 $ 974,795
========= ========= =========
</TABLE>
The Company's quarterly results of operations are not generally
affected by seasonal factors.
The Company's historical methodology for assessing the adequacy of
its allowance for possible losses on receivables focused, in significant part,
on the average per client amount of finance receivables outstanding. This caused
the quarterly provisions for losses on receivables to fluctuate as average
client balances varied due to the Company's growth and the mix of finance
receivables generated from the ABL Program and the AR Advance Program changed
over time. Given the current level of the allowance, the Company does not
anticipate that the provision for losses on receivables in future quarterly
periods will reflect the level of variability experienced historically. In
future periods, the Company anticipates that quarterly provisions will be made
primarily based on changes in overall portfolio size and composition, and, to
the extent required, based on analysis of credit risks in particular
transactions.
The results of operations for the quarter ended December 31, 1995
were impacted by the Company's acquisition of certain assets from MediMax. See
"--Overview."
Excess Collateral and Client Holdbacks
The Company's primary protection against credit losses is the Excess
Collateral, which consists of client accounts receivable due from third-party
payors which collateralize advances under the ABL Program and against which the
Company makes advances under the AR 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.
28
<PAGE>
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 a lien on various types of collateral, such as accounts receivable,
real estate, equipment, inventory and stock, depending on the circumstances of
each loan and the availability of collateral.
The Company's results of operations are affected by its collections
of client accounts receivable. The Company's turnover of its finance
receivables, calculated by dividing total collections of client accounts
receivable for each of the following quarters by the average month-end balance
of finance receivables during such quarter, was 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 3.5 x 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
29
<PAGE>
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,
although there can be no assurance that such reserve will be adequate in the
future. See "--Quarterly Financial Data."
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' pre-acquisition 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 lesser 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.
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
30
<PAGE>
million and a ratio of total debt to equity of not more than 3.0 to 1.0. In
addition, under the Bank Facility the Company is not allowed to have at any time
a cumulative negative cash flow (as defined in the Bank Facility) in excess of
$1.0 million. The intercreditor arrangements entered into in connection with the
CP Facility excludes borrowings under the CP Facility from debt for purposes of
calculating the debt-to-equity ratio. At 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 "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 anytime after December 5, 1999, without
penalty. See "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.
Interest Rate Sensitivity
Interest rate sensitivity refers to the change in interest spread
between the yield on the Company's portfolio and the cost of funds necessary to
finance the portfolio (i.e., the Bank Facility and the CP Facility) resulting
from changes in interest rates. To the extent that interest income and interest
expense do not respond equally to changes in interest rates, or that all rates
do not change uniformly, earnings are
31
<PAGE>
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 also exists with respect to the Company's term loans
under the STL Program which at December 31, 1996 constituted less than 2.5% of
the Company's assets. Such interest rate sensitivity with respect to STL Program
loans is expected to be minimized in the future as adjustable rates are charged
on new loans.
Inflation
Inflation has not had a significant effect on the Company's
operating results to date.
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 Offering which include the results of operations of
Funding, acquired subsequent to the Offering. The following discussion only
pertains to the Company's historical financial condition and results of
operations, and therefore should be read in conjunction with "Selected Financial
Data," 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, including the notes thereto of Funding. See "--Pro
Forma Results of Operations."
32
<PAGE>
HealthCare Financial Partners, Inc. (and DEL) 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 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 the 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.
33
<PAGE>
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%.
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.
34
<PAGE>
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
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 "--Overview". The
annualized yield on finance receivables increased from 21.9% in 1994 to 25.6% in
1995. Thus, the increase in total fee and interest income can be attributed to
increases in both yield and volume. Prior to March 1995, Funding financed its
operations solely through equity. The use of borrowings financed the Company's
growth after March, 1995. As a result, interest expense increased from $0 for
the period ended December 31, 1994 to $554,885 for the year ended December 31,
1995. The average cost of funds for the year ended December 31, 1995 was 11.9%.
Net fee and interest income increased from $281,486 for the period ended
December 31, 1994 to $4.1 million for the year ended December 31, 1995. Although
Funding did not have any interest expense in 1994, the annualized net interest
margin increased slightly from 21.9% in 1994 to 22.5% in 1995. This increase in
net interest margin was due to the increase in the yield on finance receivables.
The increase in net fee and interest income can be attributed to growth in both
volume and yield.
Funding's provision for losses on receivables decreased from
$326,792 for the period ended December 31, 1994 to $171,395 for the year ended
December 31, 1995. This decrease is primarily attributable to a decrease in
average client balances. Funding experienced no credit losses in either period.
Operating expenses increased from $166,317 for the period ended
December 31, 1994 to $1.0 million for the year ended December 31, 1995. This
increase resulted from Funding's commencement of operations in September 1994
and to the increase in expenses necessary to support the increase in Funding's
operations. Funding experienced an increase of 233.3% in management fees,
1,364.6% in professional fees due to growth in financing activities, 559.0% in
licensing fees and increases in other operating costs, all related to the
expansion of Funding's operations. Funding only operated for four months in
1994.
Net income increased from a loss of $211,623 for the period ended
December 31, 1994 to net income of $2.9 million for the year ended December 31,
1995, a direct result of overall growth in Funding's finance receivables
described above.
35
<PAGE>
Item 8. Financial Statements and Supplementary Data
36
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HealthCare Financial Partners, Inc.
Report of Independent Auditors, Ernst & Young LLP.............................. 38
Report of Independent Auditors, McGladrey & Pullen, LLP........................ 39
Balance Sheets as of December 31, 1996 and 1995................................ 40
Statements of Operations for the years ended December 31, 1996, 1995, and 1994. 41
Statements of Equity for the years ended December 31, 1996, 1995 and 1994...... 42
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994.. 43
Notes to Financial Statements.................................................. 44
HealthPartners Funding, L.P.
Report of Independent Auditors, McGladrey & Pullen, LLP........................ 53
Balance Sheets as of December 31, 1995 and 1994................................ 54
Statements of Operations for the year ended December 31, 1995 and the period
from September 12, 1994 (Date of Inception) through December 31, 1994.......... 55
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... 56
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.......... 57
Notes to Financial Statements.................................................. 58
</TABLE>
37
<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
38
<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
39
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
---------- ----------
(Consolidated) (Combined)
ASSETS
<S> <C> <C>
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.
40
<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.
41
<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.
42
<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.
43
<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
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.
44
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
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, 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.
45
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (continued)
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>
46
<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
receivables........................... 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. 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
47
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Equity and Stock Plans (continued)
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.
48
<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>
Deferred tax assets:
<S> <C>
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>
49
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. Income Taxes (Continued)
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.
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.
50
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Purchase of Funding (continued)
<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>
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>
<CAPTION>
<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.
13. HealthCare Financial Partners, Inc. (Parent Company only) Condensed
Financial Information
<TABLE>
<CAPTION>
Balance Sheet
Assets
<S> <C>
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
===========
</TABLE>
51
<PAGE>
HEALTHCARE FINANCIAL PARTNERS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
13. HealthCare Financial Partners, Inc. (Parent Company only) Condensed
Financial Information (continued)
<TABLE>
<CAPTION>
Statement of Operations
<S> <C>
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>
52
<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
53
<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
=========== ==========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
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.
54
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period from
September 12,
1994
(Date of
Inception)
Year Ended through
December 31, December 31,
1995 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
partner.................................................. $ 597,146 $(303,385)
========== =========
Unaudited pro forma data:
Income taxes............................................... $1,131,902
----------
Net income................................................. $1,770,412
==========
</TABLE>
See accompanying notes.
55
<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.
56
<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 other....... (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.
57
<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.
58
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. Significant Accounting Policies (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.
59
<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
Year ended Inception)
December 31, through
Ended 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>
60
<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>
61
<PAGE>
HEALTHPARTNERS FUNDING, L.P.
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Commitments and Concentrations of Credit Risk (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.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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.
62
<PAGE>
PART III
--------
Item 10. Directors and Executive Officers of the Registrant
The executive officers and directors of the Company and their ages as of March
31, 1997 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
John K. Delaney/(1)/.......... 33 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, Jr/(1)/... 36 Executive Vice President, Chief Financial 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. Brooke/(2)(3)/.. 40 Director
</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
since the formation of the Company until March 1997, when he was elected to his
current positions. 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
63
<PAGE>
President since the formation of the Company until March 1997, when he was
elected to his current positions. 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 since
the formation of the Company until March 1997 when he was elected to his current
positions. From 1993 through April 1996, Mr. Nordberg also served as General
Counsel of the Company. Prior to 1993, Mr. Nordberg was a practicing attorney
with Williams & Connolly in Washington, D.C. Mr. Nordberg received his B.A.
degree from Washington College in 1982, his M.B.A. degree from Loyola College in
1985, and his J.D. degree from the Georgetown University Law Center in 1989.
Hilde M. Alter serves as Treasurer 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
64
<PAGE>
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
an attorney with the law firm of Gibson Hoffman & Panzione in Los Angeles,
California, and from April 1992 until January 1993 she was an 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 1996. From June 1996 until joining the
Company, Mr. Widra was general counsel 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, L.L.P. in Washington, DC. 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 industries. In 1983,
Mr. Woods co-founded a technical consulting company and served as Executive Vice
President of such company until his departure until 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. 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
65
<PAGE>
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, a sale of all or substantially
all of its assets, amend the Company's charter 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 range of audit and non-audit fees and review
the adequacy of the Company's internal accounting controls.
66
<PAGE>
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.
Item 11. 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
----------------------------------------------- Award
-----
Other Annual Number of Shares All Other
Salary/(1)/ Bonus Compensation Underlying Compensation/(2)/
Name and Principal Positions Year ($) ($) ($) Options ($)
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John K. Delaney 1996 245,400 -- -- 37,000 --
Chairman, Chief Executive 1995 196,538 94,166 -- -- --
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 Relationships and Related 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.
67
<PAGE>
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
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
68
<PAGE>
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.
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
69
<PAGE>
(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, 1997, 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 $12.50. These options will vest and become exercisable
in 20% increments on each anniversary of the grant date, commencing on
September 13, 1997.
70
<PAGE>
The following table summarizes options granted during 1996 to the
Named Executives. The Company has not granted any stock appreciation rights. No
other Stock Incentives were granted or awarded in 1996.
Options Granted in 1996
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
--------------------------------------------------------------- --------------------------
Percent of
Shares Total Options
Underlying Granted to Exercise Price Expiration
Name Options(#) Employees(%) Per Share($) 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.
71
<PAGE>
Awards under the Director Plan are determined by the express terms
of the Director Plan. Rules, regulations and interpretations necessary for the
ongoing administration of the Director Plan will be made by the full membership
of the Board of Directors.
Only non-employee directors of the Company are eligible to
participate in the Director Plan. The Director Plan contemplates three types of
non-statutory option awards: (a) initial appointment awards that are granted
upon a non-employee director's initial appointment to the Board of Directors
providing an option to purchase 10,000 shares of Common Stock at a per share
exercise price equal to the then fair market value of a share of Common Stock;
(b) annual service awards that are granted to each non-employee director who
continues to serve as a non-employee director as of each annual meeting of the
stockholders of the Company following his or her initial appointment providing
an option to purchase 5,000 shares of Common Stock at a per share exercise price
equal to the then fair market value of a share of Common Stock; and (c) discount
awards under which each non-employee director also has the opportunity to elect
annually, subject to rules established by the Board of Directors, to forego
receipt of cash retainer and fees for scheduled meetings of the Board of
Directors and committees thereof that would otherwise be paid during each fiscal
year of the Company, and in lieu thereof that director be granted an option to
acquire shares of Common Stock with an exercise price per share equal to 50% of
the then fair market value of a share of Common Stock. The number of shares of
Common Stock subject to any option of this type granted for a fiscal year is
determined by taking the amount of cash foregone by the director for the fiscal
year in question and dividing that amount by the per share option exercise
price.
Each option granted pursuant to the Director Plan is immediately
vested; becomes exercisable 12 months following the date of grant; and expires
upon the earlier to occur of the tenth anniversary of the grant date or 18
months following the director's termination of service upon the Board of
Directors for any reason. The options generally are not transferable or
assignable during a holder's lifetime.
The number of shares of Common Stock reserved for issuance upon
exercise of options granted under the Director Plan, the number of shares of
Common Stock subject to outstanding options and the exercise price of each
option are subject to adjustment in the event of any recapitalization of the
Company or similar event, effected without the receipt of consideration. The
number of shares of stock subject to options granted in connection with initial
appointments or as annual service awards are also subject to adjustment in such
events. In the event of certain corporate reorganizations and similar events,
the options may be adjusted or cashed-out, depending upon the nature of the
event.
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
72
<PAGE>
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.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of December 31, 1996 by:
(i) each person or entity known by the Company to own beneficially five percent
or more of the outstanding Common Stock, (ii) each member and member of the
Board of Directors of the Company, (iii) each executive officer of the Company,
and (iv) all executive officers of the Company and all members and proposed
members of the Board of Directors as a group. Unless otherwise indicated, the
address of the stockholders as beneficially owing more than five percent of the
Common Stock listed below is that of the Company's principal executive offices.
Except as indicated in the footnotes to the table, the persons and entities
named in the table have sole voting and investment power with respect to all
shares beneficially owned.
<TABLE>
<CAPTION>
Shares Beneficially
Owned
-----
Name of
Beneficial Owner Number Percent
---------------- ------ -------
<S> <C> <C>
John K. Delaney........................................... 731,113 11.76%
Ethan D. Leder............................................ 731,113 11.76
Edward P. Nordberg, Jr.................................... 731,113 11.76
John F. Dealy(1).......................................... - -
Geoffrey E. D. Brooke(2).................................. - -
JMR Capital Partners, Inc.(3)............................. 506,319 8.15
Creative Information Systems, LLC(4)...................... 506,319 8.15
Farallon Capital Partners, L.P.(5)........................ 466,237 7.50
RR Capital Partners, L.P.(5).............................. 83,256 1.34
All directors and executive officers as a group
(13 persons)(6)....................................... 2,195,039 35.28
</TABLE>
- - --------
(1) The business address of Mr. Dealy is 2300 N Street, N.W., Washington, D.C.
20037.
(2) The business address of Mr. Brooke is 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.
73
<PAGE>
For information concerning options granted to the directors and executive
officers of the Company, see "Executive Compensation--Stock Incentive Plan" and
"Executive Compensation--Director Plan."
74
<PAGE>
Item 13. Certain Relationships and Related Transactions
Effective as of September 1, 1996, Funding acquired all of the assets
of DEL consisting principally of client receivables, for $486,630 in cash, which
amount approximated the fair value of DEL's net assets, and assumed all of DEL's
liabilities. DEL subsequently distributed the remaining proceeds from the sale
pro-rata (i) to John K. Delaney, Ethan D. Leder and Edward P. Nordberg, Jr., the
sole limited partners of DEL and each a director and officer of the Company, in
the amounts of $197,044, $197,044 and $98,522, respectively, in respect of their
limited partnership interests, and (ii) $1,188 to the Company in respect of its
general partnership interest. DEL was subsequently dissolved.
The amount paid by Funding for the assets of DEL was equal to the book
value or net investment of DEL in the assets transferred, consisting principally
of client receivables. The objective was for DEL to recognize no gain or loss on
the transaction. The purpose of the transaction was to consolidate the assets of
DEL and Funding in anticipation of the Offering and the acquisition by the
Company of the limited partnership interests of Funding described below. The
cost to the Company and each of Messrs. Delaney, Leder and Nordberg for their
interests in DEL were $7,869, $427,735, $426,897 and $81,400, respectively, and
the Company and such persons each had received, prior to the sale, distributions
from DEL in respect of their interests in the amounts of $6,681, $230,661,
$229,823, and $82,878, respectively.
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. See "Use of Proceeds." 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, Farallon and RR
Partners exercised warrants for the purchase of 379,998 shares of Common Stock,
which warrants were acquired by Farallon and a predecessor of RR Partners on
December 28, 1994 for an aggregate payment of $500, and subsequently assigned to
HP
75
<PAGE>
Investors. HP Investors transferred the warrants to Farallon 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 Farallon and RR Partners other than the ownership of the
warrants and 169,495 shares of Common Stock. The warrants were issued to provide
equity ownership in the Company to the warrant holders and as a means of further
strengthening the business relationship between the parties.
In March the Company formed Funding II and an affiliate of Farallon
committed to invest up to $20 million to Funding II. See "Business--Strategy".
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 has continued to license the RTS from Creative for $8,333 per
month. Pursuant to a Software Purchase and License Agreement, dated as of
September 1, 1996, by and between the Company and Creative, the Company acquired
the RTS from Creative for $25,000 in cash, payable in three equal consecutive
monthly installments, and granted back to Creative a non-exclusive perpetual
license to use the RTS.
Pursuant to a Support Services Agreement (the "Support Services
Agreement"), dated as of October 1, 1994, by and between the Company and The
Leddel Group, a general partnership ("Leddel") (the sole partners of which are
Messrs. Delaney, Leder and Nordberg), Leddel: (i) leased to the Company
approximately 2,500 square feet of office space in Washington, D.C. for $7,500
per month; (ii) rented to the Company the use of certain office equipment for
$2,500 per month; and (iii) provided to the Company certain professional
services, including legal and consulting services, for a fee of $2,500 per
month. For the fiscal year ended December 31, 1995, the Company paid an
aggregate of $150,000 to Leddel. Although not the result of arms-length
negotiation, the amounts paid to Leddel represented the parties' best estimates
of market rates for such office space, equipment and services. The Support
Services Agreement expired on December 31, 1995.
On September 15, 1996, the Company entered into an Advisory Services
Agreement with The Dealy Strategy Group ("DSG"), a consulting firm controlled by
John F. Dealy, 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.
76
<PAGE>
Item 14. Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8K
(a) 1. Financial Statements. See Index to Financial Statements in Item 8
hereof.
2. The financial statement schedules are either not applicable or the
information is otherwise included in the footnotes to the financial
statements.
3. Exhibits required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
- - ------------------------------------------------------------------------------
<S> <C>
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.
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>
77
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
- - --------------
* Incorporated by reference to the document filed under the same Exhibit number
to the Company's Registration Statements on Form S-1 (No. 333-12479).
** Incorporated by reference to Exhibit 99.1 to the Company's Current Report on
Report 8-K filed with the Commission on March 13, 1997.
(b) Reports on Form 8-K.
None.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HEALTHCARE FINANCIAL PARTNERS, INC.
DATE: March 31, 1997 -----------------------------------
By: Edward P. Nordberg, Jr.
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
DATE: March 31, 1997 /s/ John K. Delaney
----------------------------------------------------
John K. Delaney
Chairman of the Board, Chief Executive
Officer and Director (principal executive officer)
DATE: March 31, 1997 /s/ Ethan D. Leder
----------------------------------------------------
Ethan D. Leder
Vice-Chairman of the Board, President and Director
DATE: March 31, 1997 /s/ Edward P. Nordberg, Jr.
----------------------------------------------------
Edward P. Nordberg, Jr.
Executive Vice President, Chief Financial Officer
and Director (principal financial officer)
DATE: March 31, 1997 /s/ Hilde M. Alter
----------------------------------------------------
Hilde M. Alter
Treasurer (principal accounting officer)
DATE: March 31, 1997 /s/ Geoffrey E.D. Brooke
----------------------------------------------------
Geoffrey E. D. Brooke
(Director)
DATE: March 31, 1997 /s/ John F. Dealy
----------------------------------------------------
John F. Dealy
(Director)
79
<PAGE>
Exhibit 10.9
To Form 10K
--------------------------------------------------
HCFP FUNDING, INC.
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
LOAN AND SECURITY AGREEMENT
Dated as of November 27, 1996
$50,000,000
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
FLEET CAPITAL CORPORATION
--------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
SECTION 1. CREDIT FACILITY...................................... - 2 -
1.1 Revolving Credit Loans............................... - 2 -
----------------------
SECTION 2. INTEREST, FEES AND CHARGES........................... - 3 -
2.1 Interest............................................. - 3 -
--------
2.2 Computation of Interest and Fees..................... - 4 -
--------------------------------
2.3 Commitment Fee....................................... - 5 -
--------------
2.4 Unused Line Fee...................................... - 5 -
---------------
2.5 Collection Charges................................... - 5 -
------------------
2.6 Audit Fees........................................... - 5 -
----------
2.7 Reimbursement of Expenses............................ - 5 -
-------------------------
2.8 Bank Charges......................................... - 6 -
------------
2.9 Indemnity re: LIBOR.................................. - 6 -
-------------------
SECTION 3. LOAN ADMINISTRATION.................................. - 6 -
3.1 Manner of Borrowing Revolving Credit Loans........... - 6 -
------------------------------------------
3.2 Payments............................................. - 7 -
--------
3.3 Prepayments.......................................... - 7 -
-----------
3.4 Application of Payments and Collections.............. - 7 -
---------------------------------------
3.5 All Loans to Constitute One Obligation............... - 8 -
--------------------------------------
3.6 Loan Account......................................... - 8 -
------------
3.7 Statements of Account................................ - 8 -
---------------------
SECTION 4. TERM AND TERMINATION................................. - 8 -
4.1 Term of Agreement.................................... - 8 -
-----------------
4.2 Termination.......................................... - 8 -
-----------
SECTION 5. SECURITY INTERESTS................................... - 9 -
5.1 Security Interest in Collateral...................... - 9 -
-------------------------------
5.2 Lien Perfection; Further Assurances.................. - 10 -
-----------------------------------
5.3 Confirmation of Existing Liens....................... - 10 -
------------------------------
SECTION 6. COLLATERAL ADMINISTRATION............................ - 10 -
6.1 General.............................................. - 10 -
-------
6.2 Administration of Accounts........................... - 11 -
--------------------------
6.3 Payment of Charges................................... - 12 -
------------------
SECTION 7. REPRESENTATIONS AND WARRANTIES....................... - 12 -
7.1 General Representations and Warranties............... - 12 -
--------------------------------------
7.2 Continuous Nature of Representations and Warranties.. - 17 -
---------------------------------------------------
7.3 Survival of Representations and Warranties........... - 17 -
------------------------------------------
</TABLE>
-i-
<PAGE>
<TABLE>
<C> <S> <C>
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS.................. - 17 -
8.1 Affirmative Covenants................................ - 17 -
---------------------
8.2 Negative Covenants................................... - 19 -
------------------
8.3 Specific Financial Covenants......................... - 21 -
----------------------------
SECTION 9. CONDITIONS PRECEDENT................................. - 22 -
9.1 Documentation........................................ - 22 -
-------------
9.2 No Default........................................... - 22 -
----------
9.3 Other Loan Documents................................. - 22 -
--------------------
9.4 Equity............................................... - 22 -
------
9.5 Availability......................................... - 22 -
------------
9.6 No Litigation........................................ - 22 -
-------------
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT.... - 23 -
10.1 Events of Default.................................... - 23 -
-----------------
10.2 Acceleration of the Obligations...................... - 25 -
-------------------------------
10.3 Other Remedies....................................... - 25 -
--------------
10.4 Remedies Cumulative; No Waiver....................... - 26 -
------------------------------
SECTION 11. MISCELLANEOUS........................................ - 26 -
11.1 Power of Attorney.................................... - 26 -
-----------------
11.2 Indemnity............................................ - 27 -
---------
11.3 Modification of Agreement; Sale of Interest.......... - 27 -
-------------------------------------------
11.4 Confidentiality...................................... - 28 -
---------------
11.5 Severability......................................... - 28 -
------------
11.6 Successors and Assigns............................... - 28 -
----------------------
11.7 Cumulative Effect; Conflict of Terms................. - 28 -
------------------------------------
11.8 Execution in Counterparts............................ - 28 -
-------------------------
11.9 Notice............................................... - 29 -
------
11.10 Lender's Consent..................................... - 29 -
----------------
11.11 Credit Inquiries..................................... - 29 -
----------------
11.12 Entire Agreement..................................... - 30 -
----------------
11.13 Interpretation....................................... - 30 -
--------------
11.14 GOVERNING LAW; CONSENT TO FORUM...................... - 30 -
-------------------------------
11.15 WAIVERS BY BORROWER................................ - 31 -
---------------------
</TABLE>
-ii-
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made as of November 27, 1996, by and
between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation with an
office at 200 Glastonbury Boulevard, Glastonbury, CT 06033; and HCFP FUNDING,
INC. ("Borrower"), a Delaware corporation with its chief executive office and
principal place of business at 2 Wisconsin Circle, Suite 320, Chevy Chase, MD
20815. Capitalized terms used in this Agreement have the meanings assigned to
them in Appendix A, General Definitions. Accounting terms not otherwise
specifically defined herein shall be construed in accordance with GAAP
consistently applied.
BACKGROUND
A. On March 9, 1995, Shawmut Capital Corporation (predecessor by merger
to Lender) entered into a certain Loan and Security Agreement with
HealthPartners Funding, L.P. ("HPF"), a Delaware Limited Partnership (as amended
from time to time, the "HPF Existing Loan Agreement"), whereby Shawmut Capital
Corporation agreed to make a credit facility available to HPF in the maximum
principal amount of $23,125,000.00, which has been subsequently increased to
$50,000,000 ("HPF Existing Line of Credit"), on the terms and conditions therein
set forth. The HPF Existing Loan Agreement, together with all instruments,
documents and agreements executed in connection therewith or related thereto,
all as amended from time to time, are hereinafter referred to collectively as
the "HPF Existing Financing Agreements".
B. On March 9, 1995, Shawmut Capital Corporation entered into a certain
Loan and Security Agreement with HealthPartners - Del, L.P. ("HP Del"), a
Delaware Limited Partnership (as amended from time to time, the "HP Del Existing
Loan Agreement"), whereby Shawmut Capital Corporation agreed to make a credit
facility available to HP Del in the maximum principal amount of $1,875,000.00
("HP Del Existing Line of Credit"), on the terms and conditions therein set
forth. The HP Del Existing Loan Agreement, together with all instruments,
documents and agreements executed in connection therewith or related thereto,
all as amended from time to time, are hereinafter referred to collectively as
the "HP Del Existing Financing Agreements" and the HP Del Existing Financing
Agreements together with the HPF Existing Financing Agreements are hereinafter
referred to collectively as the Existing Financing Agreements.
C. Effective as of September 1, 1996, HPF acquired all of the net assets
of HP Del for cash, the cash was distributed to the partners of HP Del and HP
Del was liquidated.
D. On November 27, 1996, Borrower acquired all of the limited partnership
interests of HPF for cash. All of the assets of HPF were then transferred to
Borrower and all of the obligations of HPF, including the obligations of HPF and
HP Del under the Existing Financing Agreements were assumed by Borrower. After
such transfer and assumption, HPF was liquidated.
<PAGE>
E. HPF has asked for Lender's consent, which Lender has given to the
transfer of all of the assets and liabilities of HPF to Borrower and the
liquidation of HPF; such consent being required pursuant to the Existing
Financing Agreements.
F. Lender has agreed to allow the requested transfer of interests and
liquidation, provided, among other things, Borrower (i) expressly assumes all of
the obligations and liabilities of HPF and HP Del related to the Existing
Financing Agreements and (ii) executes this Agreement and all other instruments,
documents and agreements required by Lender.
G. On and after the Closing Date, except as expressly set forth herein,
this Agreement and all of the agreements, documents and instruments executed in
connection herewith shall be deemed to amend and restate (but not extinguish the
obligations evidenced by) the Existing Financing Agreements and the terms hereof
shall control.
NOW, THEREFORE, with the foregoing Background deemed incorporated herein by
reference, the parties hereto, intending to be legally bound, agree as follows.
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lender agrees to make a Revolving Credit Facility of up to the
"Facility Cap" available upon Borrower's request therefor, as follows:
1.1 Revolving Credit Loans.
----------------------
1.1.1 Loans and Reserves. Lender agrees, for so long as no
------------------
Event of Default exists, to make Revolving Credit Loans to Borrower from time to
time, as requested by Borrower in the manner set forth in subsection 3.1.1
hereof, up to a maximum principal amount at any time outstanding equal to the
Borrowing Base at such time minus reserves, if any. If the unpaid balance of
-----
the Revolving Credit Loans should exceed the Borrowing Base or any other
limitation set forth in this Agreement, such Overadvance shall nevertheless
constitute Obligations that are due and payable on demand, and which are secured
by the Collateral and entitled to all the benefits thereof. Lender shall have
the right to establish reserves in such amounts, and with respect to such
matters, as Lender shall reasonably deem necessary or appropriate, against the
amount of Revolving Credit Loans which Borrower may otherwise request under this
subsection 1.1.1, including, without limitation, with respect to (i) other sums
chargeable against Borrower's Loan Account as Revolving Credit Loans under any
section of this Agreement; (ii) amounts owing by Borrower to any Person to the
extent secured by a Lien on, or trust over, any Property of Borrower; and (iii)
such other matters, events, conditions or contingencies as to which Lender
reasonably determines reserves should be established from time to time
hereunder.
1.1.2 Use of Proceeds. The Revolving Credit Loans shall be
---------------
used solely for the purchase by Borrower of Eligible Accounts from Providers,
representing obligations of Third Party Payors to make payments to Providers
under Receivables Acquisition Agreements, advances by Borrower against Eligible
Accounts of Providers, representing obligations of Third Party Payors to make
payments to Providers under Receivables Loan Agreements and for Borrower's
general operating needs (including Distributions permitted by this Agreement),
in a manner consistent with the provisions of this Agreement and all applicable
laws.
-2-
<PAGE>
SECTION 2. INTEREST, FEES AND CHARGES
2.1 Interest.
--------
2.1.1 Revolving Credit Interest:
-------------------------
(a) Rate Options. At the time of each Revolving Credit Loan
------------
under the Revolving Credit Facility, and thereafter from time to time, Borrower
shall have the right, subject to the terms and conditions of this Agreement and
provided no Event of Default has occurred and is continuing, to designate to
Lender in writing that all, or a portion of the Revolving Credit Loans shall
bear interest at either the (i) Revolving Credit LIBOR Rate or (ii) Revolving
Credit Base Rate. Interest on each portion thereof shall accrue and be paid at
the time and rate applicable to the respective option selected by Borrower or
otherwise governing under the terms of this Agreement. If for any reason the
Revolving Credit LIBOR Rate option is unavailable, the Revolving Credit Base
Rate shall apply. The rate of interest on Revolving Credit Base Rate Loans shall
increase or decrease by an amount equal to any increase or decrease in the Base
Rate effective as of the opening of business on the day that any such change in
the Base Rate occurs.
(b) Revolving Credit LIBOR Rate Option:
----------------------------------
(i) Requests. Provided no Event of Default has occurred
--------
and is continuing, and subject to the provisions of this Section 2.1.1 (a)(i),
if Borrower desires to have the Revolving Credit LIBOR Rate apply to all or a
portion of the Revolving Credit Loans, Borrower shall give Lender a written
irrevocable request no later than 11:00 A.M. Eastern time on the second (2nd)
Business Day prior to the requested borrowing date specifying (i) the date the
Revolving Credit LIBOR Rate shall apply (which shall be a Business Day), (ii)
the LIBOR Interest Period, and (iii) the amount to be subject to the Revolving
Credit LIBOR Rate provided that such amount shall be an integral multiple of
$500,000. In no event may Borrowers have outstanding at any time LIBOR Rate
Loans with more than three (3) different LIBOR Interest Periods.
(ii) LIBOR Interest Periods. Revolving Credit LIBOR Rate
----------------------
Loans shall be selected by Borrower for a LIBOR Interest Period; provided,
however, that if the LIBOR Interest Period would otherwise end on a day which
shall not be a London Business Day, such LIBOR Interest Period shall be
shortened or extended to the immediately preceding or next succeeding London
Business Day as is the Bank's custom in the market to which such Revolving
Credit LIBOR Rate Loan relates. All accrued and unpaid interest on a Revolving
Credit LIBOR Rate Loan shall be repaid in full on the day the applicable LIBOR
Rate Period expires. Interest shall also be due and payable, for a Revolving
Credit LIBOR Rate Loan having a LIBOR Interest Period of 6 months on the day of
such 6 month period that would have been the last day of such period if such 6
month period were a 3 month period. No LIBOR Interest Period with respect to the
Revolving Credit may end after the Revolving Credit Maturity Date. Subject to
all of the terms and conditions applicable to a request to convert all or a
portion of the Revolving Credit Base Rate Loans to a Revolving Credit LIBOR Rate
Loan, Borrower may extend a Revolving Credit LIBOR Rate Loan as of the last day
of the LIBOR Interest Period to a new Revolving Credit LIBOR Rate Loan. If
Borrower fails to notify the Lender of the LIBOR Interest Period for a
subsequent Revolving Credit LIBOR Rate Loan at least two (2) Business Days prior
to the last day of the then current LIBOR Interest Period of an outstanding
Revolving Credit LIBOR Rate Loan, then such outstanding Revolving
-3-
<PAGE>
Credit LIBOR Rate Loan shall, at the end of the applicable LIBOR Interest
Period, accrue interest at the Revolving Credit Base Rate.
(iii) Adjustments. The Adjusted LIBOR Rate may be
-----------
automatically adjusted by Lender on a prospective basis to take into account the
additional or increased cost of maintaining any necessary reserves for
Eurodollar deposits or increased costs due to changes in applicable law or
regulation or the interpretation thereof occurring subsequent to the
commencement of the then applicable LIBOR Interest Period, including but not
limited to changes in tax laws (except changes of general applicability in
corporate income tax laws) and changes in the reserve requirements imposed by
the Board of Governors of the Federal Reserve System (or any successor or other
applicable governing body), excluding the Reserve Percentage and any Reserve
which has resulted in a payment pursuant to Section 2.12 below, that increase
the cost to Lender of funding the Revolving Credit LIBOR Rate Loan. Lender shall
promptly give Borrower notice of such a determination and adjustment, which
determination shall be prima facie evidence of the correctness of the fact and
the amount of such adjustment.
(iv) Unavailability. If Borrower shall have requested
--------------
the rate based on the Adjusted LIBOR Rate in accordance with this Section
2.1.1(a)(i) and Lender shall have determined, in good faith, that Eurodollar
deposits equal to the amount of the principal of the requested Revolving Credit
LIBOR Rate Loan and for the LIBOR Interest Period specified are unavailable, or
that the rate based on the Adjusted LIBOR Rate will not adequately and fairly
reflect the cost of the Adjusted LIBOR Rate applicable to the specified LIBOR
Interest Period, of making or maintaining the principal amount of the requested
Revolving Credit LIBOR Rate Loan during the LIBOR Interest Period specified, or
that by reason of circumstances affecting Eurodollar markets, adequate means do
not exist for ascertaining the rate based on the Adjusted LIBOR Rate applicable
to the specified LIBOR Interest Period, Lender shall promptly give notice of
such determination to Borrower that the rate based on the Adjusted LIBOR Rate is
not available. A determination, in good faith, by Lender hereunder shall be
prima facie evidence of the correctness of the fact and amount of such
additional costs or unavailability. Upon such a determination, (i) the
obligation to convert to, or maintain a Revolving Credit LIBOR Rate Loan at the
rate based on the Adjusted LIBOR Rate shall be suspended until Lender shall have
notified Borrower that such conditions shall have ceased to exist, and (ii) the
portion of the Revolving Credit Loans subject to the request or requested
conversion shall accrue interest at the Revolving Credit Base Rate.
2.1.2 Default Rate of Interest. Upon and after the occurrence of
------------------------
an Event of Default, and during the continuation thereof, the principal amount
of all Loans shall bear interest at a rate per annum equal to 2.0% above the
interest rate otherwise applicable thereto (the "Default Rate").
2.1.3 Maximum Interest. In no event whatsoever shall the
----------------
aggregate of all amounts deemed interest hereunder and charged or collected
pursuant to the terms of this Agreement exceed the highest rate permissible
under any law which a court of competent jurisdiction shall, in a final
determination, deem applicable hereto. If any provisions of this Agreement are
in contravention of any such law, such provisions shall be deemed amended to
conform thereto.
2.2 Computation of Interest and Fees. Interest, unused line fees and
--------------------------------
collection charges hereunder shall be calculated daily and shall be computed on
the actual number of days elapsed over a year of 360 days. For the purpose only
of computing interest hereunder (and not for the purpose of determining the
principal balance outstanding within the meaning of Section 1.1.1 hereof), all
items of payment received
-4-
<PAGE>
by Lender shall be deemed applied by Lender on account of the Obligations
(subject to final payment of such items) on the second day after receipt by
Lender of fully collected funds from the Dominion Account.
2.3 Commitment Fee. Borrower shall pay to Lender a commitment fee equal
--------------
to $200,000. Such Commitment Fee shall be fully earned and non-refundable on
the Closing Date.
2.4 Unused Line Fee. Commencing on the first day of the first month
---------------
immediately following the Closing Date, Borrower shall pay to Lender a monthly
fee equal to 1/12th of .5% of the average amount by which the Facility Cap
exceeds the average amount of the outstanding principal balance of the Revolving
Credit Loans during the preceding month. The unused line fee shall be payable
monthly in arrears on the first day of each calendar month thereafter. Borrower
shall be responsible for the unused line fees earned by Lender during the month
of November, 1996 on account of the availability of the HPF Existing Line of
Credit and the HP Del Existing Line of Credit, as well as the portion of the
unused line fee which will be earned by Lender during the portion of November,
1996 for which this Agreement shall control.
2.5 Collection Charges. If items of payment are received by Lender at a
------------------
time when there are no Revolving Credit Loans outstanding, such items of payment
shall be subject to a collection charge equal to 2 days' interest on the amount
thereof at the Base Rate, which collection charges shall be payable on the first
Business Day of each month.
2.6 Audit Fees. Borrower shall pay to Lender audit fees in accordance
----------
with Lender's current schedule of fees in effect from time to time in connection
with audits of Borrower's books and records and such other matters as Lender
shall reasonably deem appropriate, plus all out-of-pocket expenses incurred by
Lender in connection with such audits. Audit fees shall be payable on the first
day of the month following the date of issuance by Lender of a request for
payment thereof to Borrower;
2.7 Reimbursement of Expenses. If, at any time or times regardless of
-------------------------
whether or not an Event of Default has occurred, Lender incurs legal expenses or
any other out-of-pocket costs or expenses in connection with (i) the negotiation
and preparation of this Agreement or any of the other Loan Documents, any
amendment of or modification of this Agreement or any of the other Loan
Documents; (ii) to the extent deemed reasonably necessary by Lender, the
administration of this Agreement or any of the other Loan Documents and the
transactions contemplated hereby and thereby; (iii) any litigation, contest,
dispute, suit, proceeding or action (whether instituted by Lender, Borrower or
any other Person) in any way relating to the Collateral, this Agreement or any
of the other Loan Documents or Borrower's affairs; (iv) any attempt to enforce
any rights of Lender against Borrower or any other Person which may be obligated
to Lender by virtue of this Agreement or any of the other Loan Documents,
including, without limitation, the Providers or the Account Debtors; or (v) any
attempt to protect, preserve, restore, collect, sell, liquidate or otherwise
dispose of or realize upon the Collateral; then all such legal and other out-of-
pocket costs and expenses of Lender shall be charged to Borrower; provided
--------
however, that Borrower is obligated to reimburse Lender for out-of-pocket
- - -------
attorney and other legal fees and related expenses incurred by Lender in
connection with the preparation and negotiation of this Agreement and the
initial closing of the transactions contemplated herein on the Closing Date only
in amounts not exceeding $30,000 in the aggregate. All amounts chargeable to
Borrower under this Section 2.7 shall be Obligations secured by all of the
Collateral, shall be payable on demand to Lender, and shall bear interest from
the date such demand is made until paid in full at the Base Rate. Borrower shall
also reimburse Lender for expenses incurred by Lender in its administration of
the Collateral to the extent and in the manner provided in Section 6 hereof.
-5-
<PAGE>
2.8 Bank Charges. Borrower shall pay to Lender, on demand, any and all
------------
reasonable fees, costs or expenses which Lender or any Participating Lender pays
to a bank or other similar institution (including, without limitation, any fees
paid by Lender to any Participating Lender) arising out of or in connection with
(i) the forwarding to Borrower or any other Person on behalf of Borrower, by
Lender or any Participating Lender, of proceeds of loans made by Lender to
Borrower pursuant to this Agreement and (ii) the depositing for collection, by
Lender or any Participating Lender, of any check or item of payment received or
delivered to Lender or any Participating Lender on account of the Obligations.
2.9 Indemnity re: LIBOR. Borrower hereby indemnifies Lender and holds
-------------------
Lender harmless from and against any and all losses or expenses that Lender may
sustain or incur as a consequence of any prepayment or any Default by Borrower
in the payment of the principal of or interest on any LIBOR Rate Loan or failure
by Borrower to complete a borrowing of, a prepayment of or conversion of or to a
LIBOR Rate Loan after notice thereof has been given, including (but not limited
to) any interest payable by Lender to lenders of funds obtained by it in order
to make or maintain its LIBOR Rate Loans hereunder, and any other loss or
expense incurred by Lender by reason of the liquidation or reemployment of
deposits or other funds acquired by Lender to make, continue, convert into or
maintain, a LIBOR Rate Loan.
SECTION 3. LOAN ADMINISTRATION.
3.1 Manner of Borrowing Revolving Credit Loans. Borrowings under the
------------------------------------------
credit facility established pursuant to Section 1 hereof shall be as follows:
3.1.1 Loan Requests. A request for a Revolving Credit Loan
-------------
shall be made, or shall be deemed to be made, in the following manner: (i)
Borrower may give Lender notice of its intention to borrow, in which notice
Borrower shall specify the amount of the proposed borrowing and the proposed
borrowing date, no later than 11:00 a.m. Eastern time on the proposed borrowing
date, provided, however, that no such request may be made at a time when there
--------
exists an Event of Default; and (ii) the becoming due of any amount required to
be paid under this Agreement, whether as interest or for any other Obligation,
shall be deemed irrevocably to be a request for a Revolving Credit Loan on the
due date in the amount required to pay such interest or other Obligation. As an
accommodation to Borrower, Lender may permit telephonic requests for loans and
electronic transmittal of instructions, authorizations, agreements or reports to
Lender by Borrower. Unless Borrower specifically directs Lender in writing not
to accept or act upon telephonic or electronic communications from Borrower,
Lender shall have no liability to Borrower for any loss or damage suffered by
Borrower as a result of Lender's honoring of any requests, execution of any
instructions, authorizations or agreements or reliance on any reports
communicated to it telephonically or electronically and purporting to have been
sent to Lender by Borrower and Lender shall have no duty to verify the origin of
any such communication or the authority of the person sending it.
3.1.2 Disbursement. Borrower hereby irrevocably authorizes
------------
Lender to disburse the proceeds of each Revolving Credit Loan requested, or
deemed to be requested, pursuant to this subsection 3.1.2 as follows: (i) the
proceeds of each Revolving Credit Loan requested under subsection 3.1.1(i) shall
be disbursed by Lender in lawful money of the United States of America in
immediately available funds, in the case of the initial borrowing, in accordance
with the terms of the written disbursement letter from Borrower, and in the case
of each subsequent borrowing, by wire transfer to such bank account as may be
agreed upon by Borrower and Lender from time to time or elsewhere if pursuant to
a written direction from Borrower; and (ii) the proceeds of each Revolving
Credit Loan requested under
-6-
<PAGE>
subsection 3.1.1(ii) shall be disbursed by Lender by way of direct payment of
the relevant interest or other Obligation.
3.1.3 Authorization. Borrower hereby irrevocably authorizes
-------------
Lender, in Lender's sole discretion, to advance to Borrower, and to charge to
Borrower's Loan Account hereunder as a Revolving Credit Loan, a sum sufficient
to pay all interest accrued on the Obligations during the immediately preceding
month and to pay all costs, fees and expenses at any time owed by Borrower to
Lender hereunder.
3.2 Payments. Except where evidenced by notes or other instruments issued
--------
or made by Borrower to Lender specifically containing payment provisions which
are in conflict with this Section 3.2 (in which event the conflicting provisions
of said notes or other instruments shall govern and control), the Obligations
shall be payable as follows:
3.2.1 Principal. Principal payable on account of Revolving
---------
Credit Loans shall be payable by Borrower to Lender immediately upon the
earliest of (i) the receipt by Lender or Borrower of any proceeds of any of the
Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of
Default in consequence of which Lender elects to accelerate the maturity and
payment of the Obligations, or (iii) termination of this Agreement pursuant to
Section 4 hereof; provided, however, that if an Overadvance shall exist at any
-------- -------
time, Borrower shall, on demand, repay the Overadvance.
3.2.2 Interest. Interest accrued on the Revolving Credit Loans
--------
shall be due on the earliest of (i) the first calendar day of each month (for
the immediately preceding month), computed through the last calendar day of the
preceding month, (ii) the occurrence of an Event of Default in consequence of
which Lender elects to accelerate the maturity and payment of the Obligations or
(iii) termination of this Agreement pursuant to Section 4 hereof.
3.2.3 Costs, Fees and Charges. Costs, fees and charges payable
-----------------------
pursuant to this Agreement shall be payable by Borrower as and when provided in
Section 2 hereof, to Lender or to any other Person designated by Lender in
writing.
3.2.4 Other Obligations. The balance of the Obligations
-----------------
requiring the payment of money, if any, shall be payable by Borrower to Lender
as and when provided in this Agreement, the Other Agreements or the Security
Documents, or on demand, whichever is later.
3.3 Prepayments. No portion of the LIBOR Rate Loans may be prepaid during
-----------
a LIBOR Interest Period unless Borrower first satisfies in full its obligations
under Section 2.9 above arising from such prepayment.
3.4 Application of Payments and Collections. All items of payment
---------------------------------------
received by Lender by 2:00 p.m., Eastern time, on any Business Day shall be
deemed received on that Business Day. All items of payment received after 2:00
p.m., Eastern time, on any Business Day shall be deemed received on the
following Business Day. Subject to Section 2.2 hereof, payments deemed received
shall be applied immediately on account of the Obligations. Borrower
irrevocably waives the right to direct the application of any and all payments
and collections at any time or times hereafter received by Lender from or on
behalf of Borrower, and Borrower does hereby irrevocably agree that Lender shall
have the continuing exclusive right to apply and reapply any and all such
payments and collections received at any time or
-7-
<PAGE>
times hereafter by Lender or its agent against the Obligations, in such manner
as Lender may deem advisable, notwithstanding any entry by Lender upon any of
its books and records. If as the result of collections of Accounts as authorized
by subsection 6.2.6 hereof a credit balance exists in the Loan Account, such
credit balance shall not accrue interest in favor of Borrower, but shall be
available to Borrower at any time or times.
3.5 All Loans to Constitute One Obligation. The Loans shall constitute
--------------------------------------
one general Obligation of Borrower, and shall be secured by Lender's Lien upon
all of the Collateral.
3.6 Loan Account. Lender shall enter all Loans as debits to the Loan
------------
Account and shall also record in the Loan Account all payments made by Borrower
on any Obligations and all proceeds of Collateral which are finally paid to
Lender, and may record therein, in accordance with customary accounting
practice, other debits and credits, including interest and all charges and
expenses properly chargeable to Borrower.
3.7 Statements of Account. Lender will account to Borrower monthly with a
---------------------
statement of Loans, charges and payments made pursuant to this Agreement, and
such account rendered by Lender shall be deemed final, binding and conclusive
upon Borrower unless Lender is notified by Borrower in writing to the contrary
within 30 days of the date each accounting is mailed to Borrower. Such notice
shall only be deemed an objection to those items specifically objected to
therein.
SECTION 4. TERM AND TERMINATION
4.1 Term of Agreement. Subject to Lender's right to cease making Loans to
-----------------
Borrower upon or after the occurrence and during the continuance of any Event of
Default, this Agreement shall be in effect through and including March 9, 1998
(the "Original Term"), and this Agreement shall automatically renew itself for
one-year periods thereafter (the "Renewal Terms"), unless terminated as provided
in Section 4.2 hereof.
4.2 Termination.
-----------
4.2.1 Termination by Lender. Upon at least 6 months prior
---------------------
written notice to Borrower, Lender may terminate this Agreement as of the last
day of the Original Term or the then current Renewal Term and, subject to
Section 10 hereof, Lender may terminate this Agreement without notice upon or
after the occurrence of an Event of Default. Lender may also terminate this
Agreement on 6 months' prior written notice to Borrower in the event that any
one of the following individuals: John K. Delaney, Ethan D. Leder and Edward P.
Nordberg, shall cease to be the senior management of Borrower or Guarantor.
4.2.2 Termination by Borrower. Upon at least 75 days prior
-----------------------
written notice to Lender, Borrower may, at its option, terminate this Agreement;
provided, however, no such termination shall be effective until Borrower has
- - -------- -------
paid all of the Obligations in immediately available funds. Any notice of
termination given by Borrower shall be irrevocable unless Lender otherwise
agrees in writing, and Lender shall have no obligation to make any Loans on or
after the termination date stated in such notice. Borrower may elect to
terminate this Agreement in its entirety only. No section of this Agreement or
type of Loan available hereunder may be terminated singly.
-8-
<PAGE>
4.2.3 Termination Charges. At the effective date of termination
-------------------
of this Agreement by Borrower pursuant to Section 4.2.2 hereof, Borrower shall
pay to Lender (in addition to the then outstanding principal, accrued interest
and other charges owing under the terms of this Agreement and any of the other
Loan Documents) as liquidated damages for the loss of the bargain and not as a
penalty, an amount equal to 2.0% of the average outstanding principal balance of
the Revolving Credit Loans during the previous 12 months (including the period
when the HPF Existing Line of Credit and the HP Del Existing Line of Credit were
in effect) if termination occurs during the first 12-month period of the
Original Term (November 27, 1996 through November 26, 1997); and 1.0% of the
average outstanding principal balance of the Revolving Credit Loans during the
previous 12 months if termination occurs during the second 12-month period of
the Original Term (November 27, 1997 through November 26, 1998). If termination
occurs on the last day of the Original Term or the last day of any Renewal Term,
no termination charge shall be payable.
