<PAGE>
FILED PURSUANT TO
RULE 424 (b) (1)
FILE NO: 333-46605
3,500,000 SHARES
[LOGO OF HEALTHCARE FINANCIAL PARTNERS APPEARS HERE]
COMMON STOCK
Of the 3,500,000 shares of Common Stock, $.01 par value (the "Common
Stock"), offered hereby (the "Offering"), 3,350,000 shares are being sold by
HealthCare Financial Partners, Inc. (the "Company") and 150,000 shares are
being sold by the Selling Stockholders. See "Selling Stockholders." The
Company will not receive any of the proceeds from the sale of shares by the
Selling Stockholders.
The Common Stock is traded on the Nasdaq National Market under the symbol
"HCFP." On March 11, 1998, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $41.00 per share. See "Price Range
of Common Stock."
SEE "RISK FACTORS" COMMENCING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED
HEREBY.
---------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount(1) Company(2) Stockholders
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $40.00 $2.10 $37.90 $37.90
Total(3)............... $140,000,000 $7,350,000 $126,965,000 $5,685,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $500,000.
(3) The Company and the Selling Stockholders have granted the Underwriters a
30-day option to purchase up to 525,000 additional shares of Common Stock
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $161,000,000, the
Underwriting Discount will total $8,452,500, the Proceeds to Company will
total $138,619,250 and the Proceeds to Selling Stockholders will total
$13,928,250. See "Underwriting."
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them, and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of NationsBanc Montgomery Securities LLC on or about March 17,
1998.
---------------
Joint Lead Managers and Joint Bookrunners
NationsBanc Montgomery Securities LLC___________________________Lehman Brothers
ABN AMRO Incorporated
Piper Jaffray Inc.
Stephens Inc.
March 12, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
STOCK OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK, AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information, including "Risk Factors,"
appearing elsewhere in this Prospectus, and the financial statements and notes
thereto and other information incorporated by reference herein. Unless the
context otherwise requires, the information set forth in this Prospectus gives
effect to the transactions described herein under "The Reorganization," which
were completed in November 1996, in connection with the Company's initial
public offering of Common Stock (the "Initial Public Offering"), and the term
"Company" refers to HealthCare Financial Partners, Inc. and its former
partnerships and consolidated subsidiaries after giving effect to such
transactions. Unless otherwise indicated, the information set forth in this
Prospectus does not give effect to the exercise of the Underwriters' over-
allotment option.
THE COMPANY
HealthCare Financial Partners, Inc. (the "Company") is a specialty finance
company offering asset-based financing to healthcare service providers, with a
primary focus on clients operating in sub-markets of the healthcare industry,
including long-term care, home healthcare and physician practice. The Company
also provides asset-based financing to clients in other sub-markets of the
healthcare industry, including pharmacies, durable medical equipment suppliers,
hospitals, mental health providers, rehabilitation companies, disease state
management companies and other providers of finance and management services to
the healthcare industry. The Company targets small and middle market healthcare
service providers with financing needs in the $100,000 to $10 million range in
healthcare sub-markets which have favorable characteristics for working capital
financing, such as those where growth, consolidation or restructuring appear
likely in the near to medium term. Management believes, based on its industry
experience, that the Company's healthcare industry expertise and specialized
information systems, combined with its responsiveness to clients, willingness
to finance relatively small transactions, and flexibility in structuring
transactions, give it a competitive advantage in its target markets over
commercial banks, diversified finance companies and traditional asset-based
lenders. See "Business."
From its inception in 1993 through December 31, 1997, the Company has
advanced $1.9 billion to its clients in over 560 transactions, including $1.2
billion advanced during the year ended December 31, 1997. The Company had 174
clients as of December 31, 1997, of which 60 were affiliates of one or more
other clients. The average amount outstanding per client or affiliated client
group at December 31, 1997 was approximately $1.5 million. For the years ended
December 31, 1995 and 1996, the Company's pro forma net income was $1.5 million
and $3.0 million, respectively. For the year ended December 31, 1997, the
Company's consolidated net income was $8.0 million. For the year ended December
31, 1997, the Company's yield on finance receivables (total interest and fee
income divided by average finance receivables for the period) was 16.8%. See
"--Summary Financial Information."
At December 31, 1997, 69.2% of the Company's portfolio consisted of finance
receivables from businesses in the long-term care, home healthcare and
physician practice sub-markets. Estimated expenditures in 1997 for the long-
term care, home healthcare and physician practice sub-markets, which the
Company currently emphasizes, collectively constituted approximately $399.9
billion of the over $1.3 trillion U.S. healthcare market. These sub-markets are
highly fragmented, and companies operating in these sub-markets generally have
significant working capital finance requirements. The Company's clients
operating in these sub-markets tend to be smaller, growing companies with
limited access to traditional sources of working capital financing from
commercial
1
<PAGE>
banks, diversified finance companies and asset-based lenders because many such
lenders have not developed the healthcare industry expertise needed to
underwrite smaller healthcare service companies or the specialized systems
necessary to track and monitor healthcare accounts receivable transactions.
Some of the Company's clients are also constrained from obtaining financing
from more traditional working capital sources due to their inadequate equity
capitalization, limited operating history, lack of profitability, or financing
needs below commercial bank size requirements. See "Business--Financing
Programs."
The Company currently provides financing to its clients through (i) revolving
lines of credit secured by, and advances against, accounts receivable (the
"Accounts Receivable Program"), and (ii) term loans (accompanied, in certain
cases, by warrants) secured by first or second liens on real estate, accounts
receivable or other assets (the "STL Program"). Loans under the STL Program are
often made in conjunction with financing provided under the Accounts Receivable
Program. To date, the Company has not incurred any credit losses in either
program, although it periodically makes provisions for possible future losses
in the ordinary course of its business. See "Business--Financing Programs."
Under the Accounts Receivable Program, 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. 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.
During 1997, the Company expanded the STL Program to increase its penetration
of targeted healthcare sub-markets. Through the STL Program, the Company serves
clients that have more diverse and complex financing needs, such as healthcare
facility acquisitions and expansions. In addition to the collateral securing
the loans, the Company generally has recourse to the borrower. STL Program
loans generally have terms of one to three years. As a result of the Company's
expansion of the STL Program, loans under that program comprised 25.9% of
finance receivables at December 31, 1997. While yields on STL Program loans are
generally lower than the yields generated from the Accounts Receivable Program,
some STL Program loans also include warrants and other fees that may enhance
their effective yields.
In order to enhance its underwriting capabilities, reduce its reliance on
third parties and increase its fee revenue, the Company established a new
subsidiary, HealthCare Analysis Corporation ("HCAC"), in March 1997. HCAC
specializes in due diligence, reimbursement consulting and audit services for
businesses in the healthcare industry. As of January 31, 1998, HCAC employed 17
healthcare auditors and had offices in Maryland, California, Georgia,
Massachusetts and New York. Prior to establishing HCAC, the Company used third
parties for the due diligence and audit work necessary in connection with
financings provided to its clients. By using HCAC to provide all of such
services, the Company has become more responsive to its
2
<PAGE>
clients while benefitting from HCAC's high quality due diligence and consistent
audit documentation. Fees charged by HCAC for its services are passed on to
such clients and prospective clients.
The Company has developed low cost means of marketing its services on a
nationwide basis to selected healthcare sub-markets. The Company primarily
markets its services by telemarketing to prospective clients identified by the
Company, advertising in industry specific periodicals and participating in
industry trade shows. The Company also markets its services by developing
referral relationships with accountants, lawyers, venture capital firms,
billing and collection companies and investment banks. The Company's clients
also assist the Company's marketing efforts by providing referrals and
references.
The Company currently funds its operations through: (i) a $50 million
revolving line of credit (the "Bank Facility") with Fleet Capital Corporation
("Fleet"); (ii) an investment-grade asset-based commercial paper program (the
"CP Program") with ING Baring (U.S.) Capital Markets, Inc. ("ING") which
enables the Company to borrow up to $200 million; and (iii) a $100 million
revolving warehouse line of credit (the "Warehouse Facility") with Credit
Suisse First Boston ("First Boston").
The Company is a Delaware corporation which was organized in April 1993 and
commenced its business in September 1993. The Company's principal executive
offices are located at 2 Wisconsin Circle, Fourth Floor, Chevy Chase, Maryland
20815, and its telephone number is (301) 961-1640.
STRATEGY
The Company's goal is to be the leading finance company in its targeted sub-
markets of the healthcare services industry and to become the primary source
for all of the financing needs of its clients. The Company's strategy for
growth is based on the following key elements (see "Business--Strategy"):
. Target sub-markets within the healthcare industry that have favorable
characteristics for working capital financing, such as fragmented sub-
markets experiencing growth, consolidation or restructuring;
. Focus on healthcare service providers with financing needs of between
$100,000 and $10 million, a market that has been underserved by commercial
banks, diversified finance companies, traditional asset-backed lenders and
other competitors of the Company;
. Become the primary source for the financing needs of clients by introducing
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;
. Increase the Company's offering of fee-based and value-added services to
clients, such as the reimbursement consulting and clinical auditing services
provided by HCAC;
. Seek to make strategic acquisitions of and investments in businesses that
are engaged in the same or similar business as the Company or that are
engaged in lines of business complementary to the Company's business; and
. Enhance the Company's credit risk management and improve servicing
capabilities through continued development of information management
systems.
3
<PAGE>
RECENT DEVELOPMENTS
The Company's assets increased 168.9% from $101.3 million at January 1, 1997
to $272.4 million at December 31, 1997, and growth continued in early 1998 as
the Company's assets increased to $296.2 million at January 31, 1998.
On February 9, 1998, the Company announced that it had formed HealthCare
Financial Partners REIT, Inc., an entity that will elect to be taxed as a real
estate investment trust (the "HCFP REIT"). The HCFP REIT will be managed by a
newly formed subsidiary of the Company that will be compensated on a fee basis
for its management services. The Company's management believes that the HCFP
REIT represents an effective means for the Company to enhance its client
relationships by referring such clients' long-term real estate financing needs
to the HCFP REIT.
It is anticipated that the HCFP REIT will initially fund its operations with
the net proceeds of either an initial public offering or a private offering
(the "REIT Offering") (estimated to be between $100 and $200 million, less
underwriting discounts and commissions and expenses), and that the Company will
purchase up to a 9.9% ownership position in the HCFP REIT in the REIT Offering.
The Company's management anticipates that the HCFP REIT will invest in
financing products not offered by the Company, which include permanent (long-
term) mortgage loans, real estate, purchase-leaseback transactions and other
income-producing real estate-related assets in the healthcare industry. The
Company's management expects that the REIT Offering will be consummated in the
second quarter of 1998.
THE REORGANIZATION
Prior to the Initial Public Offering, the Company conducted its operations
principally in its capacity as the general partner of HealthPartners Funding,
L.P. ("Funding") and HealthPartners DEL, L.P. ("DEL"). Management concluded
that the Company's future financial position and results of operations would be
enhanced if the Company directly owned the portfolio assets of each of these
limited partnerships and the transactions described below (the
"Reorganization") were effected by the Company prior to or simultaneously with
the Initial Public Offering.
Effective as of September 1, 1996, Funding acquired all of the net assets of
DEL, consisting principally of finance receivables, for $486,630 in cash, which
amount approximated the fair value of DEL's net assets. Following the
acquisition, DEL distributed the purchase price to its partners and was
dissolved. The purpose of the transaction was to consolidate the assets of DEL
and Funding in anticipation of the acquisition by the Company of the limited
partnership interests of Funding described below.
Effective upon completion of the Initial Public Offering, the Company
acquired from HealthPartners Investors, LLC ("HP Investors"), the sole limited
partner of Funding, all of the limited partnership interests in Funding and
paid the $21.8 million purchase price for such assets from the proceeds of the
Initial Public Offering. Such purchase price represented the limited partner's
interest in the net assets of Funding and approximated both the fair value and
book value of the net assets. Funding was subsequently liquidated and
dissolved, and all of its net assets at the date of transfer, consisting
principally of advances made under the Accounts Receivable Program, were
transferred to the Company.
4
<PAGE>
In connection with the liquidation of Funding, Farallon Capital Partners L.P.