4.2.4 Effect of Termination. All of the Obligations shall be
---------------------
immediately due and payable upon the termination date stated in any notice of
termination of this Agreement. All undertakings, agreements, covenants,
warranties and representations of Borrower contained in the Loan Documents shall
survive any such termination and Lender shall retain its Liens in the Collateral
and all of its rights and remedies under the Loan Documents notwithstanding such
termination until Borrower has paid the Obligations to Lender, in full, in
immediately available funds, together with the applicable termination charge, if
any. Notwithstanding the payment in full of the Obligations, Lender shall not be
required to terminate its security interests in the Collateral unless, with
respect to any loss or damage Lender may incur as a result of dishonored checks
or other items of payment received by Lender from Borrower or any Account Debtor
and applied to the Obligations, Lender shall, at its option, (i) have received a
written agreement, executed by Borrower and by any Person whose loans or other
advances to Borrower are used in whole or in part to satisfy the Obligations,
indemnifying Lender from any such loss or damage; or (ii) have retained such
monetary reserves and Liens on the Collateral for such period of time as Lender,
in its reasonable discretion, may deem necessary to protect Lender from any such
loss or damage.
SECTION 5. SECURITY INTERESTS
5.1 Security Interest in Collateral. To secure the prompt payment and
-------------------------------
performance to Lender of the Obligations, Borrower hereby grants to Lender a
continuing Lien upon all of Borrower's assets, including all of the following
Property and interests in Property of Borrower, whether now owned or existing or
hereafter created, acquired or arising and wheresoever located:
(i) Accounts;
(ii) General Intangibles;
(iii) Deposit Accounts;
(iv) All monies and other Property of any kind now or at any time
or times hereafter in the possession or under the control of Lender or a
bailee or Affiliate of Lender;
(v) All of Borrower's rights under each Receivables Acquisition
Agreement, all sums due to Borrower thereunder, and any security interests,
guarantees or other
-9-
<PAGE>
collateral received by Borrower from a Provider in connection with such
Receivables Acquisition Agreement and each Receivables Loan Agreement;
(vi) All accessions to, substitutions for and all replacements,
products and cash and non-cash proceeds of (i) through (v) above,
including, without limitation, proceeds of and unearned premiums with
respect to insurance policies insuring any of the Collateral; and
(vii) All books and records (including, without limitation,
customer lists, credit files, computer programs, print-outs, and other
computer materials and records) of Borrower pertaining to any of (i)
through (v) above.
5.2 Lien Perfection; Further Assurances. Borrower shall execute such UCC-
-----------------------------------
1 financing statements as are required by the Code and such other instruments,
assignments or documents as are necessary to perfect Lender's Lien upon any of
the Collateral and shall take such other action at Lender's request as may be
required to perfect or to continue the perfection of Lender's Lien upon the
Collateral. Unless prohibited by applicable law, Borrower hereby authorizes
Lender to execute and file any such financing statement on Borrower's behalf.
The parties agree that a carbon, photographic or other reproduction of this
Agreement shall be sufficient as a financing statement and may be filed in any
appropriate office in lieu thereof. At Lender's request, Borrower shall also
promptly execute or cause to be executed and shall deliver to Lender any and all
documents, instruments and agreements reasonably deemed necessary by Lender to
give effect to or carry out the terms or intent of the Loan Documents.
5.3 Confirmation of Existing Liens. Borrower confirms and acknowledges
------------------------------
the continuing Lien granted by HPF and HP Del to Lender in the Collateral
pledged to Lender under the Existing Financing Agreements, the obligations under
which are expressly assumed by Borrower and constitute Obligations for all
purposes hereof.
SECTION 6. COLLATERAL ADMINISTRATION
6.1 General
-------
6.1.1 Location of Collateral. All Collateral other than
----------------------
Deposit Accounts and certain billing and collection records which are maintained
at the offices of a Provider or its agent will at all times be kept by Borrower
at its Chief Executive Office as set forth in Exhibit B hereto and shall not,
---------
without the prior written approval of Lender, be moved therefrom.
6.1.2 Protection of Collateral. All expenses of protecting
------------------------
and maintaining the Collateral, any and all excise, property, sales, and use
taxes imposed by any state, federal, or local authority on any of the Collateral
or in respect of the purchase or collection thereof shall be borne and paid by
Borrower. If Borrower fails to promptly pay any portion thereof when due,
Lender may, at its option, but shall not be required to, pay the same and charge
Borrower therefor. Lender shall not be liable or responsible in any way for the
safekeeping of any of the Collateral or for any loss or damage thereto (except
for reasonable care in the custody thereof while any Collateral is in Lender's
actual possession) or for any diminution in the value thereof, or for any act or
default of any warehouseman, carrier, forwarding agency, or other person
whomsoever, but the same shall be at Borrower's sole risk.
-10-
<PAGE>
6.2 Administration of Accounts.
--------------------------
6.2.1 Records, Schedules and Assignments of Accounts.
----------------------------------------------
Borrower shall keep accurate and complete records of its Accounts and all
payments and collections thereon and shall submit to Lender on such periodic
basis as Lender shall request a sales and collections report for the preceding
period, in form reasonably satisfactory to Lender. On or before the fifteenth
day of each month from and after the date hereof, Borrower shall deliver to
Lender, in form reasonably acceptable to Lender, a detailed aged trial balance
of all Accounts existing as of the last day of the preceding month, specifying
the names, addresses, face value, dates of invoices and due dates for each Third
Party Payor obligated on an Account so listed ("Schedule of Accounts"), and,
upon Lender's request therefor, copies of proof of purchase of such Accounts
from the Providers, proof that the payments due to the Provider in connection
with such purchase have been made and the original copy of all documents,
including, without limitation, repayment histories and present status reports
relating to the Accounts so scheduled and such other matters and information
relating to the status of then existing Accounts as Lender shall reasonably
request. Borrower shall also provide Lender with similar information with
respect to Accounts sold to or contributed to Wisconsin Circle Funding
Corporation. In the event that Accounts having an aggregate initial purchase
price in excess of $10,000 within any Batch(s) become ineligible because they
fall within one of the specified categories of ineligibility set forth in the
definition of Eligible Accounts, then Borrower shall notify Lender of such
occurrence on the first Business Day following such occurrence and the Borrowing
Base shall thereupon be adjusted to reflect such occurrence. If requested by
Lender, Borrower shall execute and deliver to Lender formal written assignments
of all of its Accounts weekly or daily, which shall include all Accounts that
have been created since the date of the last assignment.
6.2.2 Discounts, Allowances, Disputes. If Borrower or, to
-------------------------------
Borrower's knowledge, any Provider grants any discounts, allowances or credits
that are not reflected in the calculation of Fair Reimbursable Value for the
Account involved, Borrower shall report such discounts, allowances or credits,
as the case may be, to Lender as part of the next required Schedule of Accounts.
If any amounts due and owing in excess of $10,000 with respect to any Batch are
in dispute between Borrower and any Account Debtor, Borrower shall provide
Lender with written notice thereof at the time of submission of the next
Schedule of Accounts, explaining in detail the reason for the dispute, all
claims related thereto and the amount in controversy. Upon and after an
acceleration of the Loans by Lender, Lender shall have the right to settle or
adjust all disputes and claims directly with the Account Debtor and to
compromise the amount or extend the time for payment of the Accounts upon such
terms and conditions as Lender may deem advisable, and to charge the
deficiencies, costs and expenses thereof, including attorney's fees, to
Borrower.
6.2.3 Taxes. If an Account includes a charge for any tax
-----
payable to any governmental taxing authority, Lender is authorized, in its sole
discretion, to pay the amount thereof to the proper taxing authority for the
account of Borrower and to charge Borrower therefor, provided, however that
Lender shall not be liable for any taxes to any governmental taxing authority
that may be due by Borrower.
6.2.4 Account Verification. Whether or not an Event of
--------------------
Default has occurred, any of Lender's officers, employees or agents shall have
the right, at any time or times hereafter, in the name of Lender, any designee
of Lender or Borrower, to verify the validity, amount or any other matter
relating to any Accounts by mail, telephone, telegraph or otherwise. Lender
shall use its best efforts to assure that the exercise of such right does not
interfere with the conduct of Borrower's business.
-11-
<PAGE>
Borrower shall cooperate fully with Lender in an effort to facilitate and
promptly conclude any such verification process.
6.2.5 Maintenance of Dominion Account. Borrower shall
-------------------------------
maintain a Dominion Account pursuant to a lockbox arrangement acceptable to
Lender with Bank One Arizona, N.A., d/b/a Bank Star, or such other banks as may
be selected by Borrower and be acceptable to Lender. Borrower shall issue to
any such banks an irrevocable letter of instruction directing such banks to
deposit all payments or other remittances received in the lockbox to the
Dominion Account for application on account of the Obligations. All funds
deposited in the Dominion Account shall immediately become the property of
Lender, and Borrower shall obtain the agreement by such banks in favor of Lender
to waive any offset rights against the funds so deposited. Lender assumes no
responsibility for such lockbox arrangement, including, without limitation, any
claim of accord and satisfaction or release with respect to deposits accepted by
any bank thereunder. Borrower shall require each Provider to direct all Account
Debtors to remit payment on Accounts directly to the lockbox or the Dominion
Account. Notwithstanding anything in this Agreement to the contrary, Borrower
may permit the Provider to have access to a separate lockbox to which payments
by Medicare/Medicaid Account Debtors may be made, to the extent required by
applicable law. Any such funds received in such other lockbox shall be swept
daily and deposited into the Dominion Account.
6.2.6 Collection of Accounts, Proceeds of Collateral. To
----------------------------------------------
expedite collection, Borrower shall endeavor in the first instance to make
collection of its Accounts for Lender. All remittances received by Borrower on
account of Accounts, together with the proceeds of any other Collateral, shall
be held as Lender's property by Borrower as trustee of an express trust for
Lender's benefit and Borrower shall immediately deposit same in kind in the
Dominion Account. Lender retains the right at all times after the occurrence
and during the continuance of an Event of Default to notify Account Debtors that
Accounts have been assigned to Lender and to collect Accounts directly in its
own name and to charge the collection costs and expenses, including attorneys'
fees to Borrower.
6.3 Payment of Charges. All amounts chargeable to Borrower under Section
------------------
6 hereof shall be Obligations secured by all of the Collateral, shall be payable
on demand and shall bear interest from the date such advance was made until paid
in full at the rate applicable to Revolving Credit Loans from time to time.
SECTION 7. REPRESENTATIONS AND WARRANTIES
7.1 General Representations and Warranties. To induce Lender to enter
--------------------------------------
into this Agreement and to make advances hereunder, Borrower warrants,
represents and covenants to Lender that:
7.1.1 Organization and Qualification. Borrower is a
------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware. Borrower is duly qualified and is authorized to do
business and is in good standing in each state or jurisdiction listed on Exhibit
-------
C hereto and in all other states and jurisdictions where the character of its
- - -
Properties or the nature of its activities make such qualification necessary
unless such failure does not have a Material Adverse Effect.
7.1.2 Power and Authority. Borrower is duly authorized and
-------------------
empowered to enter into, execute, deliver and perform this Agreement and each of
the other Loan Documents to which it
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<PAGE>
is a party. The execution, delivery and performance of this Agreement and each
of the other Loan Documents have been duly authorized by all necessary corporate
action and do not and will not (i) require any consent or approval of the
shareholders of Borrower; (ii) contravene Borrower's Articles of Incorporation
or By-laws; (iii) violate, or cause Borrower to be in default under, any
provision of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award in effect having applicability to Borrower; (iv)
result in a breach of or constitute a default under any indenture or loan or
credit agreement or any other agreement, lease or instrument to which Borrower
is a party or by which it or its Properties may be bound or affected; or (v)
result in, or require, the creation or imposition of any Lien (other than
Permitted Liens) upon or with respect to any of the Properties now owned or
hereafter acquired by Borrower.
7.1.3 Legally Enforceable Agreement. This Agreement is, and
-----------------------------
each of the other Loan Documents when delivered under this Agreement will be, a
legal, valid and binding obligation of Borrower enforceable against it in
accordance with its respective terms.
7.1.4 Capital Structure. Exhibit D hereto states the
----------------- ---------
correct name of Borrower's Affiliates and the nature of the affiliation. There
are no outstanding options to purchase from Borrower, or any rights or warrants
to subscribe for, or any commitments or agreements of Borrower to issue or sell,
or any obligations of Borrower convertible into, Securities of Borrower other
than Wisconsin Circle Funding Corporation.
7.1.5 Corporate Names. Borrower has not been known as or
---------------
used any fictitious or trade names except those listed on Exhibit E hereto.
---------
Except as set forth on Exhibit E, Borrower has not been the surviving entity of
---------
a merger or consolidation or acquired all or substantially all of the assets of
any Person.
7.1.6 Business Locations; Agent for Process. Borrower's
-------------------------------------
chief executive office and other places of business are as listed on Exhibit B
---------
hereto. During the preceding one-year period, Borrower has not had an office,
place of business or agent for service of process other than as listed on
Exhibit B.
- - ---------
7.1.7 Title to Properties; Priority of Liens. Borrower has
--------------------------------------
good title to all of the Collateral and all of its other Property (subject to
applicable limitations on the ability of Borrower to receive direct payment as
assignee from a Medicare/Medicaid Account Debtor), in each case, free and clear
of all Liens except Permitted Liens. Borrower has paid or discharged all lawful
claims which, if unpaid, might become a Lien against any of Borrower's
Properties that is not a Permitted Lien. The Liens granted to Lender under
Section 5 hereof are first priority Liens, subject only to Permitted Liens.
7.1.8 Accounts. Lender may rely, in determining which
--------
Accounts are Eligible Accounts, on all statements and representations made by
Borrower with respect to any Account or Accounts. Unless otherwise indicated in
writing to Lender, with respect to each Account, to the best of Borrower's
knowledge after due investigation consistent with past practices of Borrower:
(i) It is genuine and in all respects what it purports to
be, and it is not evidenced by a judgment;
-13-
<PAGE>
(ii) It arises out of a completed, bona fide sale and delivery of
---- ----
goods or rendition of services by a Provider in the ordinary course of its
business and in accordance with the terms and conditions of all purchase orders,
contracts, certification, participation, certificate of need, Third Party Payor
contract or other documents relating thereto and forming a part of the contract
between the Provider and the Third Party Payor;
(iii) It is for a liquidated amount;
(iv) Such Account to the extent of the Fair Reimbursable Value, and
Lender's security interest therein, is not, and will not (by voluntary act or
omission of Borrower) be in the future, subject to any offset, Lien, deduction,
defense, dispute, counterclaim or any other adverse condition, and each such
Account is absolutely owing to Borrower and is not contingent in any respect or
for any reason;
(v) Borrower has made no agreement with any Account Debtor
thereunder for any extension, compromise, settlement or modification of any such
Account or any deduction therefrom, except discounts or allowances which are
granted by a Provider in the ordinary course of its business for prompt payment
and which are reflected in the calculation of the net amount of each respective
invoice related thereto, or which do not reduce the balance due on such Account
below the Fair Reimbursable Value for such Account and which are reflected in
the Schedules of Accounts submitted to Lender pursuant to subsection 6.2.1
hereof;
(vi) There are no facts, events or occurrences which in any way
impair the validity or enforceability of any Accounts or tend to reduce the
amount payable thereunder to less than the Fair Reimbursable Value with respect
thereto;
(vii) To the best of Borrower's knowledge, the Third Party Payor
thereunder (1) had the capacity to contract at the time any contract or other
document giving rise to the Account was executed and (2) such Third Party Payor
is Solvent;
(viii) To the best of Borrower's knowledge, there are no proceedings
or actions which are threatened or pending against any Third Party Payor
thereunder which might result in any material adverse change in the
collectibility of such Account;
(ix) It has been or will promptly be billed and forwarded to a
Medicare/Medicaid Account Debtor or Third Party Payor for payment in accordance
with applicable laws and compliance and conformance with any and all requisite
procedures, requirements and regulations governing payment by such
Medicare/Medicaid Account Debtor or Third Party Payor with respect to such
Account, and such Account if due from a Medicare/Medicaid Account Debtor is
properly payable directly to the Provider from which Borrower purchased such
Account by such Medicare/Medicaid Account Debtor or if due from any other Third
Party Payor is properly payable directly to Borrower in accordance with the
terms and conditions of a validly existing and legally binding certification,
participation or other third party payor contract;
(x) Each Eligible Provider has obtained and currently has all
Certificates of Need and Medicare and Medicaid Provider Numbers as are necessary
to operate its business. Each Eligible Provider's Certificates of Need,
Provider Numbers and all written agreements between each
-14-
<PAGE>
Eligible Provider and any Medicare/Medicaid Account Debtor or other
commercial payor, hospital, pharmacy, or managed-care payor regarding
payment for goods sold and services rendered by any Eligible Provider to
such Third Party Payor will be forwarded upon request to Borrower. All cost
reports required to be filed by an Eligible Provider with such third party
payors have been properly filed.
7.1.9 Financial Statements; Fiscal Year. An opening balance
---------------------------------
sheet of Borrower, as of November 27, 1996, will be prepared in accordance with
GAAP, and will present fairly the financial position of Borrower at such date
and will be delivered to Lender within ten (10) business days after the date
hereof.
7.1.10 Full Disclosure. The financial statements
---------------
referred to in subsection 7.1.9 hereof do not, nor does this Agreement and any
other written statement of Borrower to Lender, taken as a whole, contain any
untrue statement of a material fact or omit a material fact necessary to make
the statements contained therein or herein not misleading at the time the
statements were made. There is no fact which Borrower has failed to disclose to
Lender in writing which materially affects adversely or, so far as Borrower can
now foresee, will materially affect adversely the Properties, business,
prospects, profits or condition (financial or otherwise) of Borrower or the
ability of Borrower or its Subsidiaries to perform this Agreement or the other
Loan Documents.
7.1.11 Solvent Financial Condition. Borrower is and,
---------------------------
after giving effect to the Loans to be made hereunder, at all times will be,
Solvent.
7.1.12 Surety Obligations. Borrower is not obligated
------------------
as surety or indemnitor under any surety or similar bond or other contract
issued or entered into any agreement to assure payment, performance or
completion of performance of any undertaking or obligation of any Person.
7.1.13 Taxes. Borrower's federal tax identification
-----
number is 52-1844418. Borrower has filed all federal, state and local tax
returns and other reports it is required by law to file and has paid, or made
provision for the payment of, all taxes, assessments, fees, levies and other
governmental charges upon it, its income and Properties as and when such taxes,
assessments, fees, levies and charges that are due and payable, unless and to
the extent any thereof are being actively contested in good faith and by
appropriate proceedings and Borrower maintains reasonable reserves on its books
therefor. The provision for taxes on the books of Borrower is adequate for all
years not closed by applicable statutes, and for its current fiscal year.
7.1.14 Brokers. Borrower has not engaged any broker or
-------
finder or committed to pay, and is not aware of, any claims for brokerage
commissions, finder's fees or investment banking fees in connection with the
transactions contemplated by this Agreement other than the fee of Kent M.
Klineman, which is the sole obligation and responsibility of Borrower.
7.1.15 Patents, Trademarks, Copyrights and Licenses.
--------------------------------------------
Borrower owns or possesses all the patents, trademarks, service marks, trade
names, copyrights and licenses necessary for the present and planned future
conduct of its business without any known conflict with the rights of others.
All such patents, trademarks, service marks, trade names, copyrights, licenses
and other similar rights are listed on Exhibit G hereto.
---------
-15-
<PAGE>
7.1.16 Governmental Consents. Borrower has, and is in good
---------------------
standing with respect to, all governmental consents, approvals, licenses,
authorizations, permits, certificates, inspections and franchises necessary to
continue to conduct its business as heretofore or proposed to be conducted by it
and to own or lease and operate its Properties as now owned or leased by it,
except where the failure to comply would not have a Material Adverse Effect.
7.1.17 Compliance with Laws. Borrower has duly complied
--------------------
with, and its Properties, business operations and leaseholds are in compliance
in all material respects with, the provisions of all federal, state and local
laws, rules and regulations applicable to Borrower, as applicable, its
Properties or the conduct of its business and there have been no citations,
notices or orders of noncompliance issued to Borrower under any such law, rule
or regulation, except where the failure so to comply would not have a Material
Adverse Effect.
7.1.18 Restrictions. Borrower is not a party or subject to
------------
any contract, agreement, or charter or other corporate restriction, which
materially and adversely affects its business or the use or ownership of any of
its Properties. Borrower is not a party or subject to any contract or agreement
which restricts its right or ability to incur Indebtedness, other than as set
forth on Exhibit H hereto, none of which prohibit the execution of or compliance
---------
with this Agreement or the other Loan Documents by Borrower, as applicable.
7.1.19 Litigation. Except as set forth on Exhibit I hereto,
---------- ---------
there are no actions, suits, proceedings or investigations pending, or to the
knowledge of Borrower, threatened, against or affecting Borrower, or the
business, operations, Properties, profits or condition of Borrower taken as a
whole. Borrower is not in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or arbitration
board or tribunal.
7.1.20 No Defaults. No event has occurred and no condition
-----------
exists which would, upon or after the execution and delivery of this Agreement
or Borrower's performance hereunder, constitute a Default or an Event of
Default. Borrower is not in default, and no event has occurred and no condition
exists which constitutes, or which with the passage of time or the giving of
notice or both would constitute, a default in the payment of any Indebtedness to
any Person for Money Borrowed.
7.1.21 Leases. Exhibit J hereto is a complete listing of
------ ---------
all capitalized leases of Borrower and Exhibit K hereto is a complete listing of
---------
all operating leases of Borrower. Borrower is in full compliance with all of
the terms of each of its respective capitalized and operating leases, except
where the failure so to comply would not have a Material Adverse Effect.
7.1.22 Pension Plans. Except as disclosed on Exhibit L
------------- ---------
hereto, Borrower has no Plan. Borrower is in full compliance with the
requirements of ERISA and the regulations promulgated thereunder with respect to
each Plan. No fact or situation that could result in a material adverse change
in the financial condition of Borrower or any of its Subsidiaries exists in
connection with any Plan. Borrower has no withdrawal liability in connection
with a Multiemployer Plan.
7.1.23 Trade Relations. There exists no actual or
---------------
threatened termination, cancellation or limitation of, or any modification or
change in, the business relationship between Borrower and any Provider or any
group of Providers whose business with Borrower, individually
-16-
<PAGE>
or in the aggregate are material to the business of Borrower, or with any
material supplier, and there exists no present condition or state of facts or
circumstances which would materially affect adversely Borrower or prevent
Borrower from conducting such business after the consummation of the transaction
contemplated by this Agreement in substantially the same manner in which it has
heretofore been conducted.
7.1.24 Labor Relations. Except as described on Exhibit M
--------------- ---------
hereto, Borrower is not a party to any collective bargaining agreement. There
are no material grievances, disputes or controversies with any union or any
other organization of Borrower's employees, or threats of strikes, work
stoppages or any asserted pending demands for collective bargaining by any union
or organization.
7.2 Continuous Nature of Representations and Warranties. Each
---------------------------------------------------
representation and warranty contained in this Agreement and the other Loan
Documents shall be continuous in nature and shall remain in all material
respects accurate, complete and not misleading at all times during the term of
this Agreement, except for changes that Lender has consented to or which are not
expressly prohibited by this Agreement.
7.3 Survival of Representations and Warranties. All representations and
------------------------------------------
warranties of Borrower contained in this Agreement or any of the other Loan
Documents shall survive the execution, delivery and acceptance thereof by Lender
and the parties thereto and the closing of the transactions described therein or
related thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
8.1 Affirmative Covenants. During the term of this Agreement, and
---------------------
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
8.1.1 Visits and Inspections. Permit representatives of
----------------------
Lender, from time to time, as often as may be reasonably requested, but only
during normal business hours and so as not to unreasonably disrupt the operation
of Borrower's business operations, to visit and inspect the Properties of
Borrower and accompany Borrower on any visit or inspection of any Provider, and
to inspect, audit and make extracts from its books and records, and discuss with
its officers, its employees and its independent accountants, Borrower's or any
Provider's business, assets, liabilities, financial condition, business
prospects and results of operations. Borrower shall give Lender 3 Business Days
prior notice of any scheduled due diligence visit to any new Provider to permit
Lender or its representative to accompany Borrower on such visit.
8.1.2 Notices. Promptly notify Lender in writing of the
-------
occurrence of any event or the existence of any fact which renders any
representation or warranty in this Agreement or any of the other Loan Documents
inaccurate, incomplete or misleading.
8.1.3 Financial Statements. Keep adequate records and
--------------------
books of account with respect to its business activities in which proper entries
are made in accordance with GAAP reflecting all its financial transactions; and
cause to be prepared and furnished to Lender the following (all to be prepared
in accordance with GAAP applied on a consistent basis, unless Borrower's
certified public accountants concur in any change therein and such change is
disclosed to Lender and is consistent with GAAP):
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<PAGE>
(i) not later than 90 days after the close of each fiscal year
of Borrower, unqualified audited financial statements of Guarantor and its
Subsidiaries (including Borrower) as of the end of such year, on a
Consolidated and consolidating basis, certified by the firm of Ernst &
Young, L.L.P. of Washington, D.C. or any other firm of independent
certified public accountants of recognized standing selected by Borrower
but acceptable to Lender (except for a qualification for a change in
accounting principles with which the accountant concurs);
(ii) not later than 20 days after the end of each month
hereafter, including the last month of Borrower's fiscal year, unaudited
interim financial statements of Borrower as of the end of such month and of
the portion of Borrower's financial year then elapsed, certified by the
principal financial officer of Borrower as prepared in accordance with GAAP
and fairly presenting the financial position and results of operations of
Borrower for such month and period subject only to changes from audit and
year-end adjustments and except that such statements need not contain
notes;
(iii) promptly after the sending or filing thereof, as the case
may be, copies of any proxy statements, financial statements or reports
which Borrower has made available to its partners and copies of any
regular, periodic and special reports or registration statements which
Borrower files with the Securities and Exchange Commission or any
governmental authority which may be substituted therefor, or any national
securities exchange;
(iv) promptly after the filing thereof, copies of any annual
report to be filed in accordance with ERISA in connection with each Plan;
and
(v) such other data and information (financial and otherwise)
as Lender, from time to time, may reasonably request, bearing upon or
related to the Collateral or Borrower's financial condition or results of
operations.
Concurrently with the delivery of the financial statements described
in clause (i) of this subsection 8.1.3, Borrower shall forward to Lender a copy
of the accountants' letter to Guarantor's management that is prepared in
connection with such financial statements and also shall cause to be prepared
and shall furnish to Lender a certificate of the aforesaid certified public
accountants certifying to Lender that, based solely upon their examination of
the financial statements of Guarantor performed in connection with their
examination of said financial statements, they are not aware of any Default or
Event of Default, or, if they are aware of such Default or Event of Default,
specifying the nature thereof, and acknowledging, in a manner satisfactory to
Lender, that they are aware that Lender is relying on such financial statements
in making its decisions with respect to the Loans. Concurrently with the
delivery of the financial statements described in clauses (i) and (ii) of this
subsection 8.1.3, or more frequently if requested by Lender, Borrower shall
cause to be prepared and furnished to Lender a Compliance Certificate in the
form of Exhibit N hereto executed by the Chief Financial Officer of Borrower.
---------
8.1.4 Landlord and Storage Agreements. Provide Lender with
-------------------------------
copies of all agreements between Borrower and any landlord of any premises at
which any books and records or other Collateral may, from time to time, be kept.
8.1.5 Projections. No later than 30 days prior to the end
-----------
of each fiscal year of Borrower, deliver to Lender Projections of Borrower for
the forthcoming fiscal year, month by month.
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<PAGE>
8.1.6 Medicare and Medicaid Audits. Obtain for each Eligible
----------------------------
Provider and, upon request, make available to Lender a copy of any Medicare and
Medicaid audit.
8.1.7 Settlement and Confirmation Statement. Borrower shall
-------------------------------------
provide Lender with the Settlement and Confirmation Statement in the form
attached hereto as Exhibit Q for each Batch purchased by Borrower which shall
include an identification number for such Batch, a detailed listing of each
Account, the Fair Reimbursable Value therefor and the amount of the initial
advance made by Borrower to the Provider to purchase such Account.
8.1.8 Batch Reporting. Borrower shall provide Lender with
---------------
weekly investment summaries in form and substance acceptable to Lender showing
the number of days each Batch has been outstanding since its purchase date or
since the date of the advance secured by such Batch, if applicable. Borrower
shall provide Lender with a copy of all of the Receivables Acquisition
Agreements or Receivables Loan Agreements, as applicable, for each Eligible
Provider and all other UCC filings, UCC searches and other instruments,
documents and agreements executed and delivered by such Provider to Borrower and
shall permit all of such documents, instruments and agreements to be reviewed by
Lender's outside legal counsel upon Lender's request.
8.1.9 Fair Reimbursable Value. If, as a result of any
-----------------------
verification procedure undertaken by Lender in accordance with Section 6.2.4 or
8.1.8, Lender determines that there is a material question as to the adequacy or
accuracy of the methodology used to determine Fair Market Value with respect to
a Provider, then Lender may at Borrower's cost and expense obtain a consultant
to independently review the adequacy and accuracy of the Fair Reimbursable Value
or the independent verifier retained by Borrower to determine the Fair
Reimbursable Value.
8.2 Negative Covenants. During the term of this Agreement, and thereafter
------------------
for so long as there are any Obligations to Lender, Borrower covenants that,
unless Lender has first consented thereto in writing, it will not:
8.2.1 Mergers; Consolidations; Acquisitions. Merge or
-------------------------------------
consolidate with any Person; or acquire all or any substantial part of the
Property of any Person.
8.2.2 Loans. Make any loans or other advances of money (other
-----
than for salary, travel advances, advances against commissions and other similar
advances in the ordinary course of business) to any Person other than (i)
advances to Providers pursuant to a Receivables Acquisition Agreement, (ii)
loans to Providers secured by accounts receivable of such Providers, and (iii)
loans to Providers secured by real estate, equipment and other assets of such
Providers in an amount not to exceed in the aggregate at any one time 25% of
Borrower's Net Worth.
8.2.3 Total Indebtedness. Create, incur, assume, or suffer to
------------------
exist any Indebtedness, except:
(i) Obligations owing to Lender;
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<PAGE>
(ii) accounts payable to trade creditors and current operating
expenses (other than for Money Borrowed) which are not aged more than 120
days from billing date or more than 30 days from the due date, in each case
incurred in the ordinary course of business and paid within such time
period, unless the same are being actively contested in good faith and by
appropriate and lawful proceedings; and Borrower shall have set aside such
reserves, if any, with respect thereto as are required by GAAP and deemed
adequate by Borrower and its independent accountants;
(iii) Obligations to pay rentals with respect to leases
permitted by subsection 8.2.12;
(iv) Permitted Purchase Money Indebtedness; and
(v) contingent liabilities arising out of endorsements of
checks and other negotiable instruments for deposit or collection in the
ordinary course of business.
8.2.4 Affiliate Transactions. Except as disclosed on any
----------------------
Schedule hereto, enter into, or be a party to any transaction with any Affiliate
of Borrower, including any shareholder or any Provider, except in the ordinary
course of and pursuant to the reasonable requirements of Borrower's business and
upon fair and reasonable terms which are fully disclosed to Lender and are no
less favorable to Borrower than Borrower would obtain in a comparable arm's
length transaction with a Person not an Affiliate or shareholder of Borrower.
8.2.5 Limitation on Liens. Create or suffer to exist any
-------------------
Lien upon any of its Property, income or profits, whether now owned or hereafter
acquired, except:
(i) Liens at any time granted in favor of Lender;
(ii) Liens for taxes (excluding any Lien imposed pursuant to
any of the provisions of ERISA) not yet due, or being contested in the
manner described in subsection 7.1.13 hereto, but only if in Lender's
judgment such Lien does not adversely affect Lender's rights or the
priority of Lender's Lien in the Collateral or with respect to Liens for
taxes imposed against the Provider which sold any Accounts to Borrower,
provided that such Account shall not be an Eligible Account;
(iii) Liens arising in the ordinary course of Borrower's
business by operation of law or regulation, but only if payment in respect
of any such Lien is not at the time required and such Liens do not, in the
aggregate, materially detract from the value of the Property of Borrower or
materially impair the use thereof in the operation of Borrower's business;
(iv) Purchase Money Liens securing Permitted Purchase Money
Indebtedness;
(v) such other Liens as appear on Exhibit O hereto; and
---------
(vi) such other Liens as Lender may hereafter approve in
writing.
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<PAGE>
8.2.6 Subordinated Debt. Make any payment of any part or all
-----------------
of any Subordinated Debt or take any other action or omit to take any other
action in respect of any Subordinated Debt, except in accordance with any
Subordination Agreement relative thereto.
8.2.7 Distributions. Declare or make any Distributions, if
-------------
after taking such Distribution into account an Event of Default or Defaults
shall have occurred.
8.2.8 Capital Expenditures. Make Capital Expenditures
--------------------
(including, without limitation, by way of capitalized leases) in excess of
$100,000 in the aggregate during the Original Term and any Renewal Term.
8.2.9 Disposition of Assets. Sell, lease or otherwise dispose
---------------------
of any of, or permit any Subsidiary of Borrower to sell, lease or otherwise
dispose any of, its Properties, including any disposition of Property as part of
a sale and leaseback transaction, to or in favor of any Person, except (i)
dispositions expressly authorized by this Agreement, (ii) occurring in the
ordinary course of Borrower's business, and (iii) prior to the occurrence of an
Event of Default, the sale of all of the Eligible Accounts of a Provider for a
cash purchase price equal to or greater than that portion of the Borrowing Base
allocable to such Eligible Accounts.
8.2.10 Stock of Subsidiaries. Form any Subsidiaries other than
---------------------
Wisconsin Circle Funding Corporation.
8.2.11 Restricted Investment. Make or have, or permit any
---------------------
Subsidiary of Borrower to make or have, any Restricted Investments at any one
time with an aggregate cost greater than 25% of Borrower's Net Worth.
8.2.12 Leases. Become a lessee under any operating lease of
------
Property in excess of $150,000 in any calendar year.
8.2.13 Tax Consolidation. File or consent to the filing of any
-----------------
consolidated income tax return with any Person other than a Subsidiary of
Borrower or Guarantor.
8.2.14 Certificates of Need. Consent to allow any Eligible
--------------------
Provider to amend, alter or suspend or terminate or make provisional in any
material way, any Certificate of Need or Provider Number or third party payor
contract of such Eligible Provider without prior written notice to Lender.
8.2.15 Receivables Acquisition Agreements. Amend or modify in
----------------------------------
any material respect the terms of any Receivables Acquisition Agreement or
Receivables Loan Agreement in effect with a Provider without Lender's prior
written consent.
8.3 Specific Financial Covenants. During the term of this Agreement, and
----------------------------
thereafter for so long as there are any Obligations to Lender, Borrower
covenants that, unless otherwise consented to by Lender in writing, it shall:
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<PAGE>
8.3.1 Minimum Adjusted Tangible Net Worth. Maintain at all times
Adjusted Tangible Net Worth of not less than the amount shown below for the
period corresponding thereto:
Period
------
Amount
- - ------
Closing Date and at all times thereafter $5,000,000
8.3.2 Debt to Adjusted Tangible Net Worth Ratio. Maintain at all
-----------------------------------------
times a ratio of Debt to Adjusted Tangible Net Worth of not more than the ratio
shown below for the period corresponding thereto:
Period Ratio
------ -----
Closing Date and at all times thereafter 3 to 1
8.3.3 Cash Flow. Achieve cumulative Cash Flow during the Original
---------
Term and all Renewal Terms which is not less than negative $1,000,000 (i.e., not
worse than a cumulative cash deficit after the Closing Date of $1,000,000).
SECTION 9. CONDITIONS PRECEDENT
Notwithstanding any other provision of this Agreement or any of the
other Loan Documents, and without affecting in any manner the rights of Lender
under the other sections of this Agreement, Lender shall not be required to make
any Loan under this Agreement unless and until each of the following conditions
has been and continues to be satisfied:
9.1 Documentation. Lender shall have received, in form and substance
-------------
satisfactory to Lender and its counsel, a duly executed copy of this Agreement,
the Surety Agreement and the other Loan Documents, together with such additional
certificates as Lender and its counsel shall reasonably require not otherwise
inconsistent with the express provisions of this Agreement and the other Loan
Documents in connection therewith from time to time, all in form and substance
reasonably satisfactory to Lender and its counsel.
9.2 No Default. No Event of Default shall exist.
----------
9.3 Other Loan Documents. Each of the conditions precedent set forth in
--------------------
the other Loan Documents shall have been satisfied.
9.4 Equity. Lender shall have received evidence satisfactory to it that
------
not less than a total of $5,000,000 in cash has been contributed as equity to
the capital of Borrower.
9.5 Availability. Lender shall have determined that immediately after
------------
Lender has made the initial Loan contemplated hereby, Aggregate Adjusted
Availability shall not be less than $1,000,000.
-22-
<PAGE>
9.6 No Litigation. No action, proceeding, investigation, regulation or
-------------
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement or the consummation of the transactions contemplated hereby.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
10.1 Events of Default. The occurrence of one or more of the following
-----------------
events shall constitute an "Event of Default":
10.1.1 Payment of Obligations. Borrower shall fail to pay
----------------------
any of the Obligations on the due date thereof (whether due at stated maturity,
on demand, upon acceleration or otherwise).
10.1.2 Misrepresentations. Any representation, warranty or
------------------
other statement made or furnished to Lender by or on behalf of Borrower or
Guarantor in this Agreement, any of the other Loan Documents or any instrument,
certificate or financial statement furnished in compliance with or in reference
thereto proves to have been false in any material respect or misleading in any
material respect when made or furnished or when reaffirmed pursuant to Section
7.2 hereof.
10.1.3 Breach of Specific Covenants. Borrower shall fail or
----------------------------
neglect to perform, keep or observe any covenant contained in Sections 5.2,
6.1.1, 6.2.5, 6.2.6, or 8.2 (other than 8.2.2, 8.2.3, 8.2.4, 8.2.5, 8.2.7,
8.2.11 and 8.2.14) hereof on the date that Borrower is required to perform, keep
or observe such covenant or Borrower shall fail or neglect to perform, keep or
observe any covenant contained in Sections 8.1.3, 8.2.2, 8.2.5, 8.2.7, 8.2.11 or
8.2.14 hereof on the date that Borrower is required to perform, keep or observe
such covenant and the breach of such covenant is not cured to Lender's
reasonable satisfaction within 10 days after Borrower's receipt of notice of
such breach from Lender or the date on which such failure or neglect first
becomes known to any officer of Borrower.
10.1.4 Breach of Other Covenants. Borrower shall fail or
-------------------------
neglect to perform, keep or observe in any material respect any covenant
contained in this Agreement (other than a covenant which is dealt with
specifically elsewhere in Section 10.1 hereof) and the breach of such other
covenant is not cured to Lender's reasonable satisfaction within 40 days after
Borrower's receipt of notice of such breach from Lender or the date on which
such failure or neglect first becomes known to any officer of Borrower.
10.1.5 Default Under Security Documents/Other
--------------------------------------
Agreements/Purchase Documents. Borrower shall default in any material respect
- - -----------------------------
in the performance or observance of any term, covenant, condition or agreement
contained in, any of the Security Documents; or the Other Agreements or any
Receivables Acquisition Agreement and such default is not cured to Lender's
reasonable satisfaction within 40 days after Borrower's receipt of notice of
such breach from Lender or the date on which such failure or neglect first
becomes known to any officer of Borrower.
10.1.6 Other Defaults. There shall occur any default or
--------------
event of default on the part of Borrower under any agreement, document or
instrument to which Borrower is a party or by which Borrower or any of its
Property is bound, creating or relating to any Indebtedness (other than the
Obligations) if the payment or maturity of such Indebtedness is accelerated in
consequence of such
-23-
<PAGE>
event of default or demand for payment of such Indebtedness is made and such
default or event of default is not cured to Lender's reasonable satisfaction
within 40 days after Borrower's receipt of notice of such breach from Lender or
the date on which such failure or neglect first becomes known to any officer of
Borrower.
10.1.7 Adverse Changes. There shall occur any event or
---------------
condition which results in a Material Adverse Effect.
10.1.8 Insolvency and Related Proceedings. Borrower or
----------------------------------
Guarantor shall cease to be Solvent or shall suffer the appointment of a
receiver, trustee, custodian or similar fiduciary, or shall make an assignment
for the benefit of creditors, or any petition for an order for relief shall be
filed by or against Borrower or Guarantor under the Bankruptcy Code (and if
filed against Borrower, the continuation of such proceeding for more than 30
days), or Borrower or Guarantor shall make any offer of settlement, extension or
composition to their respective unsecured creditors generally.
10.1.9 Business Disruption; Condemnation. There shall
---------------------------------
occur a cessation of a substantial part of the business of Borrower or Guarantor
for a period which significantly affects Borrower's or Guarantor's capacity to
continue its business, on a profitable basis; or Borrower or Guarantor shall
suffer the loss or revocation of any license or permit now held or hereafter
acquired by Borrower or Guarantor which is necessary to the continued or lawful
operation of its business and the loss thereof would have a Material Adverse
Effect; or Borrower shall be enjoined, restrained or in any way prevented by
court, governmental or administrative order from conducting all or any material
part of its business affairs; or any material lease or agreement pursuant to
which Borrower leases, uses or occupies any Property shall be canceled or
terminated by the other party to such lease or agreement prior to the expiration
of its stated term and the loss thereof would have a Material Adverse Effect; or
any part of the Collateral shall be taken through condemnation or the value of
such Property shall be impaired through condemnation.
10.1.10 Change of Ownership. HealthPartners Financial
-------------------
Corporation shall cease to be the sole shareholder of Borrower or John K.
Delaney, Ethan D. Leder and Edward P. Nordberg shall cease to own collectively
own at least fifteen percent (15%) of the issued and outstanding stock of
HealthPartners Financial Corporation at any time while all three of them are
actively involved in management of Borrower, or in the event that one of them
ceases to be active in the management of Borrower, the remaining individuals
active shall cease to own collectively ten percent (10%) of the issued and
outstanding stock of Borrower or if any two of them shall cease to be active in
the management of Borrower, the remaining individual active in the management of
Borrower shall cease to own individually five percent (5%) of the issued and
outstanding stock of HealthPartners Financial Corporation.
10.1.11 Change of Management. All of John K. Delaney,
--------------------
Ethan D. Leder and Edward P. Nordberg shall cease to be senior management of
Borrower and Guarantor.
10.1.12 ERISA. A Reportable Event shall occur which
-----
Lender, in its sole discretion, shall determine in good faith constitutes
grounds for the termination by the Pension Benefit Guaranty Corporation of any
Plan or for the appointment by the appropriate United States district court of a
trustee for any Plan, or if any Plan shall be terminated or any such trustee
shall be requested or appointed, or if Borrower is in "default" (as defined in
Section 4219(c)(5) of ERISA) with respect to payments to a
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<PAGE>
Multiemployer Plan resulting from Borrower's complete or partial withdrawal from
such Plan and such Reportable Event is not cured to Lender's reasonable
satisfaction within 40 days after Borrower's receipt of notice of such breach
from Lender or the date on which such failure or neglect first becomes known to
any officer of Borrower.
10.1.13 Challenge to Agreement. Borrower or any Affiliate of
----------------------
Borrower, shall challenge or contest in any action, suit or proceeding the
validity or enforceability of this Agreement, or any of the other Loan
Documents, including with limitation, the Surety Agreement, the legality or
enforceability of any of the Obligations or the perfection or priority of any
Lien granted to Lender in connection with this Agreement.
10.1.14 Criminal Forfeiture. Borrower shall be criminally
-------------------
indicted or convicted under any law that could lead to a forfeiture of any
Property of Borrower, Guarantor or any Subsidiary of Borrower.
10.1.15 Judgments. Any money judgment, writ of attachment or
---------
similar process in excess of $250,000 is filed against Borrower or its Property
and is not fully bonded, vacated, stayed or discharged within 20 days, other
than any judgment against a Provider which attaches to Accounts purchased by
Borrower from such Provider and to sums due from Borrower to such Provider under
the Receivable Acquisition Agreement (which Accounts shall not be Eligible
Accounts).
10.2 Acceleration of the Obligations. Without in any way limiting the
-------------------------------
right of Lender to demand payment of any portion of the Obligations payable on
demand in accordance with Section 3.2 hereof, upon or at any time after the
occurrence and during the continuance of an Event of Default, all or any portion
of the Obligations shall, at the option of Lender and without presentment,
demand protest or further notice by Lender, become at once due and payable and
Borrower shall forthwith pay to Lender, the full amount of such Obligations,
provided, that upon the occurrence of an Event of Default specified in
- - --------
subsections 10.1.8 hereof, all of the Obligations shall become automatically due
and payable without declaration, notice or demand by Lender.
10.3 Other Remedies. Upon and during the continuance of an Event of
--------------
Default, Lender shall have and may exercise from time to time the following
rights and remedies:
10.3.1 All of the rights and remedies of a secured party
under the Code or under other applicable law, and all other legal and equitable
rights to which Lender may be entitled, all of which rights and remedies shall
be cumulative and shall be in addition to any other rights or remedies contained
in this Agreement or any of the other Loan Documents, and none of which shall be
exclusive.
10.3.2 The right to take immediate possession of the
Collateral, and to (i) require Borrower to assemble the Collateral, at
Borrower's expense, and make it available to Lender at a place designated by
Lender which is reasonably convenient to both parties, and (ii) enter any
premises where any of the Collateral shall be located and to keep and store the
Collateral on said premises until sold (and if said premises be the Property of
Borrower, Borrower agrees not to charge Lender for storage thereof).
10.3.3 The right to sell or otherwise dispose of all or any
Collateral in its then condition, or after any further manufacturing or
processing thereof, at public or private sale or
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<PAGE>
sales, with such notice as may be required by law, in lots or in bulk, for cash
or on credit, all as Lender, in its sole discretion, may deem advisable.
Borrower agrees that 10 days written notice to Borrower of any public or private
sale or other disposition of Collateral shall be reasonable notice thereof, and
such sale shall be at such locations as Lender may designate in said notice.
Lender shall have the right to conduct such sales on Borrower's premises,
without charge therefor, and such sales may be adjourned from time to time in
accordance with applicable law. Lender shall have the right to sell, lease or
otherwise dispose of the Collateral, or any part thereof, for cash, credit or
any combination thereof, and Lender may purchase all or any part of the
Collateral at public or, if permitted by law, private sale and, in lieu of
actual payment of such purchase price, may set off the amount of such price
against the Obligations. The proceeds realized from the sale of any Collateral
may be applied, after allowing 2 Business Days for collection, first to the
costs, expenses and attorneys' fees incurred by Lender in collecting the
Obligations, in enforcing the rights of Lender under the Loan Documents and in
collecting, retaking, completing, protecting, removing, storing, advertising for
sale, selling and delivering any Collateral, second to the interest due upon any
of the Obligations; and third, to the principal of the Obligations. If any
deficiency shall arise, Borrower shall remain jointly and severally liable to
Lender therefor.
10.3.4 Lender is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks and advertising matter, or any
Property of a similar nature, as it pertains to the Collateral, solely for the
purpose of advertising for sale and selling any Collateral, and Borrower's
rights under all licenses and all franchise agreements shall inure to Lender's
benefit for such purpose.
10.4 Remedies Cumulative; No Waiver. All covenants, conditions,
------------------------------
provisions, warranties, guaranties, indemnities, and other undertakings of
Borrower contained in this Agreement and the other Loan Documents, or in any
document referred to herein or contained in any agreement supplementary hereto
or in any schedule or in any Guaranty Agreement given to Lender or contained in
any other agreement between Lender and Borrower, heretofore, concurrently, or
hereafter entered into, shall be deemed cumulative to and not in derogation or
substitution of any of the terms, covenants, conditions, or agreements of
Borrower herein contained. The failure or delay of Lender to require strict
performance by Borrower of any provision of this Agreement or to exercise or
enforce any rights, Liens, powers, or remedies hereunder or under any of the
aforesaid agreements or other documents or security or Collateral shall not
operate as a waiver of such performance, Liens, rights, powers and remedies, but
all such requirements, Liens, rights, powers, and remedies shall continue in
full force and effect until all Loans and all other Obligations owing or to
become owing from Borrower to Lender shall have been fully satisfied. None of
the undertakings, agreements, warranties, covenants and representations of
Borrower contained in this Agreement or any of the other Loan Documents and no
Event of Default by Borrower under this Agreement or any other Loan Documents
shall be deemed to have been suspended or waived by Lender, unless such
suspension or waiver is by an instrument in writing specifying such suspension
or waiver and is signed by a duly authorized representative of Lender and
directed to Borrower.
SECTION 11. MISCELLANEOUS
11.1 Power of Attorney. Borrower hereby irrevocably designates, makes,
-----------------
constitutes and appoints Lender (and all Persons designated by Lender) as
Borrower's true and lawful attorney (and agent-in-fact) with respect to the
Collateral and Lender, or Lender's agent, may, without notice to Borrower and in
either Borrower's or Lender's name, but at the cost and expense of Borrower:
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<PAGE>
11.1.1 At such time or times upon or after the occurrence and
during the continuance of an Event of Default as Lender or said agent, in its
sole discretion, may determine, endorse Borrower's name on any checks, notes,
acceptances, drafts, money orders or any other evidence of payment or proceeds
of the Collateral which come into the possession of Lender or under Lender's
control.
11.1.2 At such time or times upon or after the occurrence and
during the continuance of an Event of Default as Lender or its agent in its sole
discretion may determine: (i) demand payment of the Accounts from the Account
Debtors, enforce payment of the Accounts by legal proceedings or otherwise, and
generally exercise all of Borrower's rights and remedies with respect to the
collection of the Accounts; (ii) settle, adjust, compromise, discharge or
release any of the Accounts or other Collateral or any legal proceedings brought
to collect any of the Accounts or other Collateral; (iii) sell or assign any of
the Accounts and other Collateral upon such terms, for such amounts and at such
time or times as Lender deems advisable; (iv) take control, in any manner, of
any item of payment or proceeds relating to any Collateral; (v) prepare, file
and sign Borrower's name to a proof of claim in bankruptcy or similar document
against any Account Debtor or to any notice of lien, assignment or satisfaction
of lien or similar document in connection with any of the Collateral; (vi)
receive, open and dispose of all mail addressed to Borrower and notify postal
authorities to change the address for delivery thereof to such address as Lender
may designate; (vii) endorse the name of Borrower upon any of the items of
payment or proceeds relating to any Collateral and deposit the same to the
account of Lender on account of the Obligations; (viii) endorse the name of
Borrower upon any chattel paper, document, instrument, invoice, or similar
document or agreement relating to the Accounts, and any other Collateral; (ix)
use Borrower's stationery and sign the name of Borrower to verifications of the
Accounts and notices thereof to Account Debtors; (x) use the information
recorded on or contained in any data processing equipment and computer hardware
and software relating to the Accounts, and any other Collateral; (xi) make and
adjust claims under policies of insurance; and (xii) do all other acts and
things necessary, in Lender's determination, to fulfill Borrower's obligations
under this Agreement.