("FCP") and RR Capital Partners, L.P. ("RR Partners"), the only two members of
HP Investors, exercised warrants for the purchase of an aggregate of 379,998
shares of Common Stock, which warrants were acquired on 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 warrants. HP Investors transferred the warrants to FCP and RR
Partners in contemplation of the liquidation of Funding.
5
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company................ 3,350,000 shares
Common Stock offered by the Selling Stockholders... 150,000 shares
Common Stock to be outstanding after the Offering.. 13,023,978 shares (1)
Use of Proceeds.................................... To finance the antici-
pated growth of the
Company's Accounts Re-
ceivable and STL Pro-
grams and for general
corporate purposes,
which may include stra-
tegic acquisitions and
investments, including
the potential investment
in up to approximately
9.9% of the common stock
of the HCFP REIT. See
"Use of Proceeds" and
"Recent Developments."
Nasdaq National Market symbol...................... "HCFP"
</TABLE>
- --------
(1) Does not include 741,013 shares of Common Stock reserved for issuance at
February 18, 1998 pursuant to the HealthCare Financial Partners, Inc. 1996
Stock Incentive Plan (the "Incentive Plan"), under which options to
purchase 556,013 shares are outstanding (of which 111,467 are presently
exercisable). The number of shares of Common Stock issuable under the
Incentive Plan will be increased effective April 1, 1998 by 750,000,
subject to stockholder approval, of which options to purchase 500,001
shares have been granted. Also does not include 100,000 shares of Common
Stock reserved for issuance pursuant to the HealthCare Financial Partners,
Inc. 1996 Director Incentive Plan (the "Director Incentive Plan"), under
which options to purchase 22,510 shares have been granted (all of which are
presently exercisable). Also does not include an option to purchase 38,381
shares of Common Stock granted outside the Incentive Plan on November 1,
1995, which option is presently exercisable.
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary unaudited pro forma statements of operations for the years ended
December 31, 1995 and 1996 are derived from the unaudited pro forma financial
information for such periods. The summary unaudited pro forma statements of
operations give effect to the Reorganization as if it had occurred at the
beginning of the respective periods. Management believes the pro forma
information giving effect to the Reorganization is the most meaningful
presentation of the Company's operating results. The summary consolidated
statement of operations for the year ended December 31, 1997, and the balance
sheet data as of December 31, 1996 and December 31, 1997, are derived from the
Company's audited historical financial statements.
The summary unaudited pro forma statements of operations do not purport to
present the actual results of operations of the Company had the transactions
and events assumed therein in fact occurred on the dates specified, nor are
they necessarily indicative of the results of operations that may be achieved
in the future. The summary unaudited pro forma statements of operations are
based on certain assumptions and adjustments described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997, incorporated by
reference herein.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
FOR THE YEAR ENDED FOR THE YEAR
DECEMBER 31, ENDED DECEMBER 31,
--------------------- ------------------
1995 1996 1997
---------- ---------- ------------------
<S> <C> <C> <C>
SUMMARY STATEMENTS OF OPERATIONS
Fee and interest income
Fee income.......................... $4,814,504 $8,518,215 $11,493,775
Interest income..................... 403,659 3,497,756 16,251,302
---------- ---------- -----------
Total fee and interest income....... 5,218,163 12,015,971 27,745,077
Interest expense...................... 634,556 3,408,562 7,921,330
---------- ---------- -----------
Net fee and interest income......... 4,583,607 8,607,409 19,823,747
Provision for losses on receivables... 217,388 656,116 1,315,122
---------- ---------- -----------
Net fee and interest income after
provision for losses on
receivables........................ 4,366,219 7,951,293 18,508,625
Operating expenses.................... 2,096,297 3,326,994 7,219,372
Other income.......................... 224,691 233,982 1,582,852
---------- ---------- -----------
Income before income taxes............ 2,494,613 4,858,281 12,872,105
Income taxes.......................... 972,899 1,894,730 4,877,257
---------- ---------- -----------
Net income............................ $1,521,714 $2,963,551 $ 7,994,848
========== ========== ===========
Basic earnings per share(1)........... $ 0.26 $ 0.50 $ 0.99
Weighted average shares
outstanding(1)....................... 5,899,991 5,906,032 8,087,857
Diluted earnings per share(1)......... $ 0.26 $ 0.50 $ 0.96
Diluted weighted average shares
outstanding(1)....................... 5,903,078 5,931,188 8,310,111
</TABLE>
(Footnotes appear on next page)
7
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
FOR OR AT THE YEAR FOR OR AT THE YEAR
ENDED DECEMBER 31, ENDED DECEMBER 31,
------------------ ------------------
1996 1997
------------------ ------------------
<S> <C> <C>
OTHER DATA
Number of clients being provided
financing at period end(2)............ 130 174
Yield on finance receivables(3)........ 18.4% 16.8%
Net interest and fee margin............ 13.2% 12.2%
Accounts Receivable Program turnover
ratio(4).............................. 11.0x 11.4x
Allowance for losses on receivables as
a percentage of finance receivables... 1.2% 1.1%
Ratio of expenses as a percentage of
total fee and interest income......... 27.7% 26.0%
Return on average finance
receivables(5)........................ 4.1% 4.9%
<CAPTION>
HISTORICAL AT DECEMBER 31,
-------------------------------------
1996 1997
------------------ ------------------
<S> <C> <C>
BALANCE SHEET DATA
Total assets........................... $101,273,089 $272,354,946
Finance receivables.................... 89,328,928 250,688,138
Client holdbacks....................... 11,739,326 6,173,260
Line of credit......................... 21,829,737 40,157,180
Commercial paper facility.............. 37,209,098 101,179,354
Warehouse line of credit facility...... -- 27,932,520
Total liabilities...................... 74,552,113 184,524,758
Stockholders' equity................... 26,720,976 87,830,188
</TABLE>
- --------
(1) Pro forma earnings per share for the years ended December 31, 1995 and 1996
computed by dividing pro forma net income by the pro forma weighted average
shares outstanding and pro forma diluted weighted average shares
outstanding, to give effect to the Reorganization.
(2) Includes 26 clients in 1996 and 60 clients in 1997 who are affiliates of
one or more other clients.
(3) Calculated by dividing fee and interest income by the average of the month
end finance receivables balances for the year.
(4) Calculated by dividing total collections of client accounts receivable for
the year by the average of the month-end finance receivables balances for
the year.
(5) Calculated by dividing net income by the average of the month-end finance
receivables balances for the year.
8
<PAGE>
RISK FACTORS
Investment in the Company's Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, together with the other information included in this Prospectus,
before purchasing the shares of Common Stock offered hereby.
This Prospectus contains certain statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). Those statements include, among
other things, the discussions of the Company's business strategy and
expectations concerning the Company's market position, future operations,
margins, profitability, funding sources, liquidity and capital resources.
Investors in the Common Stock offered hereby are cautioned that reliance on
any forward-looking statement involves risks and uncertainties, and that
although the Company believes that the assumptions on which the forward-
looking statements contained herein are reasonable, any of the assumptions
could prove to be inaccurate, and as a result, the forward-looking statements
based on the assumptions also could be incorrect. The uncertainties in this
regard include, but are not limited to, those identified in the risk factors
discussed below. In light of these and other uncertainties, the inclusion of a
forward-looking statement herein should not be regarded as a representation by
the Company that the Company's plans and objectives will be achieved.
RISK OF NONPAYMENT AND CLIENT FRAUD
The Company's ability to fully recover amounts due under the Accounts
Receivable Program and the STL Program may be adversely affected by, among
other things, the financial failure of the Company's clients or their third-
party payors, fraud (e.g., the purchase of fraudulent receivables from a
client), misrepresentation, conversion of account proceeds by clients (e.g.,
client misappropriation of account proceeds in violation of the terms of the
Accounts Receivable or the STL Program), third-party payor disputes, and
third-party claims with respect to security interests. All of these risks are
exacerbated by concentrations of clients or third-party payors at any time.
Accordingly, the Company makes provisions for losses on finance receivables by
establishing an allowance for losses. In evaluating the adequacy of the
allowance, management of the Company considers trends in 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, real estate
collateral valuations and underwriting policies, among other items. Many of
these considerations involve significant estimation by management and are
subject to rapid changes which may be unforeseen and could result in immediate
increased losses and material adjustments to the allowance. In addition, loans
under the STL Program may be secured by other types of collateral, such as
real estate, equipment, inventory and stock. There can be no assurance that
the proceeds from the sale of such collateral resulting from a loan default
under the STL Program would be sufficient to pay the outstanding balance of
such loan. Historically, the Company has experienced no credit losses in its
Accounts Receivable and STL Programs, but there is no assurance that the
Company will not experience losses on finance receivables in the future, and
such future losses could be significant and may vary from current reserve
estimates. The Company does not maintain insurance covering credit losses. In
addition, the amount of provisions for losses on finance receivables may be
either greater or less than actual future charge-offs of finance receivables
relating to these provisions. See "Business-Credit Loss Policy and
Experience".
DILUTION OF CLIENT RECEIVABLES; GOVERNMENT RIGHT OF OFFSET
Dilution of accounts receivable occurs when such receivables are not fully
collectible for reasons other than a third-party payor's financial inability
to pay (such as disagreements as to
9
<PAGE>
appropriate reimbursement for services provided). Dilution with respect to any
client's receivables increases the risk that the Company will be unable to
collect amounts advanced by the Company to the client. The Company generally
advances funds to its clients up to a specified percentage of the Company's
estimate of the net collectible value of such client's receivables. In order
to determine its estimate of the net collectible value of a prospective
client's receivables, the Company works with HCAC and third-party claim
verifiers to contact third-party payors and reviews historical collection
factors by types of third-party payors. Should dilution occur with respect to
any client in an amount greater than the Excess Collateral with respect to
such client, the Company will typically need to look to newer accounts
receivable generated by such client or to other rights the Company may have
for the collection of the outstanding obligation to the Company. If no such
new accounts receivable are forthcoming or the Company is unsuccessful in
pursuing such other rights, the Company may incur a loss. Some dilution occurs
with respect to most, if not all, clients and may be more significant with
respect to Medicare and Medicaid receivables as a result of the government's
right of offset. The Company's historical dilution has not exceeded its Excess
Collateral. However, the Company does not track such activity and, therefore,
knows only that it has not exceeded its Excess Collateral. Federal and state
government agencies, in accordance with Medicare and Medicaid statutes and
regulations, have broad rights to audit a healthcare service provider and
offset any amounts it determines were overpaid to such provider on any claims
against payments due on other current, unrelated claims. The Company monitors
collections on a daily basis but may not be able to react quickly enough to
dilution to cover resulting losses through collections on newer accounts
receivable generated by the relevant client. See "Business--Operations."
CONCENTRATION OF CLIENT BASE AND THIRD-PARTY PAYOR BASE
At December 31, 1997, approximately 14.3% of the Company's finance
receivables were concentrated in receivables from three clients or groups of
affiliated clients, the largest of which accounted for 5.6% of such finance
receivables. Adverse conditions affecting any of these clients could have a
material adverse effect on the Company's ability to collect finance
receivables from these clients. The Company's client concentration has
decreased as the number of its clients has increased over time; however, there
can be no assurance that such concentration will continue to decrease in the
future.
At December 31, 1997, approximately 67.4% of the accounts receivable that
the Company had purchased or that were pledged to the Company were payable
under Government Programs. Any situation which would result in the inability
of the federal and state governments to fully fund such programs could have a
material adverse effect on the Company and its ability to collect advances to
its clients. See "Business--Operations."
INABILITY TO COLLECT HEALTHCARE RECEIVABLES DIRECTLY FROM MEDICARE AND
MEDICAID
With certain limited exceptions, federal law prohibits payment of amounts
owed to healthcare providers under the Medicare and/or Medicaid programs to
any entity other than providers. Except pursuant to a court order, the Company
is unable to force collection directly against third-party payors in a
Government Program. Accordingly, the Company is unable to collect receivables
payable under Government Programs directly, and, instead, the Company requires
that Medicare and Medicaid proceeds be paid to a segregated lockbox account
under the control of the client, the collected balances of which are then
swept to the Company via wire transfer on a daily basis. The Company must
closely monitor its clients' collection efforts to ensure compliance with the
foregoing procedures. At December 31, 1997, approximately 67.4% 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
10
<PAGE>
obligations, there can be no assurance that the Company will continue to be
successful in monitoring such collection activities in the future. See
"Business--Operations."