11.2 Indemnity. Except with respect to any gross negligence or willful
---------
misconduct on the part of Lender, Borrower hereby agrees to indemnify Lender and
hold Lender harmless from and against any liability, loss, damage, suit, action
or proceeding ever suffered or incurred by Lender (including reasonable
attorneys fees and legal expenses) as the result of Borrower's failure to
observe, perform or discharge Borrower's duties hereunder. Except with respect
to any gross negligence or willful misconduct on the part of Lender, in
addition, Borrower shall defend Lender against and save it harmless from all
claims of any Person with respect to the Collateral. Except with respect to any
gross negligence or willful misconduct on the part of Lender, without limiting
the generality of the foregoing, these indemnities shall extend to any claims
asserted against Lender by any Person under any Environmental Laws or similar
laws by reason of Borrower's or any other Person's failure to comply with laws
applicable to solid or hazardous waste materials or other toxic substances.
Notwithstanding any contrary provision in this Agreement, the obligation of
Borrower under this Section 11.2 shall survive the payment in full of the
Obligations and the termination of this Agreement.
11.3 Modification of Agreement; Sale of Interest. This Agreement may not
-------------------------------------------
be modified, altered or amended, except by an agreement in writing signed by
Borrower and Lender. Borrower may not sell, assign or transfer any interest in
this Agreement, any of the other Loan Documents, or any of the Obligations, or
any portion thereof, including, without limitation, Borrower's rights, title,
interests, remedies, powers, and duties hereunder or thereunder. Borrower hereby
consents to Lender's participation, sale, assignment, transfer or other
disposition, at any time or times hereafter, of this
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<PAGE>
Agreement and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, Lender's rights, title, interests,
remedies, powers, and duties hereunder or thereunder (i) to any Affiliate of
Lender, or (ii) in connection with any sale, assignment, transfer or other
disposition of Lender's business or portfolio of loans of this type, or (iii) to
any other person provided that after such participation, sale, assignment,
transfer or other disposition, Lender retains at least a 25% interest in the
Loans; provided, however, if in connection with any sale, assignment, transfer
or other disposition of this Agreement and any of the other Loan Documents as
permitted in Section 11.3(ii) above, there is a change in the identity of the
group manager and loan administration manager of Lender with respect to
Borrower, then in such event within 60 days of such change Borrower may provide
Lender with notice of its intention to terminate this Agreement in accordance
with Section 4.2.2 and upon such termination, Borrower shall not be obligated to
pay the termination charges provided for in Section 4.2.3 of this Agreement. In
the case of an assignment, the assignee shall have, to the extent of such
assignment, the same rights, benefits and obligations as it would if it were
"Lender" hereunder and Lender shall be relieved of all obligations hereunder
upon any such assignments. Borrower agrees that it will use its best efforts to
assist and cooperate with Lender in any manner reasonably requested by Lender to
effect the sale of participations in or assignments of any of the Loan Documents
or any portion thereof or interest therein, including, without limitation,
assisting in the preparation of appropriate disclosure documents. Borrower
further agrees that Lender may disclose credit information regarding Borrower
and its Subsidiaries to any potential participant or assignee so long as such
person agrees in writing to maintain in confidence any information delivered to
it with respect to Borrower.
11.4 Confidentiality. For so long as any provision of this Agreement
---------------
remains in effect, Lender shall maintain confidential any and all information
relating to Borrower's business that was made available to Lender by Borrower
except (i) as permitted by Borrower from time to time; (ii) to Lender's
officers, employees, agents, advisors, and actual or prospective assignees or
participants so long as such agents, assignees or participants agree in writing
to maintain the confidentiality of such information; (iii) to the extent such
information is publicly available; (iv) to the extent Lender is required by law
to disclose such information or such disclosure is required by any regulator
having supervisory authority over Lender; or (v) to the extent Lender determines
in its reasonable discretion that the disclosure of such information is required
in order to permit Lender to administer the Loans or to exercise or enforce its
rights hereunder or under any of the other Loan Documents.
11.5 Severability. Wherever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
11.6 Successors and Assigns. This Agreement, the Other Agreements and the
----------------------
Security Documents shall be binding upon and inure to the benefit of the
successors and assigns of Borrower and Lender permitted under Section 11.3
hereof.
11.7 Cumulative Effect; Conflict of Terms. The provisions of the Other
------------------------------------
Agreements and the Security Documents are hereby made cumulative with the
provisions of this Agreement. Except as otherwise provided in Section 3.2
hereof and except as otherwise provided in any of the other Loan Documents by
specific reference to the applicable provision of this Agreement, if any
provision contained
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<PAGE>
in this Agreement is in direct conflict with, or inconsistent with, any
provision in any of the other Loan Documents, the provision contained in this
Agreement shall govern and control.
11.8 Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which counterparts taken together shall constitute but one and the
same instrument.
11.9 Notice. Except as otherwise provided herein, all notices, requests
------
and demands to or upon a party hereto, to be effective, shall be in writing and
shall be sent by certified or registered mail, return receipt requested, by
personal delivery against receipt, by overnight courier or by facsimile and,
unless otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered immediately when delivered against receipt, one
Business Day after deposit in the mail, postage prepaid, or with an overnight
courier or, in the case of facsimile notice, when sent, addressed as follows:
If to Lender: Fleet Capital Corporation
200 Glastonbury Boulevard
Glastonbury, CT 06033
Attention: Timothy Broderick, Senior
Vice President
Facsimile No.: 860-57-7759
With a copy to: Blank Rome Comisky & McCauley
1200 Four Penn Center Plaza
Philadelphia, PA 19103
Attention: Lawrence F. Flick, II, Esq.
Facsimile No.: 215-569-5555
If to Borrower: HCFP Funding, Inc.
2 Wisconsin Circle, Suite 320
Chevy Chase, MD 20815
Attention: John K. Delaney, President
Facsimile No.: 301-664-9860
With a copy to: Powell, Goldstein, Frazer & Murphy
191 Peachtree Street, N.E.
Atlanta, GA 30303
Attention: G. William Speer, Esquire
Facsimile No.: 404-572-5953
or to such other address as each party may designate for itself by notice given
in accordance with this Section 11.9; provided, however, that any notice,
-------- -------
request or demand to or upon Lender pursuant to subsection 3.1.1 or 4.2.2 hereof
shall be effective only upon receipt by Lender.
11.10 Lender's Consent. Whenever Lender's consent or approval is required
----------------
to be obtained under this Agreement, any of the Other Agreements or any of the
Security Documents as a condition to any action, inaction, condition or event,
except as otherwise provided herein, Lender shall be authorized to give or
withhold such consent or
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<PAGE>
approval in its sole and absolute discretion and to condition its consent or
approval upon the giving of additional collateral security for the Obligations,
the payment of money or any other matter.
11.11 Credit Inquiries. Borrower hereby authorizes and permits Lender to
----------------
respond to usual and customary credit inquiries from third parties concerning
Borrower or any of its Subsidiaries.
11.12 Entire Agreement. This Agreement and the other Loan Documents,
----------------
together with all other instruments, agreements and certificates executed by the
parties in connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties hereto and thereto with respect
to the subject matter hereof and thereof and supersede all prior agreements,
understandings and inducements, whether express or implied, oral or written.
11.13 Interpretation. No provision of this Agreement or any of the other
--------------
Loan Documents shall be construed against or interpreted to the disadvantage of
any party hereto by any court or other governmental or judicial authority by
reason of such party having or being deemed to have structured or dictated such
provision.
11.14 GOVERNING LAW; CONSENT TO FORUM. THIS AGREEMENT HAS BEEN NEGOTIATED,
-------------------------------
EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN NEW YORK, NEW
YORK. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK: PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL
-------- -------
SHALL BE LOCATED IN ANY JURISDICTION OTHER THAN NEW YORK, THE LAWS OF SUCH
JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF
LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER
REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH
JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF NEW YORK. AS
PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT
OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF BORROWER OR LENDER,
BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPREME COURT OF NEW YORK, NEW YORK
COUNTY, OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE
SOUTHERN DISTRICT OF NEW YORK, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND
DETERMINE ANY CLAIMS OR DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS
AGREEMENT OR TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWER
EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR
SUIT COMMENCED IN ANY SUCH COURT, AND BORROWER HEREBY WAIVES ANY OBJECTION WHICH
BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR
FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
- - ----- --- ----------
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWER HEREBY WAIVES
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWER AT THE
ADDRESS SET FORTH
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<PAGE>
IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED COMPLETED UPON THE
EARLIER OF BORROWER'S ACTUAL RECEIPT THEREOF OR 3 DAYS AFTER DEPOSIT IN THE U.S.
MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER
PERMITTED BY LAW, OR TO PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR
ORDER OBTAINED IN SUCH FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO
ENFORCE SAME IN ANY OTHER APPROPRIATE FORUM OR JURISDICTION.
11.15 WAIVERS BY BORROWER. BORROWER WAIVES (i) THE RIGHT TO TRIAL BY
-------------------
JURY (WHICH LENDER HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR
COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS,
THE OBLIGATIONS OR THE COLLATERAL: (ii) PRESENTMENT, DEMAND AND PROTEST AND
NOTICE OF PRESENTMENT, PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE,
COMPROMISE, SETTLEMENT, EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER,
ACCOUNTS, CONTRACT RIGHTS, DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES
AT ANY TIME HELD BY LENDER ON WHICH BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY
RATIFIES AND CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) NOTICE
(EXCEPT AS SPECIFICALLY SET FORTH IN THIS AGREEMENT) PRIOR TO TAKING POSSESSION
OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY
ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv)
THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF
ACCEPTANCE HEREOF. BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A
MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS
RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWER.
BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH
ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed in New York as
of the day and year specified at the beginning of this Agreement.
ATTEST: HCFP FUNDING, INC.
("Borrower")
_______________________________ By:_____________________________________
Secretary Title:____________________________
CORPORATE SEAL
Accepted in New York, New York:
FLEET CAPITAL CORPORATION
("Lender")
By:_____________________________________
Title:__________________________________
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<PAGE>
APPENDIX A
GENERAL DEFINITIONS
When used in the Loan and Security Agreement dated as of November 27,
1996, by and between Fleet Capital Corporation and HCFP Funding, Inc., the
following terms shall have the following meanings (terms defined in the singular
to have the same meaning when used in the plural and vice versa):
Account Debtor - any Third Party Payor or other Person who is or may
--------------
become obligated under or on account of an Account.
Accounts - all accounts, contract rights, chattel paper, instruments
--------
and documents, whether now owned or hereafter created or acquired by
Borrower or in which and to the extent that Borrower now has or hereafter
acquires any interest.
Adjusted LIBOR Rate - For any LIBOR Interest Period, as applied to a
-------------------
Revolving Credit LIBOR Rate Loan the rate per annum (rounded upwards, if
necessary to the next 1/16 of 1%) determined pursuant to the following
formula:
Adjusted Libor Rate = Libor Rate
------------------------
(1.00 - Reserve Percentage)
For purposes hereof, "Libor Rate" shall mean the arithmetic average of the
rates of interest per annum (rounded upwards, if necessary to the next 1/16
of 1%) at which Bank is offered deposits of United States Dollars in the
interbank eurodollar loan market on or about 2:00 P.M. New York time two
(2) Business Days prior to the commencement of such LIBOR Interest Period
on amounts substantially equal to the Revolving Credit LIBOR Rate Loan as
to which Borrower may elect the Adjusted LIBOR Rate to be applicable with a
maturity of comparable duration to the LIBOR Interest Period selected by
Borrower, for such Revolving Credit LIBOR Rate Loan.
Adjusted Net Earnings From Operations. With respect to any fiscal
-------------------------------------
period, means the net earnings (or loss) after provision for income taxes
for such fiscal period of Borrower, as reflected on the financial statement
of Borrower supplied to Lender pursuant to subsection 8.1.3 of the
Agreement, but excluding:
(i) any gain or loss arising from the sale of capital assets;
(ii) any gain arising from any write-up of assets;
(iii) earnings of any Subsidiary of Borrower accrued prior to
the date it became a Subsidiary;
(iv) earnings of any corporation, substantially all the assets
of which have been acquired in any manner by Borrower, realized by such
corporation prior to the date of such acquisition;
(v) net earnings of any business entity (other than a
Subsidiary of Borrower) in which Borrower has an ownership interest unless
such net earnings shall have actually been received by a Borrower in the
form of cash distributions;
<PAGE>
(vi) any portion of the net earnings of any Subsidiary of
Borrower which for any reason is unavailable for payment of dividends to
Borrower;
(vii) the earnings of any Person to which any assets of
Borrower shall have been sold, transferred of disposed of, or into which
Borrower shall have merged, or been a party to any consolidation or other form
of reorganization, prior to the date of such transaction;
(viii) any gain arising from the acquisition of any Securities
of Borrower; and
(ix) any gain arising from extraordinary or non-recurring
items.
Adjusted Tangible Assets. All assets except: (i) any surplus resulting
------------------------
from any write-up of assets subsequent to December 31, 1994; (ii) deferred
assets, other than prepaid insurance and prepaid taxes; (iii) patents,
copyrights, trademarks, trade names, non-compete agreements, franchises and
other similar intangibles; (iv) goodwill, including any amounts, however
designated on a Consolidated balance sheet of a Person or its Subsidiaries,
representing the excess of the purchase price paid for assets or stock over the
value assigned thereto on the books of such Person; (v) Restricted Investments;
(vi) unamortized debt discount and expense; (vii) assets located and notes and
receivables due from obligors outside of the United States of America; and
(viii) Accounts, notes and other receivables due from Affiliates or employees.
Adjusted Tangible Net Worth. At any date means a sum equal to:
---------------------------
(i) the net book value (after deducting related
depreciation, obsolescence, amortization, valuation, and other proper reserves)
at which the Adjusted Tangible Assets of a Person would be shown on a balance
sheet at such date in accordance with GAAP, minus
-----
(ii) the amount at which such Person's liabilities (other
than capital stock and surplus) would be shown on such balance sheet in
accordance with GAAP, and including as liabilities all reserves for
contingencies and other potential liabilities.
Affiliate - a Person (other than a Subsidiary): (i) which directly or
---------
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, a Person; (ii) which beneficially owns or holds 5%
or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the
Voting Stock (or in the case of a Person which is not a corporation, 5% or more
of the equity interest) of which is beneficially owned or held by a Person or a
Subsidiary of a Person.
Agreement - the Loan and Security Agreement referred to in the first
---------
sentence of this Appendix A, all Exhibits thereto and this Appendix A.
Aggregate Adjusted Availability - an amount equal to (i) Availability minus
------------------------------- -----
(ii) all sums owed to Providers under the Receivable Acquisition Agreements that
are due and payable under such agreements as of the Closing Date or which are
outstanding beyond Borrower's normal practice of paying such sums to Providers.
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<PAGE>
Availability - the amount of money which Borrower is entitled to borrow
------------
from time to time as Revolving Credit Loans, such amount being the difference
derived when the sum of the principal amount of Revolving Credit Loans then
outstanding (including any amounts which Lender may have paid for the account of
Borrower pursuant to any of the Loan Documents and which have not been
reimbursed by Borrower) is subtracted from the Borrowing Base. If the amount
outstanding is equal to or greater than the Borrowing Base, Availability is 0.
Bank - Fleet National Bank.
----
Base Rate - the rate of interest announced or quoted by Bank from time to
---------
time as its prime rate for commercial loans, whether or not such rate is the
lowest rate charged by Bank to its most preferred borrowers; and, if such prime
rate for commercial loans is discontinued by Bank as a standard, a comparable
reference rate designated by Bank as a substitute therefor shall be the Base
Rate.
Batch. A group of Accounts purchased from a Provider under the terms of a
-----
Receivables Acquisition Agreement or securing advances to a Provider under the
terms of a Receivable Loan Agreement.
Borrowing Base - as at any date of determination thereof, an amount equal
--------------
to the lesser of:
(a) 90% of the Initial Payment (as defined in the
Receivables Acquisition Agreement) amount actually advanced (or to be
advanced with respect to the Initial Payment) by Borrower to a
Provider to acquire Eligible Accounts or, in the case of loans to
Providers, 90% of the amount actually loaned by Borrower to a
Provider, which loans are secured by Eligible Accounts; and
(b) 65% of the Fair Reimbursable Value of Eligible Accounts.
Business Day - any day excluding Saturday, Sunday and any day which is a
------------
legal holiday under the laws of the State of New York or is a day on which
banking institutions located in such state are closed.
Capital Expenditures - expenditures made or liabilities incurred for the
--------------------
acquisition of any fixed assets or improvements, replacements, substitutions or
additions thereto which have a useful life of more than one year, including the
total principal portion of Capitalized Lease Obligations.
Cash Flow - for any period, means Borrower's (i) Adjusted Net Earnings from
---------
Operations for such period, plus (ii) depreciation and amortization expenses for
----
such period, plus (iii) deferred taxes for such period, plus (iv) the net effect
---- ----
(even if negative) of FASB 106 minus (v) unfinanced capital expenditures and
-----
principal payments on account of long-term Indebtedness, all as determined in
accordance with GAAP.
Capitalized Lease Obligation - any Indebtedness represented by obligations
----------------------------
under a lease that is required to be capitalized for financial reporting
purposes in accordance with GAAP.
-3-
<PAGE>
Closing Date - the date on which all of the conditions precedent in
------------
Section 9 of the Agreement are satisfied and the initial Loan is made under the
Agreement.
Code - the Uniform Commercial Code as adopted and in force in the State of
----
New York, as from time to time in effect.
Collateral - all of the Property and interests in Property described in
----------
Section 5 of the Agreement, and all other Property and interests in Property
that now or hereafter secure the payment and performance of any of the
Obligations.
Consolidated - the consolidation in accordance with GAAP of the accounts or
------------
other items as to which such term applies.
Debt to Adjusted Tangible Net Worth Ratio - with respect to any date, the
-----------------------------------------
ratio of (i) Total Liabilities for such date to (ii) Adjusted Tangible Net Worth
for such date, all as determined in accordance with GAAP.
Default - an event or condition the occurrence of which would, with the
-------
lapse of time or the giving of notice, or both, become an Event of Default.
Default Rate - as defined in subsection 2.1.2 of the Agreement.
------------
Distribution - means and includes (i) payment of any funds to the
------------
shareholders of Borrower during any calendar month and (ii) the redemption or
acquisition of shares of Borrower's stock unless made contemporaneously from the
net proceeds of the sale or issuance of capital stock.
Dominion Account - a special account of Lender established by Borrower
----------------
pursuant to the Agreement at Bank One or any other bank selected by Borrower,
but acceptable to Lender in its reasonable discretion, and over which Lender
shall have sole and exclusive access and control for withdrawal purposes.
EBIT - with respect to any fiscal period, the sum of Borrower's
----
Consolidated net earnings (or loss) before interest expense and taxes for said
period as determined in accordance with GAAP.
Eligible Account - an Account payable by an Eligible Third Party Payor
----------------
purchased (or to be purchased with proceeds of a Revolving Credit Loan) in the
ordinary course of Borrower's business from an Eligible Provider or securing an
advance made in the ordinary course of Borrower's business to an Eligible
Provider and arising in the ordinary course of such Provider's business from the
sale of goods or rendition of medical or health care services unless Lender, in
its reasonable credit judgment, deems it not to be an Eligible Account. Without
limiting the generality of the foregoing, no Account shall be an Eligible
Account if:
(i) it arises out of a sale made or services rendered by the
Borrower or the Provider to a Subsidiary or an Affiliate of Borrower or the
Provider or to a Person controlled by an Affiliate of Borrower or the
Provider; or
-4-
<PAGE>
(ii) it is part of a Batch which remains unpaid more than 90
days after the date such Batch was purchased by Borrower or an advance
secured by such Batch was made; provided, however, Accounts which are part
-------- -------
of a Batch with a Fair Reimbursable Value of up to $250,000 in the
aggregate outstanding at any one time and which remain unpaid for more than
90 days, but less than 120 days after the date such Batch was purchased by
Borrower, may be Eligible Accounts; or
(iii) 50% or more of the Accounts owed by the Eligible Third
Party Payor (other than any Medicare/Medicaid Account Debtor), are not
deemed Eligible Accounts hereunder; or
(iv) the total unpaid Accounts of the Third Party Payor (other
than any Medicare/Medicaid Account Debtor) exceed 20% of the net amount of
all Eligible Accounts, to the extent of such excess; or
(v) the total unpaid Accounts purchased from the Provider (a)
during the period from the Closing Date until the expiration of 6 months
thereafter exceed the greater of $2,000,000 or 20% of the net amount of all
Eligible Accounts, or (b) after such 6-month period exceed 15% of the Net
Amount of all Eligible Accounts, to the extent of such excess; or
(vi) any covenant, representation or warranty contained in this
Agreement or the Receivables Acquisition Agreement or Receivables Loan
Agreement with respect to such Account has been breached in any material
respect; or
(vii) the Account Debtor is also Borrower's or the Provider
which sold the Account to Borrower's, creditor or supplier, or the Account
Debtor has disputed liability with respect to such Account, or the Account
Debtor has made any claim with respect to any other Account due from such
Account Debtor to Borrower or to the Provider, or the Account otherwise is
or may become subject to any right of setoff by the Account Debtor, to the
extent of such claim or setoff; or
(viii) the Third Party Payor or the Provider which sold or
pledged as collateral the Account to Borrower has commenced a voluntary
case under the federal bankruptcy laws, as now constituted or hereafter
amended, or made an assignment for the benefit of creditors, or a decree or
order for relief has been entered by a court having jurisdiction in the
premises in respect of the Account Debtor or Provider in an involuntary
case under the federal bankruptcy laws, as now constituted or hereafter
amended, or any other petition or other application for relief under the
federal bankruptcy laws has been filed against the Third Party Payor or
Provider, or if the Account Debtor or Provider has failed, suspended
business, or consented to or suffered a receiver, trustee, liquidator or
custodian to be appointed for it or for all or a significant portion of its
assets or affairs; or
(ix) it arises from a sale or provision of services by a
Provider located outside the United States; or
(x) the Account is subject to a Lien other than a Permitted
Lien; or
-5-
<PAGE>
(xi) the services giving rise to such Account have not been
performed by the Provider or the Account otherwise does not represent a
final sale; or
(xii) the Account is evidenced by chattel paper or an instrument
of any kind, or has been reduced to judgment; or
(xiii) Borrower or the Provider has made any agreement with the
Account Debtor for any deduction therefrom, except for discounts or
allowances which are made in the ordinary course of business for prompt
payment or which are reflected in the calculation of the Fair Reimbursable
Value related to such Account; or
(xiv) Borrower or the Provider has made an agreement with the
Account Debtor to extend the time of payment thereof for more than 120 days
from the date of the purchase of, or advanced secured by, the relevant
Batch; or
(xv) the Account is subject to any limitation which would make
payment of the Fair Reimbursable Value by the Account Debtor conditional;
or
(xvi) the Account is payable in part (but not in whole), by a
Medicare/Medicaid Account Debtor or other Third Party Payor, to the extent
such Account exceeds the portion payable by such Medicare/Medicaid Account
Debtor or Third Party Payor; and
(xvii) Under no circumstance will Lender advance against any
Account or any portion of any Account to the extent such Account or a
portion thereof is payable by an individual beneficiary, recipient or
subscriber individually and not by a Medicare/Medicaid Account Debtor or
other Eligible Third Party Payor.
Eligible Third Party Payor - any Third Party Payor which Borrower has
--------------------------
deemed an "Eligible Insurer" pursuant to the Receivables Acquisition Agreements
or Receivables Loan Agreements unless Lender, in its reasonable credit judgment,
determines that such Third Party Payor is unacceptable.
Eligible Provider - any Provider which has entered into a Receivables
-----------------
Acquisition Agreement or Receivables Loan Agreement with Borrower; provided that
(i) such Provider is not in material default under any of the material terms or
conditions of such Receivables Acquisition Agreement or Receivables Loan
Agreement, (ii) Borrower has filed appropriate UCC-1 Financing Statements as
would be necessary to perfect a security interest obtained by Borrower in the
Accounts of such Provider with a priority over all other Liens in favor of any
other creditor of such Provider, and (iii) the most recent Medicare and Medicaid
audits for such Provider are acceptable to Lender in its reasonable discretion.
Equipment - all machinery, apparatus, equipment, fittings, furniture,
---------
fixtures, motor vehicles and other tangible personal Property (other than
Inventory) of every kind and description used in Borrower's operations or owned
by Borrower or in which Borrower has an interest, whether now
-6-
<PAGE>
owned or hereafter acquired by Borrower and wherever located, and all
parts, accessories and special tools and all increases and accessions
thereto and substitutions and replacements therefor.
ERISA - the Employee Retirement Income Security Act of 1974, as
-----
amended, and all rules and regulations from time to time promulgated
thereunder.
Event of Default - as defined in Section 10.1 of the Agreement.
----------------
Existing Financing Agreements - as defined in the Background section
-----------------------------
of the Agreement.
Facility Cap - $50,000,000 from the date hereof through December 31,
------------
1996 and $35,000,000 at all times thereafter.
Fair Reimbursable Value - the fair reimbursable value or amount
-----------------------
expected to collected from the Third Party Payor of Accounts purchased from
Providers or securing advances to Providers, as established by Borrower, or
an independent verification company reasonably acceptable to Lender;
provided, however, that the fair reimbursable value of any Account or
Borrower's method of calculation thereof, shall be acceptable to Lender in
the reasonable exercise of its credit discretion.
GAAP - generally accepted accounting principles in the United States
----
of America in effect from time to time.
General Intangibles - all personal property of Borrower (including
-------------------
things in action) other than goods, Accounts, chattel paper, documents,
instruments and money, whether now owned or hereafter created or acquired
by Borrower.
Guarantor - Healthcare Financial Partners, Inc.
---------
HPF - as defined in the Background section of the Agreement.
---
HPF Del - as defined in the Background section of the Agreement.
-------
HPF Del Existing Line of Credit - as defined in the Background section
-------------------------------
of the Agreement.
HPF Del Existing Loan Agreement - as defined in the Background section
-------------------------------
of the Agreement.
HPF Existing Line of Credit - as defined in the Background section of
---------------------------
the Agreement.
HPF Existing Loan Agreement - as defined in the Background section of
---------------------------
the Agreement.
HPF Del Existing Line of Credit - as defined in the Background section
-------------------------------
of the Agreement.
Indebtedness - as applied to a Person means, without duplication
------------
(i) all items which in accordance with GAAP would be included in
determining total liabilities as shown on the liability side of a
balance sheet of such Person as
-7-
<PAGE>
at the date as of which Indebtedness is to be determined, including,
without limitation, Capitalized Lease Obligations,
(ii) all obligations of other Persons which such Person has
guaranteed,
(iii) all reimbursement obligations in connection with letters
of credit or letter of credit guaranties issued for the account of
such Person, and
(iv) in the case of Borrower (without duplication), the
Obligations.
Inventory - all of Borrower's inventory, whether now owned or hereafter
---------
acquired including, but not limited to, all goods intended for sale or lease by
Borrower, or for display or demonstration; all work in process; all raw
materials and other materials and supplies of every nature and description used
or which might be used in connection with the manufacture, printing, packing,
shipping, advertising, selling, leasing or furnishing of such goods or otherwise
used or consumed in Borrower's business; and all documents evidencing and
General Intangibles relating to any of the foregoing, whether now owned or
hereafter acquired by Borrower.
LIBOR Interest Period - a period of 1, 2, 3 or 6 months duration during
---------------------
which the Revolving Credit LIBOR Rate or Term LIBOR Rate, as the case may be, is
applicable.
LIBOR Rate Loans - collectively, all Revolving Credit LIBOR Rate Loans.
----------------
Lien - any interest in Property securing an obligation owed to, or a claim
----
by, a Person other than the owner of the Property, whether such interest is
based on common law, statute or contract. The term "Lien" shall also include
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting Property. For the purpose of the Agreement, Borrower shall be deemed
to be the owner of any Property which it has acquired or holds subject to a
conditional sale agreement or other arrangement pursuant to which title to the
Property has been retained by or vested in some other Person for security
purposes.
Loan Account - the loan account established on the books of Lender pursuant
------------
to Section 3.6 of the Agreement.
Loan Documents - the Agreement, the Surety Agreement, the Other Agreements
--------------
and the Security Documents.
Loans - all loans and advances of any kind made by Lender pursuant to the
-----
Agreement.
London Business Day - Any Business Day on which banks in London, England
-------------------
are open for business.
Material Adverse Effect - means a material adverse effect on (i) the
-----------------------
business, assets, operations and financial or other condition of the Borrower
and any Subsidiaries taken as a whole, (ii) the ability of the Borrower to pay
the Obligations in accordance with the terms of this Agreement and any Security
Documents or Other Agreements, (iii) the rights and remedies of the Bank
-8-
<PAGE>
under this Agreement, any Security Documents or Other Agreements, or (iv) the
value of the Lender's security interest in the Collateral or the perfection or
priority of such security interest.
Medicare/Medicaid Account Debtor - any Account Debtor which is (i) United
--------------------------------
States of America acting under the Medicare/Medicaid program established
pursuant to the Social Security Act, (ii) any state acting pursuant to a health
plan adopted pursuant to Title XIX of the Social Security Act or (iii) any
agent, carrier, administrator or intermediary for any of the foregoing.
Money Borrowed - means (i) Indebtedness arising from the lending of money
--------------
by any Person to Borrower; (ii) Indebtedness, whether or not in any such case
arising from the lending by any Person of money to Borrower, (A) which is
represented by notes payable or drafts accepted that evidence extensions of
credit, (B) which constitutes obligations evidenced by bonds, debentures, notes
or similar instruments, or (C) upon which interest charges are customarily paid
(other than accounts payable) or that was issued or assumed as full or partial
payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease
Obligation; (iv) reimbursement obligations with respect to letters of credit or
guaranties of letters of credit and (v) Indebtedness of Borrower under any
guaranty of obligations that would constitute Indebtedness for Money Borrowed
under clauses (i) through (iii) hereof, if owed directly by Borrower.
Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of
------------------
ERISA.
Net Worth - at any date of determination thereof, (i) the aggregate amount
---------
of all assets of Borrower and its Subsidiaries on a Consolidated basis as may be
properly classified as such, less (ii) the aggregate amount of all liabilities
of Borrower and its Subsidiaries on a Consolidated basis, all as determined in
accordance with GAAP.
Obligations - all Loans and all other advances, debts, liabilities,
-----------
obligations, covenants and duties, together with all interest, fees and other
charges thereon, owing, arising, due or payable from Borrower to Lender of any
kind or nature, present or future, whether or not evidenced by any note,
guaranty or other instrument, whether arising under the Agreement or any of the
other Loan Documents or otherwise whether direct or indirect (including those
acquired by assignment), absolute or contingent, primary or secondary, due or to
become due, now existing or hereafter arising and however acquired. The term
includes without limitation, all interest, charges, fees, expenses, attorneys'
fees, and any other sums chargeable to Borrowers under any of the Loan
Documents.
Original Term - as defined in Section 4.1 of the Agreement.
-------------
Other Agreements - any and all agreements, instruments and documents (other
----------------
than the Agreement and the Security Documents), heretofore, now or hereafter
executed by any Borrower, any Subsidiary of Borrower or any other third party
and delivered to Lender in respect of the transactions contemplated by the
Agreement, as each of the same may be amended, modified, renewed, extended,
replaced, restated or substituted from time to time.
Overadvance - the amount, if any, by which the outstanding principal amount
-----------
of Revolving Credit Loans exceeds the Borrowing Base.
-9-
<PAGE>
Participating Lender - each Person who shall be granted the right by Lender
--------------------
to participate in any of the Loans described in the Agreement and who shall have
entered into a participation agreement in form and substance satisfactory to
Lender.
Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of the
---------------
Agreement.
Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of
-------------------------------------
Borrower incurred after the date hereof which is secured by a Purchase Money
Lien.
Person - an individual, partnership, corporation, limited liability
------
company, joint stock company, land trust, business trust, or unincorporated
organization, or a government or agency or political subdivision thereof.
Plan - an employee benefit plan now or hereafter maintained for employees
----
of Borrower that is covered by Title IV of ERISA.
Projections - Borrower's forecasted (i) balance sheets, (ii) profit and
-----------
loss statements, and (iii) cash flow statements, all prepared on a consistent
basis with Borrower's historical financial statements, together with appropriate
supporting details and a statement of underlying assumptions.
Property - any interest in any kind of property or asset, whether real,
--------
personal or mixed, or tangible or intangible.
Provider - any provider of medical or health care goods or services
--------
including physician services, nurse and therapist services, dental services,
hospital services, skilled nursing facility services, comprehensive outpatient
rehabilitation services, home healthcare services and medicine or healthcare
equipment and/or any other service provided by such person for any necessary or
specifically requested valid and proper medical or healthcare purpose.
Purchase Money Indebtedness - means and includes (i) Indebtedness (other
---------------------------
than the Obligations) for the payment of all or any part of the purchase price
of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred
at the time of or within 10 days prior to or after the acquisition of any fixed
assets for the purpose of financing all or any part of the purchase price
thereof, and (iii) any renewals, extensions or refinancings thereof, but not any
increases in the principal amounts thereof outstanding at the time.
Purchase Money Lien - a Lien upon fixed assets which secures Purchase Money
-------------------
Indebtedness, but only if such Lien shall at all times be confined solely to the
fixed assets the purchase price of which was financed through the incurrence of
the Purchase Money Indebtedness secured by such Lien.
Receivables Acquisition Agreements - The agreements between Borrower and
----------------------------------
each Provider in the form attached hereto as Exhibit P.
Receivables Loan Agreements - The agreements between Borrower and each
---------------------------
Provider in the form attached hereto as Exhibit R.
-10-
<PAGE>
Regulation D - Regulation D of the Board of Governors of the Federal
------------
Reserve System, comprising Part 204 of Title 12, Code of Federal Regulations, as
amended, and any successor thereto.
Reserve - for any day, that reserve (expressed as a decimal) which is in
-------
effect (whether or not actually incurred) with respect to Bank on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor or any other banking authority to which Bank is subject including any
board or governmental or administrative agency of the United States or any other
jurisdiction to which Bank is subject), for determining the maximum reserve
requirement (including without limitation any basic, supplemental, marginal or
emergency reserves) for Eurocurrency liabilities as defined in Regulation D.
Reserve Percentage - for Bank on any day, that percentage (expressed as a
------------------
decimal) which is in effect on such day, prescribed by the Board of Governors of
the Federal Reserve System (or any successor or any other banking authority to
which Lender is subject, including any board or governmental or administrative
agency of the United States or any other jurisdiction to which Bank is subject)
for determining the maximum reserve requirement (including without limitation
any basic, supplemental, marginal or emergency reserves) for (i) deposits of
United States Dollars or (ii) Eurocurrency liabilities as defined in Regulation
D, in each case used to fund a Revolving Credit LIBOR Rate Loan or Term LIBOR
Rate Loan subject to an Adjusted LIBOR Rate. The Adjusted LIBOR Rate shall be
adjusted automatically on and as of the effective day of any change in the
Reserve Percentage.
Renewal Terms - as defined in Section 4.1 of the Agreement.
-------------
Reportable Event - any of the events set forth in Section 4043(b) of ERISA.
----------------
Restricted Investment - any investment made in cash or by delivery of
---------------------
Property to any Person, whether by acquisition of stock, Indebtedness or other
obligation or Security, or by loan, advance or capital contribution, or
otherwise, or in any Property, and including loans permitted by Section
8.2.2(iii) except the following:
(i) investments in one or more Subsidiaries of Borrower to the
extent existing on the Closing Date or the sale or contribution of Accounts
to Wisconsin Circle Funding Corporation;
(ii) Property (including Accounts) to be used in the ordinary
course of business;
(iii) Current Assets arising from the sale of goods and services
in the ordinary course of business of Borrower and its Subsidiaries;
(iv) investments in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by the United
States of America, provided that such obligations mature within one year
from the date of acquisition thereof;
-11-
<PAGE>
(v) investments in certificates of deposit maturing within one
year from the date of acquisition issued by a bank or trust company
organized under the laws of the United States or any state thereof having
capital surplus and undivided profits aggregating at least $100,000,000;
and
(vi) investments in commercial paper given the highest rating by
a national credit rating agency and maturing not more than 270 days from
the date of creation thereof.
Revolving Credit Base Rate - a per annum rate equal to the sum of the
--------------------------
Base Rate plus 150 basis points.
Revolving Credit Base Rate Loan - that portion of the Revolving Credit
-------------------------------
Loans that bears interest at the Revolving Credit Base Rate.
Revolving Credit Facility - the credit facility established for Borrower by
-------------------------
Lender under and pursuant to the terms of this Agreement under which Revolving
Credit Loans may be made from time to time.
Revolving Credit LIBOR Rate - a per annum rate equal to the sum of the
---------------------------
Adjusted LIBOR Rate plus 300 basis points.
Revolving Credit LIBOR Rate Loan - that portion of the Revolving Credit
--------------------------------
Loans on which interest accrues at the Revolving Credit LIBOR Rate.
Revolving Credit Loan - a Loan made by Lender as provided in Section 1.1 of
---------------------
the Agreement.
Revolving Credit Maturity Date - the last day of the Original Term or, if
------------------------------
any Renewal Term is in effect, then the last day of such Renewal Term.
Schedule of Accounts - as defined in subsection 6.2.1 of the Agreement.
--------------------
Security - shall have the same meaning as in Section 2(1) of the Securities
--------
Act of 1933, as amended.
Security Documents - and all other instruments and agreements now or at any
------------------
time hereafter securing the whole or any part of the Obligations.
Solvent - as to any Person, such Person (i) owns Property whose fair
-------
saleable value is greater than the amount required to pay all of such Person's
Indebtedness (including contingent debts), (ii) is able to pay all of its
Indebtedness as such Indebtedness matures and (iii) has capital sufficient to
carry on its business and transactions and all business and transactions in
which it is about to engage.
Subordinated Debt - Indebtedness of Borrower that is subordinated to the
-----------------
Obligations in a manner satisfactory to Lender.
-12-
<PAGE>
-12-
Subordination Agreement - an agreement in form and substance
-----------------------
acceptable to Lender pursuant to which the holder of any Subordinated Debt
has subordinated the Indebtedness owed to it to the Obligations.
Subsidiary - any corporation of which a Person owns, directly or
----------
indirectly through one or more intermediaries, more than 50% of the Voting
Stock at the time of determination.
Surety Agreement - an unlimited agreement of guaranty and suretyship
----------------
to be executed by Guarantor on the date hereof, in form and substance acceptable
to Lender.
Third Party Payor - any Medicare/Medicaid Account Debtor or other
-----------------
commercial payor or managed care payor which has agreed to make payment to
a Provider for goods sold or medical or health care services rendered by
such Provider.
Total Liabilities - at any date means all amounts properly classified
-----------------
as liabilities on a balance sheet at such date in accordance with GAAP,
plus all reserves for contingencies and all other potential liabilities for
which no reserves have previously been established on such balance sheet,
to the extent such amounts are not already classified as liabilities in
accordance with GAAP.
Other Terms. All other terms contained in the Agreement shall have,
-----------
when the context so indicates, the meanings provided for by the Code to the
extent the same are used or defined therein.
Certain Matters of Construction. The terms "herein", "hereof" and
-------------------------------
"hereunder" and other words of similar import refer to the Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. The section titles, table of contents and
list of exhibits appear as a matter of convenience only and shall not affect the
interpretation of the Agreement. All references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations. All references to any of the Loan Documents shall include any and
all modifications thereto and any and all extensions or renewals thereof.
-13-
<PAGE>
LIST OF EXHIBITS
----------------
Exhibit B Borrower's and each Subsidiary's Business Locations
Exhibit C Jurisdictions in which Borrower and each Subsidiary is Authorized to
do Business
Exhibit D Capital Structure of Borrower
Exhibit E Corporate Names
Exhibit G Patents, Trademarks, Copyrights and Licenses
Exhibit H Contracts Restricting Borrower's Right to Incur Debts
Exhibit I Litigation
Exhibit J Capitalized Leases
Exhibit K Operating Leases
Exhibit L Pension Plans
Exhibit M Labor Contracts
Exhibit N Compliance Certificate
Exhibit O Permitted Liens
Exhibit P Forms of Receivables Acquisition Agreement
Exhibit Q Form of Settlement and Confirmation Statement
Exhibit R Forms of Receivables Loan Agreement
-14-
<PAGE>
Exhibit 10.14
To Form 10K
================================================================================
U.S. $100,000,000
RECEIVABLES LOAN AND SECURITY AGREEMENT
Dated as of December 5, 1996
Among
WISCONSIN CIRCLE FUNDING CORPORATION
as the Borrower
---------------
and
HCFP FUNDING, INC.
as the Servicer
---------------
and
HOLLAND LIMITED SECURITIZATION, INC.
as a Lender
-----------
and
ING BARING (U.S.) CAPITAL MARKETS, INC.
as the Agent
------------
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
------- ----
<S> <C> <C>
ARTICLE I.
DEFINITIONS.................................................................. 1
SECTION 1.01 Certain Defined Terms................................... 1
SECTION 1.02 Other Terms............................................ 26
SECTION 1.03 Computation of Time Periods............................ 26
ARTICLE II.
THE RECEIVABLES FACILITY.................................................... 26
SECTION 2.01 Borrowings............................................. 26
SECTION 2.02 The Initial Borrowing and Subsequent Borrowings ....... 26
SECTION 2.03 Increase, Termination or Reduction of the
Borrowing Limit........................................ 27
SECTION 2.04 Selection of Fixed Periods............................. 28
SECTION 2.05 Remittance Procedures.................................. 28
SECTION 2.06 Spread Account......................................... 31
SECTION 2.07 Special Remittance Procedures.......................... 32
SECTION 2.08 Payments and Computations, Etc......................... 32
SECTION 2.09 Fees................................................... 33
SECTION 2.10 Increased Costs; Capital Adequacy...................... 33
SECTION 2.11 Assignment of Agreements............................... 34
SECTION 2.12 Grant of a Security Interest........................... 34
SECTION 2.13 Evidence of Debt....................................... 35
SECTION 2.14 Survival of Representations and Warranties: Repurchase
and Substitution Rights and Obligations................ 35
SECTION 2.15 Prepayments: Release of Pledged Receivables............ 36
SECTION 2.16 Treatment of Amounts Paid by the Borrower.............. 37
ARTICLE III.
CONDITIONS OF LOANS......................................................... 37
SECTION 3.01 Conditions Precedent to Initial Borrowing.............. 37
SECTION 3.02 Conditions Precedent to All Borrowings and
Remittances of Collections............................. 37
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES.............................................. 38
SECTION 4.01 Representations and Warranties of the Borrower
and the Servicer....................................... 38
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Section Page
------- ----
<S> <C> <C>
ARTICLE V.
GENERAL COVENANTS OF THE BORROWER AND THE SERVICER........................... 41
SECTION 5.01 General Covenants....................................... 41
ARTICLE VI.
ADMINISTRATION AND SERVICING; CERTAIN COVENANTS.............................. 46
SECTION 6.01 Appointment and Designation of the Servicer............. 46
SECTION 6.02 Collection of Certain Pledged Receivable Payments....... 47
SECTION 6.03 Intentionally Omitted................................... 47
SECTION 6.04 Pledged Receivable Receipts............................. 47
SECTION 6.05 Insurer Payment Mechanics............................... 48
SECTION 6.06 Government Entities Payment Mechanics................... 49
SECTION 6.07 Misdirected Payments.................................... 49
SECTION 6.08 Unidentified Payments; Lender's Right of Presumption.... 50
SECTION 6.09 No Rights of Withdrawal................................. 50
SECTION 6.10 Permitted Investments................................... 50
SECTION 6.11 Servicing Compensation.................................. 50
SECTION 6.12 Reports to the Agent; Account Statements;
Servicing Information................................... 51
SECTION 6.13 Statements as to Compliance; Financial Statements....... 51
SECTION 6.14 Access to Certain Documentation......................... 53
SECTION 6.15 Appointment of Successor Servicer....................... 53
SECTION 6.16 Additional Remedies of Agent Upon Event of Default...... 54
SECTION 6.17 Waiver of Defaults...................................... 55
SECTION 6.18 Maintenance of Certain Insurance........................ 55
SECTION 6.19 Segregation of Collections.............................. 55
SECTION 6.20 UCC Matters: Protection and Perfection of
Pledged Assets.......................................... 55
SECTION 6.21 Advances by the Servicer................................ 56
ARTICLE VII.
EVENTS OF DEFAULT............................................................ 56
SECTION 7.01 Events of Default....................................... 56
ARTICLE VIII.
INDEMNIFICATION.............................................................. 60
SECTION 8.01 Indemnities by the Borrower............................. 60
SECTION 8.02 Indemnities by the Servicer............................. 62
ARTICLE IX.
MISCELLANEOUS................................................................ 63
SECTION 9.01 Amendments and Waivers.................................. 63
SECTION 9.02 Notices, Etc............................................ 64
SECTION 9.03 No Waiver; Remedies..................................... 64
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Section Page
------- ----
<S> <C> <C>
SECTION 9.04 Binding Effect; Assignability........................... 64
SECTION 9.05 Term of this Agreement.................................. 65
SECTION 9.06 Governing Law; Jury Waiver.............................. 65
SECTION 9.07 Costs, Expenses and Taxes............................... 65
SECTION 9.08 No Proceedings.......................................... 66
SECTION 9.09 Recourse Against Certain Parties........................ 66
SECTION 9.10 Execution in Counterparts; Severability; Integration.... 67
SECTION 9.11 Tax Characterization.................................... 67
</TABLE>
iii
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
------------------------------
SCHEDULES
- - ---------
SCHEDULE I Condition Precedent Documents
SCHEDULE II Credit and Collection Policy
SCHEDULE III Preexisting Lockboxes and Preexisting Lockbox Accounts
SCHEDULE IV Prior Names, Tradenames, Fictitious Names and "Doing Business As"
Names
SCHEDULE V Health Care Provider Lockboxes and Lockbox Accounts
SCHEDULE VI Schedule of Bank One Lockbox Account Agreements Requiring Setoff
Restrictions
SCHEDULE VII Schedule of (Non-Bank One) Lockbox Account Agreements Requiring
Setoff Restrictions
SCHEDULE VIII Schedule of Lockbox Account Agreements Requiring Changes
Regarding Control
SCHEDULE IX Schedule of Lockbox Account Agreements Requiring Changes
Regarding Transfer Instructions
SCHEDULE X Schedule of Additional Lockbox Account Agreements to be Delivered
SCHEDULE XI Schedule of NationsBank Lockbox Accounts
EXHIBITS
- - --------
EXHIBIT A Form of Borrowing Date/Spread Account Surplus Remittance Report
EXHIBIT B Form of Commercial Paper Remittance Report
EXHIBIT C Form of Monthly Remittance Report
EXHIBIT D Form of Loan Agreement
EXHIBIT E Form of Purchase Agreement
EXHIBIT F "Limited Purpose" Provisions of Borrower's Certificate of
Incorporation
iv
<PAGE>
EXHIBIT G [Intentionally omitted]
EXHIBIT H Forms of Opinions of Counsel for the Borrower
EXHIBIT I Form of Notice to Insurers
EXHIBIT J Form of Assignment Agreement
EXHIBIT K Form of Subordination Agreement
EXHIBIT L Form of Note Transmittal Sheet
v
<PAGE>
THIS RECEIVABLES LOAN AND SECURITY AGREEMENT (the "Agreement") is made as
---------
of December 5, 1996, among:
(1) WISCONSIN CIRCLE FUNDING CORPORATION, a Delaware corporation (the
"Borrower");
--------
(2) HCFP Funding, Inc., a Delaware corporation (sometimes herein referred
to as "Funding"), as the "Servicer" (as defined herein);
(3) HOLLAND LIMITED SECURITIZATION, INC., a Delaware corporation ("HLS");
---
and
(4) ING BARING (U.S.) CAPITAL MARKETS, INC. ("ING Capital"), as agent (the
-----------
"Agent").
------
IT IS AGREED as follows:
ARTICLE I.
DEFINITIONS
-----------
SECTION 1.01 Certain Defined Terms. (a) Certain capitalized terms used
---------------------
throughout this Agreement are defined above or in this Section 1.01.
------------
(b) As used in this Agreement and its exhibits, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined).
"Adjusted Net Realizable Value" means with respect to any Pledged
-----------------------------
Receivable, (i) in the case of any Loan Receivable, the lesser of the loan
balance outstanding under the applicable Loan Agreement or the Net Realizable
Value of such Loan Receivable multiplied by the "Borrowing Base" percentage
applicable to such Loan Receivable under the applicable Loan Agreement, or (ii)
in the case of Purchased Receivables, the Net Realizable Value of such Purchased
Receivable multiplied by the "Purchase Price" of such Purchased Receivable under
the applicable Purchase Agreement.
"Advance" means, as to any Pledged Receivable, any advance made by the
-------
Servicer with respect to any Remittance Date pursuant to Section 6.21 hereof.
------------
"Adverse Claim" means a lien, security interest, charge, encumbrance or
-------------
other right or claim of any Person (other than, with respect to the Pledged
Assets, (i) any lien, security interest, charge, encumbrance or other right or
claim in favor of (x) the Lender (or the Agent on behalf of the Lender) or (y)
any other Person who (1) prior to the date hereof has subordinated, in writing,
its interest in such Pledged Asset to the interest of the Agent and the Lender
therein pursuant to a written subordination in form and substance acceptable to
the Agent or (2) after the
<PAGE>
date hereof subordinates its interest by means of a written subordination which
is substantially similar to the agreement attached hereto as Exhibit K and (ii)
which are Receivables owing from a Government Entity, the right of such
Government Entity to offset against such Receivable, but only prior to the time
such Government Entity actually offsets against such Receivable or notifies
Funding or the Originator of its intent to do so.
"Affected Party" has the meaning assigned to that term in Section 2.10.
-------------- ------------
"Affected Person" means the Lender and any of its Affiliates, successors
---------------
and assigns.
"Affiliate" when used with respect to a Person means any other Person
---------
controlling, controlled by or under common control with such Person. For the
purposes of this definition, "control," when used with respect to any specified
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Agent's Account" means a special account (account number 96026322 at the
---------------
Agent's Bank) in the name of the Lender, the Agent or the Collateral Trustee, as
from time to time designated by the Agent by notice to the Borrower and the
Servicer.