RISKS RELATED TO LOWER CREDIT GRADE BORROWERS
The Company focuses its marketing efforts on small and middle market
healthcare service providers. Some of these providers may be unable to obtain
financing from more traditional credit sources, such as commercial banks.
Advances made to these types of clients may entail a higher risk of loss than
advances made to clients who are able to utilize traditional credit sources.
While the Company employs underwriting criteria and monitoring procedures to
mitigate the higher risks inherent in advances made to some of its clients, no
assurance can be given that such criteria or procedures will afford adequate
protection against such risk. See "Business-- Operations." In the event that
collection of amounts due under the Accounts Receivable or STL Programs are
less than anticipated, the Company's results of operations and financial
condition could be adversely affected.
RISK OF FAILURE TO RENEW FUNDING SOURCES
The Company requires substantial capital to finance its business.
Consequently, the Company's ability to grow and the future of its operations
will be affected by the availability and the terms of financing. In addition
to proceeds from the Offering, the Company expects to fund its future growth
principally from (i) the $200 million CP Facility, which will expire on
December 5, 2001, (ii) the $50 million Bank Facility, which will expire on
March 29, 2002, subject to automatic renewals for one-year periods thereafter
unless terminated by either party, and (iii) the $100 million Warehouse
Facility, which will expire as to new loans on June 27, 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 the expiration of these facilities, there is no assurance that
such financing will be available, or, if available, that it will be on terms
favorable to the Company. In the event the Company is not able to renew the CP
Facility, the Bank Facility, or the Warehouse Facility or find alternative
financing for its activities, the Company would be forced to curtail or cease
its Accounts Receivable and STL Programs, which action would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Capital Resources."
RISKS ASSOCIATED WITH REAL PROPERTY COLLATERAL
STL Program Loans are often secured by real property collateral. Real
property investments in the healthcare industry are subject to varying degrees
of risk. The economic performance and values of healthcare real estate can be
affected by many factors including governmental regulation, general economic
conditions, local and regional fluctuations in the value of commercial
property and demand for healthcare services. There can be no assurance that
the value of property securing any STL Program loan will not depreciate as a
result of these or other factors. In addition, healthcare facilities are
"special purpose" properties and cannot be readily converted to general
residential, retail or office use. Transfers of operations of healthcare
facilities are often subject to regulatory approval not required for transfers
of other types of commercial operations and other types of real estate.
Therefore, if the operation of any facility securing a loan under the STL
Program becomes unprofitable due to competition, changes in government
regulation or reimbursement policies, age of improvements or other factors,
such that the Company's borrower becomes unable to meet its obligations on
such loan, the liquidation value of such facility may be substantially less
than would be the case if it were readily adaptable to other uses. In many
cases the Company holds a junior lien on the client's real property and is
therefore subordinate to the prior interests of senior lenders. The Company
currently requires borrowers in the STL Program to secure adequate
comprehensive property and liability insurance. However, certain risks are
11
<PAGE>
uninsurable or not economically insurable and there can be no assurance that
any such borrower will have adequate funds to cover all contingencies should
an uninsured loss occur.
RISK OF INABILITY OF THE COMPANY TO CONTINUE ITS GROWTH STRATEGY
The Company's growth strategy is principally dependent upon its ability to
increase its finance receivables by making advances against accounts
receivable meeting its underwriting standards. No assurance is given that the
rate of growth experienced by the Company to date will be sustainable or is
indicative of future results. Of the Company's clients at December 31, 1996,
35.4% were no longer being financed by the Company at December 31, 1997, due
primarily to competition, consolidation in the healthcare industry and
clients' ability to self finance. Of the 46 clients which comprised the 35.4%
which have left since 1996, nine refinanced their receivables with other
sources, 22 terminated their relationships with the Company because they were
sold, nine repaid the Company with internally generated funds and six
terminated business after repayment of all amounts owed to the Company. See
"Business--Operations." Therefore, the Company's ability to further implement
its strategy for continued growth is largely dependent upon its ability to
attract and retain new clients in a competitive market. The Company's growth
is also dependent on the business growth of its clients, which may be affected
by a number of factors not within the Company's control. See "Business--
Strategy." At December 31, 1997, 69.2% of the Company's portfolio consisted of
finance receivables of long-term care, home healthcare and physician practice
businesses. If demand for financing in any of these sub-markets declines, the
Company's ability to increase its finance receivables could be adversely
affected. In the event the Company is unable to continue to attract new
clients, such inability could have a material adverse effect on the Company's
business, financial condition and results of operations.
RISKS ASSOCIATED WITH NEW PRODUCT OFFERINGS
The Company has recently begun to provide or expand products and services
not previously offered by it to healthcare industry clients, or offered only
on a limited basis, such as financing under its STL Program and certain fee-
based services, and may, in the future seek to introduce other new products
and services. See "Business--Strategy." The Company has very limited
experience with these new products and services, and there is no assurance
that the Company will be able to market these new products and services
successfully or that the return on these products and services will be
consistent with the Company's historical financial results.
RISKS ASSOCIATED WITH FAILURE TO CONSUMMATE REIT OFFERING
While the Company intends to utilize a portion of the proceeds of the
Offering to make an investment in up to approximately 9.9% of the common stock
of the HCFP REIT in the REIT Offering, the Company is subject to the normal
risk, which accompanies any initial public offering or private offering, that
the REIT Offering will not be completed. Should the REIT Offering not occur,
the Company will have excess equity equal to its contemplated investment in
the HCFP REIT. While the Company would use the proceeds for other purposes,
such as repayment of existing debt, the failure to complete the REIT Offering
and the resulting excess equity could have a detrimental impact on the
performance of the Company's Common Stock.
RISKS ASSOCIATED WITH INVESTMENT IN THE HCFP REIT
The Company will be subject to various conflicts of interest arising from
its relationship with the HCFP REIT. Through its management of the HCFP REIT
by a newly formed subsidiary, the Company will have fiduciary responsibilities
to the HCFP REIT that may not always be aligned with the Company's interests.
While the Company and the HCFP REIT are expected to enter into agreements to
mitigate these risks, no assurances can be given that conflicts will not arise
or that the Company's efforts to mitigate these risks will be effective. For
example, to the extent that the
12
<PAGE>
Company and the HCFP REIT both have credit exposure to the same clients, any
inability by those clients to meet their financial obligations could create
inter-creditor conflicts between the Company and the HCFP REIT. Although the
Company and the HCFP REIT anticipate establishing policies and procedures to
ensure that transactions, clients or situations involving both the Company and
the HCFP REIT are handled on an arms'-length basis on substantially the same
terms as would be present in situations with unaffiliated parties, there can
be no assurance that these policies and procedures will be sufficient to solve
potential conflicts of interest. Furthermore, the impact on the Company of
conflicts that may arise between the Company and the HCFP REIT, if any, and
the impact of the ultimate resolution of these conflicts cannot be predicted.
DEPENDENCE ON MANAGEMENT AND KEY PERSONNEL
The Company's success depends to a significant degree upon the continued
contributions of members of its senior management, particularly John K.
Delaney, the Company's Chairman and Chief Executive Officer; Ethan D. Leder,
the Company's Vice-Chairman and President; and Edward P. Nordberg, Jr., the
Company's Executive Vice President and Chief Financial Officer, as well as
other officers and key personnel, many of whom would be difficult to replace.
The future success of the Company also depends on its ability to identify,
attract and retain additional qualified technical and managerial personnel,
particularly with experience in healthcare financing. Although the Company has
employment agreements with Messrs. Delaney, Leder and Nordberg, the loss of
Messrs. Delaney, Leder and Nordberg or other officers and key personnel could
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company does not maintain key man life
insurance on any officers. See "Management."
It is anticipated that, after the REIT Offering, certain members of the
Company's senior management will also be senior executives of both the HCFP
REIT and its manager. These senior managers may experience conflicts of
interest in allocating management time between their responsibilities with the
Company and their responsibilities with the HCFP REIT and its manager.
RISKS ASSOCIATED WITH INABILITY TO SUCCESSFULLY COMPETE
The Company competes with numerous commercial banks, diversified finance
companies, asset-based lenders and specialty healthcare finance companies.
Many of these competitors have greater financial and other resources than the
Company and may have significantly lower cost of funds. This disparity in cost
of funds ranges from approximately 1% to 5% and reflects commercial banks'
access to deposits and other low cost sources of capital and other
competitors' greater access to the capital markets. Competition can take many
forms, including the pricing of financing, the timeliness and responsiveness
in processing a prospective client's application, and customer service. The
Company's competitors target the same type of healthcare service providers as
those targeted by the Company and, with the exception of most specialty
healthcare finance companies, generally have operated in the markets serviced
by the Company for a longer period of time than the Company. If the Company is
unable to successfully compete, its financial position and results of
operations would be adversely affected. See "Business--Competition."
FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS
The Company's healthcare finance business is subject to numerous federal and
state laws and regulations, which, among other things, may (i) require the
Company to obtain and maintain certain licenses and qualifications, (ii) limit
the interest rates, fees and other charges that the Company is allowed to
collect, (iii) limit or prescribe certain other terms of its finance
receivables arrangements with clients, and (iv) subject the Company to certain
claims, defenses and rights of
13
<PAGE>
offset. Although the Company believes that it is currently in compliance with
statutes and regulations applicable to its business, there can be no assurance
that the Company will be able to maintain such compliance without incurring
significant expense. The failure to comply with such statutes and regulations
could have a material adverse effect upon the Company. Furthermore, the
adoption of additional statutes and regulations, changes in the interpretation
and enforcement of current statutes and regulations, or the expansion of the
Company's business into jurisdictions that have adopted more stringent
regulatory requirements than those in which the Company currently conducts
business could have a material adverse effect upon the Company. See "--Risk of
Adverse Effect of Healthcare Reform" and "Business--Government Regulation."
RELIANCE ON REIMBURSEMENTS BY THIRD-PARTY PAYORS
The Company's clients receive payment for services rendered to patients from
third-party payors (including health maintenance organizations, managed care
concerns and other insurers), large corporations (which may be self-insured),
other healthcare providers and patients themselves, and from Government
Programs. The clients rely on prompt payments from third-party payors to
enable them to satisfy their obligations to the Company under the Accounts
Receivable Program. The healthcare industry is experiencing a trend toward
cost containment, as government and other third-party payors seek to impose
lower reimbursement and utilization rates and negotiate reduced payment
schedules with healthcare providers. Such cost containment could adversely
affect the ability of the Company's clients to make payments owed to the
Company, which would have an adverse impact on the Company's business and
financial performance.
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
In addition to extensive existing government healthcare regulation (see
"Business-- Government Regulation"), there are numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for
and availability of healthcare services, including a number of proposals that
would significantly limit reimbursement under Government Programs. It is not
clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals would have on the Company's business. Aspects of
certain of these healthcare proposals, such as cutbacks in Government
Programs, containment of healthcare costs on an interim basis by means that
could include a short-term freeze on prices charged by healthcare providers, a
restructuring of the way in which Medicare pays for certain services, and
greater state flexibility permitted in the administration of Medicaid, could
adversely affect the Company.
There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
Government Programs will not have an adverse effect on the Company or that
payments under Government Programs will remain at levels comparable to present
levels or will be sufficient to cover the costs allocable to patients eligible
for reimbursement pursuant to such programs. Concern about the potential
effects of the proposed reform measures has contributed to the volatility of
prices of securities of companies in healthcare and related industries, and
may similarly affect the price of the Company's Common Stock in the future.
In addition, certain private reform efforts have been instituted throughout
the healthcare industry, including the capitation of certain healthcare
expenditures. Capitation is the pre-payment of certain healthcare costs by
third-party payors (typically health maintenance organizations and other
managed healthcare concerns), based upon a predetermined monthly fee for the
aggregate patient lives under any given healthcare provider's care. The
healthcare provider then provides healthcare to such patients when and as
needed, and assumes the risk that its prepayments will cover its costs and
provide a profit for all of such services rendered. Since capitation
essentially eliminates the clients' accounts receivable that are the primary
source of
14
<PAGE>
payment for the Company's finance receivables, capitation could materially
adversely affect the Company's business, financial condition and results of
operations. See "--Failure to Comply with Government Regulations" and
"Business--Government Regulation."
RESTRICTIVE DEBT COVENANTS
The Bank Facility contains financial and operating covenants, including the
requirement that the Company maintain an adjusted tangible net worth of more
than $5.0 million, and a ratio of debt to equity of not more than 3.0 to 1.0
exclusive of its borrowings under the CP Facility. In addition, under the Bank
Facility the Company is not allowed to have at any time a cumulative negative
cash flow (as defined in the Bank Facility) in excess of $1.0 million. At
December 31, 1997, the Company was in compliance with all of such covenants.
Under the Bank Facility, borrowings under the CP Facility are excluded from
debt for purposes of calculation of the Bank Facility debt-to-equity ratio.
The Bank Facility also includes certain limitations on the ability of the
Company to consolidate, merge or transfer all or substantially all of its
assets, incur debt, create liens on its property, make capital expenditures,
dispose of assets or make investments. Under the terms of the CP Facility, ING
has the option to refuse to make any advances in the event the Company fails
to maintain a tangible net worth of at least $50.0 million. See "Business--
Capital Resources."
Future financing agreements may also contain similar financial and operating
covenants. The foregoing limitations in the Bank Facility and the CP Facility
and any future financing agreements could adversely affect the Company's
ability to implement its growth strategy. Failure to comply with the
obligations contained in these agreements could result in an event of default
under such agreements which could permit acceleration of the indebtedness
under the Bank Facility, the CP Facility or any future financing agreements.
RISKS ASSOCIATED WITH YEAR 2000
The Company has implemented a program designed to ensure that all software
used by the Company in connection with its services will manage and manipulate
data involving the transition of dates from 1999 to 2000 without functional or
data abnormality and without inaccurate results related to such data. However,
the Company believes that some of its clients and payors may not have
implemented such programs. The failure by clients and payors to implement
necessary software changes may disrupt client billing and reimbursement cycles
and adversely effect clients' cash flow and collectability of pledged accounts
receivable. The Company is unable to predict the effects that any such failure
may have on the financial condition and results of the operations of the
Company.
GENERAL ECONOMIC RISKS
The Company's business could be affected by general economic conditions in
the United States, and any sustained period of economic slowdown or recession
could materially adversely affect the Company's business, financial condition
and results of operations. The risks to which the Company's business is
subject become more acute during an economic slowdown or recession because
fewer accounts receivable may be generated by clients, resulting in decreased
fees for the Company. In addition, the financial ability of certain third-
party payors to pay outstanding accounts receivable and of clients to pay
outstanding advances may be impaired, resulting in increased credit losses.
Further, some of the Company's clients are startup or less mature ventures
that may be more susceptible to economic slowdowns or recessions.
NO DIVIDENDS
The Company has not paid any cash dividends to date and does not intend to
pay cash dividends in the foreseeable future. The Company intends to retain
earnings to finance the
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<PAGE>
development and expansion of its business. In addition, the Bank Facility and
the CP Facility do, and future financing arrangements may, impose minimum net
worth covenants, debt-to-equity covenants and other limitations that could
restrict the Company's ability to pay dividends. See "--Restrictive Debt
Covenants" and "Dividend Policy."
POSSIBLE ADVERSE IMPACT ON TRADING PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
Following the Offering, the Company will have 13,023,978 shares of Common
Stock outstanding (which includes 3,687 shares issued upon exercise of options
after December 31, 1997). All of the shares of Common Stock sold in the
Offering, 4,312,500 shares of Common Stock sold in the Company's public
offering of Common Stock in June 1997, and 2,415,000 shares of Common Stock
sold in the Initial Public Offering are freely tradeable without restriction
under the Securities Act of 1933, as amended (the "Securities Act"), except
for any shares purchased by existing affiliates of the Company, which shares
are subject to the resale limitations of Rule 144 as promulgated under the
Securities Act ("Rule 144"). All of the remaining shares of outstanding Common
Stock are "restricted securities" as that term is defined in Rule 144. Subject
to the 90-day lock-up agreement and certain other agreements restricting five
of the Company's existing stockholders from selling Common Stock, each of
which is described below, these restricted securities will be eligible for
sale pursuant to Rule 144 in the public market following the consummation of
the Offering. Additional shares of Common Stock, including shares issuable
upon exercise of employee stock options, will also become eligible for sale in
the public market from time to time. In addition, certain stockholders and
members of senior management have been granted certain registration rights
relating to shares of Common Stock held by them for sale under the Securities
Act. However, the Company, certain of its officers and directors, who in the
aggregate will own 1,619,341 shares of Common Stock after the Offering, have
agreed that, for a period of 90 days after the date of this Prospectus, they
will not, without the prior written consent of the Underwriters, offer to
sell, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for shares of Common Stock (the
"90-day lock-up agreement"), except that the Company may grant options and
issue shares of Common Stock under the Company's existing option plans and may
issue Common Stock in acquisition transactions not involving a public
offering. Further, five of the existing stockholders of the Company, who in
the aggregate will own 2,211,979 shares of Common Stock after this Offering,
have agreed that, without the prior written consent of the Company, they will
not effect any sales of Common Stock prior to November 21, 1998 in excess of
the volume limitations provided under Rule 144 (the "Rule 144 Sale
Agreement"). Following this Offering and upon the expiration of the 90-day
lock-up agreement and the Rule 144 Sale Agreement, sales of substantial
amounts of the Company's Common Stock in the public market pursuant to Rule
144 or otherwise, or the availability of such shares for sale, could adversely
affect the prevailing market price of the Common Stock and impair the
Company's ability to raise additional capital through the sale of equity
securities.
POSSIBLE FLUCTUATIONS OF STOCK PRICE
The market price of the Common Stock could be subject to significant
fluctuations in response to the Company's operating results and other factors.
In addition, the stock market in recent years has experienced extreme price
and volume fluctuations that often have been unrelated or disproportionate to
the operating performance of companies. Such fluctuations, and general
economic and market conditions, may adversely affect the market price of the
Common Stock.
AVAILABILITY OF PREFERRED STOCK FOR ISSUANCE
In addition to the Common Stock, the Company's Amended and Restated
Certificate of Incorporation authorizes the issuance of up to 10,000,000
shares of "blank check" preferred stock. Following the Offering, there will be
no shares of preferred stock outstanding, and the Company has
16
<PAGE>
no present intention to issue any shares of preferred stock. However, since
the rights and preferences of any class or series of preferred stock may be
set by the Board of Directors in its sole discretion, the rights and
preferences of any such preferred stock may be superior to those of the Common
Stock, and thus may adversely affect the rights of holders of Common Stock.
The ability to issue preferred stock could have the effect of delaying or
preventing a change in control of the Company.
POSSIBLE ANTI-TAKEOVER EFFECTS
Certain provisions of the Delaware General Corporation Law and the Company's
Amended and Restated Certificate of Incorporation may be deemed to have anti-
takeover effects and may delay or prevent a takeover attempt that a
stockholder of the Company might consider to be in the best interests of the
Company or its stockholders. These provisions include authorized blank check
preferred stock, limitations on the persons who may call a special meeting of
stockholders, a classified Board of Directors, the ability of the directors to
fill vacancies on the Board of Directors and advance notice requirements for
stockholder proposals and director nominees. The Company has also elected to
be subject to Section 203 of the Delaware General Corporation Law which
prohibits certain business transactions involving certain stockholders without
the approval of the Board of Directors or stockholders.
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<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the issuance and sale of
the Common Stock offered hereby, after deducting the underwriting discount and
estimated offering expenses, are estimated to be $126.5 million. The Company
will not receive any of the proceeds from the sale of shares of Common Stock
by the Selling Stockholders.
The Company intends to use the net proceeds from the Offering to finance
anticipated growth of the Company's Accounts Receivable and STL Programs and
for general corporate purposes, including possible strategic acquisitions and
investments. The Company anticipates making an investment in up to
approximately 9.9% of the common stock of the HCFP REIT in the event the REIT
Offering is consummated. The Company does not currently have any agreement,
arrangement or understanding regarding any such acquisition or investments,
other than its proposed investment in the HCFP REIT. See "Prospectus Summary--
Recent Developments" and "Risk Factors--Risks Associated with Failure to
Consummate REIT Offering." Pending such uses, the net proceeds to the Company
will be used to temporarily repay amounts then due under the Bank Facility,
the Warehouse Facility or the CP Facility. See "Business--Capital Resources"
for a description of the interest rates, the maturity dates and other terms
applicable to the Bank Facility, the Warehouse Facility and the CP Facility.
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<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock is listed for trading on the Nasdaq National Market under
the trading symbol "HCFP." The following table sets forth the high and low
sales prices of the Common Stock as reported by the Nasdaq National Market for
each of the calendar quarters indicated:
<TABLE>
<CAPTION>
QUARTER HIGH LOW
------- ------- -------
<S> <C> <C>
1996
Fourth (from November 21, 1996)........................... $14.000 $12.125
1997
First..................................................... $19.000 $12.375
Second.................................................... $20.500 $ 9.750
Third..................................................... $31.500 $19.000
Fourth.................................................... $37.375 $28.875
1998
First (through March 11, 1998)............................ $42.375 $32.500
</TABLE>
On March 11, 1998, the closing sale price of the Common Stock, as reported
on the Nasdaq National Market, was $41.00.
19
<PAGE>
DIVIDEND POLICY
The Company intends to retain all future earnings for the operation and
expansion of its business, and does not anticipate paying cash dividends in
the foreseeable future. Any future determination as to the payment of cash
dividends will depend upon the Company's results of operations, financial
condition and capital requirements and any regulatory restrictions or
restrictions under credit agreements or other funding sources of the Company
existing from time to time, as well as other matters which the Company's Board
of Directors may consider. In addition, the Bank Facility and the CP Facility
currently, and financing arrangements in the future may, impose minimum net
worth covenants, debt-to-equity covenants and other limitations that could
restrict the Company's ability to pay dividends. See "Risk Factors--
Restrictive Debt Covenants."
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1997 and as adjusted to give effect to the Offering and the
application of the net proceeds thereof. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
ACTUAL AS ADJUSTED
------------ ------------
<S> <C> <C>
Total borrowings.................................. $169,269,054 $ 62,604,054
============ ============
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares
authorized; none outstanding..................... $ -- $ --
Common stock, $.01 par value; 30,000,000 shares
authorized; 9,670,291 shares outstanding;
13,020,291 shares outstanding as adjusted(1)..... 96,703 130,203
Additional paid-in capital........................ 79,784,045 206,215,545
Retained earnings................................. 7,949,440 7,949,440
------------ ------------
Total stockholders' equity...................... $ 87,830,188 $214,295,188
============ ============
</TABLE>
- --------
(1) Does not include 744,700 shares of Common Stock reserved for issuance
pursuant to the Incentive Plan and 100,000 shares of Common Stock reserved
for issuance pursuant to the Director Incentive Plan. Also does not
include an option to purchase 38,381 shares of Common Stock granted
outside the Incentive Plan on November 1, 1995.
21
<PAGE>
BUSINESS
GENERAL
The Company is a specialty finance company offering asset-based financing to
healthcare service providers, with a primary focus on clients operating in
sub-markets of the healthcare industry, including long-term care, home
healthcare and physician practices. The Company also provides asset-based
financing to clients in other sub-markets of the healthcare industry,
including pharmacies, durable medical equipment suppliers, hospitals, mental
health providers, rehabilitation companies, disease state management companies
and other providers of finance and management services to the healthcare
industry. The Company targets small and middle market healthcare service
providers with financing needs in the $100,000 to $10 million range in
healthcare sub-markets which have favorable characteristics for working
capital financing, such as those where growth, consolidation or restructuring
appear likely in the near to medium term. Management believes that the
Company's healthcare industry expertise and specialized information systems,
combined with its responsiveness to clients, willingness to finance relatively
small transactions, and flexibility in structuring transactions, give it a
competitive advantage in its target markets over commercial banks, diversified
finance companies and traditional asset-based lenders.