"Agent's Bank" means First Trust of New York, National Association
------------
"Agent's Fee" has the meaning assigned to that term in Section 2.09(a).
----------- ---------------
"Agreement" means this Receivables Loan and Security Agreement, as the same
---------
may be amended, restated, supplemented or otherwise modified from time to time
hereafter.
"Alternative Rate" means, with respect to any Fixed Period for all Loans
----------------
allocated to such Fixed Period, an interest rate per annum equal to sum of the
Base Rate plus 2.0%.
----
"Assets" means Purchased Receivables, Loan Receivables and Related
------
Security.
"Assignment Agreement" means one of the Lockbox Assignment Agreements,
--------------------
dated the date hereof, between Funding and a Preexisting Lockbox Bank in
substantially the form attached hereto as Exhibit J.
---------
"Assignment and Acceptance" means an assignment and acceptance entered into
-------------------------
by the Lender and an assignee pursuant to Section 9.04.
------------
"Backup Servicer" means Input 1 LLC and any substitute Backup Servicer
---------------
appointed by the Agent pursuant to Section 6.15.
------------
2
<PAGE>
"Backup Servicing Fee" has the meaning assigned to that term in Section
-------------------- -------
2.09(a).
- - -------
"Backup Servicing Fee Letter" means the letter agreement dated as of even
---------------------------
date herewith between the Backup Servicer and the Agent, as amended or otherwise
modified from time to time.
"Bank One" means Bank One, Arizona, NA.
--------
"Base Rate" means, on any date, a fluctuating rate of interest per annum
---------
equal to the arithmetic average of the rates of interest publicly announced by
The Chase Manhattan Bank (National Association), Citibank, N.A. and Morgan
Guaranty Trust Company of New York (or their respective successors) as their
respective prime commercial lending rates (or, as to any such bank that does not
announce such a rate, such bank's "base" or other rate determined by the Lender
to be the equivalent rate announced by such bank), except that, if any such bank
shall, for any period, cease to announce publicly its prime commercial lending
(or equivalent) rate, the Agent shall, during such period, determine the "Base
----
Rate" based upon the prime commercial lending (or equivalent) rates announced
- - ----
publicly by the other such banks or, if each such bank ceases to announce
publicly its prime commercial lending (or equivalent) rate, based upon the prime
commercial lending (or equivalent) rates announced publicly by other banks
reasonably acceptable to the Borrower. The prime commercial lending (or
equivalent) rates used in computing the Base Rate are not intended to be the
lowest rates of interest charged by such banks in connection with extensions of
credit to debtors. The Base Rate shall change as and when such banks' prime
commercial lending (or equivalent) rates change.
"Batch Payoff Period" means the "Collection Period" applicable to a batch
-------------------
of Receivables as specified in the Purchase Agreement pursuant to which such
Receivables were sold to Funding; provided however that such Batch Payoff Period
shall under no circumstances be extended in a manner which is inconsistent with
the Credit and Collection Policy.
"Borrowing" means a borrowing of Loans under this Agreement.
---------
"Borrowing Base Deficiency" means, at any time that the Required
-------------------------
Overcollateralization Percentage exceeds the Overcollateralization Percentage,
an amount equal to:
<TABLE>
<CAPTION>
(FA - SA - CO) - (PRB - MOCA)
<S> <C> <C> <C>
where: FA = the Facility Amount;
PRB = the Pledged Receivables Balance;
MOCA = the Minimum Overcollateralization Amount;
SA = the amounts on deposit in the Spread Account; and
3
<PAGE>
</TABLE>
<TABLE>
<S> <C> <C>
CO = the amount of Collections on deposit in the Agent's Account
to be applied in accordance with Section 2.05 on the next
------------
Remittance Date.
</TABLE>
"Borrowing Base Surplus" means, at any time that the Overcollateralization
----------------------
Percentage exceeds the Required Overcollateralization Percentage, an amount
equal to:
<TABLE>
<CAPTION>
(PRB - MOCA) - (FA - SA - CO)
<S> <C> <C> <C>
where: PRB = the Pledged Receivables Balance;
MOCA = the Minimum Overcollateralization Amount;
SA = the amounts on deposit in the Spread Account;
CO = the amount of Collections on deposit in the Agent's Account
to be applied in accordance with Section 2.05 on the next
------------
Remittance Date; and
FA = the Facility Amount.
</TABLE>
"Borrowing Date" means, with respect to any Borrowing, the date on which
--------------
such Borrowing is funded, which date, other than in the case of the initial
Borrowing, shall be a Subsequent Borrowing Date.
"Borrowing Date/Spread Account Surplus Remittance Report" means a report,
-------------------------------------------------------
in substantially the form of Exhibit A, furnished by the Servicer to the Agent
---------
for the Lender pursuant to Section 6.12(c).
---------------
"Borrowing Limit" means, at any time, $50,000,000 as such amount may be
---------------
adjusted from time to time pursuant to Section 2.03, provided, however, that at
------------ -------- -------
all times, on or after the Termination Date, the "Borrowing Limit" shall mean
---------------
the aggregate outstanding Loans and provided, further, that at no time shall the
-------- -------
Maximum Borrowing Limit exceed the aggregate commitments of the lenders
providing credit enhancement and liquidity support to the Lender in connection
with the transactions contemplated by this Agreement.
"Business Day" means a day of the year other than a Saturday or a Sunday on
------------
which banks are not authorized or required to close in New York City.
"Capital Limit" means, at any time, an amount equal to:
-------------
<TABLE>
<CAPTION>
PRB - MOCA + SA + CO
<S> <C> <C> <C>
where: PRB = the Pledged Receivables Balance;
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
MOCA = the Minimum Overcollateralization Amount;
SA = the amounts on deposit in the Spread Account; and
CO = the amount of Collections on deposit in the Agent's Account
to be applied in accordance with Section 2.05 on the next
------------
Remittance Date.
</TABLE>
"Carrying Cost Reserve Amount" means, with respect to a Business Day that
----------------------------
is not a Remittance Date, the sum of (a) the Borrowing Base Deficiency as of
such Business Day (or as of the Business Day of the related Borrowing
Date/Spread Account Surplus Remittance Report) plus (b) aggregate accrued and
----
unpaid (i) Yield, (ii) Liquidation Fees, (iii) Facility Fee, (iv) Servicing Fee
and (v) obligations of the Borrower to the Lender hereunder other than the
amounts described in the foregoing clauses (i)(iv) (collectively, the fees and
amounts described in the foregoing clauses (i)-(v), the "Carrying Costs"), each
--------------
as of such Business Day.
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Collateral Trustee" means First Trust of New York, National Association
------------------
and any successor collateral agent and trustee with respect to the commercial
paper and the liquidity and credit support providers of the Lender.
"Collection Date" means the date following the Termination Date on which
---------------
the aggregate outstanding Loans have been paid in full and all Yield and all
other Obligations have been paid in full.
"Collections" means, with respect to any Pledged Receivable, all cash
-----------
proceeds in respect of such Pledged Receivable and all cash proceeds of other
Related Security with respect to such Pledged Receivable, and any Collection of
such Pledged Receivable deemed to have been received pursuant to Section 2.07.
------------
"Commercial Paper Remittance Report" means a report, in substantially the
----------------------------------
form of Exhibit B, furnished by the Servicer to the Agent for the Lender
---------
pursuant to Section 6.12(d).
---------------
"Concentration Account" means a special concentration account, account
---------------------
number 5274385 at Bank One, in the name of the Borrower and under the dominion
and control of the Agent.
"Contract" means an agreement (including an invoice, insurance policy,
--------
contract or other instrument) pursuant to, or under which, a Payor shall be
obligated to pay for Receivables of such Payor to any Originator from time to
time.
"CP Rate" means, with respect to any Fixed Period for all Loans allocated
-------
to such Fixed Period, the rate equivalent to the rate (or if more than one rate,
the weighted average of the
5
<PAGE>
rates) at which commercial paper notes of the Lender having a term equal to such
Fixed Period and to be issued to fund the applicable Loans by the Lender may be
sold by any placement agent or commercial paper dealer selected by the Lender,
as agreed between each such agent or dealer and the Lender and notified by the
Lender to the Agent and the Servicer; provided, however, if the rate (or rates)
-------- -------
as agreed between any such agent or dealer and the Lender with respect to any
Fixed Period for the applicable Loans is a discount rate (or rates), the "CP
Rate" for such Fixed Period shall be the rate (or if more than one rate, the
weighted average of the rates) resulting from converting such discount rate (or
rates) to an interest-bearing equivalent rate per annum.
"Credit and Collection Policy" means with respect to Receivables, those
----------------------------
credit and collection policies and practices of the Servicer in effect on the
date hereof as annexed hereto as Schedule II as such policies may hereafter be
amended, modified or supplemented from time to time in compliance with this
Agreement.
"Cut-Off Date" means with respect to the initial Borrowing and each
------------
Subsequent Borrowing Date, such date as the Agent and the Borrower shall
mutually agree.
"Debt" of any Person means (a) indebtedness of such Person for borrowed
----
money, (b) obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (c) obligations of such Person to pay the deferred
purchase price of property or services, (d) obligations of such Person as lessee
under leases which shall have been or should be, in accordance with GAAP,
recorded as capital leases, (e) obligations secured by an Adverse Claim upon
property or assets owned by such Person, even though such Person has not assumed
or become liable for the payment of such obligations and (f) obligations of such
Person under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (a) through (e) above.
-----------------------
"Default Rate" means an interest rate per annum equal to two percent (2%)
------------
plus the rate or rates of interest otherwise in effect hereunder from time to
time.
"Defaulted Receivables" means, as of any time of determination, (a) any
---------------------
Pledged Loan Receivable:
(i) in respect of which any payment, or part thereof, of principal,
interest or otherwise due and owing under the related Loan Agreement remains
unpaid for more than 30 days after its due date;
(ii) for which the Servicer determines in good faith that the Payor will
not continue remitting payments;
(iii) as to which the Payor thereof has taken the actions or is the subject
of a proceeding of the type described in Section 7.01(f);
---------------
6
<PAGE>
(iv) as to which the Health Care Provider pledging such Pledged Loan
Receivable has taken the actions or is the subject of a proceeding of the
type described in Section 7.01(f); provided, that if the bankruptcy court
--------------- --------
presiding over any bankruptcy proceeding referred to in Section 7.01(f) with
---------------
respect to such Health Care Provider issues a judicial determination that
such Pledged Loan Receivable is an allowed claim against such Health Care
Provider, such Pledged Loan Receivable shall not be a Defaulted Receivable to
the extent payable as an allowed claim; provided, further that if the
-------- -------
bankruptcy court presiding over any bankruptcy proceeding referred to in
Section 7.01(f) with respect to such
---------------
Health Care Provider issues a judicial determination that any loan agreement
entered into after commencement of such proceeding on substantially the same
terms as the Loan Agreements executed prior to such proceeding is an allowed
debtor-in-possession financing, such Pledged Loan Receivable shall not be a
Defaulted Receivable in any respect;
(v) as to which the Health Care Provider pledging such Loan Receivable has
suffered any material adverse change which affects its viability as an
ongoing concern; or
(vi) which has been or should otherwise be written off by the Servicer in
accordance with the Credit and Collection Policies; and
(b) any Pledged Purchased Receivable:
(i) that remains unpaid for more than 60 days past its applicable Batch
Payoff Period;
(ii) for which the Servicer determines in good faith that the Payor will
not continue remitting payments;
(iii) as to which the Payor thereof has taken the actions or is the
subject of a proceeding of the type described in Section 7.01(f);
---------------
(iv) as to which the Health Care Provider transferring such Pledged
Purchased Receivable has taken the actions or is the subject of a proceeding
of the type described in Section 7.01(f); provided, that if the bankruptcy
--------------- --------
court presiding over any bankruptcy proceeding referred to in Section
-------
7.01(f) with respect to such Health Care Provider issues a judicial
-------
determination that such Pledged Purchased Receivable is an allowed claim
against such Health Care Provider, such Pledged Purchased Receivable shall
not be a Defaulted Receivable to the extent payable as an allowed claim;
provided, further that if the bankruptcy court presiding over any bankruptcy
-------- -------
proceeding referred to in Section 7.01(f) with respect to such Health Care
---------------
Provider issues a judicial determination that any receivables purchase
agreement entered into after commencement of such proceeding on substantially
the same terms as the Purchase Agreements executed prior to such proceeding
is an allowed debtor-in-possession financing, such Pledged Purchased
Receivable shall not be a Defaulted Receivable in any respect; or
7
<PAGE>
(v) as to which the Health Care Provider transferring such Pledged
Purchased Receivable has suffered any material adverse change which affects
its viability as an ongoing concern; or
(vi) which would otherwise be written off in accordance with the Credit and
Collection Policies.
"Deleted Receivable" means a Pledged Receivable replaced by a Qualified
------------------
Substitute Receivable.
"Delinquency Ratio" means, for any Remittance Period, as of the last day of
-----------------
such Remittance Period, a fraction, expressed as a percentage, (a) the numerator
of which is the sum of (i) the Adjusted Net Realizable Value of all Delinquent
Receivables; and (b) the denominator of which is (i) the Adjusted Net Realizable
Value of all Pledged Loan Receivables plus (ii) the Adjusted Net Realizable
----
Value of all Pledged Purchased Receivables.
"Delinquent Receivable" means, as of any time of determination, (i) any
---------------------
Pledged Purchased Receivable in respect of which any payment, or part thereof,
remains unpaid for more than the applicable Batch Payoff Period for such Pledged
Receivable but less than 60 days beyond such Batch Payoff Period and (ii) any
Pledged Loan Receivable in respect of which any payment of principal, interest
or otherwise, or part thereof, due and owing under the related Loan Agreement
remains unpaid beyond its due date, but for no more 30 days beyond its due date.
"Depository Institution" means a depository institution or trust company,
----------------------
incorporated under the laws of the United States or any State thereof, that is
subject to supervision and examination by federal and/or state banking
authorities.
"Discount Amount" means at any time an amount equal to:
---------------
BL - BL
----
1.05
where: BL = the Borrowing Limit in effect on the date of determination.
"Eligible Assignee" means each of ING Capital, any receivables investment
-----------------
vehicle sponsored by ING Capital or any of its Affiliates, any financial
institution providing credit enhancement or liquidity support to the Lender in
connection with the transactions contemplated by this Agreement and any
Affiliate of any of the foregoing.
"Eligible Depository Institution" means a Depository Institution, the short
-------------------------------
term unsecured senior indebtedness of which is rated at least A-1 by S&P and F-1
by Fitch, if rated by Fitch.
8
<PAGE>
"Eligible Receivable" means, at any time, a Pledged Receivable:
-------------------
(a) which is a liability of a Payor organized under the laws of any
jurisdiction in the United States and having its principal office in the United
States;
(b) which is denominated and payable in United States dollars in the United
States;
(c) which is not a Defaulted Receivable;
(d) which was created through the provision of merchandise, goods or
services by a Health Care Provider in the ordinary course of its business of
delivering health care related services;
(e) which satisfies in all material respects all applicable requirements of
the Credit and Collection Policies;
(f) (i) which represents the genuine, legal, valid and binding obligation
in writing of a Payor enforceable by the holder thereof in accordance with its
terms, (ii) in respect of which the holder of such Pledged Receivable is able to
bring suit or otherwise enforce its remedies against such Payor through judicial
process, and (iii) which has not, nor has the related Contract or Purchase
Agreement or Loan Agreement, as applicable, been satisfied, subordinated,
rescinded or amended in any manner adverse to the Agent or the Lenders, subject
to (x) any applicable bankruptcy, insolvency, reorganization, moratorium or
other similar laws now or hereafter in effect relating to or affecting the
enforceability of creditors' rights generally, and (y) general equitable
principles, whether applied in a proceeding at law or in equity;
(g) which is not, nor is the related Contract or Purchase Agreement or Loan
Agreement, as applicable, subject to any exercise of any right of rescission,
set-off, recoupment, counterclaim or defense, whether arising out of
transactions concerning the Pledged Receivable or otherwise which could render
the amount collectable thereunder less than the Net Realizable Value thereof;
(h) which prior to its sale by Funding to the Borrower, was owned by
Funding, free and clear of any Adverse Claim (except for the Fleet Interest),
and Funding had the right to contribute, sell, assign and transfer the same and
interests therein as contemplated under the Funding Sale Agreement, and, upon
such transfer, the Borrower will have acquired good and marketable title to and
the sole record and beneficial ownership interest in such Pledged Receivable,
free and clear of any Adverse Claim and, after such transfer, such Pledged
Receivable did not become subject to any Adverse Claim as a result of any action
or inaction of Funding or the applicable Originator;
(i) upon each Borrowing, the Lender shall acquire a valid and perfected
first priority lien in each Pledged Receivable then existing or thereafter
arising and in the Related
9
<PAGE>
Security and Collections with respect thereto, free and clear of any Adverse
Claim except as provided hereunder. No effective financing statement or other
instrument similar in effect covering any Pledged Receivable or the Related
Security or Collections with respect thereto shall at any time be on file in any
recording office except such as may be filed in favor of (i) the Agent relating
to this Agreement, (ii) Funding relating to the Purchase Agreement or the Loan
Agreement, and (iii) the Borrower relating to the Funding Sale Agreement;
(j) which is entitled to be paid pursuant to the terms of the related
Contract, if any, has not been paid in full or been compromised, adjusted,
extended, satisfied, subordinated, rescinded or modified, and is not subject to
compromise, adjustment, extension, satisfaction, subordination, rescission, or
modification by the related Originator or Funding which could render the amount
collectable thereunder less than the Net Realizable Value thereof;
(k) in respect of which the related Originator has submitted all necessary
documentation for payment of such Pledged Receivable to the Payor and has
fulfilled all its other obligations in respect thereof;
(l) which is an "account" or "general intangible" within the meaning of the
UCC of the jurisdiction where the related Originator's, Funding's and the
Borrower's chief executive office is located;
(m) which does not contravene in any material respect any laws, rules or
regulations applicable thereto (including, without limitation, laws, rules and
regulations relating to usury, consumer protection, truth in lending, fair
credit billing, fair credit reporting, equal credit opportunity, fair debt
collection practices and privacy) and no party to the related Contract is in
violation of any such law, rule or regulation which could have a material
adverse effect on the collectibility of such Pledged Receivable, the value of
such Pledged Receivable or the payment terms of such Pledged Receivable;
(n) which does not arise from a transaction for which any additional
performance by the related Originator or acceptance or other act of the Payor
remains to be performed as a condition to any payments on such Pledged
Receivable;
(o) in respect of which there are no proceedings or investigations pending
or threatened before any Government Entity (i) asserting the invalidity of such
Pledged Receivable or the related Contract, (ii) asserting the bankruptcy or
insolvency of the related Payor, (iii) seeking the payment of such Pledged
Receivable or payment and performance of the related Contract or (iv) seeking
any determination or ruling that might materially and adversely affect the
validity or enforceability of such Pledged Receivable or the related Contract;
(p) in which the interest of the Borrower upon the Borrowing, if such
Pledged Receivable is a Pledged Loan Receivable, (i) represents funds which have
previously been disbursed or will be disbursed to a Health Care Provider during
the same day the Borrower receives a Loan on account thereof, (ii) was acquired
pursuant to documentation consistent with
10
<PAGE>
Funding's standard loan administration and documentation policies and
procedures, and (iii) is collateralized by Receivables of Health Care Providers
which Receivables do not represent self-pay obligations of individual recipients
of services from the related Health Care Providers;
(q) in which the interest of the Borrower upon the Borrowing, if such
Pledged Receivable is a Pledged Purchased Receivable, (i) is a Receivable the
purchase price of which has been disbursed or will be disbursed to a Health Care
Provider during the same day the Borrower receives a Loan on account thereof,
(ii) was acquired pursuant to documentation consistent with Funding's standard
receivables purchase administration and documentation policies and procedures,
and (iii) which does not represent self-pay obligations of individual recipients
of services from the related Health Care Providers;
(r) which, if such Pledged Receivable is a Pledged Loan Receivable, does
not have a due date later than three (3) years from the date of the related Loan
Agreement;
(s) which, if such Pledged Receivable is a Pledged Purchased Receivable,
does not have a Batch Payoff Period longer than 180 days from the date the
related invoice was generated;
(t) which has not been modified or extended while held by Funding or the
Borrower in any way other than by the Servicer in a manner consistent with the
Credit and Collection Policy;
(u) which complies with such other criteria and requirements as the Agent
may from time to time reasonably require;
(v) the Medicare and Medicaid cost reports of the Health Care Provider
which originated such Pledged Receivable for all cost reporting periods ending
on or before the date of the last audited cost report have been examined and
audited by (i), as to Medicaid, the applicable state agency or other HCFA-
designated agents or agents of such state agency, charged with such
responsibility or (ii), as to Medicare, the Medicare intermediary or other HCFA-
designated agents charged with such responsibility; and there is no current
basis for any Government Entity to assert an offset against each such Health
Care Provider which could render the amount collectable thereunder less than the
Net Realizable Value thereof;
(w) the goods or services provided and reflected by such Pledged Receivable
were received by the applicable patient;
(x) the insurance policy, contract or other instrument obligating an
Insurer to make payment with respect to such Pledged Receivable (i) does not
contain any provision prohibiting the grant of a security interest in such
payment obligation from the patient to the applicable Health Care Provider, from
such Health Care Provider to Funding, from Funding to the Borrower or from the
Borrower to the Lender, (ii) has been duly authorized and, together with the
applicable Pledged Receivable, constitutes the legal, valid and binding
obligation of the
11
<PAGE>
Insurer in accordance with its terms, (iii) together with the applicable Pledged
Receivable, does not contravene in any material respect any requirement of law
applicable thereto, and (iv) was in full force and effect and applicable to the
patient at the time the goods or services constituting the basis for the Pledged
Receivable were sold or performed;
(y) the insurance policy, contract or other instrument obligating a
Government Entity to make payment with respect to such Pledged Receivable (i)
has been duly authorized and, together with the applicable Pledged Receivable,
constitutes the legal, valid and binding obligation of the Government Entity in
accordance with its terms, (ii) together with the applicable Pledged Receivable,
does not contravene in any material respect any requirement of law applicable
thereto, and (iii) was in full force and effect and applicable to the patient at
the time the goods or services constituting the basis for the Pledged Receivable
were sold or performed; and
(z) the Payor of which, if such Payor is an Insurer, has received a Notice
which has not been revoked.
"EOB" means the explanation of benefit from a Payor that identifies the
---
services rendered on account of the Receivable specified therein.
"Event of Default" has the meaning assigned to that term in Section 7.01.
---------------- ------------
"Event of Termination" means the occurrence of any of the following events:
--------------------
(i) a regulatory, tax or accounting body has ordered that the activities of
the Lender, or any Affiliate of the Lender, contemplated hereby be terminated
or, as a result of any other event or circumstance, the activities of the Lender
contemplated hereby may reasonably be expected to cause the Lender, the Person
then acting as the administrator or the manager for the Lender, or any of their
respective Affiliates to suffer materially adverse regulatory, accounting or tax
consequences;
(ii) the commercial paper dealer of the Lender is unable to retire maturing
commercial paper issued to fund or maintain Loans hereunder through the issuance
of new commercial paper for 90 consecutive days; or
(iii) the Program Maturity Date shall have occurred.
"Facility Amount" means the sum of (a) the face amount of outstanding
---------------
commercial paper notes (net of the amount of all Yield scheduled to accrue
thereon through its stated maturity if such commercial paper notes are issued on
a discount basis) of the Lender issued to fund Loans hereunder, plus (b) any
advances outstanding under the Liquidity/Credit Enhancement Facility, plus
accrued interest thereon.
"Facility Fee" has the meaning assigned to that term in Section 2.09(a).
------------ ---------------
12
<PAGE>
"Fitch" means Fitch Investors Service, L.P. (or its predecessor or
-----
successors in interest) if and so long as it has rated and is continuing to rate
commercial paper notes of the Lender, and otherwise means such other nationally
recognized statistical rating organization as may be designated by the Agent.
"Fixed Period" means for any outstanding Loans, (a) if Yield in respect of
------------
all or any part thereof is computed by reference to the CP Rate, a period of 1
to and including 90 days and (b) if Yield in respect thereof is computed at the
Alternative Rate, a period of 1 to and including 30 days, in each case, as
determined pursuant to Section 2.04.
------------
"Fleet Bank" means Fleet Capital Corporation, a Rhode Island corporation.
----------
"Fleet Credit Agreement" means the Loan and Security Agreement, dated as of
----------------------
November 27, 1996, between Fleet Bank and Funding.
"Fleet Interest" means the security interest in the Pledged Receivables
--------------
granted pursuant to the Fleet Credit Agreement.
"Funding Sale Agreement" means that certain purchase and contribution
----------------------
agreement dated as of the date hereof between Funding, as seller, and the
Borrower, as purchaser, together with all instruments, documents and agreements
executed in connection therewith, as such Funding Sale Agreement may from time
to time be amended, supplemented or otherwise modified in accordance with the
terms hereof.
"GAAP" means generally accepted accounting principles as in effect from
----
time to time in the United States.
"Government Entity" means the United States of America, any state, any
-----------------
political subdivision of a state and any agency or instrumentality of the United
States of America or any state or political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government. Payments from Government Entities
shall be deemed to include payments governed under the Social Security Act (42
U.S.C. 1395, et. seq.), including payments under Medicare and Medicaid, and
payments administered or regulated by HCFA.
"HCFA" means the Health Care Financing Administrations of the United States
----
Department of Health and Human Services.
"Health Care Provider" means a Person whose primary business is to provide
--------------------
health care services to individuals, and who finances accounts receivable
through Funding pursuant to either a Loan Agreement or a Purchase Agreement.
13
<PAGE>
"Health Care Provider Lockbox" means one of the lockboxes located at the
----------------------------
addresses set forth on Schedule V, as amended from time to time, to receive
----------
checks and EOB's with respect to Receivables payable by Government Entities.
"Health Care Provider Lockbox Account" means one of the demand deposit
------------------------------------
accounts (established pursuant to a Health Care Provider Lockbox Account
Agreement) with respect to one or more Health Care Providers at the addresses
set forth on Schedule V, as amended from time to time, and associated with the
----------
Health Care Provider Lockboxes established and controlled by each of the Health
Care Providers to deposit Collections, including Collections received in the
Health Care Provider Lockbox and Collections received by wire transfer directly
from Government Entities.
"Health Care Provider Lockbox Account Agreement" means a lockbox agreement
----------------------------------------------
between a Health Care Provider and the bank at which such Health Care Provider's
Health Care Provider Lockbox Account is maintained, the terms of which provide
that (i) all Collections with respect to the Pledged Receivables (received from
Government Entities) of such Health Care Provider shall be deposited into such
Health Care Provider Lockbox Account and (ii) the bank at which the Health Care
Provider Lockbox Account shall be maintained (x) is directed by such Health Care
Provider to transfer all collected funds deposited in such Health Care Provider
Lockbox Account to the Concentration Account, no later than the Business Day
following such deposit and (y) shall have no right of deduction, setoff or
banker's lien against the funds in such lockbox account other than any
deductions or setoffs in respect of such bank's customary service charges or on
account of returned or dishonored checks, and is otherwise reasonably
satisfactory to the Agent.
"HP Equity" means the tangible net worth (including subordinate debt) of
---------
Funding, determined in accordance with GAAP.
"Indemnified Amounts" has the meaning assigned to that term in Section
------------------- -------
8.01.
- - ----
"Insurer" means any Person which in the ordinary course of its business or
-------
activities agrees to pay for health care goods and services received by
individuals (directly, or indirectly through employers, unions or otherwise),
including commercial insurance companies, nonprofit insurance companies (such as
Blue Cross, Blue Shield entities), employers or unions which self-insure for
employee or member health insurance, prepaid health care organizations,
preferred provider organizations, health maintenance organizations and other
Health Care Providers that contract to provide health care services to
individuals. "Insurer" includes insurance companies issuing health, personal
injury, workers' compensation or other types of insurance, as well as other
Health Care Providers that contract to pay for health care services to
individuals, but does not include any individual guarantors or Government
Entities.
"Issuer" means HLS and any other Lender whose principal business consists
------
of issuing commercial paper or other securities to fund its acquisition and
maintenance of receivables, accounts, instruments, chattel paper, general
intangibles and other similar assets.
14
<PAGE>
"Lender" means HLS or any other Person that agrees, pursuant to the
------
pertinent Assignment and Acceptance, to make Loans secured by Pledged Assets
pursuant to Article II of this Agreement.
----------
"Liquidation Fee" means, for the Loans allocated to each Fixed Period
---------------
(computed without regard to any shortened duration of such Fixed Period as a
result of the occurrence of the Termination Date) during which such Loans are
repaid (in whole or in part) prior to the end of such Fixed Period, the amount,
if any, by which (a) the Yield (calculated without taking into account any
Liquidation Fee) which would have accrued on the amount of the payment of such
Loans during such Fixed Period (as so computed) if such payment had not been
made, as the case may be, exceeds (b) the sum of (i) Yield actually received by
the Lender in respect of such Loans for such Fixed Period and, if applicable,
(ii) the income, if any, received by the Lender from the Lender's investing the
proceeds of such payments on such Loans; provided, however, that no Liquidation
-------- -------
Fee shall be payable in the case of a Termination Date resulting from the
termination in whole of the Borrowing Limit pursuant to Section 2.03 in
------------
connection with the occurrence and continuance of an Event of Termination.
"Liquidity/Credit Enhancement Facility" means the Enhancement Agreement,
-------------------------------------
dated as of the date hereof, among the Issuer, the financial institutions party
thereto and the Agent.
"Loan" means a loan made by the Lender to the Borrower pursuant to Article
---- -------
II.
- - --
"Loan Agreement" means each Loan and Security Agreement between Funding and
--------------
a Health Care Provider whereby Funding makes loans to such Health Care Provider
which loans are secured by an interest in Loan Receivables and which is either,
substantially in the form of the agreement annexed hereto as Exhibit D, or, in
---------
such other form as the Agent may approve.
"Loans Outstanding" means the sum of the amounts loaned to the Borrower for
-----------------
the initial and any subsequent borrowings pursuant to Sections 2.01 and 2.02,
------------- ----
reduced from time to time by Collections received and distributed on account of
such Loans outstanding pursuant to Section 2.05; provided, however, that such
------------ -------- -------
Loans outstanding shall not be reduced by any distribution of any portion of
Collections if at any time such distribution is rescinded or must be returned
for any reason.
"Loan Receivables" means Receivables granted as security for loans made
----------------
pursuant to a Loan Agreement.
"Maximum Borrowing Limit" has the meaning assigned to that term in Section
----------------------- -------
2.03.
- - ----
"Measurement Period" means any period comprising 3 consecutive Remittance
------------------
Periods.
15
<PAGE>
"Measurement Period Default Ratio" means, for any Measurement Period, a
--------------------------------
fraction, expressed as a percentage, the numerator of which is the sum of the
Adjusted Net Realizable Value, determined as of the end of such Measurement
Period, of the Pledged Receivables which became Defaulted Receivables during
such Measurement Period, and the denominator of which is the monthly average of
the Adjusted Net Realizable Value of all Pledged Receivables determined as of
the beginning of such Remittance Period.
"Minimum Overcollateralization Amount" means an amount equal to the
------------------------------------
greatest of (a) (i) the Pledged Receivables Balance minus (ii) the Pledged
Receivables Balance divided by 1.00 plus the Required Overcollateralization
Percentage (expressed as a decimal); (b) .15 multiplied by the Borrowing Limit
in effect at such time; (c) the sum of the two largest Originator Commitment
Amounts; and (d) an amount equal to the sum of the Adjusted Net Realizable
Values with respect to the three largest Health Care Providers.
"Misdirected Payment" means a payment made by a Payor in a manner other
-------------------
than as provided in this Agreement. A payment by a Government Entity into any
Health Care Provider Lockbox Account shall not constitute a "Misdirected
Payment" hereunder.
"Monthly Default Ratio" means, for any Remittance Period, a fraction,
---------------------
expressed as a percentage, the numerator of which is the sum of the Adjusted Net
Realizable Value, determined as of the end of such Remittance Period, of the
Pledged Receivables which became Defaulted Receivables during such Remittance
Period, and the denominator of which is the Adjusted Net Realizable Value of all
Pledged Receivables determined as of the beginning of such Remittance Period.
"Monthly Remittance Report" means a report, in substantially the form of
-------------------------
Exhibit C, furnished by the Servicer to the Agent for the Lender pursuant to
- - ---------
Section 6.12(b).
- - ---------------
"Moody's" means Moody's Investors Service, Inc. (or its predecessor or
-------
successors in interest).
"Net Portfolio Yield" means, the Weighted Average Yield less the average
-------------------
Yield Rate on the outstanding balance of the Loans during the previous
Remittance Period (expressed as a percentage per annum).
"Net Realizable Value" means with respect to any Eligible Receivable the
--------------------
amount estimated by Funding (at the time (i) of acquisition thereof by Funding
in the case of Purchased Receivables and (ii) such Receivable was granted to
Funding as security for loans made by Funding in the case of Loan Receivables)
to be the net collectable value of such Eligible Receivable, in its sole
discretion in accordance with the Credit and Collection Policy.
"New Lockbox" has the meaning assigned to that term in Section 6.05(b).
----------- ---------------
16
<PAGE>
"New Lockbox Account" has the meaning assigned to that term in Section
------------------- -------
6.05(b).
- - -------
"New Health Care Provider Lockbox Account" has the meaning assigned to that
----------------------------------------
term in Section 6.06(b).
---------------
"Note" means a promissory note executed and delivered by a Health Care
----
Provider evidencing a loan made by Funding (or a predecessor in interest
thereof) pursuant to a Loan Agreement.
"Notice to Insurers" means a notice letter on each Health Care Provider's
------------------
corporate letterhead in substantially the form attached hereto as Exhibit I or
---------
in such other form combined with any notice to Insurer in respect of payment
instructions containing language substantially similar to that contained in such
form.
"Obligations" means all present and future indebtedness and other
-----------
liabilities and obligations (howsoever created, arising or evidenced, whether
direct or indirect, absolute or contingent, or due or to become due) of the
Borrower to the Lender, the Agent, the Servicer, and/or any other Person,
arising under this Agreement and the other documents delivered by the Borrower
pursuant hereto and shall include, without limitation, all liability for
principal of and interest on the Loans, indemnifications, and other amounts due
or to become due under this Agreement, including, without limitation, interest,
fees and other obligations that accrue after the commencement of an insolvency
proceeding (in each case whether or not allowed as a claim in such insolvency
proceeding).
"Officers' Certificate" means a certificate signed by the Chairman of the
---------------------
Board, the Vice Chairman of the Board, the President, Executive Vice President
or Senior Vice President and by the Treasurer, the Secretary, or one of the
assistant treasurers or assistant secretaries.
"Original Shareholder" means each of John K. Delaney, Ethan Leder and
--------------------
Edward Nordberg.
"Originator" means each Health Care Provider, party from time to time, to
----------
(i) a Loan Agreement or (ii) a Purchase Agreement.
"Originator Commitment Amount" means with respect to (a) Eligible
----------------------------
Receivables which are Loan Receivables, the "Maximum Loan Amount" in the
applicable Loan Agreement without reference to amounts actually outstanding
thereunder, and (b) Eligible Receivables which are Purchased Receivables, the
outstanding "Investment" under the applicable Purchase Agreement.
"Outstanding Balance" of any Receivable at any time means the then
-------------------
outstanding principal balance thereof.
17
<PAGE>
"Overcollateralization Percentage" means at any time the decimal expressed
--------------------------------
as a percentage equal to:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
PRB - 1.00
------------
FA - SA - CO
where: PRB = the Pledged Receivables Balance;
FA = the Facility Amount;
SA = the amounts on deposit in the Spread
Account; and
CO = the amount of Collections on deposit in
the Agent's Account to be applied in
accordance with Section 2.05 on the
------------
next Remittance Date.
</TABLE>
"Parent Agreement" means that certain Parent Agreement dated as of the date
----------------
hereof by HealthCare Financial Partners, Inc. in favor of the Borrower, as such
Parent Agreement may from time to time be amended, supplemented or otherwise
modified in accordance with the terms thereof.
"Payor" means an Insurer or Government Entity, as applicable, obligated to
-----
make payments under a Receivable.
"Permitted Investments" means any one or more of the following:
---------------------
(1) direct obligations of, or obligations fully guaranteed as to principal
and interest by, the United States or any agency or instrumentality thereof,
provided such obligations are backed by the full faith and credit of the
United States;
(2) repurchase obligations (the collateral for which is held by a third
party or the Trustee) with respect to any security described in clause (i)
above, provided that the long-term unsecured obligations of the party agreeing
to repurchase such obligations are at the time rated by Moody's and S&P in one
of its two highest long-term rating categories and, if rated by Fitch, in one
of its two highest long-term rating categories;
(3) certificates of deposit, time deposits, demand deposits and bankers'
acceptances of any bank or trust company incorporated under the laws of the
United States or any state thereof or the District of Columbia, provided that
the short-term commercial paper of such bank or trust company (or, in the case
of the principal depository institution in a depository institution holding
company, the long-term unsecured debt obligations of the depository
institution holding company) at the date of acquisition thereof has been rated
by Moody's and S&P in its highest short-term rating category, and if rated by
Fitch, in its highest short-term rating category;
18
<PAGE>
(4) commercial paper (having original maturities of not more than 270 days)
of any corporation incorporated under the laws of the United States or any
state thereof or the District of Columbia which on the date of acquisition has
been rated by Moody's and S&P in its highest short-term rating category, and,
if rated by Fitch, in its highest short-term rating category; and
(5) money market mutual funds registered under the Investment Company Act
of 1940, as amended, having a rating, at the time of such investment, of no
less than Aaa by Moody's, AAAM by S&P and AAA if rated by Fitch;
provided, that no such instrument shall be a Permitted Investment if such
- - -------- ----
instrument evidences either (a) the right to receive interest only payments with
respect to the obligations underlying such instrument or (b) both principal and
interest payments derived from obligations underlying such instrument where the
principal and interest payments with respect to such instrument provide a yield
to maturity exceeding 120% of the yield to maturity at par of such underlying
obligation.
"Person" means an individual, partnership, corporation (including a
------
business trust), joint stock company, trust, unincorporated association, joint
venture, government (or any agency or political subdivision thereof) or other
entity.
"Pledge" means the pledge of any Loan Receivable or Purchased Receivable
------
pursuant to Article II and or the substitution of any Loan Receivable or
----------
Purchased Receivable pursuant to Section 2.15 for any existing Pledged
------------
Receivable.
"Pledged Assets" has the meaning assigned to that term in Section 2.12(a).
-------------- ---------------
"Pledged Loan Receivables" has the meaning assigned to that term in Section
------------------------ -------
2.12(a).
- - -------
"Pledged Purchased Receivables" has the meaning assigned to that term in
-----------------------------
Section 2.12(a).
- - ---------------
"Pledged Receivables" has the meaning assigned to that term in Section
------------------- -------
2.12(a).
- - -------
"Pledged Receivables Balance" means, at any time, the sum of the Adjusted
---------------------------
Net Realizable Values of Eligible Receivables (which are not Defaulted
Receivables at such time), minus the sum of:
-----
<TABLE>
<C> <S>
(a) the Rate Limit;
(b) the Insurer Limit;
(c) the Aggregate Payor Limit;
(d) the Blue Cross/Blue Shield Payor Limit;
(e) the Modified Maximum Borrowing Limit;
</TABLE>
19
<PAGE>
<TABLE>
<C> <S>
(f) the Government Payor Limit; and
(g) the Loan Maturity Limit;
</TABLE>
where:
"Rate Limit" means the sum of (i) in the case of each Loan
----------
Receivable, the excess of (x) the product of the "Borrowing Base"
percentage applicable to such Loan Receivable under the related Loan
Agreement over (y) 80% of the Net Realizable Value of such Loan
Receivable, or (ii) in the case of each Purchased Receivable, the
excess of (x) the "Purchase Price" of such Purchased Receivable under
the related Purchase Agreement over (y) 85% of the Net Realizable
Value of such Purchased Receivable.
"Insurer Limit" means the dollar amount by which the aggregate
-------------
Adjusted Net Realizable Value of the Pledged Receivables related to a
single Insurer (other than a Blue Cross or Blue Shield entity) exceeds
the product of (i) the concentration limit percentage as described in
the table below relating to the credit rating of such Insurer
(published by A.M. Best & Company) and (ii) the sum of the Adjusted
Net Realizable Values of all Pledged Receivables which are Eligible
Receivables.
<TABLE>
<CAPTION>
Rating Category Percentage
--------------- ----------
<S> <C>
A+ or higher 10.0%
less than A+ but greater than B 2.0%
B and below, unrated or uncategorized 1.0%
</TABLE>
"Aggregate Payor Limit" means the dollar amount by which the
---------------------
aggregate Adjusted Net Realizable Value of the Pledged Receivables
related to all Payors in the same credit rating category as described
in the table below (published by A.M. Best & Company) exceeds the
product of (i) the concentration limit percentage for such credit
rating category as described in the table below and (ii) the sum of
the Adjusted Net Realizable Values of all Pledged Receivables which
are Eligible Receivables.
<TABLE>
<CAPTION>
Rating Category Percentage
--------------- ----------
<S> <C>
B++ 10%
B+ 5.0%
</TABLE>
20
<PAGE>
B and below, unrated or uncategorized 15.0% until the earlier of
(i) June 6, 1997 or (ii)
the date of effectiveness
of any increase of the
Borrowing Limit above
$50,000,000 pursuant to
Section 2.03; and
------------
thereafter 10.0%
"Blue Cross/Blue Shield Payor Limit" means the dollar amount by
----------------------------------
which the aggregate Adjusted Net Realizable Value of the Pledged
Receivables related to all Insurers which are members of Blue
Cross/Blue Shield, exceeds the product of (i) 0.2 and (ii) the sum of
the Adjusted Net Realizable Values of all Pledged Receivables which
are Eligible Receivables.
"Modified Maximum Borrowing Limit" means the dollar amount by
--------------------------------
which the sum of all Originator Commitment Amounts exceeds the sum of
(x) HP Equity plus (y)(i) $75,000,000 when the Borrowing Limit is
$50,000,000 or (ii) $100,000,000 when the Borrowing Limit is
$75,000,000, or greater.
"Government Payor Limit" means the dollar amount by which the
----------------------
aggregate Adjusted Net Realizable Value of the Pledged Receivables due
from all Payors which are Government Entities exceeds the product of
(i) the sum of the Adjusted Net Realizable Values of all Pledged
Receivables which are Eligible Receivables, and (ii) in the case of
(x) Medicare, 0.4 and (y) State Medicaid, 0.15.
"Loan Maturity Limit" means the dollar amount by which the
-------------------
aggregate Adjustable Net Realizable Value of Loan Receivables related
to any Loan Agreement, the loans under which have a remaining term to
maturity (as calculated by reference to the earliest date on which the
Originator Commitment Amount under such Loan Agreements may be
terminated by Funding) of more than two but less than three years
exceeds the product of the Adjusted Net Realizable Value of all Loan
Receivables which are Eligible Receivables and 0.5.
"Preexisting Lockbox" means one of the lockboxes located at the
-------------------
addresses set forth on Schedule III, as amended from time to time, to receive
------------
checks and EOB's with respect to Receivables payable by Insurers.
"Preexisting Lockbox Account" means one of the demand deposit accounts
---------------------------
with respect to each Health Care Provider at the addresses set forth on Schedule
--------
III, as amended from time to time, and associated with the Health Care Provider
- - ---
Lockboxes established for one or
21
<PAGE>
more of the Health Care Providers, to deposit Collections, including Collections
received in the Health Care Provider Lockbox and Collections received by wire
transfer directly from Insurers.
"Preexisting Lockbox Bank" has the meaning assigned to that term in
------------------------
Section 6.05(a).
- - ---------------
"Program Maturity Date" means the fifth anniversary of the date of
---------------------
this Agreement; provided, however, that at any time after the third anniversary
of the date hereof, the Borrower may, upon not less than sixty (60) days prior
written notice to the Lender and Agent, declare the Program Maturity Date to
have occurred in which case the Program Maturity Date shall be deemed to have
occurred on the date specified in such notice.
"Purchase Agreement" means each Receivables Purchase and Sale
------------------
Agreement between Funding and a Health Care Provider pursuant to which Funding
purchases Receivables from such Health Care Provider and which agreement is
substantially in the form of Exhibit E hereto, or, in such other form as the
---------
Agent may approve.
"Purchased Receivables" means Receivables purchased from a Health Care
---------------------
Provider by Funding pursuant to a Purchase Agreement.
"Qualified Substitute Receivable" means a Pledged Receivable
-------------------------------
substituted by the Borrower for a Deleted Receivable which must, on the date of
such substitution, (i) be an Eligible Receivable (and the Borrower shall be
deemed to have represented and warranted as such) and (ii) after giving effect
to the substitution of which would not cause either (a) an Event of Default or
an event that but for notice or lapse of time or both would constitute an Event
of Default or (b) the aggregate Loans outstanding hereunder to exceed the
Borrowing Limit minus the Discount Amount as determined by reference to the most
-----
recent Monthly Remittance Report or Borrowing Date/Spread Account Surplus
Remittance Report furnished by the Servicer to the Agent for the Lender in
accordance with Section 6.12(c) hereof.
---------------
"Receivables" means the indebtedness of a Payor (whether constituting
-----------
an account, chattel paper, instrument or general intangible) arising from the
provision of health care services by a Health Care Provider including all rights
to reimbursement under any agreements with and payments from Payors and the
right to payment of any interest or finance charges and other obligations with
respect to such indebtedness, and all proceeds of the foregoing.
"Receivables Turnover Days Ratio" means the ratio of the Adjusted Net
-------------------------------
Realizable Value at the Beginning of the Remittance Period to the Collections
during such Remittance Period.
"Receivables Yield" means, (a) with respect to Purchased Receivables,
-----------------
the sum of the fees (including, without limitation, administration fees,
commitment fees and discount fees) charged with respect to each purchase as
stated in the applicable Purchase Agreement, expressed on an annualized basis;
or (b) with respect to Loan Receivables, the sum of the fees (including,
22
<PAGE>
without limitation, administration fees, commitment fees and discount fees)
charged plus the stated interest rate as provided in the applicable Loan
Agreement.
"Records" means all documents, books, records and other information
-------
(including without limitation, computer programs, tapes, disks, punch cards,
data processing software and related property and rights) maintained with
respect to Receivables and the related Payors which the Borrower has itself
generated, in which the Borrower has acquired an interest pursuant to the
Funding Sale Agreement or in which the Borrower has otherwise obtained an
interest.
"Record Date" means, as to any Remittance Date, the last day of the
-----------
month preceding the month of such Remittance Date.
"Related Security" means with respect to any Receivable:
----------------
(a) any and all security interests or liens and property subject thereto
from time to time purporting to secure payment of such Receivable;
(b) all guarantees, indemnities, warranties, letters of credit, insurance
policies and proceeds and premium refunds thereof and other agreements or
arrangements of whatever character from time to time supporting or securing
payment of such Receivable; provided, however, if any such guarantee, indemnity,
-------- -------
warranty, letter of credit, insurance policy, agreement, or arrangement
supporting or securing payment of such Receivables support or secure payment of
any Receivable which is not a Pledged Receivable, only the portion supporting or
securing the Pledged Receivables shall be Related Security;
(c) the Records relating to such Receivables;
(d) all of the Borrower's right and title to, and interest in, the Funding
Sale Agreement, the Loan Agreement (and the related Note) or the Purchase
Agreement relating to such Receivable to the extent that it relates to such
Receivable and the assignment to the Agent of all UCC financing statements filed
by the Borrower against the Servicer under or in connection with the Funding
Sale Agreement;
(e) all liquidation proceeds from the Receivables; and
(f) all proceeds of the foregoing.
"Release Price" means, with respect to a Pledged Receivable to be released
-------------
hereunder, an amount equal to the Adjusted Net Realizable Value of such Pledged
Receivable as of the opening of business on the Remittance Date on which the
release is to be effected hereunder; provided, however, that if the release is
-------- -------
in connection with the termination of any Loan Agreement or Purchase Agreement,
Release Price shall mean the outstanding obligations under such Purchase
Agreement or Loan Agreement.
23
<PAGE>
"Remittance Date" means the tenth day of each month, or if such date
---------------
is not a Business Day, the next succeeding Business Day.
"Remittance Period" means, as to any Remittance Date, the period
-----------------
beginning on the first day of the most recently ended calendar month and ending
on the last day of the most recently ended calendar month. The initial
Remittance Period shall begin on and shall end on dates mutually agreeable to
the Borrower and the Agent.
"Required Overcollateralization Percentage" means 25%.
-----------------------------------------
"S&P" means Standard & Poor's Ratings Group, a division of The McGraw-
---
Hill Companies, Inc. (or its predecessor or successors in interest) if and so
long as it has rated and is continuing to rate commercial paper notes of the
Lender, and otherwise means such other nationally recognized statistical rating
organization as may be designated by the Agent.
"Seller Note" means that certain Seller Note by Funding in favor of
-----------
the Borrower, dated the date hereof, in the principal amount of $15,000,000.
"Servicer" means at any time the Person then authorized, pursuant to
--------
Section 6.01 to service, administer and collect Pledged Receivables.
- - ------------
"Servicing Fee" means, for any Remittance Period, an amount, payable
-------------
out of payments on the Pledged Receivables and amounts applied to the payment
of, or treated as payments on the Pledged Receivables, equal to interest at the
applicable Servicing Fee Rate (appropriately divided to account for the number
of Remittance Periods in the applicable year) on the average aggregate Adjusted
Net Realizable Value of the Receivables as of the first day of such Remittance
Period.
"Servicing Fee Rate" means, with respect to each Pledged Receivable,
------------------
the per annum rate of 1.0%.
"Servicing Officer" means any officer of the Servicer involved in, or
-----------------
responsible for, the administration and servicing of the Pledged Receivables,
whose name appears on a list of servicing officers furnished to the Agent by the
Servicer, as such list may from time to time be amended.
"Spread Account" has the meaning assigned thereto in Section 2.06 of
-------------- ------------
this Agreement.
"Spread Account Bank" means the bank maintaining the Spread Account.
-------------------
"Spread Account Excess" has the meaning assigned to that term in
---------------------
Section 2.06(b).