From its inception in 1993 through December 31, 1997, the Company has
advanced $1.9 billion to its clients in over 560 transactions, including $1.2
billion advanced during the year ended December 31, 1997. The Company had 174
clients as of December 31, 1997, of which 60 were affiliates of one or more
other clients. The average amount outstanding per affiliated client group at
December 31, 1997 was approximately $1.5 million. For the years ended December
31, 1995 and 1996, the Company's pro forma net income was $1.5 million and
$3.0 million, respectively. For the year ended December 31, 1997, the
Company's consolidated net income was $8.0 million. For the year ended
December 31, 1997, the Company's yield on finance receivables was 16.8%.
HEALTHCARE INDUSTRY
According to Healthcare Financing Administration ("HCFA") projected total
domestic healthcare expenditures for 1998 will exceed $1.2 trillion, or 15.2%
of gross domestic product, compared to expenditures of $428.2 billion or 10.2%
of gross domestic product in 1985. The annual compound growth rate of
healthcare expenditures from 1985 to 1998 was 8.7%. The breakdown of projected
healthcare expenditures for 1997 is as follows (dollars in billions):
<TABLE>
<CAPTION>
PROJECTED 1998
HEALTHCARE INDUSTRY SEGMENT EXPENDITURES
--------------------------- --------------
<S> <C>
Acute-Care (hospitals)........................................ $ 449.0
Physician Services............................................ 258.9
Other Medical Non-Durables.................................... 105.5
Long-Term Care (nursing homes)................................ 102.6
Other Professional Services................................... 85.2
Insurance-net healthcare costs................................ 64.7
Dental Services............................................... 52.2
Home Healthcare............................................... 38.4
Government Public Health...................................... 33.5
Other Personal Care........................................... 30.1
Research...................................................... 17.9
Vision Products and Other Medical Durables.................... 16.2
Construction.................................................. 15.2
--------
Total......................................................... $1,269.4
========
</TABLE>
- --------
Source: HCFA, Office of the Actuary.
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<PAGE>
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 needs
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 a projected $102.6 billion in 1998, 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 in 1996 by HCIA,
Inc., a healthcare information services company, 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 a projected $38.4 billion in 1998, and are projected to
grow to $45.9 billion by the year 2000. According to the National Association
of Home Care, the number of Medicare certified home health agencies has grown
from 5,983 in 1985 to 10,027 in 1996. The home healthcare business remains
highly fragmented, with only a small percentage of such companies having any
significant market share.
According to HCFA, total annual physician services expenditures grew from
$83.6 billion in 1985 to an estimated $258.9 billion in 1998, and are
projected to grow to $309.8 billion by the year 2000. The American Medical
Association ("AMA") reports that, as of December 31, 1996, approximately
580,706 physicians were actively involved in patient care in the U.S., with a
growing number participating in multispecialty 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 ASSET-BASED 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
23
<PAGE>
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 agencies and other requirements.
In addition to working capital, small to middle market healthcare service
providers often require additional sources of financing, including term loans
to facilitate the growth or restructuring of their businesses. A majority of
the Company's clients are facility-based health care service providers, such
as nursing homes, that grow through the acquisition of additional facilities.
Facility-based healthcare service providers can often acquire additional
facilities at attractive valuations if, after identifying an opportunity, such
providers can obtain the necessary financing to quickly close on the
acquisition. Many of the Company's clients also have a need for term loans as
their businesses grow in order to support expanding infrastructure
requirements such as information systems, enhanced professional management and
marketing and business development costs. To address this market need, the
Company introduced the STL Program in late 1996.
Management believes that the growth in healthcare expenditures, the
consolidation of certain segments of the healthcare market, and the
reorganization of the healthcare delivery system (caused by both cost
containment pressures and the introduction of new products and services) will
have positive effects on the demand for the Company's services since they in
many cases will increase the working capital needs of the Company's clients.
Historically, these trends have affected different sub-markets of the
healthcare industry at different times. The Company expects these trends to
continue, thereby providing the Company with long-term growth opportunities.
STRATEGY
The Company's goal is to be the leading finance company in its targeted sub-
markets of the healthcare services industry and to become the primary source
for all of the financing needs of its clients. 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, 1997,
69.2% of the Company's portfolio consisted of finance receivables from
businesses in the long-term care, home healthcare and physician practice 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, 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 underserved 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
24
<PAGE>
financing to companies with borrowing needs in excess of $5 million. The
Company believes that its target market for transactions between $100,000 and
$10 million 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.
Become the primary source for all of the financing needs of clients by
introducing 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 began in late
1996 to offer additional financing products through the STL Program. The
Company expects to continue to selectively introduce new products to existing
and new clients, depending upon the needs of its clients, general economic
conditions, the Company's resources and other relevant factors. In some cases,
the Company anticipates that new products may be introduced as part of
cooperative arrangements with other lenders where the origination and
servicing relationship will remain with the Company.
Increase the Company's offering of fee-based and value-added services to
clients such as the reimbursement consulting and clinical auditing services
provided by HCAC. The Company constantly seeks to increase the range of fee-
based services which it offers its clients in order to (i) reduce its
dependence on profits derived from the difference between the yield on finance
receivables and its cost of funds, (ii) supplement its total revenues by the
amount of such fees, and (iii) offer a broader range of services to its
clients. The fee-generating capabilities of HCAC and the HCFP REIT (via the
management agreement, if the REIT Offering is consummated) are expected to
increase fee income of the Company.
Seek to make strategic acquisitions of and investments in businesses that
are engaged in the same or similar business as the Company or that are engaged
in lines of business complementary to the Company's business. Because of the
growth of the Company's core finance receivables business, the Company
increasingly is offered opportunities to invest in, or acquire interests in,
healthcare service businesses that are involved in financial services,
receivables management, outsourcing, or financial and administrative
infrastructure development activities. The Company believes that businesses in
these areas are synergistic with the Company's core lending business and could
allow the Company to leverage its expertise in healthcare to meet the needs of
the Company's customer base. See "Recent Developments." The Company will also
seek to take advantage of appropriate opportunities to acquire portfolios of
loans backed by healthcare receivables and to invest in or acquire companies
in the same or similar lines of business as the Company.
Enhance the Company's credit risk management and improve servicing
capabilities through continued development of information management systems.
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
The Company provides asset-based financing to healthcare service providers
through the Accounts Receivable Program and the STL Program.
25
<PAGE>
Accounts Receivable Program. Under the Accounts Receivable Program, the
Company offers healthcare service providers revolving lines of credit secured
by, and advances against, accounts receivable. Revolving lines of credit
offered through the Accounts Receivable Program permit a client to borrow, on
a revolving basis, 65% to 85% 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 revolving lines of credit secured by accounts receivable, for which the
minimum commitment amount is generally $1 million and the maximum commitment
amount is generally $10 million. Such financings are recourse to the client
and generally have a term of one to three years.
In connection with advances against receivables, 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 onetime 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% to 85% of the purchase price (which is equal to aggregate
net collectible value minus a purchase discount) 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
financings involving advances against receivables. Commitments for such
financings are generally less than $1 million and terms are generally for one
year with renewal options.
As of December 31, 1997, the Company was financing 161 clients in its
Accounts Receivable Program, and the finance receivables originated through
the Accounts Receivable Program constituted 74.1% of total finance
receivables. The yield on finance receivables generated under the Accounts
Receivable Program for the year ended December 31, 1997 was 17.0%. Of the
Company's finance receivables in its Accounts Receivables Program at December
31, 1997, 32.6% represented payables by commercial insurers or other non-
governmental third-party payors, 25.9% represented payables from Medicare and
41.5% represented payables from Medicaid.
STL Program. Under the STL Program, the Company provides its clients with
term loans for up to three years secured by first or second liens on real
estate, accounts receivable or other assets, such as equipment, inventory and
stock. The Company introduced the STL Program in late 1996, in an effort to
service clients' financing needs which the Company could not provide through
its Accounts Receivable Program. Such loans have been made to clients to
finance acquisitions and expansions of existing healthcare facilities, as well
as to provide working capital, and are often provided to clients in
conjunction with financing under the Accounts Receivable Program. Such loans
are generally recourse to the borrower.
At December 31, 1997, the Company had $65.0 million in STL Program loans
outstanding. The yield on finance receivables generated under the STL Program
for the year ended December 31, 1997, was 16.3%. At December 31, 1997, STL
Program loans comprised 25.9% of the Company's total finance receivables.
While yields on such loans are generally lower than the
26
<PAGE>
yields generated by the Accounts Receivable Program, some term loans under the
STL Program also include warrants or success fees that may enhance the
effective yield on such loans.
The following table sets forth the Company's portfolio activity at or for
the periods indicated:
PORTFOLIO ACTIVITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AND FOR THE QUARTERS ENDED
----------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Outstanding:
AR Program............. $57,448 $65,914 $79,567 $86,876 $104,865 $118,960 $172,171 $185,728
STL Program............ -- -- -- 2,453 11,923 33,420 46,331 64,961
Total AR Program
Clients................ 90 98 112 129 137 145 171 161
New AR Program Clients.. 23 14 15 35 26 29 27 28
Total STL Program
Clients................ -- -- -- 8 20 25 32 39
New STL Program
Clients................ -- -- -- -- 14 8 9 10
Avg. Finance
Receivables/ Client:
AR Program............. $ 638 $ 673 $ 710 $ 673 $ 765 $ 820 $ 1,007 $ 1,154
STL Program............ -- -- -- 307 596 1,337 1,448 1,666
</TABLE>
- -------
* "AR" means Accounts Receivable
OPERATIONS
Portfolio Development. The Company has established a portfolio development
group which is primarily responsible for new business generation, including
both marketing and underwriting.
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. 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.
At January 31, 1998, the Company employed a staff of 11 sales and marketing
representatives at its headquarters in Chevy Chase, Maryland. In November
1997, the Company opened an office for marketing in Dallas, Texas, and
currently has one employee in its Dallas office. Marketing personnel are
compensated with a base salary plus performance bonuses.
Underwriting. The Company follows written underwriting and credit policies,
and its credit committee, consisting of senior officers of the Company, must
unanimously approve each transaction
27
<PAGE>
which is proposed for the Accounts Receivable Program or STL Program with a
prospective client. The Company's underwriting policies require a due
diligence review of the prospective client, its principals, its financial
condition and strategic position, including a review of all available
financial statements and other financial information, legal documentation and
operational matters. The Company's due diligence review also includes a
detailed examination of a prospective client's accounts receivable, accounts
payable, billing and collection systems and procedures, management information
systems and real and personal property and other collateral. Such a review is
conducted after the Company and the prospective client execute a non-binding
term sheet, which requires the prospective client to pay a due diligence
deposit to defray the Company's expenses. The Company's due diligence review
is organized by the Company's underwriters and supervised by the sponsoring
member of the credit committee. At January 31, 1998, the Company employed four
underwriters at its headquarters in Maryland. HCAC independently confirms
certain matters with respect to the prospective client's business and the
collectibility of its accounts receivable and any other collateral by
conducting public record searches, and, where appropriate, by contacting
third-party payors about the prospective client's receivables. For loans
primarily secured by real property, the Company requires third-party
appraisals and Phase I environmental surveys prior to making such loans.
In order to determine its estimate of the net collectible value of a
prospective client's accounts receivable, HCAC conducts extensive due
diligence to evaluate the receivables likely to be paid within a defined
collection period. This evaluation typically includes: (i) a review of
historical collections by type of third-party payor; (ii) a review of
remittance advice and information relating to claim denials (including
explanations of benefits); (iii) a review of claims files and related medical
records; and (iv) an analysis of billing and collections staff and procedures.
HCAC may also periodically employ third-party claim verifiers to assist it in
determining 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.
Loan Administration. The Company has established a loan administration group
which is primarily responsible for monitoring the performance of its loans, as
well as its collection procedures.