- - ---------------
24
<PAGE>
"Spread Account Surplus Date" has the meaning assigned to that term in
---------------------------
Section 2.06(b).
- - ---------------
"Subsequent Borrowing Date" means each Business Day occurring after
-------------------------
the initial Borrowing Date on which the Borrower determines, in the exercise of
its sole discretion, to request an additional Borrowing from the Lender and to
pledge additional Eligible Receivables to the Lender in respect thereof.
"Supplemental Overcollateralization Percentage" means 42%.
---------------------------------------------
"Termination Date" means the earliest of (a) the Program Maturity
----------------
Date, (b) the date of termination in whole of the Borrowing Limit pursuant to
Section 2.03, (c) the date of the declaration or automatic occurrence of the
- - ------------
Termination Date pursuant to Section 7.01, (d) the date on which any commitment
------------
of a lender providing liquidity support or enhancement support to the Lender
with respect to this Agreement is terminated for any reason and a replacement
commitment is not obtained by the Lender prior to such termination and (e) the
occurrence of an Event of Termination.
"UCC" means the Uniform Commercial Code as from time to time in effect
---
in the specified jurisdiction.
"United States" means the United States of America.
-------------
"Weighted Average Yield" means the weighted average Receivables Yield
----------------------
as of any date of determination, weighted based on the Adjusted Net Realizable
Value.
"Yield" means, for all Loans allocated to any Fixed Period during any
-----
such Fixed Period, the product of
YRT x L x ED
---
360
<TABLE>
<C> <S> <C> <C>
where: YRT = the Yield Rate for such Fixed Period;
L = the Loans allocated to such Fixed Period; and
ED = the actual number of days elapsed during such
Fixed Period,
</TABLE>
provided, however, that (a) no provision of this Agreement shall require the
- - -------- -------
payment or permit the collection of Yield in excess of the maximum permitted by
applicable law and (b) Yield shall not be considered paid by any distribution if
at any time such distribution is rescinded or otherwise returned by the Lender
to the Borrower or any other Person for any reason.
"Yield Rate" means, for any Fixed Period for all Loans allocated to
----------
such Fixed Period:
25
<PAGE>
(i) to the extent the Lender will be funding the applicable Loan on the
first day of such Fixed Period through the issuance of commercial paper, a
rate equal to the CP Rate for such Fixed Period, and
(ii) to the extent the Lender will not be funding the applicable Loan on
the first day of such Fixed period through the issuance of commercial paper,
(x) a rate equal to the Alternative Rate for such Fixed Period or (y) such
other rate as the Agent and the Borrower shall agree to in writing.
SECTION 1.02 Other Terms. All accounting terms not specifically defined
-----------
herein shall be construed in accordance with GAAP. All terms used in Article 9
of the UCC in the State of New York, and not specifically defined herein, are
used herein as defined in such Article 9.
SECTION 1.03 Computation of Time Periods. Unless otherwise stated in
---------------------------
this Agreement, in the computation of a period of time from a specified date to
a later specified date, the word "from" means "from and including" and the words
"to" and "until" each mean "to but excluding."
ARTICLE II.
THE RECEIVABLES FACILITY
------------------------
SECTION 2.01 Borrowings. On the terms and conditions hereinafter set
----------
forth, the Lender shall make loans ("Loans") to the Borrower secured by Pledged
-----
Assets from time to time during the period from the date hereof until the
Termination Date. Under no circumstances shall the Lender make Loans if, after
giving effect to such Borrowing of Loans, either (a) an Event of Termination, an
Event of Default or an event that but for notice or lapse of time or both would
constitute an Event of Default has occurred and is continuing or (b) the
aggregate Loans outstanding hereunder would exceed the lesser of (i) the
Borrowing Limit minus the Discount Amount or (ii) the Capital Limit as
-----
determined by reference to the most recent Monthly Remittance Report or
Borrowing Date/Spread Account Surplus Remittance Report delivered by the
Servicer to the Lender in accordance with Section 6.12 hereof.
------------
SECTION 2.02 The Initial Borrowing and Subsequent Borrowings. (a) Until
-----------------------------------------------
the occurrence of the Termination Date, the Lender will make Loans on any
Business Day at the request of the Borrower, subject to and in accordance with
the terms and conditions of Section 2.01 and 2.02. After the Collection Date
------------ ----
has occurred, the Lender and the Agent, in accordance with their respective
interests, shall assign and transfer to the Borrower, for no consideration,
their respective remaining interests in the Pledged Assets, free and clear of
any Adverse Claim resulting solely from an act by the Lender or the Agent, but
without any other representation or warranty, express or implied.
26
<PAGE>
(b) The initial Borrowing and each Subsequent Borrowing shall be made on at
least one Business Days' notice from the Borrower to the Agent provided that
such notice is received by the Agent no later than 10:00 a.m. (New York City
time) on the day of such notice. Each such notice shall specify (i) the
aggregate amount of such Borrowing, which shall be in an amount equal to or
greater than $250,000, (ii) the date of such Borrowing, (iii) the requested
Fixed Period(s) and requested applicable Yield Rate (i.e. CP Rate or Alternative
Rate) for such Borrowing, and the allocations of Loans to each such requested
Fixed Period and (iv) the Purchased Receivables or Loan Receivables to be
pledged in connection with such Borrowing (and upon such Borrowing, such
Purchased Receivables or Loan Receivables shall be "Pledged Receivables"
hereunder). The Agent shall notify the Borrower whether the duration of the
initial Fixed Periods and the applicable Yield Rate described in such notice is
acceptable or, if not acceptable, the Agent shall advise the Borrower of such
Fixed Periods and applicable Yield Rate as may be acceptable; provided, however,
-------- -------
that the Agent hereby agrees that so long as no Event of Default or Event of
Termination has occurred and is continuing, the Agent shall use its best efforts
to fund the Loans through the issuance of commercial paper notes allocated to
this Agreement. It shall be a rebuttable presumption that the Agent has not
fulfilled the best efforts requirement of the previous sentence if the Agent is
not funding Loans hereunder through the issuance of commercial paper notes at
any time that the Agent is funding advances (as loans, investments or otherwise)
through the issuance of commercial paper to other borrowers of or sellers to HLS
who are similarly situated to the Borrower and which commercial paper notes have
maturities similar to the Fixed Periods requested by the Borrower. On the date
of such Borrowing, the Lender shall, upon satisfaction of the applicable
conditions set forth in Article III, make available to the Borrower in same day
-----------
funds, the amount of such Borrowing (net of amounts payable to or for the
benefit of the Lender to repay Loans on such Borrowing Date pursuant to Section
-------
2.05), by payment to the account which the Borrower has designated in writing.
- - ----
(c) It is expressly acknowledged that each Borrowing hereunder shall be
made without recourse to the Borrower; provided, however, that the Borrower
-----------------
shall be liable to the Agent and the Lender (i) for all representations,
warranties, covenants and indemnifications made by such Borrower pursuant to the
terms of this Agreement to the extent described in Section 8.01, (ii) for all
------------
obligations to remit any deemed Collections of Pledged Receivables pursuant to
Section 2.07, and (iii) for all fees, costs, expenses, taxes and other
- - ------------
indemnifications owed under this Agreement pursuant to Sections 2.08, 2.09,
------------- ----
2.10, 6.15 and 9.07.
- - ---- ---- ----
(d) The Loans mature 90 days after the Program Maturity Date and in no
event later than March 5, 2002. All Obligations shall be immediately due and
payable on such date.
SECTION 2.03 Increase, Termination or Reduction of the Borrowing Limit.
---------------------------------------------------------
The Borrower may, upon at least 45 days' written notice to the Agent, (a)
increase the Borrowing Limit in increments of $25,000,000 (the Agent being
deemed to have agreed to such increase upon its written confirmation of receipt
of such notice); provided that after giving effect to such increases the
--------
Borrowing Limit shall not exceed $100,000,000 (the "Maximum Borrowing
-----------------
27
<PAGE>
Limit") and provided, further that no Event of Default or Event of Termination
- - ----- -------- -------
at such time shall have occurred and be continuing, and (b) after the third
anniversary of the date of this Agreement, terminate in whole or reduce in part
the Borrowing Limit by an amount such that after giving effect to such reduction
the aggregate Loans outstanding hereunder do not exceed the Borrowing Limit
minus the Discount Amount then in effect; provided, however, that each partial
- - ----- -------- -------
reduction of the Borrowing Limit shall be in an aggregate amount equal to
$25,000,000 or an integral multiple thereof; provided, further, that the
-------- -------
Borrower may at any time, upon payment of all obligations hereunder, terminate
the entire Borrowing Limit in connection with the occurrence and continuance of
an Event of Termination.
SECTION 2.04 Selection of Fixed Periods. At all times hereafter until
--------------------------
the Termination Date, the Borrower shall, subject to the Agent's and the
Lender's approval and the limitations described below, select (a) Fixed Periods
and allocate a portion of the outstanding Loans to each selected Fixed Period,
so that the outstanding Loans are at all times allocated to one or more Fixed
Periods and (b) Yield Rates to apply to such Loans for such Fixed Periods. The
initial Fixed Period(s) and Yield Rate(s) applicable to the Loans arising as a
result of the initial Borrowing shall be specified in the notice relating to the
Borrowing described in Section 2.02(b). Each subsequent Fixed Period shall
---------------
commence on the last day of the immediately preceding Fixed Period, and the
duration of and Yield Rate applicable to such subsequent Fixed Period shall be
such as the Borrower shall select and the Agent shall approve on notice from the
Borrower received by the Agent (including notice by telephone, confirmed in
writing) not later than 12:30 P.M. (New York City time) on such last day, except
------
that if the Agent shall not have received such notice before 12:30 P.M. or the
Agent and the Borrower shall not have so mutually agreed before 2:00 P.M. (New
York City time) on such last day, such Fixed Period shall be one day and the
applicable Yield Rate shall be the Alternative Rate or, if applicable, the
Default Rate, until the Agent receives notice from the Borrower requesting a
Fixed Period and applicable Yield Rate, which, if accepted by the Agent, shall
be the Fixed Period and the applicable Yield Rate; provided, that,
-------- ----
notwithstanding the foregoing, on and after the occurrence of any Event of
Default or Event of Termination (unless such Event of Default or Event of
Termination (other than the Event of Termination described in clause (i) thereof
which Event of Termination may not be waived for the purposes of this provision)
is waived in accordance with the terms and conditions hereof), the Lender shall
cease to issue commercial paper notes to fund and maintain Loans hereunder and
the applicable Yield Rate shall be the Alternative Rate. Any Fixed Period which
would otherwise end on a day which is not a Business Day shall be extended to
the next succeeding Business Day. Any Fixed Period which commences before the
Termination Date and would otherwise end on a date occurring after the
Termination Date shall end on the Termination Date. On or after the Termination
Date, the Agent shall have the right to allocate outstanding Loans to Fixed
Periods of such duration as shall be selected by the Agent. The Lender shall,
on the first day of each Fixed Period, notify the Agent of the Yield Rate for
the Loans allocated to such Fixed Period.
SECTION 2.05 Remittance Procedures. The Servicer, as agent for the Agent
---------------------
and the Lender, will instruct the Agent's Bank, and the Agent may instruct the
Agent's
28
<PAGE>
Bank, to apply funds on deposit in the Agent's Account and the Spread Account as
described in this Section 2.05.
------------
(a) Yield and Liquidation Fees. The Servicer shall, and the Agent may, on
--------------------------
each Business Day (including any Remittance Date), direct the Agent's Bank to
set aside in the Agent's Account for transfer at the further direction of the
Lender or the Agent or any other duly authorized agent of the Lender (whether on
such day or on a subsequent day) an amount equal to the Yield through such day
on the Loans allocable to the Lender and not so previously set aside and the
amount of any unpaid Liquidation Fees owed to the Lender on such day. On the
last day of each Fixed Period, the Agent shall notify the Servicer of, and
direct the Agent's Bank to pay, such funds to be paid to the Lender in respect
of full payment of accrued Yield for such Fixed Period. On any Business Day on
which an amount is set aside in respect of Liquidation Fees pursuant to this
Section 2.05(a), the Agent shall direct the Agent's Bank to pay such funds to
- - ---------------
the Lender in payment of such Liquidation Fees.
(b) Fixed Period Loan Repayment. The Servicer and the Agent shall, on the
---------------------------
last day of each Fixed Period that is not a Remittance Date, direct the Agent's
Bank to transfer monies held by the Agent's Bank in the Agent's Account in
excess of the Carrying Cost Reserve Amount on such date, to pay the Agent for
the account of the Lender in prepayment of the Loans, an amount equal to the
aggregate Loans allocated to such Fixed Period or, prior to the Termination
Date, if lower, an amount equal to the excess, if any, of aggregate Loans
immediately prior to such distribution over the Capital Limit on such date
(without giving effect to amounts on deposit in the Agent's Account on such date
that would otherwise be included in the calculation of the Capital Limit but
after giving effect to any Borrowing made on such date and any other
distributions of amounts on deposit in the Spread Account made on such date).
(c) Remittance Date Transfers from Agent's Account. The Servicer and the
----------------------------------------------
Agent shall, on each Remittance Date direct the Agent's Bank to transfer monies
held by the Agent's Bank in the Agent's Account in excess of the aggregate
amounts set aside on such Remittance Date pursuant to Section 2.05(a), in the
---------------
following amounts and priority:
(i) to the Agent for the account of the Lender in an amount equal to
(and for payment of) the Facility Fee which has accrued and is unpaid as of
the last day of the preceding month;
(ii) if neither the Borrower nor Funding nor any Affiliate of either of
them, is the Servicer, to the Agent for the account of the Servicer in an
amount equal to the Servicing Fee which is accrued and unpaid as of the last
day of the preceding month, and any Advances not previously reimbursed to the
Servicer;
(iii) to the Spread Account in an amount equal to the Borrowing Base
Deficiency (if any) as of such Remittance Date;
29
<PAGE>
(iv) so long as no Borrowing Base Deficiency shall exist or would be
created by such transfer, to the Agent for the account of the Servicer (if the
Servicer is the Borrower, Funding or any Affiliate of either of them) in an
amount equal to the Servicing Fee which is accrued and unpaid as the last day
of the preceding month, and any Advances not previously reimbursed to the
Servicer;
(v) so long as no Borrowing Base Deficiency shall exist or would be
created by such transfer, to the Agent for the account of the Lender in an
amount equal to the aggregate amount of all other obligations of the Borrower
to the Lender hereunder pursuant to Sections 2.08, 2.09, 2.10, 6.15 and 9.07
------------- ---- ---- ---- ----
hereof;
(vi) prior to the Termination Date if such Remittance Date is a Borrowing
Date, to the Borrower in an amount equal to the Loan to be made hereunder on
such date (which amount shall constitute a Loan hereunder to the same extent
as if such amount had been advanced directly by the Lender to the Borrower on
such date);
(vii) (A) prior to the Termination Date, to the Borrower in an amount
equal to the lesser of (x) the Borrowing Base Surplus on such date, if any,
immediately prior to such distribution (without giving effect to amounts on
deposit in the Agent's Account on such date that would otherwise be included
in the calculation of the Borrowing Base Surplus but after giving effect to
any Borrowing made on such date and any other distributions of amounts on
deposit in the Spread Account made on such date) and (y) the remaining amount
on deposit in the Agent's Account and (B) on and after the Termination Date,
to the Agent for the account of the Lender in repayment of Loans in an amount
necessary to repay the Loans in full; and
(viii) to the Borrower, any remaining amounts.
Upon its receipt of funds pursuant to clause (i) above in respect of the
Facility Fee, the Agent shall retain a portion thereof in the amount of the
accrued and unpaid Agent's Fee (as of the last day of the preceding month) and
shall apply the balance of funds as directed by the Lender. Upon its receipt of
funds pursuant to clause (ii) or (iv) above, the Agent shall distribute such
funds to the Servicer in payment of any accrued and unpaid Servicing Fee and any
Servicing Advances and Advances not previously reimbursed to the Servicer. Upon
its receipt of funds pursuant to clause (v) above, the Agent shall apply such
funds as directed by the Lender or as otherwise provided in this Agreement.
(d) Borrowing Date Transfers. The Servicer and the Agent shall, on each
------------------------
Borrowing Date that is not a Remittance Date direct the Agent's Bank to transfer
monies held by the Agent's Bank in the Agent's Account in excess of the Carrying
Cost Reserve Amount as of such Borrowing Date, to the Borrower (which amount
shall constitute a Loan hereunder to the same extent as if such amount had been
advanced directly by the Lender to the Borrower on such date).
30
<PAGE>
(e) Application of Spread Account Monies. To the extent that there are
------------------------------------
insufficient available funds on deposit in the Agent's Account for the payment
of the amounts payable pursuant to Section 2.05(a), 2.05(c)(i)-(ii) and
--------------- ---------------
2.05(c)(v), funds shall be withdrawn by the Collateral Trustee from the Spread
- - ----------
Account to the extent of such insufficiency, solely upon the direction of the
Agent, to be used solely for the purposes and in the order of priority set forth
at Section 2.05(a)-(c) hereof, giving effect to the terms thereof as if each
-------------------
reference therein to the "Agent's Account" was, instead, a reference to the
Spread Account and on and after the Termination Date, funds shall be withdrawn
from the Spread Account by the Collateral Trustee, upon the direction of the
Agent, and deposited into the Agent's Account to be applied in accordance with
Section 2.05(a)-(c).
- - -------------------
(f) Borrower Deficiency Payments. Notwithstanding anything to the contrary
----------------------------
contained in this Section 2.05 or in any other provision in this Agreement, if,
------------
on any Business Day prior to the Termination Date the outstanding amount of
Loans shall exceed the lesser of (i) the Borrowing Limit minus the Discount
-----
Amount or (ii) the Capital Limit, then, the Borrower shall remit to the Agent,
prior to any Borrowing and in any event no later than the close of business of
the Agent on the next succeeding Business Day, a payment (to be applied by the
Agent in its sole discretion either to fund the Spread Account or to repay Loans
allocated to Fixed Periods selected by the Agent, in its sole discretion) in
such amount as may be necessary to reduce outstanding Loans to an amount less
than or equal to the lesser of (i) the Borrowing Limit minus the Discount Amount
-----
and (ii) the Capital Limit.
SECTION 2.06 Spread Account. (a) On or prior to the initial Borrowing
--------------
Date, the Agent shall establish and maintain, or cause to be established and
maintained, for the sole and exclusive benefit of the Collateral Trustee for the
benefit of the Agent and the Lender and their respective assigns, a cash
collateral account (the "Spread Account"). The Spread Account shall be a
--------------
subaccount within a special account maintained with a Depository Institution
which is an Eligible Depository Institution (provided, however, that the
-------- -------
Depository Institution at which such Spread Account is established and
maintained need not be an Eligible Depository Institution in the event that the
Spread Account is maintained as a fully segregated trust account with the trust
department of such Depository Institution) but shall be under the sole dominion
and control of, and in the name of, the Collateral Trustee. Notwithstanding the
foregoing, the Spread Account and the funds deposited therein (including any
interest and earnings thereon) from time to time shall constitute the property
and assets of the Borrower and the Borrower shall be solely liable for any taxes
payable with respect to the Spread Account.
(b) Prior to the occurrence of the Termination Date, on at least three
Business Days' notice from the Borrower to the Agent, the Borrower may, on any
Business Day that is not a Remittance Date (each such day a "Spread Account
--------------
Surplus Date") (provided, that a Spread Account Surplus Date shall occur no more
- - ------------ --------
frequently than once a week), instruct the Servicer to instruct the Spread
Account Bank to transfer from the Spread Account to the Borrower, an amount of
funds held in the Spread Account which shall in no event be greater than (i) the
Borrowing Base Surplus (if any) on such Spread Account Surplus Date, if such
Spread Account Surplus Date is the Business Day next succeeding a Remittance
Date or (ii) the excess of the
31
<PAGE>
Borrowing Base Surplus (if any) over the Carrying Cost Reserve Amount on such
Spread Account Surplus Date, if such Spread Account Surplus Date is not on such
a Business Day (any such amount of funds, the "Spread Account Excess"). The
---------------------
Borrower, in making any such instructions for the transfer of funds from the
Spread Account, shall simultaneously provide each of the Agent and the Spread
Account Bank with a copy of a Borrowing Date/Spread Account Surplus Remittance
Report together with a certificate of an officer of the Borrower as to the
existence and size of any Spread Account Excess.
(c) Any funds remaining in the Spread Account after the Collection Date
has occurred shall be remitted to the Borrower or as otherwise required by law.
SECTION 2.07 Special Remittance Procedures. If on any day the
-----------------------------
outstanding balance of any Pledged Receivable is reduced or canceled as a result
of a setoff in respect of any claim by the Payor thereof against the Originator,
the Borrower, the Servicer or any other Person (whether such claim arises out of
the same or a related transaction or an unrelated transaction), the Borrower
shall be deemed to have received on such day a Collection of such Pledged
Receivable in the amount of such reduction, cancellation or adjustment. If on
any day a Pledged Receivable fails to qualify as an Eligible Receivable as a
result of the failure to meet the requirements of clauses (c), (h), (i) and (t)
of the definition thereof with respect to such Pledged Receivable (or with
respect to the Related Security related thereto), the Borrower shall be deemed
to have received on such day a Collection of such Pledged Receivable in full.
SECTION 2.08 Payments and Computations, Etc. (a) All amounts to be paid
-------------------------------
or deposited by the Borrower or the Servicer hereunder shall be paid or
deposited in accordance with the terms hereof no later than 11:00 A.M. (New York
City time) on the day when due in lawful money of the United States in
immediately available funds to the Agent's Account. The Borrower shall, to the
extent permitted by law, pay to the Agent interest on all amounts not paid or
deposited when due hereunder (whether owing by the Borrower individually or as
Servicer) at the Alternative Rate, payable on demand; provided, however, that
-------- -------
such interest rate shall not at any time exceed the maximum rate permitted by
applicable law. Such interest shall be retained by the Agent except to the
extent that such failure to make a timely payment or deposit has continued
beyond the date for distribution by the Agent of such overdue amount to the
Lender, in which case such interest accruing after such date shall be for the
account of, and distributed by the Agent to the Lender. Any Obligation
hereunder shall not be reduced by any distribution of any portion of Collections
if at any time such distribution is rescinded or returned by the Lender to the
Borrower or any other Person for any reason. All computations of interest and
all computations of Yield, Liquidation Fee and other fees hereunder shall be
made on the basis of a year of 360 days for the actual number of days (including
the first but excluding the last day) elapsed.
(b) Whenever any payment hereunder shall be stated to be due on a day
other than a Business Day, such payment shall be made on the next succeeding
Business Day, and such extension of time shall in such case be included in the
computation of payment of Yield, interest or any fee payable hereunder, as the
case may be.
32
<PAGE>
(c) If any Borrowing requested by the Borrower and approved by the Lender
and the Agent pursuant to Section 2.02 or any selection of a subsequent Fixed
------------
Period and applicable Yield Rate for any Loans allocated to such Fixed Period
requested by the Borrower and approved by the Agent pursuant to Section 2.04 is
------------
not for any reason whatsoever, except as a result of any wilful misconduct of
the Lender and/or Agent, made or effectuated, as the case may be, on the date
specified therefor, the Borrower shall indemnify the Lender against any loss,
cost or expense incurred by the Lender (other than any such loss, cost or
expense solely due to the gross negligence or willful misconduct of the Lender
or the Agent), including, without limitation, any loss (including cost of funds
and out-of-pocket expenses), cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds acquired by the Lender to
fund or maintain such Loans during such Fixed Period.
SECTION 2.09 Fees. (a) The Borrower shall pay the Lender (either
----
directly or through the Agent) certain fees (the "Facility Fee") in the amounts
------------
and on the dates set forth in a fee letter executed between the Borrower and the
Lender. The Lender shall pay to the Agent, for its own account, certain fees
(the "Agent's Fee") in the amounts and on the dates set forth in a fee letter
-----------
executed between the Lender and the Agent. The Agent shall pay to the Backup
Servicer out of the Agent's Fee, a collection fee (the "Backup Servicing Fee")
--------------------
in the amounts and on the dates set forth in the Backup Servicing Fee Letter.
(b) The Lender shall pay to the Servicer a collection fee (the "Servicing
---------
Fee") equal to the Servicing Fee Rate on the daily average aggregate Adjusted
- - ---
Net Realizable Value of Pledged Receivables, from the date hereof until the
later of the Termination Date or the Collection Date, payable on each Remittance
Date.
(c) All of the fees payable pursuant to this Section 2.09 shall be payable
------------
only from Collections pursuant to, and subject to the priority of payment set
forth in, Section 2.05.
------------
SECTION 2.10 Increased Costs; Capital Adequacy. (a) If, due to either
---------------------------------
(i) the introduction of or any change (including, without limitation, any change
by way of imposition or increase of reserve requirements) in or in the
interpretation of any law or regulation or (ii) the compliance with any
guideline or request from any central bank or other governmental authority
(whether or not having the force of law), there shall be any increase in the
cost to the Agent or any Affected Person (each of which shall be an "Affected
--------
Party") of agreeing to make or making, funding or maintaining any Loan, as the
- - -----
case may be, the Borrower shall, from time to time, upon written demand by such
Affected Party (with a copy to the Agent), immediately pay to such Affected
Party (as a third party beneficiary, in the case of an Affected Party that is
not also the Lender hereunder), additional amounts sufficient to compensate such
Affected Party for such increased costs.
(b) If either (i) the introduction of or any change in or in the
interpretation of any law, guideline, rule or regulation, directive or request
or (ii) the compliance by any Affected Party with any law, guideline, rule,
regulation, directive or request from any central bank or other governmental
authority or agency (whether or not having the force of law), including, without
33
<PAGE>
limitation, compliance by an Affected Party with any request or directive
regarding capital adequacy, has or would have the effect of reducing the rate of
return on the capital of any Affected Party as a consequence of its obligations
hereunder or arising in connection herewith to a level below that which any such
Affected Party could have achieved but for such introduction, change or
compliance (taking into consideration the policies of such Affected Party with
respect to capital adequacy by an amount deemed by such Affected Party to be
material, then from time to time, within ten days after demand by such Affected
Party (which demand shall be accompanied by a statement setting forth the basis
of such demand) the Borrower shall pay directly to such Affected Party such
additional amounts as will compensate such Affected Party for such reduction.
(c) In determining any amount provided for in this Section 2.10, the
------------
Affected Party may use any reasonable averaging and attribution methods. Any
Affected Party making a claim under this Section 2.10 shall submit to the
------------
Borrower a certificate setting forth in reasonable detail the computations of
such additional or increased costs, which certificate shall be conclusive absent
demonstrable error.
(d) If as a result of any event or circumstance similar to those described
in Section 2.10(a) or 2.10(b), any Affected Party is required to compensate a
--------------- -------
bank or other financial institution providing liquidity support, credit
enhancement or other similar support to such Affected Party in connection with
this Agreement, then upon demand by such Affected Party, Borrower shall pay to
such Affected Party such additional amount or amounts as may be necessary to
reimburse such Affected Party for any amounts paid by it.
SECTION 2.11 Assignment of Agreements. The Borrower hereby assigns to
------------------------
the Agent, for the benefit of the Lender hereunder, all of the Borrower's right
and title to and interest in the Funding Sale Agreement, the Seller Note, each
Loan Agreement, each Note and each Purchase Agreement. The Borrower confirms
and agrees that the Agent shall have, following an Event of Default or an Event
of Termination, the sole right to enforce the Borrower's rights and remedies
under the Funding Sale Agreement, the Seller Note, each Loan Agreement, each
Note and each Purchase Agreement for the benefit of the Lender, but without any
obligation on the part of the Agent, the Lender or any of their respective
Affiliates, to perform any of the obligations of the Borrower under the Funding
Sale Agreement, the Seller Note, any Loan Agreement, any Note or any Purchase
Agreement. In addition, the Borrower confirms and agrees that the Borrower will
send to the Servicer any notice requested by the Agent of any breach of any
representation, warranty or covenant under the Funding Sale Agreement, the
Seller Note, any Loan Agreement, any Note and any Purchase Agreement or any
event or occurrence that would, upon notice to the Servicer or upon the passage
of time or both, would be such a breach. The Borrower further confirms and
agrees that such assignment to the Agent shall terminate upon the Collection
Date.
SECTION 2.12 Grant of a Security Interest. To secure the prompt and
----------------------------
complete payment when due of the Obligations and the performance by the Borrower
of all of the covenants and obligations to be performed by it pursuant to this
Agreement, the Borrower
34
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hereby collaterally assigns and pledges to the Agent and grants to the Agent, on
behalf of the Lender and the Agent (and their respective successors and
assigns), a security interest in all of the Borrower's right, title and interest
in and to all of the following property and interests in property (collectively,
the "Pledged Assets"), whether tangible or intangible and whether now owned or
--------------
existing or hereafter arising or acquired and wheresoever located:
(a) all Purchased Receivables (the "Pledged Purchased Receivables") and
-----------------------------
Loan Receivables (the "Pledged Loan Receivables", and together with the
------------------------
Pledged Purchased Receivables, the "Pledged Receivables"), together with all
-------------------
Related Security, including, without limitation, all Collections and other
monies due and to become due to the Borrower in respect of any Pledged
Receivable and any security therefor received on or after the applicable Cut-
Off Date;
(b) all right, title and interest of the Borrower in, to and under the
Funding Sale Agreement, the Seller Note, the Parent Agreement, each Loan
Agreement, each Note and each Purchase Agreement including, without
limitation, all monies due and to become due to the Borrower under or in
connection therewith;
(c) the Agent's Account, the Spread Account, each Health Care Provider
Lockbox Account, each New Health Care Provider Lockbox Account, each
Preexisting Lockbox Account, each New Lockbox Account and all other bank and
similar accounts relating to the collection of Pledged Receivables (whether
now existing or hereafter established) and all funds held therein or in such
other accounts, and all income from the investment of funds in the Agent's
Account, the Spread Account and such other accounts; and
(d) all proceeds of the foregoing property described in clauses (a)
through (c) above, including interest, dividends, cash, instruments and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for or on account of the sale or other disposition
of any or all of the then existing Pledged Receivables.
SECTION 2.13 Evidence of Debt. The Lender shall maintain an account or
----------------
accounts evidencing the indebtedness of the Borrower to the Lender resulting
from each Loan owing to the Lender from time to time, including the amounts of
principal and interest payable and paid to the Lender from time to time
hereunder. The entries made in such account(s) of the Lender shall be
conclusive and binding for all purposes, absent manifest error.
SECTION 2.14 Survival of Representations and Warranties: Repurchase and
----------------------------------------------------------
Substitution Rights and Obligations. It is understood and agreed that the
- - -----------------------------------
representations and warranties set forth in Section 4.01 are made and accurate
------------
on the date of this Agreement, at the time of the initial Borrowing, and on each
Subsequent Borrowing date thereafter. If as a result of the breach of any of
the representations and warranties in Section 4.01 on any day the Outstanding
Balance of any Pledged Receivable (a "Deleted Receivable") is either (a) reduced
------------------
or
35
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adjusted as a result of any defective, rejected, returned, repossessed or
foreclosed merchandise, any defective or rejected services, any failure to
provide services, any discount or any other adjustment made or performed by the
Borrower or any other Person or (b) reduced or cancelled as a result of a setoff
in respect of any claim by the Payor thereof against the Originator, Funding,
the Borrower or any other Person (whether such claim arises out of the same or a
related transaction or an unrelated transaction) which, in either case, would
render the amount collectable thereunder less than the Net Realizable Value
thereof, the Borrower, if as a result of such reduction, adjustment or
cancellation there exists a Borrowing Base Deficiency, shall, and at all other
times, may prepay a portion of the Loans by depositing in the Agent's Account
the Release Price for such Pledged Receivable(s) or (ii) substituting a
Qualified Substitute Receivable for such Pledged Receivable. The Borrower shall
promptly reimburse the Servicer, the Agent and the Lender for any reasonable
out-of-pocket expenses incurred by the Servicer, the Agent and the Lender,
respectively, in respect of any such reduction, adjustment or cancellation.
As to any Deleted Receivable for which the Borrower substitutes a
Qualified Substitute Receivable, the Borrower shall effect such substitution by
delivering to the Agent and the Lender a certification from the Borrower that
such Receivable constitutes a Qualified Substitute Receivable. Upon such
substitution, such Qualified Substitute Receivable shall be subject to the terms
of this Agreement in all respects.
It is understood and agreed that the obligations of the Borrower set forth
in this Section 2.14 to cure, substitute for or repurchase a Receivable
------------
constitute the sole remedies available to the Agent and the Lender with respect
to any Deleted Receivables.
SECTION 2.15 Prepayments: Release of Pledged Receivables. (a) The
-------------------------------------------
Borrower may, at its election, obtain the release of any Pledged Receivable at
any time after the date hereof by either (i) depositing into the Agent's Account
the Release Price therefor or (ii) prior to the Termination Date, substituting a
Qualified Substitute Receivable therefor, in each case on any Remittance Date;
provided, that in the event that after giving effect to such release the
- - -------- ----
aggregate Adjusted Net Realizable Value of Pledged Receivables would be less
than an amount equal to $10,000,000, the Borrower may only obtain such release
by, in addition to depositing the aggregate Release Price for the Pledged
Receivables to be released, paying on such Remittance Date, all Obligations then
outstanding hereunder (including, without limitation, all Loans), or otherwise
payable as a result of any such payment; provided further, that the foregoing
-------- -------
release shall only be available if, after giving effect thereto, there shall not
be a Borrowing Base Deficiency.
(b) The Borrower shall notify the Agent of any Release Price to be paid or
any Receivables to be substituted pursuant to Section 2.14 at least one Business
------------
Day prior to the Remittance Date on which such Release Price shall be paid
and/or Pledged Receivables substituted, as applicable, specifying the Pledged
Receivables and the Release Price and/or Pledged Receivables to be substituted
therefor. As to any Deleted Receivable for which the Borrower substitutes a
Qualified Substitute Receivable pursuant to this Section 2.15, the Borrower
------------
shall effect such substitution in accordance with the provisions of Section
-------
2.14.
- - ----
36
<PAGE>
SECTION 2.16 Treatment of Amounts Paid by the Borrower. Amounts paid by
-----------------------------------------
the Borrower pursuant to Section 2.15, including payments representing
------------
shortfalls in the principal amounts of Qualified Substitute Receivables, on
account of Pledged Receivables shall be treated as payments on Pledged
Receivables hereunder. The Servicer, however, shall not be entitled to
Servicing Fees with respect to any such amounts.
ARTICLE III.
CONDITIONS OF LOANS
-------------------
SECTION 3.01 Conditions Precedent to Initial Borrowing. The initial
-----------------------------------------
Borrowing hereunder is subject to the condition precedent that the Agent shall
have received on or before the date of such Borrowing the items listed in
Schedule I, each (unless otherwise indicated) dated such date, in form and
- - ----------
substance satisfactory to the Agent and the Lender.
SECTION 3.02 Conditions Precedent to All Borrowings and Remittances of
---------------------------------------------------------
Collections. Each Borrowing (including the initial Borrowing) by the Borrower
- - -----------
from the Lender shall be subject to the further conditions precedent that (a)
with respect to any such Borrowing (other than the initial Borrowing) on or
prior to the date of such Borrowing, the Servicer shall have delivered to the
Agent, in form and substance satisfactory to the Agent, a completed Monthly
Remittance Report with respect to the most recently ended Remittance Period in
accordance with the terms of Section 6.12(b) and a Borrowing Date/Spread Account
---------------
Surplus Remittance Report containing information accurate as of a date no more
than three Business Days prior to the date of such Borrowing and containing such
additional information as may be reasonably requested by the Agent; (b) on the
date of such Borrowing, the following statements shall be true, and the Borrower
by accepting the amount of such Borrowing shall be deemed to have certified
that:
(i) The representations and warranties contained in Section 4.01 are
------------
correct in all material respects on and as of such day as though made on and
as of such date,
(ii) No event has occurred and is continuing, or would result from such
Borrowing, which constitutes an Event of Default hereunder, or an event that
but for notice or lapse of time or both would constitute an Event of Default,
(iii) On and as of such day, after giving effect to such Borrowing, the
aggregate outstanding Loans do not exceed the lesser of (x) the Borrowing
Limit minus the Discount Amount, or (y) the Capital Limit, and
-----
(iv) No law or regulation shall prohibit, and no order, judgment or
decree of any federal, state or local court or governmental body, agency or
instrumentality shall prohibit or enjoin, the making of such Loans by the
Lender in accordance with the provisions hereof; and
37
<PAGE>
(c) Agent's receipt of a timely copy of the notice of Borrowing delivered to the
Agent pursuant to Section 2.02, appropriately filled out and executed by the
------------
Borrower.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES
------------------------------
SECTION 4.01 Representations and Warranties of the Borrower and the
------------------------------------------------------
Servicer. Each of the Borrower and the Servicer represents and warrants as
- - --------
follows:
(a) Each of the Servicer and the Borrower is a corporation or a limited
partnership duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization and has the power and
all licenses necessary to own its assets and to transact the business in which
it is presently engaged (which includes servicing Receivables on behalf of third
parties), and is duly qualified and in good standing under the laws of each
jurisdiction where its ownership of the Pledged Receivables requires such
qualification and where the failure to be so qualified would have a material
adverse effect on its business and assets taken as a whole or on its ability to
enforce any Receivable.
(b) Each of the Servicer and the Borrower has the power, authority and
legal right to make, deliver, and perform this Agreement and all of the
transactions contemplated hereby, and has taken all necessary action to
authorize the execution, delivery and performance of this Agreement to grant to
the Agent a first priority security interest in the Pledged Assets on the terms
and conditions of this Agreement. This Agreement constitutes the legal, valid
and binding obligation of each of the Servicer and the Borrower, enforceable
against them in accordance with its terms except as the enforceability hereof
and thereof may be limited by bankruptcy, insolvency, moratorium, reorganization
and other similar laws of general application affecting creditors' rights
generally and by general principles of equity (whether such enforceability is
considered in a proceeding in equity or at law). No consent of any other party
and no consent, license, approval or authorization of, or registration or
declaration with, any governmental authority, bureau or agency is required in
connection with the execution, delivery or performance by the Borrower, or the
validity or enforceability of this Agreement or the Pledged Receivables in
respect of the Borrower or any thereof, other than such as have been met or
obtained.
(c) The execution, delivery and performance of this Agreement and all
other agreements and instruments executed and delivered or to be executed and
delivered pursuant hereto or thereto in connection with the pledge of the
Pledged Assets will not (i) create any Adverse Claim on the Pledged Assets other
than as contemplated herein or (ii) violate any provision of any existing law or
regulation or any order or decree of any court, regulatory body or
administrative agency or the certificate of incorporation or by-laws of the
Servicer or the Borrower or any mortgage, indenture, contract or other agreement
to which the Servicer or the Borrower is a party or by which the Servicer or the
Borrower or any property or assets of the Servicer or the Borrower may be bound.
38
<PAGE>
(d) No litigation or administrative proceeding of or before any court,
tribunal or governmental body is presently pending, or, to the knowledge of the
Servicer and the Borrower, threatened against the Servicer or the Borrower or
any properties of the Servicer or the Borrower or with respect to this
Agreement, which, if adversely determined, could have a material effect on the
business, assets or financial condition of the Servicer or the Borrower or which
would draw into question the validity of this Agreement or any of the other
applicable documents forming part of the Pledged Assets.
(e) In selecting the Receivables to be pledged pursuant to this Agreement,
no selection procedures were employed which are intended to be adverse to the
interests of the Lender.
(f) The grant of the security interest in the Pledged Assets by the
Borrower to the Agent for the benefit of the Lender pursuant to this Agreement
are in the ordinary course of business for the Servicer and the Borrower and are
not subject to the bulk transfer or any similar statutory provisions in effect
in any applicable jurisdiction.
(g) The Borrower has no debts, other than debts incurred in connection with
this Agreement.
(h) The Borrower has been formed solely for the purpose of engaging in
transactions of the types contemplated by this Agreement.
(i) No consent of any other party (other than as required under the Fleet
Credit Agreement) and no consent, license, approval or authorization of, or
registration or declaration with, any governmental authority, bureau or agency
is required for the execution, delivery and performance by the Servicer and the
Borrower of, or compliance by the Servicer and the Borrower with, this Agreement
or the consummation of the transactions contemplated by this Agreement.
(j) No injunction, writ, restraining order or other order of any nature
adversely affects the Servicer's or the Borrower's performance of their
respective obligations under this Agreement.
(k) Each of the Servicer and the Borrower has filed on a timely basis all
tax returns required to be filed by it.
(l) Each of the Servicer's and the Borrower's principal place of business
and chief executive office is located at 2 Wisconsin Circle, Suite 320, Chevy
Chase, Maryland 20815.
(m) Each of the Servicer's and the Borrower's legal name is as set forth in
this Agreement; other than as disclosed on Schedule IV hereto each of the
-----------
Servicer and the Borrower has not changed its name since its incorporation; each
of the Servicer and the Borrower does not
39
<PAGE>
have trade names, fictitious names, assumed names or "doing business as" names
other than as disclosed on Schedule IV hereto.
-----------
(n) Each of the Servicer and the Borrower is solvent and will not become
insolvent after giving effect to the transactions contemplated hereby; each of
the Servicer and the Borrower is paying its debts as they become due; each of
the Servicer and the Borrower, after giving effect to the transactions
contemplated hereby, will have adequate capital to conduct its business.
(o) Each Payor (that is an Insurer) of a Pledged Receivable of any Health
Care Provider has been directed by such Health Care Provider, and is required,
to remit all payments of Collections with respect to such Pledged Receivable to
a Preexisting Lockbox or New Lockbox of such Health Care Provider; provided,
--------
however, that remittance of Collections by an Insurer to a Health Care Provider
- - -------
Lockbox shall not constitute a violation of the foregoing if such Collections do
not, at any time, constitute greater than five percent (5%) of all Collections
in such Health Care Provider Lockbox.
(p) Each Payor (that is a Government Entity) of a Pledged Receivable of any
Health Care Provider has been directed by such Health Care Provider, and is
required, to remit all payments of Collections with respect to such Pledged
Receivable to a Health Care Provider Lockbox or New Health Care Provider Lockbox
of such Health Care Provider.
(q) The Borrower has no subsidiaries.
(r) The Borrower has given fair consideration and reasonably equivalent
value in exchange for the transfer of the interests in the Pledged Receivables,
to Funding under the Funding Sale Agreement.
(s) The Servicer did not transfer any interest in any Receivable to the
Borrower under the Funding Sale Agreement with any intent to hinder, delay or
defraud any of its creditors.
(t) No Monthly Settlement Report, Borrowing Date/Spread Account Surplus
Settlement Report, Commercial Paper Settlement Report (each if prepared by the
Borrower, or to the extent that information contained therein is supplied by the
Borrower), information, exhibit, financial statement, document, book, record or
report furnished or to be furnished by the Borrower to the Agent or the Lender
in connection with this Agreement is or will be inaccurate in any material
respect as of the date it is or shall be dated or (except as otherwise disclosed
to the Agent or the Lender, as the case may be, at such time) as of the date so
furnished, and no such document contains or will contain any material
misstatement of fact or omits or shall omit to state a material fact or any fact
necessary to make the statements contained therein not misleading.
40
<PAGE>
(u) No proceeds of any Loans will be used by the Borrower to acquire any
security in any transaction which is subject to Section 13 or 14 of the
Securities Exchange Act of 1934, as amended.
(v) There are no agreements in effect adversely affecting the rights of
the Borrower to make, or cause to be made, the grant of the security interest in
the Pledged Assets contemplated by Section 2.12.
------------
(w) The Borrower is not an "investment company" or an "affiliated person"
of or "promoter" or "principal underwriter" for an "investment company" as such
terms are defined in the Investment Company Act of 1940, as amended, nor is the
Borrower otherwise subject to regulation thereunder.
(x) Schedule III, as amended from time to time, lists all lockboxes and
all demand deposit accounts established to receive, subject to Section 5.01(s),
------------
all Collections with respect to all Pledged Receivables of all Health Care
Providers payable by Insurers.
(y) Schedule V, as amended from time to time, lists all lockboxes and all
----------
demand deposit accounts established to receive all Collections with respect to
all Pledged Receivables of all Health Care Providers payable by Government
Entities.
ARTICLE V.
GENERAL COVENANTS OF THE BORROWER AND THE SERVICER
--------------------------------------------------
SECTION 5.01 General Covenants. (a) The Borrower will observe all
-----------------
corporate procedures required by its Articles of Organization, Bylaws and the
laws of its jurisdiction of incorporation. The Borrower will maintain its
corporate existence in good standing under the laws of its jurisdiction of
incorporation and will maintain its qualifications to do business as a foreign
corporation in any other state in which it does business and in which it is
required to so qualify.
(b) The Borrower will at all times ensure that (i) its directors act
independently and in its interests, (ii) it shall at all times maintain at
least two independent directors each of whom (x) is not currently and has not
been during the five years preceding the date of this Agreement an officer,
director or employee of the Borrower or an Affiliate thereof, (y) is not a
current or former officer or employee of the Borrower and (z) is not a
stockholder of the Borrower or an Affiliate thereof, (iii) its assets are not
commingled with those of Funding or any other Affiliate of Borrower, (iv) its
board of directors duly authorizes all of its corporate actions, (v) it
maintains separate and accurate records and books of account and such books and
records are kept separate from those of Funding and any other Affiliate of
Borrower, and (vi) it maintains minutes of the meetings and other proceedings of
the stockholders and the board of directors. Where necessary, the Borrower will
obtain proper authorization from its shareholders for corporate action.
41
<PAGE>
(c) The Borrower will pay its operating expenses and liabilities from its
own assets; provided, however, that the Borrower's organizational expenses may
be paid by Funding.
(d) The Borrower will not have any of its indebtedness guaranteed by
Funding. Furthermore, the Borrower will not hold itself out, or permit itself
to be held out, as having agreed to pay or as being liable for the debts of
Funding and with the exception of the provision of management services by
Funding for the Borrower, the Borrower will not engage in business transactions
with Funding, except on an arm's length basis. The Borrower will not hold
Funding out to third parties as other than an entity with assets and liabilities
distinct from the Borrower. The Borrower will cause any financial statements
consolidated with those of Funding to state that the Borrower is a separate
corporate entity with its own separate creditors who, in any liquidation of the
Borrower, will be entitled to be satisfied out of the Borrower's assets prior to
any value in the Borrower becoming available to the Borrower's equity holders.
The Borrower will not act in any other matter that could foreseeably mislead
others with respect to the Borrower's separate identity.
(e) In its capacity as Servicer, Funding will maintain separate records on
behalf of and for the benefit of the Lender, will receive all necessary
instructions and directions from the Lender in connection with its servicing of
the Pledged Receivables hereunder, and will ensure that at all times when it is
dealing with or in connection with the Pledged Receivables in its capacity as
Servicer, that it holds itself out as Servicer, and not in any other capacity.
(f) The Servicer will disclose all material transactions associated with
this transaction in appropriate regulatory filings and public announcements.
The annual financial statements of the Servicer will disclose the effects of the
transactions contemplated by the Funding Sale Agreement as a sale and the annual
financial statements of the Borrower will disclose the effects of the
transactions contemplated by this Agreement as a loan to the extent required by
and in accordance with generally accepted accounting principles.
(g) The Borrower will take all other actions necessary to maintain the
accuracy of the factual assumptions set forth in the legal opinion of Battle
Fowler LLP, special counsel to Funding and the Borrower, issued in connection
with the Funding Sale Agreement and relating to the issues of substantive
consolidation and true sale of the Pledged Receivables and Related Security.
(h) Except as otherwise provided herein, neither the Borrower nor the
Servicer will (i) sell, assign (by operation of law or otherwise) or otherwise
dispose of, or create or suffer to exist any Adverse Claim upon or with respect
to, any Pledged Receivable, Collections or Related Security, or upon or with
respect to any account to which any Collections of any Receivable are sent, or
assign any right to receive income in respect thereof or (ii) create or suffer
to exist any Adverse Claim upon or with respect to any of the Borrower's assets.
(i) The Borrower will not merge or consolidate with, or convey, transfer,
lease or otherwise dispose of (whether in one transaction or in a series of
transactions), all or
42
<PAGE>
substantially all of its assets (whether now owned or hereafter acquired), or
acquire all or substantially all of the assets or capital stock or other
ownership interest of any Person, other than, with respect to asset
dispositions, in connection herewith.
(j) The Borrower will not account for or treat (whether in financial
statements or otherwise) the transactions contemplated by the Funding Sale
Agreement in any manner other than the sale of an interest in Receivables and
Related Security by Funding to the Borrower.
(k) (i) The Borrower will cause to be delivered to the Agent within six
months (but not later than the 30th day) prior to the end of each five year
period after the initial Borrowing hereunder, a supplemental opinion of counsel
to the Borrower and the Servicer in form and substance reasonably satisfactory
to the Agent, reaffirming the opinions set forth in the opinion letter of Battle
Fowler LLP delivered to the Agent in connection with the initial Borrowing
hereunder pursuant to Section 3.01 with respect to the continued validity of the
------------
security interest of the Lender in the Pledged Assets hereunder, and (ii) the
Borrower will cause to be delivered to the Agent within 30 days following the
Agent's request therefor, a supplemental opinion of counsel to the Borrower and
Funding in form and substance reasonably satisfactory to the Agent, reaffirming
the opinions set forth in the opinion letter of Battle Fowler LLP delivered to
the Agent in connection with the initial Borrowing hereunder pursuant to Section
-------
3.01.
- - ----
(l) The Borrower will not amend, modify, waive or terminate any terms or
conditions of the Funding Sale Agreement without the written consent of the
Agent, and shall perform its obligations thereunder.
(m) The Borrower will not amend, modify or otherwise make any change to its
Certificate of Incorporation to delete or otherwise nullify or circumvent the
provisions set forth in Exhibit F hereto.
---------
(n) The Borrower shall maintain a tangible net worth (determined in
accordance with GAAP and including subordinated debt) of at least the difference
between (i) the aggregate Adjusted Net Receivable Value of Eligible Receivables
which constitute Pledged Receivables at the time minus (ii) the amount referred
to in clause (i) divided by 1.03, but in no event less than $1,000,000.
(o) If the Borrower receives any Collections, the Borrower will remit such
Collections (including, without limitation, any Collections deemed to have been
received pursuant to Section 2.07) to the Agent's Account within one Business
------------
Day following the Borrower's receipt thereof.
(p) The Borrower will not make any material amendment to the Credit and
Collection Policy without the prior written consent of the Agent.
43
<PAGE>
(q) The Servicer (if Funding) shall take all steps necessary to ensure that
(i) none of its Affiliates engage in the business of purchasing Receivables of
Health Care Providers or making revolving loans to Health Care Providers secured
primarily by the Receivables thereof and (ii) any such business formerly
conducted by an Affiliate of Funding shall be conducted by Funding on and after
the date hereof.
(r) The Borrower or Servicer shall require each Health Care Provider to
cause (i) all Collections received from Government Entities with respect to
Pledged Receivables to be remitted to its Health Care Provider Lockbox or New
Health Care Provider Lockbox, (ii) all such Collections to be deposited into the
Concentration Account on the next Business Day following such receipt and (iii)
all such Collections to be transferred from the Concentration Account to the
Agent's Account on the next Business Day following such transfer to the
Concentration Account.
(s) The Borrower or Servicer shall require each Health Care Provider to
take all steps necessary to ensure that (i) all of its payments received from
Insurers with respect to Pledged Receivables shall be deposited into its
Preexisting Lockbox or New Lockbox and (ii) no other funds shall be deposited
therein; provided, however, that remittance of Collections by an Insurer to a
-------- -------
Health Care Provider Lockbox shall not constitute a violation of the foregoing
if such Collections do not, at any time, constitute greater than five percent
(5%) of all Collections in such Health Care Provider Lockbox.
(t) The Borrower shall cause (i) each existing Health Care Provider to
prepare, execute and deliver to each Insurer who is a Payor of Pledged
Receivables, with copies, to the extent received by the Borrower or the
Servicer, to the Agent, promptly after the initial Borrowing Date, a Notice to
Insurers and (ii) each Person who becomes a Health Care Provider after the
initial Borrowing Date to prepare, execute and deliver to each Insurer who is a
Payor of Pledged Receivables, with copies to the Agent, on or prior to the date
that any Receivables of such new Health Care Provider become Pledged Receivables
hereunder, a Notice to Insurers.
(u) The Borrower shall deliver or cause Funding to deliver each Note
executed by a Health Care Provider pursuant to a Loan Agreement as follows (i)
in the case of Notes executed on or prior to the initial Borrowing Date, to the
Agent on or prior to the initial Borrowing Date and (ii) in the case of Notes
executed after the initial Borrowing Date, to the Collateral Trustee for the
benefit of the Agent no later than the Business Day following execution and
delivery of any such Note to Funding; it being agreed and understood by the
parties hereto that (i) each such Note delivered shall have been duly endorsed
and pledged by Funding and the Borrower to the Agent for the ratable benefit of
the Lenders, (ii) each such Note delivered shall be accompanied by a Note
Transmittal Sheet in the form of Exhibit L hereto (Item 1 and Item 2, Column A
of such Note Transmittal Sheet having been completed) and (iii) the Agent shall
instruct the Collateral Trustee to release to the Servicer any such Note if the
Agent and the Collateral Trustee have received evidence, satisfactory in the
Agent's reasonable business judgment, that (x) the Loan evidenced by such Note
has been repaid in full and terminated, (y) such Note is required by the
Servicer for enforcement purposes (Servicer hereby agrees (i) to hold such
released Notes in trust for the benefit of the Agent and (ii) to return such
44
<PAGE>
Note to the Collateral Agent if such requirement no longer exists) or (z) the
Loan Receivables related to such Note are no longer Pledged Receivables under
this Agreement, in each case no later than the second Business Day following
receipt by the Collateral Trustee and the Agent of a written notice executed by
an officer of the Servicer which certifies that such an event has occurred .
(v) The Borrower and Servicer hereby agree to furnish (or cause to be
furnished) to the Agent promptly, and in any case no later than 30 days after
the initial Borrowing Date, duly executed amendments to (or amendments and
restatements of) the Health Care Provider Lockbox Account Agreements with
respect to the Health Care Provider Lockbox Accounts maintained with Bank One
listed on Schedule VI hereto, which amendments (or amendments and restatements)
-----------
shall provide that Bank One shall have no right of deduction, setoff or banker's
lien against the funds in such Health Care Provider Lockbox Accounts other than
any deductions or setoffs in respect of Bank One's customary service charges or
on account of returned or dishonored checks.
(w) The Borrower and Servicer hereby agree to use their best efforts to
furnish (or cause to be furnished) to the Agent promptly, and in any case no
later than 30 days (or as soon as possible thereafter) after the initial
Borrowing Date, duly executed amendments to (or amendments and restatements of)
the Health Care Provider Lockbox Account Agreements with respect to the Health
Care Provider Lockbox Accounts listed on Schedule VII hereto, which amendments
------------
(or amendments and restatements) shall provide that the bank at which each such
Health Care Provider Lockbox Account is maintained shall have no right of
deduction, setoff or banker's lien against the funds in such Health Care
Provider Lockbox Account other than any deductions or setoffs in respect of such
bank's customary service charges or on account of returned or dishonored checks.
(x) The Borrower and Servicer hereby agree to furnish (or cause to be
furnished) to the Agent promptly, and in any case no later than 30 days after
the initial Borrowing Date, duly executed amendments to (or amendments and
restatements of) the Health Care Provider Lockbox Account Agreements with
respect to the Health Care Provider Lockbox Accounts listed on Schedule VIII
-------------
hereto, which amendments (or amendments and restatements) shall provide that
each such Health Care Provider Lockbox Account is under the control of the
applicable Health Care Provider listed on Schedule VIII.
-------------
(y) The Borrower and Servicer hereby agree to furnish (or cause to be
furnished) to the Agent promptly, and in any case no later than 30 days after
the initial Borrowing Date, duly executed amendments to (or amendments and
restatements of) the Health Care Provider Lockbox Account Agreements with
respect to the Health Care Provider Lockbox Accounts listed on Schedule IX
-----------
hereto, which amendments (or amendments and restatements) shall provide that
the bank at which each such Health Care Provider Lockbox Account is maintained
is directed by the Health Care Provider to transfer all collected funds
deposited in such Health Care Provider Lockbox Account to the Concentration
Account, no later than the Business Day following such deposit.
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(z) The Borrower and Servicer hereby agree to furnish (or cause to be
furnished) to the Agent promptly, and in any case no later than 30 days after
the initial Borrowing Date, such other duly executed amendments to (or
amendments and restatements of) the Health Care Provider Lockbox Account
Agreements with respect to the any Health Care Provider Lockbox Account which
the Agent, in its reasonable business judgment, may request.
(aa) The Borrower and Servicer hereby agree to furnish (or cause to be
furnished) to the Agent promptly, and in any case no later than 30 days after
the initial Borrowing Date, duly executed Health Care Provider Lockbox Account
Agreements (or in the case of Visiting Nurses of Del Rio a wire transfer
agreement) with respect to the Health Care Provider Lockbox Accounts listed on
Schedule X hereto, which Health Care Provider Lockbox Account Agreements (or in
- - ----------
the case of Visiting Nurses of Del Rio such wire transfer agreement) shall be,
in form and substance, satisfactory to the Agent.
(bb) The Borrower or Servicer shall require the Health Care Providers
listed on Schedule XI hereto to prevent the aggregate Collections remitted to
-----------
all Health Care Provider Lockbox Accounts listed on Schedule XI hereto from
-----------
exceeding five percent (5%) of the aggregate Collections of all such Health Care
Providers.
ARTICLE VI.
ADMINISTRATION AND SERVICING; CERTAIN COVENANTS
-----------------------------------------------
SECTION 6.01 Appointment and Designation of the Servicer. (a) The
-------------------------------------------
Borrower, the Lender and the Agent hereby appoint the Person (the "Servicer")
--------
designated by the Agent from time to time (with the approval of the Lender)
pursuant to this Section 6.01, as their agent to service, administer and collect
------------
the Pledged Receivables and otherwise to enforce their respective rights and
interests in and under the Pledged Receivables and the other Pledged Assets.
The Servicer's authorization under this Agreement shall terminate on the
Collection Date. Until the Agent gives notice to the Borrower of a designation
of a new Servicer, or consents to the appointment by the Borrower of a new
"Servicer," Funding is hereby designated as, and hereby agrees to perform the
duties and obligations of, the Servicer pursuant to the terms hereof. Upon and
after the occurrence of any Event of Default, the Agent may at any time (with
the approval of the Lender) designate as Servicer any Person to succeed Funding
or any successor Servicer, on the condition in each case that any such Person so
designated shall agree to perform the duties and obligations of the Servicer
pursuant to the terms hereof. Each of the Borrower and Funding hereby grants to
any successor Servicer an irrevocable power of attorney to take any and all
steps in the Borrower's, Funding's or the Servicer's name, as applicable, and on
behalf of the Borrower or Funding necessary or desirable, in the determination
of the successor Servicer, to collect all amounts due under any and all Pledged
Receivables, including, without limitation, endorsing the Borrower's name on
checks and other instruments representing Collections and enforcing such Pledged
Receivables.
(b) The Servicer shall service and administer the Pledged Receivables in
accordance with this Agreement and the customary and usual standards of practice
of prudent
46
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health care receivables financers and servicers in the respective states in
which the Originators are located and, to the extent not inconsistent therewith,
in the same manner as it services similar loans and/or receivables in its own
portfolio, and shall have full power and authority to do or cause to be done any
and all things in connection with such servicing and administration that it may
deem necessary or desirable. Without limiting the generality of the foregoing,
the Servicer in its own name is hereby authorized and empowered by the Agent
when the Servicer believes it appropriate in its best judgment, to prepare, for
execution and delivery by the Servicer on behalf of the Borrower, any and all
instruments of satisfaction or cancellation, or of partial or full release or
discharge, and all other comparable instruments, with respect to the Pledged
Receivables and to institute proceedings so as to convert the ownership of such
Pledged Receivables into the name of the Borrower. The Servicer shall service
and administer the Pledged Receivables in accordance with applicable state and
federal law and shall provide to the Payors any reports required to be provided
to them thereby. The Borrower shall furnish to the Servicer any powers of
attorney and other documents necessary or appropriate to enable the Servicer to
carry out its servicing and administrative duties hereunder. The Borrower shall
not be responsible for any action taken by the Servicer pursuant to the
application of such powers of attorney.
SECTION 6.02 Collection of Certain Pledged Receivable Payments. The
-------------------------------------------------
Servicer shall make reasonable efforts to collect all payments called for under
the terms and provisions of the Pledged Receivables, and shall, to the extent
such procedures shall be consistent with this Agreement and the terms and
provisions of any related insurance policy, follow such collection procedures as
it would follow with respect to health care receivables comparable to the
Pledged Receivables and held for its own account. The Servicer shall not be
required to institute or join in litigation with respect to collection of any
payment if it reasonably believes that it is prohibited by applicable law from
enforcing the instrument pursuant to which such payment is required.
SECTION 6.03 Intentionally Omitted.
SECTION 6.04 Pledged Receivable Receipts. By the close of each Business
---------------------------
Day after the initial Borrowing Date the Servicer shall cause a wire transfer of
immediately available United States funds to be made to the Agent for deposit
into the Agent's Account in an amount equal to the Collections received or made
by or on behalf of it on the previous Business Day (provided that (a) any of the
following amounts received by the Servicer on a Business Day during the period
of time beginning on the first Business Day after each Cut-off Date and ending
on the Borrowing Date related to such Cut-off Date shall be so transferred to
the Agent by the close of business on such Borrowing Date and (b) the time for
transfer to the Agent pursuant to this Section 6.04(a) shall be extended by one
---------------
Business Day in the case of any of the following amounts received or made by or
on behalf of the Servicer:
(i) all payments on account of principal, including principal
prepayments and shortfalls with respect to Qualified Substitute Receivables
(but excluding prepayment penalties), on the Pledged Loan Receivables;
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(ii) all payments on account of interest on the Pledged Loan
Receivables;
(iii) all proceeds of any prepayment of Loans in connection with the
release of any Pledged Receivable(s) in accordance with Section 2.14 or
------------
Section 2.15).
------------
The foregoing requirements for transfer to the Agent of payments and
Collections received or made by or on behalf of the Servicer with respect to the
Pledged Receivables shall be exclusive, it being understood and agreed that,
without limiting the generality of the foregoing, payments in the nature of
prepayment or late payment charges, penalty interest or assumption fees on the
Pledged Receivables need not be transferred by the Servicer to the Agent, and
shall be additional servicing compensation to the Servicer as provided in
Section 6.11.
- - ------------
SECTION 6.05 Insurer Payment Mechanics. (a) On or prior to the initial
-------------------------
Borrowing Date, the Borrower shall have entered into a lockbox agreement (the
terms of which shall be satisfactory to the Agent) with respect to the
Preexisting Lockbox and the related Preexisting Lockbox Account for each Health
Care Provider that generates Pledged Receivables due and owing from Insurers
that are, at any time, in excess of five percent (5%) of all Pledged Receivables
generated by such Health Care Provider. On or prior to the initial Borrowing
Date, the Borrower shall have entered into Assignment Agreements with each bank
(each a "Preexisting Lockbox Bank") at which, at the time of the initial
------------------------
Borrowing Date, the Borrower maintains a Preexisting Lockbox and the related
Preexisting Lockbox Account. The Borrower hereby conveys, transfers and
assigns, as security, to the Agent for the benefit of the Lender all of its
rights and interests of every kind in the Preexisting Lockboxes and the
Preexisting Lockbox Accounts.
(b) The Borrower covenants and agrees that each Person who becomes a Health
Care Provider (other than a Health Care Provider as to whom the representation
in Section 4.01(o) hereof is only true as a result of the proviso thereto) after
the initial Borrowing Date shall have previously executed and delivered to the
Borrower a lockbox agreement the terms of which provide that (i) all Collections
with respect to the Pledged Receivables of such Health Care Provider shall be
deposited into a lockbox account (in the name of the Borrower and under the
dominion and control of the Agent) to be established thereunder (each such
account a "New Lockbox Account") as follows: all checks (and EOB's) from
-------------------
Insurers on account of Pledged Receivables of such Health Care Provider shall be
sent to a new lockbox (in the name of the Borrower under the dominion and
control of the Agent to be established thereunder (each such lockbox a "New
Lockbox") and deposited daily into such New Lockbox Account, and all wire
transfers on account of Pledged Receivables shall be wired directly into the New
Lockbox Account and (ii) the bank at which the New Lockbox Account shall be
maintained shall (x) transfer all collected funds deposited in such New Lockbox
Account to the Agent's Account on a daily basis and (y) have no right of
deduction, setoff or banker's lien against the funds in such lockbox account
other than any deductions or setoffs in respect of such bank's customary service
charges or on account of returned or dishonored checks, and is otherwise
reasonably satisfactory to the Agent.
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SECTION 6.06 Government Entities Payment Mechanics. (a) On or prior to
-------------------------------------
the initial Borrowing Date, the Borrower shall have caused each Health Care
Provider which generates Pledged Receivables due and owing from Government
Entities to establish a Health Care Provider Lockbox and a Health Care Provider
Lockbox Account.
(b) The Borrower covenants and agrees that each Person who becomes a Health
Care Provider after the initial Borrowing Date shall have previously executed
and delivered to the Borrower a lockbox agreement the terms of which provide
that (i) all Collections with respect to the Pledged Receivables (received from
Government Entities) of such Health Care Provider shall be deposited into a
lockbox account (in the name of and under the dominion and control of the Health
Care Provider) to be established thereunder (each such account a "New Health
----------
Care Provider Lockbox Account") and (ii) the bank at which the New Health Care
- - -----------------------------
Provider Lockbox Account shall be maintained (x) is directed by the Health Care
Provider to transfer all collected funds deposited in such New Health Care
Provider Lockbox Account to the Agent's Account on the Business Day following
such deposit, (y) shall have no right of deduction, setoff or banker's lien
against the funds in such lockbox account other than any deductions or setoffs
in respect of such bank's customary service charges or on account of returned or
dishonored checks and (z) shall immediately notify the Agent should the Borrower
modify in any way or revoke the instructions set forth in the foregoing clause
(x) of this Section 6.06(b), and is otherwise reasonably satisfactory to the
Agent.
SECTION 6.07 Misdirected Payments. (a) In the event that the Borrower
--------------------
or any Health Care Provider receives a Misdirected Payment from an Insurer in
the form of a check, the Borrower shall send (or shall cause such Health Care
Provider to send) such Misdirected Payment, by overnight mail to the Preexisting
Lockbox Account, the New Lockbox Account, the New Health Care Provider Lockbox
Account or the Health Care Provider Lockbox Account to which such Misdirected
Payment should have originally been sent. In the event that the Borrower or any
Health Care Provider receives a Misdirected Payment from a Government Entity in
the form of a check, the Borrower shall send (or shall cause such Health Care
Provider to send) to the Health Care Provider Lockbox such Misdirected Payment
by overnight mail. In the event the Borrower or any Health Care Provider
receives a Misdirected Payment in the form of cash or wire transfer, the
Borrower shall immediately wire transfer (or shall cause such Health Care
Provider to immediately wire transfer) the amount of such Misdirected Payment
directly into the Agent's Account. All Misdirected Payments shall be sent
promptly upon receipt thereof, and in no event later than the close of business,
local time, on the first Business Day after receipt thereof.
(b) The Borrower hereby agrees and consents to the Agent taking such
actions as are reasonably necessary to ensure that future payments from the
Payor of a Misdirected Payment or from the Payor of a payment into any Health
Care Provider Account shall be made in accordance with this Agreement including,
without limitation, to the maximum extent permitted by law, (i) the Agent or the
Lender executing on the Borrower's or Health Care Provider's behalf and
delivering to such Payor a new Notice to Insurers or other form of instruction,
as applicable, and (ii) the Agent or the Lender contacting such Payor by
telephone to confirm the instructions
49
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previously provided to such Payor. Upon the Agent's or Lender's request, the
Borrower shall promptly (and in any event, within two Business Days from such
request) take (or shall promptly cause any Health Care Provider to) take such
similar actions as the Agent or the Lender may request.
SECTION 6.08 Unidentified Payments; Lender's Right of Presumption. The
----------------------------------------------------
Borrower agrees and consents that the Servicer and/or the Agent may apply any
payment it receives from a Payor against a Pledged Receivable if the Servicer
and/or the Agent is unable in good faith (after making reasonable attempts to
contact the Borrower) to determine from the information in the EOB whether such
payment from a Payor relates to such Pledged Receivable.
SECTION 6.09 No Rights of Withdrawal. Until the Collection Date, the
-----------------------
Borrower shall have no rights of direction or withdrawal with respect to amounts
held in any Health Care Provider Lockbox Account, the New Health Care Provider
Lockbox Account, any Preexisting Lockbox Account or any New Lockbox Account.
SECTION 6.10 Permitted Investments. The Servicer shall deliver to the
---------------------
Agent on the initial Borrowing Date a letter directing the Agent to invest, or
cause the investment of, funds on deposit in the Agent's Account in Permitted
Investments. A Permitted Investment acquired with funds deposited in the
Agent's Account shall mature not later than the earlier of (a) the Business Day
immediately preceding the next following Remittance Date (or, if such Permitted
Investment is an obligation of the institution that maintains the Agent's
Account, the next following Remittance Date) and (b) the Business Day
immediately preceding the last day of the next ending Fixed Period, and shall
not be sold or disposed of prior to its maturity. All such Permitted
Investments shall be registered in the name of the Agent (in its capacity as
such) or its nominee for the benefit of the Lender. All income and gain
realized from any such investment as well as any interest earned on deposits in
the Agent's Account shall be distributed in accordance with the provisions of
Section 2.05. The Servicer shall deposit in the Agent's Account (with respect
- - ------------
to investments made hereunder of funds held therein) an amount equal to the
amount of any actual loss incurred in respect of any such investment immediately
upon realization of such loss. The Agent shall not be liable for the amount of
any loss incurred in respect of any investment, or lack of investment, of funds
held in the Agent's Account.
SECTION 6.11 Servicing Compensation. As compensation for its activities
----------------------
hereunder, the Servicer shall be entitled to be paid the Servicing Fees from the
Agent's Account as provided in Section 2.05(c). Except as otherwise provided in
---------------
Sections 2.05, 6.04, 6.12 and 6.18, the Servicer shall be required to pay all
- - ------------- ---- ---- ----
expenses incurred by it in connection with its servicing activities hereunder
and shall not be entitled to reimbursement therefor, except with respect to any
Advances made by the Servicer pursuant hereto. The Servicing Fee may not be
transferred in whole or in part except in connection with the transfer of all
the Servicer's responsibilities and obligations under this Agreement. The
Servicer shall not be entitled to receive Servicing Fees with respect to amounts
paid to release Pledged Receivables pursuant to Section 2.14 or Section 2.15.
------------ ------------
50
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SECTION 6.12 Reports to the Agent; Account Statements; Servicing
---------------------------------------------------
Information. (a) The Borrower will deliver to the Agent (i) prior to each
- - -----------
Remittance Date, a report identifying the Pledged Receivables (and the aged
balance thereof) as of the last day of the immediately preceding Remittance
Period, (ii) on the Termination Date, a report identifying the Pledged
Receivables (and the aged balance thereof) on the day immediately preceding the
Termination Date and (iii) upon the Agent's request, on each day, a report
identifying the Pledged Receivables (and the aged balance thereof) on such day.
(b) On the third Business Day prior to each Remittance Date, the Servicer
shall prepare and forward to the Agent for the Lender (and to S&P and Fitch), a
Monthly Remittance Report relating to all Pledged Receivables, as of the close
of business of the Servicer on the last day of the immediately preceding
Remittance Period.
(c) On the Business Day immediately preceding each Borrowing Date that is
not a Remittance Date and on the Business Day immediately preceding each Spread
Account Surplus Date, the Servicer shall prepare and forward to the Agent for
the Lender, a Borrowing Date/Spread Account Surplus Remittance Report, as of a
date no more than three Business Days prior to such Borrowing Date or Spread
Account Surplus Date, as applicable.
(d) On the Business Day immediately preceding the last day of each Fixed
Period that is not a Remittance Date, the Servicer shall prepare and forward to
the Agent for the Lender, a Commercial Paper Remittance Report, as of the close
of business of the Servicer on the second Business Day immediately preceding
such last day.
(e) By the last Business Day of each week, the Servicer shall deliver to
the Backup Servicer a copy of any tape or disk it maintained containing
servicing information regarding the Pledged Receivables for the immediately
preceding month.
SECTION 6.13 Statements as to Compliance; Financial Statements. (a) The
-------------------------------------------------
Servicer shall deliver to the Agent, the Borrower and the Lender on or before
September 30 of each year, beginning with September 30, 1997 an Officers'
Certificate stating, as to each signatory thereof, that (a) a review of the
activities of the Servicer during the preceding calendar year and of its
performance under this Agreement has been made under such officer's supervision,
and (b) to the best of such officers' knowledge, based on such review, the
Servicer has fulfilled all of its obligations under this Agreement throughout
such year, or, if there has been a default in the fulfillment of any such
obligation, specifying each such default known to such officers and the nature
and status thereof and the action being taken to cure such default.
(b) As soon as available and no later than 45 days after the end of each of
the first three quarterly fiscal periods in each fiscal year of the Servicer,
the Servicer shall deliver to the Lender and the Agent two copies of:
(i) a consolidated balance sheet of the Servicer and its consolidated
subsidiaries as of the end of such quarter in each case setting forth in
comparative form
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the corresponding figures for the most recent year-end for which an audited
balance sheet has been prepared (subject to normal year-end adjustments),
together with any related notes required in order to provide necessary
disclosure in accordance with generally accepted accounting principles; and
(ii) consolidated statements of income, stockholders' equity and cash flow
of the Servicer and its consolidated subsidiaries, for that quarter and for
the portion of the fiscal year ending with such quarter, in each case setting
forth in comparative form the corresponding figures for the comparable period
one year prior thereto (subject to normal year-end adjustments), together
with any related notes required in order to provide necessary disclosures in
accordance with generally accepted accounting principles, accompanied by a
certificate signed by the financial vice president, treasurer, chief
financial officer or controller of the Servicer stating that such financial
statements present fairly the financial condition and results of operations
of the companies being reported upon and have been prepared in accordance
with generally accepted accounting principles, consistently applied.
(c) As soon as available and no later than 105 days after the end of each
fiscal year of the Servicer, the Servicer shall deliver to the Lender and the
Agent two copies of:
(i) a consolidated balance sheet of the Servicer and its consolidated
subsidiaries, all as of the end of the fiscal year; and
(ii) consolidated statements of income, stockholders' equity and cash flow
of the Servicer and its consolidated subsidiaries, for that fiscal year;
setting forth in each case in comparative form the figures for the previous
fiscal year and accompanied by an opinion of a firm of independent certified
public accountants of recognized standing acceptable to the Certificate
holders stating that such financial statements present fairly the financial
condition of the companies being reported upon and have been prepared in
accordance with generally accepted accounting principles consistently applied
(except for changes in application in which such accountants concur).
(d) As soon as available and no later than 105 days after the end of each
fiscal year of the Borrower, the Borrower shall deliver to the Lender and the
Agent two copies of:
(i) a consolidated balance sheet of the Borrower and its consolidated
subsidiaries, all as of the end of the fiscal year; and
(ii) consolidated statements of income, stockholders' equity and cash flow
of the Borrower and its consolidated subsidiaries, for that fiscal year;
setting forth in each case in comparative form the figures for the previous
fiscal year and accompanied by an opinion of a firm of independent certified
public accountants of recognized standing acceptable to the
Certificateholders stating that such financial statements present fairly the
financial condition of the companies being reported upon and have been
prepared in
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accordance with generally accepted accounting principles consistently applied
(except for changes in application in which such accountants concur).
SECTION 6.14 Access to Certain Documentation. The Lender or the Agent
-------------------------------
(and their respective agents or professional advisors) shall at its own expense,
have the right under this Agreement, upon reasonable prior notice to the
Servicer, to examine and audit, during business hours or at such other times as
might be reasonable under applicable circumstances, any and all of the books,
records, or other information of the Servicer, or held by another for the
Servicer or on its behalf, exclusively concerning this Agreement. Without
limiting the generality of the foregoing sentence, the Lender and the Agent
shall have the right each year during the term of this Agreement, at their own
expense, to require that their agents and/or professional advisors accompany the
claims verifiers, underwriters and similar agents and/or employees of the
Servicer during four of their normal due diligence engagements at the offices of
Health Care Providers; provided, however, that (i) three of such due diligence
-------- -------
engagements shall be chosen by the Servicer from among the four Health Care
Providers (whose Receivables are Pledged Receivables hereunder) with, at the
time of such due diligence engagement, the largest Originator Commitment Amounts
and (ii) one of such due diligence engagement shall be chosen by the Agent. The
Lender and the Agent (and their respective agents and professional advisors)
shall treat as confidential any information obtained during such examination
which is not already publicly known or available, provided, however, the Lender
or the Agent may disclose such information if required to do so by law or by any
regulatory authority.
SECTION 6.15 Appointment of Successor Servicer. If an Event of Default
---------------------------------
shall occur, then, and in each and every such case, so long as such Event of
Default shall not have been remedied, the Agent may, by notice to the Servicer,
the Borrower and the Backup Servicer terminate all of the rights and obligations
of the Servicer under this Agreement. On or after the receipt by the Servicer
of such notice, all authority and power of the Servicer under this Agreement,
whether with respect to the Pledged Assets or otherwise, shall pass to and be
vested in the Backup Servicer pursuant to and under this Section, and, without
limitation, the Backup Servicer is hereby authorized and empowered to execute
and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any
and all documents and other instruments, and to do or accomplish all other acts
or things necessary or appropriate to effect the purposes of such notice of
termination, whether to complete the transfer and endorsement or assignment of
the Pledged Receivables and related documents, or otherwise. The Servicer
agrees to cooperate with the Agent and the Backup Servicer in effecting the
termination of the Servicer's responsibilities and rights hereunder, including,
without limitation, notification to the Payors of the assignment of the
servicing function, providing the Backup Servicer with all records, in
electronic or other form, reasonably requested by it to enable the Backup
Servicer to assume the servicing functions hereunder and the transfer to the
Backup Servicer for administration by it of all cash amounts which shall at the
time be deposited by the Servicer or should have been deposited by the Servicer
in the Agent's Account or thereafter be received with respect to the Pledged
Receivables. Neither the Agent nor the Backup Servicer shall be deemed to have
breached any obligation hereunder as a result of a failure to make or delay in
making any distribution as and
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when required hereunder caused by the failure of the Servicer to remit any
amounts received on it or to deliver any documents held by it with respect to
the Pledged Assets.
Any obligations of Funding hereunder other than in its capacity as Servicer
shall continue in effect notwithstanding Funding's termination as Servicer.
On and after the time the Servicer receives a notice of termination
pursuant to this Section 6.15, the Backup Servicer shall be the successor in all
------------
respects to the Servicer in its capacity as Servicer under this Agreement and
the transactions set forth or provided for herein and shall have all the rights
and powers and be subject thereafter to all the responsibilities, duties and
liabilities relating thereto placed on the Servicer by the terms and provisions
hereof; provided, however that any failure to perform such duties or
responsibilities caused by the Servicer's failure to provide information
required by this Section 6.15 shall not be considered a default by the Backup
------------
Servicer hereunder. In addition, the Backup Servicer shall have no liability
relating to the representations and warranties of the Servicer contained in
Article IV. In the Backup Servicer's capacity as such successor, the Backup
- - ----------
Servicer shall have the same limited liability herein granted to the Servicer.
As compensation therefor, and except as otherwise provided herein, the Backup
Servicer shall be entitled to all funds relating to the Pledged Receivables
which the Servicer would have been entitled to retain from or charge to the
Agent's Account if the Servicer had continued to act hereunder. Notwithstanding
the above, the Agent may, if the Backup Servicer shall be unwilling to so act,
or shall, if the Backup Servicer is unable to so act, or if the Lender so
requests in writing to the Agent, appoint itself, or appoint any established
servicing institution having a net worth of not less than $50,000,000 as the
successor to the Servicer hereunder in the assumption of all or any part of the
responsibilities, duties or liabilities of the Servicer hereunder. Pending
appointment of a successor to the Servicer hereunder, and after the Agent
notifies the Servicer to discontinue performing servicing functions under this
Agreement, the Backup Servicer (or the Agent if there is no Backup Servicer)
shall act in such capacity as hereinabove provided. Notwithstanding the
foregoing, the Agent shall, if the Backup Servicer is unwilling or prohibited by
law from making Advances regarding Delinquent Receivables or if there is no
Backup Servicer, promptly appoint any established servicing institution having a
net worth of not less than $50,000,000 as the successor to the Servicer
hereunder in the assumption of all or any part of the responsibilities, duties
or liabilities of the Servicer hereunder, which appointment shall become
effective immediately upon approval thereof by the Lender, such approval not to
be unreasonably withheld. In connection with such appointment and assumption,
the Agent may make such arrangements for the compensation of such successor out
of payments on Pledged Receivables as it and such successor shall agree;
provided, however, that, except as provided herein, no such compensation shall
be in excess of that permitted the Servicer hereunder, unless otherwise agreed
to by the Lender. The Borrower, the Agent and such successor shall take such
action, consistent with this Agreement, as shall be necessary to effectuate any
such succession.
SECTION 6.16 Additional Remedies of Agent Upon Event of Default. During
--------------------------------------------------
the continuance of any Event of Default, so long as such Event of Default shall
not have been remedied, the Agent, in addition to the rights specified in
Section 6.15 and Section 7.01,
- - ------------ ------------
54
<PAGE>
shall have the right, in its own name and as agent for the Lender, to take all
actions now or hereafter existing at law, in equity or by statute to enforce its
rights and remedies and to protect the interests, and enforce the rights and
remedies, of the Lender (including the institution and prosecution of all
judicial, administrative and other proceedings and the filings of proofs of
claim and debt in connection therewith). Except as otherwise expressly provided
in this Agreement, no remedy provided for by this Agreement shall be exclusive
of any other remedy, and each and every remedy shall be cumulative and in
addition to any other remedy, and no delay or omission to exercise any right or
remedy shall impair any such right or remedy or shall be deemed to be a waiver
of any Event of Default.
SECTION 6.17 Waiver of Defaults. Upon consent of the Lender, the Agent
------------------
may waive any default by the Servicer in the performance of its obligations
hereunder and its consequences. Upon any such waiver of a past default, such
default shall cease to exist, and any Event of Default arising therefrom shall
be deemed to have been remedied for every purpose of this Agreement. No such
waiver shall extend to any subsequent or other default or impair any right
consequent thereon except to the extent expressly so waived.
SECTION 6.18 Maintenance of Certain Insurance. During the term of its
--------------------------------
service as Servicer, the Servicer shall maintain in force an "errors &
omissions" or employee dishonesty insurance policy in an amount not less than
$500,000 in a form that would cover any loss of trust funds collected by the
Servicer hereunder caused by employee dishonesty, and with an insurance company,
reasonably acceptable to the Lender and the Agent. The Servicer shall prepare
and present, on behalf of itself, the Agent and the Lender, claims under any
such policy in a timely fashion in accordance with the terms of such policy, and
upon the filing of any claim on any policy described in this Section, the
Servicer shall promptly notify the Agent of such claim.
SECTION 6.19 Segregation of Collections. The Servicer shall not
--------------------------
commingle funds constituting Collections with any other funds of the Servicer or
Funding.
SECTION 6.20 UCC Matters: Protection and Perfection of Pledged Assets.
--------------------------------------------------------
The Borrower will not make any change to its corporate name or use any
tradenames, fictitious names, assumed names, "doing business as" names or other
names unless prior to the effective date of any such name change or use, the
Borrower delivers to the Agent such executed financing statements as the Agent
may request to reflect such name change or use, together with such other
documents and instruments as the Agent may request in connection therewith. The
Borrower agrees that from time to time, at its expense, it will promptly execute
and deliver all further instruments and documents, and take all further action
that the Agent may reasonably request in order to perfect, protect or more fully
evidence the Lender's interest in the Pledged Assets acquired hereunder, or to
enable the Lender or the Agent to exercise or enforce any of their respective
rights hereunder. Without limiting the generality of the foregoing, the
Borrower will upon the request of the Agent: (i) execute and file such financing
or continuation statements, or amendments thereto or assignments thereof, and
such other instruments or notices, as may be necessary or appropriate or as the
Agent may request, and (ii) mark its master data processing
55
<PAGE>
records evidencing such Pledged Receivables with a legend acceptable to the
Agent, evidencing that the Lender has acquired an interest therein as provided
in this Agreement. The Borrower hereby authorizes the Agent to file one or more
financing or continuation statements, and amendments thereto and assignments
thereof, relative to all or any of the Pledged Receivables and the Related
Security now existing or hereafter arising without the signature of the Borrower
where permitted by law. A carbon, photographic or other reproduction of this
Agreement or any financing statement covering the Pledged Receivables, or any
part thereof shall be sufficient as a financing statement. The Borrower shall,
upon the request of the Agent at any time after the occurrence of an Event of
Default and at the Borrower's expense, notify the Payors of Pledged Receivables,
or any of them, of the security interest of the Lender in the Pledged Assets.
If the Borrower fails to perform any of its agreements or obligations under this
Section 6.20 the Agent may (but shall not be required to) itself perform, or
- - ------------
cause performance of, such agreement or obligation, and the expenses of the
Agent incurred in connection therewith shall be payable by the Borrower upon the
Agent's demand therefor. For purposes of enabling the Agent to exercise its
rights described in the preceding sentence and elsewhere in this Article VI, the
----------
Borrower and the Lender hereby authorize the Agent and its successors and
assigns to take any and all steps in the Borrower's name and on behalf of the
Borrower and the Lender necessary or desirable, in the determination of the
Agent, to collect all amounts due under any and all Pledged Receivables,
including, without limitation, endorsing the Borrower's name on checks and other
instruments representing Collections and enforcing such Pledged Receivables and
the related Contracts.
SECTION 6.21 Advances by the Servicer. The Servicer may, in its sole
------------------------
discretion, make an Advance in respect of any payment due on a Pledged
Receivable to the extent such payment has not been received by the Servicer as
of its due date and the Servicer reasonably expects such payment will be
ultimately recoverable. The Servicer shall deposit into the Agent's Account in
immediately available funds the aggregate of all Advances to be made during a
Remittance Period on or prior to the Business Day immediately preceding the
related Remittance Date. With respect to any Remittance Date, the amount of the
Advances to be made by the Servicer, if any, shall equal the sum of the amounts
of payments on the Pledged Receivables that first became due during the most
recently ended Remittance Period to the extent not received or collected by the
Servicer on or before the Business Day immediately preceding such Remittance
Date. The Servicer shall be entitled to reimbursement for such Advances from
monies in the Agent's Account as provided in Section 2.05(c) hereof.
---------------
ARTICLE VII.
EVENTS OF DEFAULT
-----------------
SECTION 7.01 Events of Default. If any of the following events ("Events
----------------- ------
of Default") shall occur:
- - ----------
(a) (i) The Servicer (if other than the Agent) shall fail to perform or
observe any term, covenant or agreement hereunder (other than as referred to in
clause (ii) of this Section 7.01(a)) and such failure shall remain unremedied
- - ----------- ---------------
for three Business Days or (ii) either
56
<PAGE>
the Servicer (if other than the Agent) or the Borrower shall fail to make any
payment or deposit to be made by it hereunder when due; or
(b) (i) Any representation or warranty made or deemed to be made by the
Borrower or the Servicer (or any of their officers) under or in connection with
this Agreement or any remittance report or other information or report delivered
pursuant hereto shall prove to have been false or incorrect in any material
respect when made or (ii) any representation or warranty made or deemed to be
made by Funding (or any of its officers or agents) under or in connection with
the Funding Sale Agreement shall prove to have been false or incorrect in any
material respect when made; provided, however, that if the breach described in
-------- -------
the foregoing clauses (i) or (ii) is cured by the repurchase or substitution of
Receivables pursuant to Section 2.04(a) or (b) of the Funding Sale Agreement or
by a repurchase pursuant to Section 2.14 hereof, such breach shall not
constitute an Event of Default; or
(c) Either the Borrower or the Servicer shall fail to perform or observe
any other term, covenant or agreement contained in this Agreement or in the
Funding Sale Agreement on its part to be performed or observed and any such
failure shall remain unremedied for three Business Days after written notice
thereof shall have been given by the Agent to the Borrower; or
(d) The Borrower or the Servicer shall fail to pay any principal of or
premium or interest on any Debt in an amount in excess of $1,000,000, when the
same becomes due and payable (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise) and such failure shall continue
after the applicable grace period, if any, specified in the agreement or
instrument relating to such Debt; or any other default under any agreement or
instrument relating to any Debt or any other event, shall occur and shall
continue after the appli cable grace period, if any, specified in such agreement
or instrument if the effect of such default or event is to accelerate, or to
permit the acceleration of, the maturity of such Debt; or any such Debt shall be
declared to be due and payable or required to be prepaid (other than by a
regularly scheduled required prepayment) prior to the stated maturity thereof;
or
(e) Either (i) the Lender (and, by assignment, the Collateral Trustee),
shall at any time fail to have a valid perfected first priority security
interest in the Pledged Assets and the Related Security and all Collections with
respect thereto or (ii) any purchase by or assignment to the Borrower of a
Purchased Receivable or a Loan Receivable from Funding shall, for any reason,
cease to create in favor of the Borrower (x) in the case of Loan Receivables
from a valid and perfected first priority security interest in such Receivable
and the Related Security and Collections with respect thereto and (y) in the
case of Purchased Receivables, a perfected ownership interest or security
interest in such Receivable and the Related Security and Collections with
respect thereto; provided, however, that if an event described in the foregoing
-------- -------
clauses (i) or (ii) is cured by the repurchase or substitution of Receivables
pursuant to Section 2.04(a) or (b) of the Funding Sale Agreement or by a
repurchase pursuant to Section 2.14 hereof, such event shall not constitute an
Event of Default; or
57
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(f) (i) The Borrower or the Servicer shall generally not pay its debts as
such debts become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Borrower or the Servicer
seeking to adjudicate it bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, or composi tion
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for relief
or the appointment of a receiver, trustee, or other similar official for it or
for any substantial part of its property and such proceeding remains undismissed
for a period of 60 days; or (ii) the Borrower or the Servicer shall take any
corporate action to authorize any of the actions set forth in clause (i) above
----------
in this Section 7.01(f); or
---------------
(g) The occurrence of any of the following events:
(i) the Measurement Period Default Ratio exceeds 20% for any
Measurement Period;
(ii) the Monthly Default Ratio exceeds 8% for any Remittance Period;
(iii) the Delinquency Ratio exceeds 20% for any Remittance Period;
(iv) the Delinquency Ratio exceeds 15% for three consecutive
Remittance Periods;
(v) (A) the Receivable Turnover Days Ratio is greater than 2.5 for
any Remittance Period and (B) the Overcollateralization
Percentage is less than the Supplemental Overcollateralization
Percentage for such Remittance Period;
(vi) (A) the Receivables Turnover Days Ratio is greater than 2.0 for
any three of the four most recent Remittance Periods and (B)
the Overcollateralization Percentage is less than the
Supplemental Over-collateralization Percentage for the most
recent Remittance Period;
(vii) the Receivables Turnover Days Ratio is greater than 3.0 for any
Remittance Period;
(viii) the Receivables Turnover Days Ratio is greater than 2.75 for
any three of the four most recent Remittance Periods; or
(ix) the Net Portfolio Yield is less than 5.75% for any Remittance
Period; or
(h) The Borrower shall fail to (x) make payment as specified in Section
-------
2.05(f) and such failure shall remain unremedied for more than two Business Days
- - -------
after written notice thereof (containing a description of steps to be taken to
remedy such failure) shall have been given by the Borrower to the Agent or (y)
provide the Agent written notice of such failure on the Business Day following
the occurrence thereof; or
(i) The Servicer shall cease to own (whether directly or indirectly) 100%
of the issued and outstanding stock of the Borrower; or
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<PAGE>
(j) Intentionally omitted.
(k) Intentionally omitted.
(l) (x) the Overcollateralization Percentage shall be less than the
Required Overcollateralization Percentage for more than two consecutive Business
Days after written notice thereof (containing a description of steps to be taken
to remedy such failure) shall have been given by the Borrower to the Agent or
(y) the Borrower shall have failed to provide the Agent written notice of such
deficiency on the Business Day following the occurrence of such deficiency; or
(m) Intentionally omitted.
(n) (x) Funding has HP Equity of less than (i) $20,000,000 at any time that
the Borrowing Limit does not exceed $50,000,000 or (ii) $25,000,000 at any time
that the Borrowing Limit exceeds $50,000,000, and in each case, such HP Equity
deficiency remains unremedied for more than two Business Days after written
notice thereof (containing a description of steps to be taken to remedy such
failure) shall have been given by the Borrower to the Agent or (y) the Borrower
shall have failed to provided the Agent written notice of such deficiency on the
Business Day following the occurrence of such deficiency; or
(o) the sum of Pledged Receivables Balance minus the Minimum
Overcollateralization Amount shall at any time be less than the Facility Amount;
or
(p) Intentionally omitted.
(q) any two of the Original Shareholders are either no longer employed or
not actively involved in the management of Funding; or
(r) (i) all three of the Original Shareholders are employed and/or actively
involved in the management of Funding, but cease to own (whether directly or
indirectly), in the aggregate, at least 15% of the issued and outstanding stock
of Funding; (ii) any two of the Original Shareholders are employed and/or
actively involved in the management of Funding, but cease to own (whether
directly or indirectly), in the aggregate, at least 10% of the issued and
outstanding stock of Funding; or (iii) any one of the Original Shareholders is
employed and/or actively involved in the management of Funding, but ceases to
own (whether directly or indirectly), at least 5% of the issued and outstanding
stock of Funding;
then, and in any such event, the Termination Date shall be deemed to have
occurred automatically upon the occurrence of such event except that, in the
case of any event described in Sections 7.01(a), (c), (g ), (n), (q) and (r)
---------------- --- ---- --- --- ---
above the Agent may, by notice to the Borrower, declare the Termination Date to
have occurred, except that, in the case of any event described in Sections
--------
7.01(b), (d), (e), (f), (h), (i), (l), and (o) above, the Termination Date shall
- - ------- --- --- --- --- --- ---
be deemed to have occurred automatically upon the occurrence of such event.
Upon any such declaration or
59
<PAGE>
upon any such automatic occurrence, the Agent and the Lender shall have, in
addition to all other rights and remedies under this Agreement or otherwise, all
other rights and remedies provided under the UCC of the applicable jurisdiction
and other applicable laws, which rights shall be cumulative. If any event
described in Sections 7.01(b), (c), (d), (e), (f), and (i) above shall have
---------------- --- --- --- --- ---
occurred and be continuing, the Alternative Rate, the Base Rate and the CP Rate
shall be increased to the Default Rate, effective as of the date of the
occurrence of such event.
ARTICLE VIII.
INDEMNIFICATION
---------------
SECTION 8.01 Indemnities by the Borrower. Without limiting any other
---------------------------
rights which the Agent, the Lender or any of their respective Affiliates may
have hereunder or under applicable law, the Borrower hereby agrees to indemnify
the Agent, the Lender, and each of their respective Affiliates from and against
any and all damages, losses, claims, liabilities and related costs and expenses,
including reasonable attorneys' fees and disbursements (all of the foregoing
being collectively referred to as "Indemnified Amounts") awarded against or
-------------------
incurred by any of them arising out of or as a result of this Agreement or the
ownership of Pledged Assets or in respect of any Loan Receivable, Purchased
Receivable or Related Security, excluding, however, (a) Indemnified Amounts to
the extent resulting from gross negligence or willful misconduct on the part of
the Agent, the Lender or such Affiliate or (b) recourse (except as otherwise
specifically provided in this Agreement) for uncollectible Pledged Receivables.
Without limiting the foregoing, the Borrower shall indemnify the Agent, the
Lender and each of their respective Affiliates for Indemnified Amounts relating
to or resulting from:
(i) any Pledged Receivable treated as or represented by the Borrower
to be an Eligible Receivable which is not at the applicable time an Eligible
Receivable ;
(ii) reliance on any representation or warranty made or deemed made by
the Borrower, the Servicer if Funding or one of its Affiliates or any of
their respective officers under or in connection with this Agreement, which
shall have been false or incorrect in any material respect when made or
deemed made or delivered;
(iii) the failure by the Borrower or the Servicer (if Funding or one of
its Affiliates) to comply with any term, provision or covenant contained in
this Agreement or any agreement executed in connection with this Agreement,
or with any applicable law, rule or regulation with respect to any Purchased
Receivable, Loan Receivable or the Related Security, or the nonconformity of
any Purchased Receivable, Loan Receivable or the Related Security with any
such applicable law, rule or regulation;
(iv) the failure to vest and maintain vested in the Lender or to
transfer to the Lender, a first priority security interest in the Receivables
which are, or are purported to be, Pledged Receivables, together with all
Collections and Related Security, free and
60
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clear of any Adverse Claim whether existing at the time of the related
Borrowing or at any time thereafter;
(v) the failure to maintain, as of the close of business on each
Business Day prior to the Termination Date, an aggregate amount of Loans
outstanding which is less than or equal to the lesser of (x) the Borrowing
Limit minus the Discount Amount on such Business Day, or (y) the Capital
-----
Limit on such Business Day;
(vi) the failure to file, or any delay in filing, financing statements
or other similar instruments or documents under the UCC of any applicable
jurisdiction or other applicable laws with respect to any Receivables which
are, or are purported to be, Pledged Receivables, whether at the time of any
Borrowing or at any subsequent time:
(vii) any dispute, claim, offset or defense (other than the discharge
in bankruptcy of the Payor) to the payment of any Receivable which is, or is
purported to be, a Pledged Receivable (including, without limitation, a
defense based on such Receivable not being a legal, valid and binding
obligation of such Payor enforceable against it in accordance with its
terms);
(viii) any failure of the Borrower or the Servicer (if the Servicer or
one of its Affiliates) to perform its duties or obligations in accordance
with the provisions of this Agreement;
(ix) the failure to pay when due any taxes payable in connection with
the Pledged Receivables;
(x) any repayment by the Agent or the Lender of any amount previously
distributed in payment of Loans or payment of Yield or any other amount due
hereunder, in each case which amount the Agent or the Lender believes in good
faith is required to be repaid;
(xi) the commingling of Collections of Pledged Receivables at any time
with other funds;
(xii) any investigation, litigation or proceeding related to this
Agreement or the use of proceeds of Loans or the Pledged Assets or in respect
of any Purchased Receivable, Loan Receivable or Related Security;
(xiii) any failure by the Borrower to give reasonably equivalent value
to the Servicer in consideration for the transfer by the Servicer to the
Borrower of any Purchased Receivable, Loan Receivable or Related Security, or
any attempt by any Person to void or otherwise avoid any such transfer under
any statutory provision or common law or equitable action, including, without
limitation, any provision of the Bankruptcy Code; or
61
<PAGE>
(xiv) any failure of the Borrower, the Servicer or any of their
respective agents or representatives (including, without limitation, agents,
representatives and employees of the Servicer acting pursuant to authority
granted under Section 6.01) to remit to the Servicer or the Agent,
------------
Collections of Pledged Receivables remitted to the Borrower or any such agent
or representative.
Any amounts subject to the indemnification provisions of this Section 8.01 shall
------------
be paid by the Borrower to the Agent within two Business Days following the
Agent's written demand therefor.