Monitoring. 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. Each client is also assigned to a loan officer who is primarily
responsible for monitoring that client's financial condition and the adequacy
of the Company's collateral with respect to loans to such client. All draw or
advance requests must be approved by the client's loan officer and by the
Company's senior credit officer or a portfolio manager. At January 31, 1998,
the Company employed ten account managers and four loan officers in its
Maryland headquarters. The Company's proprietary information system enables
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 its clients' billing and
collection procedures, financial condition and operating strategies at least
annually, and more frequently if warranted, particularly with respect to the
loans with outstanding balances of more than $1.5 million, where audits are
usually conducted on a quarterly basis. Such audits are conducted by HCAC.
The Company grades performing STL Program loans on a scale of 1 to 4, with
grade 1 assigned to those loans involving the least amount of risk. The
grading system is intended to
28
<PAGE>
reflect the performance of a borrower's business, the collateral coverage of
the loan and other factors considered relevant. Each loan is initially graded
based on the financial performance of the borrower and other specific risk
factors associated with the borrower, including growth, collateral coverage,
capitalization, quality of management, value of intangible assets and
availability of working capital. All new loans are assigned a grade 3 for a
period of six months in the absence of an extraordinary event during that
period. After the initial six months, loans are assigned a grade of 1 to 4.
Thereafter, all loans are reviewed and graded on at least a quarterly basis.
Performing loans are generally serviced by the Company's account managers,
with loans in grade 4 being serviced in some cases by a member of the
Company's loan workout group, which currently consists of a loan officer and
the Company's Senior Credit Officer.
Non-performing loans are graded on a scale of N1 or N2. Grade N1 is assigned
to a non-performing loan which the Company believes may be brought back into
compliance by the borrower's current management. Non-performing loans are
placed on the Company's watch list and are serviced by a member of the loan
workout group. Grade N2 is assigned to a loan that the Company believes cannot
be brought back into compliance. Such loans are liquidated either informally
or through legal proceedings.
Collection Procedures. The Company's cash collection procedures vary by (i)
the type of program provided by the Company and (ii) the type of accounts
receivable due and owing to clients from either insurance companies and health
maintenance organizations ("Commercial Insurers"), Government Programs, or in
certain limited circumstances, other healthcare service providers.
Receivables due and owing from Government Programs are subject to certain
laws and regulations not applicable to Commercial Insurers. Except in certain
limited cases, Medicare and Medicaid laws and regulations provide that
payments for services rendered under Government Programs can only be made to
the healthcare service provider that has rendered the services. See "Risk
Factors-Inability to Collect Healthcare Receivables Directly From Medicare and
Medicaid."
With respect to the Accounts Receivable 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 Accounts Receivable Program, other
than Government Program-related receivables, are required to be remitted. If a
client in the Accounts Receivable 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 Accounts Receivable Program
are swept on a daily basis to the Company.
With respect to the STL Program, clients make periodic interest and/or
principal payments, generally monthly. The Company will undertake collection
efforts if such payments are not made on a timely basis. Such efforts may
include acceleration of amounts due under the loan and institution of
foreclosure proceedings with respect to any property securing the loan. In
addition, if the loan is secured by personal guaranties, the Company may
pursue remedies to collect amounts owed by the guarantors.
Documentation. The Company's documentation for the Accounts Receivable and
STL Programs is described below.
Accounts Receivable Program. Revolving lines of credit secured by accounts
receivable are made pursuant to a loan and security agreement (the "AR Loan
Agreement"), a note, and ancillary
29
<PAGE>
documents. The AR Loan 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. 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 AR Loan Agreement contains a number of negative covenants, 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 AR Loan Agreement may be accelerated and the Company may
exercise its rights, including foreclosing on the collateral.
Advances against accounts receivable under the Accounts Receivable 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 Accounts Receivable 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 Agreements is the estimated net collectible value of such receivables less
a purchase discount, comprised of funding and servicing fees. An amount equal
to 65% to 85% of the purchase price is paid to the client; the Company retains
the balance of the purchase price as a client holdback, held as additional
security for the client's obligations under the AR Agreement. The client
holdback is released to the client (i) upon receipt by the Company of payments
relating to the receivables in an amount equal to the estimated net
collectible value of the receivables or (ii) upon expiration of the collection
period assigned to the respective batch of receivables, except that if the
Company has not received payments at least equal to the purchase price for the
receivables, then the Company may at its option either (x) offset any
shortfall against client holdbacks relating to other batches or from amounts
due to the client from the sale of other batches, or (y) require the client to
replace the uncollected receivables with substitute eligible accounts
receivable.
The AR Agreement also contemplates that the client may grant to the Company
a security interest in other assets of the client as may be mutually agreed.
In addition, pursuant to the AR Agreement, the client agrees to indemnify the
Company for all losses arising out of or relating to the AR Agreement.
Under the AR Agreement, the client covenants to notify payors of the sale of
accounts receivable to the Company and to assist the Company in collecting
payments on the purchased receivables and causing such payments to be remitted
to the Company. The client agrees to instruct all payors that payments are to
be made to such lockbox or other account as the Company may direct.
30
<PAGE>
STL Program. Because of the nature of the STL Program loans, which are made
to finance particular needs of clients such as acquisitions and expansions of
existing healthcare facilities, the Company's documentation for loans under
the STL Program is tailored to the needs of the particular borrower and the
type of available collateral. Such documentation generally includes a term
loan agreement and promissory note (the "STL Loan Agreement") and a mortgage
and security agreement with respect to the collateral for the loan. The STL
Loan Agreement contains financial and other covenants similar to those in the
AR Loan Agreement. In the event of a client default, all debt owed under the
STL Loan Agreement may be accelerated and the Company may exercise its rights,
including foreclosing on the collateral. The Company requires an appraisal and
a Phase I environmental survey for real property collateral securing an STL
Program Loan.
STL Program loans often include provision for warrants or other equity
interests in the borrower. Documentation of the warrant or other equity
interest may include provisions relating to, among other things, anti-dilution
protection, registration rights, put and call features and representation of
the Company on the board of directors or similar body of the borrower in
certain circumstances.
31
<PAGE>
CLIENTS
The Company's client base is diversified. As of December 31, 1997, the
Company was servicing clients located in 37 states across the country, in a
number of different sub-markets of the healthcare industry, with a
concentration in the long-term care, home healthcare and physician practice
sub-markets.
PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------------
NUMBER
OF PERCENT OF FINANCE PERCENT OF
INDUSTRY GROUP CLIENTS CLIENTS RECEIVABLES PORTFOLIO
- -------------- ------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
Long Term Care..................... 62 35.6% $ 104,992,876 41.9%
Home Healthcare.................... 42 24.1 42,616,475 17.0
Physician Practice................. 25 14.4 25,773,842 10.3
Mental Health...................... 12 6.9 23,931,715 9.5
Hospital........................... 7 4.0 16,331,760 6.5
Rehabilitation..................... 11 6.3 14,013,363 5.6
Other.............................. 6 3.4 9,483,990 3.8
Disease State Management........... 2 1.2 6,213,990 2.5
Ambulatory Services................ 3 1.7 4,270,334 1.7
Diagnostic......................... 2 1.2 2,112,557 0.8
Durable Medical Equipment.......... 2 1.2 947,236 0.4
--- ----- ------------- -----
Total............................ 174 100.0% $ 250,688,138 100.0%
=== ===== ============= =====
PROGRAM BREAKDOWN(1)
- --------------------
Accounts Receivable Program........ 161 80.5% $ 185,727,628 74.1%
STL Program........................ 39 19.5 64,960,510 25.9
--- ----- ------------- -----
Total............................ 200 100.0% $ 250,688,138 100.0%
=== ===== ============= =====
</TABLE>
- --------
(1) At December 31, 1997, 26 clients were in both the Accounts Receivable and
STL Programs.
CAPITAL RESOURCES
Sources of capital available to the Company to fund finance receivables
under the Accounts Receivable and STL Programs include the Bank Facility, the
CP Facility, the Warehouse Facility and stockholders' equity.
Bank Facility. The Bank Facility is a revolving line of credit for up to $50
million. The interest rates payable by the Company under the Bank Facility
adjust, based on Fleet's prime rate; however, the Company has the option to
borrow any portion of the Bank Facility in an integral multiple of $500,000
based on the one-month, two-month, three-month or six-month LIBOR plus 2.75%.
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 29, 2002, subject to automatic renewal for one-year
periods thereafter unless terminated by either party. See "Risk Factors--Risk
of Failure to Renew Funding Sources."
CP Facility. Under the terms of the CP Facility, the Company may borrow up
to $200 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
32
<PAGE>
Facility. The special purpose corporation pledges the loans and receivables to
a commercial paper conduit, which lends against such assets through the
issuance of commercial paper. The maturity date for the CP Facility is
December 5, 2001. However, the program may be terminated by the Company at any
time after December 5, 1999, without penalty. See "Risk Factors--Risk of
Failure to Renew Funding Sources."
Warehouse Facility. Under the terms of the Warehouse 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 under the STL
Program which meet certain conditions required by the Warehouse Facility. The
amount outstanding under the Warehouse Facility may not exceed 88% of the
principal amount of the loans transferred, subject to a $100 million maximum.
Interest accrues under the Warehouse Facility at a rate equal to LIBOR plus
3.75% on the first $50 million of amounts outstanding under the Warehouse
Facility and LIBOR plus 3.0% on amounts over $50 million. The Warehouse
Facility expires on June 27, 1999, as to new loans. However, previous loans
securitized under the Warehouse Facility remain outstanding following such
expiration until such loans are fully repaid or expire by their terms. See
"Risk Factors--Risk of Failure to Renew Funding Sources."
CREDIT LOSS POLICY AND EXPERIENCE
The Company regularly reviews its outstanding finance receivables to
determine the adequacy of its allowance for losses on receivables. To date,
the Company has not experienced any credit losses. The allowance for 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, real estate collateral valuations and underwriting policies, among
other items. As of December 31, 1996, the Company's general reserve was $1.1
million or 1.2% of finance receivables; at December 31, 1997, it was $2.7
million or 1.1% of finance receivables. To the extent that management deems
specific finance receivable advances to be wholly or partially uncollectible,
the Company establishes a specific loss reserve equal to such amount. At
December 31, 1996 and 1997, the Company had no specific reserves. In the
opinion of management, based on a review of the Company's portfolio, the
allowance 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 the Account
Receivable and STL Programs, 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 receivables that the Company loans or advances against
under the Accounts Receivable Program and loans made under the STL Program.
With respect to the loans under the Accounts Receivable and STL Programs,
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 advances against client receivables under the Accounts Receivable 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, 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.
33
<PAGE>
The RTS generates daily, weekly and monthly reports summarizing the current
status of each batch of receivables in the Accounts Receivable 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 Accounts Receivable Program portfolios by
client and third-party payor type.
Certain reports generated through the RTS, including cash application
detail, batch summary and trend analysis reports, can also be used to assist
the Company's clients in monitoring changes in their cash flow and managing
the growth of their businesses. These reports are provided to all of the
Company's clients on a weekly basis, and are generally relied upon as a
management tool more frequently by smaller clients in the Accounts Receivable
Program, which tend to have less sophisticated management information systems.
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
borrower 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.
Government at both the federal and state levels has continued in its efforts
to reduce, or at least limit the growth of, spending for healthcare services.
On August 5, 1997, President Clinton signed into law The Balanced Budget Act
of 1997 (the "BBA") which contains numerous Medicare and Medicaid cost-saving
measures. The BBA has been projected to save $115 billion in Medicare spending
over the next five years, and $13 billion in the Medicaid program. Section
4711 of the BBA, entitled "Flexibility in Payment Methods for Hospital,
Nursing Facility, ICF/MR, and Home Health Services", repealed the Boren
Amendment, which had required that state Medicaid programs pay to nursing home
providers amounts reasonable and adequate to meet the costs which must be
incurred by efficiently and economically operated facilities in order to
provide care and services in conformity with applicable state and federal
laws, regulations and quality and safety standards and to assure access to
hospital services. The Boren Amendment was previously
34
<PAGE>
the foundation of litigation by healthcare facilities seeking rate increases.