SECTION 8.02 Indemnities by the Servicer. Without limiting any other
---------------------------
rights which the Agent, the Lender or any of their respective Affiliates may
have hereunder or under applicable law, the Servicer hereby agrees to indemnify
the Agent, the Lender, and each of their respective Affiliates from and against
any and all Indemnified Amounts awarded against or incurred by any of them
arising out of or as a result of this Agreement or the ownership of Pledged
Assets or in respect of any Purchased Receivable, Loan Receivable or Related
Security excluding, however, (a) Indemnified Amounts to the extent resulting
from gross negligence or willful misconduct on the part of the Agent, the Lender
or such Affiliate or (b) recourse (except as otherwise specifically provided in
this Agreement) for uncollectible Pledged Receivables; provided, however, that
-------- -------
the liability for Indemnified Amounts partially attributable to other Persons
acting as servicers for receivables purchased by the Lender or collateral
pledged to the Lender shall be reasonably allocated between the Servicer and
such other Persons by the Lender. Without limiting the foregoing, the Servicer
shall indemnify the Agent, the Lender and each of their respective Affiliates
for Indemnified Amounts relating to or resulting from:
(i) reliance on any representation or warranty made or deemed made by
the Servicer (if Funding or one of its Affiliates) or any of their respective
officers under or in connection with this Agreement, which shall have been
false or incorrect in any material respect when made or deemed made or
delivered;
(ii) the failure by the Servicer (if Funding or one of its Affiliates)
to comply with any term, provision or covenant obtained in this Agreement or
any agreement executed in connection with this Agreement, or with any
applicable law, rule or regulation with respect to any Receivable, the
related Contract or the Related Security, or the nonconformity of any
Receivable, the related Contract, if any, or the Related Security with any
such applicable law, rule or regulation;
(iii) any dispute, claim, offset or defense (other than the discharge
in bankruptcy of the Payor) of the Payor to the payment of any Receivable
which is, or is purported to be, a Pledged Receivable (including, without
limitation, a defense based on such Receivable or the related Contract, if
any, not being a legal, valid and binding obligation of such Payor
enforceable against it in accordance with its terms);
(iv) any failure of the Servicer (if Funding or one of its Affiliates)
to perform its duties or obligations in accordance with the provisions of
this Agreement or any
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<PAGE>
failure by Funding, the Originator or any Affiliate thereof to perform its
respective duties under the related Contracts, if any, Loan Agreement or
Purchase Agreement;
(v) any repayment by the Agent or the Lender of any amount previously
distributed in payment of Loans or payment of Yield or any other amount due
hereunder, in each case which amount the Agent or the Lender believes in good
faith is required to be repaid;
(vi) the commingling by the Servicer of Collections of Pledged
Receivables at any time with other funds;
(vii) any investigation, litigation or proceeding related to this
Agreement or the use of proceeds of Loans, Pledged Assets or in respect of
any Receivable or Related Security; or
(viii) any failure of the Borrower, Funding or any of their respective
agents or representatives (including, without limitation, agents,
representatives and employees of Funding acting pursuant to authority granted
under Section 6.01) to remit to the Servicer or the Agent, Collections of
------------
Pledged Receivables remitted to the Borrower or any such agent or
representative.
Any amounts subject to the indemnification provisions of this Section 8.02 shall
------------
be paid by the Servicer to the Agent within two Business Days following the
Agent's written demand therefor.
The applicable Affected Party shall deliver to the indemnifying party
under Section 8.01 and Section 8.02, within a reasonable time after the Affected
------------ ------------
Party's receipt thereof, copies of all notices and documents (including court
papers) received by the Affected Party relating to the claim giving rise to the
Indemnified Amounts. Each Affected Party will cooperate with the Borrower and
the Servicer in connection with any claim giving rise to the Indemnified Amounts
to minimize the liability of such indemnifying parties, provided that nothing
contained herein shall obligate any Affected Party to take any action which, in
the opinion of the applicable Affected Party, is unlawful or otherwise
disadvantageous to such Affected Party.
ARTICLE IX.
MISCELLANEOUS
-------------
SECTION 9.01 Amendments and Waivers. (a) Except as provided in Section
---------------------- -------
9.01(b), no amendment or modification of any provision of this Agreement shall
- - -------
be effective without the written agreement of the Borrower, the Servicer, the
Agent and the Lender, and no termination or waiver of any provision of this
Agreement or consent to any departure therefrom by the Borrower or the Servicer
shall be effective without the written concurrence of the Agent and the Lender.
Any waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.
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(b) Notwithstanding the provisions of Section 9.01(a), in the event that
---------------
there is more than one Lender, the written consent of each Lender shall be
required for any amendment, modification or waiver (i) reducing any outstanding
Loans, or the Yield thereon, for any Fixed Period, (ii) postponing any date for
any payment of any Loan, or the Yield thereon, for any Fixed Period, or (iii)
modifying the provisions of this Section 9.01 and (iv) increasing the Capital
------------
Limit or the Borrowing Limit or (v) reducing the Required Overcollateralization
Percentage or the Minimum Overcollateralization Amount.
SECTION 9.02 Notices, Etc. All notices and other communications provided
-------------
for hereunder shall, unless otherwise stated herein, be in writing (including
telex communication and communication by facsimile copy) and mailed, telexed,
transmitted or delivered, as to each party hereto, at its address set forth
under its name on the signature pages hereof or specified in such party's
Assignment and Acceptance or at such other address as shall be designated by
such party in a written notice to the other parties hereto. All such notices
and communications shall be effective, upon receipt, or in the case of (a)
notice by mail, five days after being deposited in the United States mails,
first class postage prepaid, (b) notice by telex, when telexed against receipt
of answerback, or (c) notice by facsimile copy, when verbal communication of
receipt is obtained, except that notices and communications pursuant to Article
-------
II shall not be effective until received.
- - --
SECTION 9.03 No Waiver; Remedies. No failure on the part of the Agent or
-------------------
the Lender to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 9.04 Binding Effect; Assignability. This Agreement shall be
-----------------------------
binding upon and inure to the benefit of the Borrower, the Agent, the Lender and
their respective successors and permitted assigns. This Agreement and the
Lender's rights and obligations hereunder and interest herein shall be
assignable in whole or in part (including by way of the sale of participation
interests therein) by the Lender and its successors and assigns. Neither the
Borrower nor the Servicer may assign any of its rights and obligations hereunder
or any interest herein without the prior written consent of the Lender and the
Agent. The parties to each assignment or participation made pursuant to this
Section 9.04 shall execute and deliver to the Agent for its acceptance and
- - ------------
recording in its books and records, an Assignment and Acceptance or a
participation agreement or other transfer instrument reasonably satisfactory in
form and substance to the Agent and the Borrower. Each such assignment or
participation shall be effective as of the date specified in the applicable
Assignment and Acceptance or other agreement or instrument only after the
execution, delivery, acceptance and recording as described in the preceding
sentence. The Agent shall notify the Borrower of any assignment or
participation thereof made pursuant to this Section 9.04. The Lender may, in
------------
connection with any assignment or participation or any proposed assignment or
participation pursuant to this Section 9.04, disclose to the assignee or
------------
participant or proposed assignee or participant any
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<PAGE>
information relating to the Borrower and the Pledged Assets furnished to the
Lender by or on behalf of the Borrower or the Servicer.
SECTION 9.05 Term of this Agreement. This Agreement including, without
----------------------
limitation, the Borrower's obligation to observe its covenants set forth in
Articles V and VI, and the Servicer's obligation to observe its covenants set
- - ---------- --
forth in Article VI, shall remain in full force and effect until the Collection
----------
Date; provided, however, that the rights and remedies with respect to any breach
-------- -------
of any representation and warranty made or deemed made by the Borrower pursuant
to Articles III and IV and the indemnification and payment provisions of Article
------------ -- -------
VIII and Article IX and the provisions of Section 9.08 and Section 9.09 shall be
- - ---- ---------- ------------ ------------
continuing and shall survive any termination of this Agreement.
SECTION 9.06 Governing Law; Jury Waiver. THIS AGREEMENT SHALL BE
--------------------------
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW
YORK, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE INTERESTS OF
THE LENDER IN THE PLEDGED RECEIVABLES, OR REMEDIES HEREUNDER, IN RESPECT
THEREOF, ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW
YORK. EACH OF THE PARTIES HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY
LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS
AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREUNDER.
SECTION 9.07 Costs, Expenses and Taxes. (a) In addition to the rights
-------------------------
of indemnification granted to the Agent, the Lender and its Affiliates under
Article VIII hereof, the Borrower agrees to pay on demand all reasonable costs
- - ------------
and expenses of the Lender and the Agent incurred in connection with the
preparation, execution, delivery, administration (including periodic auditing),
or any waiver or consent issued in connection with, this Agreement and the other
documents to be delivered hereunder or in connection herewith or incurred in
connection with any amendment, waiver or modification of this Agreement and
other documents to be delivered hereunder or in connection herewith that is
necessary or requested by any of the Borrower, Funding, Fitch, Moody's or S&P or
made necessary or desirable as a result of the actions of any regulatory, tax or
accounting body affecting the Lender and its Affiliates, or which is related to
an Event of Default including, without limitation, the reasonable fees and
reasonable out-of-pocket expenses of counsel for the Agent and the Lender with
respect thereto and with respect to advising the Agent and the Lender as to
their respective rights and remedies under this Agreement and the other
documents to be delivered hereunder or in connection herewith, and all costs and
expenses, if any (including reasonable counsel fees and expenses), incurred by
the Agent or the Lender in connection with the enforcement of this Agreement and
the other documents to be delivered hereunder or in connection herewith.
(b) The Borrower shall pay on demand any and all commissions of placement
agents and dealers in respect of commercial paper notes issued to fund the Loans
and any and all
65
<PAGE>
stamp, sales, excise and other taxes and fees payable or determined to be
payable in connection with the execution, delivery, filing and recording of this
Agreement, the other documents to be delivered hereunder or any agreement or
other document providing liquidity support, credit enhancement or other similar
support to the Lender in connection with this Agreement or the funding or
maintenance of Loans hereunder.
(c) The Borrower shall pay on demand all other costs, expenses and taxes
(excluding franchise and income taxes) incurred by any Issuer or any general or
limited partner or shareholder of such Issuer ("Other Costs"), including,
-----------
without limitation, the cost of auditing such Issuer's books by certified public
accountants, the cost of rating such Issuer's commercial paper by independent
financial rating agencies, the taxes (excluding franchise and income taxes)
resulting from such Issuer's operations, and the reasonable fees and out-of-
pocket expenses of counsel for the Issuer or any counsel for any general or
limited partner or shareholder of the Issuer with respect to (i) advising such
Person as to its rights and remedies under this Agreement and the other
documents to be delivered hereunder or in connection herewith, (ii) the
enforcement of this Agreement and the other documents to be delivered hereunder
or in connection herewith and (iii) advising such Person as to the issuance of
the Issuer's commercial paper notes to fund Loans and action in connection with
such issuance.
SECTION 9.08 No Proceedings. Each of the Borrower, the Agent, the
--------------
Servicer and the Lender each hereby agrees that it will not institute against,
or join any other Person in instituting against, any Issuer any proceedings of
the type referred to in Section 7.01(f) so long as any commercial paper issued
---------------
by such Issuer shall be outstanding or there shall not have elapsed one year and
one day since the last day on which any such commercial paper shall have been
outstanding.
SECTION 9.09 Recourse Against Certain Parties. No recourse under or with
--------------------------------
respect to any obligation, covenant or agreement (including, without limitation,
the payment of any fees or any other obligations) of the Lender as contained in
this Agreement or any other agreement, instrument or document entered into by it
pursuant hereto or in connection herewith shall be had against any administrator
of the Lender or any incorporator, affiliate, stockholder, officer, employee or
director of the Lender or of any such administrator, as such, by the enforcement
of any assessment or by any legal or equitable proceeding, by virtue of any
statute or otherwise; it being expressly agreed and understood that the
-- ----- --------- ------ --- ----------
agreements of the Lender contained in this Agreement and all of the other
agreements, instruments and documents entered into by it pursuant hereto or in
connection herewith are, in each case, solely the corporate obligations of the
Lender, and that no personal liability whatsoever shall attach to or be incurred
by any administrator of the Lender or any incorporator, stockholder, affiliate,
officer, employee or director of the Lender or of any such administrator, as
such, or any other them, under or by reason of any of the obligations, covenants
or agreements of the Lender contained in this Agreement or in any other such
instruments, documents or agreements, or which are implied therefrom, and that
any and all personal liability of every such administrator of the Lender and
each incorporator, stockholder, affiliate, officer, employee or director of the
Lender or of any such administrator, or any of them, for breaches by the Lender
of any such obligations, covenants
66
<PAGE>
or agreements, which liability may arise either at common law or at equity, by
statute or constitution, or otherwise, is hereby expressly waived as a condition
of and in consideration for the execution of this Agreement. The provisions of
this Section 9.09 shall survive the termination of this Agreement.
------------
SECTION 9.10 Execution in Counterparts; Severability; Integration. This
----------------------------------------------------
Agreement may be executed in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed shall be deemed
to be an original and all of which when taken together shall constitute one and
the same agreement. In case any provision in or obligation under this Agreement
shall be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby. This Agreement contains the final and complete
integration of all prior expressions by the parties hereto with respect to the
subject matter hereof and shall constitute the entire agreement among the
parties hereto with respect to the subject matter hereof, superseding all prior
oral or written understandings other than the fee letters described in Section
-------
2.09.
- - ----
SECTION 9.11 Tax Characterization. Notwithstanding any provision of this
--------------------
Agreement, the parties hereto intend for the transactions effected hereunder to
constitute a financing transaction for federal taxation purposes.
67
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
THE BORROWER: WISCONSIN CIRCLE FUNDING
CORPORATION
By: [SIGNATURE APPEARS HERE]
------------------------------
Title: Chief Executive Officer
Attention:
Facsimile No.:
Telephone No.:
THE SERVICER: HCFP FUNDING, INC.
By: [SIGNATURE APPEARS HERE]
------------------------------
Title: Chief Executive Officer
Facsimile No.:
Telephone No.:
THE AGENT: ING BARING (U.S.) CAPITAL MARKETS, INC.
By:___________________________
Title:
ING Baring (U.S.) Capital Markets, Inc.
135 East 57th Street
New York, New York 10022-2101
Attention: Joseph Weingarten
Facsimile No.: 212/593-3362
Confirmation No.: 212/409-0966
68
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their respective officers thereunto duly authorized, as of the date first
above written.
THE BORROWER: WISCONSIN CIRCLE FUNDING
CORPORATION
By:______________________________
Title:
Attention:
Facsimile No.:
Telephone No.:
THE SERVICER: HCFP FUNDING, INC.
By:______________________________
Title:
Facsimile No.:
Telephone No.:
THE AGENT: ING BARING (U.S.) CAPITAL MARKETS, INC.
By: [SIGNATURE APPEARS HERE]
---------------------------------
Title: Vice President
ING Baring (U.S.) Capital Markets, Inc.
135 East 57th Street
New York, New York 10022-2101
Attention: Joseph Weingarten
Facsimile No.: 212/593-3362
Confirmation No.: 212/409-0966
69
<PAGE>
THE LENDER: HOLLAND LIMITED SECURITIZATION, INC.
By ING Baring (U.S.) Capital Markets, Inc.,
as attorney-in-fact
By: [SIGNATURE APPEARS HERE]
--------------------------------
Title: Vice President
Holland Limited Securitization, Inc.
c/o International Nederlanden (U.S.)
Capital Markets, Inc.
135 East 57th Street
New York, New York 10022-2101
Attention: Joseph Weingarten
Facsimile No.: 212/593-3362
Confirmation No.: 212/409-0966
c/o Lord Securities Corporation
2 Wall Street, 19th Floor
New York, New York 10005
Attention: Andrew L. Stidd
Facsimile No.: 212/346-9008
Telephone No.: 212/346-9012
70
<PAGE>
PURCHASE AND CONTRIBUTION AGREEMENT
Dated as of December 5, 1996
Between
HCFP FUNDING, INC.
as Seller
---------
and
WISCONSIN CIRCLE FUNDING CORPORATION
as Purchaser
------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
ARTICLE I
DEFINITIONS
<S> <C> <C>
SECTION 1.1 Certain Defined Terms......................................... 1
---------------------
SECTION 1.2 Other Terms................................................... 12
-----------
ARTICLE II
AMOUNTS AND TERMS OF PURCHASES AND CONTRIBUTIONS
SECTION 2.1 Facility...................................................... 13
--------
SECTION 2.2 Purchase and Contribution of Transferred Assets............... 13
-----------------------------------------------
SECTION 2.3 Collections................................................... 14
-----------
SECTION 2.4 Settlement Procedures......................................... 14
---------------------
SECTION 2.5 Payments and Computations, Etc................................ 15
------------------------------
ARTICLE III
CONDITIONS OF PURCHASES
SECTION 3.1 Conditions Precedent to Initial Purchase from the Seller...... 15
--------------------------------------------------------
SECTION 3.2 Conditions Precedent to All Purchases......................... 16
-------------------------------------
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties of the Seller.................. 17
--------------------------------------------
ARTICLE V
COVENANTS
SECTION 5.1 Covenants of the Seller....................................... 20
-----------------------
SECTION 5.2 Grant of Security Interest.................................... 25
--------------------------
SECTION 5.3 Covenant of the Seller and the Purchaser...................... 25
----------------------------------------
ARTICLE VI
ADMINISTRATION AND COLLECTION
SECTION 6.1 Designation of Servicer....................................... 26
-----------------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 6.2 Duties of Servicer............................................ 26
------------------
SECTION 6.3 Certain Rights of the Purchaser............................... 27
-------------------------------
SECTION 6.4 Rights and Remedies........................................... 28
-------------------
SECTION 6.5 Transfer of Records to Purchaser.............................. 29
--------------------------------
ARTICLE VII
EVENTS OF TERMINATION
SECTION 7.1 Events of Termination......................................... 29
---------------------
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Indemnities by the Seller..................................... 31
-------------------------
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Amendments, Etc............................................... 33
---------------
SECTION 9.2 Notices, Etc.................................................. 33
------------
SECTION 9.3 Binding Effect; Assignability................................. 34
-----------------------------
SECTION 9.4 Costs, Expenses and Taxes..................................... 34
-------------------------
SECTION 9.5 No Proceedings................................................ 35
--------------
SECTION 9.6 Confidential.................................................. 35
------------
SECTION 9.7 GOVERNING LAW................................................. 35
-------------
SECTION 9.8 Third Party Beneficiary....................................... 35
-----------------------
SECTION 9.9 Execution in Counterparts..................................... 35
-------------------------
ARTICLE X
PURCHASER LOANS TO THE SELLER
SECTION 10.1 Purchaser Loans............................................... 36
---------------
SECTION 10.2 Notices Relating to Loans..................................... 36
-------------------------
SECTION 10.3 Disbursement of Loan Proceeds................................. 36
-----------------------------
SECTION 10.4 Seller Note................................................... 36
-----------
SECTION 10.5 Loan Repayments............................................... 37
---------------
SECTION 10.6 Interest...................................................... 37
--------
SECTION 10.7 Time and Method of Payments................................... 37
---------------------------
</TABLE>
ii
<PAGE>
EXHIBITS
EXHIBIT A Form of Opinion of Counsel for the Seller
EXHIBIT B Credit and Collection Policy
EXHIBIT C Lock-Box Accounts
EXHIBIT D Forms of Loan Agreement
EXHIBIT E Form of Purchase Agreement
EXHIBIT F Form of Subordination Agreement
EXHIBIT G Form of Seller Note
EXHIBIT H Form of Notice to Fleet
iii
<PAGE>
PURCHASE AND CONTRIBUTION AGREEMENT
Dated as of December 5, 1996
HCFP FUNDING, INC., a Delaware corporation (the "Seller" and WISCONSIN
------
CIRCLE FUNDING CORPORATION, a Delaware corporation (the "Purchaser"), agree as
---------
follows:
PRELIMINARY STATEMENTS. (1) Certain terms which are capitalized and used
throughout this Agreement (in addition to those defined above) are defined in
Article I of this Agreement.
(2) The Seller has Receivables that it wishes to sell to the Purchaser, and
the Purchaser is prepared to purchase such Receivables on the terms set forth
herein.
(3) The Seller may also wish to contribute Receivables to the capital of
the Purchaser on the terms set forth herein.
NOW, THEREFORE, the parties agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Certain Defined Terms. As used in this Agreement, the
---------------------
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Adjusted Net Realizable Value" means with respect to any Transferred
-----------------------------
Receivable, (i) in the case of any Loan Receivable, the lesser of the loan
balance outstanding under the applicable Loan Agreement or the Net Realizable
Value of such Loan Receivable multiplied by the "Borrowing Base" percentage
applicable to such Loan Receivable under the applicable Loan Agreement, or (ii)
in the case of Purchased Receivables, the Net Realizable Value of such Purchased
Receivable multiplied by the "Purchase Price" of such Purchased Receivable under
the applicable Purchase Agreement.
"Adverse Claim" means a lien, security interest, charge, encumbrance or
-------------
other right or claim of any Person (other than, with respect to any Transferred
Asset, (i) any lien, security interest, charge, encumbrance or other right or
claim in favor of (x) the Purchaser or its assignee or (y) any Person who (1)
prior to the date hereof has subordinated, in writing, its interest in such
Transferred Asset to the interest of the Purchaser or its assignee therein
pursuant to a written subordination in form and substance acceptable to the
Purchaser and its
<PAGE>
assignee in their sole discretion or (2) after the date hereof subordinates its
interest by means of a written subordination which is substantially similar to
the agreement attached hereto as Exhibit F or (ii) which are Receivables owing
from a Government Entity, the right of such Government Entity to offset against
such Receivable, but only prior to the time such Government Entity actually
offsets against such Receivable or notifies the applicable Health Care Provider
or the Seller of its intent to do so.
"Affiliate" when used with respect to a Person means any other Person
---------
controlling, controlled by or under common control with such Person. For the
purposes of this definition, "control," when used with respect to any specified
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Base Rate" means, on any date, a fluctuating rate of interest per annum
---------
equal to the arithmetic average of the rates of interest publicly announced by
The Chase Manhattan Bank (National Association), Citibank, N.A. and Morgan
Guaranty Trust Company of New York (or their respective successors) as their
respective prime commercial lending rates (or, as to any such bank that does not
announce such a rate, such bank's "base" or other rate determined by the Lender
to be the equivalent rate announced by such bank), except that, if any such bank
shall, for any period, cease to announce publicly its prime commercial lending
(or equivalent) rate, the Agent shall, during such period, determine the "Base
----
Rate" based upon the prime commercial lending (or equivalent) rates announced
- - ----
publicly by the other such banks or, if each such bank ceases to announce
publicly its prime commercial lending (or equivalent) rate, based upon the prime
commercial lending (or equivalent) rates announced publicly by other banks
reasonably acceptable to the Seller. The prime commercial lending (or
equivalent) rates used in computing the Base Rate are not intended to be the
lowest rates of interest charged by such banks in connection with extensions of
credit to debtors. The Base Rate shall change as and when such banks' prime
commercial lending (or equivalent) rates change.
"Batch Payoff Period" means the "Collection Period" applicable to a batch
-------------------
of Receivables as specified in the Purchase Agreement pursuant to which such
Receivables were sold to the Seller; provided, however, that such Batch Payoff
Period shall under no circumstances be extended in a manner which is
inconsistent with the Credit and Collection Policy.
"Borrowing Limit" means $15,000,000.
---------------
"Business Day" means a day of the year other than a Saturday or a Sunday on
------------
which banks are not authorized or required to close in New York City.
2
<PAGE>
"Collections" means, with respect to any Receivable, all cash proceeds in
-----------
respect of such Receivable and all cash proceeds of Related Security with
respect to such Receivable, and all funds deemed to have been received by the
Seller or any other Person as a Collection pursuant to Section 2.4.
"Contract" means each Loan Agreement and/or each Purchase Agreement, as
--------
appropriate.
"Contributed Receivable" has the meaning specified in Section 2.1.
----------------------
"Credit and Collection Policy" means with respect to Receivables, those
----------------------------
credit and collection policies and practices of the Seller in effect on the date
of this Agreement as annexed hereto as Exhibit B, as such policies and practices
may hereafter be amended, modified or supplemented from time to time in
compliance with this Agreement.
"Debt" of any Person means (a) indebtedness of such Person for borrowed
----
money, (b) obligations of such Person evidenced by bonds, debentures, notes or
other similar instruments, (c) obligations of such Person to pay the deferred
purchase price of property or services, (d) obligations of such Person as lessee
under leases which shall have been, or should be, in accordance with GAAP,
recorded as capital leases, (e) obligations secured by an Adverse Claim upon
property or assets owned by such Person, even though such Person has not assumed
or become liable for the payment of such obligations and (f) obligations of such
Person under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (a) through (e) above.
-----------------------
"Defaulted Receivables" means, as of any time of determination, (a) any
---------------------
Loan Receivable:
(i) in respect of which any payment, or part thereof, of principal,
interest or otherwise due and owing under the related Loan Agreement remains
unpaid for more than 30 days after its due date;
(ii) as to which the Health Care Provider pledging such Loan Receivable has
taken the actions or is the subject of a proceeding of the type described in
Section 7.1(g); provided, that if the bankruptcy court presiding over any
--------
bankruptcy proceeding referred to in Section 7.1(g) with respect to such Health
Care Provider issues a judicial determination that such Loan Receivable is an
allowed claim against such Healthcare Provider, such Loan Receivable shall not
be a Defaulted Receivable to the extent payable as an allowed claim; provided,
--------
further that if the bankruptcy court presiding over any bankruptcy proceeding
- - -------
referred to in Section 7.1(g) with respect to such Health Care Provider issues a
judicial determination that any loan agreement entered into after commencement
of such proceeding on
3
<PAGE>
substantially the same terms as the Loan Agreement is an allowed debtor-in-
possession financing, such Loan Receivable shall not be a Defaulted Receivable
in any respect;
(iii) as to which the Health Care Provider pledging such Loan Receivable
has suffered any material adverse change which affects its viability as an
ongoing concern;
(iv) which has been or should otherwise be written off by the Servicer in
accordance with the Credit and Collection Policies;
(v) for which the Servicer determines in good faith that the Payor will
not continue remitting payments; or
(vi) as to which the Payor thereof has taken the actions or is the subject
of a proceeding of the type described in Section 7.1(g); and
(b) any Purchased Receivable:
(i) that remains unpaid for more than 60 days past its applicable
Batch Payoff Period;
(ii) for which the Servicer determines in good faith that the Payor
will not continue scheduled payments;
(iii) as to which the Health Care Provider transferring such
Purchased Receivable has taken the actions or is the subject of a proceeding of
the type described in Section 7.1(g); provided, that if the bankruptcy court
--------
presiding over any bankruptcy proceeding referred to in Section 7.1(g) with
respect to such Health Care Provider issues a judicial determination that such
Purchased Receivable is an allowed claim against such Health Care Provider, such
Purchased Receivable shall not be a Defaulted Receivable to the extent payable
as an allowed claim; provided, further that if the bankruptcy court presiding
-------- -------
over any bankruptcy proceeding referred to in Section 7.1(g) with respect to
such Health Care Provider issues a judicial determination that any receivables
purchase agreement entered into after commencement of such proceeding on
substantially the same terms as the Purchase Agreement is an allowed debtor-in-
possession financing, such Purchased Receivable shall not be a Defaulted
Receivable;
(iv) which would otherwise be written off in accordance with the
Credit and Collection Policies;
(v) as to which the Health Care Provider assigning such Purchased
Receivable has suffered any material adverse change which affects its viability
as an ongoing concern; or
4
<PAGE>
(vi) as to which the Payor thereof has taken the actions or is the
subject of a proceeding of the type described in Section 7.1(g).
"Delinquent Receivable" means, as of any time of determination, (i) any
---------------------
Purchased Receivable in respect of which any payment of principal, interest or
otherwise, or part thereof, due and owing under the related Loan Agreement
remains unpaid for more than the applicable Batch Payoff Period for such
Receivable but less than 60 days beyond such Batch Payoff Period and (ii) any
Loan Receivable in respect of which any payment, or part thereof, remains unpaid
beyond its due date, but for no more than 30 days beyond its due date.
"Dilution" means, with respect to any Receivable, the aggregate amount of
--------
any reductions or adjustments in the Outstanding Balance of such Receivable as a
result of any defective, rejected, returned, repossessed or foreclosed
merchandise or services or any cash discount or other adjustment or setoff.
"Eligible Receivable" means, at any time, a Receivable:
-------------------
(a) which is a liability of a Payor organized under the laws of any
jurisdiction in the United States and having its principal office in the United
States;
(b) which is denominated and payable in United States dollars in the United
States;
(c) which is not a Delinquent Receivable or a Defaulted Receivable;
(d) which was created through the provision of merchandise, goods or
services by a Health Care Provider in the ordinary course of its business of
delivering health care related services;
(e) which satisfies in all material respects all applicable requirements of
the Credit and Collection Policies;
(f) (i) which represents the genuine, legal, valid and binding obligation
in writing of a Payor enforceable by the holder thereof in accordance with its
terms, (ii) in respect of which the holder of such Receivable is able to bring
suit or otherwise enforce its remedies against such Payor through judicial
process, and (iii) which has not, nor has the related Contract been satisfied,
subordinated, rescinded or amended in any manner, subject to (x) any applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting the enforceability of creditors'
rights generally, and (y) general equitable principles, whether applied in a
proceeding at law or in equity;
5
<PAGE>
(g) which is not, nor is the related Contract, subject to any exercise of
any right of rescission, set-off, recoupment, counterclaim or defense, whether
arising out of transactions concerning the Receivable or otherwise which could
render the amount collectable thereunder less than the Net Realizable Value
thereof;
(h) which prior to the transfer hereunder was owned by the Seller, free and
clear of any Adverse Claim, and, after such transfer, such Receivable did not
become subject to any Adverse Claim as a result of any action or inaction of the
Seller or the applicable Health Care Provider (other than a lien granted
hereunder or under the Holland Loan Agreement);
(i) upon each sale or contribution hereunder, the Purchaser shall acquire a
valid and perfected ownership interest in each Transferred Receivable and in the
Related Security and Collections with respect thereto, free and clear of any
Adverse Claim except as provided hereunder. No effective financing statement or
other instrument similar in effect covering any Transferred Receivable or the
Related Security or Collections with respect thereto shall at any time be on
file in any recording office except such as may be filed in favor of (i) the
agent relating to the Holland Loan Agreement, (ii) the Seller relating to the
Purchase Agreement or the Loan Agreement, and (iii) the Purchaser relating to
this Agreement;
(j) which is entitled to be paid pursuant to the terms of the related
Contract, has not been paid in full or been compromised, adjusted, extended,
satisfied, subordinated, rescinded or modified, and is not subject to
compromise, adjustment, extension, satisfaction, subordination, rescission, or
modification by the related Health Care Provider or the Seller which could
render the amount collectable thereunder less than the Net Realizable Value
thereof;
(k) in respect of which the related Health Care Provider has submitted all
necessary documentation for payment of such Receivable to the Payor and has
fulfilled all its other obligations in respect thereof;
(l) which is an "account" or "general intangible" within the meaning of the
UCC of the jurisdiction where the related Health Care Provider's, the Seller's
and the Purchaser's chief executive office is located;
(m) which does not contravene in any material respect any laws, rules or
regulations applicable thereto (including, without limitation, laws, rules and
regulations relating to usury, consumer protection, truth in lending, fair
credit billing, fair credit reporting, equal credit opportunity, fair debt
collection practices and privacy) and no party to the related Contract is in
violation of any such law, rule or regulation which could have a material
adverse effect on the collectibility of such Transferred Receivable, the value
of such Transferred Receivable or the payment terms of such Transferred
Receivable;
6
<PAGE>
(n) which does not arise from a transaction for which any additional
performance by the related Health Care Provider or acceptance or other act of
the Payor remains to be performed as a condition to any payments on such
Transferred Receivable;
(o) in respect of which there are no proceedings or investigations pending
or threatened before any Government Entity (i) asserting the invalidity of such
Transferred Receivable or the related Contract, (ii) asserting the bankruptcy or
insolvency of the related Payor, (iii) seeking the payment of such Transferred
Receivable or payment and performance of the related Contract or (iv) seeking
any determination or ruling that might materially and adversely affect the
validity or enforceability of such Transferred Receivable or the related
Contract;
(p) in which the interest of the Seller, if such Transferred Receivable is
a Loan Receivable, (i) represents funds which have previously been disbursed or
will be disbursed during the same day to a Health Care Provider, (ii) was
acquired pursuant to documentation consistent with the Seller's standard loan
administration and documentation policies and procedures, and (iii) is
collateralized by Receivables of Health Care Providers which Receivables do not
represent self-pay obligations of individual recipients of services from the
related Health Care Providers;
(q) in which the interest of the Seller, if such Transferred Receivable is
a Purchased Receivable, (i) is a Receivable the purchase price of which has been
disbursed or will be disbursed during the same day to a Health Care Provider,
(ii) was acquired pursuant to documentation consistent with the Seller's
standard receivables purchase administration and documentation policies and
procedures, and (iii) which does not represent self-pay obligations of
individual recipients of services from the related Health Care Providers;
(r) which, if such Transferred Receivable is a Loan Receivable, does not
have a due date later than three (3) Years from the date of the related Loan
Agreement;
(s) which, if such Transferred Receivable is a Purchased Receivable, does
not have a Batch Payoff Period longer than 180 days from the date the related
invoice was generated;
(t) which may not be modified or extended in any way in a manner
inconsistent with the Credit and Collection Policy or the extension of the Batch
Payoff Period;
(u) the Medicare and Medicaid cost reports of the Health Care Provider
which originated such Transferred Receivable for all cost reporting periods
ending on or before the date of the last audited cost report have been examined
and audited by (i), as to Medicaid, the applicable state agency or other HCFA-
designated agents or agents of such state agency, charged with such
responsibility or (ii), as to Medicare, the Medicare intermediary or other HCFA-
designated agents charged with such responsibility; and there is no basis for
any
7
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Government Entity to assert an offset against each such Health Care Provider
which could render the amount collectable thereunder less than the Net
Realizable Value thereof;
(v) the goods of services provided and reflected by such Transferred
Receivable were received by the applicable patient;
(w) the insurance policy, contract or other instrument obligating the Payor
(who is not a Government Entity) to make payment with respect to such
Transferred Receivable (i) does not contain any provision prohibiting the grant
of a security interest in such payment obligation from the patient to the
applicable Health Care Provider, from such Health Care Provider to the Seller,
from the Seller to the Purchaser or from the Purchaser to the agent under the
Holland Loan Agreement, (ii) has been duly authorized and, together with the
applicable Transferred Receivable, constitutes the legal, valid and binding
obligation of such Payor in accordance with its terms, (iii) together with the
applicable Transferred Receivable, does not contravene in any material respect
any requirement of law applicable thereto, and (iv) was in full force and effect
and applicable to the patient at the time the goods or services constituting the
basis for the Transferred Receivable were sold or performed; and
(x) the insurance policy, contract or other instrument obligating a
Government Entity to make payment with respect to such Transferred Receivable
(i) has been duly authorized and, together with the applicable Transferred
Receivable, constitutes the legal, valid and binding obligation of the
Government Entity in accordance with its terms, (ii) together with the
applicable Transferred Receivable, does not contravene in any material respect
any requirement of law applicable thereto, and (iii) was in full force and
effect and applicable to the patient at the time the goods or services
constituting the basis for the Transferred Receivable were sold or performed.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time, and the regulations promulgated and rulings issued
thereunder.
"Event of Termination" has the meaning specified in Section 7.1.
--------------------
"Facility" means the willingness of the Purchaser to consider making
--------
Purchases of Receivables from the Seller from time to time pursuant to the terms
of this Agreement.
"Facility Termination Date" means the earliest of (i) the Program Maturity
-------------------------
Date (as defined in the Holland Loan Agreement), (ii) the date of termination of
the Facility pursuant to Section 7.1 and (iii) the date which the Seller
designates by at least two Business Days' notice to the Purchaser.
"Federal Funds Rate" means, for any period, a fluctuating interest rate per
------------------
annum equal for each day during such period to the weighted average of the rates
on overnight Federal funds transactions with members of the Federal Reserve
System arranged by Federal
8
<PAGE>
funds brokers, as published for such day (or, if such day is not a Business Day,
for the next preceding Business Day) by the Federal Reserve Bank of New York,
or, if such rate is not so published for any day which is a Business Day, the
average of the quotations for such day on such transactions received by
Citibank, N.A. from three Federal funds brokers of recognized standing selected
by it.
"Fleet" means Fleet Capital Corporation, a Rhode Island corporation.
-----
"General Trial Balance" of the Seller on any date means a list of the
---------------------
Purchased Receivables owned by the Seller and Loan Receivables in which the
Seller has a security interest (whether in the form of a computer printout,
magnetic tape or diskette) on such date, listing Payors and the Receivables
respectively owed by such Payors on such date together with the aged Outstanding
Balances of such Receivables, in form and substance satisfactory to the
Purchaser.
"Government Entity" means the United States of America, any state, any
-----------------
political subdivision of a state and any agency or instrumentality of the United
States of America or any state or political subdivision thereof and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government. Payments from Government Entities
shall be deemed to include payments governed under the Social Security Act (42
U.S.C. 1395, et seq.), including payments under Medicare and Medicaid, and
payments administered or regulated by HCFA.
"Health Care Provider" means a Person whose primary business is to provide
--------------------
health care services to individuals, and who finances receivables through the
Seller pursuant to either a Loan Agreement or a Purchase Agreement.
"HCFA" means the Health Care Financing Administrations of the United States
----
Department of Health and Human Services.
"Holland Loan Agreement" means that certain Receivables Loan and Security
----------------------
Agreement, dated as of the date hereof, among the Purchaser, as borrower, the
Seller, as servicer, Holland Limited Securitization, Inc., as lender, and ING
Baring (U.S.) Capital Markets, Inc., as agent, as amended or restated from time
to time.
"Incipient Event of Termination" means an event that but for notice or
------------------------------
lapse of time or both would constitute an Event of Termination.
"Indemnified Amounts" has the meaning specified in Section 8.1.
-------------------
"Loan Agreement" means each Loan and Security Agreement between the Seller
--------------
and a Health Care Provider whereby the Seller makes loans to such Health Care
Provider which loans are secured by an interest in Loan Receivables and which is
either substantially in
9
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the form of the agreement annexed hereto as Exhibit D or in such other form as
---------
the Purchaser may approve.
"Loan Receivables" means Receivables that have been granted as security for
----------------
loans made by the Seller pursuant to a Loan Agreement.
"Lock-Box Bank" means any of the banks or other financial institutions
-------------
holding one or more Lock-Box Accounts.
"Lock-Box Account" has the meaning specified in Section 2.1.
----------------
"Maturity Date" has the meaning specified in Section 10.4.
-------------
"Net Realizable Value" means with respect to any Transferred Receivable the
--------------------
amount estimated by the Seller (at the time (i) of acquisition thereof by the
Seller in the case of Purchased Receivables or (ii) such Receivable was granted
to the Seller as security for loans made by the Seller in the case of Loan
Receivables) to be the net collectable value of such Transferred Receivable, in
its sole discretion in accordance with the Credit and Collection Policy.
"Note" means a promissory note executed and delivered by a Health Care
----
Provider evidencing a loan made by the Seller (or a predecessor in interest
thereof) pursuant to a Loan Agreement.
"Outstanding Balance" of any Transferred Receivable at any time means the
-------------------
Adjusted Net Realizable Value thereof, less all Collections received in respect
of such Transferred Receivable.
"Payor" means an Insurer or Government Entity, as applicable, obligated to
-----
make payments under a Receivable.
"Person" means an individual, partnership, corporation (including a
------
business trust), joint stock company, trust, unincorporated association, joint
venture or other entity, or a government or any political subdivision or agency
thereof.
"Purchase" has the meaning in Section 2.1.
--------
"Purchase Agreement" means each Receivables Purchase and Sale Agreement
------------------
between the Seller and a Health Care Provider pursuant to which the Seller
purchases Receivables from such Health Care Provider and which agreement is
substantially in the form of Exhibit C hereto, or in such other form as the
---------
Purchaser may approve.
"Purchase Date" has the meaning specified in Section 2.1.
-------------
10
<PAGE>
"Purchase Price" means, with respect to any Transferred Asset, an amount
--------------
equal to the initial principal amount of the loan advanced or to be advanced to
the Purchaser pursuant to the Holland Loan Agreement which is attributable to
the pledge of such Transferred Assets by the Purchaser pursuant to the Holland
Loan Agreement.
"Purchased Receivables" means Receivables purchased from a Health Care
---------------------
Provider by the Seller pursuant to a Purchase Agreement.
"Purchaser Loan" has the meaning specified in Section 10.1.
--------------
"Receivables" means the indebtedness (whether constituting an account,
-----------
chattel paper, instrument or general intangible) arising from the provision of
health care services by a Health Care Provider including all rights to
reimbursement under any agreements with and payments from Payors and the right
to payment of any interest or finance charges and other obligations with respect
to such indebtedness, and all proceeds of the foregoing.
"Related Security" means with respect to any Receivable:
----------------
(a) any and all security interests or liens and property subject thereto
from time to time purporting to secure payment of such Receivable;
(b) all guarantees, indemnities, warranties, letters of credit, insurance
policies and proceeds and premium refunds thereof and other agreements or
arrangements of whatever character from time to time supporting or securing
payment of such Receivable; provided, however, if any such guarantee, indemnity,
-------- -------
warranty, letter of credit insurance policy, agreement, or arrangement
supporting or securing payment of such Receivables support or secure payment of
any Receivable which is not a Transferred Receivable, only the portion
supporting or securing the Transferred Receivables shall be Related Security;
(c) the documents, books, records and other information (including, without
limitation, computer programs, tapes, disks, punch cards, data processing
software and related property and rights) relating to such Receivables and the
related Payor;
(d) all of the Seller's right and title to, interest in, and rights under,
the Loan Agreement (and each related Note) or the Purchase Agreement relating to
such Receivable to the extent that it relates to such Receivable and all UCC
financing statements filed under or in connection therewith;
(e) all liquidation proceeds from the Receivables; and
(f) all proceeds of the foregoing.
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<PAGE>
"Remittance Date" means the tenth day of each month, or if such date is not
---------------
a Business Day, the next succeeding Business Day.
"Remittance Period" means, as to any Remittance Date, the period beginning
-----------------
on the first day of the most recently ended calendar month and ending on the
last day of the most recently ended calendar month. The initial Remittance
Period shall begin on and shall end on dates mutually agreeable to the Seller
and the Purchaser.
"Seller Interest Rate" has the meaning specified in Section 10.4.
--------------------
"Seller Note" has the meaning specified in Section 10.6.
-----------
"Seller Report" means a report, in form and substance satisfactory to the
-------------
Purchaser, furnished by the Servicer to the Purchaser pursuant to Section
6.2(b).
"Servicer" means at any time the Person then authorized pursuant to Section
--------
6.1 to service, administer and collect Transferred Receivables.
"Servicer Fee" has the meaning specified in Section 6.3.
------------
"Settlement Date" means the 10th day of each month (or if such day is not a
---------------
Business Day, the immediately succeeding Business Day); provided, however, that
-------- -------
following the occurrence of an Event of Termination, Settlement Dates shall
occur on such days as are selected from time to time by the Purchaser or its
designee in a written notice to the Servicer.
"Sold Receivable" means a Receivable which the Seller has transferred and
---------------
assigned to the Purchaser and which, pursuant to the procedure described in
Section 2.1, has been identified as a Sold Receivable.
"Transferred Assets" means those assets specified in Section 2.1 hereof.
------------------
"Transferred Receivable" means a Sold Receivable or a Contributed
----------------------
Receivable.
"UCC" means the Uniform Commercial Code as from time to time in effect in
---
the specified jurisdiction.
SECTION 1.2 Other Terms. All accounting terms not specifically defined
-----------
herein shall be construed in accordance with generally accepted accounting
principles. All terms used in Article 9 of the UCC in the State of New York, and
not specifically defined herein, are used herein as defined in such Article 9.
12
<PAGE>
ARTICLE II
AMOUNTS AND TERMS OF PURCHASES AND CONTRIBUTIONS
SECTION 2.1 Facility. (a) On the terms and conditions hereinafter
--------
set forth and without recourse (except to the extent as is specifically provided
herein), the Seller, from time to time during the period from the date hereof to
the Facility Termination Date, hereby agrees to sell, assign, transfer and
convey to the Purchaser, and the Purchaser hereby agrees to purchase from the
Seller (each such purchase, a "Purchase"), all of the Seller's right, title and
interest, from time to time, in and to (i) all Purchased Receivables and/or Loan
Receivables of Health Care Providers identified by the Seller from time to time,
together with all Related Security, including, without limitation, all
Collections and other monies due and to become due to the Seller in respect of
such Purchased Receivables or Loan Receivables and any security therefor
received on or after the applicable date on which the assignment of the
Purchased Receivables or Loan Receivables occurs (each a "Purchase Date"), (ii)
all rights of the Seller in, to and under (but not any obligations or
liabilities in respect of) each Loan Agreement and each Purchase Agreement
relating to each Transferred Receivable including, without limitation, all
monies due and to become due to the Borrower under or in connection therewith,
(iii) the Seller's right, tile and interest in and to any lockbox, concentration
account or other bank or similar accounts (each a "Lock-Box Account") relating
to the collection of Transferred Receivables (whether now existing or hereafter
established) and all funds held therein and all income from the investment of
funds therein in each case to the extent relating the Transferred Receivables,
and (iv) all proceeds of the foregoing property described in clauses (i) through
(iii) above, including interest, dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed in respect of or
in exchange for or on account of the sale or other disposition of any or all of
the then existing Transferred Receivables (the foregoing are referred to herein
collectively as the "Transferred Assets").
(b) The Seller hereby agrees to send notice in the form attached as
Exhibit H hereto to Fleet (at the address indicated on such form) promptly upon
the identification by the Seller pursuant to Section 2.1(a) of a Health Care
Provider whose Receivables will be purchased hereunder and will require Fleet to
acknowledge receipt of such notice.
SECTION 2.2 Purchase and Contribution of Transferred Assets. The
-----------------------------------------------
Seller shall give the Purchaser at least one Business Day's notice of its
request for the initial Purchase hereunder, and such request for the initial
Purchase shall specify the date of such Purchase (which shall be a Business Day)
and the Purchase Price to be paid in connection with such Purchase. On the
Purchase Date, the Purchaser shall, upon satisfaction of the applicable
conditions set forth in Article III, pay the Purchase Price in consideration for
the Purchase of Transferred Assets on such Purchase Date by deposit of such
amount in same day funds to the Seller's account designated by the Seller. To
the extent the Transferred Assets have any value
13
<PAGE>
in excess of the Purchase Price therefor, such value shall be deemed a
contribution by the Seller to the capital of the Purchaser as of the related
Purchase Date. The Purchaser shall maintain accurate books records of the
relative allocation of each Purchase of Transferred Assets as a sale and a
capital contribution.
SECTION 2.3 Collections. (a) On each Business Day, the Servicer
-----------
shall deposit or shall cause to be deposited into an account of the Purchaser or
the Purchaser's assignee all Collections of Transferred Receivables then held by
the Servicer.
(b) Only Collections of Transferred Receivables shall be deposited
into the account of the Purchaser or the Purchaser's assignee. Notwithstanding
the foregoing, the deposit of Collections which are not Collections of
Transferred Receivables into an account of the Purchaser or the Purchaser's
assignee shall not constitute a default hereunder if (i) the Seller shall advise
the Purchaser no later than five Business Days after such deposit of such
deposit and, on the Business Day following such notice, the Purchaser shall
remit, or shall cause to be remitted, all Collections so deposited which are
identified, to the Purchaser's satisfaction, to be Collections of Receivables
which are not Transferred Receivables to the Seller and (ii) such Collections
not on account of Transferred Receivables at no time exceeded 10% of all
Collections in such account at such time.
SECTION 2.4 Settlement Procedures. (a) If on any day the
---------------------
Outstanding Balance of any Sold Receivable is reduced, adjusted or cancelled as
a result of any cash discount or other adjustment made by the Seller, or any
set-off or dispute in respect of any claim by the Payor thereof against the
Seller (whether such claim arises out of the same or a related transaction or an
unrelated reaction but excluding adjustments, reductions or cancellations in
---------
respect of such Payor's bankruptcy), the Seller shall be deemed to have received
on such day a Collection of such Sold Receivable in the amount of such reduction
or adjustment. The Seller shall pay to the Servicer on or prior to the next
Settlement Date all amounts deemed to have been received pursuant to this
subsection.
(b) Upon discovery by the Seller or the Purchaser of a breach of any
of the representations and warranties made by the Seller in Section 4.1(j) with
respect to any Transferred Receivable, such party shall give prompt written
notice thereof to the other party, as soon as practicable and in any event
within three Business Days following such discovery and the Seller shall be
deemed to have received on such day a Collection of such Transferred Receivable
in full. The Seller shall pay to the Servicer on or prior to the next
Settlement Date all amounts deemed to have been received pursuant to this
subsection.
(c) Except as stated in subsection (a) or (b) of this Section 2.4 or
as otherwise required by law or the underlying Contract, all Collections from a
Payor of any Transferred Receivable shall be applied to the Receivables of such
Payor in the order of the age of such Receivables, starting with the oldest such
Receivable, unless such Payor designates its payment for application to specific
Receivables.
14
<PAGE>
SECTION 2.5 Payments and Computations, Etc. (a) All amounts to be
------------------------------
paid or deposited by the Seller or the Servicer hereunder shall be paid or
deposited no later than 11:00 A.M. (New York City time) on the day when due in
same day funds to the Purchaser's account designated from time to time in
writing by the Purchaser.
(b) The Seller shall, to the extent permitted by law, pay to the
Purchaser interest on any amount not paid or deposited by the Seller (whether as
Servicer or otherwise) when due hereunder at an interest rate per annum equal to
2% per annum above the Base Rate, payable on demand.
(c) All computations of interest and all computations of fees
hereunder shall be made on the basis of a year of 360 days for the actual number
of days (including the first but excluding the last day) elapsed. Whenever any
payment or deposit to be made hereunder shall be due on a day other than a
Business Day, such payment or deposit shall be made on the next succeeding
Business Day and such extension of time shall be included in the computation of
such payment or deposit.
ARTICLE III
CONDITIONS OF PURCHASES
SECTION 3.1 Conditions Precedent to Initial Purchase from the Seller.
--------------------------------------------------------
The initial Purchase of Receivables from the Seller hereunder is subject to the
conditions precedent that the Purchaser shall have received on or before the
date of such Purchase the following, each (unless otherwise indicated) dated
such date, in form and substance satisfactory to the Purchaser:
(a) Certified copies of the resolutions of the Board of Directors of
the Seller approving this Agreement and certified copies of all documents
evidencing other necessary corporate action and governmental approvals, if
any, with respect to this Agreement.
(b) A certificate of the Secretary or Assistant Secretary of the
Seller certifying the names and true signatures of the officers of the
Seller authorized to sign this Agreement and the other documents to be
delivered by it hereunder.
(c) Executed financing statements, in form suitable for filing, naming
the Seller as the debtor and the Purchaser as the secured party, or other
similar instruments or documents, as the Purchaser may deem necessary or
desirable under the UCC of all appropriate jurisdictions or other
applicable law to perfect the Purchaser's ownership of and security
interest in the Transferred Assets.