In place of the Boren Amendment, the BBA requires only that, for services and
items furnished on or after October 1, 1997, a state Medicaid program must
provide for a public process for determination of Medicaid rates of payment
for nursing facility services, under which proposed rates, the methodologies
underlying the establishment of such rates, and justification for the proposed
rates are published, and which gives providers, beneficiaries and other
concerned state residents a reasonable opportunity for review and comment on
the proposed rates, methodologies and justifications. States are actively
seeking ways to reduce Medicaid spending for healthcare by such methods as
capitated payments and substantial reductions in reimbursement rates. The BBA
also requires that nursing homes transition to a prospective payment system
under the Medicare program during a three-year "transition period" commencing
with the first cost reporting period beginning on or after July 1, 1998. The
BBA also contains several new antifraud provisions. Given the recent enactment
of the BBA, the Company is unable to predict the impact of the BBA and
potential changes in state Medicaid reimbursement methodologies on the
revenues of its clients.
In addition to the inability of the Company to directly collect receivables
under Government Programs and the right of payors under such programs to
offset against unrelated receivables, the Company's healthcare finance
business is indirectly affected by healthcare regulation to the extent that
any of its clients' failure to comply with such regulation affects such
clients' ability to collect receivables or repay loans made by the Company.
See "Risk Factors--Dilution of Receivables; Government Right of Offset." The
most significant healthcare regulations that could potentially affect the
Company are: (i) certificate of need regulation, which many states require
upon the provision of new health services, particularly for long-term care and
home healthcare companies; (ii) Medicare--Medicaid fraud and abuse statutes,
which prohibit, among other things, the offering, payment, solicitation, or
receipt of remuneration, directly or indirectly, as an inducement to refer
patients to facilities owned by physicians if such facilities receive
reimbursement from Medicare or Medicaid; and (iii) other prohibitions of
physician self-referral that have been promulgated by the states.
Certificate of Need Regulation. Many states regulate the provision of new
healthcare 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. See "Risk Factors--Reliance on
Reimbursements by Third-Party Payors."
35
<PAGE>
Further Regulation of Physician Self-Referral. Additional regulatory
attention has been directed toward physician-owned healthcare facilities and
other arrangements whereby physicians are compensated, directly or indirectly,
for referring patients to such healthcare facilities. In 1988, legislation
entitled the "Ethics in Patient Referrals Act" (H.R. 5198) was introduced
which would have prohibited Medicare payments for all patient services
performed by an entity which a patient's referring physician had an investment
interest. As enacted, the law prohibited only Medicare payments for patient
services per-formed 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 prohibit or limit a physician 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. Accounts receivable resulting from a referral in
violation of these laws could be denied from payment which could adversely
affect the Company's clients and the Company. See "Risk Factors--Reliance on
Reimbursements by Third Party Payors."
LEGAL PROCEEDINGS
The Company is currently not a party to any material litigation although it
is involved from time to time in routine litigation incidental to its
business.
EMPLOYEES
As of January 31, 1998, the Company employed 71 people on a full-time basis.
The Company believes that its relations with employees are good.
PROPERTY
The Company's headquarters occupy approximately 15,600 square feet at 2
Wisconsin Circle, Chevy Chase, Maryland. This space is provided under the
terms of a lease that expires in January, 2003, with a five-year renewal
option. The current cost is approximately $40,000 per month. The Company
believes that its current facilities are adequate for its existing needs and
that additional suitable space will be available as required.
36
<PAGE>
MANAGEMENT
The executive officers and directors of the Company and their ages as of
February 1, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John K. Delaney(1)............ 34 Chairman of the Board, Chief Executive
Officer and Director
Ethan D. Leder(1)............. 35 Vice-Chairman of the Board, President and
Director
Edward P. Nordberg, Jr.(1).... 37 Executive Vice President, Chief Financial
Officer and Director
Hilde M. Alter................ 56 Treasurer and Chief Accounting Officer
Steven M. Curwin.............. 39 Senior Vice President, General Counsel and
Secretary
Michael G. Gardullo........... 39 Vice President and Senior Credit Officer
Jeffrey P. Hoffman............ 37 Vice President and Portfolio Manager
Steven I. Silver.............. 37 Vice President, Portfolio Development
Debra M. Van Alstyne.......... 46 Vice President, Deputy General Counsel and
Assistant Secretary
Howard T. Widra............... 29 Vice President and Senior Analyst
Chris J. Woods................ 47 Vice President and Chief Information Officer
James L. Buxbaum.............. 42 President of HCAC
Jay C. Beam................... 35 Vice President of HCAC
Flint D. Besecker............. 32 Vice President of HCAC
John F. Dealy(2) (3).......... 58 Director
Geoffrey E.D. Brooke(2) (3)... 41 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 from
the formation of the Company until March 1997. From 1990 through 1992, Mr.
Delaney co-owned and operated American Home Therapies, Inc., a provider of
home care and home infusion therapy services, which was sold in 1992. Prior to
1990, Mr. Delaney was a practicing attorney with Shaw, Pittman, Potts &
Trowbridge in Washington, D.C. Mr. Delaney received his A.B. degree from
Columbia University in 1985 and his J.D. degree from the Georgetown University
Law Center in 1988.
Ethan D. Leder serves as Vice-Chairman of the Board, President and a
Director of the Company. Mr. Leder co-founded the Company in 1993 and served
as Vice-Chairman of the Board and Executive Vice President from the formation
of the Company until March 1997. From 1993 through September 1996, Mr. Leder
also served as Treasurer to the Company. From 1990 through 1992, Mr. Leder co-
owned and operated American Home Therapies, Inc., a provider of home care and
home infusion therapy services, which was sold in 1992. Prior to 1990, Mr.
Leder was engaged in the private practice of law in Baltimore, Maryland and
Washington, D.C. Mr. Leder received
37
<PAGE>
his B.A. degree from Johns Hopkins University in 1984 and his J.D. degree from
the Georgetown University Law Center in 1987.
Edward P. Nordberg, Jr. serves as Executive Vice President, Chief Financial
Officer and a Director of the Company. Mr. Nordberg co-founded the Company in
1993 and served as a Senior Vice President and Secretary of the Company from
the formation of the Company until March 1997. From 1993 through April 1996,
Mr. Nordberg also served as General Counsel of the Company. Prior to 1993, Mr.
Nordberg was a practicing attorney with Williams & Connolly in Washington,
D.C. Mr. Nordberg received his B.A. degree from Washington College in 1982,
his M.B.A. degree from Loyola College in 1985, and his J.D. degree from the
Georgetown University Law Center in 1989.
Hilde M. Alter serves as Treasurer and Chief Accounting Officer of the
Company. Ms. Alter joined the Company in September 1996. From 1981 to joining
the Company, Ms. Alter was a partner with the accounting firm of Keller,
Bruner & Co. in Bethesda, Maryland. Ms. Alter is a certified public
accountant. Ms. Alter received her B.A. degree from American University in
1966.
Steven M. Curwin serves as Senior Vice President, General Counsel and
Secretary of the Company. Mr. Curwin joined the Company in August 1996, and
has served as a Vice President from August 1996 and as a full-time consultant
to the Company since May 1996. From September 1994 to joining the Company, Mr.
Curwin was a practicing attorney with Shulman, Rogers, Gandal, Pordy & Ecker,
P.A. in Rockville, Maryland. From January 1989 to August 1994, Mr. Curwin was
a practicing attorney with Dewey Ballantine in Washington, D.C. Mr. Curwin
received his B.A. degree from Franklin & Marshall College in 1980 and his J.D.
degree from the Boston University School of Law in 1985.
Michael G. Gardullo serves as Vice President and Senior Credit Officer of
the Company. Mr. Gardullo joined the Company in February 1996. From June 1995
to joining the Company, Mr. Gardullo was a Senior Account Executive/Manager at
The FINOVA Group in King of Prussia, Pennsylvania. From 1993 to 1995, Mr.
Gardullo was Vice President and Regional Credit Manager at LaSalle Business
Credit, an affiliate of ABN AMRO Bank, N.V., in Baltimore, Maryland. From 1991
to 1993, Mr. Gardullo was Vice President and Manager, respectively, at
StanChart Business Credit in Baltimore, Maryland and London, England. From
1982 through 1991, Mr. Gardullo held various management and operational
positions at several asset-based lending institutions. Mr. Gardullo received
his B.S. degree from Seton Hall University in 1981 and his M.B.A. degree from
Rutgers University in 1982.
Jeffrey P. Hoffman serves as Vice President and Portfolio Manager of the
Company. Mr. Hoffman joined the Company in September 1996. From 1994 to
joining the Company, Mr. Hoffman was a Vice President-Senior Loan Officer and
from 1990 to 1993, Mr. Hoffman was a Vice President-Senior Underwriter at
Fleet Capital Corporation and its predecessor companies, Shawmut Capital
Corporation and Barclays Business Credit, in Glastonbury, Connecticut and New
York, New York. From 1988 through 1990, Mr. Hoffman was an assistant vice
president with Bankers Trust Company in New York, New York. From 1982 through
1988, Mr. Hoffman held various management positions with Bank of Boston, in
New York, New York. Mr. Hoffman received his B.A. degree from the State
University of New York at Albany in 1982 and his M.B.A. degree from Adelphi
University in 1987.
Steven I. Silver, CPA, serves as Vice President, Portfolio Development. He
has been employed by the Company since November, 1995, initially as a
marketing consultant and subsequently as an officer in portfolio development
activities. Prior to joining the Company, Mr. Silver was a vice president with
MediMax, Inc., in New York, New York from 1993 to 1995 principally responsible
for business development in the healthcare finance industry. From 1987 to
1993, Mr. Silver was
38
<PAGE>
employed by several commercial finance and brokerage firms in New York, New
York. From 1983 to 1987, Mr. Silver was an accountant with Coopers & Lybrand
in New York, New York. Mr. Silver received a B.S. in accounting from the State
University of New York at Albany in 1983.
Debra M. Van Alstyne serves as Vice President, Deputy General Counsel and
Assistant Secretary of the Company. Ms. Van Alstyne joined the Company in
March 1997. From July 1993 through July 1995, Ms. Van Alstyne was an attorney-
advisor, and from August 1995 until joining the Company in March 1997, Ms. Van
Alstyne was a Senior Attorney, with the Division of Corporate Finance of the
Securities and Exchange Commission. From January 1993 until July 1993, Ms. Van
Alstyne was a practicing attorney with the law firm of Gibson Hoffman &
Panzione in Los Angeles, California, and from April 1992 until January 1993,
she was a practicing attorney with the law firm of Aprahamian & Ducote in
Newport Beach, California. Ms. Van Alstyne received her B.A. degree from the
University of California, Irvine, California in 1974, and received her J.D.
degree from UCLA School of Law, Los Angeles, California in 1977.
Howard T. Widra serves as Vice President and Senior Analyst of the Company.
Mr. Widra joined the Company in January 1997. From June 1996 until joining the
Company, Mr. Widra was a consultant to America Long Lines, Inc., a long
distance phone carrier. From October 1993 until May 1996, Mr. Widra was a
practicing attorney with Steptoe & Johnson, LLP in Washington, D.C. Mr. Widra
received his B.A. degree from the University of Michigan in 1990 and his J.D.
degree from Harvard Law School in 1993.
Chris J. Woods serves as Vice President and Chief Information Officer of the
Company. Mr. Woods joined the Company in March 1997. From 1991 to the time Mr.
Woods joined the Company, he was an independent technical consultant for
clients primarily in the health care and telecommunications industries. In
1983, Mr. Woods co-founded a technical consulting company and served as
Executive Vice President of such company until his departure in 1991. Prior to
1983, Mr. Woods worked for Control Data Corporation. Mr. Woods received his
B.S. degrees in Computer Science and Geology from the State University of New
York at Buffalo in 1972.
James L. Buxbaum serves as President of HealthCare Analysis Corporation, a
wholly-owned subsidiary of the Company. Mr. Buxbaum became President of that
company in March 1997. From October 1993 until March 1997, Mr. Buxbaum was
President of J.L. Buxbaum, Inc., a mergers and acquisition consulting company
in Baltimore, Maryland. From November 1989 to October 1993, he was a partner
with the accounting firm of Wolpoff & Company in Baltimore, Maryland. Mr.
Buxbaum is a certified public accountant. Mr. Buxbaum received his B.B.A.
degree from George Washington University in 1977.
Jay C. Beam serves as Vice President of HealthCare Analysis Corporation. Mr.
Beam joined that company in April 1997. He served since October 1995 as a
consultant to the Company. From 1991 until he joined the Company, Mr. Beam was
the founding partner of the accounting and consulting firm Beam & Associates
in Annandale, Virginia. From 1984 to 1991, Mr. Beam was senior manager in the
audit and tax departments of various national accounting firms in the
Washington, D.C. metropolitan area. Mr. Beam is a certified public accountant.
Mr. Beam received his B.S. degree in Accounting from the University of
Maryland in 1984. Mr. Beam is the brother-in-law of Mr. Leder.
Flint D. Besecker serves as Vice President of HealthCare Analysis
Corporation. Mr. Besecker joined that company in May 1997. He served since
March 1996 as a health care due diligence consultant for the Company. From
1988 to 1997 he held various positions as a practicing certified public
accountant and health care consultant in the state of New York for Freed
Maxick Sachs & Murphy P.C., Welch Foods, Inc., and KMPG Peat Marwick. Mr.
Besecker is a certified public accountant. Mr. Besecker received his B.S.
degree in Accounting from Canisius College in 1988.
39
<PAGE>
John F. Dealy became a Director of the Company in January 1997. Mr. Dealy
has been President of The Dealy Strategy Group, a management consulting firm,
since 1983. In addition, Mr. Dealy was Senior Counsel to Shaw, Pittman, Potts
& Trowbridge in Washington, D.C. from 1982 through 1996, as well as a
professor in the Georgetown University School of Business since 1982. Mr.
Dealy is currently a director of the First Maryland Bancorp. From 1976 to
1982, Mr. Dealy was President of Fairchild Industries, Inc. Prior to 1976, Mr.
Dealy held a number of management positions at Fairchild Industries, Inc. Mr.
Dealy received his B.S. degree from Fordham College in 1961 and his L.L.B.
degree from the New York University School of Law in 1964.
Geoffrey E. D. Brooke became a Director of the Company in January 1997. Dr.
Brooke is Senior Member, Rothschild Bioscience Unit, a division of Rothschild
Asset Management Limited, and is responsible for its venture capital
operations in the Asian Pacific region. Mr. Brooke resides in Australia. Prior
to joining Rothschild, from June 1992 to September 1996, Dr. Brooke was the
President of MedVest, Inc., a healthcare venture capital firm in Washington,
D.C. which he co-founded with Johnson & Johnson, Inc. Prior to co-founding
MedVest, Inc., Dr. Brooke managed the life sciences portfolio of a publicly
traded group of Australian venture capital funds. Dr. Brooke is licensed in
clinical medicine by the Medical Board of Victoria, Australia. Dr. Brooke
earned his medical degree from the University Of Melbourne, Australia and a
M.B.A. from IMD in Lausanne, Switzerland.
Pursuant to the Company's Amended and Restated Certificate of Incorporation,
the Board of Directors has been divided into three classes. Class I consists
of Messrs. Nordberg and Brooke whose terms will expire at the annual meeting
of stockholders in 2000; 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.
40
<PAGE>
SELLING STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of February 18, 1998,
and as adjusted to give effect to the Offering, by each Selling Stockholder.
See "Management" for information regarding the Selling Stockholders.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR NUMBER OF OWNED AFTER
TO THE OFFERING SHARES THE OFFERING(2)
--------------- BEING ------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------- ------- ------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
John K. Delaney(1)............... 586,967 5.96% 50,000 536,967 4.08%
Ethan D. Leder(1)................ 578,561 5.88 50,000 528,561 4.01
Edward P. Nordberg, Jr.(1) ...... 626,013 6.36 50,000 576,013 4.37
</TABLE>
- --------
(1) Includes 7,400, 7,400 and 7,400 shares subject to options issued under the
Incentive Plan to Messrs. Delaney, Leder and Nordberg, respectively, which
are exercisable within 60 days. Does not include 234,599, 214,601 and
139,601 shares, respectively, subject to options not exercisable within 60
days (of which 204,999, 185,001 and 110,001 have been granted subject to
stockholder approval).
(2) If the Underwriters' over-allotment option is exercised in full, Messrs.
Delaney, Leder and Nordberg will own 464,467, 456,061 and 503,513 shares
of Common Stock after the Offering, respectively, or 3.45%, 3.38% and
3.73%, respectively.
41
<PAGE>
UNDERWRITING
NationsBanc Montgomery Securities LLC, Lehman Brothers Inc., ABN AMRO
Incorporated, Piper Jaffray Inc. and Stephens Inc. (the "Underwriters"), have
severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company and the Selling
Stockholders the number of shares of Common Stock indicated below opposite
their respective names at the public offering price less the underwriting
discount set forth on the cover page of this Prospectus. The Underwriting
Agreement provides that the obligations of the Underwriters are subject to
certain conditions precedent, and that the Underwriters are committed to
purchase all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC.............................. 1,181,250
Lehman Brothers Inc. .............................................. 1,181,250
ABN AMRO Incorporated.............................................. 787,500
Piper Jaffray Inc. ................................................ 175,000
Stephens Inc. ..................................................... 175,000
---------
Total............................................................ 3,500,000
=========
</TABLE>
The Underwriters have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on
the cover page of this Prospectus. The Underwriters may allow to selected
dealers a concession of not more than $1.20 per share, and the Underwriters
may allow, and such dealers may reallow, a concession of not more than $0.10
per share to certain other dealers. After the Offering, the offering price and
other selling terms may be changed by the Underwriters. The Common Stock is
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject an order in whole or in part.
The Underwriters may offer the shares of Common Stock through a selling group.
The Company and the Selling Stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 307,500 and 217,500 additional
shares of Common Stock, respectively, to cover over-allotments, if any, at the
same price per share as the initial 3,500,000 shares to be purchased by the
Underwriters. To the extent that the Underwriters exercise this option, each
of the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the table above. The Underwriters may purchase such shares only to
cover over-allotments made in connection with the Offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act, or will contribute to payments the Underwriters may be required to make
in respect thereof.
The Selling Stockholders have agreed, subject to certain limited exceptions,
not to sell or offer to sell, contract to sell, transfer the economic risk of
ownership in, make any short sale, pledge or otherwise dispose of the shares
of Common Stock currently held by them after the Offering, or any securities
exercisable or exchangeable for or any other rights to purchase or acquire any
shares of Common Stock for a period of 90 days after the Effective Date
without the prior written consent of NationsBanc Montgomery Securities LLC
other than shares sold in the Offering. NationsBanc Montgomery Securities LLC,
may, in its sole discretion and at any time without notice, release all or any
portion of the securities subject to these lock-up agreements. In addition,
the Company
42
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has agreed that for a period of 90 days after the Effective Date it will not,
without the prior written consent of NationsBanc Montgomery Securities LLC,
issue, offer, sell, grant options to purchase or otherwise dispose of any
equity securities or securities convertible into, exercisable or exchangeable
for Common Stock or other equity securities, subject to certain limited
exceptions including granting of options and sales of shares under the
Company's existing option plans and issuance of Common Stock in acquisition
transactions not involving a public offering.
In connection with the distribution of the Common Stock, rules of the
Securities and Exchange Commission (the "Commission") permit the Underwriters
to engage in certain transactions that stabilize the price of the Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Common Stock. If the
Underwriters create a short position in the Common Stock in connection with
the Offering, i.e., if they sell more shares of Common Stock than are set
forth on the cover page of this Prospectus, the Underwriters may reduce that
short position by purchasing Common Stock in the open market. The Underwriters
may also elect to reduce any short position by exercising all or part of the
over-allotment option described above. The Underwriters may also impose a
penalty bid on certain selling group members. This means that if the
Underwriters purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock,
they may reclaim the amount of the selling concession from the selling group
members who sold those shares as part of the Offering.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security. Neither the Company nor any of the
Underwriters makes any representation or predictions as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in
such transactions or that such transactions, once commenced, will not be
discontinued without notice.
NationsBanc Montgomery Securities LLC, Lehman Brothers Inc., ABN AMRO
Incorporated, Piper Jaffray Inc. and Stephens Inc. may participate in the REIT
Offering.
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LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Powell, Goldstein, Frazer & Murphy LLP, Atlanta, Georgia. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Gibson, Dunn & Crutcher LLP, San Francisco, California.
EXPERTS
The consolidated financial statements of HealthCare Financial Partners, Inc.
appearing in the Annual Report on Form 10-K of HealthCare Financial Partners,
Inc. for the year ended December 31, 1997 have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such financial statements
referred to above are incorporated herein by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The combined financial statements of HealthCare Financial Partners, Inc. and
HealthPartners DEL, L.P. as of December 31, 1995 and for the year ended
December 31, 1995 incorporated by reference in this Prospectus and
Registration Statement have been audited by McGladrey & Pullen, LLP,
independent auditors, as indicated in their reports with respect thereto, and
are incorporated by reference herein in reliance upon the authority of said
firm as experts in accounting and auditing.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1997, has been filed with the Commission and is incorporated in this
Prospectus by reference and made a part hereof. In addition, the description
of the Company's Common Stock contained in the Company's Registration
Statement filed pursuant to Section 12 of the Exchange Act on Form 8-A, as
amended, is incorporated in this Prospectus by reference and made a part
hereof.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the Offering shall be deemed to be incorporated by
reference in this Prospectus and to be a part hereof from the respective dates
of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute part of this
Prospectus.
The Company undertakes to provide without charge to each person, including
any beneficial owner of Common Stock, to whom a copy of this Prospectus has
been delivered, upon written or oral request, a copy of any or all information
incorporated by reference in this Prospectus (not including exhibits to such
information, unless such exhibits are specifically incorporated by reference
into such information).
Such requests should be directed to HealthCare Financial Partners, Inc.,
Attention: Edward P. Nordberg, Jr., Chief Financial Officer, at 2 Wisconsin
Circle, Fourth Floor, Chevy Chase, Maryland 20815, telephone number (301) 961-
1640.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act. In accordance with the Exchange Act, the Company files reports, proxy
statements and other information with the Commission. The reports, proxy
statements and other information can be inspected and copied at the public
reference facilities that the Commission maintains at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York 10048, and
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of these
materials can be obtained at prescribed rates from the Public Reference
Section of the Commission at the principal offices of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. Such documents may also be
obtained at the Web site maintained by the Commission (http://www.sec.gov).
The Company's Common Stock is quoted on the Nasdaq National Market and such
reports, proxy statements and other information may be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street N.W.,
Washington, D.C. 20006.
The Company has filed with the Commission a registration statement on Form
S-3 (the "Registration Statement") under the Securities Act with respect to
the Common Stock. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain items of which are contained in schedules and
exhibits to the Registration Statement as permitted by the rules and
regulations of the Commission. Statements made in the Prospectus concerning
the contents of any documents referred to herein are not necessarily complete.
With respect to each such document filed with the Commission as an exhibit to
the Registration Statement, reference is made to the exhibit for a more
complete description, and each such statement shall be deemed qualified in its
entirety by such reference.
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No dealer, sales representative or any other person has been authorized to
give any information or to make any representations other than those contained
in this Prospectus in connection with the offering made hereby and, if given or
made, such information or representations must not be relied upon as having
been so authorized by the Company, any Selling Stockholder or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person or by anyone in any jurisdiction in which it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that
there has been no change in the affairs of the Company or that the information
contained herein is correct as of any time subsequent to the date hereof.
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary......................................................... 1
Risk Factors............................................................... 9
Use of Proceeds............................................................ 18
Price Range of Common Stock................................................ 19
Dividend Policy............................................................ 20
Capitalization............................................................. 21
Business................................................................... 22
Management................................................................. 37
Selling Stockholders....................................................... 41
Underwriting............................................................... 42
Legal Matters.............................................................. 44
Experts.................................................................... 44
Incorporation of Certain Documents by Reference............................ 45
Additional Information..................................................... 45
</TABLE>
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3,500,000 SHARES
[LOGO OF HEALTHCARE FINANCIAL PARTNERS APPEARS HERE]
COMMON STOCK
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PROSPECTUS
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Joint Lead Managers and Joint Bookrunners
NationsBanc Montgomery
Securities LLC
Lehman Brothers
ABN AMRO Incorporated
Piper Jaffray Inc.
Stephens Inc.
March 12, 1998
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