15
<PAGE>
(d) Evidence of the filing of, or duly executed in form suitable for
filing, proper financing statements, if any, necessary (x) to release all
Adverse Claims or (y) to subordinate all security interests which do not
constitute Adverse Claims, in each case, of any Person in the Transferred
Assets previously granted by the Seller.
(e) Completed requests for information, dated on or before the date of
such initial Purchase, listing all other effective financing statements
filed in the jurisdictions referred to in subsection (c) above that name
the Seller as debtor, together with copies of such other financing
statements (none of which shall cover any Transferred Receivables,
Contracts or Related Security).
(f) A favorable opinion of Battle Fowler LLP, counsel for the Seller,
substantially in the form of Exhibit A hereto, and as to such other matters
as the Purchaser may reasonably request.
(g) Evidence that each entity holding a Lock-Box Account has been
notified of the Purchase of the Transferred Assets by the Purchaser and has
been directed and has agreed in writing to remit funds payable from such
Lock-Box Account to the Purchaser or its assignee.
SECTION 3.2 Conditions Precedent to All Purchases. Each Purchase
-------------------------------------
(including the initial Purchase) hereunder shall be subject to the further
conditions precedent that:
(a) with respect to any such Purchase, on or prior to the date of such
Purchase, the Seller shall have delivered to the Purchaser, (i) if
requested by the Purchaser, the Seller's General Trial Balance (which if in
magnetic tape or diskette format shall be compatible with the Purchaser's
computer equipment) as of a date not more than 31 days prior to the date of
such Purchase, and (ii) a written report identifying, among other things,
the Receivables to be included in such Purchase and the then outstanding
Sold Receivables and the aged balance thereof, in each case correlated to
Purchases;
(b) with respect to any such Purchase, on or prior to the date of such
Purchase, the Seller shall have delivered to the Purchaser, in form and
substance satisfactory to the Purchaser, a completed Seller Report for the
most recently ended reporting period for which information is required
pursuant to Section 6.2(b) and containing such additional information as
may reasonably be requested by the Purchaser;
(c) the Seller shall have marked its master data processing records
and, at the request of the Purchaser, each Contract giving rise to Sold
Receivables and all other relevant records evidencing the Receivables which
are the subject of such
16
<PAGE>
Purchase with a legend, acceptable to the Purchaser, stating that the
Seller's interest in such Receivables, the Related Security and Collections
with respect thereto, have been sold and assigned in accordance with this
Agreement; and
(d) on the date of such Purchase the following statements shall be
true (and the Seller, by accepting the amount of such Purchase, shall be
deemed to have certified that):
(i) The representations and warranties contained in Section
4.1 are correct on and as of the date of such Purchase as though made
on and as of such date,
(ii) No event has occurred and is continuing, or would result
from such Purchase, that constitutes an Event of Termination or would
constitute an Incipient Event of Termination and
(iii) The Purchaser shall not have delivered to the Seller a
notice that the Purchaser shall not make any further Purchases
hereunder; and
(e) the Purchaser shall have received such other approvals, opinions
or documents as the Purchaser may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 Representations and Warranties of the Seller. The Seller
--------------------------------------------
represents and warrants as follows:
(a) The Seller is a corporation duly incorporated, validly existing
and in good standing under the laws of Delaware and is duly qualified to do
business, and is in good standing, in every jurisdiction where the nature
of its business requires it to be so qualified, unless the failure to so
qualify would not have a material adverse effect on (i) the interests of
the Purchaser hereunder, (ii) the collectibility of the Transferred
Receivables, or (iii) the ability of the Seller or the Servicer to perform
their respective obligations hereunder.
(b) The execution, delivery and performance by the Seller of this
Agreement and the other documents to be delivered by it hereunder,
including the Seller's sale and contribution of Receivables hereunder and
the Seller's use of the proceeds of Purchases, (i) are within the Seller's
corporate powers, (ii) have been duly authorized by all necessary corporate
action, (iii) do not contravene (1) the Seller's charter or by-
17
<PAGE>
laws, (2) any law, rule or regulation applicable to the Seller, (3) any
contractual restriction binding on or affecting the Seller or its property or
(4) any order, writ, judgment, award, injunction or decree binding on or
affecting the Seller or its property, and (iv) do not result in or require the
creation of any lien, security interest or other charge or encumbrance upon or
with respect to any of its properties (except for the transfer of the Seller's
interest in the Transferred Receivables pursuant to this Agreement). This
Agreement has been duly executed and delivered by the Seller.
(c) No authorization or approval or other action by, and no notice to
or filing with, any governmental authority or regulatory body is required for
the due execution, delivery and performance by the Seller of this Agreement or
any other document to be delivered thereunder.
(d) This Agreement constitutes the legal, valid and binding obligation
of the Seller enforceable against the Seller in accordance with its terms,
except to the extent enforceability may be effected or limited by applicable
bankruptcy, insolvency, moratorium, reorganization or other similar laws
generally affecting creditors' rights and by equitable principals.
(e) Sales and contributions made pursuant to this Agreement will
constitute a valid sale, transfer, and assignment of the Transferred Receivables
to the Purchaser, enforceable against creditors of, and purchasers from, the
Seller. The Seller shall have no remaining property interest in any Transferred
Receivable.
(f) The consolidated balance sheets of the parent of the Seller and
its subsidiaries as at December 31, 1996, and the related statements of income
and retained earnings of the Seller and its subsidiaries for the fiscal year
then ended, copies of which have been furnished to the Purchaser, fairly present
the financial condition of the Seller and its subsidiaries as at such date and
the results of the operations of the Seller and its subsidiaries for the period
ended on such date, all in accordance with generally accepted accounting
principles consistently applied, and since December 31, 1996 there has been no
material adverse change in the business, operations, property or financial or
other condition of the Seller.
(g) There is no pending or threatened action or proceeding affecting
the Seller or any of its subsidiaries before any court, governmental agency or
arbitrator which may materially adversely affect the financial condition or
operations of the Seller or any of its subsidiaries or the ability of the Seller
to perform its obligations under this Agreement, or which purports to affect the
legality, validity or enforceability of this Agreement.
18
<PAGE>
(h) No proceeds of any Purchase will be used to acquire any equity
security of a class which is registered pursuant to Section 12 of the Securities
Exchange Act of 1934.
(i) No transaction contemplated hereby requires compliance with any
bulk sales act or similar law.
(j) Each Transferred Receivable is an Eligible Receivable, and prior
to its sale or contribution hereunder the Seller owns each Purchased Receivable
and has a first priority perfected security interest in each Loan Receivable
free and clear of any Adverse Claim (other than any Adverse Claim arising solely
as the result of any action taken by the Purchaser). When the Purchaser makes a
Purchase it shall acquire valid and perfected first priority ownership of each
Sold Receivable and the Related Security and Collections with respect thereto
free and clear of any Adverse Claim (other than any Adverse Claim arising solely
as the result of any action taken by the Purchaser), and no effective financing
statement or other instrument similar in effect covering any Transferred
Receivable, any interest therein, the Related Security or Collections with
respect thereto is on file in any recording office except such as may be filed
in favor of the Purchaser or its assigns in accordance with this Agreement.
(k) Each Seller Report (if prepared by the Seller, or to the extent
that information contained therein is supplied by the Seller), information,
exhibit, financial statement, document, book, record or report furnished or to
be furnished at any time by the Seller to the Purchaser in connection with this
Agreement is or will be accurate in all material respects as of its date or
(except as otherwise disclosed to the Purchaser at such time) as of the date so
furnished, and no such document contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements contained therein, in the light of the
circumstances under which they were made, not misleading.
(l) The principal place of business and chief executive office of the
Seller and the office where the Seller keeps its records concerning the
Transferred Receivables are located at the address or addresses referred to in
Section 5.1(b).
(m) Each Lock-Box Account (including the identity and address of the
entity holding each Lock-Box Account) is identified on Exhibit C hereto,
together with the account numbers of the Lock-Box Accounts (as the same may be
updated from time to time pursuant to Section 5.1(h)).
(n) Except as set forth on Schedule 4.01 (h), the Seller is not known
by and does not use any tradename or doing-business-as name.
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(o) With respect to any programs used by the Seller in the servicing
of the Receivables, no sublicensing agreements are necessary in connection
with the designation of a new Servicer pursuant to Section 6.1 (b) so that
such new Servicer shall have the benefit of such programs (it being
-- -----
understood that, however, the Servicer, if other than the Seller, shall be
---------- ----
required to be bound by a confidentiality agreement reasonably acceptable
to the Seller).
(p) The transfers of Transferred Receivables by the Seller to the
Purchaser pursuant to this Agreement, and all other transactions between
the Seller and the Purchaser, have been and will be made in good faith and
without intent to hinder, delay or defraud creditors of the Seller.
(q) If less than all of the Receivables of the Seller have been
transferred to the Purchaser pursuant to this Agreement, no selection
procedure was utilized by the Seller in selecting the Transferred
Receivables to be transferred to the Purchaser hereunder which is adverse
to the interests of the Purchaser or would reasonably be expected to result
in the Transferred Receivables containing a higher percentage of Defaulted
Receivables than the percentage of Defaulted Receivables in the Receivables
retained by the Seller.
ARTICLE V
COVENANTS
SECTION 5.1 Covenants of the Seller. From the date hereof until
-----------------------
the first day following the Facility Termination Date on which all of the
Transferred Receivables are either collected in full or become Defaulted
Receivables:
(a) Compliance with Laws, Etc. The Seller will comply in all material
--------------------------
respects with all applicable laws, rules, regulations and orders and
preserve and maintain its corporate existence, rights, franchises,
qualifications and privileges except to the extent that the failure so to
comply with such laws, rules and regulations or the failure so to preserve
and maintain such existence, rights, franchises, qualifications, and
privileges would not materially adversely affect the collectibility of the
Transferred Receivables or the ability of the Seller to perform its
obligations under this Agreement.
(b) Offices, Records and Books of Account. The Seller will keep its
-------------------------------------
principal place of business and chief executive office and the office where
it keeps its records concerning the Transferred Receivables at the address
of the Seller set forth under its name on the signature page to this
Agreement or, upon 30 days' prior written notice to the Purchaser, at any
other locations in jurisdictions where all actions required by Section
5.1(j) shall have been taken and completed. The Seller also will
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maintain and implement administrative and operating procedures (including,
without limitation, an ability to recreate records evidencing Transferred
Receivables and related Contracts in the event of the destruction of the
originals thereof), and keep and maintain all documents, books, records and
other information reasonably necessary or advisable for the collection of
all Transferred Receivables (including, without limitation, records
adequate to permit the daily identification of each new Transferred
Receivable and all Collections of and adjustments to each existing
Transferred Receivable). The Seller shall make a notation in its books and
records, including its computer files, to indicate which Receivables have
been sold or contributed to the Purchaser hereunder.
(c) Performance and Compliance with Contracts and Credit and
--------------------------------------------------------
Collection Policy. The Seller will, at its expense, timely and fully
-----------------
perform and comply with all material provisions, covenants and other
promises required to be observed by it under the Contracts related to the
Transferred Receivables, and timely and fully comply in all material
respects with the Credit and Collection Policy in regard to each
Transferred Receivable and the related Contract.
(d) Sales, Liens, Etc. Except for the sales and contributions of
-----------------
Receivables contemplated herein, the Seller will not sell, assign (by
operation of law or otherwise) or otherwise dispose of, or create or suffer
to exist any Adverse Claim upon or with respect to, any Transferred
Receivable, Related Security, related Contract or Collections, or upon or
with respect to any account to which any Collections of any Transferred
Receivable are sent, or assign any right to receive income in respect
thereof.
(e) Extension or Amendment of Transferred Receivables. Except as
-------------------------------------------------
provided in Section 6.2(c), the Seller will not extend, amend or otherwise
modify the terms of any Transferred Receivable, or amend, modify or waive
any term or condition of any Contract related thereto in a manner
inconsistent with the Credit and Collection Policy.
(f) Change in Business or Credit and Collection Policy. The Seller
--------------------------------------------------
will not make any change in the character of its business or in the Credit
and Collection Policy that would, in either case, materially adversely
affect the collectibility of the Transferred Receivables or the ability of
the Seller to perform its obligations under this Agreement.
(g) Audits. The Seller will, from time to time during regular
------
business hours as requested by the Purchaser or its assigns, permit the
Purchaser, or its agents, representatives or assigns, (i) to examine and
make copies of and abstracts from all books, records and documents
(including, without limitation, computer tapes and disks) in the possession
or under the control of the Seller relating to Transferred Receivables
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and the Related Security, including, without limitation, the related
Contracts, and (ii) to visit the offices and properties of the Seller for
the purpose of examining such materials described in clause (i) above, and
to discuss matters relating to Transferred Receivables and the Related
Security or the Seller's performance hereunder or under the Contracts with
any of the officers or employees of the Seller having knowledge of such
matters.
(h) Change in Payment Instructions to Payors. The Seller will not
----------------------------------------
add or terminate any bank or bank account as a Lock-Box Bank or Lock-Box
Account from those listed in Exhibit E to this Agreement, or make any
change in its instructions to Payors regarding payments to be made to any
Lock-Box Bank, unless the Purchaser shall have received notice of such
addition, termination or change (including an updated Exhibit E) and
executed copies of agreements with each new Lock-Box Bank or with respect
to each new Lock-Box Account.
(i) Deposits to Lock-Box Accounts. The Seller will deposit, or cause
-----------------------------
to be deposited, all Collections of Transferred Receivables (other than
Collections received from a Government Entity) into Lock-Box Accounts, and
the Seller will not deposit or otherwise credit, or cause or permit to be
so deposited or credited, to any Lock-Box Account cash or cash proceeds
other than Collections of Transferred Receivables.
(j) Further Assurances. (i) The Seller agrees from time to time, at
------------------
its expense, promptly to execute and deliver all further instruments and
documents, and to take all further actions, that may be necessary or
desirable, or that the Purchaser or its assignee may reasonably request, to
perfect, protect or more fully evidence the sale and contribution of
Receivables under this Agreement, or to enable the Purchaser or its
assignee to exercise and enforce its respective rights and remedies under
this Agreement. Without limiting the foregoing, the Seller will, upon the
request of the Purchaser or its assignee, (A) execute and file such
financing or continuation statements, or amendments thereto, and such other
instruments and documents, that may be necessary or desirable to perfect,
protect or evidence such Transferred Receivables; and (B) deliver to the
Purchaser copies of all Contracts relating to the Transferred Receivables
and all records relating to such Contracts and the Transferred Receivables,
whether in hard copy or in magnetic tape or diskette format (which if in
magnetic tape or diskette format shall be compatible with the Purchaser's
computer equipment).
(ii) The Seller authorizes the Purchaser or its assignee to file
financing or continuation statements, and amendments thereto and
assignments thereof, relating to the Transferred Receivables and the
Related Security, the related Contracts and the Collections with respect
thereto without the signature of the Seller where permitted by law. A
photocopy or other reproduction of this Agreement shall be sufficient as a
financing statement where permitted by law.
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(iii) The Seller shall perform its obligations under the Contracts
related to the Transferred Receivables to the same extent as if the
Transferred Receivables had not been sold or transferred.
(k) Reporting Requirements. The Seller will provide to the Purchaser
----------------------
the following:
(i) as soon as available and no later than 45 days after the end
of each of the first three quarterly fiscal periods in each fiscal year of
the Seller:
(A) a consolidated balance sheet of the Seller and its
consolidated subsidiaries as of the end of such quarter in each case
setting forth in comparative form the corresponding figures for the
most recent year-end for which an audited balance sheet has been
prepared (subject to normal year-end adjustments), together with any
related notes required in order to provide necessary disclosure in
accordance with generally accepted accounting principles; and
(B) consolidated statements of income, stockholders' equity and
cash flow of the Seller and its consolidated subsidiaries, for that
quarter and for the portion of the fiscal year ending with such
quarter, in each case setting forth in comparative form the
corresponding figures for the comparable period one year prior thereto
(subject to normal year-end adjustments), together with any related
notes required in order to provide necessary disclosures in accordance
with generally accepted accounting principles, accompanied by a
certificate signed by the financial vice president, treasurer, chief
financial officer or controller of the Seller stating that such
financial statements present fairly the financial condition and
results of operations of the companies being reported upon and have
been prepared in accordance with generally accepted accounting
principles, consistently applied.
(ii) as soon as available and no later than 105 days after the
end of each fiscal year of the Seller:
(A) a consolidated balance sheet of the Seller and its
consolidated subsidiaries, all as of the end of the fiscal year; and
(B) consolidated statements of income, stockholders' equity and
cash flow of the Seller and its consolidated subsidiaries, for that
fiscal year; setting forth in each case in comparative form the
figures for the previous fiscal year and accompanied by an opinion of
a firm of independent certified public accountants of recognized
standing acceptable to the Purchaser stating that such financial
statements present fairly the financial condition of the companies
being
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reported upon and have been prepared in accordance with generally
accepted accounting principles consistently applied (except for
changes in application in which such accountants concur).
(iii) as soon as possible and in any event within five days after
the occurrence of each Event of Termination or Incipient Event of
Termination, a statement of the chief financial officer of the Seller
setting forth details of such Event of Termination or Incipient Event of
Termination and the action that the Seller has taken and proposes to take
with respect thereto;
(iv) promptly after the sending or filing thereof, copies of all
reports that the Seller sends to any of its securityholders, and copies of
all reports and registration statements that the Seller or any subsidiary
files with the Securities and Exchange Commission or any national
securities exchange;
(v) promptly after the filing or receiving thereof, copies of
all reports and notices that the Seller or any Affiliate files under ERISA
with the Internal Revenue Service or the Pension Benefit Guaranty
Corporation or the U.S. Department of Labor or that the Seller or any
Affiliate receives from any of the foregoing or from any multiemployer plan
(within the meaning of Section 4001 (a)(3) of ERISA) to which the Seller or
any Affiliate is or was, within the preceding five years, a contributing
employer, in each case in respect of the assessment of withdrawal liability
or an event or condition which could, in the aggregate, result in the
imposition of liability on the Seller and/or any such Affiliate in excess
of $1,000,000.
(vi) at least ten Business Days prior to any change in the
Seller's name, a notice setting forth the new name and the effective date
thereof;
(vii) concurrently with the delivery of each Seller Report by the
Servicer, a statement as to whether or not all of the Receivables under all
Contracts arising during the immediately preceding month have been
transferred by the Seller to the Purchaser and, if less than all of such
Receivables have been transferred, a summary of those Receivables not
transferred; and
(viii) such other information respecting the Transferred
Receivables or the condition or operations, financial or otherwise, of the
Seller as the Purchaser may from time to time reasonably request.
(l) Separate Conduct of Business. The Seller will: (i) maintain
----------------------------
separate corporate records and books of account from those of the
Purchaser; (ii) conduct its business from an office separate from that of
the Purchaser; (iii) ensure that all oral and written communications,
including without limitation, letters, invoices, purchase orders,
contracts, statements and applications, will be made solely in its own
name; (iv)
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have stationery and other business forms and a mailing address and a
telephone number separate from those of the Purchaser; (v) not hold itself
out as having agreed to pay, or as being liable for, the obligations of the
Purchaser; (vi) not engage in any transaction with the Purchaser except as
contemplated by this Agreement or as permitted by the Holland Loan
Agreement; (vii) continuously maintain as official records the resolutions,
agreements and other instruments underlying the transactions contemplated
by this Agreement; and (viii) disclose on its annual financial statements
(A) the effects of the transactions contemplated by this Agreement in
accordance with generally accepted accounting principles and (B) that the
assets of the Purchaser are not available to pay its creditors.
(m) The Seller shall take all steps necessary to ensure that (i) none
of its Affiliates engages primarily in the business of purchasing
Receivables of Health Care Providers or making loans to Health Care
Providers secured by the Receivables thereof and (ii) any such business
formerly conducted by an Affiliate of the Seller shall be conducted by the
Seller on and after the date hereof.
(n) Delivery of Notes. The Seller shall deliver each Note executed by
-----------------
a Health Care Provider pursuant to a Loan Agreement as follows (i) in the
case of Notes executed on or prior to the date hereof, to the Purchaser (or
its assignee) on or prior to the date hereof and (ii) in the case of Notes
executed after the date hereof, to the Purchaser (or its assignee) no later
than the Business Day following execution and delivery of any such Note to
the Seller; it being agreed and understood by the parties hereto that (i)
each such Note delivered shall have been duly endorsed and pledged by the
Seller to the Purchaser.
SECTION 5.2 Grant of Security Interest. To secure all obligations
--------------------------
of the Seller arising in connection with this Agreement, and each other
agreement entered into in connection with this Agreement, whether now or
hereafter existing, due or to become due, direct or indirect, or absolute or
contingent, including, without limitation, Indemnified Amounts, payments on
account of Collections received or deemed to be received, and any other amounts
due the Purchaser hereunder, the Seller hereby assigns and grants to Purchaser a
security interest in all of the Seller's right, title and interest now or
hereafter existing in, to and under all Receivables which do not constitute
Transferred Receivables, the Related Security and all Collections with regard
thereto. The Purchaser hereby acknowledges that the foregoing security interest
shall be subject and subordinate to the security interest in such assets in the
favor of Fleet Bank.
SECTION 5.3 Covenant of the Seller and the Purchaser. The Seller
----------------------------------------
and the Purchaser have structured this Agreement with the intention that each
Purchase of Receivables hereunder be treated as a sale of such Receivables by
the Seller to the Purchaser for all purposes. The Seller and the Purchaser
shall record each Purchase as a sale or purchase, as the case may be, on its
books and records, and reflect each Purchase in its
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financial statements and tax returns as a sale or purchase, as the case may be.
In the event that, contrary to the mutual intent of the Seller and the
Purchaser, any Purchase of Receivables hereunder is not characterized as a sale,
the Seller shall, effective as of the date hereof, be deemed to have granted
(and the Seller hereby does grant) to the Purchaser a first priority security
interest in and to any and all Receivables and the proceeds thereof to secure
the repayment of all amounts advanced to the Seller hereunder with accrued
interest thereon, and this Agreement shall be deemed to be a security agreement.
ARTICLE VI
ADMINISTRATION AND COLLECTION
SECTION 6.1 Designation of Servicer. The servicing, administration
-----------------------
and collection of the Transferred Receivables shall be conducted by such Person
(the "Servicer") so designated hereunder from time to time. The Seller is hereby
--------
designated as, and hereby agrees to perform the duties and obligations of, the
Servicer pursuant to the terms hereof and the parties hereto agree and
acknowledge that the Seller shall act as Servicer hereunder until the occurrence
of an Event of Default under the Holland Loan Agreement. Upon the occurrence of
an event of default under the Holland Loan Agreement, the Seller agrees that,
upon notice to the Seller from the Purchaser or its designee, the Seller will
terminate its activities as Servicer hereunder in a manner which the Purchaser
(or its designee) believes will facilitate the transition of the performance of
such activities to the new Servicer, and the Seller shall use its best efforts
to assist the Purchaser (or its designee) to take over the servicing,
administration and collection of the Transferred Receivables, including, without
limitation, providing access to and copies of all computer tapes or disks and
other documents or instruments that evidence or relate to Transferred
Receivables maintained in its capacity as Servicer and access to all employees
and officers of the Seller responsible with respect thereto. The Purchaser at
any time after giving such notice may designate as Servicer any Person
(including itself) to succeed the Seller or any successor Servicer, if such
Person shall consent and agree to the terms hereof. The Servicer may, with the
prior written consent of the Purchaser, subcontract with any other Person for
the servicing, administration or collection of Transferred Receivables. Any
such subcontract shall not affect the Servicer's liability for performance of
its duties and obligations pursuant to the terms hereof.
SECTION 6.2 Duties of Servicer. (a) The Servicer shall take or
------------------
cause to be taken all such actions as may be necessary or advisable to collect
each Transferred Receivable from time to time, all in accordance with applicable
laws, rules and regulations, with reasonable care and diligence, and in
accordance with the Credit and Collection Policy. The Purchaser hereby appoints
the Servicer, from time to time designated pursuant to Section 6.1, as agent to
enforce its ownership and other rights in the Transferred Receivables, the
Related Security and the Collections with respect thereto. In performing its
duties as Servicer, the Servicer shall exercise the same care and apply the same
policies as it would exercise and
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apply if it owned the Transferred Receivables and shall act in the best
interests of the Purchaser and its assignees.
(b) On the third Business Day prior to each Remittance Date, the
Servicer shall prepare and forward to the Purchaser (i) a Seller Report,
relating to all then outstanding Transferred Receivables, and the Related
Security and Collections with respect thereto, in each case, as of the close of
business of the Servicer on the last day of the immediately preceding Remittance
Period, and (ii) if requested by the Purchaser, a listing by Payor of all
Transferred Receivables correlating Sold Receivables and Purchases, together
with an aging report of such Transferred Receivables.
(c) The Seller shall deliver to the Servicer, and the Servicer shall
hold in trust for the Seller and the Purchaser in accordance with their
respective interests, all documents, instruments and records (including, without
limitation, computer tapes or disks) which evidence or relate to Transferred
Receivables.
(d) The Servicer shall as soon as practicable following receipt turn
over to the Seller or deposit directly to the Lock-Box Account designated by the
Seller any cash collections or other cash proceeds received with respect to
Receivables not constituting Transferred Receivables, less, in the event the
Seller is not the Servicer, all reasonable and appropriate out-of-pocket costs
and expenses of the Servicer of servicing, collecting and administering the
Receivables to the extent not covered by the Servicer Fee received by it.
(e) The Servicer also shall perform the other obligations of the
"Servicer" set forth in this Agreement with respect to the Transferred
Receivables.
(f) The Servicer shall be paid a servicing fee in consideration of
the performance of its duties hereunder, which servicing fee shall be in the
amount and payable at the times and in the priority specified in the Holland
Loan Agreement.
SECTION 6.3 Certain Rights of the Purchaser. (a) The Purchaser
-------------------------------
may, at any time, give notice of ownership and/or direct the Payors of
Transferred Receivables and any Person obligated on any Related Security, or any
of them, that payment of all amounts payable under any Transferred Receivable
shall be made directly to the Purchaser or its designee. The Seller hereby
transfers to the Purchaser (and its assigns and designees) the exclusive
ownership and control of the Lock-Box Accounts maintained by the Seller for the
purpose of receiving Collections.
(b) The Seller shall, at any time upon the Purchaser's request and at
the Seller's expense, give notice of such ownership to each Payor of Transferred
Receivables and direct that payments of all amounts payable under such
Transferred Receivables be made directly to the Purchaser or its designee.
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(c) At the Purchaser's request and at the Seller's expense, the Seller
and the Servicer shall (A) assemble all of the documents, instruments and other
records (including, without limitation, computer tapes and disks) that evidence
or relate to the Transferred Receivables, and the related Contracts and Related
Security, or that are otherwise necessary or desirable to collect the
Transferred Receivables, and shall make the same available to the Purchaser at a
place selected by the Purchaser or its designee, and (B) segregate all cash,
checks and other instruments received by it from time to time constituting
Collections of Transferred Receivables in a manner acceptable to the Purchaser
and, promptly upon receipt, remit all such cash, checks and instruments, duly
indorsed or with duly executed instruments of transfer, to the Purchaser or its
designee. The Purchaser shall also have the right to make copies of all such
documents, instruments and other records at any time.
(d) The Seller authorizes the Purchaser to take any and all steps in
the Seller's name and on behalf of the Seller that are necessary or desirable,
in the determination of the Purchaser, to collect amounts due under the
Transferred Receivables, including, without limitation, endorsing the Seller's
name on checks and other instruments representing Collections of Transferred
Receivables and enforcing the Transferred Receivables and the Related Security
and related Contracts.
SECTION 6.4 Rights and Remedies. (a) If the Seller or the
-------------------
Servicer fails to perform any of its obligations under this Agreement, the
Purchaser may (but shall not be required to) itself perform, or cause
performance of, such obligation, and, if the Seller (as Servicer or otherwise)
fails to so perform, the costs and expenses of the Purchaser incurred in
connection therewith shall be payable by the Seller as provided in Section 8.1
or Section 9.4 as applicable.
(b) The Seller shall perform all of its obligations under the
Contracts related to the Transferred Receivables to the same extent as if the
Seller had not sold or contributed Receivables hereunder and the exercise by the
Purchaser of its rights hereunder shall not relieve the Seller from such
obligations or its obligations with respect to the Transferred Receivables. The
Purchaser shall not have any obligation or liability with respect to any
Transferred Receivables or related Contracts, nor shall the Purchaser be
obligated to perform any of the obligations of the Seller thereunder.
(c) The Seller shall cooperate with the Servicer (if other than the
Seller) in collecting amounts due from Payors in respect of the Transferred
Receivables.
(d) The Seller hereby grants to Servicer an irrevocable power of
attorney, with full power of substitution, coupled with an interest, to take in
the name of the Seller all steps necessary or advisable to endorse, negotiate or
otherwise realize on any writing or other right of any kind held or transmitted
by the Seller or omitted or received by Purchaser (whether or not from the
Seller) in connection with any Transferred Receivable.
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SECTION 6.5 Transfer of Records to Purchaser. Each Purchase and
--------------------------------
contribution of Receivables hereunder shall include the transfer to the
Purchaser of all of the Seller's right and title to and interest in the records
relating to such Receivables and shall include an irrevocable non-exclusive
license to the use of the Seller's computer software system to access and create
such records. Such license shall be without royalty or payment of any kind, is
coupled with an interest, and shall be irrevocable until all of the Transferred
Receivables are either collected in full or become Defaulted Receivables.
The Seller shall take such action requested by the Purchaser, from
time to time hereafter, that may be necessary or appropriate to ensure that the
Purchaser has an enforceable ownership interest in the records relating to the
Transferred Receivables and rights (whether by ownership, license or sublicense)
to the use of the Seller's computer software system to access and create such
records.
In recognition of the Seller's need to have access to the records
transferred to the Purchaser hereunder, the Purchaser hereby grants to the
Seller an irrevocable license to access such records in connection with any
activity arising in the ordinary course of the Seller's business or in
performance of its duties as Servicer, provided that (i) the Seller shall not
disrupt or otherwise interfere with the Purchaser's use of and access to such
records during such license period and (ii) the Seller consents to the
assignment and delivery of the records (including any information contained
therein relating to the Seller or its operations) to any assignees or
transferees of the Purchaser provided they agree to hold such records
confidential.
ARTICLE VII
EVENTS OF TERMINATION
SECTION 7.1 Events of Termination. If any of the following events
---------------------
("Events of Termination") shall occur and be continuing:
---------------------
(a) The Servicer (if the Seller or any of its Affiliates) (i) shall
fail to perform or observe any term, covenant or agreement under this
Agreement (other than as referred to in clause (ii) of this subsection (a))
and such failure shall remain unremedied for three Business Days or (ii)
shall fail to make when due any payment or deposit to be made by it under
this Agreement; or
(b) The Seller shall fail (i) to transfer to the Purchaser when
requested any rights, pursuant to this Agreement, which the Seller then has
as Servicer, or (ii) to make any payment required under Section 2.4(a) or
2.4(b); or
(c) Any representation or warranty made or deemed made by the Seller
(or any of its officers) under or in connection with this Agreement or any
information or
29
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report delivered by the Seller pursuant to this Agreement shall prove to have
been incorrect or untrue in any material respect when made or deemed made or
delivered; or
(d) The Seller shall fail to perform or observe any other term, covenant or
agreement contained in this Agreement on its part to be performed or observed
and any such failure shall remain unremedied for three Business Days after
written notice thereof shall have been given to the Seller by the Purchaser; or
(e) The Seller or any of its subsidiaries shall fail to pay any principal
of or premium or interest on any of its Debt which is outstanding in a principal
amount of at least $1,000,000 in the aggregate when the same becomes due and
payable (whether by scheduled maturity, required prepayment, acceleration,
demand or otherwise), and such failure shall continue after the applicable grace
period, if any, specified in the agreement or instrument relating to such Debt;
or any other event shall occur or condition shall exist under any agreement or
instrument relating to any such Debt and shall continue after the applicable
grace period, if any, specified in such agreement or instrument, if the effect
of such event or condition is to accelerate, or to permit the acceleration of,
the maturity of such Debt; or any such Debt shall be declared to be due and
payable, or required to be prepaid (other than by a regularly scheduled required
prepayment), redeemed, purchased or defeased, or an offer to repay, redeem,
purchase or defease such Debt shall be required to be made, in each case prior
to the stated maturity thereof; or
(f) Any Purchase or contribution of Receivables hereunder, the Related
Security and the Collections with respect thereto shall for any reason cease to
constitute valid and perfected ownership of such Receivables, Related Security
and Collections free and clear of any Adverse Claim; or
(g) The Seller or any of its subsidiaries shall generally not pay its debts
as such debts become due, or shall admit in writing its inability to pay its
debts generally, or shall make a general assignment for the benefit of
creditors; or any proceeding shall be instituted by or against the Seller or any
of its subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief, or composition of it or its debts under any law relating to bankruptcy,
insolvency or reorganization or relief of debtors, or seeking the entry of an
order for relief or the appointment of a receiver, trustee, custodian or other
similar official for it or for any substantial part of its property and, in the
case of any such proceeding instituted against it (but not instituted by it),
either such proceeding shall remain undismissed or unstayed for a period of 60
days, or any of the actions sought in such proceeding (including, without
limitation, the entry of an order for relief against, or the appointment of a
receiver, trustee, custodian or other similar official for, it or for any
substantial part of its property) shall occur; or the Seller or any of its
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subsidiaries shall take any corporate action to authorize any of the
actions set forth above in this subsection (g); or
(h) the Seller shall cease to own (whether directly or indirectly)
100% of the issued and outstanding stock of the Purchaser; or
(i) There shall have occurred any material adverse change in the
financial condition or operations of the Seller since the Closing Date; or
there shall have occurred any event which may materially adversely affect
the collectibility of the Transferred Receivables or the ability of the
Seller to collect Transferred Receivables or otherwise perform its
obligations under this Agreement;
then, and in any such event, the Purchaser or its assigns may, by notice to the
Seller, take either or both of the following actions: (x) declare the Facility
Termination Date to have occurred (in which case the Facility Termination Date
shall be deemed to have occurred) and (y) without limiting any right under this
Agreement to replace the Servicer, designate another Person to succeed the
Seller as Servicer; provided, that, automatically upon the occurrence of any
--------
event (without any requirement for the passage of time or the giving of notice)
described in paragraph (g) of this Section 7.1, the Facility Termination Date
shall occur. Upon any such declaration or designation or upon such automatic
termination, the Purchaser shall have, in addition to the rights and remedies
under this Agreement, all other rights and remedies with respect to the
Receivables provided after default under the UCC and under other applicable law,
which rights and remedies shall be cumulative.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 Indemnities by the Seller. Without limiting any other
-------------------------
rights which the Purchaser may have hereunder or under applicable law, the
Seller hereby agrees to indemnify the Purchaser and its assigns and referees
(each, an "Indemnified Party") from and against any and all damages, claims,
-----------------
losses, liabilities and related costs and expenses, including reasonable
attorneys' fees and disbursements (all of the foregoing being collectively
referred to as "Indemnified Amounts"), awarded against or incurred by any
-------------------
Indemnified Party arising out of or as a result of:
(i) the inclusion, or purported inclusion, in any Purchase of any
Receivable that is not an Eligible Receivable on the date of such Purchase;
(ii) representation or warranty or statement made or deemed made by
the Seller (or any of its officers) under or in connection with this
Agreement, which shall have been incorrect in any material respect when
made;
31
<PAGE>
(iii) the failure by the Seller to comply with any applicable law,
rule or regulation with respect to any Transferred Receivable or the related
Contract; or the failure of any Transferred Receivable or the related Contract
to conform to any such applicable law, rule or regulation;
(iv) the failure to vest in the Purchaser absolute ownership of the
Receivables that are, or that purport to be, the subject of a Purchase or
contribution under this Agreement and the Related Security and Collections in
respect thereof, free and clear of any Adverse Claim;
(v) the failure of the Seller to have filed, or any delay in
filing, financing statements or other similar instruments or documents under the
UCC of any applicable jurisdiction or other applicable laws with respect to any
Receivables that are, or that purport to be, the subject of a Purchase or
contribution under this Agreement and the Related Security and Collections in
respect thereof, whether at the time of any Purchase or contribution or at any
subsequent time;
(vi) any dispute, claim, offset or defense (other than discharge in
bankruptcy of the Payor) of the Payor to the payment of any Receivable that is,
or that purports to be, the subject of a Purchase or contribution under this
Agreement (including, without limitation, a defense based on such Receivable or
the related Contract not being a legal, valid and binding obligation of such
Payor enforceable against it in accordance with its terms), or any other claim
resulting from the sale of the merchandise or services related to such
Receivable or the furnishing or failure to furnish such merchandise or services
or relating to collection activities with respect to such Receivable (if such
collection activities were performed by the Seller acting as Servicer) except to
the extent that such dispute, claim, offset or defense results solely from
actions or failures to act of the Purchaser or its assigns;
(vii) any failure of the Seller, as Servicer or otherwise, to perform
its duties or obligations in accordance with the provisions hereof or to perform
its duties or obligations under any Contract related to a Transferred
Receivable;
(viii) any products liability or other claim arising out of or in
connection with merchandise, insurance or services which are the subject of any
Contract;
(ix) the commingling of Collections of Transferred Receivables by
the Seller or a designee of the Seller, as Servicer or otherwise, at any time
with other funds of the Seller or an Affiliate of the Seller;
(x) any investigation, litigation or proceeding related to this
Agreement or the use of proceeds of Purchases or the ownership of Receivables,
the Related Security, or Collections with respect thereto or in respect of any
Receivable, Related Security or
32
<PAGE>
Contract, except to the extent any such investigation, litigation or
proceeding relates to a possible matter involving an Indemnified Party for
which neither the Seller nor any of its Affiliates is at fault;
(xi) any failure of the Seller to comply with its covenants
contained in Section 5.1;
(xii) any Servicer Fees or other costs and expenses payable to any
replacement Servicer, to the extent in excess of the Servicer Fees payable
to the Seller hereunder;
(xiii) any claim brought by any Person other than an Indemnified Party
arising from any activity by the Seller or any Affiliate of the Seller in
servicing, administering or collecting any Transferred Receivable; or
(xiv) any Dilution with respect to any Transferred Receivable.
It is expressly agreed and understood by the parties hereto (i) that the
foregoing indemnification is not intended to, and shall not, constitute a
guarantee of the collectibility or payment of the Transferred Receivables and
(ii) that nothing in this Section 8.1 shall require the Seller to indemnify any
Person (A) for Receivables which are not collected, not paid or uncollectible on
account of the insolvency, bankruptcy, or financial inability to pay of the
applicable Payor, (B) for damages, losses, claims or liabilities or related
costs or expenses resulting from such Person's gross negligence or willful
misconduct, or (C) for any income taxes or franchise taxes incurred by such
Person arising out of or as a result of this Agreement or in respect of any
Transferred Receivable or any Contract.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 Amendments, Etc. No amendment or waiver of any
---------------
provision of this Agreement or consent to any departure by the Seller therefrom
shall be effective unless in a writing signed by the Purchaser and, in the case
of any amendment, also signed by the Seller, and then such amendment, waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given. No failure on the part of the Purchaser to exercise,
and no delay in exercising, any right hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise of any right hereunder
preclude any other or further exercise thereof or the exercise of any other
right.
SECTION 9.2 Notices, Etc. All notices and other communications
------------
hereunder shall, unless otherwise stated herein, be in writing (which shall
include facsimile
33
<PAGE>
communication) and be taxed or delivered, to each party hereto, at its address
set forth under its name on the signature pages hereof or at such other address
as shall be designated by such party in a written notice to the other parties
hereto. Notices and communications by facsimile shall be effective when sent
(and shall be followed by hard copy sent by regular mail), and notices and
communications sent by other means shall be effective when received.
SECTION 9.3 Binding Effect; Assignability. (a) This Agreement
-----------------------------
shall be binding upon and inure to the benefit of the Seller, the Purchaser and
their respective successors and assigns; provided, however, that the Seller may
-------- -------
not assign its rights or obligations hereunder or any interest herein without
the prior written consent of the Purchaser. In connection with any sale or
assignment by the Purchaser of all or a portion of the Transferred Receivables,
the buyer or assignee, as the case may be, shall, to the extent of its purchase
or assignment, have all rights of the Purchaser under this Agreement (as if such
buyer or assignee, as the case may be, were the Purchaser hereunder) except to
the extent specifically provided in the agreement between the Purchaser and such
buyer or assignee, as the case may be.
(b) This Agreement shall create and constitute the continuing
obligations of the parties hereto in accordance with its terms, and shall remain
in full force and effect until such time, after the Facility Termination Date,
when all of the Transferred Receivables are either collected in full or become
Defaulted Receivables; provided, however, that rights and remedies with respect
-------- -------
to any breach of any representation and warranty made by the Seller pursuant to
Article IV and the provisions of Article VIII and Sections 9.4, 9.5 and 9.6
shall be continuing and shall survive any termination of this Agreement.
SECTION 9.4 Costs, Expenses and Taxes. (a) In addition to the
-------------------------
rights of indemnification granted to the Purchaser pursuant to Article VIII
hereof, the Seller agrees to pay on demand all costs and expenses in connection
with the preparation, execution and delivery of this Agreement and the other
documents and agreements to be delivered hereunder, including, without
limitation, the reasonable fees and out-of-pocket expenses of counsel for the
Purchaser with respect thereto and with respect to advising the Purchaser as to
its rights and remedies under this Agreement, and the Seller agrees to pay all
costs and expenses, if any (including reasonable counsel fees and expenses), in
connection with the enforcement of this Agreement and the other documents to be
delivered hereunder excluding, however, any costs of enforcement or collection
--------- --------
of Transferred Receivables.
(b) In addition, the Seller agrees to pay any and all stamp and other
taxes and fees payable in connection with the execution, delivery, filing and
recording of this Agreement or the other documents or agreements to be delivered
hereunder, and the Seller agrees to save each Indemnified Party harmless from
and against any liabilities with respect to or resulting from any delay in
paying or omission to pay such taxes and fees.
34
<PAGE>
SECTION 9.5 No Proceedings. The Seller hereby agrees that it will
--------------
not institute against the Purchaser any proceeding of the type referred to in
Section 7.1 (g) so long as there shall not have elapsed one year plus one day
since the later of (i) the Facility Termination Date and (ii) the date on which
all of the Transferred Receivables are either collected in full or become
Defaulted Receivables.
SECTION 9.6 Confidential. Unless otherwise required by applicable
------------
law, each party hereto agrees to maintain the confidentiality of this Agreement
in communications with third parties and otherwise; provided that this Agreement
may be disclosed to (i) third parties to the extent such disclosure is made
pursuant to a written agreement of confidentiality in form and substance
reasonably satisfactory to the other party hereto, and (ii) such party's legal
counsel and auditors and the Purchaser's assignees, if they agree in each case
to hold it confidential.
SECTION 9.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY,
-------------
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT
GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF), EXCEPT TO THE EXTENT
THAT THE PERFECTION OF THE PURCHASER'S OWNERSHIP OF OR SECURITY INTEREST IN THE
RECEIVABLES OR REMEDIES HEREUNDER, IN RESPECT THEREOF, ARE GOVERNED BY THE LAWS
OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK.
SECTION 9.8 Third Party Beneficiary. Each of the parties hereto
-----------------------
hereby acknowledges that the Purchaser may assign all or any portion of its
rights under this Agreement and that such assignees may (except as otherwise
agreed to by such assignees) further assign their rights under this Agreement,
and the Seller hereby consents to any such assignments. All such assignees,
including parties to the Holland Loan Agreement in the case of assignment to
such parties, shall be third party beneficiaries of, and shall be entitled to
enforce the Purchaser's rights and remedies under, this Agreement to the same
extent as if they were parties thereto, except to the extent specifically
limited under the terms of their assignment.
SECTION 9.9 Execution in Counterparts. This Agreement may be
-------------------------
executed in any number of counterparts, each of which when so executed shall be
deemed to be an original and all of which when taken together shall constitute
one and the same agreement.
35
<PAGE>
ARTICLE X
PURCHASER LOANS TO THE SELLER
SECTION 10.1 Purchaser Loans. The Purchaser hereby agrees, on the
----------------
terms and subject to the conditions of this Agreement, upon request of the
Seller, to make advances (each, a "the Purchaser Loan") to the Seller during the
term of this Agreement in an aggregate principal amount at any one time
outstanding up to, but not exceeding, the Borrowing Limit; provided that no such
--------
the Purchaser Loans may be made if an Event of Termination or an Event of
Default (as defined in the Holland Loan Agreement), or an event which, upon the
giving of notice or the passage of time, or both, would become an Event of
Termination or an Event of Default has occurred and is continuing.
SECTION 10.2 Notices Relating to Loans. The Seller shall give the
-------------------------
Purchaser same day notice, and the Agent (as defined in the Holland Loan
Agreement) a monthly report (with the option reserved by the Agent to receive
daily notice upon request therefor), of each borrowing of each Purchaser Loan.
Each such notice of borrowing shall specify the amount of the Purchaser Loans to
be borrowed and the date of such borrowing (which shall be a Business Day).
SECTION 10.3 Disbursement of Loan Proceeds. Not later than 3:00
-----------------------------
p.m., New York City time, on the date specified for each Purchaser Loan
hereunder, the Purchaser shall transfer, by wire transfer or otherwise, but in
any event in immediately available funds, the amount of the Purchaser Loan to be
made on such date, to the account designated by the Seller in accordance with
instructions previously supplied to the Purchaser.
SECTION 10.4 Seller Note. (a) The Purchaser Loans made by the
-----------
Purchaser hereunder shall be evidenced by a single promissory note of the Seller
in substantially the form of Exhibit __ hereto (the "Seller Note "). The Seller
Note shall be dated the date of this Agreement, shall be payable to the order of
the Purchaser in a principal amount equal to the Borrowing Limit and shall
otherwise be duly completed.
(b) The Purchaser shall enter on a schedule attached to the Seller
Note a notation (which may be computer generated) with respect to each Purchaser
Loan made hereunder of the date and principal amount thereof. The failure of
the Purchaser to make a notation on the schedule to the Seller Note as aforesaid
shall not limit or otherwise affect the obligation of the Seller to repay the
Purchaser Loans in accordance with their respective terms as set forth herein.
(c) The Seller acknowledges that the Seller Note is pledged to the
Collateral Agent (as defined in the Holland Loan Agreement, on behalf of the
Lender and the Agent, pursuant to the Holland Loan Agreement to secure the
obligations of the Purchaser thereunder.
36
<PAGE>
SECTION 10.5 Loan Repayments. The Purchaser Loans shall mature on
---------------
the date which is one year and one day after the Program Maturity Date (as
defined in the Holland Loan Agreement) (the "Maturity Date"). The Purchaser
Loans may be not be prepaid by the Seller.
SECTION 10.6 Interest. (a) The Seller shall pay to the Purchaser
--------
interest at the prime rate plus 1% (the "Seller Interest Rate") on the unpaid
principal amount of each Purchaser Loan for the period commencing on and
including the date of such the Purchaser Loan until but excluding the date such
the Purchaser Loan shall be paid in full. All Accrued Interest shall be payable
on the Maturity Date.
SECTION 10.7 Time and Method of Payments. All payments of principal,
---------------------------
interest and other amounts (including indemnities) payable by the Seller
hereunder shall be made in Dollars, in immediately available funds, to the
Purchaser not later than 11:00 a.m., New York City time, on the date on which
such payment shall become due. Any such payment made on such date but after
such time shall, if the amount paid bears interest, be deemed to have been made
on, and interest shall continue to accrue and be payable thereon until, the next
succeeding Business Day. If any payment of principal or interest becomes due on
a day other than a Business Day, such payment may be made on the next succeeding
Business Day and such extension shall be included in computing interest in
connection with such payment. All payments hereunder and under the Seller Note
shall be made without set-off or counterclaim and in such amounts as may be
necessary in order that all such payments shall not be less than the amounts
otherwise specified to be paid under this Agreement and the Seller Note. Upon
payment in full of the Seller Note, one year and one day after the end of the
term of this Agreement, the Purchaser shall mark the Seller Note "Paid" and
return it to the Seller.
37
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
SELLER: HCFP FUNDING, INC.
By: /s/ John K. Delaney
-----------------------------------------
Name: John K. Delaney
Title: Chief Executive Officer
Address:
c/o HealthCare Financial Partners
2 Wisconsin Circle, Suite 320
Chevy Chase, Maryland 20815
Attention: Edward P. Nordberg, Jr.
Facsimile No.: (301) 664-9860
PURCHASER: WISCONSIN CIRCLE FUNDING CORPORATION
By: /s/ John K. Delaney
-----------------------------------------
Name: John K. Delaney
Title: Chief Executive Officer
Address:
c/o HealthCare Financial Partners
2 Wisconsin Circle, Suite 320
Chevy Chase, Maryland 20815
Attention: Edward P. Nordberg, Jr.
Facsimile No.: (301) 664-9860
38
<PAGE>
EXHIBIT 21.1
TO FORM 10-K
List of Subsidiaries
--------------------
HCFP Funding, Inc., a Delaware corporation
HCFP Funding, II, Inc., a Delaware corporation
Wisconsin Circle Funding Corporation, a Delaware corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS AS OF DECEMBER 31, 1996 AND 1995 AND STATEMENTS OF OPERATIONS FOR THE
YEARS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 11,734,705 0
<SECURITIES> 0 0
<RECEIVABLES> 88,605,124 2,496,765
<ALLOWANCES> 1,078,992 66,840
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 314,169 106,008
<DEPRECIATION> 90,772 29,868
<TOTAL-ASSETS> 101,273,089 2,669,939
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 62,150 34,200
<OTHER-SE> 26,658,826 (159,665)
<TOTAL-LIABILITY-AND-EQUITY> 101,273,089 2,669,939
<SALES> 0 0
<TOTAL-REVENUES> 12,249,953 1,787,349
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,326,994 1,472,240
<LOSS-PROVISION> 656,116 45,993
<INTEREST-EXPENSE> 3,408,562 79,671
<INCOME-PRETAX> 4,858,281 189,445
<INCOME-TAX> 38,860 (5,892)
<INCOME-CONTINUING> 4,819,421 195,337
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 4,289,859 0
<NET-INCOME> 529,562 195,337
<EPS-PRIMARY> .13 0
<EPS-DILUTED> 0 0
</TABLE>
